Final Results

RNS Number : 0584F

Cranswick PLC

20 May 2013

 

Embargoed 7am Monday May 20 2013

CRANSWICK PLC:  Record of growth continues

Cranswick plc ("Cranswick" or "the Company" or "the Group"), the food producer, announces its audited preliminary results for the year ended 31 March 2013.

Highlights:

·    Reported revenues up 7 per cent to £875m (2012: £821m)

·    Underlying sales ahead by 5 per cent*

·    Operating profit before impairment up 7 per cent at £50.0m (2012: £46.7m)

·    Adjusted pre-tax profit up 8 per cent to £49.3m (2012: £45.6m) ^†

·    Reported pre-tax profit down 2 per cent to £47.4m (2012: £48.4m)

·    Adjusted earnings per share up 8 per cent to 78.9p (2012: 72.9p) ^†

·    Reported earnings per share down 4 per cent to 75.1p (2012: 78.6p) 

·    Recommended final dividend up 6 per cent to 20.6p (2012: 19.5p)

·    Interest cover 63 times (2012: 49 times)

·    Net debt down to £20.1m (2012: £21.7m)

·     East Anglian Pigs acquired subsequent to year end

Notes:

Comparative figures are for the 53 weeks to 31 March 2012

*excluding contribution from Kingston Foods acquired on 29 June 2012

^†before non-recurring charge of £1.8m (2012: non-recurring net gain of £2.7m)

Cranswick Chairman Martin Davey said: 

"This has been a positive year for Cranswick. Further progress was achieved in trading and investment was made for this progress to continue over the longer term.

"Total revenue for the year was 7 per cent higher at £875 million and 9 per cent higher than previously after adjusting for the extra week.

"Adjusted profit before tax was £49.3 million compared to £45.6 million last year which included the benefit of the extra week, an increase of 8 per cent.

"Operating cash flow in the year was strong and after significant investment in the asset base and the acquisition of cooked meats supplier Kingston Foods, year end net debt stood at £20.1 million compared to £21.7 million a year earlier.

"Investment elsewhere in the business contributed additional capacity and operating efficiencies which in turn have enabled the Company to absorb some of the inflationary pressures within the supply chain.  This, along with substantial new business from customers later in the year, were significant features of the year's trading.

"Subsequent to the year end the Company acquired East Anglian Pigs.  This is a successful business involved in the breeding, rearing and finishing of British pigs and a key supplier to the Group's Norfolk activities.

"Recent issues in the integrity of the supply chain for meat products and the introduction in 2013 of higher welfare standards for pig production in the EU enhance the competitive position of UK based pork processors. The Company's well invested asset base, providing efficient means of production and headroom for future growth, along with an experienced management team and a robust balance sheet should enable it to capitalise on opportunities that arise."

-ends-

For further information:

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Chairman's statement

This has been a positive year for Cranswick. Further progress was achieved in trading and investment was made for this progress to continue over the longer term. Pig meat consumption in the UK continues to grow. There was a 2 per cent increase in UK per capita consumption during 2012 compared to a fractional increase in poultry and reductions in beef/veal and lamb/mutton (source: BPEX). In food service pig meat performed well and accounted for 28 per cent of all protein servings, making it the most popular protein out of the home (source: BPEX).

The business is totally focused on working closely with both its customer base and supply chain to ensure that the consumer has competitively priced food that is nutritious, tasty and a wholesome constituent of a balanced diet.

Results

The performance in the year was particularly pleasing considering the previous year was a 53 week period compared to the usual 52 week period this past year.

Underlying sales, which exclude the contribution from Kingston Foods, rose 5 per cent during the year and reflected growth across most product sectors. Particularly strong growth was seen in sales of bacon and sausage.  Underlying sales were 7 per cent higher on an equivalent 52 week basis.  Total revenue for the year was 7 per cent higher at £875 million and 9 per cent higher than previously after adjusting for the extra week.

With an unchanged operating margin before impairment, and after net finance costs of £0.8 million, adjusted profit before tax was £49.3 million compared to £45.6 million last year which included the benefit of the extra week, an increase of 8 per cent. Earnings per share on the same basis were 8 per cent higher at 78.9 pence. Reported profit before tax was £47.4 million and earnings per share were 75.1 pence compared to £48.4 million and 78.6 pence respectively a year ago.

Net finance costs were covered 63 times by profit before net finance costs and tax, compared to 49 times in the previous year. Operating cash flow in the year was strong and after significant investment in the asset base and the acquisition of cooked meats supplier Kingston Foods, year end net debt stood at £20.1 million compared to £21.7 million a year earlier. This amount is comfortably within the Company's borrowing facility and with a very small pension scheme exposure puts the balance sheet in good shape.

There are full reviews of trading and finances in the reviews by the Chief Executive and Finance Director which follow.

Investments

During the year Kingston Foods was acquired and integrated into the Company's cooked meats business. Kingston, which has broadened the Group's customer base, has performed well since acquisition and I welcome Tony Turner, managing director, and his colleagues to Cranswick.

Subsequent to the year end the Company acquired East Anglian Pigs.  This is a successful business involved in the breeding, rearing and finishing of British pigs and a key supplier to the Group's Norfolk activities. It operates in the British premium outdoor pig-rearing sector and has accreditation under the RSPCA Freedom Foods and the Red Tractor schemes. This strategic acquisition enhances Cranswick's commitment to, and greater control over, a robust and integrated supply chain with a clear focus on premium British ingredients. I welcome Adrian Dowling, managing director, and his colleagues to Cranswick.

Significant organic developments included the purchase of and investment in the Riverside fresh pork facility in Hull and the construction of the pastry plant in Malton, North Yorkshire. These two sites, which have only recently been commissioned, will contribute to the long term growth of the Company.

Investment elsewhere in the business contributed additional capacity and operating efficiencies which in turn have enabled the Company to absorb some of the inflationary pressures within the supply chain.  This, along with substantial new business from customers later in the year, were significant features of the year's trading.

Resources were committed to secure approval for fresh pork exports to China and authorisation has also been obtained to supply the Australian market. Along with the approval obtained previously for supplies to the USA this increases the potential international opportunities for the business.

