Final Results

RNS Number : 3976H

Cranswick PLC

19 May 2014

 



Embargoed 7am Monday May 19 2014

CRANSWICK plc: PRELIMINARY RESULTS

  A positive performance despite challenging market conditions

Cranswick plc ("Cranswick" or "the Company" or "the Group"), the food producer, announces its audited preliminary results for the year ended 31 March 2014.

FINANCIAL HIGHLIGHTS

·     Strong underlying revenue¹ growth, up 12 per cent at £980.6m (2013: £875.2m)

·     Adjusted profit before tax up 6 per cent to £52.2m (2013: £49.1m)

·     Adjusted earnings per share^2,3  up 7 per cent to 84.1p (2013: 78.7p)

·     Recommended final dividend of 22p - up 7 per cent

·     Net debt 15 per cent lower at £17.0m (2013: 20.1m)

OPERATIONAL HIGHLIGHTS

·    £14.4m investment in pig breeding and rearing activities

·    New gourmet pastry facility fully commissioned

·     £28m investment in Group's asset base

Summary results

Adjusted results	2014	2013	Movement
Reported revenue	£994.9m	£875.2m	+14%
Underlying revenue 1	£980.6m	£875.2m	+12%
Adjusted Group operating profit 2	£53.3m	£50.0m	+6%
Adjusted profit before tax 2, 3	£52.2m	£49.1m	+6%
Adjusted earnings per share 2, 3	84.1p	78.7p	+7%
Dividend per share	32.0p	30.0p	+7%
Net debt	£17.0m	£20.1m	-15%

Statutory results	2014	2013	Movement
Reported revenue	£994.9m	£875.2m	+14%
Underlying revenue 1	£980.6m	£875.2m	+12%
Group operating profit	£55.8m	£48.2m	+16%
Profit before tax	£54.8m	£47.3m	+16%
Earnings per share	88.7p	74.9p	+18%
Dividend per share	32.0p	30.0p	+7%
Net debt	£17.0m	£20.1m	-15%

1	excluding contribution from acquisitions
2	adjusted Group operating profit, adjusted profit before tax and adjusted earnings per share exclude release of contingent consideration and net IAS 41 valuation movement on biological assets in 2014 and impairment of property, plant and equipment in 2013.  These are the measures used by the Board to assess the Group's underlying performance.
3	comparative information has been restated to reflect an amendment to IAS 19(R) Employee Benefits

Cranswick Chairman Martin Davey said:  "This has been a positive, albeit challenging, year for Cranswick.  The business had to contend with record input prices, the impact on its customer base of the changing dynamics of UK food retailing and an environment where the consumer has been subject to ongoing financial constraints.

"Strong growth in both total and underlying sales was recorded and this reflected market share gains along with further growth in those categories in which the group is positioned in the UK market.  Export sales continued to grow and this achievement was recently recognised by the industry with Cranswick being named 'Exporter of the Year'.

 "During the year the Company invested in pig breeding and pig rearing activities. This strategic development enhances Cranswick's commitment to, and gives greater control over, a robust and integrated supply chain with a clear focus on premium British ingredients.

 "The past year has seen another positive performance from the Company and the Board looks forward to the challenges and opportunities that lie ahead as it pursues the continuation of Cranswick's successful long term development."

-ends-

For further information:

Paul Quade                                                                  020 7248 8010

CityRoad Communications                                            07947 186694

CHAIRMAN'S STATEMENT

Results

This has been a positive, albeit challenging, year for Cranswick. The business had to contend with record input prices, the impact on its customer base of the changing dynamics of UK food retailing and an environment where the consumer has been subject to ongoing financial constraints.

For the business to have continued to maintain its progress against this backdrop is no mean achievement.  Strong growth in both total and underlying sales was recorded and this reflected market share gains along with further growth in those categories in which the group is positioned in the UK market. Market growth was particularly strong in the 'super premium' categories as seen with both sausage and bacon.  Export sales continued to grow and this achievement was recently recognised by the industry with Cranswick being named 'Exporter of the Year'.

Total sales, which include a small amount of third party sales from the pig breeding and rearing activities acquired in the year, of £995 million were 14 per cent ahead of the previous year and included particularly significant increases in fresh pork, bacon and cooked meats.  Underlying sales increased by 12 per cent.  Adjusted operating profit rose to £53.3 million although operating margins were slightly below those of the previous year on account of the increase in input prices.

Reported profit before taxation was £54.8 million and earnings per share were 88.7 pence.  Excluding the net IAS 41 valuation movement on the pig herd in the current financial year and non-recurring items in both the current and prior financial years, adjusted profit before taxation was £52.2 million, an increase of 6.3 per cent on that achieved previously.  Earnings per share on the same basis (after tax) rose 6.9 per cent to 84.1 pence.

The borrowings of the business are conservatively structured and the Company has recently extended its banking facility through to July 2018.  This £120 million unsecured facility provides generous headroom going forward.  Net finance costs were covered 55 times by Group operating profit, compared to 54 times the previous year.  Operating cash flow in the period was particularly strong, notwithstanding the £27.7 million investment in the Group's asset base and £14.4 million spent on acquisitions.  Net debt at the end of the year stood at £17.0 million compared to £20.1 million a year earlier.

Strategic Investments

During the year the Company invested in pig breeding and pig rearing activities.  These operate under Wayland Farms and Wold Farms and together supply 15 to 20 per cent of the Company's weekly requirements.  This strategic development enhances Cranswick's commitment to, and gives greater control over, a robust and integrated supply chain with a clear focus on premium British ingredients.  In addition, it has helped offset some of the impact of the rise in input prices.

