Preliminary Results
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Date: |
21 September 2020 |
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On behalf of: |
Finsbury Food Group Plc ('Finsbury', 'the Company' or 'the Group') |
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Embargoed until: 0700hrs |
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Finsbury Food Group Plc
Preliminary Results
Finsbury Food Group Plc (AIM: FIF), a leading UK speciality bakery manufacturer of cake, bread and morning goods for the retail and foodservice channels, is pleased to announce its preliminary results for the 52 week ended 27 June 2020.
Summary
· Resilient Group revenue of £306.3m.
· Adjusted * 1 EBITDA down 4.4% to £24.4m (up 2.8% to £26.2m including impact of first-time adoption of IFRS16 of £1.8m).
· Adjusted * 1 profit before tax is £13.9m which is before significant and non-recurring items of £10.3m.
· Adjusted Basic EPS * 2 7.9p.
· Net bank debt of £26.5m, decreased by £9.1m (2019: £35.6m) at 1.1 times annualised EBITDA of the Group (2019: 1.4 times).
The impact of the first-time adoption of IFRS 16 will be to increase operating profit by £0.1m, interest costs by £0.2m, EBITDA by £1.8m, debt by £11.8m (previously operating leases under IAS 17) and assets of £9.4m.
Strategic highlights
· The business has proven to be resilient, responding quickly to Covid-19 to deliver a robust trading performance.
· Covid-19 and resultant lockdown had an immediate and adverse impact on Group revenue and profit.
o Foodservice business adversely impacted.
o Retail business had winners and losers depending on subsector.
o Polish business struggled with fall in demand and logistics barriers.
· Responded rapidly to create a safe working environment for our employees.
· Continued focus on driving productivity and efficiency:
o Integrated IT system embedded in all manufacturing sites, excluding Ultrapharm.
o Implementation of Group-wide review and standardisation of bakery processes leading to improved quality and reduction of waste.
o System focus on quality with a 10% reduction in complaints year on year.
· Opening of new gluten free bakery in Poland to expand capacity for the continental market.
· Further innovation in line with consumer trends with:
o The launch of BOSH! branded plant based, vegan friendly whole cakes and celebration cakes.
o The Celebration Cake factory now nut free with reengineered character licensed celebration cakes.
o A new Line of Harry Potter licensed cakes.
o A growing gluten free cake range rolled out across new retail customers.
· Continued development of HomeSafe programme with 15% decrease in number of accidents during the year.
· Implementation of group wide environmental framework in line with ISO14001.
· Product excellence illustrated by the winning of several Quality Food and Drink 'Q' Awards.
* 1 Profit is before significant non-recurring and other items.
* 2 Adjusted EPS has been calculated using earnings excluding the impact of amortisation of intangibles and significant non-recurring and other items as shown on the face of the Statement of Comprehensive Income.
Commenting on the results, John Duffy, Chief Executive of Finsbury Food Group Plc, said:
"The first three quarters of the financial year saw the Group perform in line with market expectations as the benefits of our long-term investment programme and operating initiatives continued to bear fruit. The outbreak of Covid-19 saw unprecedented demand swings and resulted in a challenging period for the Group, but I am proud of how we responded and were able to play a part in ensuring the UK's supermarkets had the food stocks needed at the time."
"After the initial shock, we took decisive action to protect the business, our people and realign our operations to the changes in demand, which resulted in a robust performance in the circumstances. We have seen month-on-month improvement since the outbreak which, encouragingly, has continued into the new financial year. Our teams have worked hard in recent years to build Finsbury into a more resilient business, and there is no doubt those improvements were a key factor in enabling us to remain strongly cash generative throughout the period.
"We remain focused on becoming a leading speciality bakery group and, notwithstanding coronavirus-related disruption, we have continued to make good progress towards that goal. There will inevitably be further obstacles to overcome as the pandemic plays out and with Brexit approaching, but there is a sense of cautious optimism in the business, and we are confident that by continuing to manage the business in a disciplined and pragmatic way, we will emerge a stronger, more streamlined and efficient organisation capable of delivering sustainable growth and healthy returns for shareholders."
This announcement contains inside information.
Contact:
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Finsbury Food Group John Duffy (Chief Executive) Steve Boyd (Finance Director)
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029 20 357 500 |
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Cenkos Securities Max Hartley (Corporate Finance)
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Alma PR Rebecca Sanders-Hewett Sam Modlin David Ison |
020 3405 0205 |
Notes to editors:
· Finsbury Food Group Plc (AIM: FIF) is a leading UK manufacturer of cake and bread bakery goods, supplying a broad range of blue chip customers within both the grocery retail and 'out of home eating' foodservice sectors including major multiples and leading foodservice providers.
· The Company is one of the largest speciality bakery groups in the UK and, with its Overseas division, has sales in the financial year ending 27 June 2020 exceeding £306m.
· The Company's bakery product range is comprehensive and includes:
o Large premium and celebration cakes.
o Small snacking cake formats such as cake slices and bites.
o Artisan, healthy lifestyle and organic breads through to rolls, muffins (sweet and savoury) and morning pastries, all of which are available both fresh and frozen dependent on customer channel requirements.
o Gluten Free bread, morning goods and cake ranges.
· The Company is one of the largest ambient cake manufacturers in the UK, a market valued at over £965 million (source: IRI 52 w/e 20th June 2020). The retail bread and morning goods market has a value of £4.7 billion (source: Kantar Worldpanel 52 w/e 19th April 2020). The retail Free From cake market is valued at £52 million (source: Kantar Worldpanel 52 w/e 17th May 2020). The retail Free From bread & morning goods market is valued at £137 million (source: Kantar Worldpanel 52 w/e 19th April 2020). The UK Out of Home Foodservice Bakery sector is worth approximately £1bn per annum (source: UK foodservice data derived from MCA data for 52 weeks to 31st December 2019).
· The Company comprises a core UK Bakery division and an Overseas division:
o The UK Bakery division has manufacturing sites in Cardiff, East Kilbride, Hamilton, Salisbury, Sheffield, Manchester, and Pontypool.
· The Overseas division comprises the Company's 50% owned company, Lightbody Stretz Ltd, which supplies and distributes the Group's UK-manufactured products and third party products, primarily to Europe, and the Company's manufacturing facilities in Rybarzowice and Zywiec in Poland.
Adjusted EBITDA and profit reconciliation of statutory to adjusted
In order to understand the business performance adjusted measures for the Group are presented which exclude the impact of significant non-recurring items and new accounting standards to present adjusted EBITDA, operating profit and profit before tax. The analyses below show the movement from Adjusted to Statutory measures, the figures are for the 52 weeks ended 27 June 2020 and 52 weeks ended 29 June 2019:
Adjusted EBITDA | 2020 £000 | 2019 £000 |
Adjusted EBITDA excluding IFRS 16 impact | 24,408 | 25,527 |
IFRS 16 lease costs | 1,840 | - |
Adjusted EBITDA including IFRS 16 impact | 26,248 | 25,527 |
Significant non-recurring items - Reorganisation (Note 4) | (1,594) | (1,200) |
Significant non-recurring items - Impairment of goodwill and non-current assets (Note 4) | (8,737) | - |
Difference between defined benefit pension scheme charges and cash cost | 200 | (162) |
Movement in the fair value of foreign exchange contracts | (73) | (178) |
Adjustments, Significant non-recurring and other items | (10,204) | (1,540) |
EBITDA | 16,044 | 23,987 |
Adjusted Operating Profit | 2020 £000 | 2019 £000 | |||
Adjusted operating profit excluding IFRS 16 impact | 14,833 | 16,833 | |||
IFRS 16 impact on operating profit | 106 | - | |||
Adjusted operating profit including IFRS 16 impact | 14,939 | 16,833 | |||
Significant non-recurring items - Reorganisation (Note 4) | (1,594) | (1,200) | |||
Significant non-recurring items - Impairment of goodwill and non-current assets (Note 4) | (8,737) | - | |||
Difference between defined benefit pension scheme charges and cash cost | 200 | (162) | |||
Movement in the fair value of foreign exchange contracts | (73) | (178) | |||
Adjustments, Significant non-recurring and other items | (10,204) | (1,540) | |||
Operating profit | 4,735 | 15,293 | |||
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Adjusted Profit before Tax | 2020 £000 | 2019 £000 |
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Adjusted Profit before tax excluding IFRS 16 impact | 13,869 | 15,919 |
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IFRS 16 impact on profit before tax | (141) | - |
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Adjusted profit before tax including IFRS 16 impact | 13,728 | 15,919 |
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Significant non-recurring items - (Note 4) | (1,594) | (1,200) |
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Significant non-recurring items - Impairment of goodwill and non-current assets (Note 4) | (8,737) | - |
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Difference between defined benefit pension scheme charges and cash cost | (56) | (444) |
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Movement in the fair value of foreign exchange contracts | (73) | (178) |
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Discounting of deferred consideration | (14) | (139) |
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Movement in the fair value of interest rate swaps | (386) | (382) |
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Adjustments, Significant non-recurring and other items | (10,860) | (2,343) |
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Profit before tax | 2,868 | 13,576 |
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Adjusted EBITDA, operating profit and profit before tax exclude significant and non-recurring and other items as shown in the tables. The adjusted operating profit has been given as, in the opinion of the Board, this will allow shareholders to gain a clearer understanding of the trading performance of the Group.
Group Performance Measures
| Group Performance Measures
| Statutory Measures |
Group Revenue £306.3 down 2.8%
| *2 | *2 |
Adjusted EBITDA*1 £24.4m down 4.4%
| Adjusted EBITDA*1 £26.2m up 2.8%
| EBITDA £16.0m |
Adjusted Operating Profit*1 £14.8m down 11.9%
| Adjusted Operating Profit*1 £14.9m down 11.3%
| Operating Profit £4.7m |
Adjusted Profit*1 before Tax £13.9m down 12.9%
| Adjusted Profit*1 before Tax £13.7m down 13.8%
| Profit before Tax £2.9m |
Adjusted EPS 7.9p down 15.1%
| Adjusted EPS 8.0p down 14.0%
| Basic EPS (0.6)p |
Capital investment £4.7m down 57.3%
| *2 | *2 |
Net Bank Debt £26.5m down 25.6%
| Net Debt (incl. leases) £38.3m up 7.6% | Net Debt (incl leases) £38.3m |
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Group performance measures have been calculated including and excluding the impact of the first time adoption impact of IFRS 16. This is to allow year on year comparability of the key performance measures. Statutory measures include first time adoption impact of IFRS 16.
The impact of first time adoption of IFRS 16 is as follows:
| 27 June 2020 |
| £000 |
Net increase in operating profit | 106 |
Increase in interest costs | (247) |
Net decrease in PBT | (141) |
Net increase in EBITDA | 1,840 |
Increase in debt | (11,823) |
Increase in assets | 9,434 |
*1The Group uses Alternative Performance Measures (APMs) which are non-IFRS measures to monitor performance of its operations and of the Group as a whole. These APMs along with their definitions and reconciliations to IFRS measures are provided in the Adjusted EBITDA, operating profit and profit before tax tables on the previous page and the tables in the Financial Review Section. APMs are disclosed as, in the opinion of the Board, this will allow shareholders to gain a clearer understanding of the trading performance of the Group.
Adjusted EPS has been calculated using profit, excluding amortisation of intangibles, significant non-recurring and other items as shown in the tables above net of associated taxation. In the opinion of the Board, the adjustments made will allow shareholders to gain a clearer understanding of the trading performance of the Group.
*2Measures that do not vary are shown in the first column only.
