Final Results

Associated British Foods PLC 10 November 2004 For release 10 November 2004 Associated British Foods plc preliminary results for year ended 18 September 2004 Good performances across the group drive strong profit growth at ABF Highlights â€¢ Adjusted operating profit up 12% to Â£478m* â€¢ Group sales up 5% to Â£5,165m â€¢ Investment income less interest payable up from Â£23m to Â£36m â€¢ Adjusted profit before tax up 15% to Â£525m ** â€¢ Adjusted earnings per share up 13% to 46.6p ** â€¢ Dividends per share up 12% to 16.4p â€¢ Cash generated, before acquisitions and disposals, of Â£227m â€¢ Net cash funds of Â£1,258m (reduced by Â£645m for yeast acquisition post year end) â€¢ Basic earnings per share up 5% to 43.3p and profit before tax up 10% to Â£494m Peter Jackson, Chief Executive of Associated British Foods, said: 'These results again demonstrate our ability to deliver strong underlying profit growth from our businesses against a backdrop of adverse commodity pricing and currency movements. We are well placed for future success with our new yeast businesses giving us further growth opportunities.' * before amortisation of goodwill. ** before profits less losses on the sale of businesses and fixed assets and amortisation of goodwill. All figures stated after profits on the sale of businesses and fixed assets and amortisation of goodwill are shown on the face of the consolidated profit and loss account. For further information please contact: Associated British Foods: Until 1500 only Peter Jackson, Chief Executive Geoff Lancaster, Head of External Affairs John Bason, Finance Director Mobile: 07860 562 659 Tel: 020 7638 9571 Jonathan Clare/Chris Barrie/Sara Batchelor, Citigate Dewe Rogerson Tel: 020 7638 9571 After 1500 John Bason, Finance Director Tel: 020 7589 6363 Notes to Editors 1. Associated British Foods is a diversified international food, ingredients and retail group with global sales of Â£5.2 billion and over 35,000 employees. Our aim is to achieve strong, sustainable leadership positions in markets that offer potential for profitable growth. We look to achieve this through a combination of growth of existing businesses, acquisition of complementary new businesses and achievement of high levels of operating efficiency. 2. ABF has achieved an operating profit compound annual growth rate of 11% from 1999 to 2004. The delivery of this strong profit growth has been driven by investment in both existing businesses and strategic acquisitions in areas of core expertise. The cash generation of the businesses has enabled the group to fuel its own growth and, before the payment for the international yeast business from Burns Philp in the next financial year, net cash funds have increased over the period. 1999 2000 2001 2002 2003 2004 CAGR Adjusted operating profit* Â£m 284 299 320 369 427 478 +11% Adjusted eps* p 31.2 34.1 37.2 39.1 41.3 46.6 + 8% Net cash funds Â£m 871 981 1,051 1,050 1,238 1,258 * 1999 to 2003 restated for adoption of FRS 17 3. The combined businesses acquired from Burns Philp had an operating profit before the amortisation of goodwill of US$134m (Â£73m) and sales of US$723m (Â£393m) in the year ended June 2004. 4. ABF has strong positions in the markets in which it operates: Twinings A world leader in speciality teas Ovaltine Manufactured in Europe, Asia and Australia, and sold in 50 countries Mazola The leading US corn oil brand Silver Spoon The UK's leading retail sugar brand Kingsmill (bread) Number six grocery brand in the UK (Top 50 Biggest Brands - Marketing 28/08/03) Ryvita UK number one in crispbread Tip Top (bread) Australia's number one food brand AB Mauri (yeast) Market leader in North America, Latin America and Asia; number three in Europe Primark One of the UK's leading high street clothing retailers ASSOCIATED BRITISH FOODS plc PRELIMINARY ANNOUNCEMENT FOR THE YEAR ENDED 18 SEPTEMBER 2004 For release 10 November 2004 CHAIRMAN'S STATEMENT The past year has seen substantial progress for the group. There has been good growth in profits backed by the cash generation which underpins our ability to pay larger dividends to shareholders while investing for the future. The competitive strength of many of our businesses has increased despite facing tough trading conditions. There have been important steps in the group's strategic development. Adjusted operating profit rose by 12%. The improvement was led by excellent results from several of our businesses. This enabled the group to absorb the impact of severe competitive action and adverse commodity price movements on some of our businesses as well as an overall adverse effect of currency movements. An element of the profit improvement was due to recent acquisitions but the major growth was delivered by the established businesses. The results for the year have been prepared applying FRS 17, as discussed in the Finance Director's Report. Important contributors to growth included the hot beverages business which advanced strongly with good volume and margin growth in several key markets. It is also particularly pleasing to note a strong advance in the UK milling and baking business where continuing improvements in operational efficiency helped deliver greatly improved margins and profit. These strong contributions enabled the group to absorb the impact of adverse conditions in some of the other grocery businesses. Unusually sharp vegetable oil price rises in the US resulted in loss of margin for ACH in the first half of the year. Competitor activity there and in the Australian bakery business was also particularly strong. Action has been taken to protect and strengthen our positions for the longer term but the impact in the year could not be avoided. The primary food businesses overall delivered good profit growth. The major factor was price improvement in our overseas sugar businesses after a prolonged period of weakness. This was offset to some degree by lower profits from British Sugar where further improvements in operational efficiency were more than offset by lower selling prices as a result of sterling's strength against the euro. Primark had another excellent year of progress. The headline catching statistic of like-for-like sales growth was 6% for the year, an outstanding performance when average selling prices were being substantially reduced. Extra space was added both from new stores and by extending existing stores and we are now trading from 10% more space than a year ago. Overall sales advanced by 14%, and with margins improving, profits were ahead by 23%. Shareholders will be well aware that only the best retailers prosper in this highly competitive market. The management have continued to provide customers with attractive goods, well displayed and at great prices. They deserve shareholders' thanks for another exceptional result. In addition to the improvement in operating profit there was a significant increase in net investment income. As a consequence adjusted profit before tax rose by 15%. Adjusted earnings per share increased by 13%. I believe this is a very satisfactory performance. Cash generation has remained strong with Â£227m of positive cash flow after paying dividends but before the effect of acquisitions and disposals of businesses. This was lower than the previous year but capital expenditure increased from Â£180m to Â£223m, a sizeable part of which related to new stores and extensions for Primark. It is the consistently strong generation of cash over the years which has given your company the resources to make strategic investments when the right opportunities occur. During the year we completed a number of acquisitions, at a cost of Â£229m, which strengthened our position in several of our grocery markets. In addition, after the year end, we completed the purchase of the international yeast, yeast extracts and bakery ingredients business from Burns Philp, at a cost of Â£645m, and this acquisition increases our position in food ingredients and develops our international reach. AB Mauri, as the business is now known, has cash generation