Final Results

Premier Foods plc 07 March 2006 7 March 2006 Premier Foods plc Preliminary Results 2005 Premier delivers sales up 6.0%, operating profit up 18.2% and strengthens brand portfolio. Year Ended 31 December 2005 2004 £m £m Change Turnover 789.7 744.7 +6.0% Grocery Turnover 683.4 594.4 +15.0% Like-for-like Grocery turnover* 603.8 594.4 +1.6% Trading profit** 108.4 95.7 +13.3% Trading profit margin** 13.7% 12.9% +80bps Operating profit 95.3 80.6 +18.2% Like-for-like operating profit* 90.2 80.6 +11.9% Profit before taxation for continuing operations 51.8 2.3 Earnings per share (basic) 34.0p 9.9p Adjusted basic earnings per share*** 23.6p 21.2p +11.3% Recommended final dividend per share 9.5p 9.0p +5.6% Recommended total dividend per share 14.25p 9.0p n/a * Like-for-like represents results from continuing operations excluding results from acquisitions and disposals ** Trading profit represents operating profit for continuing activities before exceptional items, amortisation and the effect of changes in pension assumptions ***Adjusted earnings per share represents profit after taxation for continuing operations before amortisation, exceptional items and the effects of changes in pension assumptions per ordinary share. The comparative for 2004 is a pro forma estimate of adjusted earnings per share calculated on the basis that the capital structure put in place at the time of the IPO was in place from 1 January 2004. •Like-for-like Grocery trading profit of £94.9m up 5.4% •Like-for-like Grocery trading profit, before £3.5m Branston Beans launch spend, up 9.3% •Pro-forma sales of Drive brands up 10.0% •Pro-forma branded sales up 2.8% •Improved pro forma branded mix of business: 61% of grocery sales (2004: 55%) •Efficiency and cost saving programme delivering •Repositioned portfolio into higher growth categories Robert Schofield, Chief Executive of Premier Foods plc, said, '2005 has seen another robust performance by our Grocery business with our drive brands growing strongly and our operating margins improving in line with our targets. We have invested heavily behind our brands, increasing our marketing spend on our existing brands by £5m, of which £3.5m was spent in the final quarter of 2005 launching our new Branston Beans. Furthermore, we have strengthened our brand portfolio through the acquisitions of Bird's, Quorn and Cauldron and the sale of our Tea business. This has improved our growth prospects by moving us into higher growth categories. The integration of these businesses has gone well and the brands have performed in line with our expectations. As previously indicated, our potato business has suffered as customers have rationalised their supplier base but we have taken decisive action to cut the cost base and align the business with the new requirements of its customer base.' For further information: Premier Foods plc Robert Schofield, Chief Executive Paul Thomas, Finance Director Gwyn Tyley, Investor Relations Manager +44 (0) 1727 815850 Citigate Dewe Rogerson Michael Berkeley Sara Batchelor Anthony Kennaway +44 (0) 20 7638 9571 A presentation to analysts will take place on Tuesday 7 March at 9am at Merrill Lynch Financial Centre, 2 King Edward Street, London, EC1A 1HQ. Operating review - continuing operations 2005 2004 £m £m Sales Grocery 683.4 594.4 15.0% Fresh Produce 106.3 150.3 -29.3% ------ ------ Total sales 789.7 744.7 6.0% Trading profit 108.4 95.7 13.3% Amortisation of intangibles (6.3) (2.8) 125.0% Effect of change in pension assumptions - 3.4 - ------ ------ Operating profit before exceptional items 102.1 96.3 6.0% Exceptional items (6.8) (15.7) -56.7% ------ ------ Operating profit 95.3 80.6 18.2% In 2005, we achieved another year of branded sales growth and improved operating margins. In addition, we have strengthened our brand portfolio with the acquisitions of Bird's, Quorn and Cauldron and the disposal of our Tea and Jonker Fris businesses. Our strategy is based upon growing the sales of our branded portfolio, whilst maintaining the benefits derived from also supplying retailer branded product, and driving efficiency improvements and cost reductions to improve our operating profit margins. Overall, continuing operations generated sales growth of 6%, based on a like-for-like growth in Grocery of 2% and the strong contributions from Bird's and Quorn, which have been offset by a weaker performance from our Fresh Produce business. We increased the marketing spend on our existing brand portfolio by £5.0m to £27.7m, of which £3.5m was spent during the fourth quarter of the year launching our new Branston Beans. This increased marketing spend fuelled strong sales growth for our drive brands: Loyd Grossman grew 22%, Branston 14% (excluding Branston Beans), Ambrosia 12% and Hartley's 1%. In addition, we spent £6.3m marketing the brands acquired in the year which helped to generate pro-forma year-on-year growth of 8% for Quorn and 9% for Cauldron. Overall, we have been delighted by the resilience of the business in withstanding a number of significant trading and one-off events in the last eighteen months. In October 2004, a fire at our Bury St Edmunds factory disrupted production of our pickles and cooking sauce products. We were pleased to get the factory back into full production by the Easter of 2005. In the spring, we were involved in a major product recall resulting from the contamination of raw materials supplied to us, which contained the dye Sudan I, and which were used in a range of products manufactured by the Group. We responded to this issue through a number of initiatives to address the concerns that affected the Group and the wider food production industry. In addition, the business has responded strongly to the challenges of the trading impact of an inventory overhang in January 2005, exceptionally mild autumn weather and significant levels of energy and utility cost inflation. As we indicated at the time of our interim announcement, sales for our potato business were significantly lower than in 2004 as a result of lower market prices and volumes and this continued during the second half of the year. During 2005, we realigned the business with its customer base through the acquisition of the Gedney's fresh produce business and adjusted the business' cost base through the closure of two of its four remaining packing facilities. This will ensure that we enter 2006 as an efficient and competitive supplier of a broad range of fresh produce. Following the acquisition of Gedney's we have renamed this segment 'Fresh Produce'. In 2005, we conducted a strategic review of our Tea and Jonker Fris businesses and concluded that the success and future competitiveness of those businesses could be better served by alternative ownership and, accordingly, we disposed of the businesses in October and December 2005 respectively. The net effect of acquisitions and disposals during the year is an increase in the pro forma share of Grocery sales from branded products of 6% to approximately 61%. Simultaneously, we have fully integrated Bird's into our business during the year and have made excellent progress on the integration of Quorn and Cauldron over the second half. Continuing operations - Grocery 2005 2004 £m £m Sales 683.4 594.4 15.0% Like-for-like sales 603.8 594.4 1.6% Trading profit 107.9 90.0 19.9% Like-for-like trading profit 94.9 90.0 5.4% Convenience Foods, Pickles, Sauces and Meat-Free 2005 2004 £m £m Sales 396.7 347.5 14.2% Like-for-like sales 347.1 347.5 (0.1%) Trading profit 40.8 34.6 17.9% Like-for-like trading profit 34.3 34.6 (0.9%) Sales in our Convenience Foods, Pickles, Sauces and Meat-Free categories have demonstrated a resilient performance throughout 2005 with like-for-like sales of £347.1m (2004: £347.5m) and like-for-like trading profit of £34.3m (2004: £34.6m). These categories have seen strong growth in Branston, excluding Branston Beans, (up 14%) and Loyd Grossman brands (up 22%), offset by lower sales from our smaller, mature brands and own label convenience foods. This performance has been achieved despite the effect of lower sales in January 2005 due to the high level of inventory on hand after the Christmas 2004 trading period and the effect of a mild autumn which has particularly affected the sales of 'warming' soups and convenience meals. Like-for-like trading profit was flat at £34.3m after spending an additional £3.5m on the launch of Branston Beans and after absorbing significant cost inflation particularly in relation to tin-plate and energy related utility costs. We have put significant efforts behind our Branston brand during the year. At the start of the year, following the fire at our Bury St Edmunds factory in October 2004, our primary focus was on the rebuilding of production and distribution of the core Branston sweet and sour pickle ranges. We launched a new range of Branston relishes in March 2005, which achieved a category-leading position within 2 months of their launch. Finally, in October, we launched a new range of Branston Beans and Pasta in anticipation of the expiry of our HP licence, which is due in March 2006. The launch has been extremely successful with Branston Beans gaining a 7% value market share within 3 months of launch. In 2005, again following a period of rebuilding production and distribution after the Bury