Chairman's Statement
As we reported in our interim results in February, the first half of the financial year was a period of encouraging progress for the Group, with the benefits of our long-term investment programme and operating initiatives coming on stream. Indeed, this continued through until almost the end of our third quarter.
The outbreak of the coronavirus, with the consequential lockdown in March, had a major impact on businesses across the UK and Finsbury was no exception. Food was suddenly consumed almost entirely in the home. The demand profile across our product portfolio underwent rapid change and we had to act decisively and adapt quickly to continue producing food products in a way that kept our colleagues safe, whilst at the same time protecting the long-term sustainability of the business.
There are now encouraging signs that we are moving in the right direction once again, after a challenging few months. However, it is important that the pandemic does not overshadow the significant operational progress the Company has continued to make, which will stand it in good stead to deliver on its longer-term growth ambitions, once more normal trading patterns return.
A resilient performance
Considering the extent of the impact of the pandemic from March, the financial performance for the year was a very credible one. Group revenues were £306.3m (2019: £315.3m), adjusted EBITDA was £24.4m (excluding £1.8m uplift from first time adoption of IFRS 16 leases). We have impaired assets that are considered to be overvalued considering their expected cash generation by £8.7 million delivering a profit before tax of £2.9m (see Note 8).
From the start of our new financial year strong sales growth, profit and cash generation were driven by ongoing delivery against our strategy of selling an ever-expanding and diverse range of innovative products through a broad range of channels while seeking opportunities to drive increased productivity and efficiency. This pattern continued until the nationwide lockdown in March.
Since then sales in the largest part of our business, Retail, have remained relatively resilient and have continued to recover month-by-month since April. Everyday bakery products such as rolls proved popular but demand for celebration cakes was more subdued as a result of lockdown restricting social gatherings. It is hard to overstate the magnitude of the impact the outbreak of the pandemic had on our foodservice and food to go division, which in the prior financial year was 20% of sales turnover. Their end markets suddenly disappeared, almost completely, as restrictions on travel were introduced and consumer behaviour was thrust into unchartered territory. Encouragingly, this improved and sales in foodservice and food to go recovered to around 39% of prior year levels for Q4.
As outlined in our Covid-19 trading updates, management implemented a range of measures to control costs and preserve cash while scaling back production in response to reduced demand. As a result of those actions, we find ourselves in a healthy and secure financial position. The Group has remained cash generative throughout the period, has not needed to make use of any government financial assistance schemes aside from furlough, and has extensive headroom remaining of its £55m revolving credit facility.
The coronavirus presented our teams with significant operational challenges the likes of which had not been encountered before, but they met them with enthusiasm and tenacity and I am proud of the way they were able to keep the business running without compromising on the high standards we set for ourselves.
Considerable strategic progress despite the pandemic
Finsbury Food Group comprises several once independent businesses and a major strategic focus of the past few years has been on introducing initiatives to ensure they operate as one cohesive unit with a greater uniformity of process and procedures and better communication. Work on that front continued apace during the year, despite the disruption caused by the pandemic.
The chief executive's review outlines in more detail the progress we have made, however, I would like to pick out three examples:
· IT has been a key investment theme in recent periods and is now at a level of maturity where we have standardised management information across the sites and can use it to keep introducing new initiatives to further drive productivity and efficiency gains across the Group.
· More broadly, the company-wide rollout of professional communications software such as Workplace by Facebook and Microsoft Teams has made collaboration and sharing of information across the Group during the pandemic easier than it was before the lockdown restrictions were introduced.
· In April we completed the migration of our third-party training academy to online. This meant that several projects that otherwise would have had to have been put on hold were able to go ahead.
Delivery down to the hard work and commitment of our teams
The coronavirus pandemic has tested the mettle of everyone at Finsbury and I would like to take this opportunity to pay tribute to them all for the way they have responded, particularly in adapting to the new ways of working. Their courage, dedication and professionalism in the face of adversity has been first class, from the senior leadership team through to those in our bakeries and countless others whose efforts have meant we could continue to make a contribution to keeping the UK's food shelves stocked.
Dividend
The Board withdrew the interim dividend of 1.23 pence per share on 29 March 2020 and have decided not to propose a final dividend in the context of the continued uncertainty surrounding the pandemic and Brexit. The Board is minded to reinstate a dividend for F21 and will provide an update as these unknowns pass and our outlook is more certain.
Board
The Board composition remains unchanged since last reported and we continue to comply to the QCA Corporate Governance Code. The Board met at sites as usual until March and since then has met using online meeting facilities and will continue to do so until it is felt safe to go back to meeting on sites.
Positioning the business for growth
After the initial impact, we are starting to see some positive monthly sales trends that hint at the beginnings of a recovery. Furloughed staff at its peak totalled 534, at 31 August 2020 the number had reduced to 94. The outlook now versus where it was when the pandemic first took hold is much improved, but with market volatility likely to persist, it remains difficult to predict with any accuracy the rate at which the recovery will take place.
With the business on a sound financial footing, in the near-term we will continue to prioritise the health and safety of our colleagues while carefully managing our resources and operations to meet the returning demand in a sustainable way.
Longer-term, we remain just as focused on our goal of becoming the leading speciality bakery group as we ever were. Finsbury is a fundamentally strong business engineered to be resilient, and for all the negatives associated with the crisis, there is no doubt it has accelerated a number of positive operational improvements which will benefit the Group for many years to come.
Coronavirus risks and Brexit uncertainty remain, but with the good work we have done before and during the pandemic to improve and refine our working practices, we are confident we will emerge a stronger, more streamlined and efficient organisation.
Peter Baker
Non-Executive Chairman
18 September 2020
Chief Executive's Report
Finsbury has a strong track record of successfully navigating macroeconomic pressures, but the events of the past few months were entirely unprecedented and presented a new set of challenges. I am pleased with how the business has coped, really illustrating the strength of our group and commitment of our teams. A crisis tells us a lot about ourselves, and I believe we have responded brilliantly.
Review of performance
As previously reported, the first half was both a period of growth and of successful delivery against our strategic priorities, primarily driven by organic performance in UK Bakery as well as new business wins and the first full financial year contribution from our acquired Free From business, Ultrapharm.
Performance in the second half was reflective of continued momentum in January and February in line with market expectations, followed by significantly weaker trading as a result of the outbreak of Covid-19 at the end of March and the dramatic changes in demand the Group experienced thereafter.
The benefit of the Group's geographical, channel, customer and product diversification has been evident throughout the pandemic. Our European customers and bakeries experienced lockdown first and were able to share their learnings quickly across the Group.
Our largest channel, Retail, remained relatively resilient throughout, although it was impacted by rapid changes to shopping behaviours, which we are pleased to say we adapted to quickly. Helped in part by the warm weather, some areas of retail demand clearly benefited such as round cakes and buns and rolls, while foodservice and food to go were hardest hit. Celebration cake sales were dented but to a lesser extent than one might expect, with households keen to continue marking special occasions despite restrictions on celebrating with extended family and friends.
Our ability to adapt quickly to changing consumer needs is evident in the steady monthly sales improvements we have seen since March as our customers are now gradually moving back towards normalised ranges in line with the gradual relaxation of the nationwide lockdowns. Following the staggered re-opening of some customer sites our foodservice and food to go volumes have started to recover.
Response to Covid-19
We have detailed our response to the outbreak of the coronavirus in our previous updates but it is worth reiterating that from the outset, everything we have done has been within the parameters of, first and foremost, keeping our colleagues, suppliers and customers safe.
Early on, after ensuring our facilities were meeting government standards for social distancing and safe working, we were focused on meeting volatile and unforecastable swings in demand at a time where there was widespread concern about the availability of food stock across the UK. Thanks to our colleagues, who have worked tirelessly and under difficult circumstances, the Group adapted quickly and effectively to the situation, and has continued to deliver.
At the same time, we knew that communities were in need, and I'm delighted we were able to work with our customers to play a small part in the national effort against the virus by producing loaves to be included in food boxes for the shielding housebound, in conjunction with several of our major customers, as well as provide charitable food donations to NHS and key workers as well as local care homes.
Developing Group scale benefits
Covid-19 has demonstrated the importance of the investment and hard work that has been undertaken to create a cohesive Group that operates at scale. While the focus has been on strengthening the business for the long-term, there is no doubt the improvements and efficiencies we have already achieved have been valuable in coordinating an effective and agile crisis response.
This time last year, we rolled out six Group Operating Principles, a set of practical building blocks that establish best practice and how we want to consistently run our businesses. They are:
· Operating Excellence - we continually invest in our bakeries to improve our efficiency and customer satisfaction
· Sustainable Approach - we optimise our use of resources and focus on reducing waste throughout our supply chain and in our bakeries
· Quality and Innovations - our innovative, high-quality bakery products reflect changing customer needs and anticipate key market trends
· Cost Effectiveness - we maintain strict cost controls without compromising quality, streamlining our processes from sourcing to delivery
· Growth With Our Partners - through long-term relationships with our customers and suppliers, and an understanding of their needs, we can all enjoy profitable growth
· People Who Care - we invest in our people, who take personal pride in their contribution to our success, and are strong advocates of our business and products
I am pleased to report they are now a common framework used across Finsbury to translate our group strategy into action. This is thanks in large part to the investment we have made in our IT infrastructure, making it easier to introduce group-wide information which facilitates improved collaboration for improvement initiatives and leveraging scale benefits across the Group.
One of these initiatives within Operating Excellence is our Process Blueprint project which is now active in all Finsbury bakeries. The project is designed to establish, embed, and optimise knowledge of all our processes while encouraging collaboration and exchange of ideas to help us achieve our goal of making fantastic and consistently high-quality products in as efficient a manner as possible.
With the systems, resources and knowledge base we now have in the Group, our provision of management information is much improved, granting us greater optionality over, for example, buying materials and services on a Group basis rather than by site at a local level or optimising our group-wide supply chain distribution efficiency and agility.
Until recently, we have been mainly focused on significant capital investment - whether that be in IT or physical capacity increases across our sites. Now, with that phase of our investment programme largely complete, our efforts have shifted to filling that capacity and further optimising our operations.
In isolation these are small examples but they are indicative of the direction of travel of the business and its evolution into a more progressive, expert organisation. A number of strategic initiatives have already been introduced and we continue to see further productivity and efficiency gains as a real long-term opportunity for us.
Investing in our people
Within the People Who Care principle, we continued to make good progress against our People Strategy during the period with a focus on improving employee engagement. One example of this is the group-wide sentiment survey we ran to gather feedback from staff regarding our handling of the coronavirus crisis covering areas such as health and safety, demonstrating care, communication and leadership. The response was positive across all areas and sites, while also providing valuable insight to inform initiatives we are now actively engaging with local teams to action.
Communication is a key driver of engagement and this has been transformed by the rollout of Workplace by Facebook as our primary group-wide communication tool. Workplace has been invaluable during the pandemic, enabling us to communicate and operate effectively remotely, whilst also enabling us to remain connected and drive business performance.
During the period, we continued to embed the Talent Management process, enabling us to identify, retain and develop existing talent, create a pipeline for future talent, and identify capability gaps aligned to the business strategy. We also ran our third graduate recruitment campaign specifically targeted at bringing entry level finance talent into the business, and are continuing with the business-wide Engineering Apprenticeship Programme to address what we know to be a future national and industry shortfall in engineering talent.
Committed to ensuring our bakeries are sustainable
We are committed to a sustainable approach throughout our supply chain and in our bakeries and have implemented sustainability metrics and goals embedded within all our business strategies.