qualities similar to many of our businesses. Year end net cash resources of Â£1.26 billion have been reduced by the AB Mauri investment but the group continues to have strong financial resources. These give the flexibility to invest in further development of the group's businesses when appropriate. Pension provision and the funding problems faced by some companies are frequent subjects for press comment. The group's funding position as calculated on the FRS 17 accounting basis is sound. It is the Board's intention to maintain a strong position for the group's schemes. It can be expected that some increase in cash contributions will be required to the main UK scheme after the triennial valuation in April 2005. The strategic direction of recent years has been to build on the group's main areas of strength, to broaden the spread of the businesses and their global coverage and to reduce the proportion of the group's profits earned from the sugar businesses. The acquisitions which have been made and the continued investment in production facilities and in growing Primark's store space are essential parts of that strategy. The benefits of these investments will be seen in the current year and beyond. The proportion of group profits derived from the non-sugar businesses has increased substantially in recent years and we expect this to continue. It can also be expected that changes to the European sugar regime will impact British Sugar's profits in coming years. With continued strategic development in the group's other businesses, that impact will be mitigated. In the meantime, the strong management team at British Sugar will ensure that, as a highly efficient operator, it remains at the forefront of developments in the European sugar industry. Dividends The directors have proposed a final dividend of 11.15p which, together with the interim already paid, makes a total of 16.40p for the year, an increase of 12%. The proposed final dividend will be paid on 14 January 2005 to shareholders on the register on 3 December 2004. Board Changes Peter Jackson has notified the Board that he will retire as chief executive, and as a director, on 31 March 2005. On the recommendation of the Nominations Committee, the Board has appointed George Weston to succeed him. I will express my thanks to Peter for his undoubted achievements as chief executive when I next report to you. It suffices to say now that the successful development of the group over the last few years is due in no small part to his leadership. He will leave businesses and a management team well placed to achieve further success. On 3 November the Board appointed Tim Clarke as a non-executive director. Mr Clarke is chief executive of Mitchells & Butlers plc and previously was chief executive of Six Continents PLC prior to the demerger of Mitchells & Butlers. I look forward to his contribution to the Board. Employees Good results in difficult trading conditions do not happen by accident. They are the consequence of the hard work and enterprise of the many thousands of our employees across the world. On behalf of shareholders, I thank them all for their efforts and the success they have achieved in the past year. Outlook Strong competitive conditions are a fact of life for all the group's businesses. Success requires continued investment in maximising operational efficiency, in product development and in marketing. Enhanced programmes in all these areas are built into our plans for the current year. The group's strong financial resources enable it to back further development opportunities as they arise. With a positive contribution to earnings from AB Mauri, I believe the group is well placed for further growth. Martin Adamson Chairman CHIEF EXECUTIVE'S REVIEW The year saw another good set of results. Operating profit, before amortisation of goodwill, increased by 12% to Â£478m, sales increased by 5% to Â£5,165m and adjusted earnings per share rose by 13% to 46.6p. Equally important is the way the group has been strengthened for further growth in years to come. Our group prospers on the back of good market positions, first-rate assets, strong cash flow and, most importantly, effective people. This year has seen all these elements of our business reinforced. In addition, the business has moved to become more international, it has increased the scale of key operations and, on the way, become less dependent on the European sugar regime. It is always satisfying to report good market performance where competitive pressure never fails to be strong. Examples this year include Ryvita where new packaging, promotion and product development drove a major improvement in sales and market share. Twinings continued to grow from strength to strength and Mazola in the US increased its market share despite the need to raise prices as a result of a sharp corn oil price increase. In Ingredients we saw a particularly strong market performance in sugar free natural sweeteners in North America and, in Primary Foods, the marketing success of our Chinese animal feeds business is worthy of special mention. These were all good achievements but no list of marketing excellence would be complete without reference to Primark whose track record of delivering consistently high like-for-like sales growth is difficult to surpass. The Primark team know their market and work relentlessly to provide their customers with an offering which is unmatchable elsewhere. A key challenge for Primark is to find the right sites to bring their offering to a wider public. Some progress has been made in finding new stores but the year saw a major focus on extending existing stores including Manchester, Romford and Mary Street in Dublin. The determination to invest in new assets and to optimise what we have is common across our business. This year saw good progress in the construction of our new bakery in Sydney and the completion of a new manufacturing facility in Manchester which will increase our noodle capacity and enable us to make a new generation of microwaveable products. We have also successfully started tea bagging and packaging in Shanghai and have announced a planned major upgrade to our sugar production facilities in China. We will continue to invest appropriately in our business both through the development of new and improved capital assets as well as in acquisitions that take our business forward. That we can do this with confidence is due to a combination of good people and the very strong cash generating characteristics of the group. In some quarters, the importance of strong cash flow is sometimes not fully appreciated. We believe it is vital and that it is a quality that will underpin our long-term ability to compete strongly and continue to grow. I referred above to acquisitions as being an important part of the way forward. We look for acquisitions to capitalise on existing strengths, to give scale to businesses that have potential and to enter into new markets where we see opportunities. There have been a number of examples where this has been demonstrated this year. The acquisition of Billington's brought with it a very strong, differentiated position in the UK specialist retail sugar market. Running this business in conjunction with our existing Silver Spoon retail business strengthens both brands. The acquisition of the Capullo vegetable oil business in Mexico took ACH into a major new market with a product it knows. This added strength and critical mass to its existing retail branded business. This marketing mass was further strengthened at the year end by the addition of the consumer yeast and herbs and spices brands acquired from Burns Philp. The remainder of the Burns Philp yeast business will be run as a separate business within the group under the AB Mauri name. The acquisition of these businesses has brought to our group some excellent people and strong market positions. It has also significantly broadened our international footprint, particularly in South America where we have, to date, had no presence. These businesses have strong cash