St Edmunds fire, we extended our Loyd Grossman range to include Pesto and 'Creamy' sauces, which helped to consolidate Loyd Grossman as the third largest cooking sauce brand in the UK. The continued strong growth in 2005 means that the Loyd Grossman brand has now more than trebled in size over the last five years. Meat-Free 2005* 2004 £m £m Sales 49.6 - Trading Profit 6.5 - Pro-forma 12 months 2005 2004 Sales 99.8 92.7 7.7% Trading Profit 11.2 8.1 38.3% * 'Meat-Free' includes Quorn (29 weeks) and Cauldron (9 weeks) in 2005 Sales from the Meat-Free business have been included for the first time this year following the acquisition of Marlow Foods (owner of the 'Quorn' brand) in June and Cauldron in October 2005. The combined business has generated sales of £49.6m and trading profit of £6.5m. On a pro-forma basis, the Meat-Free business generated growth in sales and trading profit of 7.7% to £99.8m (2004: £92.7m) and 38.3% to £11.2m (2004: £8.1m), respectively. This performance post acquisition is consistent with our growth and profitability assumptions at the time of acquisition and we believe the business is well positioned to capitalise on the growth of its markets, which will result from the shift in consumer trends towards healthier eating and provide a growth platform for the business. Following these acquisitions, the Group's knowledge of and access to the vegetarian and meat alternative markets is now unique amongst its competitors. Following the acquisition of Quorn, we upweighted the marketing spend on the brand, with two additional bursts of TV advertising, and increased the level of new product development to continue driving the brands strong sales growth. During 2005 household penetration increased from 16.5% to 18.2%, equating to an additional 420,000 households now eating Quorn. The integration of the Quorn and Cauldron businesses has proceeded well with the sales, marketing and operations functions now fully integrated into Premier's management structures. Spreads, Desserts and Beverages 2005 2004 £m £m Sales 286.7 246.9 16.1% Like-for-like sales 256.7 246.9 4.0% Trading profit 67.1 55.4 21.1% Like-for-like trading profit 60.6 55.4 9.4% Our Spreads, Desserts and Beverages product group has performed well. Total sales grew by 16.1%, with like-for-like sales growth of 4.0% underpinning the additional sales from the Bird's business which was acquired in February 2005. Like-for-like trading profit grew by 9.4% to £60.6m (2004: £55.4m) and total trading profit, including Bird's, grew by 21.1% to £67.1m. The like-for-like growth has been driven by Ambrosia with the introduction of new 'fruit layer' custard and rice, the growth of 'snacking' formats and new own label contracts. Sales for the acquired brands are in line with our expectations at the time of the acquisition. The transfer of production of the Bird's and Angel Delight brands to our Knighton factory was completed in December 2005. From the acquisition in February through to the commissioning of the new lines in December, we incurred additional costs as we sourced production from Kraft. These costs ceased on the transfer of production and have been treated as exceptional because of their non-recurring nature. Fresh Produce 2005 2004 £m £m Sales 106.3 150.3 (29.3%) Like-for-like sales 94.2 150.3 (37.3%) Trading profit 0.5 5.7 (91.2%) Like-for-like trading profit 0.4 5.7 (93.0%) Sales in our Fresh Produce business have reduced by 29.3% to £106.3m (2004: £150.3m) and trading profit by 91.2% to £0.5m (2004: £5.7m). This result is disappointing, having arisen as a result of the poor general trading environment, lower overall market prices and the effect of contracts lost at the end of 2004 as a result of supplier consolidation in this category by the major multiple grocery retailers. Following on from the initial phase of operational restructuring in 2004, we have further reviewed the cost structure and packing capacity of the business and have reduced its operating cost base through the closure of two of the remaining four packing facilities. We have also realigned the business with its customers requirements through the acquisition of the Gedney's fresh produce business in September 2005 which has widened the fresh produce offering to our customers. This ensured that we entered 2006 as an efficient and competitive supplier of a broad range of fresh produce. Discontinued operations 2005 2004 £m £m Sales 77.5 152.1 (49.2%) Trading Profit 8.6 14.6 (41.1%) On 30 October 2005, the Group disposed of its Tea business for £80.2m. On 7 December 2005, the Group disposed of its Netherlands-based convenience foods business, Jonker Fris, for £4.4m. The results for these businesses during the period of our ownership in 2005 together with the profit or loss on disposal are presented as the result for 2005, net of tax, from discontinued operations. This total amount is compared with the results for these businesses and our French spreads business Materne, which was disposed of in 2004. Business outlook Overall trading performance for the year to date has been in line with expectations. The trading environment remains highly competitive and energy related inflationary pressure remains a concern. However, we are confident that we will continue to develop the business in line with our strategy, focussing on driving our branded sales growth whilst maintaining tight control on our cost base. Financial Review For the first time, the annual results of the Group have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union ('IFRS'). For completeness we have disclosed comparative financial information as reconciled to that formerly presented under UK GAAP on our website, available at www.premierfoods.co.uk. The impact of conversion to IFRS has had no impact on the cash flows of the Group. Since the publication of the interim results no further adjustments have been made to the information previously disclosed, other than to reflect the classification of results of the continuing and discontinued operations of the Group. As explained in more detail in note 10, on 30 October 2005 the Group disposed of its Tea business, followed by the disposal of its Jonker Fris subsidiary on 7 December 2005. In accordance with IFRS 5, the results of both activities have been presented as discontinued operations for the entire period of ownership in 2005 and 2004. For 2004, discontinued operations also include the results of Materne, our French spreads business sold in July 2004. Income Statement - continuing operations Sales Sales generated by the Group's continuing operations increased by 6.0% to £789.7m (2004: £744.7m). The most significant components of this movement were the additional sales arising from our acquisitions of Bird's, Quorn and Cauldron , offset by the reduction in sales at MBM, our potatoes business, as a result of weaker market pricing and the loss of contract volume. Total grocery sales increased by 15.0% to £683.4m, with like-for-like sales, stated before the impact of acquisitions, increasing by 1.6% to £603.8m. This was the result of strong trading in the Grocery business in the fourth quarter, offset by weak trading conditions experienced in January and the un-seasonally warm Autumn. Acquisitions In the current year, much progress has been achieved towards the full integration of each of the brands and businesses acquired during 2005, and as such it is anticipated that these businesses will continue to deliver incremental sales and profit at levels consistent with the Group's expectations at the time of acquisition. In addition, we expect that the transfer of production of Bird's to our Knighton site that was completed in December 2005 will generate a level of incremental cost saving in line with the targets set at the time of its acquisition. For the purposes of comparability, we have presented the additional cost of sourcing production from Kraft as exceptional costs during 2005 (see note 3). For 2005, the contributions generated during the period of our ownership of Quorn (29 weeks) and Cauldron (9 weeks) are in line with our expectations at the date of each acquisition, with Quorn generating trading profit of £6.0m (2004: £nil) and Cauldron £0.5m (2004:£nil). We have integrated the Quorn and Cauldron sales and marketing functions into existing Premier structures to maximise the sales growth and profitability in our ownership of the leading two Meat-Free brands in the market. We continue to consider actively opportunities to acquire new brands, based on a strict set of strategic and financial criteria. Gross Profit Gross profit for 2005 was £206.4m, an increase of 15.7% over 2004. On a like-for-like basis total gross margins stated prior to Bird's transitional manufacturing costs were 25.8%, up from 24.2% in 2004. This improvement primarily reflects the benefit of significant capital investment in production efficiency, a reduction in depreciation charged following a review of the estimated useful economic life of our assets and the write off of assets damaged in the fire at our Bury St Edmunds factory supplemented by a strong performance from our drive brands. The overall increase reflects this like-for-like performance coupled with the strong gross profit margins of our acquisitions and the effect of the disposals of our Tea and Jonker