Dividend

The Board is proposing to increase the final dividend to 20.6 pence per share, an increase of 5.6 per cent on last year. Together with the interim dividend, which was raised 4.4 per cent to 9.4 pence per share and paid in January 2013, this makes a total dividend for the year of 30.0 pence per share. This represents an increase of 5.3 per cent on the 28.5 pence per share paid last year. The final dividend, if approved by Shareholders, will be paid on 6 September 2013 to Shareholders on the register at the close of business on 5 July 2013.  Shareholders will again have the option to receive the dividend by way of scrip issue.

Board

Adam Couch was appointed Chief Executive in August 2012 in line with the prior notification to Shareholders. This followed the appointment of Jim Brisby as Sales and Marketing Director and Mark Bottomley as Finance Director within the previous three years as part of the Board's succession planning. Each of these were internal appointments and made after giving due consideration to potential candidates from outside the Company. It illustrates to our colleagues the opportunity for career development with Cranswick and maintains the culture, ethos and values of the business.  With the executive team now well established I will be moving to a part time role as Chairman with effect from 1 September 2013.

Patrick Farnsworth will be standing down from the Board at the forthcoming Annual General Meeting. Patrick has served as a Non-Executive Director since 2004 and this year will have completed a term of nine years at which time, under corporate governance guidelines, he will no longer be deemed independent. I would like to thank Patrick for his contribution to the development of the business and wish him well for the years ahead.

Kate Allum, CEO of First Milk Limited and former head of European supply chain for McDonald's, joins the Board as a Non-Executive Director in July 2013. Kate brings operational experience of international food markets and broadens the expertise and experience within the Board.

Hector Fraser

Hector, one of the 23 local farmers who founded Cranswick in the early 1970's and who served as a director until his retirement in 1989, sadly passed away last month. Hector contributed enormously to the early development of the business and the Directors join with all at Cranswick in offering condolences to Hector's wife Judy and all his family.

Corporate Governance

The Board is mindful of the requirements of the UK Corporate Governance Code and embraces this as part of its culture.  Developments since last year include the arrangements that have been put in place for external evaluation of the Board and its procedures as well as the improved gender diversity within the Board as referred to above.

Staff

The achievements of the year would not have been possible without the expertise, determination and commitment of the management teams and their colleagues within the business. Once again they have proved themselves to be amongst the best in the sector and on behalf of the Board I express sincere thanks and appreciation.

Outlook

Cranswick is very much focused on working closely with its customers in providing a range of products that continues to prove popular with the consumer. Encouragement is taken from the increase in pork consumption within the UK and this, coupled with new product development, positions the business favourably.

Recent issues in the integrity of the supply chain for meat products and the introduction in 2013 of higher welfare standards for pig production in the EU enhance the competitive position of UK based pork processors. The Company's well invested asset base, providing efficient means of production and headroom for future growth, along with an experienced management team and a robust balance sheet should enable it to capitalise on opportunities that arise.

The Board looks forward to the task that lies ahead as it pursues the continuation of Cranswick's successful long term development.

Martin Davey

Chairman

20 May 2013

Review of activities

In my first annual report as Chief Executive it is pleasing to report significant growth across the business, driven by Cranswick's continued focus on premium quality food products, supplied from efficient, modern, well invested facilities.  Reported sales increased by 7 per cent with sales, excluding the contribution from Kingston Foods, increasing by 5 per cent.  This was particularly pleasing given the previous year benefited from the inclusion of an extra week.

The business has faced a number of challenges over the last twelve months, and none more so than the continuing inflationary pressures on pig producers driven by high feed prices.   These pressures led to record pig prices, with the price peaking in December 2012 at 161 pence per kilogramme.  These record input costs were met with positive action by the Group, its producers and retail customers. This action should lead to longer term, more strategic pricing arrangements which will allow the industry to better manage volatile cereal and soya costs, the major constituents of animal feed, that have been experienced in the last two years.

The business has managed the upward pressure on pig prices, partly through the support of the Group's customers, but also through the operational efficiencies which have developed following the significant investment in the business' infrastructure over the past 5 years.  This expenditure, totalling £125 million, has been made on improving and expanding the primary processing, sausage, cooked meats and bacon facilities and most recently in developing a new pastry production unit on a green field site at Malton, North Yorkshire, which was commissioned in May this year.  This investment has delivered first class operations with sufficient headroom to meet the demands of the Group's customers at peak times whilst improving operating efficiencies and maintaining the quality standards expected by the Company's stakeholders.  The issues faced by the wider meat industry, which broke in January 2013, are a timely reminder of how fragile the supply chain in the food sector can become.  Cranswick is immensely proud of the work done in conjunction with its suppliers and customers in this area which place the business in a strong position to further develop supplier and customer relationships. Integrated, tighter and more transparent supply chains are expected to be a feature going forward and Cranswick has taken positive action in this area through the acquisition of East Anglian Pigs Limited (EAP).

Fresh pork had a strong year with sales growing by 5 per cent.  This growth was particularly marked in the last quarter of the financial year, with new business from two of the Group's key retail customers added, which could only be accommodated by the addition of a new retail packing facility. An existing food grade facility, situated in Hull, East Yorkshire, in proximity to the Group's largest fresh pork processing plant, was acquired in January and commissioned only one month later.  The Hull fresh pork site now has capacity to process 30,000 pigs each week and this facility is supported by the Group's second fresh pork site in Norfolk which is capable of processing 18,000 pigs each week.  Both are of significant importance to the local farming communities in each region as the majority of pigs processed are sourced from within a 50 mile radius of the respective sites.  The Hull and Norfolk operations have both benefited from gaining direct export approval to China and more recently to Australia.  Export sales, which have increased by 9 per cent in volume terms over the last twelve months, now account for 5 per cent of the Group's revenues.  Sixteen 25 tonne containers are shipped to the Far East each week and shipment of premium cuts to Australia is imminent.