One example of the tangible impact that this approach is having is our focus on waste reduction which, at one of our sites, has resulted in a 25% year-on-year reduction in waste but it is delivering significant benefits across the whole Group. We have engaged with specialist group wide providers in waste management to drive our zero waste to landfill target across all sites by the end of 2020 and are working to identify further opportunities to reduce waste at source.
As part of our work to reduce our energy consumption, we have successfully trialled localised energy monitoring which resulted in a 10% reduction of energy. This initiative is now being rolled out across the business with all key assets in all bakeries implementing localised energy monitoring to enable measurement of key energy reduction projects. Alongside this, we continue to drive conversion to LED lighting across all of the individual group bakeries, with around 60% of the total already completed.
Whilst almost all our plastic packaging is recyclable with almost 80% of it being readily recyclable in the UK, we are working to ensure all plastics are recyclable.
Continued product innovation to meet consumer needs
Notwithstanding the demand shifts in recent months, key trends of health and wellbeing, and ethical and environmental choices remain a driving force with consumers.
Responding to consumer demand has always put us at the forefront in our categories and our teams have launched a number of innovative and appealing lines in the period. These include plant based, vegan friendly whole cakes and celebration cakes, launched with the BOSH! brand. Having identified nut free as an important concern for shoppers hosting family and party occasions in particular, we have invested significantly in our Celebration Cake bakery in Hamilton over the last year to turn it into a fully nut free site, a first in the cake industry. We have since launched a range of character licensed based products, all clearly marked with our unique Nut Free logo on pack. The range includes some of our most popular licenses including Disney's Frozen, Spiderman, Harry Potter, Batman and Peppa Pig.
We are committed to growing our licensed brand portfolio and had several successes on that front in the period. We were able to tap into the fast-growing gaming market through signing partnerships with Xbox, Mario and Nerf, and our long-standing relationship with Mars went from strength to strength, with the Galaxy Ripple becoming our bestselling celebration cake in the period further to its launch in April 2019.
Innovation remains at the core of what we do across all our licenses. Our desire to provide consumers with on-trend, exciting and delicious new products drives us and enables us to maintain our market leading position.
In Artisan bread, we continued on our strategic growth journey, with increasing expertise reinforcing our market leadership position. During the period, we carefully invested in additional capacity and state of the art production equipment, driving efficiencies and quality improvements and adding a further 50% capacity. With world class production facilities now in place and a strong innovation pipeline, we anticipate further success in this on-trend growth sector moving forwards.
Current trading and outlook
Against a macro-economic backdrop that continues to be defined by high levels of uncertainty, encouragingly, sales continued to improve month-on-month in the first two months of the new financial year. As the recent tightening of restrictions designed to curtail the spread of the virus have demonstrated, though, it remains difficult to forecast potential bumps in the road and the impact they may have. The trajectory of sales in our foodservice business in particular is sensitive to this type of policy change. While it is hard to say when levels of demand will return to normal in this division - or what normal looks like longer-term - we continue to carefully manage our resources and operations to meet demand levels in an appropriate and sustainable way. Given the ongoing market uncertainty we are unable to provide guidance at this time.
Looking ahead, we will continue to monitor and respond to the pandemic as it evolves, working more closely with our customers and global brand partners than ever before to ensure we anticipate changing demand patterns and manufacture products and ranges that meet changing consumer needs. We have delivered a robust performance in the circumstances to date, and are confident that with the comprehensive optimisation of the business that has taken place in the past few years and the extensive operational improvements that have been introduced and accelerated as a result of the pandemic, we are well-positioned to continue to successfully navigate the challenges we face.
We remain focused on becoming the leading speciality bakery group and, notwithstanding coronavirus-related disruption, we have continued to make good progress towards that goal. There will inevitably be further obstacles to overcome as the pandemic plays out and with Brexit approaching, but there is a sense of cautious optimism in the business, and we are confident that by continuing to manage the business in a disciplined and pragmatic way, we will emerge a stronger, more streamlined and efficient organisation capable of delivering sustainable growth and healthy returns for shareholders.
John Duffy
Chief Executive Officer
18 September 2020
Financial Review
Group revenue for the 52-week period to 27 June 2020 is £306.3 million, 2.8% lower than last year. Following a strong first half performance which saw Group revenues grow 4.7% to £159.4m, performance in the second half was impacted by the outbreak of the Covid-19 pandemic, with sales down 9.8% to £146.9m.
20% of Group revenue is within food service / out of home eating which was largely shut down in response to the pandemic. The reduction in sales to the foodservice / out of home eating starting 23 March is the primary driver behind the reduction in second half Group revenue. Monthly sales since 23 March have improved from being 24% down in April to 15% down in June against the prior year. This reflects the beginning of a recovery in foodservice / Out of Home eating but also reflect growing volumes in our Retail business as consumers adjust to a changed environment. Adjusted operating profit at £14.9 million is down 11.3% on last year. Adjusted operating profit margins are 4.9% (2019: 5.3%), a consequence of Covid-19.
Impairment and other significant and non-recurring items
At the year end we identified a non-cash impairment of Goodwill in Ultrapharm of £7.5 million a consequence of forecasted future earnings that do not support the carrying value. In addition, strategic reorganisation costs on the back of the pandemic of £1.3 million, a value write down in unused bakery assets in Cardiff of £1.2 million and pre-pandemic commissioning costs of our new bakery in Poland of £0.3 million have all been classified as significant and non-recurring. Items identified as significant and non-recurring have been excluded from operating profit in the table below to better reflect the ongoing trading position. Adjusted operating profit is deemed to provide a clearer presentation of the trading performance and sustainable cash generation of the Group.
Dividend
The Company announced the cancellation of the interim dividend on 29 March 2020. The Company has decided not to pay a dividend for the 52 weeks to 27 Jun 2020 given the uncertainty of Covid-19 as well as the additional risks that will be faced in the case of a no-deal Brexit.
The tables below show what the Directors consider to be the trading performance of the Group. The adjusted measures eliminate the impact of significant and non-recurring items and other accounting items that are not deemed to reflect the continuing performance of the Group.
52 week period ended 27 June 2020
| Operating performance |
Significant non-recurring*- Impairment | Significant non-recurring*- other items | Defined benefit pension scheme | Fair value of interest rate swaps/ foreign exchange contracts |
Discounting of deferred consideration | As per Consolidated Statement of Comprehensive Income |
| £000 | £000 | £000 | £000 | £000 | £000 | £000 |
Revenue | 306,348 | - | - | - | - | - | 306,348 |
Cost of sales | (210,881) | - | - | - | - | - | (210,881) |
Gross profit | 95,467 | - | - | - | - | - | 95,467 |
Other costs excluding depreciation & amortisation | (69,219) |
(8,737) | (1,594) | 200 | (73) |
- | (79,423) |
EBITDA | 26,248 | (8,737) | (1,594) | 200 | (73) | - | 16,044 |
Depreciation & amortisation | (11,309) | - | - | - | - | - | (11,309) |
Operating Profit | 14,939 | (8,737) | (1,594) | 200 | (73) | - | 4,735 |
Finance income | 61 | - | - | - | - | - | 61 |
Finance costs | (1,272) | - | - | (256) | (386) | (14) | (1,928) |
Profit before tax | 13,728 | (8,737) | (1,594) | (56) | (459) | (14) | 2,868 |
Taxation | (3,398) | 235 | 303 | 11 | 87 | 1 | (2,761) |
Profit for the year | 10,330 | (8,502) | (1,291) | (45) | (372) | (13) | 107 |
*Refer to Note 4 for further details on significant non-recurring items.
52 week period ended 29 June 2019
| Operating performance |
| Significant non-recurring items |
|
| Defined benefit pension scheme |
| Fair value of interest rate swaps/ foreign exchange contracts |
Discounting of deferred consideration | As per Consolidated Statement of Comprehensive Income |
| £000 |
| £000 |
|
| £000 |
| £000 | £000 | £000 |
Revenue | 315,281 |
| - |
|
| - |
| - | - | 315,281 |
Cost of sales | (219,849) |
| - |
|
| - |
| - | - | (219,849) |
Gross profit | 95,432 |
| - |
|
| - |
| - | - | 95,432 |
Other costs excluding depreciation & amortisation | (69,905) |
| (1,200) |
|
| (162) |
| (178) | - | (71,445) |
EBITDA | 25,527 |
| (1,200) |
|
| (162) |
| (178) | - | 23,987 |
Depreciation & amortisation | (8,694) |
| - |
|
| - |
| - | - | (8,694) |
Operating Profit | 16,833 |
| (1,200) |
|
| (162) |
| (178) | - | 15,293 |
Finance income | 77 |
| - |
|
| - |
| - | - | 77 |
Finance costs | (991) |
| - |
|
| (282) |
| (382) | (139) | (1,794) |
Profit before tax | 15,919 |
| (1,200) |
|
| (444) |
| (560) | (139) | 13,576 |
Taxation | (3,605) |
| 128 |
|
| 75 |
| 95 | 24 | (3,283) |
Profit for the year | 12,314 |
| (1,072) |
|
| (369) |
| (465) | (115) | 10,293 |
Earnings per Share (EPS)
EPS comparatives to the prior year can be distorted by significant non-recurring items and other items highlighted above. The Board is focused on growing adjusted diluted EPS which is calculated by eliminating the impact of the items highlighted above as well as amortisation of intangibles and incorporates the dilutive effect of share options. Adjusted diluted EPS is 7.7p (2019: 9.0p).
| 52 week 2020 | 52 week 2019 |
Basic EPS | (0.6)p | 7.3p |
Adjusted basic EPS | 7.9p | 9.3p |
Diluted** basic EPS | (0.6)p | 7.0p |
Adjusted* diluted** EPS | 7.7p | 9.0p |
*Further details on adjustments can be found in Note 7.
**Diluted EPS takes basic EPS and incorporates the dilutive effect of share options.
Cash Flow
There was a decrease in our working capital of £1.0 million (2019: £5.6 million increase) in the financial year driven by the downturn in trading as a result of the pandemic. Corporation Tax payments made in the financial year totalled £1.8 million (2019: £2.0 million). The payments in the current and prior year took account of the research and development tax relief due to the Group, tax losses being utilised, and a higher tax rate charged on overseas profits. Capital expenditure in the year amounted to £4.7 million (2019: £11.0 million).
Debt and Bank Facilities
The Group's total net debt is £26.5 million (2019: £35.6 million), down £9.1 million from the prior year. Responding to the Covid-19 pandemic, the Board immediately took a number of cash and cost-conserving actions to ensure the business remained on a sound footing to deliver on its longer-term growth ambitions. These included:
·the freezing of all discretionary expenditure and capital investment;
·careful management of cash resources; and
·the suspension of the interim dividend.
In addition to these measures, the Board and Executive team took a 30% salary reduction between April and June whilst other senior executives took a 20% reduction.
Throughout the year which includes the Covid-19 affected final 3 months the Group has remained profitable and has generated cash which has resulted in a reduction in net debt of £9.1m. It has remained comfortably within its credit facility of £55.0 million. Furthermore, the Group has not looked to utilise any of the Government Loan schemes.
The Group recognises the inherent risk from interest rate rises, and uses interest rate swaps to mitigate these risks. The Group has two swaps, one for £20.0 million for five years from 3 July 2017 (fixed) at 0.455% and one for £5.0 million for three years from 28 March 2019 (fixed) at 1.002%. The total balance of swaps at 27 June 2020 is £25.0 million (2019: £25.0 million). The counterparty to these transactions is HSBC Bank Plc.