generating characteristics and further reduce the proportion of the group's cash flow and profit derived from the European sugar regime. This reduction is an objective we have been pursuing for a number of years in the knowledge that such political regimes evolve over time. We will respond as appropriate when we know what the new arrangements are. Proposals are currently expected to be finalised during 2005. Whatever happens we are confident that we will still have a strong sugar business, well placed to move forward as the industry adapts. As with any year, life for many of our businesses has been challenging but that is the way of the world. Certain of our businesses know they have to improve but in general our people are effective and are up to the task ahead. We are fortunate in the people we have and we recognise the need to provide them with development opportunities and a safe environment in which to work. There have been major training and development initiatives across a wide range of our businesses and capital programmes in a number of our factories to improve safety further. This year has seen good progress across the group. The year end is, however, a mere moment to reflect. Striving for success never ends. Your group is ambitious and well placed to succeed. Peter Jackson Chief Executive GROCERY Our businesses around the world produce and sell famous brands as well as own label grocery products. 2004 2003 Sales Â£m 2,446 2,310 Operating profit Â£m 160 148 Our international grocery businesses grew sales by 6% to Â£2,446m and profit by 8% to Â£160m and now represent 46% and 33% respectively of the group's sales and profits. The profit increase reflected a strong improvement in UK milling and baking, Ryvita and international hot beverages and the start of a recovery in our UK frozen bakery operation. ACH recovered margins in the second half of the year after a disappointing first half. Acquisitions Following its successful acquisition of Mazola in 2002, ACH acquired Capullo, the leading Mexican premium canola oil brand in May this year. This not only provides an entry into the growing Mexican market but also the opportunity to introduce Capullo to the US where ACH already has a strong franchise with Hispanic consumers. The US herbs and spices business and the Fleischmann consumer yeast business have now been acquired from Burns Philp and will be integrated with the sales and marketing infrastructure for retail and foodservice channels of ACH. The herbs and spices brands are Tone's, Durkee and the premium Spice Islands range which have products in spices, extracts, dry seasonings and sauces. Manufacturing is based at Ankeny, Iowa, in a recently built factory with high quality, efficient operations and excellent research and development facilities. Fleischmann is the number one brand in retail yeast in the US market. The Askeys range of ice cream wafers and cones was acquired in March by Silver Spoon and fits with its popular Treat syrups range which has been grown to market leadership from a standing start. Demonstrating that there is room for manoeuvre in UK retail sugar, the Billington's brand was added in August. It is the leading supplier of unrefined cane sugars to the UK and has a strong consumer following and also consolidates our position in the niche organic market. We substantially increased our presence in fast growing ethnic foods with the addition of the Blue Dragon oriental foods range which commands considerable supermarket presence in ethnic sauces and meal accompaniments. Market and Product Development Our grocery brands have also been strengthened by a number of new product introductions and increased marketing support. In the US, Mazola volumes increased despite a modest decline in the overall market and price increases necessary to recover rising commodity corn oil prices. In foodservice two new products were launched to meet increasing consumer demand to reduce trans-fatty acids in the diet. Karo syrups and Argo starch were relaunched in the market with new contemporary packaging and a brown sugar variant was added to the Karo range. In the UK, Kingsmill launched a branded snack range and added a brown variant to its successful new Toastie range. Allinson and Burgen, popular with those seeking a healthier diet, were relaunched. A new snack, Ryvita Minis, based on the classic crispbread, was introduced with television advertising support and comes in four flavours. Noble Rise and Tip Top, our leading bread brands in Australia, continued to perform strongly and range extensions introduced last year were well received by consumers. The Burgen brand also performed well in Australia where extensions to the range drove double-digit sales growth. Our international hot beverages business celebrated a successful first full year of trading from Ovaltine. Growth in the brand was achieved in Switzerland, the Philippines and in Thailand. New products were launched under both the Twinings and Ovaltine brands including a 'stick' variety of Options, a new formulation of Activ8 in the Philippines and new Twinings tea, '1706', launched in the UK in anticipation of the 300th anniversary of the brand. Following a successful test marketing last year, Silver Spoon launched its reduced calorie 'Light' variety nationally with television advertising support. Efficiency Improvement A number of initiatives have been taken to strengthen the performance of our core businesses, improve efficiencies and reduce costs. In Australia, the bakery business took responsibility for cake following the sale of biscuits last year and the subsequent relaunch of the Top Taste brand has been very successful. In May we announced the consolidation of the Melosi and Don's delicatessen brands on the Don's site in Victoria. Production at the Melosi plant in Sydney has now transferred and this will considerably improve operational efficiency and reduce supply chain costs. Construction of the new bakery in Sydney is progressing well and we have announced the closure of the Chatswood bakery in north Sydney as we consolidate production for New South Wales on the new site. In the UK, considerable management effort has been directed at improving performance at Speedibake, our frozen bakery business, and improvement has been achieved in both operating and commercial results. The business has now been integrated with Allied Bakeries where we have the appropriate manufacturing and commercial skills to take the business forward. The new manufacturing facility in Manchester for Westmill is nearing completion following a Â£10m investment programme. Finally in the US, following a manufacturing review, ACH announced the closure of its Oklahoma City plant, transferring production to other facilities with a consequent improvement in capacity utilisation. PRIMARY FOOD & AGRICULTURE We add value to primary products through our sophisticated and efficient processing facilities to produce high quality staple ingredients such as sugar. 