Fris businesses. Selling and Distribution Costs Selling and distribution expenses were £73.7m for 2005, an increase of 16.2% compared to in 2004. On a total like-for-like basis, selling and distribution expenses decreased by £1.0m, reflecting an increase of £5.0m on marketing spend relating primarily to our Branston Beans launch offset by logistics cost savings made within both Grocery and Fresh Produce. Administrative Costs Administrative expenses were £39.8m in 2005, an increase of 6.4% compared to in 2004. On a total like-for-like basis administrative expenses before amortisation and exceptional items increased by £0.5m primarily due to the impact of share based payment costs of £1.1m offset by the rationalisation of property and other fixed costs in Fresh Produce of £1.0m. Amortisation of intangible assets increased to £6.3m in 2005 (2004: £2.8m), primarily due to the acquisitions of Bird's and Quorn. Other Operating Income Other operating income amounted to £2.4m comprising £0.9m of fair value adjustments on ongoing forward foreign exchange contracts and £1.5m of income under our business interruption insurance in relation to the fire at Bury St Edmunds. Under IAS 39, changes in the fair value of unsettled forward foreign exchange contracts that are not designated as hedges are now recorded outside of cost of sales. These economic hedges are recorded as other operating income or expense with variations in commodity prices due to foreign exchange shown as part of cost of sales. The net economic impact remains the same. Operating Profit Operating profit before exceptional items for the continuing business was £102.1m for 2005, an increase of £5.8m, or 6.0%, compared to 2004. Operating profit after exceptional items increased by 18.2% to £95.3m. Exceptional Items Exceptional items are not addressed in IFRS. Accordingly, the Group has defined exceptional items as those items of financial significance to be disclosed separately, in order to assist in understanding the financial performance achieved and in making projections of future results Exceptional items for the period reflect the aggregate effect of a number of non-recurring events, resulting in a net expense of £6.8m compared to £15.7m in the prior year. The principal elements of the charge for the current period relate to the costs associated with the integration of the Bird's business, the rationalisation of our operations at MBM, the Sudan 1 product recall and the impact of the insurance claim for the Bury St Edmunds fire (see note 3). Pensions Consistent with all public companies, the Group reviews actuarial assumptions used in calculating its pension obligations on a regular basis. It is our objective to ensure that the balance between the cash flow risk to the business and our responsibilities to our current and former employees is fully and regularly understood and that the impact of changes to the composition of the business on our pension obligations is known in advance. In this context, the Group monitors the scheme-specific demographic characteristics of members, along with the discount rate, returns on equity, inflation and the rate of future salary increases assumptions. As at 31 December 2005, on an IAS 19 'Employee Benefits' basis, in aggregate, the Group's pension schemes are in deficit (net of related deferred tax asset) by £59.1m. We have revised the assumptions used in determining the IAS19 liabilities to reflect changes in the economic environment and the scheme as at 31 December 2005. These changes, detailed in note 5, continue to be monitored on a regular basis. Interest Interest payable for the business of £51.5m comprised net cash interest payable of £42.4m, the write-off of debt issuance costs arising on the re-negotiation of borrowings in 2005 of £6.3m, the regular amortisation of debt issuance costs of £1.7m and the impact of movements in the fair value of interest rate swaps of £1.1m. The net interest payable of £43.5m, after interest income of £8.0m represents a significant saving on the prior year cost of £78.3m. The saving is a consequence of the new financing structure put in place at the time of the IPO in July 2004. At the time of the acquisition of Marlow Foods in June 2005, the Group carried out a further re-financing exercise to fund the acquisition, its future investment programmes and its ongoing working capital requirements. This resulted in the write-off of £6.3m of un-amortised facility costs relating to the previous structure. Facility costs relating to the new credit facilities totalled £5.6m and these are being amortised over the term of the new facilities. The Group continues to actively review the sources and cost of funds in the context of its short to medium term investment opportunities with the intention of securing the lowest cost of financing for the level of gearing. Taxation The tax charge and effective rate of tax for continuing operations were £14.9m and 28.8% respectively, broadly in line with the rate anticipated for the full year. The underlying cash rate of tax paid for 2005 is 24%, reflecting the deductibility of goodwill arising on certain acquisitions and the acceleration of benefits available through ongoing capital expenditure programmes. Under IFRS, it is anticipated that the effect of an ongoing investment programme will be to maintain the effective cash rate of tax within a range of 25-26% in the medium term, with movements in deferred tax adjusting the income statement effective rate of tax to the UK statutory rate. Discontinued operations The Group continues to monitor actively the ongoing operational performance and strategic positioning of all its brands and product categories. As a result of this process, on 30 October 2005, the Group sold its Tea business to Apeejay Tea International for consideration of £80.2m and sold its Netherlands-based convenience foods business, Jonker Fris, to NPM on 7 December 2005 for consideration of £4.4m. In aggregate, the Group recorded a profit on disposal of these businesses of £40.9m, a result that was considered the best value available to the Group. This profit, combined with the operating profits earned by each of the businesses during the Group's period of ownership (net of taxes), has been recorded as the result of discontinued operations in the income statement. Earnings Per Share Based on our performance for the year, basic earnings per share was 34.0p (2004: 9.9p). In accordance with IFRS and as a reflection of the impact of disposals in the year, basic earnings per share from continuing and discontinued operations were 15.0 pence per share (2004: 1.5p) and 19.0 pence per share (2004: 8.4p) respectively, significantly ahead of the prior year. Dividend Consistent with our stated dividend policy, the board recommended a final dividend of 9.50p per ordinary share (2004: 9.00p), resulting in a total dividend for 2005 of 14.25p per ordinary share. The final dividend payment, which totals £23.5m, is payable in July 2006. Under IFRS dividends are recorded in the financial statements in the period in which they are declared. Cash Flow and Borrowings In the year, the Group's net borrowings increased from £370.3m to £572.1m. After a cash inflow from operations of £73.9m, the primary components of the net outflow were acquisition cash flows (including repayment of Marlow debt), net of disposals, of £194.2m, ongoing net capital expenditure of £36.2m, dividends of £33.8m and debt issuance costs of £5.6m. Net cash generated by operating activities of £73.9m in 2005 compares with £28.5m in 2004, primarily reflecting an improvement in operating profit of £14.7m and a reduction of £23.1m in net interest payable. Acquisition cash flows (including repayment of Marlow debt) of £275.8m consists of the consideration and associated transaction costs of £72.1m, £172.0m and £27.1m for the purchase of Bird's, Marlow Foods and Cauldron Foods within Grocery and £4.6m for Gedney's within Fresh Produce. The total consideration for Marlow Foods included £3.2m of acquisition related costs and included a payment of a cash sum of £118.6m (net of cash acquired), assumed borrowings of £53.4m and £4.1m of loan notes. Capital Expenditure The Group operates a capital expenditure programme that is monitored within pre-defined financial targets, related to the performance of the Group, operating efficiency and growth characteristics of each investment. In 2005, the Group incurred net capital expenditure totalling £36.2m in relation to ongoing and acquired businesses. This was in addition to the re-build of our Bury St. Edmunds plant. This figure includes acquisition related capital expenditure of £6.0m spent on the relocation of Bird's production to our Knighton factory. We continue to review the capital demands of the business and consider the expenditure for 2005 to reflect a level of spend slightly ahead of our ongoing target level, as a result of a combination of recurring and non-recurring investment requirements. Impact of IFRS The consolidated financial statements of the Group are presented in accordance with IFRS. The Group has made excellent progress in achieving its conversion to IFRS. The impact on earnings has been limited to the accounting for the Group's foreign exchange and interest rate swaps, the amortisation of intangibles, pension