The effective interest rate for the Group at the year end, taking account of the interest rate swap in place with base rate at 0.10% and LIBOR at 0.691%, was 2.2% (2019: base rate 0.500%and LIBOR 0.501% effective interest rate 2.0%).
Financial Covenants
The Board reviews the Group's cash flow forecasts and key covenants regularly, to ensure it has adequate facilities to cover its trading and banking requirements with an appropriate level of headroom. The forecasts are based on management's best estimates of future trading. As noted earlier, there has been no breach of covenants during the year and the Board do not expect any in the forecast periods.
Interest cover (based on adjusted earnings before interest, tax, depreciation and amortisation - EBITDA) for the 52 weeks to 27 June 2020 was 25.3 (2019: 28.0). Net bank debt to EBITDA (based on adjusted EBITDA) for the year to 27 June 2020 was 1.1 (2019: 1.4).
Taxation
The Group taxation charge for the year was £2.8 million (2019: £3.3 million). The effective rate of tax on profits before significant and non-recurring and other items is 24.8% (2019: 22.6%). You can find further details on the tax charge in Note 6 to the Group's Financial Statements.
Financial and Non-Financial Key Performance Indicators
We monitor a range of financial and non-financial KPIs at site level covering, amongst others, productivity, quality and health and safety.
The Group Board receives a regular overview of all KPIs.
The Strategic Report was approved by the Board of Directors on 18 September 2020 and was signed on its behalf by:
Stephen Boyd
Director
Financial Statements
Consolidated Statement of Comprehensive Income
for the 52 weeks ended 27 June 2020 and 52 weeks ended 29 June 2019
|
|
| 2020 |
| 2019 |
|
| Note | £000 |
| £000 |
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
| 2 | 306,348 |
| 315,281 |
Cost of sales |
|
| (210,881) |
| (219,849) |
Gross profit |
|
| 95,467 |
| 95,432 |
Administrative expenses |
| 3 | (80,401) |
| (78,939) |
Administrative expenses - significant and non-recurring |
| 4 | (10,331) |
| (1,200) |
Operating profit |
|
| 4,735 |
| 15,293 |
Finance income |
| 5 | 61 |
| 77 |
Finance cost |
| 5 | (1,928) |
| (1,794) |
Net finance cost |
|
| (1,867) |
| (1,717) |
Profit before tax |
|
| 2,868 |
| 13,576 |
Taxation |
| 6 | (2,761) |
| (3,283) |
Profit for the financial year |
|
| 107 |
| 10,293 |
|
|
|
|
|
|
Other comprehensive (expense)/income |
|
|
|
|
|
Items that will not be reclassified to profit and loss |
|
|
|
|
|
Remeasurement on defined benefit pension scheme |
|
| (3,806) |
| (332) |
Movement in deferred taxation on pension scheme liability |
|
| 723 |
| 56 |
Other comprehensive expense for the financial year, net of tax |
|
| (3,083) |
| (276) |
Total comprehensive (expense)/income for the financial year |
|
| (2,976) |
| 10,017 |
|
|
|
|
|
|
Profit attributable to: |
|
|
|
|
|
Equity holders of the parent |
|
| (759) |
| 9,287 |
Non-controlling interest |
|
| 866 |
| 1,006 |
Profit for the financial year |
|
| 107 |
| 10,293 |
|
|
|
|
|
|
Total comprehensive income attributable to: |
|
|
|
|
|
Equity holders of the parent |
|
| (3,842) |
| 9,011 |
Non-controlling interest |
|
| 866 |
| 1,006 |
Total comprehensive (expense)/income for the financial year |
|
| (2,976) |
| 10,017 |
|
|
|
|
|
|
Earnings per ordinary share |
|
|
|
|
|
Basic |
| 7 | (0.6) |
| 7.3 |
Diluted |
| 7 | (0.6) |
| 7.0 |
The Notes on pages 17 to 32 form an integral part of these Financial Statements | |||||
Financial Statements
Consolidated Statement of Financial Position
at 27 June 2020 and 29 June 2019
| Note |
|
2020 |
2019 |
|
|
| £000 | £000 |
Non-current assets |
|
|
|
|
Intangibles | 8 |
| 88,626 | 97,664 |
Property, plant and equipment |
|
| 61,736 | 57,009 |
Other financial assets |
|
| - | 28 |
Deferred tax assets |
|
| 4,623 | 3,655 |
|
|
| 154,985 | 158,356 |
Current assets |
|
|
|
|
Inventories |
|
| 14,618 | 14,805 |
Trade and other receivables |
|
| 40,003 | 49,724 |
Cash and cash equivalents |
|
| 10,173 | 12,358 |
Other financial assets - fair value of derivatives |
|
| - | 176 |
|
|
| 64,794 | 77,063 |
Total assets |
|
| 219,779 | 235,419 |
Current liabilities |
|
|
|
|
Other interest-bearing loans and borrowings | 10 |
| (3,191) | (335) |
Trade and other payables |
|
| (48,861) | (55,543) |
Provisions |
|
| (471) | (2,640) |
Other financial liabilities - fair value of derivatives |
|
| (501) | (218) |
Deferred consideration |
|
| (481) | (1,000) |
Current tax liabilities |
|
| (1,375) | (306) |
|
|
| (54,880) | (60,042) |
Non-current liabilities |
|
|
|
|
Other interest-bearing loans and borrowings | 10 |
| (45,113) | (47,390) |
Provisions |
|
| (550) | (3,434) |
Deferred consideration |
|
| (1,357) | (1,824) |
Deferred tax liabilities |
|
| (2,117) | (1,800) |
Pension fund liability |
|
| (15,174) | (11,312) |
|
|
| (64,311) | (65,760) |
Total liabilities |
|
| (119,191) | (125,802) |
|
|
|
|
|
Net assets |
|
| 100,588 | 109,617 |
|
|
|
|
|
Equity attributable to equity holders of the parent |
|
|
|
|
Share capital |
|
| 1,304 | 1,304 |
Share premium account |
|
| 64,956 | 64,956 |
Capital redemption reserve |
|
| 578 | 578 |
Employee share reserve |
|
| (3,378) | (3,616) |
Retained earnings |
|
| 34,918 | 44,207 |
|
|
| 98,378 | 107,429 |
Non-controlling interest |
|
| 2,210 | 2,188 |
Total equity |
|
| 100,588 | 109,617 |
|
|
|
|
|
These Financial Statements were approved by the Board of Directors on 18 September 2020 and were signed on its behalf by:
Stephen Boyd (Director)
Registered Number 00204368
The notes on pages 17 to 32 form an integral part of these Financial Statements
Financial Statements
Consolidated Statement of Changes in Equity
for the 52 weeks ended 27 June 2020 and 29 June 2019
|
|
|
|
|
|
|
|
| ||||||||||
|
| Share Capital | Share premium | Capital redemption reserve | Employee share reserve | Retained Earnings | Non-controlling interest | Total equity |
| |||||||||
|
| £000 | £000 | £000 | £000 | £000 | £000 | £000 |
| |||||||||
|
|
|
|
|
|
|
|
|
| |||||||||
Balance at 30 June 2018 |
| 1,304 | 64,956 | 578 | (3,282) | 38,954 | 2,072 | 104,582 |
| |||||||||
|
|
|
|
|
|
|
|
|
| |||||||||
Profit for the financial year |
| - | - | - | - | 9,287 | 1,006 | 10,293 |
| |||||||||
Other comprehensive (expense)/ income: |
|
|
|
|
|
|
|
|
| |||||||||
Remeasurement on defined benefit pension |
|
- |
- |
- |
- |
(332) |
- |
(332) |
| |||||||||
Deferred tax movement on pension scheme remeasurement |
|
- |
- |
- |
- |
56 |
- |
56 |
| |||||||||
Total other comprehensive expense |
| - | - | - | - | (276) | - | (276) |
| |||||||||
Total comprehensive income for the period |
|
- |
- |
- |
- |
9,011 |
`1,006 |
10,017 |
| |||||||||
|
|
|
|
|
|
|
|
|
| |||||||||
Transactions with owners, recorded directly in equity: |
|
|
|
|
|
|
|
|
| |||||||||
Shares issued from EBT |
| - | - | - | (499) | - | - | (499) |
| |||||||||
Shares issued during the year |
| - | - | - | 165 | (165) | - | - |
| |||||||||
Impact of share-based payments |
| - | - | - | - | 696 | - | 696 |
| |||||||||
Deferred tax on share options |
| - | - | - | - | (256) | - | (256) |
| |||||||||
Foreign exchange translation differences |
|
- |
- |
- |
- |
250 |
- |
250 |
| |||||||||
Dividend paid |
| - | - | - | - | (4,283) | (890) | (5,173) |
| |||||||||
Balance at 29 June 2019 |
| 1,304 | 64,956 | 578 | (3,616) | 44,207 | 2,188 | 109,617 |
| |||||||||
|
|
|
|
|
|
|
|
|
| |||||||||
Balance at 29 June 2019 |
| 1,304 | 64,956 | 578 | (3,616) | 44,207 | 2,188 | 109,617 |
| |||||||||
|
|
|
|
|
|
|
|
|
| |||||||||
Profit for the financial year |
|
|
|
|
|
|
|
|
| |||||||||
Other comprehensive (expense)/ income: |
| - | - | - | - | (759) | 866 | 107 |
| |||||||||
Remeasurement on defined benefit pension |
|
- |
- |
- |
- |
(3,806) |
- |
(3,806) |
| |||||||||
Deferred tax movement on pension scheme remeasurement |
|
- |
- |
- |
- |
723 |
- |
723 |
| |||||||||
Total other comprehensive expense |
|
|
|
|
| (3,083) | - | (3,083) |
| |||||||||
Total comprehensive (expense)/income for the period |
|
|
|
|
|
(3,842) |
866 |
(2,976) |
| |||||||||
|
|
|
|
|
|
|
|
|
| |||||||||
Transactions with owners, recorded directly in equity: |
|
|
|
|
|
|
|
|
| |||||||||
Shares issued from EBT |
| - | - | - | 1,207 | (1,207) | - | - |
| |||||||||
Shares issued during the year |
| - | - | - | (969) | - | - | (969) |
| |||||||||
Impact of share-based payments |
| - | - | - | - | (1,066) | - | (1,066) |
| |||||||||
Deferred tax on share options |
| - | - | - | - | (182) | - | (182) |
| |||||||||
Foreign exchange translation differences |
|
- |
- |
- |
- |
(17) |
- |
(17) |
| |||||||||
Dividend paid |
| - | - | - | - | (2,975) | (844) | (3,819) |
| |||||||||
Balance at 27 June 2020 |
| 1,304 | 64,956 | 578 | (3,378) | 34,918 | 2,210 | 100,588 |
| |||||||||
|
| |||||||||||||||||
The notes on pages 17 to 32 form an integral part of these Financial Statements. | ||||||||||||||||||
| ||||||||||||||||||
Financial Statements
Consolidated Cash Flow Statement
for the 52 weeks ended 27 June 2020 and 29 June 2019
|
|
|
|
| Note | 2020 | 2019 |
|
| £000 | £000 |
Cash flows from operating activities |
|
|
|
Profit for the financial year |
| 107 | 10,293 |
Adjustments for: |
|
|
|
Depreciation | 3 | 7,656 | 7,366 |
Depreciation right of use assets | 3 | 1,919 | - |
Significant non-recurring items | 4 | 1,594 | 1,200 |
Net finance costs | 5 | 1,867 | 1,717 |
Taxation | 6 | 2,761 | 3,283 |
Amortisation of intangibles | 8 | 1,734 | 1,328 |
Impairment of goodwill | 8 | 7,500 | - |
Impairment of fixed assets |
| 1,237 | - |
Change in fair value of foreign exchange contracts |
| 73 | 178 |
Contributions by employer to pension scheme |
| (200) | 162 |
Operating profit before changes in working capital |
| 26,248 | 25,527 |
|
|
|
|
Changes in working capital: |
|
|
|
Decrease/(Increase) in inventories |
| 210 | (62) |
Decrease/(Increase) in trade and other receivables |
| 9,949 | (3,321) |
Decrease in trade and other payables |
| (9,192) | (2,199) |
Cash generated from operations before costs of disposals and acquisitions |
| 27,215 | 19,945 |
|
|
|
|
Costs relating to closure of bakeries and commissioning |
| (1,887) | (3,534) |
Lease payments |
| (3,362) | - |
Interest paid |
| (1,088) | (856) |
Tax paid |
| (1,822) | (2,040) |
Net cash generated from operating activities |
| 19,056 | 13,515 |
|
|
|
|
Cash flows from investing/divesting activities |
|
|
|
Purchase of property, plant and equipment and intangibles |
| (4,703) | (11,016) |
Purchase of companies |
| (1,000) | (16,915) |
Net cash used in investing activities |
| (5,703) | (27,931) |
|
|
|
|
Cash flows from financing activities |
|
|
|
(Repayment)/Drawdown of revolving credit |
| (10,960) | 22,144 |
(Repayment)/Drawdown of asset finance liabilities |
| - | 828 |
Purchase of shares by employee benefit trust |
| (969) | (499) |
Dividend paid to non-controlling interest |
| (844) | (890) |
Dividend paid to shareholders |
| (2,975) | (4,283) |
Net cash generated from / (used in) financing activities |
| (15,748) | 17,300 |
|
|
|
|
Net (decrease)/increase in cash and cash equivalents |
| (2,395) | 2,884 |
Opening cash and cash equivalents |
| 12,358 | 9,363 |
Effect of exchange rate fluctuations on cash held |
| 210 | 111 |
Cash and cash equivalents at end of period |
| 10,173 | 12,358 |
The notes on pages 17 to 32 form an integral part of these Financial Statements. | |||
| |||
Notes to the Consolidated Financial Statements
Presentation of Financial Statements
Basis of Preparation
Background
The financial information on pages 13 to 16 is extracted from the Group's consolidated financial statements for the 52 week period ended 27 June 2020, which were approved by the Board of Directors on 18 September 2020.