2004 2003 Sales Â£m 1,682 1,544 Operating profit Â£m 189 172 Sales increased by 9% to Â£1,682m. Profit increased by 10% to Â£189m and reflected the strong improvement in profit in both our Polish and Chinese sugar operations. In the UK, factory performance was strong with high beet purity, favourable sugar content, high plant reliability and low energy consumption contributing to further improvements in operating efficiency. However, profit reduced with a lower sugar crop than last year, at 1.37 million tonnes, and there was an adverse profit impact of Â£4m from the strength of sterling against the euro. In Poland, profit increased after an excellent campaign and an increase in prices. As expected accession to the EU and in consequence membership of the European sugar regime brought about a stabilising of sugar demand, which had been particularly volatile during the previous year, and market prices increased. We are in the process of acquiring the minority shareholdings and this will enable further efficiencies and increased investment in capacity over the next two years. Profit was significantly ahead in China where prices improved as a result of growing demand and lower crop volumes. In addition our operating performance improved with high yields. A significant investment is now underway at two factories to increase capacity and completion is expected by the 2006/7 campaign. It was a challenging year for our agriculture group, ABNA, with margins adversely impacted by increased wheat prices resulting from the reduced grain harvest in 2003. However, we strengthened our market position in pig and poultry feeds with the continued focus on supply-chain partnerships. Our industry leading quality feed assurance systems enable our customers to offer supermarkets eggs, pork and poultry products that are guaranteed to have been produced using safe and fully traceable feeds. We sold our ruminant compound feeds business during the year. This was a low margin business and our exit has enabled us to focus on developing our supply chain partnerships and service offerings. Our capability in this area was further strengthened with the acquisition of a feed ingredients business which works with a number of feed ingredient manufacturers to develop products that enhance feed performance. In China, significant progress was made with the focus on added value animal feeds and contracts were exchanged to buy out our joint venture partners in China. INGREDIENTS We develop and produce functional ingredients from natural products for use in a diverse range of applications. 2004 2003 Sales Â£m 294 311 Operating profit Â£m 36 32 Our ingredients group focuses on high technology ingredients for food and non-food applications. We have significant positions in supplying specific sectors of the bakery and confectionery industries, particularly with enzymes, polyols and bakery ingredients. We also supply the pharmaceutical and personal care sectors. Profit increased 13% to Â£36m with strong growth from our US speciality food polyols business and a recovery at Cereform, particularly in the UK. There was a decline in sales over last year to Â£294m as a result of the exit from lower margin commodity business in bakery ingredients and lipid technologies, and the translation effect of the weaker dollar against sterling. Our US polyols business, SPI, benefited from its focus on providing speciality low calorie sweeteners that are tailored to meet the specific needs of food manufacturers with continued strong growth coming from sugar-free products. Margins in liquid sorbitol improved following last year's outsourcing of manufacture. In the pharmaceutical business, antacid ingredients' growth slowed as consumers switched from branded to lower margin own label products. Enzyme sales increased with good growth in those for application in the bakery and beverage industries. We expanded our regional sales activities in Brazil, Poland and China and reduced our reliance on third party distributors. There continued to be an impact on margins as a result of the weakness of the US dollar against the euro. In both Europe and the US, we achieved substantial growth in the supply of medium chain triglycerides and increased our overall global market share. The successful implementation of the technology in the UK has enabled the business to win global contracts and to establish our position as a leading supplier. Our speciality extruded ingredients business in the US had another strong year. New ingredients for the US nutritional bar market have driven strong growth at major customers and further capacity is being added to meet demand for the successful speciality soy protein based ingredients. In Cereform, our bakery ingredients business, the operational efficiency programmes implemented a year ago resulted in a substantial profit improvement. In the UK a strong focus on our leading-edge bread improvers has further strengthened our market leadership. The acquisition of the international yeast and bakery ingredients business from Burns Philp was completed after the year end. The bakers' yeast business is market leader in North America, Latin America and Asia and is number 3 in Europe and will trade under the name AB Mauri. The market for bakers' yeast is growing at an overall 3-4% p.a., 1-2% in developed countries but much faster in many developing countries such as China, where the growth rate is over 10%. It operates from 42 production sites in 24 countries. The main products of the bakery ingredients business are bread improvers, conditioners, mixes and fats and oils. Combined with Cereform, the new business will have coverage of all significant markets, unrivalled market access in developing markets, low cost distribution through sharing of overheads with yeast and leading technology for western style baking. RETAIL Primark has a winning formula for providing quality merchandise at affordable prices. 2004 2003 Sales Â£m 858 752 Operating profit Â£m 108 88 The excellent growth reported at the half year by Primark continued in the second half and sales for the full year were up 14% to Â£858m and profit was up 23% to Â£108m. Like-for-like sales growth of 6% demonstrated Primark's superior performance compared to other high street retail textile businesses. Sales were driven further by new store openings and extensions to existing stores. Profit also benefited from better buying decisions and favourable currency exchange rates. At the year end we were trading from 120 stores across the UK and Ireland and total retail selling area increased from 2.1 million to 2.3 million square feet over the year. New stores were opened at Boscombe, Loughborough, Slough and at Watford, in phase one of its development. Extensions to existing stores were completed in Mary Street in Dublin, Carlow, Romford, Newport, Birkenhead, Reading, Manchester and Wigan. Manchester is our largest store with 100,000 square feet over two floors in a prime city centre site. After the year end, new stores are planned to open before Christmas in Lincoln and Sunderland and the final phase in Watford. Sites have been secured for a new store in Leeds and a relocation in Cardiff which will open later in 2005 offering better premises and more space. In addition there are plans to take the Primark formula to a small number of stores in the Madrid area later in 2005. Primark has now captured a share of over 10% of the value clothing market and yet there are still many towns and regions not served by one of its stores. The availability of good high street locations is the limiting factor in extending the highly successful formula further. Considerable management attention is focused on securing further sites. FINANCE DIRECTOR'S REPORT GROUP PERFORMANCE Group sales increased by 5% to Â£5,165m and operating profit, before the amortisation of goodwill, increased by 12% to Â£478m. Operating profit for the prior year has been restated to reflect a change of accounting policy for retirement benefits following adoption this year of FRS 17. The effect of this change is to reduce the group's adjusted operating profit in 2003 by Â£23m and adjusted profit before tax by Â£15m. The significant increase in operating profit reflected strong underlying growth in the group against a background of commodity price increases and adverse currency movements on the translation of overseas business results. The profit benefited by Â£7m from the trading of an extra week this year. The disposal of properties no longer required by the group resulted in a profit on disposal of fixed assets of Â£8m which compares with Â£12m last year. Investment income increased from Â£53m to Â£59m benefiting from the rising trend of sterling interest rates and an increase in the average funds invested. The reduction of Â£7m in interest payable is attributable to the translation benefit on the interest on the group's US dollar debt arising from a weaker dollar against sterling and repayment of debt in China, Poland and Australia. As a result, investment income less interest payable increased by Â£13m compared to last year. Following the adoption of FRS 17, the profit