accounting, accruals for employee incentive awards and deferred tax. There have also been a number of presentational changes to the income statement and balance sheet, but there has been no cash impact arising from any of these adjustments. We have embedded IFRS within the business and IFRS will form the basis for all of our financial communications in the future. Following our transition to IFRS, the Group conducted a review of the useful economic lines and residual values of its property, plant and equipment. As a consequence, and based upon independent valuation advice, we have revised the weighted average useful lives of our assets upwards, with the effect of reducing our current year and on-going depreciation charge by £2.5-£3.6m annually. Consolidated income statement 31 December Year ended 2005 31 December 2004* Note £m £m ------------------------- ----- ----------- ----------- Continuing operations Turnover 2 789.7 744.7 Cost of sales (583.3) (566.3) ------------------------- ----- ----------- ----------- Gross profit 206.4 178.4 Selling and distribution (73.7) (63.4) costs Administrative costs (39.8) (37.4) Other operating income 2.4 3.0 ------------------------- ----- ----------- ----------- Operating profit 95.3 80.6 ----------- ----------- Before exceptional items 102.1 96.3 Exceptional items 3 (6.8) (15.7) ----------- ----------- Interest payable and other financial charges 4 (51.5) (83.6) Interest receivable 4 8.0 5.3 ------------------------- ----- ----------- ----------- Profit before taxation for continuing operations opopoperations 51.8 2.3 Taxation (charge)/credit (14.9) 0.1 ------------------------- ----- ----------- ----------- Profit after taxation for continuing operations 36.9 2.4 Profit from discontinued 10 46.7 13.4 operations ------------------------- ----- ----------- ----------- Profit for the year 83.6 15.8 ------------------------- ----- ----------- ----------- Earnings per share (pence) 6 Basic 34.0 9.9 Diluted 33.7 9.7 ------------------------- ----- ----------- ----------- Earnings per share (pence) 6 - continuing Basic 15.0 1.5 Diluted 14.9 1.5 ------------------------- ----- ----------- ----------- Earnings per share (pence) 6 - discontinued Basic 19.0 8.4 Diluted 18.8 8.2 ------------------------- ----- ----------- ----------- Dividends** Recommended final dividend (£m) 7 23.5 22.0 Declared interim dividend (£m) 11.8 - Recommended final dividend (pence) 9.5 9.0 Declared interim dividend (pence) 4.75 - * Results are restated for the impact of the transition to International Financial Reporting Standards ('IFRS'). ** Under IFRS dividends are recorded in the period in which they are declared. Consolidated balance sheet As at 31 December 2005 2004* Note £m £m ------------------------------ ------ ------- --------- ASSETS: Non-current assets Property, plant and equipment 197.3 141.3 Goodwill 267.7 129.4 Intangible assets 151.5 52.6 Investments 0.1 0.1 Other non-current assets 0.4 0.8 Deferred tax assets - 11.7 ------------------------------ ------ ------- --------- Current assets Inventories 89.8 91.8 Trade and other receivables 136.3 110.6 Financial assets - derivative financial instruments 1.3 - Cash and cash equivalents 14.0 12.5 ------------------------------ ------ ------- --------- Total assets 858.4 550.8 ------------------------------ ------ ------- --------- LIABILITIES: Current liabilities Trade and other payables (166.8) (136.5) Financial liabilities 8 (35.9) (27.9) - short term borrowings - derivative financial instruments (1.5) - Interest payable (2.0) (2.2) Provisions (0.3) - Current tax liabilities (19.4) (12.7) ------------------------------ ------ ------- --------- Non-current liabilities Financial liabilities 8 (546.1) (354.9) long-term borrowings 8 (4.1) - loan notes Retirement benefit obligations 5 (84.5) (65.6) Provisions (0.4) (2.9) Other liabilities (0.1) - Deferred tax liabilities (15.3) - ------------------------------ ------ ------- --------- Total liabilities (876.4) (602.7) ------------------------------ ------ ------- --------- Net liabilities (18.0) (51.9) ------------------------------ ------ ------- --------- EQUITY Capital and reserves Share capital 2.5 2.4 Share premium (a) 321.5 320.9 Merger reserve (a) (136.8) (136.8) Other reserves (a) (0.2) - Profit and loss reserve (a) (205.0) (238.4) ------------------------------ ------ ------- --------- Total shareholders' deficit (18.0) (51.9) ------------------------------ ------ ------- --------- * Results are restated for the impact of the transition to International Financial Reporting Standards ('IFRS'). Consolidated cash flow statement Year ended 31 December 2005 2004* Note £m £m ----------------------------------- ------ ------ ------- Cash generated from operations (d) 117.7 87.9 ------ ------- Interest paid (42.6) (64.7) Interest received 6.3 5.3 Taxation paid (7.5) - ------ ------- Cash inflow from operating activities 73.9 28.5 ------ ------- Acquisition of Bird's (72.1) - Acquisition of Marlow (118.6) - Acquisition of Gedney's (4.6) - Acquisition of Cauldron (27.1) - Sale of subsidiaries/businesses 81.6 34.2 Purchase of property, plant and equipment (49.8) (35.9) Receipts from insurers 12.0 5.9 Purchase of intangible assets (1.1) (0.9) Sale of property, plant and equipment 2.7 4.0 ------ ------- Cash (outflow)/inflow from investing activities (177.0) 7.3 ------ ------- Repayment of borrowings (380.0) (151.4) Proceeds from new borrowings 585.9 - Proceeds from share issue - 119.1 Share issue refund/(costs) 0.6 (10.1) Debt issuance costs (5.6) (8.1) Repayment of debt acquired with Marlow (53.4) - Dividends paid (33.8) - ------ ------- Cash inflow/(outflow) from financing activities 113.7 (50.5) ----------------------------------- ------ ------ ------- Net inflow/(outflow) of cash and cash 10.6 (14.7) equivalents Cash and cash equivalents at beginning of year 2.6 17.3 ----------------------------------- ------ ------ ------- Cash and cash equivalents at end of year 13.2 2.6 ----------------------------------- ------ ------ ------- Consolidated statement of recognised income and expense ----------------------------------- ------ ------- Profit for the year 83.6 15.8 Actuarial losses (net of tax) (18.2) (39.2) Tax on share options 0.7 - ----------------------------------- ------ ------- Net loss not recognised in income statement (17.5) (39.2) ----------------------------------- ------- ------- Total recognised income/(expense) recognised in the year 66.1 (23.4) Effect of adopting IAS 39 at 1 January 2005 (note 4) (1.8) - ----------------------------------- ------- ------- 64.3 (23.4) ----------------------------------- ------- ------- * Results are restated for the impact of the transition to International Financial Reporting Standards ('IFRS'). (a) Analysis of movement in reserves Group Profit Share Merger Other and loss premium reserve reserves reserve Total £m £m £m £m £m ------------------ ------- ------- -------- ----------- ----------- At 1 January 2004 10.0 (136.8) - (221.5) (348.3) Capitalisation of the Group's loan notes by issue of shares 203.4 - - - 203.4 Shares issued through public offer for cash 117.9 - - - 117.9 Issue expenses (10.1) - - - (10.1) Capitalisation of share premium (0.9) - - - (0.9) Shares issued to Directors 0.6 - - - 0.6 Share based payments - - - 6.5 6.5 Profit for the year - - - 15.8 15.8 Actuarial gains and losses (net of taxation) - - - (39.2) (39.2) ------------------ ------- ------- -------- ----------- ----------- At 31 December 2004 320.9 (136.8) - (238.4) (54.3) First time adoption of IAS 39 - - (1.8) - (1.8) ------------------ ------- ------- -------- ----------- ----------- At 1 January 2005 320.9 (136.8) (1.8) (238.4) (56.1) Profit for the year - - - 83.6 83.6 Dividends paid - - - (33.8) (33.8) Actuarial gains and losses (net of taxation) - - - (18.2) (18.2) Settlement of derivatives - - 1.6 - 1.6 Share based payments - - - 1.1 1.1 Issue costs refund 0.6 - - - 0.6 Tax on share options - - - 0.7 0.7 ------------------ ------- ------- -------- ----------- ----------- At 31 December 2005 321.5 (136.8) (0.2) (205.0) (20.5) ------------------ ------- ------- -------- ----------- ----------- (b) Reconciliation of cash and cash equivalents to net borrowings 2005 2004 £m £m Net inflow/(outflow of cash and cash equivalents 10.6 (14.7) Debt acquired with Marlow (53.4) - (Increase)/dec rease of borrowings (146.0) 355.7 Other non-cash changes (13.0) (17.4) ----------------------------------- --------- ------- (Increase)/decrease in borrowings net of cash (201.8) 323.6 Total borrowings net of cash at beginning of year (370.3) (693.9) ----------------------------------- --------- ------- Total borrowings at end of year (572.1) (370.3) ----------------------------------- --------- ------- (c) Analysis of movement in borrowings At 31 Effect Re-stated Cash Other As at December of at 1 flow non cash 31 2004 IAS 32 January changes December 2005 2005 £m £m £m £m £m £m --------------- -------- ------ -------- ------- -------- -------- Bank overdrafts (9.9) (23.0) (32.9) 32.1 - (0.8) Cash and bank deposits 12.5 23.0 35.5 (21.5) - 14.0 --------------- -------- ------ -------- ------- -------- -------- Cash and cash equivalents net of overdrafts 2.6 - 2.6 10.6 - 13.2 Borrowings - term (380.0) - (380.0) 55.0 - (325.0) Borrowings - revolver - - - (260.0) - (260.0) Loan