Sausage sales increased by 10 per cent. This was a pleasing performance given the inclement summer weather experienced in 2012.  Further investment in the Group's gourmet sausage facility in Hull ensured that excellent service levels were achieved in the peak production periods, particularly in the lead up to Christmas, which is Cranswick's busiest trading period.  Logistically, this can be extremely challenging, but the Company continues to successfully meet its customers' demanding expectations.  The Hull facility, which now has weekly capacity in excess of 700 tonnes and is capable of producing 11 million sausages each week, still very much embodies the Group's premium ethos.  Producing high quality products to such a scale is achieved through an unstinting focus on quality and continual reference back to the artisan origins of these premium product ranges.  This methodology, so successful in growing the premium gourmet sausage business, has been used to great effect in developing a range of premium beef burgers. These products incorporate whole cuts of prime traceable British beef with a homemade appearance and texture using only the finest ingredients.  Sales of beef burgers grew strongly in the year and contributed to the increase in overall sales in this category.  

Sales of premium hand cured, air-dried bacon were ahead by 13 per cent. The unique nature of this process has gained wide acclaim and features in all but one of the major retailers top tier offerings.  New products have also been developed in the gammon category which offers consumers further premium cuts which were previously unavailable. The bacon facility, at Sherburn-in-Elmet, near Leeds, has seen further investment this year through the latest laser slicing technology to further improve efficiencies, increase throughput speeds and provide additional capacity to accommodate peak production periods.

Cooked meat sales continue to perform strongly with sales ahead of the previous year by 11 per cent. Growth was supported by significant business wins during the final quarter. This additional business will have greater impact in the forthcoming year.  The hand-cured, air-dried premium ham range, developed last year for one of the Group's key retail customers, in conjunction with the Hull fresh pork and Sherburn sites, has continued to gain market share. This range sets a new standard in terms of visual appearance and taste utilising premium RSPCA Freedom Foods accredited material.  There was further investment in production capacity during the year, with the addition of a 2,000 square metre extension to the Sutton Fields facility in Hull, which increased capacity by 50 per cent and was commissioned in advance of the peak Christmas trading period.  Growth was further supported by the acquisition of Kingston Foods earlier in the financial year.  Adjusting for the contribution to sales from Kingston Foods in the period since acquisition, underlying sales increased by 6 per cent.

Sales of continental products which were 7 per cent lower than the previous year held up extremely well considering the loss of business with a major retail customer over the last two years. New products have been introduced including a range of olives under the 'Bodega' brand and new listings of filled fresh pasta with one of the Group's major retail customers. New customers have also been added with sales to one of the retail discounters growing particularly strongly.  Alongside these developments, sales of core products including corned beef have remained extremely resilient.

Sandwich sales increased by 7 per cent against the backdrop of a competitive market.  New sandwich platter business secured with one of the major multiples will drive top line growth in the coming year and this follows a move into the convenience retail sector during the last 12 months.  Sales were also boosted during the year by supplying meal solutions to key sporting events over the summer period, including the Olympic opening and closing ceremonies.  In addition, a number of operational changes have been made which will further improve the site performance by driving efficiencies through cost reduction and range simplification.

The gourmet pastry facility was completed in May this year and will offer an extended range of premium pastry products to complement the all butter pastry sausage roll and the Yorkish Pasty ranges which established Cranswick in this market.  The new state of the art facility extends to 5,000 square metres and employs technology unrivalled in the sector.  New products will include quiches and hot pies, with one of the Group's major high street retail customers as the anchor customer.  Pastry sales grew strongly during the year. With the new Malton facility now commissioned and new customers and products being added, the business is well positioned to continue its positive development.

Cranswick's growth has been driven through a pursuit of excellence in quality food products allied to an unstinting focus on driving operational efficiencies throughout the Group's operations.  Aligned to this, a more vertically integrated approach is now being developed, given the UK consumer's concern with food safety, provenance and traceability.  This approach was evidenced by the Company's recently announced acquisition of EAP.

The successful development of the business has only been possible through the skill and determination of Cranswick's colleagues and this is a common theme throughout all the Group's operations.  I would like to express my thanks for their dedication, help and support in the last twelve months. 

Pork's value proposition remains strong, particularly compared to both beef and lamb.  This together with its health attributes and versatility allied to the Group's knowledge and understanding of both its customers and the UK consumer, leave Cranswick well positioned to continue its growth strategy.

Adam Couch

Chief Executive

20 May 2013

Financial review
Business development and performance

The key features of the year have been the record sales and underlying operating profit for the Group, continued capital investment and strong cash generation. The Group delivered record production and sales volumes across the Christmas trading period.  The trading environment in which the Group operates has remained challenging.  During the third quarter of the year, the business faced rapid raw material price inflation, which it managed through the support of the Group's customers and also through operational efficiency improvements.  The Group has experienced continuing competitor pressure, although the efficiencies achieved through on-going capital investment and as extra volumes are put through its factories have mitigated to some extent against these pressures.

Revenue

Reported sales were 7 per cent ahead of last year reflecting growth across most product sectors.  After adjusting for the revenue contributed by Kingston Foods, which was acquired on 29 June 2012, sales were 5 per cent higher than the prior year which included the benefit of a 53^rd week.  Sales of fresh pork, cooked meats, bacon, sausages and sandwiches all grew strongly.  Sales of continental products were lower following the decision of one retail customer to move to a direct sourcing policy, although new products and new customers together with increased sales to existing customers helped, to some extent, to mitigate this.  Pastry sales grew particularly strongly, albeit from a modest base, and there was a growing contribution to revenues from the Group's export markets.

Operating profit         

Group operating profit of £48.2 million is stated after a property impairment charge of £1.8 million.  This was a non-cash item, which followed a reassessment of the carrying value of a mothballed production facility in East Lancashire.  Group operating profit before impairment at £50.0 million increased by 7 per cent and at 5.7 per cent of sales, operating margin was in line with the level achieved last year.

Share of results of associate

The Group's share of the post-tax result of its associate, Farmers Boy (Deeside) Limited (FBD), in the prior year was a loss of £0.7 million.  On 30 March 2012 the Group sold its 49 per cent holding in FBD to Wm Morrison Supermarkets PLC for a cash consideration of £14.5 million.  The transaction gave rise to a profit on sale in the year to 31 March 2012 of £8.3 million.