The financial information does not constitute statutory accounts within the meaning of sections 434(3) and 435(3) of the Companies Act 2006 or contain sufficient information to comply with the disclosure requirements of International Financial Reporting Standards (IFRS) and related interpretations as adopted for use in the European Union.
The Company's auditors, PricewaterhouseCoopers LLP, have given an unqualified report on the consolidated financial statements for the 52 week period ended 27 June 2020. The auditors' report did not include reference to any matters to which the auditors drew attention without qualifying their report and did not contain any statement under section 498 of the Companies Act 2006. The consolidated financial statements will be filed with the Registrar of Companies, subject to their approval by the Company's shareholders on 21 November 2020 at the Company's Annual General Meeting.
Basis of Accounting
The Group's consolidated financial statements for the year ended 27 June 2020 have been prepared in accordance with International Financial Reporting Standards (IFRS) and related interpretations as adopted for use in the European Union and those parts of the Companies Act 2006 that are applicable to companies reporting under IFRS.
The Directors are satisfied that the Group has adequate resources to continue to operate for a period of not less than 12 months from the date of approval of the financial statements and that there are no material uncertainties around their assessment. Accordingly, the Directors continue to adopt the going concern basis of accounting.
The Group's principal accounting policies have been consistently applied throughout the year and will be set out in the notes to the Group's 2020 Annual Report.
Going Concern and impact of Covid-19
In the current climate where there is uncertainty around the impact of Covid-19, relevant judgements and assumptions have to be made. This will include the impact of Covid-19 on the economy, the extent and duration of social distancing measures on demand and the workforce. The health and safety of our employees is a top priority and UK Government guidelines are being adhered to with regards to social distancing and working remotely. The Group has a resilient supply chain and production network and is working closely with all its major customers to navigate through the challenging trading environment. As a manufacturer of a wide range of baked goods the Covid-19 impact has varied considerably between businesses, there have been significant growth in demand in some areas of retail, reduction of demand in foodservice and we have experienced varying degrees of impact on demand across a range of product areas (in retail and foodservice). Demand recovery is anticipated across businesses at different rates. When considering going concern judgement has to be made as to the extent of disruption and the ongoing challenges. Forecasts have been built on a bottom up basis and stress tested to prepare an approved budget used as a basis for reviewing going concern. Having reviewed the Group's short- and medium-term plans and available financial facilities, the Board has reasonable expectations that the Group has adequate resources to continue in operational existence for the next 12 months and the foreseeable future.
The Group meets its funding requirements through internal cash generation and bank credit facilities, which are committed until February 2023. Committed banking facilities are £55m of which £36.2m was drawn at the year end with a further accordion available of £35m. The Group's forecasts and projections, taking account of reasonably possible changes in trading performance, including the possible effect of the UK's decision to withdraw from the EU, show that the Group will be able to operate comfortably within its current bank facilities. The Group has a relatively conservative level of debt to earnings.
The Board reviews the Group's covenants on a regular basis to ensure that it has adequate facilities to cover its trading and banking requirements with an appropriate level of headroom. The forecasts are based on management's best estimates of future trading. There has been no breach of covenants during the year and none expected during the next 12 months. All covenant tests were passed at the year end.
After making enquiries, the Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Accordingly, the Board continues to adopt the going concern basis in preparing the Financial Statements for both the Group and the parent company. The financial statements have been prepared under the historical cost convention, as modified by the revaluation of derivative financial instruments and pension scheme assets.
Critical Accounting Estimates and Judgements
· Investments (including goodwill and intangibles)
The Group holds goodwill and intangibles and the parent company holds investments in the respective balance sheets. The carrying values are tested for impairment on an annual basis (more frequently if there are indications of impairment due to changes in market environment or changes that may affect the carrying value). There is a risk that an impairment may not be correctly identified.
· Impairment
Detailed impairment models are prepared for each cash generating unit, detailed budgets and strategic forecasts are used as a basis for the modelling. Budgets and forecasts are sense checked during various rounds of internal management reviews. Sensitivities are applied to the discount rates used and the assumptions and results are reviewed by the Audit Committee and audited annually by external auditors. Impairment testing involves significant judgement as to whether the carrying value of each asset can be supported by the net present value of estimated future cash flows derived from such asset using cash flow projections which have been discounted at an appropriate rate. The key areas are:
o Discount rates
o Future revenue and costs
o Long term growth rates
The impact of Covid-19 pandemic has added a further level of complication and challenge due to the uncertainty of economic recovery and social distancing timeframes. Detailed bottom up budgets have been prepared at business level and sensitivities applied, more complex assumptions had to be made on recovery rates of demand adding more uncertainty into modelling than previous years.
Further detail can be found under the significant accounting policy for intangible assets and goodwill and in Note 8.
1. Significant Accounting Policies
New and upcoming standards
The following new standards, new interpretations and amendments to standards and interpretations are applicable for the first time for the financial year ended 27 June 2020.
· IFRS 16 "Leases" (effective 1 January 2019);
· Amendments to IFRS 9 - Financial Instruments on Prepayment Features with Negative Compensation (effective 1 January 2019);
· Amendment IAS 28 "Investments in associates" (effective 1 January 2019);
· Amendments to IAS 19, "Employee benefits' (effective 1 January 2019);
· Annual improvements to IFRS Standards 2015-2017 Cycle (effective 1 January 2019);
With the exception of IFRS 16 "Leases", none of the amendments to the above standards had a material impact on the financial statements.
This is the first full year set of the Group's financial statements in which IFRS 16 has been applied. The Group has adopted IFRS 16 from 30 June 2019 using the modified retrospective approach, comparatives have not been restated. The reclassifications and adjustments from the new leasing rules are therefore recognised in the opening Consolidated Statement of Financial position on 30 June 2019.
On transition the Group recognised a right of use lease asset of £16.3m, being £15.0m created from assets previously treated as operating leases Under IAS 17 and £1.3m relating to amounts transferred into right of use asset category which were previously treated as a finance lease under IAS 17. A lease liability of £15.8m has been recognised on transition, being £15.0m created from leases previously treated as operating leases Under IAS17 and £0.8m relating to amounts transferred into right of use asset category which were previously treated as a finance lease under IAS 17.
The impact on the Group's full year results are detailed in Note 9. The impact of first time adoption of IFRS 16 are summarised as follows;
Performance measures impacted by IFRS 16 | £m |
EBITDA | +£1.8 |
Group operating profit | +£0.1 |
Group profit before taxation | (£0.1) |
Basic EPS | (0.1) |
Net debt as at 27 June 2020 | +£11.8m |
Assets | +£9.4m |
There are a number of new standards, interpretations and amendments to existing standards that are not yet effective and have not been adopted early by the Group. The future introduction of these standards is not expected to have a material impact on the financial statements of the Group.
· Amendments to IFRS 3 - Business Combinations (effective 1 January 2020);
· Amendments to IAS 1 - Presentation of financial statements on classification of liabilities (effective 1 January 2022);
· Amendments to IFRS 9, IAS 39 and IFRS 7 - Interest rate benchmark reform (effective 1 January 2020);
· IFRIC Interpretation 23 Uncertainty over Income Tax Treatments (effective 1 January 2019);
Work will continue in the new financial year to assess the impact of the new standards and interpretations on the Group's Financial Statements.
Leases
The company leases various land and buildings, fork lift trucks and equipment. Rental contracts are typically made for fixed periods of between two months and eighteen years but may have extension options.
Contracts may contain both lease and non-lease components. The company allocates the consideration in the contract to the lease and non-lease components based on their relative stand-alone prices. However, for leases of real estate for which the company is a lessee and for which it has major leases, it has elected not to separate lease and non-lease components and instead accounts for these as a single lease component.
Lease terms are negotiated on an individual basis and contain a wide range of different terms and conditions. The lease agreements do not impose any covenants other than the security interests in the leased assets that are held by the lessor.
Leased assets may not be used as security for borrowing purposes. Until the 2019 financial year, leases of property, plant and equipment were classified as either finance leases or operating leases. From 30 January 2019, leases are recognised as a right of use asset and a corresponding liability at the date at which the leased asset is available for use by the company.
Assets and liabilities arising from a lease are initially measured on a present value basis. Lease liabilities include the net present value of the following lease payments:
• Fixed payments (including in-substance fixed payments), less any lease incentives receivable;
• Variable lease payments that are based on an index or a rate, initially measured using the index or rate as at the commencement date;
• Amounts expected to be payable by the company under residual value guarantees;
• The exercise price of a purchase option if the company is reasonably certain to exercise that option; and
• Payments of penalties for terminating the lease, if the lease term reflects the company exercising that option.
Lease payments to be made under reasonably certain extension options are also included in the measurement of the liability.
The lease payments are discounted using the interest rate implicit in the lease.
If that rate cannot be readily determined, which is generally the case for leases in the company, the lessee's incremental borrowing rate is used, being the rate that the individual lessee would have to pay to borrow the funds necessary to obtain an asset of similar value to the right of use asset in a similar economic environment with similar terms, security and conditions.