notes - - - - (4.1) (4.1) Finance leases - - - - (0.9) (0.9) Other (0.1) - (0.1) - - (0.1) --------------- -------- ------ -------- ------- -------- -------- Gross borrowings net of cash (377.5) - (377.5) (194.4) (5.0) (576.9) Debt issuance costs 7.2 - 7.2 5.6 (8.0) 4.8 --------------- -------- ------ -------- ------- -------- -------- Total net borrowings (370.3) - (370.3) (188.8) (13.0) (572.1) --------------- -------- ------ -------- ------- -------- -------- (d) Reconciliation of operating profit to cash generated from operations Year Ended 31 December 2005 2004 £m £m ----------------------------- -------- -------- Continuing operations Operating Profit 95.3 80.6 Depreciation of property, plant and equipment 15.9 15.0 Amortisation of intangible assets 6.3 2.8 Gain on disposal of property, plant and equipment (4.7) (0.6) Revaluation gains on financial instruments (1.1) - Share based payments 1.1 6.5 ----------------------------- -------- -------- Net cash inflow from operating activities before interest and 112.8 104.3 tax (paid)/received and movements in working capital (Increase)/decrease in inventories (0.7) 4.8 Increase in receivables (12.4) (13.3) Increase/(decrease) in other payables and provisions 16.9 (4.4) Movement in net retirement benefit obligations (5.4) (20.3) ----------------------------- -------- -------- Cash generated from continuing operations 111.2 71.1 Discontinued operations 6.5 16.8 ----------------------------- -------- -------- Cash generated from operations 117.7 87.9 ----------------------------- -------- -------- -------- -------- Exceptional items cash flow (8.9) (18.6) Cash generated from operations before exceptional items 126.6 106.5 -------- ------- (e) Additional analysis of cash flows Year ended 31 December 2005 2004 ----------------------------------- -------- -------- £m £m Interest received 6.3 5.3 Interest paid (42.6) (64.7) Issue costs of new bank loan (5.6) (8.1) ----------------------------------- -------- -------- Return on investments and servicing of (41.9) (67.5) finance ----------------------------------- -------- -------- Sales of subsidiaries/businesses Sale of subsidiaries/businesses 81.6 34.8 Cash disposed of on sale of subsidiaries/ - (0.6) businesses ----------------------------------- -------- -------- Sales of subsidiaries/businesses 81.6 34.2 ----------------------------------- -------- -------- 1. Basis of Preparation For the first time, the annual results of the Group have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union ('IFRS'). For completeness we have disclosed comparative financial information as reconciled to that formerly presented under UK GAAP on our website, available at www.premierfoods.co.uk. The impact of conversion to IFRS has had no cash impact. Since the publication of the interim results no further adjustments have been made to the information previously disclosed, other than to reflect the re-classification of results of the continuing and discontinued operations of the Group. On 30 October 2005 the Group sold its Tea business and Jonker Fris on 7 December 2005. In accordance with IFRS 5, the results of both activities have been presented as discontinued operations for the entire period of ownership in 2004 and 2005. For 2004 discontinued operations also include the results of Materne, our French spreads business sold in July 2004. The date of transition to IFRS was 1 January 2004, being the start of the earliest period of comparative information. The financial information for 2004 has been restated to comply with IFRS. Under the provisions of IFRS 1 'First time adoption of International Financial Reporting Standards' the requirements of IAS 32 'Financial Instruments: Disclosure and presentation' and IAS 39 'Financial Instruments: Recognition and measurement' have been adopted from 1 January 2005 (note 4). The figures and financial information for the year 2004 do not constitute the statutory financial statements for that year. Those financial statements have been delivered to the Registrar and included the auditors' report which was unqualified and did not contain a statement either under section 237(2) of the Companies Act 1985 (accounting records or returns inadequate or accounts not agreeing with records and returns), or section 237(3) (failure to obtain necessary information and explanations). The figures and financial information for the year 2005 do not constitute the statutory financial statements for that year. Those financial statements have not yet been delivered to the Registrar. The principal accounting policies in the preparation of this financial information are set out on our website and prepared on a consistent basis to the 2005 financial statements. These policies have been consistently applied to all the years presented, unless otherwise stated. Premier Foods plc was incorporated on 22 June 2004, with an issued share capital of 5,000,000 1p ordinary shares. Premier Foods plc became the ultimate holding company of the Group on 15 July 2004. On this date, HMTF Premier Limited (HMTFPL) contributed its shares in Premier Foods Investment No.3 Limited (PFI No.3) to Premier Foods plc in exchange for 1,000 1p ordinary shares in Premier Foods plc. The scheme of arrangement has been accounted for as a Group reconstruction. 2. Segmental Analysis The results below for the year ended 31 December 2005 are divided into continuing and discontinued operations, with the two continuing segments described as Grocery and Fresh Produce. Following the disposal of our Tea business, within Grocery we now refer to two product groupings, namely Convenience Foods, Pickles, Sauces and Meat-Free (which now incorporates Quorn and Cauldron) and Spreads, Desserts and Beverages. Results for the Tea business and Jonker Fris are presented as discontinued operations. Each of these segments primarily supplies the United Kingdom market, although we also supply certain products to mainland Europe and 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. The segment results for the year ended 31 December 2005 are as follows: Year ended 31 December 2005 Grocery Fresh Unallocated Total for Produce Group £m £m £m £m -------------------- -------- -------- -------- --------- Turnover Total turnover from continuing operations 683.4 106.3 - 789.7 -------------------- -------- -------- -------- --------- Result Operating profit before exceptional 101.6 0.5 - 102.1 Exceptional items (3.1) (3.7) - (6.8) Interest payable and other finance charges - - (51.5) (51.5) Interest receivable - - 8.0 8.0 -------------------- -------- -------- -------- --------- Profit before taxation for continuing operations 98.5 (3.2) (43.5) 51.8 Taxation - - (14.9) (14.9) -------------------- -------- -------- -------- --------- Profit after taxation for continuing operations 98.5 (3.2) (58.4) 36.9 Discontinued operations 46.7 - - 46.7 -------------------- -------- -------- -------- --------- Profit for the year 145.2 (3.2) (58.4) 83.6 -------------------- -------- -------- -------- --------- Balance sheet Segment assets 800.0 42.7 - 842.7 Unallocated assets - - 15.7 15.7 -------------------- -------- -------- -------- --------- Consolidated total assets 800.0 42.7 15.7 858.4 -------------------- -------- -------- -------- --------- Segment liabilities (238.9) (13.2) - (252.1) Unallocated liabilities - - (624.3) (624.3) -------------------- -------- -------- -------- --------- Consolidated total liabilities (238.9) (13.2) (624.3) (876.4) -------------------- -------- -------- -------- --------- Other information Grocery Fresh Discontinued Total for Produce Group £m £m £m £m Capital expenditure 42.4 2.3 5.1 49.8 Software expenditure 0.7 0.3 - 1.0 Depreciation 13.0 2.9 2.2 18.1 Amortisation 6.3 - 0.3 6.6 Year ended 31 December 2004 Grocery Fresh Unallocated Total for Produce Group £m £m £m £m -------------------- -------- -------- --------- -------- Turnover Total turnover from continuing operations 594.4 150.3 - 744.7 -------------------- -------- -------- --------- -------- Result Operating profit before exceptional 90.6 5.7 - 96.3 Exceptional items (9.2) (6.5) - (15.7) Interest payable and other finance charges - - (83.6) (83.6) Interest receivable - - 5.3 5.3 Profit before taxation for continuing operations 81.4 (0.8) (78.3) 2.3 Taxation - - 0.1 0.1 -------------------- -------- -------- --------- -------- Profit after taxation for continuing operations 81.4 (0.8) (78.2) 2.4 Discontinued operations 13.4 - - 13.4 -------------------- -------- -------- --------- -------- Profit for the year 94.8 (0.8) (78.2) 15.8 -------------------- -------- -------- --------- -------- Balance sheet Segment assets 487.1 39.5 - 526.6 Unallocated assets - - 24.2 24.2 -------------------- -------- -------- --------- -------- Consolidated total assets 487.1 39.5 24.2 550.8 -------------------- -------- -------- --------- -------- Segment liabilities (192.6) (13.1) - (205.7) Unallocated liabilities - - (397.0) (397.0) -------------------- -------- -------- --------- -------- Consolidated total liabilities (192.6) (13.1) (397.0) (602.7) -------------------- -------- -------- --------- -------- Other information Grocery Fresh Discontinued Total for Produce Group £m £m £m £m Capital expenditure 32.6 0.9 3.8 37.3 Software expenditure 0.9 - - 0.9 Depreciation 13.0 2.0 4.0 19.0 