E-Malt.com News article: 3702

Ireland: Greencore Group plc, the convenience food and ingredients group, announced on November 23 its preliminary statement of results for the year ended September 24, 2004. The year under review was one of significant progress for Greencore. Whilst profit before tax* grew by 8% and headline earnings per share* grew by 6%, these measures do not fully reflect the Group's achievements in the year. The company has posted 4% overall like-for-like sales growth.

Commenting on the results, Greencore Group Chief Executive, David Dilger, said: "I am pleased with these results. Against the background of a difficult first half caused by adverse raw material pricing, Greencore has demonstrated its resilience by achieving good profit growth and cash generation in FY2004. I am confident that our strategy, the quality of our market positions and our complementary growth and cash generative characteristics position us well for further progress."

In the first half, headline earnings per share* declined by 5%. In that period, profits increased at the Ingredients and Agribusiness division and at the Group's associate companies, and the Group's interest charge reduced by in excess of 20%. However, these improvements were more than offset by the time lag between an unusually high level of raw material cost increases in the Convenience Food division and subsequent price increases and cost reduction initiatives implemented by the Group to offset them.

In the second half, the Group performed strongly with headline earnings per share* increasing by 15%, as:

- the Convenience Food division benefited from the implemented price increases;
- the Group continued to sharpen its focus on its convenience food activities by the disposal of its loss-making bread business, Rathbones, and its interest in its sugar distribution associate, James Budgett (these gave rise to a net exceptional loss of EUR 51.4 million, of which EUR 13.2 million impacted net assets);
-continuing operating profit (including share of continuing associates' profit) increased by 5% (3% on a like-for-like basis); and
- the interest charge reduced by 21%, from EUR 19.3 million in the second half of 2003 to EUR 15.2 million in the second half of 2004.

Once again, the Group demonstrated its strong cash generative characteristics. Net debt at the end of September 2004 was EUR 387 million, EUR 43 million below the level of September 2003, and EUR 49 million lower excluding the impact of currency translation.

The Board intends to continue for the time being with the policy of prioritizing the reduction of the indebtedness which was assumed to finance the acquisition of Hazlewood Foods in 2001. A final dividend of 7.58c will therefore be declared, making a total for the year of 12.63c, which is in line with last year's level. Shareholders will again be offered the option of receiving dividends in the form of cash or shares.

The Group has a well-balanced portfolio of businesses with complementary growth and cash generative characteristics. The Ingredients and Agribusiness division contains high quality businesses with strong market positions and excellent cash generation capability. The Convenience Food division has exciting growth prospects, underpinned by a continuation of the demographic factors that have driven the increased demand for quality convenience food in the last decade.

The Convenience Food division's sales into alternative channels, most notably to convenience stores, garage forecourts, airlines, food service companies and other food manufacturers, continue to expand. Nonetheless, some 70% of the division's sales are to multiple foods retailers. Whilst there are challenges in servicing the many diverse requirements of large retailers, there are also clear opportunities. Large retailers are the principal route to market for the food industry in the UK and Europe and their share of the grocery market has increased significantly over the last decade.

Greencore believes that it will continue to succeed in this environment, by focusing not merely on what it supplies, but also how it supplies it. The Group has a clear strategy in this regard:

- it has number one or two positions in all of the key markets which it supplies;
- in most of its key markets, ownership is concentrated and demand is broadly in balance with supply;
- the Group's asset base is both well invested and of significant scale, with, on average, higher sales and lower customer concentration per facility than almost all of its competitors;
- the Group has a balanced exposure to UK retailers with its customer profile, in most cases, reflecting its customers' share of the UK grocery market;
- the product ranges it supplies have, with very few exceptions, higher than average growth rates, both historically and prospectively; and
- its product range generates higher than average profitability for its customers.

Furthermore, as a leading retailer brand supplier, Greencore is well positioned to capitalize on the continued shift of brand equity in the food industry from the manufacturers to the retailers.

The Group's success in the year under review in achieving price increases across many of its categories is a testament to this strategy and the quality of these market positions.

Further progress is anticipated in the current year. The Convenience Food division is well positioned, relative to its competitors, to benefit from the continuing growth in its market as a consequence of its clear strategy.

In the Ingredients and Agribusiness division, European sugar processors are facing increased levels of competition and impending regime reform, and Greencore Sugar is, therefore, evaluating every alternative strategy whereby its future profitability can be protected. Meanwhile, international malt margins remain low relative to historic averages, whilst both the Group's sugar and malt operations are being impacted by significantly increased fuel costs. However, both of these businesses have well earned reputations for operational excellence and low cost management. This culture will underpin the future of these businesses.