The company is exposed to potential future increases in variable lease payments based on an index or rate, which are not included in the lease liability until they take effect. When adjustments to lease payments based on an index or rate take effect, the lease liability is reassessed and adjusted against the right of use asset.
Lease payments are allocated between principal and finance cost. The finance cost is charged to profit or loss over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period.
Right of use assets are measured at cost comprising the following:
• The amount of the initial measurement of lease liability;
• Any lease payments made at or before the commencement date less any lease incentives received;
• Any initial direct costs; and
• Restoration costs.
Right of use assets are generally depreciated over the shorter of the asset's useful life and the lease term on a straight-line basis. If the company is reasonably certain to exercise a purchase option, the right of use asset is depreciated over the
underlying asset's useful life.
Payments associated with short-term leases of equipment and vehicles and all leases of low-value assets are recognised on a straight-line basis as an expense in profit or loss. Short-term leases are leases with a lease term of 12 months or less.
Low-value assets comprise small items of warehouse equipment and office equipment.
As explained in Notes 1 and 9, the company has changed its accounting policy for leases where the company is the lessee to comply with IFRS 16. The impact of the change is explained in Note 9.
IFRS 16 Leases sets out the principle for the recognition, measurement, presentation and disclosure of leases for both lessee and lessor. It eliminates the classification of leases as either operating leases or finance leases and introduces a single lessee accounting model where the lessee is required to recognise assets and liabilities for all material leases that have a term greater than a year.
The Group has adopted IFRS 16 Leases using the modified retrospective approach. Therefore, the cumulative effect of adopting IFRS 16 Leases was recognised as an adjustment to the opening balance of retained earnings at 29 June 2019 with no restatement of comparative information.
On adoption of IFRS 16 Leases, the Group recognised liabilities in relation to leases which had previously been classified as operating leases under the principles of IAS 17 Leases. These liabilities were measured at the present value of the remaining lease payments, discounted using the Groups' incremental borrowing rate as of 29 June 2019. The weighted average incremental borrowing rate applied is 2.21%.
In applying IFRS 16 Leases for the first time, the Group has used the following practical expedients permitted by the standard:
• The use of a single discount rate for portfolios of leases with reasonably similar characteristics.
• Accounting for low value (less than $5,000) and certain leases with a remaining lease term of less than 12 months as at 29 June 2019 on straight line basis as an expense without recognising a right-of-use asset or a lease liability.
• The use of hindsight in determining the lease term where the contract contains options to extend or terminate the lease.
Under IFRS 16 leases excluding low value and those with a remaining term of less than 12 months as at 29 June 2019 are recognised in the opening Consolidated Statement of Financial Position on 30 June 2019. Under IFRS 16 the previous leases charge has been replaced by the depreciation on the right of use asset and interest on the lease liability.
Prior to this change, leases of property, plant and equipment where the company, as lessee, had substantially all the risks and rewards of ownership were classified as finance leases. Finance leases were capitalised at the lease's inception at the fair value of the leased property or, if lower, the present value of the minimum lease payments. The corresponding rental obligations, net of finance charges, were included in creditors: amounts falling due within 12 months and the long-term component was included in creditors: amounts falling due after more than one year.
Each lease payment was allocated between the liability and finance cost. The finance cost was charged to profit or loss over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The property, plant and equipment acquired under finance leases was depreciated over the asset's useful life, or over the shorter of the asset's useful life and the lease term if there was no reasonable certainty that the company would obtain ownership at the end of the lease term.
Leases in which a significant portion of the risks and rewards of ownership were not transferred to the company as lessee were classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) were charged to profit or loss on a straight-line basis over the period of the lease.
Intangible Assets and Goodwill
Goodwill is stated at cost less any accumulated impairment losses. Goodwill is allocated to cash-generating units and is not amortised but is tested annually for impairment. Intangible assets are capitalised separately from goodwill as part of a business combination, only if the fair value can be measured reliably on initial recognition and if the future economic benefits are expected to flow to the Group. All intangible assets recognised are considered to have finite lives and are amortised on a straight-line basis over their estimated useful economic lives that range from 15 to 20 years. Goodwill arises when the fair value of the consideration for the business exceeds the fair value of the net assets acquired. Where the excess is negative (negative goodwill), the amount is taken to retained earnings. Goodwill is capitalised and subject to impairment reviews both annually and where there are indications that the carrying value may not be recoverable.
Impairment
The carrying amounts of the Group's intangible assets and goodwill are reviewed at each period end date to determine whether there is an indication of impairment. Intangible assets and goodwill are considered to be impaired if objective evidence indicates that one or more events have had a negative effect on the estimated future cash flows of that asset. If any such indication exists, the asset's recoverable amount is estimated.
For goodwill and intangible assets that have an indefinite useful life, the recoverable amount is estimated at each period end date.
An impairment loss would be recognised whenever the carrying amount of an intangible asset, goodwill or its cash generating unit exceeds its recoverable amount. Impairment losses are recognised in the Consolidated Statement of Comprehensive Income.
Calculation of Recoverable Amount
The recoverable amount is the greater of the asset's fair value less costs to sell and its value in use. In assessing an assets' value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset.
2. Revenue and Segment Information
Operating segments are identified on the basis of the internal reporting and decision making. The Group's Chief Operating Decision Maker is deemed to be the Board as it is primarily responsible for the allocation of resources to segments and the assessment of performance by segment. The Board assesses profit performance principally through adjusted profit measures consistent with those disclosed in the Annual Report and Accounts.
The UK Bakery segment manufactures and sells bakery products to UK grocery and food service sectors. It comprises six subsidiaries all of which manufacture and supply food products through the channels described above. These subsidiaries have been aggregated into one reportable segment as they share similar economic characteristics. The economic indicators considered are the nature of the products and production process, the type and class of customer, the method of distribution and the regulatory environment.
The Overseas segment procures and sells bakery products to European grocery and food service sectors. It comprises Lightbody Europe and Ultraeuropa. Ultraeuropa has manufacturing facilities in Poland where it manufactures and sells Free From bakery products into the European markets.
The Company acquired Ultrapharm on 3 September 2018, the prior year financial results include those relating to the acquired business in UK Bakery and Overseas.
Revenue | UK Bakery | Overseas | Total Group | ||||
52 weeks to 27 June 2020 and 52 weeks to 29 June 2019. | 2020 £000 | 2019 £000 | 2020 £000 | 2019 £000 | 2020 £000 | 2019 £000 | |
Total | 271,414 | 278,533 | 34,934 | 36,748 | 306,348 | 315,281 | |
Reportable Segments
| 52 weeks to 27 June 2020 £000 Total | 52 weeks to 29 June 2019 £000 Total |
Revenue UK Bakery | 271,414 | 278,533 |
Revenue Overseas | 34,934 | 36,748 |
Total revenue | 306,348 | 315,281 |
|
|
|
Adjusted operating profit UK Bakery | 13,162 | 14,180 |
Adjusted operating profit Overseas | 1,777 | 2,653 |
Total adjusted operating profit | 14,939 | 16,833 |
Significant non-recurring impairment | (8,737) | - |
Significant non-recurring other | (1,594) | (1,200) |
Defined benefit pension scheme | 200 | (162) |
Fair value foreign exchange contracts | (73) | (178) |
Operating profit | 4,735 | 15,293 |
Finance income | 61 | 77 |
Finance expense | (1,928) | (1,794) |
Net finance cost | (1,867) | (1,717) |
Profit before taxation | 2,868 | 13,576 |
Taxation | (2,761) | (3,283) |
Profit for the financial year | 107 | 10,293 |
The Group has three customers (2019: three) which individually account for 10 per cent or more of the Group's total revenue. These customers individually account for 21 per cent, 12 per cent and 10 per cent. In the prior year these same three customers accounted for 20 per cent, 13 per cent and 10 per cent of the revenue in the 52 weeks to 29 June 2019. In addition to the Europe sales disclosed in Reportable Segments, the Group also made sales to European markets through UK-based organisations.
3. Administrative Expenses and Auditors' Remuneration
Included in profit are the following:
| 2020 | 2019 |
| £000 | £000 |
|
|
|
Amortisation of intangibles | 1,734 | 1,328 |
Depreciation of owned tangible assets | 7,656 | 7,072 |
Depreciation on right of use assets | 1,919 | - |
Depreciation on assets under finance leases and hire purchase contracts | - | 294 |
Impairment of fixed assets | 1,237 |
|
Impairment of goodwill | 7,500 | - |
Loss on foreign exchange | 213 | 166 |
Variable lease payments | 193 | - |
Expenses relating to short term and low value leases | 164 | - |
Hire of plant and machinery - operating leases | - | 765 |
Hire of other assets - operating leases | - | 806 |
Movement on fair value of foreign exchange contracts | 73 | 178 |
Research and development | 2,244 | 1,987 |
Share option charges | 145 | 697 |
|
|
|
Depreciation recognised on right of use assets in the year in relation to leases previously recognised as operating leases under IAS 17 upon adoption of IFRS 16 is £1,734,000. The remainder of the deprecation on right of use assets relates to assets previously treated as finance leases under IAS 17. | ||
Auditors' remuneration:
| 2020 | 2019 |
| £000 | £000 |
|
|
|
Audit of these Financial Statements | 50 | 60 |
Audit of the Financial Statements of subsidiaries of the Company | 118 | 133 |
Other services | 20 | - |
|
|
|
Other services relate to assistance with non-UK VAT registrations. | ||
4. Significant Non-Recurring Items
The Group presents certain items as significant and non-recurring. These relates to items which, in management's judgement, need to be disclosed by virtue of their size or incidence in order to obtain a more meaningful understanding of the financial information. They reflect costs that will not be repeated and therefore do not reflect ongoing trading of business which is most meaningful to users.
Included within significant non-recurring items shown in the table on page 10 of the Financial Review section are the following costs:
| 2020 | 2019 |
| £000 | £000 |
Commissioning costs | 257 | - |
Impairment of goodwill (Refer to Note 8) | 7,500 | - |
Impairment of fixed assets | 1,237 | - |
Other reorganisation people costs | 1,337 | 823 |
Site closures - property, leases and contract costs | - | (152) |
Acquisition related costs | - | 529 |
| 10,331 | 1,200 |
Commissioning costs relate to the associated commissioning costs of a new bakery in Poland have been classed as significant non-recurring due to their nature. Reorganisation costs relate to the strategic reorganisation of the Group following the varying degrees of impact of the pandemic on the businesses within the Group.
There has been an impairment of the goodwill relating to the Ultrapharm acquisition, which based on current performance was deemed to be overvalued, Note 8 provides further detail.
There has been a fixed asset impairment of assets held at the Cardiff site, this reflects the specific writing down of an asset where there were no firm plans to utilise the asset given the outlook of no sales and a market recovering from a global pandemic.