Further investment in new product categories came with the commissioning of the Yorkshire Baker pastry facility in Malton, North Yorkshire.  The site produces a range of premium pastry products including pies, sausage rolls and quiches and was operational from summer last year.  Commissioning costs and the challenges of a start-up have been absorbed whilst growing the sales and developing the range in partnership with the customer base.

Other investments in the year added capacity and improved operating efficiencies enabling the Company to absorb some of the supply chain inflation.

Dividend

The Board is proposing to increase the final dividend to 22 pence per share, an increase of 6.8 per cent from last year.  Together with the interim dividend, which was raised 6.4 per cent to 10 pence per share; this makes a total dividend for the year of 32 pence per share.  This is an increase of 6.7 per cent on the 30 pence per share paid last year.  The final dividend, if approved by Shareholders, will be paid on 5 September 2014 to Shareholders on the register at the close of business on 4 July 2014.  Shares will go ex-dividend on 2 July 2014.  Shareholders will again have the option to receive the dividend by way of scrip issue.

Board

Bernard Hoggarth, who stood down from the position of Chief Executive in 2012 and has continued since on a part-time basis, is retiring from the Board at the forthcoming Annual General Meeting. Bernard has been with Cranswick for 36 years and has made an enormous contribution to the development of the Company.  Over this period the business has evolved from an East Yorkshire supplier of animal feed into one of the UK's leading food producers.  His involvement over the years has embraced at different times animal feed sales, pig rearing and marketing along with the development into food production.  This period has seen Cranswick progress from being a farmer-owned regional business into a listing on the London Stock Exchange and a member of the FTSE250.  I have worked with Bernard's for almost 30 of those years and express my personal thanks for his immense contribution and for being a great colleague throughout that time.

John Worby will also be standing down from the Board at the forthcoming Annual General Meeting.  John has served as a Non-Executive Director and Chairman of the Audit Committee since 2005 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.  John's experience and contribution to discussions has been of enormous value in the development of the business and, on behalf of the Board, I extend our sincere thanks and wish him well for the future.

Mark Reckitt joined the Board as a Non-Executive Director in May 2014 and will take over as Chairman of the Audit Committee at the conclusion of the forthcoming Annual General Meeting.  He retired from his position as Group Strategy Director at Smiths Group plc in April 2014.  Prior to joining Smiths Group in 2011 Mark had 20 years with Cadbury plc in roles embracing finance and strategy.  He is also a Non-Executive Director and Chairman of the Audit Committee at JD Wetherspoon plc.

In addition to the Board changes outlined above Kate Allum joined the Company as a Non-Executive Director in July 2013, as previously reported to Shareholders.  Kate's experience of international food markets has broadened the expertise and experience within the Board.

Corporate Governance

The Board is mindful of the requirements of the UK Corporate Governance Code and embraces this as part of its culture.  Recent developments have included the external evaluation of the Board and its procedures, undertaken in 2013, which reported positively and the improved gender diversity within the Board.

Environmental Initiatives

Managing and reducing the impact that the business has on the environment is an integral part of the Company's activities and has been the focus of attention for some years under a dedicated project team.  Significant progress has been made in a number of areas including waste, water, energy, packaging and carbon footprint and this was highlighted recently with the winning of the industry's 'Environmental Initiative of the Year' award for 2014.

Staff

The continued successful development of the business over the past year would not have been achieved without the hard work, determination and expertise of all staff at the Company and on behalf of the Board I extend sincere appreciation and thanks for their contribution.

Outlook

The past year has seen another positive performance from the Company and the Board looks forward to the challenges and opportunities that lie ahead as it pursues the continuation of Cranswick's successful long term development.

Martin Davey

Chairman

19 May 2014

OPERATIONAL REVIEW

I am pleased to report that the business delivered a robust trading performance during the financial year with total revenues ahead by 14 per cent.  Underlying revenues, which exclude the contribution from acquisitions, increased by 12 per cent reflecting strong growth across most of the Group's categories, driven by new product launches and a broadening customer base.  This growth was underpinned by market growth in the Group's core categories and by strong export growth.  Adjusted Group operating profit increased by 6 per cent reflecting strong revenue growth which was partly offset by the impact of higher input costs, particularly in the first half of the year.  The pig rearing and breeding operations, which were acquired during the year, also made a positive contribution to the Group's performance.

Rising input costs

Pig prices increased during the first half of the financial year to reach a new record high in July 2013 and remained at this level through to the end of the third quarter as a result of high feed prices and demand for high quality British pork.  As previously, Cranswick managed this input cost inflation through constructive discussion with its customers, by delivering on-going operating efficiency improvements and through the benefit of producing pigs internally.  Pig prices eased in the fourth quarter of the year, however the extent of and time lag in recovering these higher input costs, together with higher than anticipated start-up costs at the Group's new gourmet pastry facility in Malton, North Yorkshire, meant that adjusted operating margins at 5.4 per cent were slightly lower than the 5.7 per cent reported last year.

Despite these price increases the UK consumer continues to appreciate the attractiveness, versatility and low relative pricing of pork compared to other meat proteins, particularly beef and lamb.  Demand for premium products continued unabated, with premium sausage and bacon sales growing well ahead of their overall respective categories.

Acquisition of pig herd

During the year the Group invested heavily in its pig breeding and rearing activities, acquiring East Anglian Pigs (now renamed Wayland Farms) on 29 April 2013 and then further breeding units in September and December 2013 which operate under the Wold Farms banner.  Cranswick now has a herd of premium outdoor pigs for use in its premium range products which can satisfy 15 to 20 per cent of the Group's overall British pig requirements.  This move supported the decision by one of the Group's key retail customers, in August 2013, to move to an all British fresh pork offering.  A combination of falling feed prices and strong demand for higher welfare British pork enabled Wayland farms to make a positive contribution to the Group post-acquisition.  The Group will continue to invest in its pig operations to further improve productivity and efficiencies.  The UK is currently only 50 per cent self-sufficient in pig meat, but ongoing investment in the sector should help to make inroads into this shortfall in the medium term.