Finance costs

Net finance costs of £0.8 million (2012: £1.0 million) were lower than the previous year reflecting the strong cash generation in the year which resulted in lower average borrowings.  Interest cover strengthened from 49.2 times to 62.9 times.

Profit before tax

Profit before tax at £47.4 million (2012: £48.4 million) was 2 per cent lower, but after adjusting for the effects of the associate and goodwill impairment in the prior year and the property impairment charge in the current year referred to above, adjusted profit before tax was 8 per cent higher at £49.3 million (2012: £45.6 million).  This was notwithstanding the fact that the prior year benefited from the inclusion of a 53^rd week.

Taxation

The tax charge as a percentage of profit before taxation was 23.6 per cent (2012: 22.5 per cent). The standard rate of UK Corporation Tax was 24 per cent for 2013 and 26 per cent for 2012. The lower than standard rate of tax in the current year relates to a deferred tax credit of £0.3 million following the substantial enactment of the Finance Act 2013 which reduces the corporation tax rate from 24 per cent to 23 per cent in the year to 31 March 2014. The lower than standard rate in the previous year related to the gain on sale of the Group's 49 per cent stake in FBD which did not attract a tax charge, together with a further credit of £0.7 million in relation to the planned reduction in the Corporation tax rate from 26 per cent to 24 per cent in the current year.

Earnings per share

Adjusted earnings per share, which exclude the effect of the property impairment charge this year and the effects of FBD and goodwill impairment from the prior year, increased by 6.0 pence from 72.9 pence to 78.9 pence.  Basic earnings per share fell by 4.5 per cent to 75.1 pence, reflecting a strong increase in underlying profitability in the current year, offset by the impairment charge and, in the prior year, the profit on sale of the Group's 49 per cent stake in FBD.  The weighted average number of shares in issue during the year was 48,257,000 (2012: 47,709,000). Again, the prior year earnings per share figure benefited from the inclusion of a 53^rd week.

Cash flow and net debt

The Group continues to deliver strong operational cash flows.  Cash generated from operating activities was £49.8 million (2012: £45.5 million), with the increase compared to the previous year reflecting increased Group operating profits partly offset by an increase in working capital reflecting growth of the business overall.  The net cash outflow from investing activities of £35.5 million is principally accounted for by capital additions, net of fixed asset sale proceeds, of £30.5 million and the cash spent of the acquisition of Kingston Foods of £6.0 million, less loan repayments received of £0.7 million.  The previous year's outflow was £3.3 million.  The £26.0 million of net cash used in financing activities in 2013 is largely due to interest paid of £0.9 million, dividends paid of £11.4 million and loan repayments of £14.0 million net of proceeds from issue of share capital of £0.5 million. The prior year cash outflow from financing was £20.8 million.  The overall result is a net decrease in cash and cash equivalents of £11.7 million (2012: increase of £21.4 million).  Net debt reduced by £1.6 million to £20.1 million (2012: £21.7 million) at the year end, and gearing fell from 9 per cent to 7 per cent.

Pensions

The Group operates a number of defined contribution schemes, whereby contributions are made to schemes operated by major insurance companies.  Contributions to these schemes are determined as a percentage of employees' basic salary.  Cranswick Country Foods plc operates a defined benefit scheme which has been closed to further accrual since 2004. Under International Accounting Standard (IAS) 19, the deficit at 31 March 2013 was £3.4 million (2012: £5.3 million).  The present value of funded obligations was £21.5 million (2012: £21.2 million) and the fair value of plan assets was £18.2 million (2012: £15.8 million).

Post balance sheet events

On 29 April 2013, the Group acquired the whole of the issued share capital of East Anglian Pigs Limited, a company involved in the breeding, rearing and finishing of British pigs, for a net cash consideration of £10.7 million.  Further details of the acquisition are set out in the Chairman's Statement and in note 9.

Principal risks and uncertainties

There are a number of potential risks and uncertainties, which could have a material impact on the Group's long-term performance and cause actual results to differ materially from expected and historical results. 

Effective risk management underpins the delivery of the Group's strategy and objectives.  The Board is ultimately responsible for Cranswick's system of risk management and internal control and sets the Group's overall appetite for risk.  This overarching risk appetite is cascaded down through the business to operational management.  Risk management processes are embedded throughout the Group at all levels.

Roles and responsibilities

Board	Responsible for the Group's system of risk management and internal control and for setting the Group's overall appetite for risk.
Audit Committee	Review the systems of internal control which are in place and provide assurance to the Board that the process of risk management and internal control is operating effectively.
Risk Committee	Provide oversight and advice to the Board and Audit Committee in relation to current and future risk exposures and future risk strategy including advice on determination of risk appetite and tolerance.
Site management	Operate the risk management process within the approved risk management framework and ensure that it is implemented effectively and efficiently. Identify and assess all key risks, properly allocate management responsibility and ensure that risks remain adequately identified, analysed and controlled.

The principal risks and uncertainties facing Cranswick and the actions taken to reduce their impact are set out below:

Risk area	Nature of risk and potential impact	Risk mitigation
Industry risks
State of the economy Change in 2012/13 → No change	A deterioration in the world and, in particular, UK economies may adversely affect the activity levels of consumers and the Group's immediate customers, leading to a fall in demand for the Group's products and ultimately lower profitability and cash flow.	Although Cranswick is unable to influence general economic conditions, the business offers a range of products across premium, standard and value tiers which it is able to flex in response to consumer and market trends.  Pork remains an extremely competitively priced protein.
Competition, customer retention and reliance on key customers Change in 2012/13 → No change	The Group trades in highly competitive markets which tend to operate without long term contracts.  Product innovation and changing consumer trends provide a constant challenge to the future success of the Group and its ability to compete effectively. A significant proportion of the Group's revenues are generated from a small number of major grocery retail customers, loss of all or part of the Group's business with one or more of these customers would adversely impact the Group's results.	The Group manages the risk of operating in a consolidated sector by maintaining strong customer relationships. This process is supported by delivering high levels of service and quality and by continued focus on product development and technical innovation.  The commercial teams continually look for opportunities to expand the customer base across all product categories and work closely with key customers to ensure service, quality and new product development are of the highest standard.  Significant supply side consolidation seen in recent years further mitigates this risk.
Raw material price fluctuations Change in 2012/13 ↑ Increased volatility in animal feed prices and impact of new 2013 EU welfare regulations	The major exposure the Group has to raw material price fluctuations is pig meat.  An increase in raw material input costs may impact Group profitability.	Purchasing of pigs and pig meat is coordinated centrally and whilst the Group does not generally seek to hedge against pig price movements because of the downside risk, longer term contracts have been negotiated in certain instances with key pig suppliers. The Group further mitigates the risk of raw material price inflation through on-going pricing discussions with its customers and continued focus on improving operating efficiencies across all its production facilities.
Environmental matters Change in 2012/13 → No change	The industry is subject to a range of UK and EU legislation. Environmental standards are being tightened on a regular basis and require increasing levels of investment. Compliance imposes costs and prolonged failure to comply could materially affect the Group's ability to operate.	The Directors believe that good environmental practices support the Board's strategy by enhancing the reputation of the Group, the efficiency of production and the quality of products. Further details of these initiatives are set out in the Group's Corporate Social Responsibility statement and on the Group's website under the 'Greenthinking' banner.
Food scares and product contamination Change in 2012/13 ↑ Recent meat industry food scares	As a food producer, Cranswick is subject to industry related risks of contamination of products and/or raw materials and potential health related issues. Such an incident may lead to product recall costs, reputational damage and regulatory penalties.	The risk of such events is mitigated by ensuring that all raw materials are traceable to source and that the manufacturing, storage and distribution systems of both Group sites and those of suppliers are continually audited and monitored by experienced and well qualified site based and Group technical teams.
Supplier standards Change in 2012/13 ↑ Recent meat industry food scares	Cranswick is reliant upon its suppliers meeting the Group's high quality and welfare standards.  Failure on their part could lead to customer complaints and reputational damage.	The Group ensures all suppliers of key raw materials have independent third party accreditations.  Detailed technical specifications are in place for all products, and all sites have trained product inspection and Quality Assurance teams.
Operational risks
Food safety Change in 2012/13 → No change	A breach of food safety legislation or the introduction of more stringent regulations may lead to reputational damage and regulatory penalties including restrictions on operations, damages or fines.	Cranswick conforms to all relevant food safety regulations and adopts best practice across its production facilities.  All of its production sites are subject to audits to ensure Group standards are maintained.
Business continuity Change in 2012/13 → No change	The Group faces the risk of incidents such as a major fire, which may result in significant and prolonged disruption to its operating facilities and ensuing loss of sales and reduced profitability.	Business continuity plans are in place across the Group's manufacturing facilities and appropriate insurance cover is in place to mitigate any financial loss.  Potential business disruption is limited due to multi-site operations across the majority of the Group's product lines.
Legislation Change in 2012/13 → No change	Legislation in all the markets the Group serves changes on a regular basis, and interpretation of existing laws can also change to create ever tightening standards, often requiring additional human resources and the provision of new assets and systems.  Failure to comply with existing or new legislation may adversely affect the Group's results.	Cranswick is committed to responding positively to new regulation and ensuring that the Group's views are expressed during consultation exercises.
Overseas markets Change in 2012/13 ↑ Recent meat industry food scares	Cranswick trades in a growing number of overseas markets, and may not be familiar with local practices and regulations.  Failure to comply could lead to prosecution and loss of raw material supply or customer.	Extensive research is carried out into new markets ahead of commencement of trade. The Group uses reputable local contacts to ensure that local laws are complied with.
Technology Change in 2012/13 → No change	The Group is increasingly reliant on both IT and operational technology and operations could be significantly impacted if these systems are not well maintained and updated on a regular basis.	The Group has well trained, operational engineers at each site who carry out regular checks, calibration and maintenance on all key machinery. It also has central and site based IT teams to maintain computer systems. Robust back-up procedures are in place, as are disaster recovery plans, both of which are tested regularly.
Business integration Change in 2012/13 → No change	The Group has grown by acquisition as well as organically, and faces the challenge of integrating new businesses into the Cranswick group and achieving operational targets.	The Group ensures suitable incentives are in place to retain key management, who work closely with existing group management to help smooth the transition. There is also rigorous review of operations and results by the Group Board. A rigorous due diligence approach is adopted for all potential acquisitions which encompasses all legal, commercial, financial, technical and environmental matters.
Human resource risks
Health & Safety Change in 2012/13 → No change	A breach of Health & Safety regulations would leave the Group exposed to reputational damage and regulatory penalties.	A dedicated Group Health & Safety team, supported by site based coordinators, proactively monitors, manages and improves performance.  All team members receive continual training to industry approved standards.  Quarterly reports on performance against KPIs are issued to site management and the Group Board.
Ethical management Change in 2012/13 → No change	Good employee working conditions are core to Cranswick's values however poor practice in this area could lead to prosecution, industrial action and adverse media attention.	The Group is a member of SEDEX and ALP, and has agreed to comply with the ETI base code.  Additionally, all sites will undergo SMETA ethical audits at least once every two years and carry out labour provider audits each year. The Group also has an independent whistleblowing hotline in place so that employees can raise any concerns they might have (anonymously if they so choose).
Staff recruitment and retention Change in 2012/13 → No change	The success of the Group is dependent on attracting and retaining high quality senior management and staff.	The Group mitigates the risk associated with loss of key personnel through robust succession planning, strong recruitment processes, effective incentives and retention initiatives and on-going training and development.
Access to workforce Change in 2012/13 → No change	The Group experiences periods of heightened demand, and has the potential to experience mass absence due to sickness.  Without flexibility in the workforce, customer orders may not be fulfilled.	All Group sites have access to multiple approved agencies for the supply of temporary, skilled and unskilled labour.  Strict hygiene rules and return to work procedures are in operation at all sites.
Financial risks
Interest rates, currency, liquidity and credit risk Change in 2012/13 → No change	The Group is exposed to interest rate risk on borrowings and foreign currency risk on purchases, particularly of charcuterie products.  In addition the Group needs access to funding for current business and future growth.	Interest rate and foreign currency risks are managed using effective hedging policies, which are coordinated and controlled by the Group's treasury function.  Each operation has access to the Group's overdraft facility and bank positions are monitored on a daily basis.  All term debt is arranged centrally and appropriate headroom is maintained.
Granting of credit and recoverability of debt Change in 2012/13 → No change	The majority of sales are made to major UK retailers and practically all sales, to these and other customers, are made on credit terms. Granting of credit to inappropriate parties or failure to collect debts on a timely basis could leave the Group exposed to losses.	Control procedures over acceptance of new customers and review of the level of credit granted with reference to external credit agencies take place at all sites.  Debts are recovered on a pro-active basis and management teams aim to ensure customers trade within the agreed terms.
Business acquisitions Change in 2012/13 → No change	Businesses may be acquired based on inaccurate information, unachievable forecasts or without appropriate consideration being given to the terms of purchase.	Rigorous due diligence is carried out in advance of any new business acquisition, using internal and external specialists where required.

