UK Cake Maker Finsbury Food Reports Challenging 2008; Successfully Renegotiated Banking Arrangements with HSBC

25 March 2009 - Finsbury Food Group Plc, a leading manufacturer of cake, bread and morning goods, today announces its interim results for the six months to 31 December 2008.

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Highlights

• Revenue up 11% to £92.1m (2008 : £82.8m) with like for like growth of 2%
• Bread and Free From sales growth of 16% and 23% respectively on like for like basis
• Increase in demand for key licensed brands
• Adjusted* results from operating activities down by 28% to £3.3m (2008 : £4.5m)
• Results from operating activities down by 10% to £3.1m (2008 : £3.5m)
• Adjusted* profit before tax down by 45% to £1.8m (2008 : £3.3m)
• Adjusted* diluted earnings per share of 2.4p (2008 : 4.4p)
• Significantly increased level of investment in promotional support for customers and consumers
• Further investment towards more effective integration of the Cake division
• Successful renegotiation of banking facility with HSBC Bank Plc

Commenting on the results, Martin Lightbody, Chief Executive of Finsbury Food Group plc, said:

"It is encouraging to see that sales have remained strong and resilient despite the recessionary environment. We have focussed our investment and attention on further integration of our businesses and improving our facilities. Advancing the quality of our products and raising the standard of the service we provide to our customers is imperative, particularly in the current economic climate. We are also delighted with the continued support we have received from our bankers, HSBC Bank Plc, and our success in securing a more appropriate banking facility going forward.

"As a stronger business, we are well positioned to face the challenges ahead and take advantage of future opportunities."

 

 Business Review

Overview

The interim results of Finsbury Food Group Plc are for the six months ended 31 December 2008.

This has been an extremely challenging period for Finsbury, although sales revenues remain strong.  Despite selling predominantly premium products, the Group has continued to achieve organic growth, demonstrating resilience in a recessionary environment.

Input prices have stabilised over recent months with some key commodities coming back down from their historical peaks but the benefit of this has been offset by increases in the costs of other materials resulting from the weakness of sterling.  The Group has experienced higher costs of distribution (£0.5 million) and utilities (£0.7 million) in the period.  These further increases were only partially mitigated by increases in selling prices. As a result, and in line with previous guidance, operating margins have declined by 1.9% year on year.  

We have responded to our customers' requirements by increasing levels of investment in promotional activity to ensure that we are offering the consumer value for money in a tough economic climate.  There has been a significant level of internal investment to improve our bakery facilities and product quality. We are focussed on achieving a more effective integration of our two major cake businesses (Lightbody and Memory Lane Cakes) that will allow us to leverage our scale as an efficient, low cost producer within the cake market. 

The trading environment remains uncertain and as a result, together with our desire to continue to invest for the medium and long term benefit of the Group, we proactively sought to renegotiate our existing banking arrangements with HSBC Bank Plc. This process has been successfully completed and has resulted in a more appropriate facility for the ongoing business. More details are provided under the section on Debt and Bank Facilities.

Trading Results

Group revenue for the six months to 31 December 2008 was £92.1 million (2008: £82.8 million), an increase of £9.3 million (11.2%) year on year. Like for like sales from continuing operations, excluding the full year effect of businesses acquired during the course of the last financial year (namely Anthony Alan Foods Ltd and Livwell Ltd) and an additional week's trading, were £84.4 million. This represents an increase of £1.7 million (2.0%) year on year.

Gross margin for the period was 36.5% (2008: 35.6%) representing an increase of 0.9%. This slight improvement is mainly attributable to changes in the sales mix with a higher proportion of Bread and Free From sales and an increase in sales of branded products.  Branded products attract a higher gross margin to cover royalty payments which are included in administration costs.

Profit before tax was £0.2 million (2008: £1.6 million). This was achieved after net finance expenses of £2.9 million (2008: £1.9 million).  Net financing expenses include a charge of £1.4 million (2008: £0.5 million) in respect of the movement in the fair value of interest rate swaps and a discount charge of £0.1 million (2008: £0.2 million) relating to deferred consideration.  Net bank interest payable in the period was £1.4 million (2008: £1.2 million).

The Directors consider adjusted profit before tax to be a more appropriate measure of the underlying performance of the business - this adjusted figure eliminates the impact of significant non-recurring items and other charges associated with the adoption of International Financial Reporting Standards (IFRS). Adjusted profit before tax for the period was £1.8 million (2008: £3.3 million) representing a decrease of 45% on the corresponding period last year.

The tax charge for the period is based on the estimated effective tax rate on profits for the full year of 28%. This is higher than the effective rate for the full year ended 30 June 2008 when we benefited from a retrospective claim for research and development tax relief.

Adjusted earnings per share for the period were 2.4p (2008: 4.4p). The dilutive effect of share options is negligible in the period.

There was a net cash outflow of £3.0 million during the period. Net cash generated from operating activities was £3.9 million (2008: net cash used £0.5 million) representing an improvement of £4.3 million on the corresponding period last year. This improvement was due to the benefit of the research and development tax relief and tighter control of working capital.  Capital expenditure of £2.2 million in the period reflects continued investment in improving the fabric of our bakeries and increasing capacity within our Bread business.

