2008 Annual Results (Part 1)

RNS Number : 3554O

Premier Foods plc

05 March 2009

 

5 March 2009

Premier Foods plc Annual Results 2008

Business trading well - adjusted earnings per share from continuing operations up 5.4%

Transformation nearing completion - competitively positioned for the future

Capital structure solution - £404m equity issue combined with renegotiated bank agreements and pensions framework agreement

	Year ended 31 December 2008 £m		Year ended 31 December 2007 £m	Change
Turnover1	2,603.6		2,125.2	22.5%
Trading profit2
Including operations discontinued in      20083	320.2		280.2	14.3%
Continuing operations	310.2		271.9	14.1%
Operating profit before exceptional items1	256.0		230.7	11.0%
Operating (loss)/profit1	(40.5)		72.0	-
Adjusted profit before tax4
Including operations discontinued in      20083	193.8		170.8	13.5%
Continuing operations	183.6		162.5	13.0%
Loss after tax1,5	(373.3)		(37.8)
Basic (loss)/ earnings per share	(52.5p)		(8.2p)
Adjusted earnings per share4
Including operations discontinued in      20083	16.4p		15.5p	5.8%
Continuing operations	15.5p		14.7p	5.4%
Dividend per share	-		6.5p	-

 H2 Group turnover for continuing operations up 10.0%

• • Grocery division in good volume growth for last four months of the year

  • Hovis brand relaunch increased market share by 2.4pp to 24.7%

• H2 Trading profit for continuing operations up 11.7%2

• Annual cost synergies remain on track for the full £113m

• • £53m delivered in 2008 

  • Run rate at 31 December 2008 of £89m

• Manufacturing rationalisation programme completed - 9 factories closed over 12 months

• Disposal of Le Pain Croustillant, Sofrapain³ and Martine³ for £47m

• Capital structure solution: equity issue raising approximately £404m of gross proceeds announced today combined with amended bank agreement and pensions framework agreement (Please see the separate announcement released today for further details.)

• Impairment of goodwill in relation to Hovis division of £194m due to increased cost of capital

• Non-cash charge of £219m on mark-to-market of interest rate swaps due to unprecedented fall in market expectations for LIBOR 

Robert Schofield, Chief Executive of Premier Foods plc ('Premier') said, 

'The Group made significant progress over the course of 2008. We completed our manufacturing rationalisation programme, closing 9 factories over a 12 month period, implemented SAP in our Grocery division and successfully relaunched Hovis, our biggest brand. Additionally, we are pleased by the trading performance of the business which has demonstrated resilience against the backdrop of a challenging economic environment. It is a great credit to all of Premier's employees that, despite the turbulence in the financial markets, they have remained focussed and delivered on the commercial priorities that we set ourselves at the start of the year.

'We recognised soon after the acquisition of RHM that Hovis required a new strategy.  We have invested £16m on recipe improvements, we introduced redesigned packaging and the 'Come on lad' advertising campaign won the 2008 'Advertising Campaign of the Year' award. Most importantly though, the consumer has responded positively to the relaunch and Hovis' market share has risen by 2.4 percentage points to 24.7% since August 2008.

'We have now completed our capital structure review and have proposed raising approximately £404m gross equity proceeds, which we believe, combined with the amended lending agreement and new pensions framework agreement we have announced today, will put in place a more appropriate capital structure for the business going forward and provide a solid platform for Premier's future development. 

'One of the most pleasing aspects of the business in 2008 is how robust trading has been during a tough period for consumer-facing businesses. We believe that with the momentum developed in our Grocery business over the last four months of 2008, combined with the successful relaunch of Hovis and the remaining integration synergies, we are well positioned for further progress in 2009.'

 (1) Continuing operations.

(2) Trading profit is defined as operating profit before exceptional items, amortisation of intangible assets, the revaluation of foreign exchange and other derivative contracts under IAS39 and pension credits or charges in relation to the difference between the expected return on pension assets and interest costs on pension liabilities.

(3) Operations discontinued in 2008 comprise Le Pain Croustillant ('LPC'), Martine Spécialités SAS ('Martine') and Sofrapain SAS ('Sofrapain'), businesses in our Speciality Bakery Group, part of the Hovis division. The sales of LPC and Martine completed on 2 March 2009. A contract for the sale of Sofrapain was signed on 6 February 2009 and completion is expected during April 2009.

(4) Adjusted profit before tax and Adjusted earnings per share are calculated as set out below:

Continuing operations	2008		2007
	£m		£m
Trading profit	310.2		271.9
Less net regular interest	(126.6)		(109.4)
Adjusted profit before tax	183.6		162.5
Less notional tax calculated at 28.5%/30.0%	(52.3)		(48.7)
Adjusted profit after tax	131.3		113.8
Divided by:
Average shares in issue (millions)	844.6		772.6
Adjusted earnings per share	15.5p		14.7p

Including operations discontinued in 2008	2008		2007
	£m		£m
Trading profit	320.2		280.2
Less net regular interest	(126.4)		(109.4)
Adjusted profit before tax	193.8		170.8
Less notional tax calculated at 28.5%/30.0%	(55.2)		(51.2)
Adjusted profit after tax	138.6		119.6
Divided by:
Average shares in issue (millions)	844.6		772.6
Adjusted earnings per share	16.4p		15.5p
Net regular interest
Net interest payable and other financial charges	(186.1)		(145.4)
Net interest receivable and other financial income	41.6		26.8
Add exceptional write off of financing costs	17.0		-
Add accelerated amortisation of debt issuance costs	-		8.4
Add unwind of discount on provisions	0.9		0.8
Net regular interest payable - continuing operations	(126.6)		(109.4)
Net interest payable - operations discontinued in 2008	0.2		-
Net regular interest payable including operations discontinued in 2008	(126.4)		(109.4)

  (5) Reconciliation for continuing operation of adjusted profit before tax to loss after tax

	2008		2007
	£m		£m
Adjusted profit before tax	183.6		162.5
Less impairment of goodwill	(194.4)		-
Less other exceptional items	(102.1)		(158.7)
Less Amortisation of intangible assets	(76.7)		(62.0)
Add pension financing credit	15.6		16.1
Add foreign exchange and other derivative contracts	6.9		4.7
Less fair value adjustments on interest rate swaps	(218.9)		(31.0)
Less exceptional write off of financing costs	(17.0)		-
Less accelerated amortisation of debt issuance costs	-		(8.4)
Less unwind of discount on provisions	(0.9)		(0.8)
Loss before tax	(403.9)		(77.6)
Taxation credit	30.6		39.8
Loss after tax	(373.3)		(37.8)

For further information:

Premier Foods plc                                                          [phone]

Paul Thomas, Finance Director

Gwyn Tyley, Director of Investor Relations

Richard Godden, Investor Relations and Acquisitions Manager

Maitland                                                                           [phone]

Neil Bennett

Emma Burdett

Brian Hudspith

A presentation to analysts and investors will take place on Thursday, 5th March 2009 at 9.30am at Goldman Sachs, River Court, 120 Fleet Street, London, EC4A 2QQ. Anyone wishing to attend the presentation should contact:

Sally Colbourne

Tel:     [phone]

Email:   [e-mail]

 Operating review 

£m	2008		20072
Turnover
Grocery	1,419.0		1,232.9
Hovis	756.3		534.9
Chilled & Ireland	428.3		357.4
Turnover for continuing operations	2,603.6		2,125.2
Trading profit1 for continuing operations	310.2		271.9
Trading profit margin – continuing operations	11.9%		12.8%
Amortisation of intangibles	(76.7)		(62.0)
Foreign exchange valuation items credit	6.9		4.7
Pension financing credit	15.6		16.1
Operating profit before exceptional items	256.0		230.7
Exceptional items	(296.5)		(158.7)
Operating (loss)/profit	(40.5)		72.0
Operations discontinued in 2008
Turnover	173.0		122.4
Trading profit1	10.0		8.3

(1) Trading profit is defined as operating profit from continuing operations before exceptional items, amortisation of intangible assets, the revaluation of foreign exchange and other derivative contracts under IAS39 and pension credits or charges in relation to the difference between the expected return on pension assets and interest costs on pension liabilities. Trading profit for discontinued operations excludes any allocation of central overhead costs.

(2) The results for 2007 include only 41 weeks trading for RHM which was acquired in March 2007. As such the results for 2008 and 2007 are not directly comparable. 

Introduction

At the time of our preliminary results for 2007, we set out our priorities for 2008. These were: cost inflation recovery; synergy delivery from the integration of RHM and Campbell's; the re-launch of Hovis; the implementation of certain key modules of the enterprise software system, SAP; and to progress our factory rationalisation plans. We have achieved all of these commercial priorities despite the backdrop of an exceptionally challenging trading and financial environment. 

2008 performance

The first and second halves of 2008 showed marked differences in the economic environment and also the trading patterns of the Group.

The first half of 2008 was dominated by the need to increase prices to recover significant commodity cost inflation whilst capacity was constrained in the Grocery division by the manufacturing rationalisation programme and the implementation of core modules of SAP. In Hovis, whilst we stabilised our market share, the performance reflected lower year on year volumes. In the Chilled & Ireland division, meat-free continued to grow strongly and our business in Ireland focussed on delivering its integration synergies. The chilled retailer brand business experienced tough underlying trading conditions but was successful in winning new contracts which commenced in August.

In the second half, from September we began to see good sales volume growth in our Grocery division as we were able to return promotional activity to more normal levels having completed the manufacturing rationalisation programme.  As the economic downturn became more apparent, many of our Grocery categories began to show volume growth as consumers looked for brands and products they could trust and which offer good value for money. Following the relaunch of Hovis we saw improvements in brand equity measures, followed by increases in market share. The meat-free business continued to show strong growth, assisted in its export markets by the weakening of sterling whilst profit development in our Irish business continued to be driven by integration synergies. The benefit of the new contracts in the chilled retailer brand business was partly offset by the weakening of demand for its premium quality products due to the economic downturn.

Trading profit growth in the second half for the Group was primarily due to integration synergies. The synergies were, however, partly offset by increased manufacturing costs in the Grocery division, an under-recovery of cost inflation in the Chilled & Ireland division and a small year on year decline in volumes in the Hovis division in the third quarter.

We believe that the Group finished 2008 with significant momentum, with year on year volume growth in its two largest divisions, Grocery and Hovis. In spite of concerns that the economic downturn might lead to consumers trading down to retailer-branded products, in the majority of our categories, branded products have seen greater volume growth than retailer-branded products. 

Integration

In April 2008, we implemented some core elements of the SAP information system in our Grocery division, following which we continued with the manufacturing rationalisation programme.  We have closed 9 factories across our Grocery division in the space of twelve months, a considerable accomplishment which has significantly increased the scale and efficiency of the remaining factories.

We remain on track to deliver the full £113m of annual cost synergies identified at the time of the acquisition of RHM with an annualised run rate as we enter 2009 of £89m. With the major administration integration and manufacturing rationalisation programmes complete, the remaining elements of the integration programme in 2009 include the opening of a Group wide shared service centre in Manchester, rationalising the Grocery division logistics network and realising further procurement synergies. The shared service centre, envisaged to employ approximately 300 people, will provide the ideal platform upon which the full benefits of the SAP systems and processes can be realised. The logistics programme will result in the operation of a 3 hub strategy across the UK with key distribution centres in East Anglia, the North West and the Midlands.

In January 2009, we announced that we had received firm offers for the businesses of Le Pain Croustillant ('LPC'), Sofrapain SAS ('Sofrapain') and Martine Spécialitiés SAS ('Martine') for a net consideration totalling approximately £47m. The sales of LPC and Martine completed on 2 March 2009 and we expect the sale of Sofrapain to complete in April 2009. These businesses are principally own label businesses outside the UK and Ireland and are therefore not core to Premier's stated strategy.

Capital Structure

We have now completed our capital structure review and have proposed raising approximately £404m gross equity proceeds, which we believe, combined with the amended lending agreement and new pensions framework agreement, will enable us to put in place a more appropriate capital structure for the business going forward and in turn, provide a solid platform for future development. Please see the separate announcement released today for further details.

Grocery

£m	2008		2007
Turnover	1,419.0		1,232.9
Trading profit	239.2		214.1

The Grocery division comprises the original Premier business with the exception of the meat-free business, the Campbell's business, RHM's Culinary Brands division, Ledbury Preserves from RHM's Customer Partnerships division and Manor Bakeries from the RHM Cakes division.

Turnover from the Grocery segment was £1,419.0m for 2008, an increase of £186.1m, or 15.1%, as compared to £1,232.9m for 2007. The increase in turnover was principally due to the acquisition of RHM. The increase in trading profit was primarily due to the inclusion of a full year of RHM trading and the integration synergies partly offset by unrecovered cost inflation during the first half of the year.

Of the three divisions, the Grocery division has experienced the greatest change from the integration of the RHM and Campbell's businesses. Following the completion of the initial integration of the administration functions in 2007, our focus in 2008 turned to our manufacturing rationalisation programme and the implementation of SAP. These two projects required a more stable sales profile, particularly during the first half of the year. This limited the division's level of promotional activity, leading to reduced sales volumes.

On preparing the detailed plans for the manufacturing rationalisation programme during early 2008, we identified an opportunity to accelerate the programme and in so doing, complete the closure of all 9 factories by the end of November 2008, earlier than originally envisaged. We deemed the acceleration of the programme would reduce the risk to the business by removing capacity constraints more quickly and so enable it to return its focus to organic growth sooner. The rationalisation programme was successfully completed in line with this accelerated timetable.

In the second half, the impact of the economic downturn which led to increased volumes in our categories, together with the newly improved capacity across our manufacturing network led to a noticeable increase in our sales volumes over the last four months of the year. This combined with price increases to recover raw material cost inflation, resulted in an increase in turnover of 10.8% against the same period in 2007.

We believe that the outlook for the division in 2009 is good. The evidence to date suggests that the economic backdrop is positive for many of the categories we operate in as consumers look for brands and products that they can trust and which offer good value for money.  Following the completion of the manufacturing rationalisation programme, we are now shifting our attention to delivering branded sales growth through product innovation.

Hovis

 

£m	2008		2007
Turnover	756.3		534.9
Trading profit	20.9		17.4

 

The Hovis division comprises the RHM Bread Bakeries division.

Turnover from the Hovis segment was £756.3m for 2008, an increase of £221.4m, or 41.4%, as compared to £534.9m for 2007. The increase in turnover was primarily due to the acquisition of RHM and increases in prices primarily as a result of increased wheat and energy costs. The increase in trading profit is primarily due to the inclusion of a full year of RHM trading partly offset by lower volumes in the second and third quarters of 2008 and the additional investment behind the Hovis brand.

As announced in our preliminary results for 2007, we embarked on a new strategy for our Hovis division. The principal elements of this strategy, which we have rolled out through the year, were: improved quality, redesigned packaging, new advertising and an extended range, including new 400g loaves. We commenced the implementation of the new strategy with an improved recipe and new packaging for Hovis white bread in the spring, returning it to sales volume growth. We then rolled out improved recipes, manufacturing processes and consistent packaging across the whole range during the second half.  In September we aired our award winning new TV advert 'Go on lad'. We were delighted by the consumer response to the relaunch and Hovis' market share has improved by 2.4 percentage points from August 2008 to January 2009 to reach 24.7%, its highest level for 16 months.  We have also seen a significant improvement in brand equity measures, particularly quality, health, and 'willing to pay more for'. Turnover for the division in the second half of the year was 10.0% higher than the same period in 2007, due to price increases to recover cost inflation partly offset by the lower overall volumes over the second half.

Wheat prices have remained elevated compared to historic levels for the duration of 2008, although they have decreased from the highs of late 2007 and early 2008. The 2008 UK wheat harvest saw a significant increase in tonnage of wheat harvested but, due to the wet summer, it was of poorer quality than generally used for bread making.  Therefore, whilst feed wheat prices have fallen sharply, the premium required for bread making wheat has been at record levels during the second half of 2008.

Chilled & Ireland

 

£m	2008		2007
Turnover	428.3		357.4
Trading profit	50.1		40.4

 

The Chilled & Ireland division comprises the RF Brookes and Charnwood chilled foods and pizza base businesses from RHM's Customer Partnerships division, Avana Bakeries from RHM's Cakes division, Premier's Meat-free business and all of our operations in the Republic of Ireland.

Turnover from the Chilled & Ireland division was £428.3m for 2008, an increase of £70.9m, or 19.8%, as compared to £357.4m for 2007. The increase in turnover was primarily due to the acquisition of RHM though we also saw strong sales volume and value growth in meat-free operations. The increase in trading profit was primarily due to integration synergies and the inclusion of a full year of RHM trading.

Quorn, our category leading meat-free brand, experienced another year of strong sales growth with progress both in UK and overseas markets.  Internationally, there was good volume growth in Sweden, Belgium and the USA, whilst the brand was launched for the first time in Norway.  We have recently launched a significant new advertising campaign for the first half of 2009 which focuses on the health benefits and versatility of Quorn. This will be supported by continued strong new product development.  

The chilled ready meals business won a number of new contracts in August 2008 and this helped to offset Christmas trading, which was softer than expected in the ready meals and own label cake business units.  This reflected the impact of the economic downturn on the premium products these business units supply.

  The Irish business unit has undergone a year of bedding down the new integrated structure for the combined RHM, Campbell's and Chivers Ireland businesses.  Following the integration, products for the Irish market are now predominantly produced at the Group's factories in the UK.  The resultant synergy benefits are flowing through, ensuring profit progression despite the background of the tough economic environment in Ireland which we are seeing at the current time.

Current trading

Current trading is in line with our expectations and we believe that our brands will continue to be resilient in the difficult economic environment. Food inflation, although at lower levels than in 2007 and 2008 remains a concern, particularly due to the effect of the weakening of sterling.

The integration programme continues to progress well. The Group's new shared service centre was opened in February 2009 and the implementation of SAP in the Group's ambient cake business is on track for April 2009. 

We believe that with the momentum developed by its Grocery division and the success of the Hovis relaunch, combined with the remaining integration synergies, we are well positioned for further progress in 2009.

Robert Schofield

Chief Executive

Financial review

Due to legal restrictions associated with the issue of new equity, all figures referred to in this review are only on a statutory basis, rather than a pro forma basis which treats acquired businesses as if they had been owned for the whole of the current and prior reporting periods.

The equity issue is dependent on shareholder approval. Further details are set out within the Basis of Preparation note to the financial statements contained within this results announcement. The audit opinion on the 2008 Annual report and accounts contains an emphasis of matter in relation to the material uncertainty relating to the equity fund-raising referred to in the Basis of Preparation note. 

Group structure

As previously announced, following the acquisition and integration of Campbell's and RHM, the Group implemented a new divisional structure with effect from 1 January 2008.  It has defined three segments being 'Grocery', 'Hovis' and 'Chilled & Ireland' with the primary drivers of the structure being the commonality of the categories it operates in and the supply chain used to serve them.

In January, the Group announced firm offers for the purchase of its speciality bakery businesses, Martine, LPC and Sofrapain. The sales of LPC and Martine completed on 2 March 2009. The contract for the sale of Sofrapain was signed and control of the business passed to the purchaser on 6 February, with legal completion expected during April 2009. The results of these businesses have been classified as discontinued operations and are set out in note 10 to the financial statements. The income statement for 2007 has been restated to reflect these businesses as discontinued operations. All discussion of the numbers included below refers to the continuing business unless otherwise stated. The assets and liabilities relating to the speciality bakery businesses as at 31 December 2008 have been presented as held for sale on the balance sheet. Full details of this are set out in note 17 to the financial statements.  

Income statement

Turnover from continuing operations was £2,603.6m for 2008, an increase of £478.4m, or 22.5% as compared to 2007. The primary reason for the increase is the inclusion of a full year of RHM trading in 2008 (compared to 41 weeks post-acquisition trading in 2007). In addition, the Group had to increase prices significantly in order to recover the high levels of input cost inflation experienced since the second half of 2007.

Operating profit / (loss)

Operating profit for the continuing business before exceptional items was £256.0m, an 11.0% increase on last year. This increase was largely due to the inclusion of a full year of RHM trading in 2008 and the synergies arising on the integration of Campbell's and RHM, partly offset by lower volumes in the Grocery division in the first half of the year as the Group implemented SAP and integrated the manufacturing operations and lower volumes in the Hovis division during the first three quarters of the year.  

Trading profit for the continuing business and the speciality bakery businesses combined was £320.2m, an increase of 14.3% in comparison to 2007, due to the inclusion of a full year of RHM trading in 2008 and the cost savings and volume referred to above.

Operating profit after exceptional items fell from a profit of £72.0m in 2007 to a loss of £40.5m in 2008 after recognising an impairment charge against the goodwill attributable to the Hovis division of £194.4m (2007: £nil) and £102.1m (2007: £158.7m) of other exceptional items, primarily related to the integration programme.  

 Exceptional items - restructuring costs

Consistent with its ongoing approach to financial reporting, the Group has classified all non-recurring integration costs as exceptional items, the full impact of which is set out in note 5 to the financial statements. 

In the current and prior years these items have primarily related to the significant integration programmes undertaken to achieve the cost savings and reshaping of the business following the Campbell's and RHM acquisitions. These integration programmes are now largely complete.

Overall exceptional items associated with restructuring for the year resulted in a net charge of £102.1m (2007: £158.7m).  Total cash outflow on exceptional items in the year was £121.8m (2007: £105.5m).

The integration of the Campbell's business continued with the closure of manufacturing operations and warehousing facilities at King's Lynn, incurring costs of £6.3m.  

The Group incurred £60.6m of expenses in the year in relation to the integration of RHM's UK operations, primarily due to the closure of certain RHM sites and the resulting transfer of production from those factories to other Group facilities, the integration of certain warehousing facilities into other Group warehouses and the creation of a Group-wide shared service centre in Manchester.

The completion of the restructuring of our Meat-free business and the commissioning of a new chilled facility at Methwold to enable the manufacture of chilled products for Quorn and Cauldron products on a single site has resulted in costs of £3.5m.

Costs associated with the integration of our Irish operations into a single operating business were £6.0m.  

The Group also incurred £21.1m of costs relating to a number of restructuring projects that have taken place across our Hovis division implementing new business processes and preparing for the roll-out of SAP into this division. The 2008 exceptional charge also includes an impairment of assets and redundancy costs relating to the closure of its Rotherham mill, onerous lease costs for properties and impairment recognised against certain plant and machinery relating to discontinued production lines.  

Other exceptional costs of £6.7m include costs associated with the roll-out of a new SAP software package, various cost reduction and supply chain initiatives and also re-financing project fees.

The integration programme has resulted in a number of sites becoming available for sale and, during the year, the Group sold properties in Bristol, Droylsden, Middlewich, Wythenshawe and Stoke in the UK, and Thurles in the Republic of Ireland. Total proceeds from the sale of fixed assets were £26.4m. A net profit of £2.1m was recognised on these disposals. 

Exceptional items - impairment charge

During the year the Group has recognised an impairment charge of £194.4m against the goodwill allocated to the Hovis Cash Generating Unit ('CGU'). This impairment charge has arisen as a result of the significant increase in the discount rate used to calculate the recoverable amount of the CGU which increased from 8.4% in 2007 to 11.1% in 2008. 

The increase in discount rate is a result of the deterioration in the economic climate, resulting in increased costs of debt and increased levels of return expected by equity investors. Had discount rates remained at 2007 levels, no impairment charge would have been recognised.

The Group has also recognised an impairment charge of £68.5m to write down the net assets attributable to the speciality bakery businesses (LPC, Sofrapain and Martine) to their recoverable amounts.  

Financing

On 29 February 2008, the Group amended certain terms of its Term and Revolving Credit Facilities by agreement with its lending banks to provide greater covenant headroom for the remainder of its financing period. The Group also converted its £100m Acquisition line to a Working Capital line and renegotiated a further £125m of short term facilities with three of its leading banks.

Subsequent to 31 December 2008 an additional £60m of short term financing maturing on 31 March 2009 was agreed to cover working capital requirements in this period.

As part of its capital structure review and subsequent to the year end, the Group agreed amendments to its Term and Revolving Credit Facilities. These amendments include a rephasing of the amortisation of these facilities to an extended maturity date of December 2013 and the reset of the covenant schedule. Further details are provided in note 34 to the financial statements.

Net interest payable and other financial charges and income

Net interest payable and other financial charges and income for the continuing business was £144.5m, compared with £118.6m in 2007. Net cash interest costs are £119.0m, an increase of £13.8m, reflecting a higher level of borrowings carried for the full year in 2008 compared with only the post-acquisition period in 2007, and also an increased level of average borrowing in the year.  

Movement on fair valuation of interest rate swaps

Marking to market our portfolio of interest rate swaps resulted in a charge in 2008 of £218.9m (2007: a charge of £31.0m). These are non cash interest costs and reflect the difference between the actual fixed rate interest cost and the theoretical interest cost on a floating rate basis over the life of the swaps. Refer to note 8 of the financial statements for further details.

The Group has interest rate hedging in place for the majority of its borrowing. At the end of the year a total of £1,650m was hedged of which £465m was swapped into short-dated fixed rate instruments, £600m into long-dated callable swaps. £350m was hedged by swaps with a cap and floor structure, and £235m was hedged by other callable swaps. Further details are given in note 22. Based on LIBOR as at 31 December 2008, the average hedge rate for the first quarter of 2009 was 4.7%.  Based on LIBOR at the current date, the average hedge rate would increase to 5.1%.

Taxation

The taxation credit on continuing activities for the year was £30.6m (2007: £39.8m). This is made up of a current tax charge of £2.8m, and a deferred tax charge of £0.9m on overseas activities; a deferred tax credit of £4.6m on underlying continuing UK operations; a current year credit of £20.6m on allowable exceptional items and a credit of £9.1m from the release of prior year provisions as a result of the favourable resolution of outstanding issues with HMRC and adjustments to deferred tax balances. 

The £4.6m credit on UK operations is made up of a credit on underlying activities of £32.2m, at an effective rate of 26.8%, reduced by charges of £25.4m as a result of the enactment in the 2008 Finance Act of provisions to abolish taxation relief for investment in industrial buildings and £2.2m relating to share based payments to reduce the deferred tax asset thereon to their fair value. 

The credit relating to exceptional items was adversely affected by items not allowable for tax, being primarily the write down of goodwill, which reduced the tax credit by £55.4m and other amounts totalling £8.2m.

Dividends

As announced on 18 November 2008, the Board considered it appropriate to suspend dividend payments. The Board is committed to resuming dividend payments when possible but the future payment of dividends will be dependent upon the Group's ability to reduce its level of debt, the limitations on dividends imposed by the Group's proposed amended debt agreements and the condition of the credit markets at the relevant time, with any final dividend being subject to the approval of the Group's Shareholders at a general meeting. The proposed amended debt agreements impose restrictions on the ability to announce dividends which are subject to a leverage test and an interest cover test, with the payment being restricted to no more than 50% of consolidated profits attributable to shareholders for the previous financial year.

Earnings per share

Basic loss per share of 44.2 pence (2007: 4.9 pence) on continuing operations has been calculated by dividing the loss attributed to ordinary shareholders of £373.3m (2007: £37.8m) by the weighted average number of shares in issue during the year.

Adjusted earnings per share for continuing operations is 15.5 pence (2007: 14.7 pence). Adjusted earnings per share for continuing operations has been calculated by dividing the adjusted earnings (defined as operating profit before exceptional items, amortisation of intangible assets, the movement in the IAS 39 valuation of forward foreign exchange contracts and other derivative contracts and the pension financing credit in relation to the difference between the expected return on assets and interest costs on pension liabilities less net regular interest payable and notional taxation) attributed to ordinary shareholders of £131.3m (2007: £113.8m) by the weighted average number of ordinary shares in issue during each year. These earnings have been calculated by reflecting tax at a notional rate of 28.5% (2007: 30%). Adjusted earnings per share for continuing operations and the speciality bakery businesses combined is 16.4 pence (2007: 15.5 pence).  

Cash flow and borrowings

During the year, the net borrowings of the Group increased from £1,618.5m at 1 January 2008 to £1,766.8m, an increase of £148.3m. Of this movement, the cash and non-cash elements were £122.2m and £26.1m respectively. The non-cash movement related to foreign exchange differences and debt issuance costs.

The cash inflow from operating activities was £84.1m (2007: £270.9m). This comprises cash from operations of £189.4m (2007: £360.2m). Despite the increase in the interest charge for the year, net cash interest paid of £105.4m was only £7.4m up on the 2007 payment of £98.0m. This is due to the timing of interest payments around the respective year ends and reflects an increase in accrued interest payable of approximately £10m.  

The fall in cash generated from operating activities from £360.2m in 2007 to £189.4m is primarily due to the non-recurrence of the working capital movements arising from the mid-period acquisition of RHM during March 2007.

During the year the Group continued to take advantage of the £100m non-recourse securitisation programme on certain trade receivables, £90m of which, being the maximum allowable, was drawn at the end of the year. The programme provided the Group with a saving in interest costs of around 40bps compared to the cost of drawing the amounts under the Revolvong Credit Facility.

Capital expenditure in the year was £129.8m on tangible fixed assets and £31.2m on intangible assets (2007: £115.9m on tangible fixed assets and £8.7m on intangible assets), due to the completion of the final year of integration and rationalisation of its manufacturing operations. Proceeds received in respect of disposal of fixed assets were £26.4m in 2008 (2007: £48.9m). The Group also paid dividends of £54.7m (2007: £61.1m)

Pension schemes

At 31 December 2008 the Group's defined benefit pension schemes showed a net deficit of £11.5m (2007: deficit of £123.2m). This comprises a £172.3m net deficit in relation to Premier schemes and a net surplus of £160.8m in relation to the schemes associated with RHM.  

This improvement in the IAS 19 pension valuation is primarily the result of two factors. Firstly scheme liabilities are valued using a discount rate derived from the yield on AA rated corporate bonds. As a result of recent economic turbulence, these yields and the associated discount rates, have increased from 5.9% as at 31 December 2007 to 6.3% as at 31 December 2008. This has had the effect of reducing the present value of the liabilities of each of our schemes. Secondly, the RHM scheme invests in interest rate and inflation swaps that increase or decrease in value as these two variable assumptions change. These helped to reduce the impact of the current economic conditions on the assets of the scheme and, combined with the movement on yields referred to above, resulted in the movement of the RHM scheme to a surplus of £160.8m as at 31 December 2008. These factors are partly offset by changing the mortality assumption from short cohort to medium cohort for the Premier schemes.

CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS:

Certain statements made in this press release constitute ''forward-looking statements'' within the meaning of the US Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by the use of forward-looking terminology, including the terms ''believes'', ''estimates'', ''plans'', ''anticipates'', ''targets'', ''aims'', ''continues'', ''expects'', ''intends'', ''hopes'', ''may'', ''will'', ''would'', ''could'' or ''should'' or, in each case, their negative or other variations or comparable terminology. These forward-looking statements include matters that are not facts. They appear in a number of places throughout this press release and include statements regarding the Group's intentions, beliefs or current expectations concerning, amongst other things, the Group's results of operations, financial condition, liquidity, financial covenants, prospects, growth, strategies and the industries in which the Group operates. By their nature, forward-looking statements involve risk and uncertainty because they relate to future events and circumstances. A number of factors could cause actual results and developments to differ materially from those expressed or implied by the forward-looking statements including, without limitation: the Company's ability successfully to combine the business of the Group and to realise expected synergies from that combination; conditions in the markets; the market position of the Company or its subsidiaries; earnings, financial position, cash flows, liquidity, financial covenants, return on capital and operating margins of the Company; anticipated investments and capital expenditures of the Company; changing business or other market conditions; and general economic conditions. These and other factors could adversely affect the outcome and financial effects of the plans and events described herein. Forward-looking statements contained in this press release based on past trends or activities should not be taken as a representation that such trends or activities will continue in the future. Save as required by law or by the Listing Rules, the Prospectus Rules or the Disclosure and Transparency Rules, Premier does not undertake any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. You should not place undue reliance on forward-looking statements, which are applicable only as at the date of this press release.

 

END

 

 

FR QELBBKXBFBBZ