Infrastructure investment

The Group invested £28 million in its infrastructure during the year, bringing total capital expenditure to more than £130 million over the last five years.  This investment is reflected in the quality of the Group's production facilities which are some of the most efficient and well invested in the sectors in which Cranswick operates.  Significant completed and ongoing projects are highlighted in the individual category sections below. 

Fresh pork (↑15%)

Fresh pork sales grew by 15 per cent compared to the same period last year as the Group saw the full year benefit of contract wins in the fourth quarter of the last financial year.  Sales were also boosted by strong export growth which increased by 10 per cent compared to the previous year. 

In the lead up to Christmas 1,000 tonnes of product were being shipped to the Far East each week.  The Group is making a substantial investment in the Norfolk facility to upgrade the abattoir and introduce a new rapid chiller which will increase capacity and improve yields in this area of the plant. 

During the year Cranswick withdrew its support from the price reporting mechanism that calculates the Deadweight Average Pig Price (DAPP).  This was based on historic discussions with the British Pig Executive (BPEX) about the clarity and transparency of the calculation.  Cranswick will continue to work with BPEX to examine alternative ways in which pricing of pigs may be reported.

In January, the Russian authorities banned the import of European pig meat in response to the outbreak of African swine fever in Eastern Poland and the Ukraine.  Although the UK does not export to Russia, the decision has had an impact on both volumes and prices for the UK's trading partners within the Eurozone.

Earlier in the year Porcine Endemic Diarrhoea virus (PEDv) was discovered in the US herd.  This disease has a significant impact on mortality of the young pig population.  The UK herd has not been affected to date but the industry remains vigilant and bio security continues to be of paramount importance.

Sausage (↑2%)

Sausage sales increased by 2 per cent reflecting continued demand for the Group's premium sausage ranges.  July saw a record sales week for the Lazenby's facility for a non-Christmas period.  The premium sausage category continues its impressive resilience of recent years as consumers recognise the quality proposition that high end products offer.  However sausage sales to the lead customer at the Norfolk site were lower year on year and as a result the decision was taken to consolidate sausage production at the Group's principle sausage facility in Hull.  With much of the equipment also transferred, the costs associated with this reorganisation were kept to a minimum.  Sales of premium beef burgers, which are produced using the same artisanal skills developed for Cranswick's gourmet sausages, also performed well during the strong summer barbecue season, with sales ahead by 24 per cent compared to the prior year.  A second burger production line has now been commissioned to meet increased demand in the forthcoming summer season. 

Bacon (↑14%)

Bacon sales were 14 per cent higher than the previous period.  Sales of premium bacon continue to grow strongly as the UK consumer trades up from the standard tier category.  The introduction of speciality cures and smoked products supported this growth along with ongoing development of ready to cook ranges which are now also being produced across the fresh pork, and sausage categories.  Seasonal gammon steaks and joints also performed extremely well over the key Christmas trading period.

The unique artisan production methods developed at the Sherburn site continue to support the wider Group in offering unrivalled product quality.  This is demonstrated through collaboration with the Barnsley cooked meats facility in producing premium air dried cooked meat products and through the use of air dried streaky bacon in Christmas sausage products.

Cooked meats (↑16%)

Cooked meats sales increased 16 per cent year on year.  Demand for premium air dried hams helped drive this growth along with strong promotional activity, particularly in the fourth quarter of the financial year. Investment to extend the Milton Keynes facility is progressing to plan and budget.  This project which is due to be completed in the second quarter of the new financial will substantially increase capacity and deliver significant efficiency gains and further improvements in product quality through the use of advanced cooking and slicing technology. 

Pastry (↑138%)

Pastry sales grew strongly, albeit from a low base, to more than double those of the previous year following the move into the new Malton facility.  Start-up costs were higher than anticipated as the business focussed on the successful launch of several new product ranges for the Group's lead retail customer in this category.  With costs now running at anticipated levels, the focus is now firmly on delivering the anticipated returns from the £12 million investment.  The new product pipeline saw the launch a range of hand lined quiches for the summer season followed by a premium savoury pie range which was launched in the autumn.  A further 19 new products will be launched in the current financial year with new customers, both retail and food service, being targeted.

Continental (↑3%)

Sales of Continental products were 3 per cent up on the same period last year.  This performance was particularly pleasing given that sales were 16 per cent lower in the first quarter following the loss of business with one of the Group's retail customers which continued its strategy of moving to an in-house sourcing strategy.  Several new product launches and the addition of new retail contracts helped this category return to growth.  A renewed focus on sourcing new artisanal products from Continental Europe and further development of the customer profile will drive ongoing growth in this category. 

Sandwiches (↓5%)

Sandwich sales were 5 per cent lower following a conscious decision to rationalise the core product range and develop a more focused customer strategy.  These initiatives, driven by a new management team which has brought a new focus to improving operating efficiencies and raw material sourcing have seen the business perform strongly during the year.  The management team has targeted margin enhancing sustainable contracts and it is pleasing to be able to report that despite losing one large contract during the year and a second effective from the end of quarter one of the new financial year, profitable long term contract wins with new customers will fully mitigate these losses.  The introduction of new product lines including the "&Made" brand has had a significant beneficial impact.  There is a real opportunity to give food service customers a wider offering using selected products from the Group's broad category base and in particular the new pastry ranges.  With 25 per cent of all breakfast menus including bacon, the business is ideally placed to satisfy food service customer requirements in this area.  Also, given the consolidation that has taken place in the UK sandwich category in the last two years, the business is confident that there will be opportunities to develop a stronger presence in the retail sector.

Summary and outlook

Cranswick's growth continues to be underpinned by the quality of its products which deliver real value to and great food experiences for the UK consumer.  The business operates from highly efficient and well invested facilities with empowered management teams working collaboratively and sustainably with the Group's customers and suppliers. 

The Company remains highly cash generative allowing it to make attractive returns to shareholders, to continue to invest in its infrastructure to build capacity and drive further operational efficiencies and to pursue earnings enhancing strategic acquisitions. 

The continued successful development of Cranswick is testament to the skill, quality and determination of the teams across each of the Group's businesses and I would like to express my thanks for their dedication and support over the last twelve months.

With experienced management at all levels, a strong range of products, a well invested asset base and a robust financial position, the Group is well placed to continue its long term growth strategy.

Adam Couch

Chief Executive

19 May 2014

FINANCIAL REVIEW

The Group is presenting its financial information for the year ended 31 March 2014 with comparative information for the year ended 31 March 2013, restated for the impact of IAS 19 (Revised).

Revenue

Revenue increased by 13.7 per cent from £875.2 million to £994.9 million.  Adjusting for the contributions from Kingston Foods Limited which was acquired on 29 June 2012 and Wayland Farms which was acquired on 29 April 2013, underlying sales increased by 12.0 per cent.  Sales increased across all product categories with the exception of Sandwiches, where the customer and product bases have been rationalised which has helped to drive a significantly improved trading result within this category.  Fresh Pork, Cooked Meats, Bacon and Pastry grew very strongly as a result of increased market share and new product development.  Again, there was a growing contribution to revenues from the Group's export business.

Adjusted Group operating profit ^(I)

Adjusted Group Operating profit increased by 6.4 per cent to £53.3 million (2013: £50.0 million). Adjusted Group operating margin at 5.4 per cent of sales was lower than the 5.7 per cent reported for the last financial year.  The lower operating margin in the year reflected substantially higher input costs compared to those of the prior year and start-up costs at the new gourmet pastry facility at Malton, North Yorkshire, which was commissioned during the year, partly offset by strong revenue growth, operational efficiencies and the positive contribution from Wayland Farms in the 11 months following acquisition.  Raw material price inflation mainly impacted the first half of the year, with operating margin falling to 4.9 per cent.  In the second half the margin recovered strongly to 5.8 per cent as raw material prices dropped back.

Finance costs

Net finance costs of £1.0 million (2013: £0.9 million) were marginally higher than the previous year reflecting slightly higher average borrowings during the year as a result of acquisitions and continued capital investment largely offset by strong cash generation.  Interest cover strengthened from 53.5 times to 54.4 times.

On 27 March 2014, the Group successfully completed a process to amend and extend its banking facilities.  The new facility, which is on improved terms, runs to July 2018 and comprises a revolving credit facility of £120 million, including a committed overdraft of £20 million.  In addition, the facility includes an accordion features which allows the Group to drawdown a further £30 million on the same terms at any point during the life of the facility.  This unsecured facility provides generous headroom going forward.

Adjusted profit before tax ^(I)

Adjusted profit before tax was 6.3 per cent higher at £52.2 million (2013: £49.1 million).

Taxation

The tax charge as a percentage of profit before taxation was 21.1 per cent (2013: 23.6 per cent). The standard rate of UK Corporation Tax was 23 per cent for 2014 and 24 per cent for 2013. The charge for the current year benefited from a £1.0 million (2013: £0.3 million) deferred tax credit following a 2 per cent enacted reduction in the UK corporation tax rate from April 2014 and a further 1 per cent reduction from April 2015 (2013: 1 per cent reduction from April 2013).  In addition the £1.1 million contingent consideration provision release was not chargeable to tax.

Adjusted earnings per share ⁽ⁱ⁾

Adjusted earnings per share, increased by 6.9 per cent from 78.7 pence to 84.1 pence reflecting a strong increase in underlying profitability.  The weighted average number of shares in issue during the year was 48,734,000 (2013: 48,257,000).

Note (i) Adjusted profit measures

Following the investment in pig breeding and rearing activities during the period as referred to in more detail below, the Group now monitors performance principally through the adjusted profit measures which exclude certain non-cash items including the net IAS 41 valuation credit of £1.4 million on biological assets and the release of the £1.1 million provision for contingent consideration payable to the previous owners of Kingston Foods which reflects the Directors' current expectations of the anticipated performance of the business over the three year period from acquisition.  The statutory results, including these items, show a 15.8 per cent increase in profit before tax to £54.8 million (2013: £47.3 million), a 15.7 per cent increase in Group operating profit to £55.8 million (2013: £48.2 million) and an 18.4 per cent increase in earnings per share to 88.7 pence (2013: 74.9 pence).

Acquisitions

On 29 April 2013 the Group acquired 100 per cent of the issued share capital of East Anglian Pigs Limited (now renamed Wayland Farms Limited) for a net cash consideration of £10.9 million.  Wayland Farms made a positive contribution to Cranswick's activities during the period.  On 13 September 2013 and 19 December 2013 the Group made further investment in its pig rearing and breeding activities by acquiring certain trade, assets and livestock from Dent Limited for £2.0 million, and from the administrators of Dent Limited for £1.5 million, respectively.  Further details of these transactions are set out in note 7.

The pig herd was valued on initial recognition at £13.1 million and at 31 March 2014 at £14.7 million in accordance with the provisions of IAS 41 Biological assets which requires livestock to be valued at fair value rather than historic cost.  The valuation gain between initial recognition and the year-end of £1.4 million has been disclosed separately on the face of the income statement.

Cash flow and net debt

The Group continues to deliver strong operational cash flows.  Cash generated from operating activities was £60.1 million (2013: £49.8 million), with the increase compared to the previous year reflecting increased Group operating profits and a reduction in working capital of £2.1 million, compared to an increase of £4.5m in the prior year.  The net cash outflow from investing activities of £40.8 million is accounted for by capital additions, net of fixed asset sale proceeds, of £27.4 million and the cash spent on the acquisition of Wayland and Wold Farms of £14.4 million, less loan repayments received of £1.0 million.  The previous year's outflow was £35.5 million.  The £14.2 million of net cash used in financing activities in 2014 is largely due to interest paid of £1.1 million, dividends paid of £12.7 million and net loan repayments of £0.5 million.  The prior year cash outflow from financing was £26.0 million.  The overall result is a net increase in cash and cash equivalents of £5.1 million (2013: decrease of £11.7 million).  Net debt reduced by £3.1 million to £17.0 million (2013: £20.1 million) at the year-end, and gearing fell from 7.3 per cent to 5.6 per cent.

Pensions

The Group operates a number of defined contribution pension schemes whereby contributions are made to schemes operated by major insurance companies.  Contributions to these schemes are determined as a percentage of employees' earnings.  The Group also operates a defined benefit pension scheme which has been closed to further benefit accrual since 2004.  The deficit on this scheme at 31 March 2014 was £6.5 million (2013: £3.4 million).  Cash contributions to the scheme during the year, as part of the programme to reduce the deficit, were £1.1 million.  The present value of funded obligations was £25.2 million and the fair value of plan assets was £18.7 million.

During the year the triennial valuation of the scheme was completed.  Following a review of the valuation the Group's Directors agreed a new contribution schedule with the Trustees of the scheme to further reduce the deficit.  Over the period from April 2014 to November 2019, cash contributions will be increased to £1.3m per annum.

Restatement

Following the amendment to IAS 19, which came into effect for the Group from 1 April 2013, interest on pension scheme assets is now calculated by reference to the liability discount rate rather than the expected long-term yield on the assets, as was the case previously.  Comparative information has been restated accordingly and further details, including modest reduction in the Group's profit before tax and earnings per share, are set out in note 2.

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

19 May 2014

RISK MANAGEMENT AND PRINCIPAL RISKS

As a leading UK food producer, the Group faces a variety of risks and uncertainties. Operating in a highly competitive industry, it is critical that the Group identifies, assesses and prioritises its risks. This, along with the development of appropriate mitigating actions, enables the Group to achieve its strategic objectives and protect its reputation. 

The Group has a formal risk management process in place, which is embedded within the business to support the identification and effective management of risks across the Group.  It is regularly reviewed and updated for changes within the Group, industry and wider economy.

Risk Management framework

The Board is responsible for the identification and effective management of risks across the Group and relies on the Group Risk Committee to oversee the Group's risk management processes. The Internal Audit function provides independent assurance to management and the Audit Committee keeps under review the effectiveness of mechanisms put in place to mitigate risks.

Board 'Ultimately responsible for the Group's system of risk management and internal control and for setting the Group's overall risk appetite'

Audit Committee 'Reviews the systems of internal control which are in place and provides assurance to the Board that the processes of risk management and internal control are operating effectively'

Group Risk Committee 'Provides oversight and advice to the Audit Committee and Board in relation to current and future risk exposures and future risk strategies'

Operational Management 'Operate site level risk management processes to ensure that risks remain adequately identified, analysed and controlled'

The principal risks and uncertainties facing the Group are summarised on the following pages. However, this is not intended to be an exhaustive analysis of all risks currently facing the Group.

Risk Area	Description of risk	How we manage it
Strategic Risks
Consumer demand	Deterioration in the economy 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.	The business offers a range of products across premium, standard and value tiers which it is able to flex in response to customer and market demands. Pork remains an extremely competitively priced and sought after product.
Competitor activity	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.	The Group manages the risk of operating in a competitive sector by developing and maintaining strong customer relationships. This process is supported by delivering high levels of service and quality, and by the continued focus on product development and technical innovation.
Commercial Risks
Reliance on key customers	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 on the Group's financial performance.	The Group's 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 developments are of the highest standard.

Risk Area	Description of risk	How we manage it
Commercial Risks
Pricing and availability of raw materials	The major exposure the Group has to pricing and availability of raw materials is in relation to pig meat.  An increase in raw material input costs, pig feed prices or a lack of availability of pig meat would adversely impact on the Group's profitability.	The Group has a trusted, long-standing farming supply base, and the acquisition of Wayland Farms and the recent formation of Wold Farms have also helped to mitigate the risks associated with pig price fluctuations and raw material supply. In addition the Group mitigates the risk of raw material price inflation through on-going pricing discussions with its customers and suppliers.
Financial Risks
Interest rate, currency, liquidity and credit risks	The Group is exposed to interest rate risk on borrowings and foreign currency risk on purchases particularly of charcuterie products from the European Union. 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 managed by the Group's Treasury function. Each Site has access to the Group's overdraft facility and bank balances are monitored on a daily basis by Group Finance. All term debt is arranged centrally and appropriate headroom is maintained.  Bank facilities were renewed prior to the year-end through to July 2018.
Business acquisitions	Businesses may be acquired based on inaccurate information, unachievable forecasts or without appropriate consideration being given to the terms of the purchase.	Rigorous due diligence reviews are carried out in advance of any new business acquisition, using internal and specialised external resource where required.
Operational Risk
Food scares	As a food producer, the Group is subject to the risks of product and / or raw material contamination and potential health related industry wide food scares and issues. Such incidents 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 original source and that the manufacturing, storage and distribution systems of both Group sites and suppliers are continually monitored by experienced and well trained site based and Group Technical teams.
Business continuity	The Group faces the risk of incidents such as major fire, flood or loss of key utilities, which may result in significant and prolonged disruption to its operating facilities resulting in loss of sales and reduced profitability.	Detailed business continuity plans are in place across the Group's manufacturing sites and appropriate insurance arrangements deployed to mitigate any financial loss. Potential business disruption is minimised through multi-site operations across the Group's key product lines.
Recruitment and retention of key staff	The success of the Group is dependent on attracting and retaining high quality senior management and staff.	The Group mitigates the risk associated with the loss of key staff through robust succession planning, strong recruitment processes, competitive remuneration packages and on-going training and development plans.
Food safety	A breach of food safety standards, legislation or ethical standards may lead to reputational damage and regulatory penalties including restrictions on operations, damages or fines.	The Group conforms to all relevant food safety regulations and adopts industry best practice across its production sites and within its supply chain. All sites are subject to frequent audits by internal teams, customers and regulatory authorities to ensure standards are being adhered to.
Pig herd infection and disease	An infection or disease outbreak may result in the loss of livestock, or the inability to move animals freely, impacting on the supply of raw materials into the Group's abattoirs.	The Group mitigates against this risk with farming facilities which have a broad geographical spread to avoid reliance on a single production area.  In addition, robust vaccination and herd operating procedures mitigate the risk of common diseases and infections.

GROUP INCOME STATEMENT

FOR THE YEAR ENDED 31 MARCH 2014

			2014		2013
	Notes		£'000		£'000
					(Restated)
Revenue			994,905		875,171
Adjusted Group operating profit			53,255		50,041
Impairment of property, plant and equipment			-		(1,836)
Release of contingent consideration			1,086		-
Net IAS 41 valuation movement on biological assets			1,441		-
Group operating profit	4		55,782		48,205
Finance revenue			32		62
Finance costs			(1,057)		(963)
Profit before tax			54,757		47,304
Taxation			(11,550)		(11,165)
Profit for the year			43,207		36,139
Earnings per share (pence)
On profit for the year:
Basic	5		88.7p		74.9p
Diluted	5		88.3p		74.7p
On adjusted profit for the year:
Basic	5		84.1p		78.7p
Diluted	5		83.7p		78.5p

The restatement of the comparative reflects an amendment to IAS 19 Employee Benefits, further details can be found in note 2.

GROUP STATEMENT OF COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 MARCH 2014

			2014 £'000		2013 £'000 (Restated)
Profit for the year			43,207		36,139
Other comprehensive income
Other comprehensive income to be reclassified to profit or loss in subsequent periods:
Cash flow hedges
Gains/ (Losses) arising in the year			(18)		(4)
Reclassification adjustments for (gains)/ losses included in the income statement			4		69
Income tax effect			3		(15)
Net other comprehensive income to be reclassified to profit or loss in subsequent periods			(11)		50
Items not to be reclassified to profit or loss in subsequent periods:
Actuarial (losses)/ gains on defined benefit pension scheme			(4,177)		1,077
Income tax effect			735		(293)
Net other comprehensive income not being reclassified to profit or loss in subsequent periods			(3,442)		784
Other comprehensive income, net of tax			(3,453)		834
Total comprehensive income, net of tax			39,754		36,973

GROUP BALANCE SHEET

AT 31 MARCH 2014

	Notes	2014 £'000		2013 £'000
Non-current assets
Intangible assets		130,535		129,003
Property, plant and equipment		156,578		147,386
Biological assets		1,174		-
Financial assets		-		702
Total non-current assets		288,287		277,091
Current assets
Biological assets		13,543		-
Inventories		47,426		48,463
Trade and other receivables		97,775		93,097
Financial assets		-		696
Cash and short-term deposits	8	12,223		7,633
Total current assets		170,967		149,889
Total assets		459,254		426,980
Current liabilities
Trade and other payables		(108,806)		(106,109)
Financial liabilities		(327)		(608)
Income tax payable		(6,495)		(7,123)
Total current liabilities		(115,628)		(113,840)
Non-current liabilities
Other payables		(409)		(410)
Financial liabilities		(28,898)		(29,572)
Deferred tax liabilities		(4,737)		(5,947)
Provisions		(343)		(190)
Defined benefit pension scheme deficit		(6,528)		(3,357)
Total non-current liabilities		(40,915)		(39,476)
Total liabilities		(156,543)		(153,316)
Net assets		302,711		273,664
Equity
Called-up share capital		4,896		4,853
Share premium account		64,173		61,603
Share-based payments		7,779		6,765
Hedging reserve		(15)		(4)
Retained earnings		225,878		200,447
Equity attributable to owners of the parent		302,711		273,664

GROUP STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED 31 MARCH 2014

	Notes	2014		2013
		£'000		£'000
				(Restated)
Operating activities
Profit for the year		43,207		36,139
Adjustments to reconcile Group profit for the year to net cash inflows from operating activities:
Income tax expense		11,550		11,165
Net finance costs		1,025		901
Gain on sale of property, plant and equipment		(100)		(237)
Depreciation of property, plant and equipment		17,831		15,486
Impairment of property, plant and equipment		-		1,786
Amortisation of intangible assets		159		119
Share-based payments		1,014		1,162
Difference between pension contributions paid and amounts recognised in the income statement		(1,006)		(908)
Release of government grants		(85)		(61)
Release of contingent consideration		(1,086)		-
Net IAS 41 valuation movement on biological assets		(1,441)		-
Increase in biological assets		(176)		-
Decrease/ (increase) in inventories		1,497		(9,514)
Increase in trade and other receivables		(3,910)		(5,568)
Increase in trade and other payables		4,702		10,561
Cash generated from operations		73,181		61,031
Tax paid		(13,050)		(11,219)
Net cash from operating activities		60,131		49,812
Cash flows from investing activities
Interest received		28		62
Principal amounts received in relation to loans advanced		1,002		696
Acquisition of subsidiaries, net of cash acquired	7	(14,402)		(5,986)
Purchase of property, plant and equipment		(27,684)		(30,809)
Receipt of government grants		100		-
Proceeds from sale of property, plant and equipment		197		318
Proceeds from sale of investment classified as held for sale		-		221
Net cash used in investing activities		(40,759)		(35,498)
Cash flows from financing activities
Interest paid		(1,094)		(862)
Proceeds from issue of share capital		410		491
Proceeds from borrowings		30,000		-
Repayment of borrowings		(30,500)		(14,000)
Dividends paid		(12,700)		(11,404)
Repayment of capital element of finance leases and hire purchase contracts		(349)		(243)
Net cash used in financing activities		(14,233)		(26,018)
Net increase/ (decrease) in cash and cash equivalents	8	5,139		(11,704)
Cash and cash equivalents at beginning of year	8	7,084		18,788
Cash and cash equivalents at end of year	8	12,223		7,084

GROUP STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 MARCH 2014

	Share capital £'000	Share premium £'000	Share- based payments £'000	Hedging reserve £'000	Retained earnings £'000	Total equity £'000
(Restated)
At 31 March 2012	4,803	58,642	5,603	(69)	176,953	245,932
Profit for the year	-	-	-	-	36,139	36,139
Other comprehensive income	-	-	-	65	769	834
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
Profit for the year	-	-	-	-	43,207	43,207
Other comprehensive income	-	-	-	(11)	(3,442)	(3,453)
Total comprehensive income	-	-	-	(11)	39,765	39,754
Share-based payments	-	-	1,014	-	-	1,014
Scrip dividend	19	2,184	-	-	-	2,203
Share options exercised (proceeds)	24	386	-	-	-	410
Dividends	-	-	-	-	(14,903)	(14,903)
Deferred tax related to changes in equity	-	-	-	-	246	246
Corporation tax related to changes in equity	-	-	-	-	323	323
At 31 March 2014	4,896	64,173	7,779	(15)	225,878	302,711

1.   Basis of preparation

The results comprise those of Cranswick plc and its subsidiaries for the year ended 31 March 2014.  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 2013 (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 2014 and 31 March 2013 have been reported on by the auditors who issued an unqualified opinion in respect of both periods and the auditors' reports for 2014 and 2013 did not contain statements under 498(2) or 498(3) of the Companies Act 2006.  Statutory accounts for the year ended 31 March 2013 have been filed with the Registrar of Companies.  The statutory accounts for the year ended 31 March 2014, which were approved by the Board on 19 May 2014, 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 2013, except as follows:

IAS 1 Presentation of Items of Other Comprehensive Income (Amendment)

The amendments to IAS 1 introduce a grouping of items presented in other comprehensive income. Items that could be reclassified (or recycled) to profit or loss at a future point in time now have to be presented separately from items that will never be reclassified.  The amendment affected presentation only, and had no impact on the Group's financial position or performance.

IAS 19 (revised) Employee Benefits

IAS 19 (revised) includes a number of amendments to the accounting for defined benefit pension schemes.  The principal impact on the Group of the application of this standard is that interest on pension scheme assets is now calculated by reference to the liability discount rate rather than the expected long-term yield on the assets, as was the case previously.  The impact of the amendment on profit before tax for the prior year ended 31 March 2013 was to increase finance costs by £135,000, with a resulting reduction of 0.2 pence in both earnings per share and adjusted earnings per share.  The amendment also led to a £33,000 reduction in the prior year tax charge, offset by an increase in income tax charged through other comprehensive income.  There was no impact on the reported pension liability as the impact on the income statement is mitigated by an offsetting adjustment in the calculation of actuarial gains and losses in the statement of comprehensive income.

IFRS 13 Fair Value Measurement

IFRS 13 establishes a single source of guidance for all fair value measurements. IFRS 13 does not change when an entity is required to use fair value, but rather provides guidance on how to measure fair value under IFRS when fair value is required or permitted. The resulting calculations under IFRS 13 affected the principles that the Group uses to assess the fair value, but the assessment of fair value under IFRS 13 has not materially changed the fair values recognised or disclosed. IFRS 13 mainly impacts the disclosures of the Group. It requires specific disclosures about fair value measurements and disclosures of fair values, some of which replace existing disclosure requirements in other standards.

New and revised standards

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

3.   Business and geographical 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.   Group operating profit                                                                                        

Group operating costs comprise:

			2014 £’000		2013 £’000
Cost of sales excluding net IAS 41 valuation movement on biological assets			877,012		768,633
Net IAS 41 valuation movement on biological assets*			(1,441)		-
Cost of sales			875,571		768,633
Gross profit			119,334		106,538
Selling and distribution costs			35,995		34,627
Administrative expenses excluding impairment and release of contingent consideration			28,643		21,870
Impairment of property, plant and equipment			-		1,836
Release of contingent consideration			(1,086)		-
Administrative expenses			27,557		23,706
Total operating costs			939,123		826,966

* This represents the difference between operating profit prepared under IAS 41 and operating profit prepared under historical cost accounting, which forms part of the reconciliation to adjusted operating profit.

5.   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 £43,207,000 (2013: £36,139,000 as restated) 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:

	2014		2013
	Thousands		Thousands
Basic weighted average number of shares	48,734		48,257
Dilutive potential ordinary shares - share options	191		137
	48,925		48,394

Adjusted earnings per share

During the year the Group released contingent consideration in relation to the acquisition of Kingston Foods Limited.  In addition, the Group made the Wayland and Wold Farms acquisitions described in note 7, and subsequently recognised a profit on the IAS 41 valuation movement on biological assets acquired.  In the prior year the Group impaired freehold property, plant and equipment to their fair value at its mothballed production facility in East Lancashire.  The property has subsequently been demolished and the land is in the process of being sold.

As the release of contingent consideration and the impairment of property, plant and equipment do not form part of the on-going business of the Group and due to the volatility of the valuation of biological assets the Directors consider it appropriate to present an adjusted measure of earnings per share on the face of the income statement which excludes the effects of these items to provide a more meaningful measure of the underlying performance of the business.  Adjusted earnings per share are calculated using the weighted average number of shares for both basic and diluted amounts as detailed above.

Adjusted profit for the period is derived as follows:

		2014		2013
		£'000		£'000 (Restated)
Profit for the year		43,207		36,139
Impairment of property, plant and equipment		-		1,836
Release of contingent consideration		(1,086)		-
Net IAS 41 valuation movement on biological assets		(1,441)		-
Tax on net IAS 41 valuation movement on biological assets		288		-
Adjusted profit for the year		40,968		37,975

6.   Dividends

Subject to Shareholders' approval the final dividend will be paid on 5 September 2014 to Shareholders on the register at the close of business on 4 July 2014.

7.   Acquisitions

On 29 April 2013, the Group acquired 100 per cent of the issued share capital of East Anglian Pigs Limited (renamed Wayland Farms Limited) for a total consideration of £13.5 million. 

On 20 August 2013, the Group incorporated a new company; Wold Farms Limited.  On 13 September 2013, Wold Farms Limited acquired certain trade and assets of Dent Limited for a total consideration of £2.0 million and subsequently, on 19 December 2013, acquired further Dent Limited assets from the administrator for a total consideration of £1.5 million.  The principal activities of both Wayland Farms Limited and Wold Farms Limited are pig breeding, rearing and finishing.  The acquisitionsgive the Group greater control over its supply chain.

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

		Wayland Farms Limited	Wold   Farms Limited (Provisional)	Total
		£'000	£'000	£'000
Net assets acquired:
	Property, plant and equipment	3,828	435	4,263
	Biological assets	10,550	2,550	13,100
	Inventories	398	62	460
	Trade receivables	1,368	-	1,368
	Bank and cash balances	2,540	-	2,540
	Trade payables	(3,258)	-	(3,258)
	Provisions	(150)	-	(150)
	Financial liabilities	(1,500)	-	(1,500)
	Finance lease obligations	(603)	-	(603)
	Corporation tax liability	(148)	-	(148)
	Deferred tax liability	(905)	84	(821)
		12,120	3,131	15,251
Goodwill arising on acquisition		1,355	336
Total consideration		13,475	3,467
Satisfied by:
	Cash	13,475	3,467	16,942
Analysis of cash flows on acquisition:
Included within cash flows from investing activities
Cash consideration paid		13,475	3,467
Cash and cash equivalents acquired		(2,540)	-
		10,935	3,467
Included within net cash from operating activities
Transaction costs of the acquisition		121	121
Net cash outflow arising on acquisition		11,146	3,588

The fair values on the Wold Farms transactions remain provisional due to their timing and will be finalised within twelve months of the respective transaction dates.

From the date of acquisition, the external revenues of Wayland Farms Limited were £10.8 million and the company contributed a net profit after tax (excluding the IAS 41 valuation movement on biological assets) of £2.5 million to the Group.  If the Wayland Farms Limited combination had taken place at the beginning of the year, the Group's profit after tax for the year would have been unchanged at £43.2 million and revenues would have been £995.6 million.

In the period since acquisition, the external revenues of Wold Farms Limited were £nil and the company contributed a net lossafter tax of £0.2 million to the Group.  Due to the nature of the two transactions, with only a proportion of the trade and assets of Dent Limited being acquired, the Directors consider it impracticable to assess the impact of Wold Farms Limited on the revenues and profit after tax of the Group had the combination taken place at the beginning of the period.

Included in the £1,691,000 of goodwill recognised, are certain intangible assets that cannot be individually separated from the acquireesand reliably measured due to their nature.  These items include the expected value of synergies, the assembled workforces and the strategic benefits of vertical integration including security of supply.

Transaction costs of £211,000 and £121,000 have been expensed in relation to Wayland Farms Limited and Wold Farms Limited respectively, and are included in administrative expenses.

8.   Analysis of changes in net debt

Analysis of changes in net debt:

	At 31 March 2013		Cash flow		Other non cash changes		At 31 March 2014
Group	£'000		£'000		£'000		£'000
Cash and cash equivalents	7,633		4,590		-		12,223
Overdrafts	(549)		549		-		-
	7,084		5,139		-		12,223
Other financial assets	1,398		(1,002)		(396)		-
	8,482		4,137		(396)		12,223
Revolving credit	(28,498)		500		(900)		(28,898)
Finance leases and hire purchase contracts	(55)		349		(603)		(309)
Net debt	(20,071)		4,986		(1,899)		(16,984)

Net debt is defined as cash and cash equivalents and loans receivable less interest bearing liabilities (net of unamortised issue costs).

9.   Related party transactions

During the year the Group and Company entered into transactions, in the ordinary course of business, with related parties, including transactions between the Company and its subsidiary undertakings.  In the Group accounts transactions between the Company and its subsidiaries are eliminated on consolidation but these transactions are reported for the Company below:

Company	Services rendered to related party £'000	Interest paid to related party £'000	Dividends received from related party £'000
Related party - Subsidiaries
2014	17,560	2,724	12,700
2013	19,000	2,066	11,404

Amounts owed by or to subsidiary undertakings are unsecured and repayable on demand.

10. Report and accounts

The Report and Accounts will be available on the Company's website at www.cranswick.co.ukon 26 June 2014.  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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