and loss account includes a new caption, other financial income, which represents the return on the group's defined benefit pension scheme assets less the interest on scheme liabilities. Profit before tax increased from Â£448m to Â£494m. Adjusted to exclude profits on the sale of businesses and fixed assets and the amortisation of goodwill, profit before tax increased 15% from Â£458m to Â£525m. TAXATION The tax charge of Â£146m included an underlying charge of Â£151m, at an effective tax rate of 28.8% on the profit before tax adjusted for the profits less losses on the sale of businesses and fixed assets and the amortisation of goodwill, and compares to 29.0% in 2003. The lower rate reflected higher profits in lower tax rate jurisdictions. The tax charge for the year benefited from a Â£9m (2003 - Â£10m) credit for tax relief on the amortisation of goodwill arising from asset acquisitions. This credit has been excluded from the calculation of adjusted earnings per share. EARNINGS AND DIVIDENDS Earnings increased by Â£16m to Â£342m and the weighted average number of shares in issue remained constant at 789 million. Earnings per ordinary share increased by 5% from 41.3p to 43.3p. A more consistent measure of performance is provided by the adjusted earnings per share which excludes profits on the sale of businesses and fixed assets and the amortisation of goodwill net of any tax benefit. Adjusted earnings per share increased by 13% from 41.3p to 46.6p. The first interim dividend was increased by 11% to 5.25p and a final dividend has been proposed at 11.15p which represents an overall increase of 12% for the year. Dividends will cost a total of Â£129m and Â£213m will be transferred to reserves. The dividend is covered, on an adjusted basis, 2.8 times. BALANCE SHEET Fixed assets increased by Â£136m to Â£2,052m due to the additional goodwill arising on acquisitions in the year and a level of capital expenditure higher than depreciation. Net cash funds, being current asset investments and cash at bank less short-term borrowings and loans, were Â£20m higher than last year at Â£1,258m. Working capital, including tax and dividend accruals, reduced by Â£1m. Net assets now include a pension asset which is the net of the market value of the assets and liabilities, net of tax, of the group's defined benefit pension schemes. In an environment where many schemes are showing substantial deficits it should be noted that our schemes are fully funded on an FRS 17 basis. The group's net assets increased by Â£168m to Â£3,496m. A currency loss of Â£75m arose on the translation into sterling of the group's non-sterling net assets. This largely resulted from the significant weakening of the US dollar against sterling. The combination of higher profits and strong management of capital employed has resulted in an increased return on capital employed in each of our business segments and an increase from 22.2% to 24.4% for the continuing businesses of the group. Return on capital employed is defined as operating profit before the amortisation of goodwill expressed as a percentage of average capital employed for the year. CASH FLOW Net cash flow from operating activities was Â£631m compared to Â£630m last year. Working capital was well controlled with a net improvement of Â£7m over the year despite growth in the businesses. However, this inflow was lower than last year and as a result was an offset to the strong increase in operating profit. In addition there was an increase in pension contributions. Capital expenditure during the year was Â£223m of which Â£70m was spent on the acquisition of new stores and the refitting of existing Primark stores. The balance was used principally to upgrade, modernise and expand existing manufacturing facilities as well as investment in new factories in Manchester and Sydney. The net expenditure on acquisitions less proceeds from disposals, amounted to Â£204m. The total acquisition spend in the year was Â£229m. This related primarily to the acquisition of the US herbs and spices business of Burns Philp which completed on 3 September, the Capullo vegetable oil business in Mexico, the food brands of G. Costa and Billington's sugar. Proceeds from disposals, including the sale of the ruminant compound feed business of ABNA, amounted to Â£25m. The acquisition of the international yeast and bakery ingredients business from Burns Philp was completed after the year end, on 30 September 2004. TREASURY POLICY AND CONTROLS The group's cash and current asset investments totalled Â£1,683m at the year end including Â£1,030m placed with professional investment managers who have full discretion to act within closely monitored and agreed guidelines. The investment objective is to preserve the underlying assets, whilst achieving a satisfactory return. The investment guidelines are kept under constant review with the objective of monitoring and controlling risk levels. The guidelines require that investments must carry a minimum credit rating of AA- and also set down conditions relating to sovereign risk, length of maturity, exchange rate exposure and type of investment instrument. Aggregate limits for each category of investment and risk exposure are set for each manager. The group's UK cash balances are managed by a central treasury department operating under strictly controlled guidelines, which also arranges term bank finance, as and when necessary, to finance acquisitions and short-term working capital requirements particularly for the sugar beet and wheat harvests. A number of the group's businesses are exposed to changes in exchange rates on sales and purchases made in foreign currencies and to changes in commodity prices. British Sugar is exposed to movements in the euro exchange rate on the price of sugar in the UK and Poland, Primark sources garments from overseas primarily in US dollars and many businesses purchase raw materials in foreign currencies largely US dollar denominated. Significant cross-border transactions are covered by forward purchases and sales of foreign currency, or foreign currency options as appropriate. The majority of the group's commodity exposures are managed through forward purchase contracts with only limited use being made of derivative markets. All derivative transactions are tightly controlled within set limits and speculative trading is not undertaken. The group does not hedge the translation effect of exchange rate movements on the profit and loss account. The group regards its interest in its overseas subsidiary undertakings as long-term investments and does not hedge the translation effect of exchange rate movements on them. POST BALANCE SHEET EVENTS The completion of the acquisition of the international yeast and bakery ingredients businesses from Burns Philp for Â£645m (US$1,175m) was announced on 30 September 2004. These businesses together with US herbs and spices businesses had an operating profit of US$129m (Â£70m) and sales of US$708m (Â£383m) in the year ended June 2003 and net tangible assets at 30 June 2003 of US$393m (Â£212m). The completion accounts for this acquisition will be finalised shortly. INTERNATIONAL FINANCIAL REPORTING STANDARDS We will adopt International Financial Reporting Standards (IFRS) in our accounts for the year ending 16 September 2006 which will include comparative information for 2004/5, and our project work is well on track to ensure that we meet the deadline. Accounting for retirement benefits, financial instruments and intangible assets are those areas where we expect IFRS to have the most impact on our reported results. The adoption of FRS 17 brings the group's accounting policy for retirement benefits closely into line, in all material respects, with the expected requirements of IFRS. A number of the group's activities are conducted in foreign currencies. In order to protect against currency volatility the group hedges the exposure by taking forward cover. IAS 39 - Financial Instruments, requires all such hedges to be strictly designated against the appropriate underlying transactions, with