Amortisation 2.8 - 0.7 3.5 Unallocated assets and liabilities, comprises cash and cash equivalents, net borrowings, taxation balances and financial derivatives. Discontinued Operations On 30 October, the Group disposed of its Typhoo Tea and related products (collectively 'Tea') business for £80.2m. On 7 December, the Group also disposed of its Netherlands-based convenience foods business, Jonker Fris, for £4.4m. The segmental results for the discontinued operations stated above aggregated with the profit or loss of each business in arriving at the net result from discontinued operations for 2005, with 2004 restated for comparison purposes. In 2004, discontinued operations also included our French spreads business Materne. Discontinued operations had the following effect on the segment results of Grocery, analysed into continuing and discontinued components. Discontinued Continuing Grocery 2005 2005 2005 Turnover £m £m £m --------------------------- ----------- -------- -------- Total turnover 77.2 683.4 760.6 --------------------------- ----------- -------- -------- Result Operating profit 8.3 98.5 106.8 --------------------------- ----------- -------- -------- Discontinued Continuing Grocery 2004 2004 2004 Turnover £m £m £m --------------------------- ----------- -------- -------- Total turnover 152.1 594.4 746.5 --------------------------- ----------- -------- -------- Result Operating profit 9.6 81.2 90.8 --------------------------- ----------- -------- -------- Segmental analysis - secondary The following table provides an analysis of the Group's sales, which are allocated on the basis of geographical market destination and segmental assets and additions to property, plant and equipment and intangible assets, which are allocated by geographical market origin. Turnover Carrying Value of Total Capital Expenditure (continuing) Segmental Assets (including software) 2005 2004 2005 2004 2005 2004 £m £m £m £m £m £m ----------- ------ ----- --------- ------- -------- -------- United 757.4 724.5 858.4 533.5 50.1 35.8 Kingdom Mainland 25.4 14.0 - 17.3 0.7 2.4 Europe Other 6.9 6.2 - - - - countries ----------- ------ ----- --------- ------- -------- -------- Total 789.7 744.7 858.4 550.8 50.8 38.2 ----------- ------ ----- --------- ------- -------- -------- 3. Exceptional items During the year, the Group incurred the following: 2005 2004 £m £m Exceptional items - continuing operations 4.7 - Bird's - transitional manufacturing costs 0.5 - - other integration costs MBM restructuring costs 3.7 3.9 Net insurance recovery on Bury St Edmunds (4.7) (3.5) Sudan 1 2.4 - IPO 0.9 15.0 Restructuring and other costs 0.7 0.3 Property disposal (1.4) - ------------------------------------ ------------ ------- Total 6.8 15.7 ------------------------------------ ------------ ------- (a) Bird's transitional manufacturing costs On 14 February 2005 the Group acquired the Bird's Custard, Angel Delight and associated brands from Kraft Foods Inc. (collectively 'Bird's'). Following the acquisition, the product range continued to be produced at Kraft's factory in Banbury under a series of transitional arrangements. These arrangements were extended to the end of the year following the decision to ensure the continuity of supply to our customers during the heavy pre-Christmas trading season for Bird's. For the purposes of comparability, we have presented the additional cost of sourcing production from Kraft as exceptional costs. (b) MBM restructuring costs In the period to 31 December 2005, as part of our ongoing commitment to manufacturing efficiency, we incurred restructuring costs and stock write-offs relating to rationalisation of operations within the Fresh Produce segment. This has been part of an ongoing process, which began in the second half of 2004 and is the result of a significant reduction in business volumes. (c) Net insurance recovery on Bury St Edmunds On 27 October 2004, the Group suffered a serious fire at its Bury St Edmunds factory, which is the primary manufacturing site for our pickles and sauces. Subsequently, the factory has been rebuilt and the benefit of replacing depreciated assets with new capital investment and credited as exceptional income, net of the impact of writing off the damaged assets. (d) Sudan 1 On 18 February 2005, the Foods Standards Agency initiated a recall of a number of products, which had been identified as being contaminated with a dye, 'Sudan 1', which is not authorised for use in food products. The dye was traced to a batch of chilli powder supplied to the Group in its manufacture of Worcester sauce. The Group used the Worcester sauce in three other products and supplied Worcester sauce to a number of retail and food ingredient customers. Claims against the company by customers relating to the recall are being dealt with by our insurers and we continue to believe we have no material financial exposure in this respect. During the course of the recall the Group incurred a number of legal and other expenses involved in the handling of the recall. These are the subject of a claim against the supplier of the contaminated chilli powder and its insurers. In case such recovery is unsuccessful the Group has provided in full for these costs and has recorded an exceptional charge of £2.4m in relation to this matter. (e) IPO In 2004, the company's initial public offering (IPO) resulted in a charge of £15.0m of exceptional items to continuing operations. The costs included the cash cancellation of existing share options, the cash cancellation of 30% of senior management's share options and the cost of issue of new 1p ordinary share options, exercisable one year after the IPO. We also incurred a further £3.1m of costs, attributable to the IPO, of which £0.9m were charged in 2005. (f) Restructuring and other costs These primarily relate to the restructuring of the production and administration facilities in the UK grocery business. (g) Property disposal This relates to the sale of surplus property in the West Midlands. This property was not used in our operations. For year ended 31 December 2004, exceptional items relating to the Tea and Jonker Fris businesses have been restated and reclassified to discontinued business. 4. Net interest payable and financial instruments On 1 January 2005, the Group adopted the provisions of IAS 32 and IAS 39, Financial Instruments. The primary effect of this change in accounting policy relates to the accounting, presentation and disclosure of the Group's interests in forward exchange contracts and interest rate swaps and the effect of these changes was to increase the Group's net liabilities at 31 December 2004 by £1.8m to £53.7m. In future, the operating profit impact of commodity contracts and foreign currency transactions will be recorded as other operating income or expense. As noted below, the net economic impact of the interest rate swaps will form a component of net interest payable. On 6 June 2005, the Group renewed its borrowings with term facilities of £325.0m repayable over the period to 6 June 2010 and revolving credit facilities of £455.0m, of which £260.0m was drawn down as at 31 December 2005. As a result of these changes, debt issuance costs of £6.3m (2004: £10.5m) relating to the prior facilities were written off to interest payable. Cash and bank deposits and short-term borrowings included in the balance sheet reflect the anticipated level at which the Group will offset cash and overdrafts and legal rights to such offset in accordance with IAS 32. 2005 2004 £m £m ------------------------------------ ---------- --------- Interest payable 8.6 22.4 Interest payable on bank loans, senior notes and overdrafts Interest payable on unsecured, unguaranteed loan notes - 11.1 Interest payable on term facility 20.4 15.7 Interest payable on revolving facility 13.4 8.9 Amortisation of debt issuance costs 1.7 3.9 Fair valuation of interest rate swaps 1.1 - ------------------------------------ ---------- --------- 45.2 62.0 Senior notes early redemption penalty - 11.1 Acceleratedl amortisation of debt issuance costs 6.3 10.5 ------------------------------------ ---------- --------- 6.3 21.6 ------------------------------------ ---------- --------- Total interest payable 51.5 83.6 Interest receivable - bank deposits (8.0) (5.3) ------------------------------------ ---------- --------- Net interest payable 43.5 78.3 ------------------------------------ ---------- --------- 5. Retirement Benefit Schemes Accounting Policy Employee benefits Group companies operate a number of pension schemes. The schemes are generally funded through payments to insurance companies or trustee-administered funds, determined by periodic actuarial calculations. The Group has both defined benefit and defined contribution plans. A defined benefit plan is a pension plan that defines an amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and compensation. A defined contribution plan is a pension plan under which the Group pays fixed contributions into a separate entity. The Group has no legal or constructive obligations to pay further contributions into a defined contribution plan if the fund does not hold sufficient assets to pay all employees the benefits relating to employee service in the current and prior periods. Defined Contribution Plans Obligations for contributions to