5. Finance Income and Cost
Recognised in the Consolidated Statement of Comprehensive Income
| 2020 | 2019 |
| £000 | £000 |
Finance income |
|
|
Interest on interest rate swap agreements | 44 | 60 |
Bank interest receivable | 17 | 17 |
Total finance income | 61 | 77 |
Finance cost |
|
|
Interest on net pension position | (256) | (282) |
Change in fair value of interest rate swaps | (386) | (382) |
Bank interest payable | (999) | (991) |
Unwinding of discount on deferred consideration | (14) | (139) |
Lease liabilities | (273) | - |
Total finance cost | (1,928) | (1,794) |
|
|
|
6. Taxation
Recognised in the Consolidated Statement of Comprehensive Income
|
| 2020 £000 | 2019 £000 |
Current tax |
|
|
|
Current year |
| 2,762 | 2,969 |
Adjustments for prior years |
| 6 | 194 |
Total current tax |
| 2,768 | 3,163 |
|
|
|
|
Deferred tax |
|
|
|
Origination and reversal of temporary differences |
| 130 | 136 |
Rate change |
| (222) | - |
Adjustments for prior years |
| 85 | (16) |
Total deferred tax |
| (7) | 120 |
Total tax expense |
| 2,761 | 3,283 |
Reconciliation of effective tax rate
The weighted average hybrid rate of UK, Polish and French tax is 22.6% (2019: 21.4%). The tax assessed for the period is higher (2019: higher) than the hybrid rate of UK and French tax. The UK corporation tax rate for the period is 19.0% (2019: 19.0 %). The differences are explained below:
| 2020 | 2019 |
| £000 | £000 |
Profit before taxation | 2,868 | 13,576 |
Non deductible intangible impairment | 7,500 | - |
| 10,368 | 13,576 |
|
|
|
Tax using the UK corporation tax rate of 19.00%, (2019: 19.00%) | 1,970 | 2,579 |
|
|
|
Overseas profits charged at different taxation rate | 439 | 481 |
Non-deductible expenses and timing differences | 479 | 195 |
Restatement of opening net deferred tax due to rate change and differences in rates | (218) | (60) |
R&D uplift current year | - | (90) |
Adjustments to tax charge in respect of prior periods | 91 | 178 |
Total tax expense | 2,761 | 3,283 |
The UK corporation tax rate reductions from 20% to 19% from 1 April 2017 and 18% from 1 April 2020 were substantively enacted on 26 October 2015. An additional reduction to 17% from 1 April 2020 was substantively enacted on 6 September 2016. This was reversed in March 2020 with the UK corporation tax remaining at 19%. The deferred tax assets and liabilities at 27 June 2020 have been calculated based on a rate of 19%.
The adjustment of £91,000 for prior year includes ineligible capital spends offset and disallowable expenses being different to the assumed levels at the time of preparation of the Annual Report.
The Company has an unrecognised deferred tax asset of £182,000 (2019: £163,000) relating to capital losses carried forward. This asset has not been recognised in the financial statements as it is not expected that suitable gains will arise in the future in order to utilise the underlying capital losses.
7. Earnings Per Ordinary Share
Basic earnings per share for the period is calculated on the basis of profit for the year after tax, divided by the weighted average number of shares in issue being 127,128,000 (2019: 127,511,000).
Basic diluted earnings per share is calculated by adjusting the weighted average number of ordinary shares in issue to assume conversion of all potential dilutive ordinary shares. At 27 June 2020, the diluted weighted average number of shares in issue was 130,820,000, (2019: 131,889,000).
An adjusted earnings per share has been calculated to show the trading performance of the Group. These adjusted earnings per share exclude:
· Reorganisation and other significant non-recurring items
· IFRS 9 'Financial Instruments: Recognition and Measurement' fair value adjustment relating to the Group's interest rate swaps and foreign exchange contracts
· IAS 19 (revised) 'Accounting for retirement benefits' relating to net income
· The taxation effect at the appropriate rate on adjustments
· Amortisation of intangible assets
| 52 weeks to 27 June 2020 | 52 weeks to 29 June 2019
| ||
Profit | £000 | £000 | ||
(Loss)/profit attributable to equity holders of Company (basic) | (759) | 9,287 | ||
Significant non-recurring and other items | 10,223 | 2,021 | ||
Intangible amortisation net of deferred tax | 574 | 564 | ||
Numerator for adjusted earnings per share calculation (adjusted basic) |
10,038 |
11,872 | ||
|
|
|
|
|
Shares | Basic | Diluted | Basic | Diluted |
Weighted average number of ordinary shares in issue during the period | '000 127,128 | '000 127,128 | '000 127,511 | '000 127,511 |
Dilutive effect of share options | - | 3,692 | - | 4,378 |
| 127,128 | 130,820 | 127,511 | 131,889 |
|
|
|
|
|
Earnings per share (pence per share) |
|
|
|
|
Basic and diluted | (0.6) | (0.6) | 7.3 | 7.0 |
Adjusted basic and adjusted diluted | 7.9 | 7.7 | 9.3 | 9.0 |
Significant non-recurring and other items net of taxation are tabled in the Strategic Report on page 10 and comprise: impairment of goodwill and fixed assets £8,502,000, (2019: nil), significant non-recurring charges £1,291,000 (2019: £1,072,000), defined benefit pension scheme charge £45,000 (2019: charge £369,000), fair value of interest rate swaps, foreign exchange contracts charge £372,000 (2019: £465,000 charge) and the unwinding of deferred consideration discounting charge £13,000 (2019: charge £115,000).
8. Intangibles
Intangible assets comprise customer relationships, brands and goodwill.
| Goodwill | Business systems | Brands and licences | Customer relationships | Total |
| £000 | £000 | £000 | £000 | £000 |
Cost at 30 June 2018 | 73,458 | 7,569 | 3,683 | 5,909 | 90,619 |
Acquired | 11,546 | - | - | 1,721 | 13,267 |
Additions | - | 2,412 | - | - | 2,412 |
Cost at 29 June 2019 | 85,004 | 9,981 | 3,683 | 7,630 | 106,298 |
Additions | - | 196 | - | - | 196 |
Cost at 27 June 2020 | 85,004 | 10,177 | 3,683 | 7,630 | 106,494 |
|
|
|
|
|
|
Accumulated amortisation at 30 June 2018 | (4,290) | (178) | (1,359) | (1,479) | (7,306) |
Charge for the year | - | (648) | (143) | (537) | (1,328) |
Accumulated amortisation at 29 June 2019 | (4,290) | (826) | (1,502) | (2,016) | (8,634) |
Charge for the year | - | (1,025) | (143) | (566) | (1,734) |
Impairment | (7,500) | - | - | - | (7,500) |
Accumulated amortisation at 27 June 2020 | (11,790) | (1,851) | (1,645) | (2,582) | (17,868) |
|
|
|
|
|
|
Net book value at 30 June 2018 | 69,168 | 7,391 | 2,324 | 4,430 | 83,313 |
Net book value at 29 June 2019 | 80,714 | 9,155 | 2,181 | 5,614 | 97,664 |
Net book value at 27 June 2020 | 73,214 | 8,326 | 2,038 | 5,048 | 88,626 |
|
|
|
|
|
|
The customer relationships recognised in the opening costs were purchased as part of the Ultrapharm acquisition in September 2018 and the acquisition of Fletchers Group of Bakeries in October 2014. They are considered to have finite useful lives and are amortised on a straight-line basis over their estimated useful lives of twenty years for brands and between ten and fifteen years for customer relationships. The intangibles were valued using an income approach, using multi-period excess earnings method for customer relationships and Relief from Royalty Method for brand valuation. The amortisation of intangibles has been charged to administrative expenses in the Consolidated Statement of Comprehensive Income. The business systems are considered to have finite useful lives and are amortised on a straight-line basis over their estimated useful lives of ten years.
Goodwill has arisen on acquisitions and reflects the future economic benefits arising from assets that are not capable of being identified individually and recognised as separate assets. The goodwill reflects the anticipated profitability and synergistic benefits arising from the enlarged Group structure. The goodwill is the balance of the total consideration less fair value of assets acquired and identified. The carrying value of the goodwill is reviewed annually for impairment. The carrying value of all goodwill has been assessed during the year.
8. Intangibles (continued)
The Group tests goodwill for impairment on an annual basis, or more frequently if there are indications that the goodwill may be impaired. The recoverable amounts of the cash generating units are determined from value in use calculations. The key assumptions for the value in use calculations are the discount and growth rates used for future cash flows and the anticipated future changes in revenue, direct costs and indirect costs. The assumptions used reflect the past experience of management and future expectations.
There have been major disruptions to markets since March 2020 as a result of the impact of the Covid-19 pandemic. Post Covid-19 consumer spending behaviour and lifestyle choices are an unknown. With knowledge and experience since lock-down a bottom up full year 2021 budget and strategic forecast to June 2023 has been compiled.
The forecasts have taken in consideration the following key factors:
1. Covid-19 has had an impact on markets, focus is on a rebuild of the business to a 'new normal' with difficulty in predicting timescale for recovery and the impact of recessionary pressures.
2. Latest market forecast and market research data has been considered when making commercial judgements.
3. Detailed SWOT analysis of all businesses with strategic plan to respond to challenges.
4. Plans to combat inflationary pressures particularly labour costs in UK and Europe.
5. There are ingredient challenges during the lock-down environment, these have been factored into the forecasts.
6. Operating Brilliance Programme will support improved efficiencies and help drive recipe value engineering, plausible improvements have been built in.
7. Leadership teams strengthened to help realise a step change in growth particularly in the free from area.
The forecasts covering a three-year period are based on the detailed financial forecasts challenged and approved by management for the next three years. The cashflows beyond this forecast are extrapolated to perpetuity using a 1.1% (2019: 0.5%) growth rate for all of the CGUs. The starting position has been impacted by Covid-19 and growth we believe is relatively prudent when compared to long term UK GDP, basis, to reflect the uncertainties of forecasting further than three years. Changes in revenue and direct costs in the detailed three year plan are based on past experience and expectations of future changes in the market to the extent that can be anticipated.
The strategic forecast process commenced in November 2019 to review consumer and competitor insight to prepare the foundations for the financial forecasts, this groundwork was completely overtaken by events surrounding the worldwide pandemic. The recent strategic forecasts were prepared as late as possible in the financial year to allow further insights into the post lockdown environment and the journey to recovery. We have been encouraged by the recovery in the final quarter of the year to 27 June 2020 with Revenue trends improving, with April 24% down year on year, May, 19% down and June 14% down.
The revenue growth rate in the strategic forecast combines volume, mix and price of products. An inflation factor has been applied to costs of sales, variable costs and indirect costs and takes into consideration the general rate of inflation, movements in commodities, improvement in efficiencies from capital investment and operations and purchasing initiatives. External market data and trends are considered when predicting growth rates. Compound annual growth rates for revenues for the three year forecast period range from 3.7% to 14.0%, reflecting the recovery from the lower base year and budget year that have been impacted by the Covid-19 pandemic.
A pre-tax discount rate of 9% (2019: 11%) has been used in these calculations. The discount rate uses weighted average cost of capital which reflects the returns on government bonds and an equity risk premium adjusted specifically for Finsbury plus further risk premiums that consider cash generating unit risk. The Group has considered the economic environment and higher level of return expected by equity holders due to the perceived risk in equity markets when selecting the discount rate. The discount rate has decreased by 2% to take account of the removal of a small company risk premium that had been included in the prior year, the spread of investors and liquidity supports the exclusion of this risk premium. The discount rate used for each cash generating unit has been kept constant as the market risk is deemed not to be materially different between the different segments of the bakery sector, nor over time. When considering the Ultrapharm discount rate a further 0.5% has been added for the overseas risk element.