Going concern

After reviewing the available information, including business plans and making enquiries, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the financial statements.

Mark Bottomley

Finance Director

20 May 2013

Group income statement

for the year ended 31 March 2013

				2013		2012
	Notes			£'000		£'000
Revenue				875,171		820,775
Cost of sales				(768,633)		(718,605)
Gross profit				106,538		102,170
Operating expenses excluding impairment				(56,497)		(55,434)
Group operating profit before impairment				50,041		46,736
Impairment of goodwill				-		(4,924)
Impairment of property, plant and equipment				(1,836)		-
Group operating profit				48,205		41,812
Share of results of associate				-		(712)
Profit on disposal of associate				-		8,254
Profit before net finance costs and tax				48,205		49,354
Finance revenue				62		151
Finance costs				(828)		(1,154)
Profit before tax				47,439		48,351
Taxation				(11,198)		(10,871)
Profit for the year				36,241		37,480
Earnings per share (pence)
On profit for the year:
Basic	4			75.1p		78.6p
Diluted	4			74.9p		78.4p
Adjusted earnings per share (excluding effect of associate and impairment):
Basic	4			78.9p		72.9p
Diluted	4			78.7p		72.7p

Group statement of comprehensive income

for the year ended 31 March 2013

					2013 £'000		2012 £'000
Profit for the year					36,241		37,480
Other comprehensive income
Movement on hedging items:
Losses arising in the year					(4)		(69)
Reclassification adjustment for losses/ (gains) included in the income statement					69		(146)
Actuarial gains/ (losses) on defined benefit pension scheme					942		(3,504)
Deferred tax relating to components of other comprehensive income					(275)		892
Other comprehensive income for the year, net of tax					732		(2,827)
Total comprehensive income for the year attributable to owners of the parent					36,973		34,653

Group balance sheet

at 31 March 2013

	Notes	2013 £'000		2012 £'000
Non-current assets
Intangible assets		129,003		122,839
Property, plant and equipment		147,386		130,853
Investment in associate		-		-
Financial assets		702		1,398
Total non-current assets		277,091		255,090
Current assets
Inventories		48,463		38,516
Trade and other receivables		93,097		85,534
Financial assets		696		696
Cash and short-term deposits	7	7,633		20,100
Total current assets		149,889		144,846
Assets held for sale		-		221
Total assets		426,980		400,157
Current liabilities
Trade and other payables		(106,109)		(91,078)
Financial liabilities		(608)		(1,624)
Income tax payable		(7,123)		(5,936)
Provisions		-		(389)
Total current liabilities		(113,840)		(99,027)
Non-current liabilities
Other payables		(410)		(462)
Financial liabilities		(29,572)		(42,301)
Deferred tax liabilities		(5,947)		(7,093)
Provisions		(190)		-
Defined benefit pension scheme deficit		(3,357)		(5,342)
Total non-current liabilities		(39,476)		(55,198)
Total liabilities		(153,316)		(154,225)
Net assets		273,664		245,932
Equity
Called-up share capital		4,853		4,803
Share premium account		61,603		58,642
Share-based payments		6,765		5,603
Hedging reserve		(4)		(69)
Retained earnings		200,447		176,953
Equity attributable to owners of the parent		273,664		245,932

Group statement of cash flows

for the year ended 31 March 2013

	Notes	2013		2012
		£'000		£'000
Operating activities
Profit for the year		36,241		37,480
Adjustments to reconcile Group profit for the year to net cash inflows from operating activities:
Taxation		11,198		10,871
Net finance costs		766		1,003
Fair value adjustment to put option in relation to associate		-		(95)
Share of result of associate		-		712
Gain on sale of associate		-		(8,254)
Gain on sale of property, plant and equipment		(237)		(140)
Depreciation of property, plant and equipment		15,486		13,972
Impairment of property, plant and equipment		1,786		-
Impairment of goodwill		-		4,924
Amortisation of intangible assets		119		-
Share-based payments		1,162		1,501
Difference between pension contributions paid and amounts recognised in the income statement		(1,043)		(1,076)
Release of government grants		(61)		(55)
Increase in inventories		(9,514)		(2,822)
Increase in trade and other receivables		(5,568)		(6,610)
Increase in trade and other payables		10,696		5,405
Cash generated from operations		61,031		56,816
Tax paid		(11,219)		(11,283)
Net cash from operating activities		49,812		45,533
Cash flows from investing activities
Interest received		62		173
Principal amounts received in relation to loans advanced		696		1,906
Acquisition of subsidiaries, net of cash acquired	6	(5,986)		-
Purchase of property, plant and equipment		(30,809)		(20,311)
Receipt of government grants		-		149
Proceeds from sale of property, plant and equipment		318		308
Proceeds from sale of associate		-		14,500
Proceeds from sale of investment classified as held for sale		221		-
Net cash used in investing activities		(35,498)		(3,275)
Cash flows from financing activities
Interest paid		(862)		(1,305)
Proceeds from issue of share capital		491		702
Purchase of own shares		-		(136)
Issue costs of long term borrowings		-		(1,005)
Repayment of borrowings	7	(14,000)		(7,000)
Dividends paid		(11,404)		(11,831)
Repayment of capital element of finance leases and hire purchase contracts		(243)		(272)
Net cash used in financing activities		(26,018)		(20,847)
Net (decrease)/ increase in cash and cash equivalents		(11,704)		21,411
Cash and cash equivalents at beginning of year	7	18,788		(2,623)
Cash and cash equivalents at end of year	7	7,084		18,788