hedging effectiveness tested regularly. All financial instruments must be revalued at the balance sheet date and if it is not possible to demonstrate hedge effectiveness, any gain or loss arising is taken to the profit and loss account. It may not be practical for all businesses to meet the strict hedging criteria for all contracts which may therefore result in some volatility in the profit and loss account and balance sheet. Similar issues arise where derivative or forward contracts are entered into as hedges against changes in certain commodity prices. We do not currently distinguish between the various components of the intangible asset arising on acquisitions where the price paid exceeds the fair market value of the tangible assets acquired. All such intangibles are disclosed as goodwill and amortised over an appropriate economic life. IFRS require separate identification of these intangibles, and amortisation where appropriate, with any residue being classified as goodwill which is not to be amortised but is subject to annual tests for impairment. We are currently assessing the merits of restating historic acquisitions in order to provide comparability with future transactions. The goodwill amortisation charge in our accounts is likely to change as a result of the review. Although the IFRS accounting for deferred taxation is unlikely to have a material impact on the reported results, it will be necessary to apply deferred taxation, where appropriate, to the adjustments required by other accounting standards. IFRS are still evolving and the disclosure requirements will involve changes to the presentation and content of the primary statements and notes to the accounts. The adoption of FRS 17 has removed the impact of the main area of difference between our current accounting practice and IFRS on the calculation of adjusted earnings per share. The adoption of IAS 39 will, however, result in some volatility in this measure between accounting years. The changes to goodwill amortisation will not affect adjusted earnings per share. FINANCIAL REPORTING STANDARDS AND ACCOUNTING POLICIES The group has adopted 'FRS 17 - Retirement Benefits', during the year and the accounts for the year ended 13 September 2003 have been restated to reflect this change of accounting policy. Adoption of this standard has the effect of reducing the group's adjusted operating profit by Â£23m (2003 - Â£23m) and reducing adjusted profit before tax by Â£12m (2003 - Â£15m). The assets and liabilities of the group's pension schemes are now consolidated in the group balance sheet. As a result the group's net assets have increased by Â£58m (2003 - Â£31m). The group has also adopted 'UITF Abstract 38 - Accounting for ESOP Trusts'. This abstract changes the presentation of an entity's own shares held in an employee share trust from requiring them to be recognised as assets to requiring them to be deducted in arriving at shareholders' funds. The impact of adopting this abstract has been to reclassify shares held by the Trust from fixed assets to reserves, reducing net assets by Â£10m (2003 - Â£9m). In addition, the net cash outflow arising from the purchase of shares by the Trust has been reclassified from 'capital expenditure and financial investment' to 'financing'. To reflect the increasing international breadth of our businesses, and in anticipation of the acquisition of the international yeast and bakery ingredients businesses, we have revised the composition of our geographic segments. The prior year has been restated to reflect these changes but there is no impact in the total group turnover, operating profit or capital employed. John Bason Finance Director The annual report and accounts will be available on 11 November 2004 and the annual general meeting will be held at The Royal Garden Hotel, London at 11am on Friday, 10 December 2004. CONSOLIDATED PROFIT AND LOSS ACCOUNT For the For the year ended year ended 18 September 13 September 2004 2003 restated Note Â£m Â£m Turnover of the group including its share of joint ventures 5,181 4,931 Less share of turnover of joint ventures (16) (22) Group turnover 1 5,165 4,909 Operating costs (4,744) (4,531) Group operating profit 421 378 Share of operating results of: - joint ventures 8 4 - associates 3 3 Total operating profit 1 432 385 Operating profit before amortisation of goodwill 478 427 Amortisation of goodwill (46) (42) Profits less losses on sale of fixed assets 8 12 Profits less losses on sale of businesses 7 20 Investment income 59 53 Profit on ordinary activities before interest 506 470 Interest payable (23) (30) Other financial income 11 8 Profit on ordinary activities before taxation 494 448 Adjusted profit before taxation 525 458 Profits less losses on sale of fixed assets 8 12 Profits less losses on sale of businesses 7 20 Amortisation of goodwill (46) (42) Tax on profit on ordinary activities 2 (146) (125) Profit on ordinary activities after taxation 348 323 Minority interests - equity (6) 3 Profit for the financial year 342 326 Dividends 3 (129) (115) Transfer to reserves 213 211 Basic and diluted earnings per ordinary share 4 43.3p 41.3p Adjusted earnings per ordinary share 4 46.6p 41.3p The group has made no material acquisitions nor discontinued any operations within the meaning of the Financial Reporting Standards during either 2004 or 2003. The results for the year ended 13 September 2003 have been restated to reflect the adoption of 'FRS 17 - Retirement Benefits'. The impact of this change is detailed in note 8. CONSOLIDATED BALANCE SHEET As at As at 18 September 2004 13 September 2003 restated Â£m Â£m Fixed assets Intangible assets - goodwill 593 510 Tangible assets 1,459 1,406 2,052 1,916 Interest in net assets of - joint ventures 12 9 - associates 11 12 Other investments 1 1 Total fixed asset investments 24 22 2,076 1,938 Current assets Stocks 496 516 Debtors 600 544 Investments 1,547 1,542 Cash at bank and in hand 136 170 2,779 2,772 Creditors amounts falling due within one year Short-term borrowings (68) (92) Other creditors (829) (793) (897) (885) Net current assets 1,882 1,887 Total assets less current liabilities 3,958 3,825 Creditors amounts falling due after one year Loans (357) (382) Other creditors (8) (7) (365) (389) Provisions for liabilities and charges (155) (139) Net assets excluding pension asset 3,438 3,297 Pension asset 58 31 Net assets 3,496 3,328 Capital and reserves Called up share capital 47 47 Revaluation reserve 3 3 Other reserves 173 173 Profit and loss reserve including pension reserve 3,246 3,081 Equity shareholders' funds 3,469 3,304 Minority interests in subsidiary undertakings - equity 27 24 3,496 3,328 The balance sheet as at 13 September 2003 has been restated to reflect the adoption of 'FRS 17 - Retirement Benefits' and 'UITF 38 - Accounting for ESOP Trusts'. The details of these changes are disclosed in note 8. CONSOLIDATED CASH FLOW STATEMENT For the For the year ended year ended 18 September 13 September 2004 2003 Note Â£m Â£m Cash flow from operating activities 5 631 630 Dividends from joint ventures 4 4 Dividends from associates 2 2 Return on investments and servicing of finance Investment income 55 52 Interest paid (23) (27) Dividends paid to minorities (1) (16) 31 9 Taxation (128) (120) Capital expenditure and financial investment Purchase of tangible fixed assets (223) (180) Sale of tangible fixed assets 29 40 (194) (140) Acquisitions and disposals Purchase of subsidiary undertakings (229) (215) Sale of joint ventures and associates 1 - Sale of subsidiary undertakings 24 124 (204) (91) Equity dividends paid (119) (108) Net cash inflow before use of liquid funds and financing 23 186 Management of liquid resources (18) (173) Financing Borrowings due within one year - repayment of loans (97) (224) - increase in loans 81 220 Borrowings due after one year - repayment of loans (6) (3) - increase in loans 2 4 (Decrease)/increase in bank borrowings (6) 16 Net increase in cost of own shares held (2) - (Decrease)/increase in cash (23) 26 CONSOLIDATED STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES For the For the year ended year ended 18 September 13 September 2004 2003 restated Â£m Â£m Profit for the financial year 342 326 Actuarial gains/(losses) on net pension assets 43 (95) Deferred tax associated with net pension assets (13) 28 Currency translation differences on foreign currency net assets (75) 52 Tax on currency translation differences 1 1 Total recognised gains and losses relating to the year 298 312 Prior year adjustment 45 Total recognised gains and losses since previous year end 343 CONSOLIDATED STATEMENT OF HISTORICAL COST PROFITS There is no material difference between the group results as reported and on an unmodified historical cost basis. Accordingly no note of historical cost profits and losses has been prepared. RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS For the For the year ended year ended 18 September 13 September 2004 2003 restated Â£m Â£m Opening shareholders' funds as previously reported 3,272 2,991 Prior year adjustment - UITF 38 (9) (10) Prior year adjustment - FRS 17 41 114 Opening shareholders' funds restated 3,304 3,095 Profit for the financial year 342 326 Dividends (129) (115) Goodwill written back (3) 11 Net (increase)/decrease in own shares held (1) 1 Other recognised gains and losses relating to the (44) (14) year Closing shareholders' funds 3,469 3,304 NOTES TO THE PRELIMINARY ANNOUNCEMENT 1. Segmental analysis Group turnover Operating profit Capital employed 2004 2003 2004 2003 2004 2003 (restated) (restated) (restated) Â£m Â£m Â£m Â£m Â£m Â£m Analysis by business Grocery 2,446 2,310 160 148 767 709 Primary food & agriculture 1,682 1,544 189 172 690 704 Ingredients 294 311 36 32 125 136 Retail 858 752 108 88 338 293 Inter company sales (160) (185) - - - - Central costs / capital employed - - (19) (16) (24) (28) 5,120 4,732 474 424 1,896 1,814 Businesses disposed: Grocery 22 90 1 - - 2 Primary food & agriculture 23 69 3 2 - 15 Packaging - 18 - 1 - - 5,165 4,909 478 427 1,896 1,831 Amortisation of goodwill - - (46) (42) - - 5,165 4,909 432 385 1,896 1,831 Analysis by geography (by origin and destination) United Kingdom 2,952 2,667 298 278 1,169 1,116 Rest of Europe 526 473 59 36 193 178 The Americas 865 862 66 78 255 210 Australia, Asia & Rest of World 834 807 51 32 279 310 Inter company sales (57) (77) - - - - 5,120 4,732 474 424 1,896 1,814 Businesses disposed: United Kingdom 26 131 - 5 - 16 Rest of Europe 5 2 - - - - The Americas - 11 - 1 - - Australia, Asia & Rest of World 14 33 4 (3) - 1 5,165 4,909 478 427 1,896 1,831 Amortisation of goodwill - - (46) (42) - - 5,165 4,909 432 385 1,896 1,831 We have revised the composition of our geographic segments to reflect the increasingly international breadth of our businesses. The amortisation of goodwill arises in Primary Food & Agriculture Â£2m (2003 - Â£6m), Ingredients Â£6m (2003 - Â£7m) and Grocery Â£38m (2003 - Â£29m). By geography, the charge arises in the United Kingdom Â£11m (2003 - Â£6m), Rest of Europe Â£8m (2003 - Â£4m), the Americas Â£23m (2003 - Â£23m) and Australia, Asia & Rest of World Â£4m (2003 - Â£9m). Capital employed comprises tangible fixed assets, interests in joint ventures and associates, current assets (excluding deferred tax, cash and investments), creditors (excluding borrowings, tax and dividends), and provisions for liabilities and charges excluding deferred tax. NOTES TO THE PRELIMINARY ANNOUNCEMENT continued For the For the year ended year ended 18 September 13 September 2004 2003 restated Â£m Â£m 2. Tax on profit on ordinary activities The charge for the year comprises: UK corporation tax at 30% (2003 - 30%) 94 82 Overseas income and corporation tax 30 35 Joint ventures and associates 2 2 Current tax charge 126 119 UK deferred tax 7 (1) Overseas deferred tax 13 7 Total tax charge 146 125 Add back: Tax credit on goodwill amortisation 9 10 Exceptional charge on property & business (4) (2) disposals Underlying tax charge 151 133 3. Dividends First interim dividend of 5.25p per share 41 37 (2003 - 4.75p) Second interim dividend of 9.85p per share in 2003 - 78 Proposed final dividend of 11.15p per share in 2004 88 - 129 115 The first interim dividend was paid on 31 August 2004. The proposed final dividend will be paid on 14 January 2005. 4. Earnings per ordinary share Adjusted profit for the financial year 368 326 Profits less losses on sale of fixed assets 8 12 Profits less losses on sale of businesses 7 20 Tax effect on above (4) (2) Amortisation of goodwill (46) (42) Tax credit on goodwill amortisation 9 10 Minority share of above - 2 Profit for the financial year attributable 342 326 to shareholders Adjusted earnings per ordinary share 46.6p 41.3p Earnings per ordinary share on: - sale of fixed assets 1.0p 1.5p - sale of businesses 0.9p 2.5p - tax effect on above (0.5p) (0.2p) - amortisation of goodwill (5.8p) (5.3p) - tax credit on goodwill amortisation 1.1p 1.3p - minority share of above - 0.2p Earnings per ordinary share 43.3p 41.3p The weighted average number of ordinary shares in issue during the year was 789 million (2003 - 789 million). The calculation of the weighted average number of shares excludes the shares held by the Employee Share Option Scheme on which the dividends are being waived. Adjusted earnings per ordinary share, which exclude the impact of profits less losses on the disposal of businesses and fixed assets, goodwill amortisation and the associated tax credit, is shown to provide clarity on the underlying performance of the group. The diluted earnings per share calculation takes into account the dilutive effect of share options. The diluted, weighted average number of shares is 789 million (2003 - 789 million). NOTES TO THE PRELIMINARY ANNOUNCEMENT continued For the For the year ended year ended 18 September 13 September 2004 2003 restated Â£m Â£m 5. Reconciliation of operating profit to cash flow from operating activities Group operating profit 421 378 Amortisation of goodwill 46 42 Depreciation 139 142 (Increase)/decrease in working capital - stocks 30 (11) - debtors (39) 20 - creditors 16 35 Other provisions 4 4 Pension cost less contributions 13 20 Other movement in own shares held reserve 1 - Net cash from operating activities 631 630 2004 2003 6. Reconciliation of net cash flow to movement in Â£m Â£m net funds (Decrease)/increase in cash (23) 26 Management of liquid resources 18 173 Net decrease/(increase) in borrowings 26 (13) Change in net funds resulting from cash flows 21 186 Effect of currency changes 8 15 On acquisition of subsidiary undertakings (9) (13) Movement in net funds 20 188 Opening net funds 1,238 1,050 Closing net funds 1,258 1,238 At Cash Exchange At 13 flow Acquisition adjustments 18 September of September 2003 subsidiary undertakings 2004 Â£m Â£m Â£m Â£m Â£m 7. Analysis of net funds Cash at bank and in hand 170 (23) - (11) 136 Short-term borrowings (92) 22 (5) 7 (68) Investments 1,542 18 - (13) 1,547 Loans over one year (382) 4 (4) 25 (357) 1,238 21 (9) 8 1,258 8. Prior year adjustments 'Financial Reporting Standard 17 - Retirement Benefits' (FRS 17) has been adopted in full with effect from 14 September 2003. The adoption of FRS 17 has required a change to the accounting treatment of defined benefit pension arrangements such that the group now includes the assets and liabilities of these arrangements in the consolidated balance sheet. Current service costs, curtailment and settlement gains and losses, and net financial returns are included in the profit and loss account in the period to which they relate. Actuarial gains and losses are recognised in the statement of total recognised gains and losses. The group operates a number of defined benefit pension arrangements, the total cost of which included within operating profit, was Â£43m (2003 - Â£41m restated). This total pension cost compares to Â£20m (2003 - Â£18m), which would have been incurred under the previous accounting policy. The following table sets out the impact of adopting FRS 17 on the effected line items in the group profit and loss account and balance sheet: Group profit and loss account