Continuing to extend a culture of operational excellence and low cost across the Group as a whole will be an important driver of profit growth. The Group has resolved to be even more aggressive in reducing its cost base, so that all of its businesses, both the convenience food categories and also the ingredients and agribusiness activities, can clearly distinguish themselves as the most cost-efficient operators in their sectors.

In summary, the environment for many of the Group's businesses remains challenging. Nonetheless, the Group expects to offset this through the quality of its market leading positions, the ongoing growth in its categories, a relentless focus on the cost base and the strong cash generative nature of its portfolio.

The Convenience Food division recorded good topline growth in spite of poor summer weather, and successfully implemented a substantial price increase and cost reduction program. However, the lag of three to four months in recovering higher raw material costs reduced profitability by some EUR 5 million, whilst its insurance costs were significantly ahead of the previous year's level.

In last year's preliminary results announcement, the Group indicated that raw material cost inflation in the UK food industry was running at a higher rate than had been experienced for a number of years. This arose because of the simultaneous occurrence of very poor harvests arising from the exceptionally dry summer weather in 2003, the weakening of sterling, an avian flu epidemic in Continental Europe and increased consumer demand for protein products. These factors led to significant inflation in a range of the key raw materials of the Group's UK convenience food operations, including flour, egg, dairy produce, poultry and red meat.

Input costs in the financial year were close to 5% above the levels of the previous year on an annual spend in excess of EUR 350 million. A concerted initiative was put in place across the Group's UK convenience food activities to recover this inflation, with a particular focus on those categories most impacted. These included quiche, sandwiches, cakes and desserts, frozen savory products, ready meals and bread. Price increases with an annualized value in excess of EUR 17 million were implemented, and these, together with the cost reduction initiatives, offset all of the cost inflation experienced to date.

As the Group has indicated before, the UK retail market is increasingly competitive. Customers continue to seek better value, the disparity between those outperforming and those underperforming is increasing, whilst the merger of two of the UK's leading food retailers has led to the consolidation of their supplier base, with those suppliers whose trade has increased typically offering improved terms in return. However, the quality of Greencore's market positions and its balanced exposure to UK retailers has positioned the Group well to deal with these issues. As a result, their impact on the Group in the year has broadly been as expected.

As evidenced by the division's sales growth, demand for quality convenience food continues to grow, although different categories had differing levels of sales growth, driven, primarily, by the impact of summer weather and their customer profile. Nonetheless, the division's two largest categories, sandwiches and chilled Italian ready meals, consolidated their number one market positions in the year. The Group has a strong track record in renewing and expanding its product range and introduced in excess of 1,000 new or reformulated products in the period.

A key challenge for Greencore, however, is to continue to develop additional income streams so that, whilst it remains well positioned to capitalize on the growth in the convenience food sales of the multiple food retailers in its categories, it increases its presence in other channels.

The Group is confident of further increases in these channels in the current year and, in addition, will start supplying a number of leading international players in the fast-food sector. Sales in the Convenience Food division to customers other than the multiple food retailers now account for close to 30% of total continuing sales in the division.

The increasing consumer understanding of and interest in the link between food and health also provides significant opportunities for the Group. For example, sales of the "healthy" ranges within the sandwich category now account for 45% of total sandwich sales, up from 25% in 2002.

Operating performance improved significantly at the pizza category during the year. Although the financial performance of the category is still not satisfactory, it has improved, whilst the business has some exciting sales opportunities which should result in the recent progress continuing. Operating performance also improved at the Group's cakes and desserts facility and that business also has a strong pipeline of new product opportunities.

Significant capital investment was undertaken in the period, including further capacity enhancement at two of the Group's chilled ready meal facilities, the completion of the rebuilding of the Group's principal frozen savory products facility, the installation of a new high-speed, multi-range line at the Group's mineral water category and investment in automation in the sandwich category.

The division once again performed strongly, with like-for-like sales and operating profit growth of 4% being underpinned by excellent cash generation.

The profitability of the Group's Malt division was impacted by higher barley prices in the UK and Ireland and by lower international malt prices. Continued improvements in capacity utilization, with consequent record levels of production and sales, coupled with strong cost management, helped to counter this. Malting margins remain under pressure as the recent reduction in barley prices has been accompanied by further falls in malt prices. The Group has, therefore, closed two of its smaller maltings in the UK which will increase efficiencies and enhance the overall competitiveness of the Malt division.


24 November, 2004