Group statement of changes in equity

for the year ended 31 March 2013

	Share capital £'000	Share premium £'000	Share- based payments £'000	Hedging reserve £'000	Treasury shares £'000	Retained earnings £'000	Total equity £'000
As at 31 March 2011	4,764	56,609	4,102	146	-	155,311	220,932
Profit for the year	-	-	-	-	-	37,480	37,480
Other comprehensive income	-	-	-	(215)	-	(2,612)	(2,827)
Total comprehensive income	-	-	-	(215)	-	34,868	34,653
Own shares acquired	-	-	-	-	(136)	-	(136)
Share-based payments	-	-	1,501	-	-	-	1,501
Scrip dividend	19	1,351	-	-	-	-	1,370
Share options exercised (proceeds)	20	682	-	-	-	-	702
Share options exercised (transfer)	-	-	-	-	136	(136)	-
Dividends	-	-	-	-	-	(13,201)	(13,201)
Deferred tax related to changes in equity	-	-	-	-	-	(52)	(52)
Corporation tax related to changes in equity	-	-	-	-	-	163	163
At 31 March 2012	4,803	58,642	5,603	(69)	-	176,953	245,932
Profit for the year	-	-	-	-	-	36,241	36,241
Other comprehensive income	-	-	-	65	-	667	732
Total comprehensive income	-	-	-	65	-	36,908	36,973
Share-based payments	-	-	1,162	-	-	-	1,162
Scrip dividend	31	2,489	-	-	-	-	2,520
Share options exercised (proceeds)	19	472	-	-	-	-	491
Dividends	-	-	-	-	-	(13,924)	(13,924)
Deferred tax related to changes in equity	-	-	-	-	-	370	370
Corporation tax related to changes in equity	-	-	-	-	-	140	140
At 31 March 2013	4,853	61,603	6,765	(4)	-	200,447	273,664

1.   Basis of preparation

The results comprise those of Cranswick plc and its subsidiaries for the year ended 31 March 2013.  This preliminary announcement has been prepared on the basis of accounting policies as set out in the statutory accounts for the year ended 31 March 2012 (except as detailed below) and International Financial Reporting Standards and interpretations issued by the International Accounting Standards Board as adopted by the European Union ("IFRS") and does not constitute the Company's statutory accounts within the meaning of Section 435 of the Companies Act 2006. 

Statutory accounts for the years ended 31 March 2013 and 31 March 2012 have been reported on by the auditors who issued an unqualified opinion in respect of both periods and the auditors' reports for 2013 and 2012 did not contain statements under 498(2) or 498(3) of the Companies Act 2006.  Statutory accounts for the year ended 31 March 2012 have been filed with the Registrar of Companies.  The statutory accounts for the year ended 31 March 2013, which were approved by the Board on 20 May 2013, will be delivered to the Registrar of Companies following the Company's Annual General Meeting.

2.   Accounting policies

The accounting policies applied by the Group in this preliminary announcement are the same as those applied by the Group in the financial statements for the year ended 31 March 2012 except for the following policy which have been adopted following the acquisition of East Anglian Pigs Limited.

Biological assets

Biological assets are measured on initial recognition and at the end of each reporting period at fair value less cost to sell. Changes in the measurement of fair value less cost to sell are included in profit or loss for the period in which they arise. All costs incurred in maintaining the assets are included in profit or loss for the period in which they arise. Fair values of livestock held for breeding are determined with reference to market prices of livestock of similar age, breed and genetic material.

New and revised standards

The application of new and revised standards and interpretations has not had a material effect on the net assets, results and disclosures of the Group.

3.   Business segments

IFRS 8 requires operating segments to be identified on the basis of the internal financial information reported to the Chief Operating Decision Maker ('CODM').  The Group's CODM is deemed to be the Executive Directors on the Board, who are primarily responsible for the allocation of resources to segments and the assessment of performance of the segments.

The CODM assesses profit performance using profit before taxation measured on a basis consistent with the disclosure in the Group accounts.

The Group reports on one reportable segment:

·     Food - Manufacture and supply of food products to UK grocery retailers, the food service sector and other food producers.

All Group revenues are received for the provision of goods; no revenues are received in relation to the provision of services.

4.   Earnings per share

Basic earnings per share amounts are calculated by dividing net profit for the year attributable to members of the parent company of £36,241,000 (2012: £37,480,000) by the weighted average number of shares outstanding during the year. In calculating diluted earnings per share amounts, the weighted average number of shares is adjusted for the weighted average number of ordinary shares that would be issued on the conversion of all dilutive potential ordinary shares into ordinary shares.

The weighted average number of ordinary shares for both basic and diluted amounts was as per the table below:

	2013		2012
	Thousands		Thousands
Basic weighted average number of shares	48,257		47,709
Dilutive potential ordinary shares - share options	137		92
	48,394		47,801

Basic weighted average number of shares for 2013 excludes a weighted average of nil shares (2012: 17,377 shares) held during the year by the Cranswick plc Employee Benefit Trust and a weighted average of nil treasury shares (2012: 7,806 treasury shares) held during the year by the Group .  At 31 March 2013 no shares were held by either the Trust or the Group (2012: nil).