defined contribution pension plans are recognised as an expense in the income statement as incurred. Defined Benefit Plans 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 unrecognised actuarial gains or losses and past service costs. The defined benefit obligation is 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 interest rates 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 expenditure in the year in which they arise. Past-service costs are recognised immediately in income, 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. Group Defined Benefit Schemes Most Group companies participate in the Premier Foods Pension Scheme (the 'PFPS'), the principal funded defined benefit scheme operated by the Group. The Group also operates a smaller funded defined benefit scheme, the Premier Ambient Products Pension Scheme (the 'PAPPS') for employees within the Ambrosia business. Under the schemes, employees are entitled to retirement benefits varying as a percentage of final salary on retirement. No other post-retirement benefits are provided. The assets of both schemes are held by the trustees and are independent of the Group's finances. The schemes invest through investment managers appointed by the trustees in UK and European equities and in investment products comprising a broader range of assets. For the purposes of this financial information, pension costs presented are calculated by independent, qualified actuaries using the projected unit credit method. The figures below are consolidated to include PFPS and PAPPS. At the balance sheet date, the principal actuarial assumptions used were as follows: Liabilities 2005 2004 ---------------------------- -------- ----------- Discount rate 5.00% 5.50% Expected salary increases 3.75% 3.50% Future pension increases 2.75% 2.50% Inflation 2.75% 2.50% Average expected remaining life of a 65 year old male 15* 16* (years) * The mortality assumption used is slightly below the national average because it reflects the socio-economic profile of the membership and the schemes' actual and anticipated mortality experience. The fair values of plan assets and the expected rates of return on assets were: Assets Expected rate Market Expected Market of return value rate of value return 2005 2005 2004 2004 % £m % £m ---------------- ------ --------- -------- ---------- Equities 8.00% 160.8 8.50% 136.8 Insight Targeted Return 6.75% 66.0 7.70% 166.4 ML Targeted Return 7.75% 103.8 - - Cash & Other 4.50% 3.9 - ---------------- ------ --------- -------- ---------- Total 7.63% 334.5 8.06% 303.2 ---------------- ------ --------- -------- ---------- At the balance sheet date, the distribution of assets underlying the targeted return products were: 2005 2004 --------------- ------ -------- -------- -------- -------- --------- Cash Equities Total Cash Equities Total £m £m £m £m £m £m --------------- ------ -------- -------- -------- -------- --------- Insight Targeted 66.0 - 66.0 166.4 - 166.4 Return ML Targeted Return 60.2 43.6 103.8 - - - --------------- ------ -------- -------- -------- -------- --------- The expected return on pension scheme assets is based on the long-term investment strategy set out in the Schemes' Statement of Investment Principles at the start of the year. In 2005, the expected return was calculated using the equity return and targeted investment return assumptions of 8.5% and 7.7% respectively. As at 31 December 2004, £99.9m was temporarily held as cash with an expected return of 8.5%, pending re-investment in equity markets. The expected return on the majority of the remaining cash £66.5m was the targeted return benchmark in place of 6.5% (net of fees). The actual rate of return on plan assets was 13.4% (2004: 10.8%).The plan assets do not include any of the Group's own financial instruments, nor any property occupied by, or other assets used by, the Group. The amounts recognised in the balance sheet arising from the Group's obligations in respect of its defined benefit schemes is as follows: 2005 2004 £m £m ----------------------- ---------- --------- Present value of funded obligations (418.9) (368.3) Fair value of plan assets 334.5 303.2 ----------------------- ---------- --------- Deficit in scheme (84.4) (65.1) ----------------------- ---------- --------- Changes in the present value of the defined benefit obligation are as follows: 2005 2004 £m £m --------------------------- ---------- --------- Opening defined benefit obligation (368.3) (301.9) Current service cost (4.3) (2.7) Interest cost (20.0) (16.1) Actuarial losses (43.7) (65.8) Other income - (2.2) Curtailments 1.2 - Contributions by plan participants (2.1) (2.0) Benefits paid 18.3 22.4 --------------------------- ---------- --------- Closing defined benefit obligation (418.9) (368.3) --------------------------- ---------- --------- Changes in the fair value of plan assets are as follows: 2005 2004 £m £m --------------------------- ---------- --------- Opening fair value of plan assets 303.2 272.5 Expected return 23.4 21.5 Administrative and life insurance costs (1.2) (1.4) Actuarial gains 17.8 9.8 Contributions by employer 7.5 19.0 Contributions by plan participants 2.1 2.0 Other income - 2.2 Benefits paid (18.3) (22.4) --------------------------- ---------- --------- Closing fair value of plan assets 334.5 303.2 --------------------------- ---------- --------- The history of the plan for the current and prior period is as follows: 2005 2004 £m £m --------------------------- --------------- --------- Present value of defined benefit obligation (418.9) (368.3) Fair Value of plan assets 334.5 303.2 --------------------------- --------------- --------- Deficit (84.4) (65.1) --------------------------- --------------- --------- Experience adjustments on plan liabilities (43.7) (65.8) Experience adjustments on plan assets 17.8 9.8 In accordance with the transitional provisions for the amendments to IAS 19 'Employee Benefits' in December 2004, the disclosures above are determined prospectively from the 2004 reporting period. The Group expects to contribute approximately £8.3m to its defined benefit plan in 2006. The amounts recognised in the income statement are as follows: 2005 2004 £m £m --------------------------- --------------- --------- Current service cost (4.3) (2.7) Administrative and life insurance costs (1.2) (1.4) Interest cost (20.0) (16.1) Expected return on plan assets 23.4 21.5 Gains on curtailment 1.2 - --------------------------- --------------- --------- Total (expense)/credit (0.9) 1.3 --------------------------- --------------- --------- The actual return on plan assets was £40.5m (2004: £29.5m). During the year actuarial losses of £25.9m (2004: £56.0m) were recognised in the statement of income and expenses. Accumulated actuarial losses were £81.9m as at 31 December 2005 (2004: £56.0m). Defined Contribution Schemes A number of companies in the Group operate defined contribution schemes, predominantly Stakeholder arrangements. In addition a number of schemes providing life assurance benefits only are operated. The total expense recognised in the income statement of £0.9m (2004: £0.4m) represents contributions payable to the plans by the Group at rates specified in the rules of the plans. Other post retirement benefits The Group does not provide any other post retirement benefits. 6. Earnings per share Basic earnings per share have been calculated by dividing earnings attributable to ordinary shareholders of £83.6m (2004: £15.8m) by the weighted average number of ordinary shares of the Company. 2005 2004 ---------------- ------ --------- -------- ------ --------- -------- Basic Dilutive Diluted Basic Dilutive Diluted EPS effect of EPS EPS effect of EPS share share options options ---------------- ------ --------- -------- ------ --------- -------- Continuing operations Profit after tax (£m) 36.9 - 36.9 2.4 - 2.4 Weighted average number of 245.5 2.4 247.9 159.2 3.0 162.2 shares (million) Earnings per share (pence) 15.0 (0.1) 14.9 1.5 - 1.5 Discontinued operations Profit after tax (£m) 46.7 - 46.7 13.4 - 13.4 Weighted average number of 245.5 2.4 247.9 159.2 3.0 162.2 shares (million) Earnings per share (pence) 19.0 (0.2) 18.8 8.4 (0.2) 8.2 Total business Profit after tax (£m) 83.6 - 83.6 15.8 - 15.8 Weighted average number of 245.5 2.4 247.9 159.2 3.0 162.2 shares (million) Earnings per share (pence) 34.0 (0.3) 33.7 9.9 (0.2) 9.7 ---------------- ------ --------- -------- ------ --------- -------- Diluted Diluted earnings per share is calculated by adjusting the weighted average number of ordinary shares outstanding to assume conversion of all dilutive potential ordinary shares. The only dilutive instrument 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. The number of shares used to calculate ordinary earnings per share is compared below with the number of shares that would have been issued assuming the exercise of the share options. No adjustments are required to earnings between undiluted and diluted earnings per share. 