Cake Division

Comprising Lightbody Group Ltd, Memory Lane Cakes Ltd and Campbells Cakes Ltd, our Cake division realised 4% growth in sales compared to the corresponding period last year. Anthony Alan Foods Ltd, acquired by the Group in October 2007, is now fully integrated into Lightbody and Memory Lane and no longer trades as a separate entity. The full year effect of this acquisition accounts for 1% of the revenue growth versus last year. The inclusion of an additional week's trading accounts for the remaining 3% growth. On a like for like basis, excluding the impact of acquisitions and the additional week, sales were flat with a decrease in sales of seasonal products and celebration cakes offsetting increases in sales of branded small cakes (particularly WeightWatchers and Thorntons).

The cake market as a whole grew by 3% in terms of value year on year with a corresponding 3% decrease in sales volume (Source: AC Nielsen). Celebration cake accounts for around one third of our Cake division's turnover and sales in this sector of the cake market were flat year on year for the period to 31 December 2008.  

As stated previously, we have invested significantly in our customers' promotional activity in order to support their retailer brand offering and drive growth in sales of products under our licensed brands with an increase in investment of £1 million versus the corresponding period last year.  Sales of products under the Thorntons and WeightWatchers brands have been particularly strong as a result of new product development and increased store distribution.

The Cake division in particular has been affected by continuing increases in key commodities, such as sugar and chocolate. These increases, together with higher distribution and utilities costs, have been only partially recovered by price increases secured during the period. This has resulted in the continued suppression of both gross margins and operating profits.  Furthermore, we have put additional resource towards a more effective integration of the two major businesses within the Cake division, Lightbody and Memory Lane, to allow us to provide an improved service to our customers.

Bread & Free From Division

Sales in our Bread business increased by 21% compared to the same period last year. Like for like growth was 16% with the balancing 5% attributable to the inclusion of the additional week's trading.  Waitrose remains the division's largest customer accounting for around two thirds of the sales in the period. The main driver for the growth in sales is increased trading with other major retailers.

The profitability of the Bread business has been impacted by the increased cost of raw materials with only partial recovery coming from increases in selling prices. This accounts for circa 3% of the reduction in operating profit versus the same period last year.

The operating margin has also been affected by our investment in growth with an increased level of sales and marketing expenditure and initiatives to improve the operating efficiencies within the business. We expect the benefit from these initiatives to show through in the second half of the current financial year.

Sales in our Free From businesses, United Central Bakeries and Livwell Ltd, increased by 135% compared to the corresponding period last year. The full year effect of the acquisition of the trade and assets of Yorkshire Farm Bakeries and A&P Foods in April 2008, to form Livwell Ltd, accounts for the majority of the growth. Like for like sales growth, excluding the additional week's trading and the impact of Livwell, was 23%.

The like for like sales growth has resulted from the launch of new products into the Free From market, including jam doughnuts and crumpets, together with increased distribution of existing products. We have some new product development in the pipeline but expect future growth to come mainly from further increases in distribution of our existing range.

Debt and Bank Facilities

The Group's total net debt as at 31 December 2008 was £42.9 million including net borrowings from HSBC Bank Plc and loan notes. This total included a net bank overdraft of £8.9 million against a maximum overdraft facility of £12.5 million.

In addition to this, the Group also has £6.0 million deferred consideration payable in respect of the acquisitions of Anthony Alan Foods Ltd, Yorkshire Farm Bakeries and A&P Foods.

Having reviewed the Group's existing facility with HSBC Bank Plc in light of their expectations with regard to future trading, the Directors determined that the existing repayment profile and covenant suite was no longer appropriate and we approached HSBC Bank Plc with a view to revising it to something more suitable for the business going forward. This process is now complete and the revised facility will take effect from 26 March 2009.  

The key features of the revised facility, totalling £49 million, are as follows:-

• overdraft (£2.0m)
• confidential invoice discounting facility (£16.0m flexible)
• term loan A repayable over five years (£10.9m)
• term loan B repayable at the end of five years (£6.6m)
• mortgage as per current facility (£8.2m)
• rolling asset finance facility (£5.4m)

There have been some movement in the interest rate margins on this revised facility and the two new term loans are linked to LIBOR. The margins on the remaining items under the facility are linked to the base rate. The impact of these changes on our effective interest rate is to increase it by 1.1%.

The Directors are pleased to have the continued support of HSBC Bank Plc and are confident that this revised facility provides an appropriate level of headroom and flexibility in what remains an uncertain economic environment.

Current Trading and Outlook

Current trading for the first eight weeks since the half year is in line with expectations, with revenue growth of 10% in absolute terms and 5% on a like for like basis, after eliminating the impact of Livwell Ltd.  Over these eight weeks, sales have increased by 4% in our Cake division, by 14% in our Free From businesses and by 6% in our Bread business.  As anticipated, growth has slowed in our Bread business as a result of the Hot Cross Bun trade and Easter coming later this year than last.

January is always a tough trading month for the Group with cake sales generally slow to pick up after Christmas. During this time we tend to have an increased level of promotional activity to fill capacity gaps where appropriate and this year was no different. The requirement for promotions is ongoing but we are managing our customers' demands to protect our profitability as much as possible.

We anticipate that our profitability in the second half of the year will be better than the first half. We will have the positive impact of the Hot Cross Bun trade within our Bread business and we expect to realise some benefit from our operational efficiency initiatives.  The business' expectations for the full year are in line with our previous guidance.

The trading environment remains difficult but we are confident that, through appropriate investment and more effective integration of our subsidiaries, we are becoming a stronger business better able to deal with the challenges we currently face and well set to take advantage of the opportunities that will come along in the future.

  

Consolidated Income Statement

  Consolidated Balance Sheet

  Consolidated Cash Flow Statement 

  Statement of Recognised Income and Expense

  Notes: