2008 Annual Results (Part 2)

RNS Number : 3556O

Premier Foods plc

05 March 2009

 

Consolidated income statement
		Year		Year
		ended		ended
		31 Dec    2008		31 Dec    2007
				(Restated)*
Note		£m		£m
Continuing operations
Turnover	4	2,603.6		2,125.2
Cost of sales		(1,819.5)		(1,476.6)
Gross profit		784.1		648.6
Selling, marketing and distribution costs		(351.0)		(299.9)
Administrative costs		(478.2)		(279.2)
Net other operating income		4.6		2.5
Operating (loss)/profit	6	(40.5)		72.0
Before exceptional items		256.0		230.7
Impairment of goodwill	5	(194.4)		-
Other exceptional items	5	(102.1)		(158.7)
Interest payable and other financial charges	8	(186.1)		(145.4)
Interest receivable and other financial income	8	41.6		26.8
Movement on fair valuation of interest rate swaps	8	(218.9)		(31.0)
Loss before taxation for continuing operations		(403.9)		(77.6)
Taxation credit	9	30.6		39.8
Loss after taxation for continuing operations		(373.3)		(37.8)
Loss from discontinued operations	10	(70.5)		(25.5)
Loss for the year attributable to equity shareholders		(443.8)		(63.3)
Basic and diluted loss per share (pence)	11	(52.5)		(8.2)
Basic and diluted loss per share (pence) - continuing	11	(44.2)		(4.9)
Basic and diluted loss per share (pence) - discontinued	11	(8.3)		(3.3)
Adjusted earnings per share (pence)	11	16.3		15.4
* Comparatives have been restated to reflect the classification of Martine Spécialités S.A.S., Le Pain Croustillant and Sofrapain S.A.S. as discontinued operations.
The notes  form an integral part of the consolidated financial statements.

Consolidated balance sheet
		As at		As at
	31 Dec 2008		31 Dec 2007
				(Restated)*
	Note	£m		£m
ASSETS:
Non-current assets
Property, plant and equipment	13	638.9		607.1
Goodwill	14	1,371.3		1,649.5
Other intangible assets	15	1,159.5		1,237.8
Retirement benefit assets	25	163.7		-
Total non-current assets		3,333.4		3,494.4
Current assets
Assets held for sale	17	124.4		30.6
Inventories	18	238.8		208.4
Trade and other receivables	19	337.0		328.9
Financial assets - derivative financial instruments	22	21.2		8.5
Cash and cash equivalents	29	40.6		23.9
Total current assets		762.0		600.3
Total assets		4,095.4		4,094.7
LIABILITIES:
Current liabilities
Trade and other payables	20	(539.8)		(538.5)
Financial liabilities
- short term borrowings	21	(174.8)		(112.7)
- derivative financial instruments	22	(250.3)		(25.6)
Accrued interest payable		(22.8)		(12.9)
Provisions	24	(23.6)		(56.6)
Current income tax liabilities		(4.1)		(8.1)
Liabilities held for sale	17	(56.5)		-
Total current liabilities		(1,071.9)		(754.4)
Non-current liabilities
Financial liabilities - long term borrowings	21	(1,632.6)		(1,529.7)
Retirement benefit obligations	25	(175.2)		(123.2)
Provisions	24	(28.1)		(18.4)
Other liabilities		(2.7)		(1.1)
Deferred tax liabilities	23	(193.1)		(207.6)
Total non-current liabilities		(2,031.7)		(1,880.0)
Total liabilities		(3,103.6)		(2,634.4)
Net assets		991.8		1,460.3
EQUITY:
Capital and reserves
Share capital	26	8.5		8.5
Share premium	27	760.6		760.6
Merger reserve	27	890.7		890.7
Other reserves	27	(23.0)		(3.1)
Profit and loss reserve	27	(645.1)		(196.5)
Capital and reserves attributable to the Company's equity shareholders		991.7		1,460.2
Minority interest	27	0.1		0.1
Total shareholders' funds		991.8		1,460.3
* The 31 Dec 2007 comparatives have been restated for IFRS 3 fair value adjustments on the acquisition of RHM plc.
The notes form an integral part of the consolidated financial statements.

Signed on behalf of the Board of Directors, who approved the financial statements on 5 March 2009.

Robert Schofield                                     Paul Thomas

Director and Chief Executive                    Finance Director

Consolidated statement of recognised income and expense
		Year		Year
		ended		ended
		31 Dec 2008		31 Dec 2007
	Note	£m		£m
Actuarial gain on pensions	25	56.2		135.3
Tax charge on actuarial gain on pensions	23	(18.8)		(39.5)
Exchange differences on translation	27	10.8		0.1
Fair value movement on net investment hedge	27	(19.9)		(3.1)
Deferred tax charge on share options	23	(0.5)		(1.1)
Net income recognised directly in equity		27.8		91.7
Loss for the year		(443.8)		(63.3)
Total recognised (expense)/income in the year attributable to equity shareholders		(416.0)		28.4
The notes form an integral part of the consolidated financial statements.

Consolidated cash flow statement
		Year		Year
		ended		ended
		31 Dec 2008		31 Dec 2007
	Note	£m		£m
Cash generated from operating activities	29	189.4		360.2
Interest paid		(150.4)		(122.8)
Interest received		45.0		24.8
Taxation received		0.1		8.7
Cash inflow from operating activities		84.1		270.9
Acquisition of RHM		-		(306.1)
Acquisition of Chivers Ireland		-		(18.4)
Acquisition of Campbell's		-		(0.3)
Sale of subsidiaries		-		22.0
Purchase of property, plant and equipment		(129.8)		(115.9)
Purchase of intangible assets		(31.2)		(8.7)
Sale of property, plant and equipment		26.4		47.8
Sale of intangible assets		-		1.1
Cash outflow from investing activities		(134.6)		(378.5)
Repayment of borrowings		(178.7)		(962.9)
Proceeds from borrowings		291.6		1,901.5
Proceeds from securitisation programme		22.4		67.6
Financing costs		(20.2)		(18.8)
Proceeds from share issue		-		1.3
Share issue costs		-		(2.2)
Purchase of own shares		-		(3.0)
Repayment of debt and interest acquired with RHM		-		(793.5)
Dividends paid		(54.7)		(61.1)
Cash inflow from financing activities		60.4		128.9
Net inflow of cash and cash equivalents		9.9		21.3
Cash and cash equivalents at beginning of year		23.8		2.5
Cash and cash equivalents at end of year	29	33.7		23.8
The notes form an integral part of the consolidated financial statements.

1.  General information

Premier Foods plc (“the Company”) is a public limited company incorporated in the United Kingdom under the Companies Act 1985. The address of the registered office and principal place of business is Premier House, Centrium Business Park, Griffiths Way, St Albans, Hertfordshire, AL1 2RE. The principal activity of the Company and its subsidiaries (“the Group”), is the supply of branded and own label food and beverage products, as described in note 16.

These Group consolidated financial statements were authorised for issue by the Board of Directors on 5 March 2009.

2.  Accounting policies

The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated.

2.1 Basis of preparation 

The Group consolidated financial statements have been prepared on the going concern basis, which assumes that the Group will continue to be able to meet its liabilities as they fall due for the foreseeable future.

Following the acquisition of RHM plc in March 2007, the Group has undertaken an extensive integration and restructuring programme, which has been delivered against a substantially more challenging trading, economic and credit environment. In view of the volatile operating conditions and the Group's significant level of leverage following the acquisitions of Campbell's and RHM plc, the Board and its advisors have spent recent months examining ways of accelerating the reduction of Group debt in order to establish additional financial headroom and a more appropriate long-term capital structure.

Following discussions with the Group's lending banks and considering the potential for the credit environment to remain difficult, the Board has concluded that raising additional equity combined with a renegotiated agreement with the Group's lending banks and an agreement with the Trustees of the Group's UK Defined Benefit Plans would provide a more appropriate capital structure, and achieve an increase in financial headroom given the more challenging trading environment. Further details on the equity raising, amended agreement with the lending banks and the agreement reached with the Trustees are shown in note 34.

This approach aims to minimise the quantum of new equity capital that needs to be raised whilst providing the Group with the appropriate comfort regarding its future liquidity and covenant headroom.

The amended agreement with the lending banks and the agreement with the Trustees are both conditional on the equity raising. The proposed equity raising requires that a resolution be passed by Shareholders at an Extraordinary General Meeting in order to proceed and in order for the amended terms under the Group's Term and Revolving Credit Facilities to take effect.

In the event that the resolution is not passed, the amended Term and Revolving Credit Facilities Agreement will not become effective. The Group would be required to re-enter negotiations with its lending banks. Should these further negotiations prove unsuccessful then the Group may have insufficient liquidity shortly thereafter in April or May 2009 and/or would face being unable to meet its financial covenants.

The Board has concluded that the resolution to be passed by Shareholders at the General Meeting in order for the placing and open offer and the firm placing to proceed such that the equity proceeds are received on 27 March 2009 in line with the timetable set out in the Prospectus for the Placing and Open Offer and Firm Placing represents a material uncertainty that casts significant doubt upon the Group's ability to continue as a going concern. However, after considering the uncertainties described above the Board has a reasonable expectation that the Group will be successful in obtaining the necessary resolution and for this reason believes it is appropriate to continue to adopt the going concern basis in preparing the annual report and accounts.  The financial statements do not include the adjustments that would result if the Group was unable to continue as a going concern.

The financial information in this announcement does not constitute the Group's statutory accounts for the years ended 31 December 2008 or 2007. The preliminary results for the year ended 31 December 2008 have been extracted from audited consolidated financial statements which have not yet been delivered to the Registrar of Companies. The auditors have reported on the Group's statutory accounts for the year ended 31 December 2008. The report was unqualified but includes a matter of emphasis in respect of going concern. The report does not contain a statement under Section 237 (2) or (3) of the Companies Act 1985. The financial information for the year ended 31 December 2007 is derived from the statutory accounts for that year except for restatements relating to discontinued operations and the finalisation of provisional fair values on acquisitions in 2007.

The consolidated financial statements of Premier Foods plc have been prepared in accordance with International Financial Reporting Standards ('IFRS's') as endorsed by the European Union ('EU'), International Financial Reporting Interpretation Committee ('IFRIC') interpretations, and the Companies Act 1985 applicable to companies reporting under IFRS, and on the historical cost basis with the exception of derivative financial instruments, defined benefit pension schemes and share based payments which are incorporated using fair value. The principal accounting policies adopted are set out below.

The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group's accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in note 3.

The following accounting standards and interpretations, issued by the International Accounting Standards Board (IASB) or IFRIC, are effective for the first time in the current financial year and have been adopted by the Group with no significant impact on its consolidated results or financial position:

IFRIC 12 - Service concession agreements    

New standards and interpretations not applied

Up to and during the year ended 31 December 2008, the IASB and the IFRIC have issued the following standards and interpretations with an effective date after the date of these financial statements:

International Financial Reporting Standards			Effective for accounting periods beginning on or after:
	IFRS 8	Operating segments	1 January 2009
	IFRS 2	Amendment - Vesting conditions and cancellations	1 January 2009
	IAS 1 (Revised)	Presentation of financial statements	1 January 2009
	IAS 23 (Revised)	Borrowing costs	1 January 2009
	IFRS 1/IAS 27	Cost of an investment in a subsidiary, jointly controlled entity or associate	1 January 2009
International Financial Reporting Interpretations Committee
	IFRIC 13	Customer Loyalty Programmes	1 July 2008
	IFRIC 14	IAS 19 - the limit on a defined benefit asset, minimum funding requirements and their interaction	1 January 2009

These standards will be adopted by the Group in future accounting periods.

The Directors do not anticipate that the adoption of any of these standards and interpretations will have a material impact on the Group's financial statements except for IFRS 8 'Operating segments' which will require additional disclosures and may result in a change to the number of operating segments reported. 

  The following standards and amendments to published standards have not been endorsed by the EU.

International Financial Reporting Standards
	IFRS 3 (Revised)	Business combinations
	IAS 1/IAS 32 (Amendment)	Puttable financial instruments and obligations arising on a liquidation
	IAS 27 (Revised)	Consolidated and separate financial statements
	IAS 39 (Amendment)	Financial instruments: recognition and measurement on eligible hedged items
International Financial Reporting Interpretations Committee
	IFRIC 15	Agreements for the construction of real estate
	IFRIC 16	Hedges of a net investment in a foreign operation
	IFRIC 17	Distributions of non-cash assets to owners
	IFRIC 18	Transfers of assets from customers

2.2 Basis of consolidation

The consolidated financial statements include the financial statements of Premier Foods plc and entities controlled by the Company (its subsidiaries) up to 31 December each year. Control is achieved where the Company has the power to govern the financial and operating policies of an investee entity so as to obtain benefits from its activities.

The purchase method of accounting is used for all acquisitions.

On acquisition, the assets and liabilities and contingent liabilities of a subsidiary are measured at their fair values as at that date. Any excess of the cost of acquisition over the fair values of the identifiable net assets acquired is recorded as goodwill. 

The results of subsidiaries acquired or disposed of during the year are included in the consolidated income statement from the effective date of acquisition or up to the effective date of disposal, as appropriate. Upon completion of the Group's fair value exercise in accordance with IFRS 3: 'Business Combinations' ('IFRS 3') in the 12 months following acquisition, comparatives are restated for the final fair value adjustments. In addition,  comparatives are also restated to reclassify disposed businesses into discontinued operations.

Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group.

All inter-Group transactions, balances, income and expenses are eliminated on consolidation.

2.3 Turnover

Turnover comprises the invoiced value for the sale of goods net of sales rebates, discounts, value added tax and other taxes directly attributable to turnover and after eliminating sales within the Group. Turnover is recognised when the outcome of a transaction can be measured reliably and when it is probable that the economic benefits associated with the transaction will flow to the Group. Turnover is recognised on the following basis:

(i) Sale of goods

Sales of goods are recognised as turnover on transfer of the risks and rewards of ownership, which generally coincides with the time when the merchandise is delivered to customers and title passes.

(ii) Interest income

Interest income is recognised on a time proportion basis, taking into account the principal amounts outstanding and the interest rates applicable, taking into consideration the interest element of derivatives.

(iii) Sales rebates and discounts

Sales rebates and discount reserves are established based on management's best estimate of the amounts necessary to meet claims by the Group's customers in respect of these rebates and discounts. The provision is made at the time of sale and released, if unutilised, after assessment that the likelihood of such a claim being made has become remote.

2.4 Segmental reporting

A business segment is a group of assets and operations engaged in providing products or services that are subject to risks and returns that are different from those of other business segments. A geographical segment is engaged in providing products or services within a particular economic environment that is subject to risks and returns that are different from those segments operating in other economic environments. Income and expenses that are not directly attributable to a particular segment are allocated to each segment based on various cost drivers, including headcount.

2.5 Share-based payments

The fair value of employee share option plans is calculated using an option-pricing model. In accordance with IFRS 2 'Share-based Payment' ('IFRS 2'), the resulting cost is charged to the income statement over the vesting period of the options. The amount of the charge is adjusted to reflect expected and actual levels of options vesting.

2.6 Foreign currency translation

Transactions in foreign currencies are recorded at the rate of exchange at the date of the transaction. Assets and liabilities denominated in foreign currencies are translated into sterling, the Group's presentational currency, at rates of exchange ruling at the end of the financial year. 

The results of overseas subsidiaries with functional currencies other than in sterling are translated into sterling at the average rate of exchange ruling in the year. Exchange differences arising from retranslation at year end exchange rates of the net investment in foreign subsidiaries are recorded in reserves as a separate component of equity. When a foreign operation is sold exchange differences previously taken to equity are recognised in the income statement as part of the gain or loss on sale. 

Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate.

All other exchange gains or losses are recorded in the income statement.

2.7 Dividends

Dividend distribution to the Group's shareholders is recognised as a liability in the Group's financial statements in the period in which the dividends are approved by the Group's shareholders, and for interim dividends, in the period in which they are paid.

2.8 Property, plant and equipment ('PPE')

Property, plant and equipment is initially recorded at cost. Subsequent expenditure is added to the carrying value of the asset when it is probable that incremental future economic benefits will transfer to the Group. All other subsequent expenditure is expensed in the period it is incurred.

Differences between the cost of each item of PPE and its residual value are written off over the estimated useful life of the asset using the straight-line method. Reviews of the estimated remaining useful lives and residual values of individual productive assets are performed annually, taking account of commercial and technological obsolescence as well as normal wear and tear. Freehold land is not depreciated. The useful  economic lives of owned assets range from 20 to 50 years for buildings, and 3 to 35 years for vehicles, plant and equipment.

  All items of PPE are reviewed for impairment when there are indications that the carrying value may not be fully recoverable. 

2.9 Business combinations and goodwill 

On the acquisition of a business, fair values are attributed to the tangible and intangible assets and liabilities acquired. Goodwill arises when the fair value of the consideration for a business exceeds the fair value of the aggregate of the net assets acquired. Goodwill arising on acquisitions is capitalised and subject to impairment review, both annually and when there are indications that the carrying value may not be recoverable. 

Items of PPE acquired as part of a business acquisition are stated at fair value at the date of acquisition using a market value or depreciated replacement cost model.

On acquisition, the Group undertakes a review of the accounting policies of the business acquired to ensure compliance both with IFRS's and the accounting policies of the Group.

2.10 Intangible assets

In addition to goodwill the Group recognises the following intangible assets: 

Acquired intangibles

Acquired trademarks, brands, customer relationships, licences, recipes and similar assets that are controlled through custody or legal rights and that could be sold separately from the rest of the business are capitalised, where fair value can be reliably measured. A reputable independent specialist performs the valuations. All of these assets are considered to have finite lives and are amortised on a straight-line basis over their estimated useful economic lives that range from 7 to 40 years.

Research and development

Research expenditure is charged to the income statement in the year in which it is incurred.

Costs incurred in developing a product, typically its recipe or packaging, are charged to income in the year in which they are incurred unless the future economic benefits of the project can be regarded as reasonably certain and are in accordance with International Accounting Standard 38 'Intangible Assets' ('IAS 38'), in which case they are capitalised and amortised over their estimated useful economic lives.

Software development costs

Assets acquired or internally developed, such as software, are capitalised when the future economic benefit is reasonably assured and the criteria within IAS 38 are met. Software development costs are capitalised and amortised over their estimated useful lives on a straight-line basis over a range of 3 to 10 years. 

2.11 Impairment 

The useful economic lives of intangible assets are determined, based on a review of a combination of factors including the asset ownership rights acquired and the nature of the overall product life cycle.  

Intangible assets and property, plant and equipment are tested for impairment when an event that might affect asset values has occurred. An impairment loss is recognised, in the income statement, to the extent that the carrying amount cannot be recovered either by selling the asset or by the discounted future earnings from operating the assets in accordance with International Accounting Standard 36 'Impairment of Assets' ('IAS 36').

Intangible assets with finite lives are subject to impairment testing on indication of impairment.  Goodwill is tested annually for impairment.  Any impairment losses are written off immediately.  

2.12 Interest

Borrowing costs are accounted for on an accruals basis in the income statement using the effective interest method.

2.13 Leases

Assets held under finance leases, where substantially all the risks and rewards of ownership are transferred to the Group, are capitalised and included in property, plant and equipment at the lower of the minimum lease payments or fair value. Each asset is depreciated over the shorter of the lease term or its estimated useful life on a straight-line basis. Obligations relating to finance leases, net of finance charges in respect of future periods, are included under borrowings. The interest element of the rental obligation is allocated to accounting periods during the lease term to reflect a constant rate of interest on the remaining balance of the obligation for each accounting period.  

Rental costs under operating leases are charged to the income statement on a straight-line basis over the lease period.

2.14 Inventories

Inventory is valued at the lower of cost and net realisable value.  Where appropriate, cost includes production and other attributable overhead expenses as described in International Accounting Standard 2 'Inventories' ('IAS 2'). Cost is calculated on a first-in-first-out basis by reference to the invoiced value of supplies and attributable costs of bringing the inventory to its present location and condition.

All inventories are reduced to net realisable value where the estimated selling price is lower than cost.

2.15 Taxation

The charge or credit for taxation is based on the profit or loss for the year and takes into account deferred taxation.  

Deferred taxation is accounted for in respect of temporary differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax bases used in computation of taxable profit. Deferred taxation is not provided on the initial recognition of an asset or liability in a transaction, other than in a business combination, if at the time of the transaction there is no effect on either accounting or taxable profit or loss.

Deferred tax is measured at the tax rates that are expected to apply in the periods in which the asset or liability is settled based on tax rates (and tax laws) that have been enacted or substantively enacted at the balance sheet date. It is recognised in the income statement except when it relates to items credited or charged directly to equity, in which case the deferred tax is also dealt with in equity.

Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary difference can be utilised. Their carrying amount is reviewed at each balance sheet date on the same basis.

Deferred tax assets and liabilities are offset when they relate to income taxes levied by the same taxation authority and when the Group intends to settle its current tax assets and liabilities on a net basis.

2.16 Employee benefits

Group companies provide a number of long-term employee benefit arrangements, primarily through pension schemes. The schemes are generally funded through payments to insurance companies or trustee-administered funds determined by periodic independent actuarial calculations. The Group has both defined benefit and defined contribution plans. 

Defined benefit plans

A defined benefit plan is a pension plan that defines the amount of pension benefit that an employee will receive on retirement, usually dependent on factors such as age, years of service and compensation.  

The liability recognised in the balance sheet in respect of defined benefit pension plans is the present value of the defined benefit obligation at the balance sheet date less the fair value of plan assets, together with adjustments for actuarial gains or losses and past service costs. Defined benefit obligations are calculated annually by independent actuaries using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using yields of high-quality corporate bonds that are denominated in the currency in which the benefits will be paid, and that have terms to maturity approximating to the terms of the related pension liability.

Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are charged or credited to the statement of recognised income and expense in the year in which they arise.

Current service costs, past-service costs, administration costs, expected return on assets and interest costs are recognised immediately in the income statement, unless the changes to the pension plan are conditional on the employees remaining in service for a specified period of time (the vesting period). In this case, the past-service costs are amortised on a straight-line basis over the vesting period.

Defined contribution plans

A defined contribution plan is a pension plan under which the Group pays fixed contributions into a separate entity, which then invests the contributions to buy annuities for the pension liabilities as they become due based on the value of the fund, hence the Group has no legal or constructive obligations to pay further contributions.

Obligations for contributions to defined contribution pension plans are recognised as an expense in the income statement as they fall due.

2.17 Provisions

Provisions are recognised when the Group has present legal or constructive obligations as a result of past events, it is probable that an outflow of resources will be required to settle the obligations and a reliable estimate of the amount can be made. Where the Group expects a provision to be reimbursed, for example under an insurance contract, the reimbursement is recognised as a separate asset but only when the reimbursement is virtually certain. Where material, the Group discounts its provisions. 

2.18 Contingent liabilities and contingent assets

A contingent liability is a possible obligation that arises from past events and the existence of which will only be confirmed by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the Group or the amount of obligation cannot be measured reliably. A contingent liability is not recognised but is disclosed in the notes to the financial statements. When an outflow becomes probable, it is recognised as a provision.  

A contingent asset is a possible asset that arises from past events and the existence of which will be confirmed only by the occurrence or non-occurrence of one or more uncertain events not wholly within the control of the Group. Contingent assets are not recognised but are disclosed in the notes to the financial statements when an inflow of economic benefits is probable. When inflow is virtually certain an asset is recognised.

2.19 Financial instruments

Financial assets and financial liabilities are recognised on the Group's balance sheet when the Group becomes a party to the contractual provisions of the instrument.

Trade and other receivables

Trade and other receivables are initially measured at fair value and subsequently measured at amortised cost less any provision for impairment. A provision is made for impairment when there is objective evidence that the Group will not be able to collect all amounts due according to the terms of the receivables. Trade and other receivables are discounted when the time value of money is considered material.  

The rights and obligations relating to those trade receivables that have been sold to third parties are de-recognised from the balance sheet where the risks and rewards of ownership are considered to have transferred. Cash received from third parties in exchange for the transfer of ownership is recorded within cash and cash equivalents with the cost of financing prior to settlement by the customer recorded as interest on an accruals basis. Amounts received from customers for receivables in respect of which title has transferred, for example under the debtors securitisation programme, represent amounts owed to the transferee and are recorded as short term borrowings.

Cash and cash equivalents

Cash and cash equivalents, with original maturities at inception of less than 90 days, comprise cash on hand and demand deposits, and other short-term highly liquid investments that are readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value.

For the purpose of the cash flow statement, cash and cash equivalents comprise cash at bank, cash in hand, short-term deposits with an original maturity of three months or less held for the purpose of meeting short-term cash commitments and bank overdrafts.

Financial liabilities and equity

Financial liabilities and equity instruments issued by the Group are classified according to the substance of the contractual arrangements entered into and the definitions of a financial liability and an equity instrument. An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities. The accounting policies adopted for specific financial liabilities and equity instruments are set out below.

Bank borrowings

Interest-bearing bank loans and overdrafts are measured initially at fair value and subsequently at amortised cost, using the effective interest rate method. Any difference between the proceeds (net of transaction costs and inclusive of debt issuance costs) and the settlement or redemption of borrowings is recognised over the term of the borrowings in accordance with the Group's accounting policy for borrowing costs.

Trade and other payables 

Trade and other payables are initially measured at fair value and subsequently measured at amortised cost. Trade payables and other liabilities are discounted when the time value of money is considered material.

Equity instruments

Equity instruments issued by the Company are recorded at the proceeds received, net of directly attributable issue costs.

Derivative financial instruments 

Derivatives embedded in other financial instruments or other host contracts are treated as separate derivatives when their risk and characteristics are not closely related to those of the host contracts and the host contracts are not carried at fair value, with unrealised gains or losses reported in the income statement. Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently re-measured at their fair value. Movements in fair value of foreign exchange derivatives are recognised within other operating income and expense and those relating to interest rate swaps are recorded in interest payable and other financial charges or interest receivable and other financial income.

Net investment hedge

Any gain or loss on the hedging instrument relating to the effective portion of changes in the fair value of derivatives that are designated and qualify as net investment hedges is recognised in equity. The gain or loss relating to the ineffective portion is recognised immediately in the income statement within other operating income and expenditure.

  2.20 Investment in own shares

Investments in own shares are shown as a deduction in shareholders' funds.

3.  Critical accounting policies, estimates and judgements

The following are areas of particular significance to the Group's financial statements and include the application of judgment, which is fundamental to the compilation of a set of financial statements.

3.1 Pensions

The present value of the Group's pension obligations depends on a number of actuarial assumptions. The primary assumptions used include the expected long-term rate of return on invested funds, the discount rate applicable to scheme liabilities, the long-term rate of inflation and estimates of the mortality applicable to scheme members.

At each reporting date, and on a continuous basis, the Group reviews the macro-economic and Company specific factors influencing each of these assumptions, using professional advice, in order to record the Group's ongoing commitment and obligation to defined benefit schemes in accordance with IFRS. One such assumption is the assumption of mortality rates and how these are expected to change in the future. If the Group's assumption on the mortality of its members was amended to assume an increase of a further one year improvement in mortality, total liabilities would increase by approximately 3.4%.

The Group is aware of, and alert to, the need to inform the Pensions Regulator to the extent that the Group is involved in any corporate activity that affects the rights of pension scheme members and the carrying value of the pension schemes.  

Each of the underlying assumptions is set out in more detail in note 25.  

Negotiations of the timing of deficit payments in relation to the pension schemes was concluded subsequent to the year end, further detail is included in note 34.

3.2 Goodwill and other intangible assets

Impairment reviews in respect of goodwill are performed annually unless an event indicates that an impairment review is necessary. Impairment reviews in respect of intangible assets are performed when an event indicates that an impairment review is necessary. Examples of such triggering events include a significant planned restructuring, a major change in market conditions or technology, expectations of future operating losses, or a significant reduction in cash flows. The recoverable amounts of cash-generating units ('CGU's') are determined based on the higher of realisable value and value-in-use calculations. These calculations require the use of estimates.

The Group has considered the impact of the assumptions used on the calculations and has conducted sensitivity analysis on the impairment tests of the CGUs' carrying values. See note 14 for further details.

Acquired trademarks, brands, customer relationships, recipes and similar assets are considered to have finite lives that range from 7 to 40 years. The determination of the useful lives takes into account certain quantitative factors such as sales expectations and growth prospects, and also many qualitative factors such as history and heritage, and market positioning, hence the determination of useful lives are subject to estimates and judgement. For further details see note 15.

3.3 Advertising and promotion costs

Trade spend and promotional activity is dependent on market conditions and negotiations with customers. Trade spend is charged to the income statement according to the substance of the agreements with customers and the terms of any contractual relationship. Promotional support is generally charged to the income statement at the time of the relevant promotion. These costs are accrued on best estimates. The actual costs may not be known until subsequent years when negotiations with customers are concluded. Such adjustments are recognised in the year when final agreement is reached.

  Expenditure on advertising is charged to the income statement when incurred, except in the case of airtime costs when a particular campaign is used more than once. In this case they are charged in line with the airtime profile.

3.4 Exceptional items

Exceptional items are not explicitly addressed under IFRS. Accordingly, the Group has defined exceptional items as those items of sufficient financial significance to be disclosed separately in order to assist in understanding the financial performance achieved and in making projections of future results. Each of these items relate to events or circumstances that are material and non-recurring in nature, such as a major restructuring, disposal of a business or asset, or integration of an acquisition.  See note 5 for further details.

3.5 Securitisation

The Group has sold the rights and obligations relating to certain of its trade receivable balances under a receivables purchasing agreement in order to achieve an overall lower cost of funding and permanently accelerate the generation of cash from working capital. Accounting for a sale of this nature is judgmental and dependent on evidence of the substantive transfer of risk and reward from the Group to a third party. In this instance, transference of the two primary risks, those of late payment and credit default was achieved at the balance sheet date. The Group anticipates that the receivables purchasing agreement will remain in place over the medium term and that de-recognition of the receivables subject to it will continue to be achieved, dependent upon ongoing review of the assessment of risk and reward transfer.

3.6 Financial instruments

The Group uses a variety of derivative financial instruments to manage the risks arising from adverse movements in interest rates, commodity prices, and foreign currency. 

The Group has a policy of not applying hedge accounting to these derivatives (other than in the case of a Net Investment Hedge against Euro denominated assets) and taking any gain or loss on the movement of the fair values of derivatives to the income statement. 

  4.  Segmental analysis

As previously announced, the Group implemented the new segmental structure, effective from 1 January 2008, following the acquisition and integration of the Campbell's and RHM businesses.  The Group has defined three segments namely 'Grocery', 'Hovis' and 'Chilled & Ireland' with the primary drivers of the structure being the commonality of the categories operated in and the supply chain to service them.  

The Grocery segment comprises the original Premier business with the exception of the Meat-free business, the Campbell's business, RHM's Culinary Brands segment, Ledbury Preserves from RHM's Customer Partnerships segment and Manor Bakeries from the RHM Cakes segment. The Hovis segment comprises the RHM Bread Bakeries segment. It was initially named the 'Bread & Milling' segment but has been renamed as the 'Hovis' segment reflecting the segment's principal brand. The Chilled & Ireland segment comprises the RF Brookes and Charnwood chilled foods and pizza base businesses from RHM's Customer Partnerships segment, Avana Bakeries from RHM's Cakes segment, Premier's Meat-free business and all operations in the Republic of Ireland.

Results for Martine Spécialités S.A.S., Sofrapain S.A.S. and Le Pain Croustillant are presented as discontinued operations in both the current year and the comparative results.

Each of the segments below primarily supplies the United Kingdom market, although the Group also supplies certain products to other parts of Europe and also the United States. Inter-segment transfers or transactions are entered into under the same terms and conditions that would be available to unrelated third parties. These segments are the basis on which the Group reports its primary segment information. 

As a consequence of the extensive integration of the business, certain operating costs have been incurred centrally. These costs have been allocated, using various cost drivers including headcount, between the Group's operating segments and are reflected in the analysis below. 

Trading profit is defined as operating profit before exceptional items, amortisation of intangible assets, the revaluation of foreign exchange and other derivative contracts under IAS 39 and pension credits or charges in relation to the difference between the expected return on pension assets and interest costs on pension liabilities. The definition of trading profit has changed in comparison to the prior year to exclude the revaluation on other derivative contracts under IAS 39.  

Trading profit has been reported in addition to operating profit as the directors believe it provides an alternative measure with which the shareholders can assess the Group's underlying trading performance.

  The segment results for the years ended 31 December 2008 and 2007 are as follows:

							Year ended 31 December 2008
					Grocery	Hovis	Chilled & Ireland	Un-allocated	Total for Group
					£m	£m	£m	£m	£m
Total turnover from continuing operations					1,419.0	756.3	428.3	-	2,603.6
Result
Trading profit					239.2	20.9	50.1	-	310.2
Amortisation					(40.6)	(17.2)	(18.9)	-	(76.7)
Fair value movements on foreign exchange and other derivative contracts					3.1	2.3	1.5	-	6.9
Pension financing credit					6.7	5.3	3.6	-	15.6
Operating profit before exceptional items					208.4	11.3	36.3	-	256.0
Exceptional items					(69.4)	(216.7)	(6.4)	(4.0)	(296.5)
Operating profit/(loss)					139.0	(205.4)	29.9	(4.0)	(40.5)
Interest payable & other financial charges					-	-	-	(405.0)	(405.0)
Interest receivable & other financial income					-	-	-	41.6	41.6
Profit/(loss) before taxation for continuing operations					139.0	(205.4)	29.9	(367.4)	(403.9)
Taxation credit					-	-	-	30.6	30.6
Profit/(loss) after taxation for continuing operations					139.0	(205.4)	29.9	(336.8)	(373.3)
Discontinued operations					-	(72.4)	-	1.9	(70.5)
Profit/(loss) for the year					139.0	(277.8)	29.9	(334.9)	(443.8)
Balance sheet
Segment assets					2,391.7	895.4	740.8	-	4,027.9
Unallocated assets					-	-	-	67.5	67.5
Consolidated total assets					2,391.7	895.4	740.8	67.5	4,095.4
Segment liabilities					(494.8)	(229.5)	(127.7)	-	(852.0)
Unallocated liabilities					-	-	-	(2,251.6)	(2,251.6)
Consolidated total liabilities					(494.8)	(229.5)	(127.7)	(2,251.6)	(3,103.6)

Other information	Grocery	Hovis	Chilled & Ireland	Speciality bakery businesses	Other dis-continued	Total
PPE expenditure	82.9	24.0	23.3	3.8	-	134.0
Intangible asset expenditure	31.0	0.2	-	-	-	31.2
Depreciation	26.6	15.8	8.3	5.8	-	56.5
Amortisation	40.6	17.2	18.9	5.3	-	82.0
Impairment of PPE	0.1	11.3	-	-	-	11.4
Impairment of goodwill	-	194.4	-	68.5	-	262.9

				Year ended 31 December 2007 (Restated)*
				Grocery	Hovis	Chilled & Ireland	Un-allocated	Total for Group
				£m	£m	£m	£m	£m
Total turnover from continuing operations				1,232.9	534.9	357.4	-	2,125.2
Result
Trading profit				214.1	17.4	40.4	-	271.9
Amortisation				(32.7)	(13.3)	(16.0)	-	(62.0)
Fair value movements on foreign exchange and other derivative contracts				3.3	0.6	0.8	-	4.7
Pension financing credit				6.5	6.7	2.9	-	16.1
Operating profit before exceptional items				191.2	11.4	28.1	-	230.7
Exceptional items				(94.6)	(25.3)	(38.8)	-	(158.7)
Operating profit/(loss)				96.6	(13.9)	(10.7)	-	72.0
Interest payable & other financial charges				-	-	-	(176.4)	(176.4)
Interest receivable & other financial income				-	-	-	26.8	26.8
Profit/(loss) before taxation for continuing operations				96.6	(13.9)	(10.7)	(149.6)	(77.6)
Taxation credit				-	-	-	39.8	39.8
Profit/(loss) after taxation for continuing operations				96.6	(13.9)	(10.7)	(109.8)	(37.8)
Discontinued operations				3.5	2.0	(12.5)	(18.5)	(25.5)
Profit/(loss) for the year				100.1	(11.9)	(23.2)	(128.3)	(63.3)
* Comparatives have been restated to reflect the classification of Martine Spécialités S.A.S., Le Pain Croustillant and Sofrapain S.A.S. as discontinued operations.
Balance sheet
Segment assets			2,206.4		1,074.5	747.2	-	4,028.1
Unallocated assets			-		-	-	66.6	66.6
Consolidated total assets			2,206.4		1,074.5	747.2	66.6	4,094.7
Segment liabilities			(407.0)		(201.6)	(104.4)	-	(713.0)
Unallocated liabilities			-		-	-	(1,921.4)	(1,921.4)
Consolidated total liabilities			(407.0)		(201.6)	(104.4)	(1,921.4)	(2,634.4)

Other information	Grocery	Hovis	Chilled & Ireland	Speciality bakery businesses	Other dis-continued	Total
PPE expenditure	194.0	205.3	76.4	35.1	3.3	514.1
Intangible asset expenditure	1,047.9	617.3	303.6	121.1	-	2,089.9
Depreciation	23.8	9.8	11.3	3.9	1.2	50.0
Amortisation	32.7	13.3	16.0	4.2	0.1	66.3
Impairment of  PPE	12.3	-	3.6	-	-	15.9
Impairment of other intangibles	-	0.6	-	-	-	0.6
* Balance sheet comparatives at 31 Dec 2007 have been restated for IFRS 3 fair value adjustments on the acquisition of RHM plc.

Unallocated assets and liabilities comprise cash and cash equivalents, net borrowings, taxation balances and derivative financial assets and liabilities and head office assets.

Segmental analysis - secondary 

The following table provides an analysis of the Group's turnover allocated on the basis of geographical market destination. The table also contains an analysis of segmental assets and additions to property, plant and equipment and intangible assets allocated by geographical location.

				United Kingdom	Other Europe	Rest of world	Total for Group
				£m	£m	£m	£m
Turnover by destination
2008				2,433.5	144.6	25.5	2,603.6
2007 (Restated)*				1,991.6	107.8	25.8	2,125.2
Carrying value of segmental assets by location
2008				3,904.6	190.8	-	4,095.4
2007 (Restated)**				3,905.7	189.0	-	4,094.7
Total capital expenditure by location
2008				161.6	3.6	-	165.2
2007 (Restated)**				2,471.1	132.9	-	2,604.0
* Turnover comparatives have been restated to reflect the classification of Martine Spécialités S.A.S., Le Pain Croustillant and Sofrapain S.A.S. as discontinued operations.
** Balance sheet comparatives at 31 Dec 2007 have been restated for IFRS 3 fair value adjustments on the acquisition of RHM plc.

Capital expenditure for 2007 includes assets purchased as part of the acquisition of RHM plc.

5.  Exceptional items

During the year the Group continued with its investment and restructuring programme in order to capture the cost and operational synergies available to the enlarged Group following the acquisition of RHM plc and the Campbell's business. This is the primary factor behind total non-recurring integration and restructuring exceptional costs in the year. 

Exceptional costs were as follows:

		Year		Year
		ended		ended
		31 Dec		31 Dec
		2008		2007
		£m		£m
Exceptional items - continuing operations
Integration of RHM UK operations	(a)	60.6		88.1
Integration of Campbell's UK operations	(b)	6.3		12.4
Integration of Irish operations	(c)	6.0		21.5
Restructure of Meat-free operations	(d)	3.5		15.3
Hovis restructuring and other costs	(e)	21.1		9.6
Other restructuring and other costs	(f)	6.7		12.2
Gain on property disposals	(g)	(2.1)		(0.4)
Goodwill impairment	(h)	194.4		-
Total		296.5		158.7

  (a)    Integration of RHM UK operations

On 16 March 2007, the Group acquired RHM plc. In order to achieve the planned synergy benefits from the acquisition, the Group continued to incur a significant level of restructuring expenditure and investment during the year on the integration of RHM plc. The integration costs incurred relate to the following key initiatives:

•    On 2 July 2007, the Group announced the results of a review of its combined manufacturing facilities which identified six ex-RHM sites that were to close. The closure programme was completed during 2008, resulting in restructuring and redundancy costs and costs relating to the transfer of production to the remaining Group manufacturing sites. 

•    The Group has also commenced the restructure and integration of certain warehousing facilities which also resulted in restructuring and redundancy costs being incurred during the year.

•    Redundancy and restructuring costs relating to the move of existing administrative functions to a group-wide shared service centre in Manchester.

(b)    Integration of Campbell's UK operations

On 14 August 2006, the Group acquired Campbell's Grocery Products Limited. The closure and subsequent integration of the Kings Lynn manufacturing operations and warehousing facilities into the existing operations of the Group was completed in the year resulting in £6.3m of restructuring and redundancy costs.

(c)    Integration of Irish operations

Following the acquisitions of Campbell's Grocery Products Ireland Limited in August 2006, Chivers Ireland Limited in January 2007 and the RHM Ireland business in March 2007, the Group has significantly increased its commercial presence in Ireland. In the year, the Group completed the principal phases of integrating these companies and has created a single operating business, a key step in generating future cost and operating synergy benefits in Ireland. As part of this exercise, the Group has closed two factories (Thurles and Coolock) and implemented a centralised distribution operation. 

(d)    Restructure of Meat-free operations

During 2006, the Group announced plans for the closure of its factory at Portishead and the purchase and development of a new chilled facility at Methwold to enable the integration of chilled production for Quorn and Cauldron products on a single site. The Methwold facility is now fully operational and commissioning costs relating to the new plant have now ceased.  

(e)    Hovis restructuring and other costs

The Hovis business has undertaken a number of restructuring projects in 2007 and 2008 in order to align the business with new ways of working and for the preparation of the ERP roll out. These projects involved headcount reductions through organisational and structural changes, new warehouse technology and operating methods and supply chain management restructuring initiatives. The current year exceptional charges also includes an impairment of assets and redundancy costs relating to the closure of our Rotherham mill, onerous lease costs for properties and impairment recognised against certain plant and machinery relating to discontinued production lines. 

(f)    Other restructuring and other costs

This category incorporates cost reduction initiatives associated with our warehousing network, factory transformation programme and other supply chain initiatives.

Prior year exceptional charges relate to costs associated with general business restructuring, the restructuring of our warehousing network, training and a number of compliance related initiatives. 

(g)    Gain on property disposals

The net disposal gain of £2.1m in the year includes the disposal of sites and plant and machinery in Bristol, Droylsden, Middlewich, Wythenshawe and Stoke in the UK and Thurles in the Republic of Ireland.  

  (h)    Goodwill impairment

An impairment charge of £194.4m has been recognised against the goodwill allocated to the Hovis CGU (see note 14).

6.  Operating (loss)/profit for continuing operations

6a. Analysis of costs by nature		Year		Year
		ended		ended
		31 Dec 2008		31 Dec 2007
			(Restated)*
		£m		£m
Cost of inventories sold		1,463.3		1,208.8
Employee benefits expense (note 7)		503.6		499.0
Depreciation of property, plant and equipment:
- owned assets		50.5		44.3
- under finance leases		0.2		0.6
Amortisation of intangible assets:
- software and licences		7.7		4.4
- brands and trademarks		34.3		30.1
- customer relationships		34.7		27.5
Impairment of inventory		5.6		0.8
Impairment of property, plant and equipment		11.4		15.9
Impairment of intangible assets		-		0.6
Impairment of goodwill		194.4		-
Operating lease rental payments:
- plant and machinery		21.2		6.4
- land and buildings		8.8		8.2
Repairs and maintenance expenditure		54.5		39.3
Research and development costs		5.1		3.9
(Gain)/loss on disposal of property, plant and equipment/intangible assets		(0.8)		1.2
Net foreign exchange (gains)/losses		(5.1)		3.8
Auditor remuneration		2.2		2.0
* Comparatives have been restated to reflect the classification of Martine Spécialités S.A.S., Le Pain Croustillant and Sofrapain S.A.S. as discontinued operations.

Operating lease obligations are further disclosed in note 30.

6b. Auditor remuneration		Year  Ended 31 Dec 2008		Year  Ended 31 Dec 2007
		£m		£m
Fees payable to the Company's auditor for the audit of the Parent Company and consolidated financial statements		0.6		0.6
Fees payable to the Company's auditor and its associates for other services:
- The audit of the Company's subsidiaries, pursuant to legislation		0.7		0.8
- Other services relating to taxation		0.2		0.1
- Other services pursuant to legislation		0.1		0.1
- Services relating to corporate finance transactions		3.1		0.1
- Other services		-		0.3
Total auditor remuneration		4.7		2.0

Fees of £48,855 were paid to the Company's auditors in respect of the audit and services in relation to one of the Group's pension schemes.

Included within total fees paid to the auditors of £4.7m (2007: £2.0m) are £2.5m (2007: £nil) of costs which are directly attributable to the financing negotiations and proposed equity raising detailed in note 34. These costs are therefore held on the balance sheet.

7.  Employees 

	Year		Year
	ended		ended
	31 Dec 2008		31 Dec 2007
		(Restated)*
	£m		£m
Staff costs for the Group during the year for continuing operations
Wages and salaries	429.2		361.6
Social security costs	38.4		35.5
Termination benefits	15.6		79.6
Share options granted to directors and employees	2.2		3.9
Pension costs - defined contribution plans (note 25)	1.1		1.2
Pension costs - defined benefit plans (note 25)	17.1		17.2
Total staff costs	503.6		499.0
* Comparatives have been restated to reflect the classification of Martine Spécialités S.A.S., Le Pain Croustillant and Sofrapain S.A.S. as discontinued operations.

Average monthly number of people employed (including executive directors)

	Number		Number*
Management	583		984
Administration	1,857		1,757
Production, distribution and other	13,473		13,906
Total employees	15,913		16,647
* Comparatives have been restated to reflect the classification of Martine Spécialités S.A.S., Le Pain Croustillant and Sofrapain S.A.S. as discontinued operations.

In 2008 the Group standardised the definitions of the classifications shown in the table above. As a result there has been a reallocation between the Management and Administration categories in 2008 when compared to 2007.

Directors' remuneration (including retirement benefits accruing to the directors under defined benefit schemes) is disclosed in the audited sections of the directors' remuneration report, which form part of these financial statements.

8.  Interest payable and receivable

On 28 February 2008 the Group entered into a supplemental agreement with its banks amending certain terms of its Senior Term Credit Facility and Revolving Credit Facility Arrangement of 16 March 2007. The Senior Term Facility now comprises £1,332m of Term facilities. The Revolving Credit Facility is a multi-currency revolving credit facility of £500m.  The final maturity date of the above arrangements is 16 March 2012. The Group also converted the Acquisition line of the Secured Senior Working Capital Credit Facility into a £100m Working Capital line and agreed an additional £125m of short-term facilities with three of its banks.

In respect of these amendments to the existing facilities and arrangement of the new facilities, the Group incurred costs of £15.3m, £12.1m of which were immediately charged to the income statement.

On 18 November 2008 the Group announced an agreement with its lending banks to defer its 31 December 2008 covenant test to 31 March 2009, pending a review of its capital structure. Fees of £4.9m incurred in relation to this have been expensed in the year to 31 December 2008.

		Year		Year
		ended		ended
		31 Dec 2008		31 Dec 2007
			(Restated)*
		£m		£m
Interest payable on bank loans, senior notes and overdrafts **		35.0		19.5
Interest payable on term facility **		96.0		84.5
Interest payable on revolving facility **		29.6		28.0
Unwind of discount on provisions		0.9		0.8
Amortisation of debt issuance costs		7.6		4.2
		169.1		137.0
Exceptional write-off of financing costs		17.0		-
Accelerated amortisation of debt issuance costs		-		8.4
Movement on fair valuation of interest rate swaps		218.9		31.0
Total interest payable and other financial charges		405.0		176.4
Interest receivable on bank deposits **		(41.6)		(26.8)
Total interest receivable and other financial income		(41.6)		(26.8)
Net interest		363.4		149.6
* Comparatives have been restated to reflect the classification of Martine Spécialités S.A.S., Le Pain Croustillant and Sofrapain S.A.S. as discontinued operations.
** Interest payable and receivable include the interest element of derivatives.

The fair value of interest rate swaps has risen from an £18.5m liability at 31 December 2007 to a £237.4m liability at 31 December 2008 resulting in a negative movement of £218.9m for the year due to a decrease in the LIBOR rates to unprecedented levels combined with the nature of the Group's interest rate swaps (refer to note 22). The liability at 31 December 2008 represents the net present value of the interest cash flows calculated using the contracted fixed rates compared to the interest cash flows that would arise if the interest was calculated on a floating basis.  

Since 31 December 2008, the Group has negotiated an amendment to the break clauses in two of its interest rate swaps. Refer to note 34 for further details.

  9.  Tax on loss on ordinary activities

Analysis of the credit for the year:

				Continuing operations		Dis-continued operations	Total
					£m	£m	£m
2008
Current tax
- Current year					-	0.9	0.9
- Prior years					(7.6)	1.4	(6.2)
Overseas current tax (current year)					2.8	-	2.8
Deferred tax
- Current year					(24.3)	0.2	(24.1)
- Prior years					(1.5)	0.6	(0.9)
Income tax (credit)/charge for the year					(30.6)	3.1	(27.5)
2007 (Restated)*
Current tax
- Current year					-	-	-
- Prior years					(10.2)	-	(10.2)
Overseas current tax (current year)					-	2.1	2.1
Deferred tax
- Current year					(15.3)	-	(15.3)
- Current year restatement of acquired balances					(11.6)	-	(11.6)
- Prior years					1.0	-	1.0
- Prior years restatement of opening balances					(3.7)	-	(3.7)
Income tax (credit)/charge for the year					(39.8)	2.1	(37.7)
* Comparatives have been restated to reflect the classification of Martine Spécialités S.A.S., Le Pain Croustillant and Sofrapain S.A.S. as discontinued operations.

Tax relating to items recorded in equity for continuing operations was:

						2008	2007
						£m	£m
Deferred tax charge on share options						0.5	1.1
Deferred tax charge on pension movements						19.2	39.5
Current tax credit on pension movements						(0.4)	-
						19.3	40.6

The tax credit from continuing operations for the year differs from the standard rate of corporation tax in the United Kingdom of 28.5% for the year ended 31 December 2008, and 30% for the year ended 31 December 2007. The reasons for this are explained below:

						Year ended	Year ended
						31 Dec 2008	31 Dec 2007
							(Restated)*
						£m	£m
Loss before taxation for continuing operations						(403.9)	(77.6)
Tax credit at the domestic income tax rate of 28.5% (2007: 30%)						(115.1)	(23.3)
Tax effect of:
Non deductible exceptional items						63.6	5.9
Other disallowable items						1.2	0.7
Adjustment to reflect the abolition of tax relief for industrial buildings						25.4	-
Adjustments to capital allowances that do not give rise to temporary differences						-	0.1
Adjustment to deferred tax asset for share based pay adjusted from equity						2.2	-
Adjustment due to current year deferred tax being provided at 28%						1.2	1.3
Adjustment to restate acquired deferred tax balance at 28%						-	(11.6)
Adjustments to prior years						(9.1)	(12.9)
Income tax credit						(30.6)	(39.8)
* Comparatives have been restated to reflect the classification of Martine Spécialités S.A.S., Le Pain Croustillant and Sofrapain S.A.S. as discontinued operations.

10.  Discontinued operations

The Group has received firm offers for its speciality bakery businesses, Martine Spécialités S.A.S., Le Pain Croustillant and Sofrapain S.A.S.  Subsequent to year end the Group completed the employee consultation process required under French labour law and binding offer agreements were signed in relation to the disposal of the three businesses (refer to note 34). 

The assets and liabilities relating to the speciality bakery businesses as at 31 December 2008 have been presented as a held for sale disposal group in the balance sheet (refer to note 17).

Discontinued operations also include items relating to the disposal of MBMG, Erin Foods and RHM Frozen Foods in 2007, and a receipt relating to a property disposed of with our subsidiary Jonker Fris, which was disposed of in 2005.

The results of the discontinued operations for the year are as follows:

	Year ended 31 December 2008				Year ended 31 December 2007 (Restated)*
	Speciality bakery businesses		Other dis-continued	Total dis-continued		Speciality bakery businesses	Other dis-continued	Total dis-continued
	£m		£m	£m		£m	£m	£m
Turnover	173.0		-	173.0		122.4	65.1	187.5
Cost of sales	(131.9)		-	(131.9)		(93.0)	(58.5)	(151.5)
Gross profit	41.1		-	41.1		29.4	6.6	36.0
Selling, marketing and distribution costs	(26.1)		-	(26.1)		(18.4)	(5.0)	(23.4)
Administrative costs	(85.4)		(0.2)	(85.6)		(6.9)	(29.5)	(36.4)
Net other operating income	0.9		1.6	2.5		-	-	-
Operating (loss)/profit		(69.5)	1.4	(68.1)		4.1	(27.9)	(23.8)
Before exceptional items	4.7		(0.9)	3.8		4.1	(1.5)	2.6
Exceptional items	(74.2)		2.3	(71.9)		-	(26.4)	(26.4)
Interest payable	(0.2)		(0.1)	(0.3)		-	-	-
Interest receivable	0.4		0.6	1.0		-	0.4	0.4
(Loss)/profit before taxation	(69.3)		1.9	(67.4)		4.1	(27.5)	(23.4)
Taxation	(3.1)		-	(3.1)		(2.1)	-	(2.1)
(Loss)/profit after taxation	(72.4)		1.9	(70.5)		2.0	(27.5)	(25.5)
* Comparatives have been restated to reflect the classification of Martine Spécialités S.A.S., Le Pain Croustillant and Sofrapain S.A.S. as discontinued operations.

Included within the loss after tax for the year ended 31 December 2008 is an impairment charge of £68.5m, which has been recognised against goodwill to write down the carrying value of the net assets held for sale to their fair values after any attributable foreign exchange reserve movements. 

During the year there was an operating cash inflow in relation to discontinued operations of £15.0m (2007: £3.5m outflow), an outflow of £4.0m (2007: £17.8m inflow) in respect of investing activities, and an outflow of £0.3m (2007: £1.2m outflow) in respect of financing activities.

  11.  Earnings per share

Basic loss per share has been calculated by dividing the loss attributable to ordinary shareholders of £443.8m (2007: £63.3m) by the weighted average number of ordinary shares of the Company.  

		Year ended 31 Dec 2008					Year ended 31 Dec 2007
							(Restated)*
		Basic		Dilutive effect of share options	Diluted		Basic	Dilutive effect of share options	Diluted
Continuing operations
Loss after tax (£m)		(373.3)		-	(373.3)		(37.8)	-	(37.8)
Weighted average number of shares (m)			844.6	-	844.6		772.6	-	772.6
Loss per share (pence)		(44.2)		-	(44.2)		(4.9)	-	(4.9)
Discontinued operations
Loss after tax (£m)		(70.5)		-	(70.5)		(25.5)	-	(25.5)
Weighted average number of shares (m)			844.6	-	844.6		772.6	-	772.6
Loss per share (pence)		(8.3)		-	(8.3)		(3.3)	-	(3.3)
Total
Loss after tax (£m)		(443.8)		-	(443.8)		(63.3)	-	(63.3)
Weighted average number of shares (m)			844.6	-	844.6		772.6	-	772.6
Loss per share (pence)		(52.5)		-	(52.5)		(8.2)	-	(8.2)
* Comparatives have been restated to reflect the classification of Martine Spécialités S.A.S., Le Pain Croustillant and Sofrapain S.A.S. as discontinued operations.

Adjusted earnings per share ('Adjusted EPS')

Adjusted earnings per share is defined as trading profit less net regular interest payable, less a notional tax charge at 28.5% (2007: 30%) divided by the weighted average number of ordinary shares of the Company.  

Trading profit is defined as operating profit before exceptional items, amortisation of intangible assets, the revaluation of foreign exchange and other derivative contracts under IAS 39 and pension credits or charges in relation to the difference between the expected return on pension assets and interest costs on pension liabilities. The definition of trading profit has changed in comparison to the prior year to exclude the revaluation on other derivative contracts under IAS 39.    

Net regular interest payable is defined as net interest after excluding non-cash items, namely exceptional write-off of financing costs, accelerated amortisation of debt issuance costs, fair value adjustments on interest rate swaps and the unwind of the discount on provisions.

Trading profit and Adjusted EPS have been reported as the directors believe these provide an alternative measure with which the shareholders can assess the Group's underlying trading performance.

Year ended 31 December 2008
	Continuing		Total
		Discontinued Speciality bakery businesses	Continuing & Speciality bakery businesses	Dis-continued Other	Total
	£m	£m	£m	£m	£m
Operating (loss)/profit	(40.5)	(69.5)	(110.0)	1.4	(108.6)
Exceptional items	296.5	74.2	370.7	(2.3)	368.4
Operating profit/(loss) before exceptional items	256.0	4.7	260.7	(0.9)	259.8
Pension financing credit	(15.6)	-	(15.6)	-	(15.6)
Foreign exchange and other derivative contracts	(6.9)	-	(6.9)	-	(6.9)
Amortisation of intangibles	76.7	5.3	82.0	-	82.0
Trading profit/(loss)	310.2	10.0	320.2	(0.9)	319.3
Less net regular interest payable	(126.6)	0.2	(126.4)	(0.1)	(126.5)
Adjusted profit/(loss) before tax	183.6	10.2	193.8	(1.0)	192.8
Notional tax at 28.5%	(52.3)	(2.9)	(55.2)	0.3	(54.9)
Adjusted profit/(loss) after tax	131.3	7.3	138.6	(0.7)	137.9
Average shares in issue (m)	844.6	844.6	844.6	844.6	844.6
Adjusted EPS (pence)	15.5	0.9	16.4	(0.1)	16.3
Net regular interest payable
Net interest payable	363.4	(0.2)	363.2	(0.5)	362.7
Exclude exceptional write-off of financing costs	(17.0)	-	(17.0)	-	(17.0)
Exclude fair value adjustments on interest rate swaps	(218.9)	-	(218.9)	-	(218.9)
Exclude unwind of discount on provisions	(0.9)	-	(0.9)	0.6	(0.3)
Net regular interest payable	126.6	(0.2)	126.4	0.1	126.5

Year ended 31 December 2007
	Continuing		Total
		Discontinued Speciality bakery businesses	Continuing & Speciality bakery businesses	Dis- continued Other	Total
	£m	£m	£m	£m	£m
Operating profit/(loss)	72.0	4.1	76.1	(27.9)	48.2
Exceptional items	158.7	-	158.7	26.4	185.1
Operating profit/(loss) before exceptional items	230.7	4.1	234.8	(1.5)	233.3
Pension financing credit	(16.1)	-	(16.1)	-	(16.1)
Foreign exchange and other derivative contracts	(4.7)	-	(4.7)	-	(4.7)
Amortisation of intangibles	62.0	4.2	66.2	0.1	66.3
Trading profit/(loss)	271.9	8.3	280.2	(1.4)	278.8
Less net regular interest payable	(109.4)	-	(109.4)	0.4	(109.0)
Adjusted profit/(loss) before tax	162.5	8.3	170.8	(1.0)	169.8
Notional tax at 30.0%	(48.7)	(2.5)	(51.2)	0.3	(50.9)
Adjusted profit/(loss) after tax	113.8	5.8	119.6	(0.7)	118.9
Average shares in issue (m)	772.6	772.6	772.6	772.6	772.6
Adjusted EPS (pence)	14.7	0.8	15.5	(0.1)	15.4
Net regular interest payable
Net interest payable	149.6	-	149.6	(0.4)	149.2
Exclude accelerated amortisation of debt issuance costs	(8.4)	-	(8.4)	-	(8.4)
Exclude fair value adjustments on interest rate swaps	(31.0)	-	(31.0)	-	(31.0)
Exclude unwind of discount on provisions	(0.8)	-	(0.8)	-	(0.8)
Net regular interest payable	109.4	-	109.4	(0.4)	109.0

Dilutive effect of share options

The dilutive effect of share options is calculated by adjusting the weighted average number of ordinary shares outstanding to assume conversion of all dilutive potential ordinary shares. The only dilutive potential ordinary shares of the Company are share options. A calculation is done to determine the number of shares that could have been acquired at fair value (determined as the average annual market share price of the Company's shares) based on the monetary value of the subscription rights attached to the outstanding share options.  

For the years ended 31 December 2008 and 31 December 2007, there is no dilutive effect as the outstanding share options that could have been acquired at fair value is less than the monetary value of the subscription rights attached to these options.  

The issue of 4,731 ordinary shares during the year has been included in determining the weighted average for the current year (see note 26).

No adjustment is made to the loss in calculating undiluted and diluted loss per share.

						2008		2007
					Number		Number
Weighted average number of ordinary shares for the purpose of basic loss per share
					844,604,404		772,592,139
Effect of dilutive potential ordinary shares:
- Share options						-		-
Weighted average number of ordinary shares
for the purpose of diluted loss per share					844,604,404		772,592,139

12.  Dividends

		2008		2007
		pence		pence
Interim dividend		-		4.30
Final dividend		-		2.20
Total dividend		-		6.50

The Board has decided that no dividend will be proposed for the year ended 31 December 2008. 

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 Company's ability to reduce its level of debt, the limitations on payment of future dividends imposed by the Company's debt agreements and the condition of the credit markets at the relevant time, with any dividend being subject to the approval of the Group's Shareholders at a general meeting. The Amended Term and Revolving Credit Facilities Agreement imposes restrictions on the ability to propose dividends which are subject to a leverage test and an interest cover test, with the payment being restricted to no more than 50 per cent of retained earnings.

13. Property, plant and equipment

	Freehold land and buildings	Long leasehold land and buildings	Short leasehold land and buildings	Vehicles, plant and equipment	Total
	£m	£m	£m	£m	£m
Cost
At 1 January 2007	85.0	2.2	1.3	316.0	404.5
Additions	4.1	-	0.3	111.5	115.9
Acquisition of subsidiaries/businesses	116.6	11.4	32.2	238.0	398.2
Disposal of subsidiaries/businesses	(12.5)	-	(1.0)	(23.3)	(36.8)
Disposals	(10.7)	(0.7)	(0.2)	(113.3)	(124.9)
Transferred to held for sale	(37.3)	(2.2)	(1.1)	(11.7)	(52.3)
At 31 December 2007*	145.2	10.7	31.5	517.2	704.6
Additions	4.8	-	0.4	128.8	134.0
Disposals	(1.6)	-	(0.4)	(46.7)	(48.7)
Reclassifications	-	-	1.3	(1.3)	-
Transferred to held for sale	(10.4)	(3.4)	(1.6)	(32.8)	(48.2)
Foreign exchange	2.6	1.5	-	4.8	8.9
At 31 December 2008	140.6	8.8	31.2	570.0	750.6
Aggregate depreciation and impairment
At 1 January 2007	11.7	2.2	0.7	135.3	149.9
Depreciation charge for the year	4.1	0.3	1.5	44.1	50.0
Disposal of subsidiaries/businesses	(3.3)	-	(0.4)	(16.6)	(20.3)
Disposals	(3.1)	(0.7)	(0.1)	(72.4)	(76.3)
Impairment	-	-	0.4	15.5	15.9
Transferred to held for sale	(8.0)	(1.2)	(0.9)	(11.6)	(21.7)
At 31 December 2007*	1.4	0.6	1.2	94.3	97.5
Depreciation charge for the year	6.8	0.8	1.0	47.9	56.5
Disposals	(0.9)	-	(0.3)	(43.7)	(44.9)
Impairment	2.3	-	1.6	7.5	11.4
Reclassifications	-	-	1.1	(1.1)	-
Transferred to held for sale	(1.7)	(1.5)	(0.3)	(6.8)	(10.3)
Foreign exchange	0.4	0.7	-	0.4	1.5
At 31 December 2008	8.3	0.6	4.3	98.5	111.7
Net book value
At 31 December 2007*	143.8	10.1	30.3	422.9	607.1
At 31 December 2008	132.3	8.2	26.9	471.5	638.9
* The 31 Dec 2007 comparatives have been restated for IFRS 3 fair value adjustments on the acquisition of RHM plc.

The net book value of the Group's vehicles, plant and equipment includes an amount of £0.9m (2007: £1.1m) in respect of assets held under finance leases.

At 31 December 2008 the Group had entered into contractual commitments for the acquisition of property, plant and equipment amounting to £22.8m (2007: £42.6m).

The impairment in 2008 of £11.4m mostly relates to the closure of our mill in Rotherham and an impairment against certain plant and machinery relating to discontinued production lines.  The impairment charge reflects the difference between the carrying value of assets and their expected recoverable amounts. Recoverable amounts have been determined on the basis of value in use or fair value less costs to sell. As at 31 December 2008, the rate used to discount the forecasted cash flows was 11.1% (2007: 8.4%).

The impairment in 2007 of £15.9m relates to the integration of the administrative functions of RHM's former head office at Marlow, the Culinary Brands business at Addlestone and Middlewich, the Manor Bakeries business at Windsor, the closures of nine manufacturing sites as a result of the Group's manufacturing review, the announced closures of the bread manufacturing sites in Bradford and Plymouth, and a depot in Telford, the closure of the Kings Lynn manufacturing site as a result of the Campbell's integration and the closure of the Coolock and Thurles manufacturing sites as a result of the integration of the Irish operations.

The Group's borrowings are secured on the assets of the Group including property, plant and equipment.

14.  Goodwill 

		2008		2007 (Restated)*
		£m		£m
Cost
At 1 January		1,649.5		480.2
Acquisition of subsidiaries		-		1,171.4
Impairment - continuing		(194.4)		-
Impairment - discontinuing		(68.5)		-
Transferred to held for sale		(15.3)		-
Disposal of subsidiaries/businesses (note 10)		-		(2.1)
At 31 December		1,371.3		1,649.5
* The 31 Dec 2007 comparatives have been restated for IFRS 3 fair value adjustments on the acquisition of RHM plc.

Impairment tests for goodwill

As a result of the integration programme undertaken by the Group, the previously disclosed cash-generating units ('CGU's') have been changed to more closely align them with the new divisional structure, which was effective from 1 January 2008. 

This has resulted in six CGU's in which Goodwill acquired in various business combinations has been allocated.  Goodwill previously allocated to Ambrosia, Bird's, Nestlé, RHM Culinary Brands and the UK business of Campbell's has been allocated to the Grocery CGU. Goodwill previously allocated to Cauldron and Marlow has been allocated into the Meat-free CGU. Goodwill previously allocated to the Irish business of Campbell's, Chivers Ireland and RHM Ireland (previously within RHM Customer Partnerships CGU) has been allocated into the Ireland CGU. Goodwill previously allocated to the RHM Customer Partnerships CGU has been allocated between the Grocery, Chilled and Ireland CGU's. Goodwill previously allocated to RHM Cakes has been allocated between the Cake and Chilled CGU's. There has been no change to the allocation of goodwill to RHM Bread Bakeries (which subsequently became the Hovis CGU).

The new CGU's are as follows: 

		2008		2007 (Restated)*
		£m		£m
Cake		128.8		128.8
Chilled		170.7		170.7
Grocery		759.9		759.9
Hovis		163.0		441.2
Ireland		59.3		59.3
Meat-free		89.6		89.6
Net carrying value of goodwill		1,371.3		1,649.5
* The 31 Dec 2007 comparatives have been restated into their new CGU's and also for IFRS 3 fair value adjustments on the acquisition of RHM plc.

Goodwill is tested annually for impairment, or more frequently if there are indications that goodwill may be impaired.  The recoverable amount of a CGU is determined based on value in use calculations or fair value less costs to sell, depending on the way in which the value of the CGU is expected to be recovered.

In 2008, an impairment assessment of the carrying value of the goodwill assigned to the speciality bakery businesses, Martine Spécialités S.A.S., Le Pain Croustillant and Sofrapain S.A.S. has been undertaken by assessing their fair value less costs to sell in light of the decision to dispose of these businesses. This goodwill was previously included within the Hovis CGU and was tested for impairment prior to its classification as held for sale. The impairment test in respect of the remaining goodwill within the Hovis CGU and the other CGU's has been undertaken by assessing the CGU's value in use.

Key assumptions

Fair value less costs to sell in respect of the speciality bakery businesses has been determined by reference to the value of the firm offers received, less the expected costs of disposing the businesses.

The key assumptions for calculating value in use are those relating to the cash flows, long term growth rate and discount rate.

Cash flow assumptions

The cash flows used in the value in use calculation are pre-tax cash flows based on the latest approved management forecasts in respect of the following five years.  Assumptions regarding these future cash flows are based upon actual results in prior periods and adjusted for expected developments in the following years with reference to market conditions and reasonable management expectations for the businesses.  All income and costs are taken into account and an estimate of capital expenditure required to maintain these cash flows is also made. 

Long term growth rate assumptions

The five year management forecasts are extrapolated in perpetuity using growth assumptions relevant for the business sector.  The growth rate applied is 2.25% (2007: 2.0%) and is not considered to be higher than the average long term industry growth rate.

Discount rate

The discount rate applied to the cash flows is calculated using a pre-tax rate based on the weighted average cost of capital ('WACC') which would be anticipated for a market participant investing in the Group.  The Directors believe it is appropriate to use a single common discount rate for all impairment testing as each CGU shares similar risk profiles.

The Group has considered the impact of the deterioration in the economic climate in determining the appropriate discount rate to use in impairment testing. Due to the increased cost of borrowing and the higher level of return expected by equity holders (due to the perceived risk in equity markets) the discount rate used has increased significantly when compared with the previous year. At 31 December 2008 the pre-tax rate used to discount the forecasted cash flows has been determined to be 11.1% (2007: 8.4%).

Impairment

A total impairment charge of £262.9m has been recognised in the year.

Included within this charge is £68.5m recognised against the goodwill allocated to the speciality bakery businesses and has been recorded within discontinued operations. The residual goodwill attributable to these businesses of £15.3m has been transferred to assets held for sale (refer to note 17).

A further charge of £194.4m has been recognised against the goodwill allocated to the Hovis CGU (which is included within the Hovis segment) and thereby reducing the carrying value of this CGU to its recoverable amount. This impairment has arisen as a result of the significant increase in discount rate (as noted above).  Any favourable change in assumptions in future periods will result in additional headroom however any adverse change would result in additional impairment.

With regards to the remaining CGU's, the Directors believe no reasonable change in the key assumptions used in the impairment testing would cause the carrying value to exceed its recoverable amount. 

 

END

 

 

FR QELBBKXBLBBB