2005 2004 Number Number ------------------------------------ ---------- --------- Weighted average number of ordinary shares for the purpose of basic earnings per share 245,471,086 159,224,050 Effect of dilutive potential ordinary shares: Share options 2,438,835 3,048,316 ------------------------------------ ---------- --------- Weighted average number of ordinary shares for the purpose of diluted earnings per share 247,909,921 162,272,366 ------------------------------------ ---------- --------- 7. Dividends The board proposes a final dividend of 9.50 pence per ordinary share (2004: 9.00 pence), which is payable on 7 July 2006 to shareholders on the Register of Members on 9 June 2006 resulting in an aggregate dividend in 2005 of 14.25 pence per ordinary share (2004: 9.00 pence). In accordance with IFRS final dividend is recognised when declared an interim dividend is recognised when paid. 8. Bank and other borrowings 2005 2004 £m £m ------------------------------------------- --------- -------- Due within one year: Secured Senior Credit Facility - Term (note 25.0 - a) Debt issuance costs (0.6) - ------------------------------------------- --------- -------- 24.4 - ------------------------------------------- --------- -------- Secured Senior Credit Facility - Revolving 11.0 - (note a) Debt issuance costs (0.6) - ------------------------------------------- --------- -------- 10.4 - ------------------------------------------- --------- -------- Secured Senior Credit Facility -Term A - 9.3 (note b) Debt issuance costs - (0.9) ------------------------------------------- --------- -------- - 8.4 ------------------------------------------- --------- -------- Secured Senior Credit Facility -Term B - 10.7 (note b) Debt issuance costs - (1.1) ------------------------------------------- --------- -------- - 9.6 ------------------------------------------- --------- -------- Bank overdrafts 0.8 9.9 ------------------------------------------- --------- -------- Total bank borrowings 35.6 27.9 Finance lease obligations 0.3 - ------------------------------------------- --------- -------- 35.9 27.9 ------------------------------------------- --------- -------- Due after more than one year: Secured Senior Credit Facility - Term (note 300.0 - a) Debt issuance costs (1.4) - ------------------------------------------- --------- -------- 298.6 - ------------------------------------------- --------- -------- Secured Senior Credit Facility - Revolving 249.0 - (note a) Debt issuance costs (2.2) - ------------------------------------------- --------- -------- 246.8 - ------------------------------------------- --------- -------- Secured Senior Credit Facility -Term A - 166.5 (note b) Debt issuance costs - (2.4) ------------------------------------------- --------- -------- - 164.1 ------------------------------------------- --------- -------- Secured Senior Credit Facility -Term B - 193.5 (note b) Debt issuance costs - (2.8) ------------------------------------------- --------- -------- - 190.7 ------------------------------------------- --------- -------- Finance lease obligations 0.6 - Other unsecured loans 0.1 0.1 ------------------------------------------- --------- -------- 0.7 0.1 ------------------------------------------- --------- -------- 546.1 354.9 ------------------------------------------- --------- -------- Loan notes (note c) 4.1 - ------------------------------------------- --------- -------- Total bank and other borrowings 586.1 382.8 ------------------------------------------- --------- -------- The carrying amount of the Group's borrowings are all denominated in Pounds Sterling. (a) Senior Term Credit Facility and Revolving credit Facility Arrangement - 2005 On 6 June 2005, the Group refinanced and entered into a new Term and Revolving Credit Facility agreement. This was arranged by BNP Paribas, J.P. Morgan plc, Lloyds TSB Bank plc and The Royal Bank of Scotland plc as lead arrangers and underwriters and Lloyds TSB Bank plc as facility agent and security trustee. These facilities were subsequently syndicated to a further 23 financial institutions. The Senior Term Credit Facility comprises £325.0m. The Revolving Credit Facility is a multi currency revolving credit facility of up to £455.0m (or its equivalent in other currencies). The final maturity date of the above arrangements is 6 June 2010. (b) Senior Credit Facility and Acquisition Facility Arrangement - 2004 The facilities in place prior to 6 June 2005 included a Senior Credit Facility and an Acquisition Facility agreement with J.P. Morgan plc as arranger, JPMorgan Chase Bank as underwriter, with J.P. Morgan Europe Limited as agent and security trustee. Under the Senior Credit Facility, a syndicate of financial institutions made £380.0m of credit facilities available to the Group. The Senior Credit Facility comprised £175.8m of Term A facilities and £204.2m of Term B facilities. In addition a multi currency revolving credit facility of £200.0m (or its equivalent in other currencies) was available. These facilities were repaid on 6 June 2005. (c) Loan notes - 2008 As part of the acquisition arrangement of Marlow Foods Holdings Limited, on 6 June 2005, the Group entered into deferred consideration arrangements with certain individuals. This resulted in loan notes being issued to the Group. These notes incur interest at a six month LIBOR rate and mature in 2008. 9. A cquisitions of subsidiaries The following companies were acquired during the year: Name of Principal Date of Shares Voting Cash Total net businesses activities acquisition acquired equity outflow on consid- acquired instruments acquisition eration* acquired % £m £m --------- ---------- ---------- -------- --------- ---------- ---------- Bird's Manufacture 14 February No N/a 72.1 72.1 and distribution of Bird's Custard, Angel Delight and associated brands (acquired from Kraft) Marlow Manufacturing 6 June Yes 100 118.6 176.1 Foods and Holding distribution Limited of 'Quorn' products (meat free myco-protein), both frozen and chilled Monument Supply and 5 September Yes 100 4.6 4.6 (GB) distribution Limited of fresh (Gedney's) vegetables Cauldron Manufacturing 30 October Yes 100 27.1 27.1 Foods and Limited distribution of vegetable based products. *Total net consideration includes net debt and cash acquired as well as costs of acquisitions. The financial performance of the companies acquired was as follows: Name of Revenue post Profit^ post Pro-forma Pro-forma businesses acquisition acquisition Revenue for Profit^ for acquired Year* Year* £m £m £m £m -------------- ------------ ------------ ----------- ----------- Bird's 30.0 - 33.8 - Marlow Foods Holding Limited 47.1 4.5 84.4 6.3 Monument (GB) Limited 12.1 0.1 36.0 0.3 Cauldron Foods Limited 2.5 0.5 15.4 1.9 ^ Profit is defined as operating profit before interest and tax. * As if the acquisition had occurred on 1 January 2005. 10. Discontinued operations The results of the discontinued operations for the period from 1 January 2005 to the dates of disposal are as follows: Period End Year 2005 End 2004 £m £m ------------------------------------ ------------ ------- Revenue 77.2 152.1 Expenses (68.9) (142.5) ------------------------------------ ------------ ------- Profit before tax 8.3 9.6 Income tax expense (2.5) (2.4) ------------------------------------ ------------ ------- Profit after tax on discontinued operations for the 5.8 7.2 period ------------ ------- ------------------------------------ Pre tax gain on disposal 40.9 9.8 Tax on gain - (3.6) ------------------------------------ ------------ ------- Gain after taxation 40.9 6.2 ------------------------------------ ------------ ------- ------------------------------------ ------------ ------- Total profit on discontinued operations 46.7 13.4 ------------------------------------ ------------ ------- During the year discontinued businesses contributed £6.5m (2004: £16.8m) to the Group's net operating cash flows, paid £5.1m (2004: £3.8m) in respect of investing activities and paid £nil (2004: £nil) in respect of financing activities. A cash inflow of £81.6m (2004: £34.2m) arose on the disposal of discontinued businesses. 11. Disposal of subsidiaries/businesses As referred to in note 2 the Group disposed of its Tea and Jonker Fris businesses during the year. On the respective dates of disposal the net assets of each business were as follows: Tea Jonker Fris 30 October 2005 7 December 2005 Property, plant and equipment 15.0 2.6 Intangible assets and goodwill 6.3 - Inventories 10.0 10.1 Trade and other receivables 0.3 5.1 Cash and bank deposits - - Trade and other payables - (7.1) Current tax recoverable - 0.4 Deferred tax liabilities (2.0) - -------------------------------- ----------- ------------ Net assets disposed 29.6 11.1 Consideration 77.7 3.9 -------------------------------- ----------- ------------ Gain/(loss) on disposal 48.1 (7.2) Gain on curtailment of pension (net of tax) 0.8 Foreign exchange on disposal - (0.8) -------------------------------- ----------- ------------ Total gain/(loss) 48.9 (8.0) -------------------------------- ----------- ------------ Satisfied by: Cash 80.0 5.0 Net consideration adjustment 0.2 (0.6) Disposal costs (2.5) (0.5) -------------------------------- ----------- ------------ 77.7 3.9 -------------------------------- ----------- ------------ Net cash inflow arising on disposal: Cash consideration 77.7 3.9 -------------------------------- ----------- ------------ 77.7 3.9 -------------------------------- ----------- ------------ This information is provided by RNS The company news service from the London Stock Exchange

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