Group Profit/loss Other Tax on Profit for operating on sale of financial profit on the profit businesses income ordinary financial Â£m Â£m Â£m activities year Â£m Â£m Year to 13 September 2003 As previously reported 401 14 - (128) 332 Adoption of FRS 17 (23) 6 8 3 (6) As restated 378 20 8 (125) 326 Group balance sheet Other Provision Net Profit and creditors for pension loss liabilities and charges assets reserve Â£m Â£m Â£m Â£m As at 13 September 2003 As previously reported (799) (143) - 3,049 Adoption of FRS 17 6 4 31 41 As restated (793) (139) 31 3,090 The group has also complied with 'UITF 38 - Accounting for ESOP Trusts'. This has resulted in the reclassification of shares held in employee trusts from 'investments' to 'shareholders' funds'. This has the effect of reducing net assets and the profit and loss reserve by Â£9m at 13 September 2003. In addition the net cash outflow arising from the purchase of shares by the Trust has been reclassified from 'capital expenditure and financial investments' to 'financing'. The total impact of these changes to accounting policies on the group profit and loss reserve is as follows: Profit and loss reserve Â£m As at 13 September 2003 As previously reported 3,049 Adoption of FRS 17 41 Adoption of UITF 38 (9) As restated 3,081 9. Other information The financial information set out above does not constitute the group's statutory financial statements for the years ended 18 September 2004 and 13 September 2003, but is derived from them. The 2003 financial statements have been filed with the Registrar of Companies whereas those for 2004 will be delivered following the company's annual general meeting. The auditor's opinions on these financial statements were unqualified and did not include a statement under section 237 (2) or (3) of the Companies Act 1985. ACCOUNTING POLICIES Basis of preparation These financial statements have been prepared under the historical cost convention as modified by the revaluation of certain assets, and in accordance with applicable accounting standards and the Companies Act 1985. Basis of consolidation The group accounts comprise a consolidation of the accounts of the company and its subsidiary undertakings, together with the group's share of the results and net assets of its joint ventures and associates. The financial statements of the company and its subsidiary undertakings are made up for the 53 weeks ended 18 September 2004, except that, to avoid delay in the preparation of the consolidated financial statements, those of the Australian, New Zealand, China, Poland and the North American subsidiary undertakings are made up to 31 August 2004. Acquisitions The consolidated profit and loss account includes the results of new subsidiary undertakings, joint ventures and associates attributable to the period since change of control. Disposals The results of subsidiary undertakings, joint ventures and associates sold are included up to the dates of change of control. The profit or loss on the disposal of an acquired business takes into account the amount of any related goodwill previously written off directly to reserves, or the net amount of capitalised goodwill remaining unamortised, as appropriate. Intangible fixed assets Intangible fixed assets consist of goodwill arising on acquisitions since 13 September 1998, being the excess of the fair value of the purchase consideration of new subsidiary undertakings, joint ventures and associates over the fair value of net assets acquired. Goodwill is capitalised in accordance with FRS 10 and amortised over its useful economic life, not exceeding 20 years. Goodwill previously written off against reserves has not been reinstated. Tangible fixed assets Tangible fixed assets are carried at their original cost less accumulated depreciation. Depreciation Depreciation is provided on the original cost of assets and is calculated on a straight line basis at rates sufficient to reduce them to their estimated residual value. No depreciation is provided on freehold land or payments on account. Leaseholds are written off over the period of the lease. The anticipated life of other assets is generally deemed to be not longer than: Freehold buildings 66 years Plant, machinery, fixtures and fittings - sugar factories 20 years - other operations 12 years Vehicles 8 years Fixed asset investments Joint ventures and associates are accounted for in the financial statements of the group under the equity method of accounting. Other fixed asset investments in the group's accounts, and all fixed asset investments in the accounts of the company, are stated at cost less amounts written off in respect of any impairment. Stocks Stocks are valued at the lower of cost or net realisable value, after making due provision against obsolete and slow-moving items. In the case of manufactured goods the term 'cost' includes ingredients, production wages and production overheads. Current asset investments Current asset investments are stated at the lower of cost or market value. ACCOUNTING POLICIES continued Foreign currencies Monetary assets and liabilities denominated in foreign currencies are translated into sterling at rates of exchange ruling at the balance sheet date or at the contracted rate as appropriate. The assets and liabilities of overseas operations are translated into sterling at the rates of exchange ruling at the balance sheet date. The results of overseas operations have been translated at the average rate prevailing during the year. Exchange differences arising on consolidation are taken directly to reserves. Other exchange differences are dealt with as part of operating profits. Group Turnover Turnover represents the net invoiced value of goods and services delivered to customers excluding sales taxes. Pension and post-retirement benefits In accordance with 'FRS 17 - Retirement Benefits', the operating and financing costs of pension and post-retirement schemes are recognised separately in the profit and loss account. Service costs are systematically spread over the service lives of the employees and financing costs are recognised in the period in which they arise. The costs of past service benefit enhancements, settlements and curtailments are also recognised in the period in which they arise. The difference between actual and expected returns on assets during the year, including changes in actuarial assumptions, are recognised in the statement of total recognised gains and losses. Research and development Expenditure in respect of research and development is written off against profits in the period in which it is incurred. Leases All material leases entered into by the group are operating leases, whereby substantially all of the risks and rewards of ownership of an asset remain with the lessor. Rental payments are charged against profits on a straight line basis over the life of the lease. Financial instruments Forward foreign exchange contracts and currency options are used to hedge forecast transactional cash flows and accordingly, any gains or losses on these contracts are recognised in the profit and loss account when the underlying transaction is settled. Derivative commodity contracts are used to hedge committed purchases or sales of commodities and accordingly, any gains or losses on these contracts are recognised in the profit and loss account in the same accounting period as the underlying purchase or sale. Gains or losses arising on hedging instruments that are cancelled due to the termination of the underlying exposure are taken to the profit and loss account immediately. Deferred tax Provision for deferred tax is made on all timing differences that have originated, but not reversed at the balance sheet date. A deferred tax asset is regarded as recoverable and therefore recognised only when it is regarded as more likely than not that there will be sufficient future taxable profits. Deferred tax is not discounted. This information is provided by RNS The company news service from the London Stock Exchange

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