Adjusted earnings per share

In the current year the Group impaired freehold property, plant and equipment to their fair value at its mothballed production facility in East Lancashire.  In the prior year, the Group impaired the carrying value of goodwill in relation to its Sandwiches cash generating unit and disposed of its investment in associate Farmers Boy (Deeside) Limited which was acquired in July 2010.  As the impairment of both goodwill and property, plant and equipment and the investment in the associate do not form part of the on-going business of the Group the directors consider it appropriate to present an adjusted EPS on the face of the income statement which excludes the effect of the impairments and the associate, thus facilitating better comparison with prior and future periods.  Adjusted earnings per share are calculated using the weighted average number of shares for both basic and diluted amounts as per the table above.

Adjusted net profits excluding the effect of the associate and the impairment of property, plant and equipment and goodwill are derived as follows:

		2013		2012
		£'000		£'000
Profit for the year		36,241		37,480
Impairment of property, plant and equipment		1,836		-
Share of results of associate		-		712
Profit on disposal of associate		-		(8,254)
Fair value adjustment to put option in relation to associate		-		(95)
Impairment of goodwill		-		4,924
Adjusted profit for the year excluding effect of associate and impairment		38,077		34,767

5.   Dividends

Subject to Shareholders' approval the final dividend will be paid on 6 September 2013 to Shareholders on the register at the close of business on 5 July 2013.

6.   Acquisition

On 29 June 2012, the Group acquired 100 per cent of the issued share capital of Kingston Foods Limited for a total consideration of £8.9 million.  The principal activity of Kingston Foods Limited is the manufacture and distribution of cooked meat and poultry products and the acquisition is expected to enlarge the customer base of the Group.

Fair values of the net assets at the date of acquisition were as follows:

							Fair value £'000
Net assets acquired:
	Customer relationships						795
	Property, plant and equipment						682
	Inventories						433
	Trade receivables						1,743
	Bank and cash balances						1,857
	Trade payables						(1,615)
	Provisions						(187)
	Corporation tax liability						(97)
	Deferred tax liability						(200)
							3,411
Goodwill arising on acquisition							5,488
Total consideration							8,899
Satisfied by:
	Cash						7,843
	Contingent consideration						1,056
							8,899
Analysis of cash flows on acquisition:
	Included within cash flows from investing activities
	Cash consideration paid						7,843
	Cash and cash equivalents acquired						(1,857)
							5,986
	Included within net cash from operating activities
	Transaction costs of the acquisition						145
	Net cash outflow arising on acquisition						6,131

From the date of acquisition, the acquired business has contributed £11.6 million of revenue and a net profit after tax of £0.7 million to the Group.  If the combination had taken place at the beginning of the period, the Group's profit after tax for the period would have been £36.6 million and revenues would have been £879.2 million.

Included in the £5,488,000 of goodwill recognised above, are certain intangible assets that cannot be individually separated from the acquiree and reliably measured due to their nature.  These items include the expected value of synergies and an assembled workforce.

Transaction costs of £145,000 have been expensed and are included in administration expenses.

Contingent Consideration

The agreement includes contingent consideration payable in cash to the previous owners of Kingston Foods Limited based on the performance of the business over a 3 year period from acquisition.  The amount payable will be between £nil and £2.5 million dependant on the average EBITDA of the business during the 3 year period versus an agreed target level.

The fair value of the contingent consideration at 31 March 2013 was estimated at £1,121,000, discounted in the table above.

7.   Analysis of changes in net debt

	At 31 March 2012		Cash flow		Other non cash changes		At 31 March 2013
	£'000		£'000		£'000		£'000
Cash and cash equivalents	20,100		(12,467)		-		7,633
Overdrafts	(1,312)		763		-		(549)
	18,788		(11,704)		-		7,084
Other financial assets	2,094		(696)		-		1,398
	20,882		(12,400)		-		8,482
Revolving credit	(42,246)		14,000		(252)		(28,498)
Finance leases and hire purchase contracts	(298)		243		-		(55)
Net debt	(21,662)		1,843		(252)		(20,071)

8.   Related party transactions

During the year the Group entered into transactions, in the ordinary course of business, with related parties.  In the Group accounts transactions between the Company and its subsidiaries are eliminated on consolidation.  Other transactions with related parties, which relate to the prior year, were as follows:

		Sales to related party £'000	Service rendered to related party £'000	Amounts owed by related party £'000
Associate - Farmers Boy (Deeside) Limited
2013		-	-	-
2012		12,422	259	-

Farmers Boy (Deeside) Limited ceased to be a related party upon sale of the Group's 49 per cent shareholding on 30 March 2012.

9.   Events after the balance sheet date

On 29 April 2013, the Group acquired 100 per cent of the issued share capital of East Anglian Pigs Limited for a total consideration of £13.5 million.  The principal activities of East Anglian Pigs Limited are pig breeding, rearing and finishing.  The acquisition gives the Group greater control over its supply chain.

Fair values of the net assets at the date of acquisition were as follows:

							Provisional fair value £'000
Net assets acquired:
	Property, plant and equipment						3,828
	Biological assets						10,148
	Inventories						743
	Trade receivables						1,642
	Bank and cash balances						2,753
	Trade payables						(3,391)
	Provisions						(150)
	Financial liabilities						(1,500)
	Corporation tax liability						(290)
	Deferred tax liability						(93)
	Finance lease obligations						(603)
							13,087
Goodwill arising on acquisition							378
Total consideration							13,465
Satisfied by:
	Cash						13,465
Net cash outflow arising on acquisition:
	Cash consideration paid						13,465
	Cash and cash equivalents acquired						(2,753)
							10,712

The fair values on acquisition are provisional due to the timing of the transaction and will be finalised within twelve months of the acquisition date.

Included in the £378,000 of goodwill recognised above, are certain intangible assets that cannot be individually separated from the acquiree and reliably measured due to their nature.  These items include the expected value of the assembled workforce and the strategic benefits of vertical integration including security of supply.

10. Report and accounts

The Report and Accounts will be available on the Company's website at www.cranswick.co.uk on 29 June 2013.  Further copies will be available upon request from the Company Secretary, Cranswick plc, 74 Helsinki Road, Sutton Fields, Hull, HU7 0YW.

 

END

 

 

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