8. Intangibles (continued)
The table below shows the carrying values of goodwill allocated to cash generating units or groups of cash generating units. When calculating the discount rate that would need to be applied for there to be zero headroom, the discounted cashflows were compared against the against carrying amount of goodwill, plant property and equipment and the first time recognition under IFRS 16 of right of use assets for leases which were previously treated as operating leases under IAS 17. The discount rates are shown in the table below:
| Carrying value of goodwill |
| Discount rate at which headroom is nil | |||
|
| |||||
| 2020 £000 |
| 2019 £000 |
| 2020 | 2019 |
| £000 |
| £000 |
| % | % |
Lightbody of Hamilton | 45,698 |
| 45,698 |
| 20.8 | 18.8 |
Fletchers Bakery | 20,118 |
| 20,118 |
| 12.4 | 15.0 |
Ultrapharm* | 4,046 |
| 11,546 |
| *9.5 | - |
Nicholas & Harris | 2,980 |
| 2,980 |
| 51.3 | 45.9 |
Johnstone's Food Service | 372 |
| 372 |
| 92.3 | 83.5 |
| 73,214 |
| 80,714 |
|
|
|
*9.5% with £7.5m impairment taken.
Impairment
An impairment charge has been booked against the Ultrapharm cash generating units. The business has proven more immature than expected and additional resource has been invested into both the UK and Polish businesses. We face commercial issues (in part relating to a small warranty claim) now exacerbated by Covid-19 which have adversely affected cashflows and hence valuation. We believe that the Gluten Free sector remains attractive and that performance will meet our expectations over time. The conclusion is that, based on current performance, the business is overvalued. The strategic forecast revenues and profits have been sensitised and a downside forecast has been considered giving reduced cashflow assumptions, which when compared to the carrying value of assets has indicated an impairment is necessary. A non-cash impairment of £7.5 million has been recognised in the current year's financial results. The downside forecast has been used as a basis for calculating the impairment charge. Revenue in this forecast is expected to grow over the next three years at an annual growth rate of 10%. Each 1% reduction in the annual growth rate over the three year period, compared to forecast, would have an impact of £260,000 on the impairment charge.
The discount rate at which the headroom is nil for Fletchers Bakery is 12.4%. There are key strategies in place in order to improve the performance of Fletchers. New opportunities are in the later stages of customer negotiations for new products into existing customers. An uplift is expected at Easter which was severely disrupted in 2020 by the pandemic. There are also further opportunities in the new product development pipeline that are expected to be realised in the short term. Sensitivities have been carried out to exclude any growth, which, after returning to pre- Covid-19 level of sales, demonstrates that headroom still exists. It has been concluded that that there no impairment was necessary on the carrying value of goodwill relating to the Fletchers Bakery at 27 June 2020.
Sensitivity analyses have been carried out by the Directors on the carrying value of all remaining goodwill using pre-tax discount rates up to 12.5% which would not result in an impairment of any cash generating units.
Further sensitivity analysis has been carried out using a range of factors such as growth rate and cost increases. These include:
· If future growth rate assumption of 1.0% was replaced with zero growth rate
· If future growth rate assumption of 1.0% was replaced with a decline of 1.0%
There are many uncertainties surrounding the recovery, consumer response, retailer dynamics and inflationary impact. Immediate response has been a series of cost saving initiatives and the acceleration of operational improvement plans, the strategic responses have been around restructuring capacity, development of supply chain systems to accelerate leveraging group scale and driving growth agenda with customers. Where we have identified market and product challenges that will lead to unacceptable recovery timescales, we have taken the decision to recognise a non-cash impairment.
In addition to the Covid-19 priorities, the Group has a cross-functional team which has prepared a number of strategies to minimise the impact of Brexit. We buy some commodities from Europe. Any tariffs on trade will therefore have a bearing on the Group. We have contingency planning in place, looking at alternative UK sources of products. Higher logistics and administration costs may result from border delays and could necessitate higher stock levels. We are developing labour strategies to retain and develop existing workers, attract and hire new workers and reduce labour, while boosting productivity with our capital investment programme. We believe we have strategies that would minimise the impact and the directors are satisfied with the carrying value of the remaining cash generating units.
9. Leases
This is the first full year set of the Group's financial statements in which IFRS 16 has been applied. The Group has adopted IFRS 16 from 30 June 2019 using the modified retrospective approach, comparatives have not been restated. The reclassifications and adjustments from the new leasing rules are therefore recognised in the opening Consolidated Statement of Financial Position on 30 June 2019. Under IFRS 16 the previous operating leases charge has been replaced by the depreciation on the right of use asset and interest on the lease liability. The Group leases many assets including land and buildings, vehicles, machinery and equipment.
The impact on the Consolidated Statement of Financial Position as at 27 June 2020 and the Consolidated Statement of Comprehensive Income for the 52 weeks to 27 June 2020 are shown in the tables below:
(i) Amounts recognised in the Consolidated Statement of Financial Position:
Property plant and equipment comprises owned and leased assets that do not meet the definition of investment property.
|
| 27 June 2020 £000 |
Property plant and equipment owned |
| 52,302 |
Right of use assets |
| 9,434 |
|
| 61,736 |
Included within right of use assets in the table above are assets with a net book value of £1,373,000 previously recognised as a Finance lease under IAS 17.
Right of use assets
Adjustment on transition to IFRS 16 |
Property £000 | Plant, equipment and vehicles £000 |
Total £000 |
Assets previously recognised as a finance lease under IAS 17 | - | 1,373 | 1,373 |
Assets previously recognised as an operating lease under IAS 17 | 14,031 | 941 | 14,972 |
Onerous lease transferred as a proxy for impairment on transition | (3,804) | - | (3,804) |
Total adjustments on transition to IFRS 16 | 10,227 | 2,314 | 12,541 |
Lease modifications | (454) | - | (454) |
Reversal of impairment | 454 | - | 454 |
Depreciation charge for the year | (1,368) | (551) | (1,919) |
Balance at 27 June 2020 | 8,859 | 1,763 | 10,622 |
Right of use assets recognised upon adoption of IFRS 16 previously recognised as operating leases under IAS 17 on 30 June 2019 were £11,168,000 (cost £14,972,000 net of impairment of £3,804,000) and £1,373,000 previously recognised as a finance Lease under IAS 17. There were no additions to right of use assets during the year.
Depreciation for the period to 27 June 2020 on right of use assets for leases previously treated as operating leases under IAS 17 is £1,734,000 and a net book value at 27 June 2020 of £9,434,000.
Lease liabilities | At 27 June 2020 £000 | At 30 June 2019 £000 |
Contracted undiscounted minimum lease payments |
|
|
Not later than one year | 3,369 | 3,587 |
Later than one year and not later than five years | 6,658 | 7,606 |
Later than five years | 3,859 | 5,321 |
Total gross payments | 13,886 | 16,514 |
Discounted using the Group's weighted average incremental borrowing rate | 12,495 | 15,709 |
Less Low value leases not recognised as a liability | (22) | (31) |
Less short term and low value leases recognised as an expense on a straight-line basis | (164) | (234) |
Add/Less adjustments as a result of a different treatment of termination options | (14) | 356 |
Lease liability recognised | 12,295 | 15,800 |
Current lease liability | 3,191 | 3,105 |
Non-current lease liability | 9,104 | 12,695 |
Lease liabilities recognised on adoption of IFRS 16 on 30 June 2019 for assets previously treated as operating leases under IAS 17 were £14,972,000 these had a closing value of £11,823,000 at 27 June 2020.
(ii) Amounts recognised in the Consolidated Statement of Comprehensive Income
| 52 weeks ended 27 June 2020 £000 |
Interest on lease liabilities | (273) |
Variable lease payments not included in the measurement of lease liabilities | (193) |
Expenses relating to short-term leases | (164) |
Expenses relating to leases of low-value assets, excluding short term leases of low value assets | (16) |
Consolidated Statement of Comprehensive Income Impact of IFRS 16 in comparison to when IAS 17 applied* | 52 weeks ended 27 June 2020 £000 |
Reduction in lease rentals | 1,840 |
Depreciation on right of use assets | (1,734) |
Impact on the operating profit | 106 |
Lease related interest costs | (247) |
Overall impact on Group profit before tax of IFRS 16 | (141) |
*The table above does not include impact of leases previously recognised as finance leases under IAS 17 as there is no change in accounting treatment of these leases under IFRS 16.
(iii) Amounts recognised in the Consolidated Cash Flow Statement
Cash flow impact | 52 weeks ended 27 June 2020 £000 |
Total cash outflow for lease rentals | 3,362 |
Impact on earnings per share
The impact on earnings per share for the 52 weeks to 27 June 2020 as a result of first time adoption of IFRS 16 is a reduction of (0.1) pence per share.
|
|
|
|
|
10. Other Interest-Bearing Loans and Borrowings
This note provides information about the contractual terms and repayment terms of the Group's interest-bearing loans and borrowings, which are measured at amortised cost, using the effective interest rate method.
2020 Statutory |
Margin | Frequency of Repayments |
Year of maturity |
Facility £000 |
Drawn £000 |
Current £000 | Non-Current £000 | ||
|
|
|
|
|
|
|
| ||
Revolving credit | 1.50%/LIBOR | Varies | 2023 | 55,000 | 36,184 | - | 36,184 | ||
Leases* | Various | Varies | Various |
| 12,295 | 3,191 | 9,104 | ||
Unamortised transaction costs |
|
|
| (175) | - | (175) | |||
|
|
|
|
| 48,304 | 3,191 | 45,113 | ||
|
|
|
|
|
|
|
| ||
Leases* include all leases recognised as lease liabilities under IFRS 16 (see Note 9). Lease liabilities are shown separately in the table below to show total bank debt as defined by our banking facility agreement, which only recognises leases as defined as finance leases under IAS 17 as part of bank debt. | |||||||||
2020 |
Margin | Frequency of Repayments |
Year of maturity |
Facility £000 |
Drawn £000 |
Current £000 | Non-Current £000 | ||
|
|
|
|
|
|
|
| ||
Revolving credit | 1.50%/LIBOR | Varies | 2023 | 55,000 | 36,184 | - | 36,184 | ||
Finance Lease (under IAS 17) | Various | Monthly | 2023 |
| 472 | 247 | 225 | ||
Unamortised transaction costs |
|
|
| (175) | - | (175) | |||
Total bank debt |
|
|
| 36,481 | 247 | 36,234 | |||
Operating leases (under IAS 17) | 2.2% | Varies |
|
| 11,823 | 2,944 | 8,879 | ||
Total debt |
|
|
| 48,304 | 3,191 | 45,113 | |||
|
|
|
|
|
|
|
| ||
|
|
|
|
| |||||
2019 |
Margin | Frequency of Repayments |
Year of maturity |
Facility £000 |
Drawn £000 |
Current £000 | Non-Current £000 | ||
|
|
|
|
|
|
|
| ||
Revolving credit | 1.50%/LIBOR | Varies | 2023 | 55,000 | 47,144 | - | 47,144 | ||
Finance Lease | Various | Monthly | 2023 | 828 | 828 | 335 | 493 | ||
Unamortised transaction costs |
|
|
| (247) | - | (247) | |||
Total bank debt at 29 June 2019 |
|
|
|
| 47,725 | 335 | 47,390 | ||
Operating leases (under IAS 17) at 30 June 2019 on transition to IFRS 16 | 2.2% | Varies |
|
|
14,972 |
2,770 |
12,202 | ||
Total debt at 30 June 2019 on transition to IFRS 16 |
|
|
|
|
62,697 |
3,105 |
59,592 | ||
|
|
|
|
|
|
|
| ||
All of the above loans are denoted in pounds Sterling, with various interest rates and maturity dates. The main purpose of the above facilities is to finance the Group's operations.
As part of the bank borrowing facility the Group needs to meet certain covenants every six months. There were no breaches of covenants during the year. The covenant tests required are net bank debt: EBITDA, interest cover, debt service cover and capital expenditure.
The revolving credit bank facility available for drawdown is £55.0 million plus a further £35.0 million accordion facility (2019: £35.0 million plus a further £55.0 million accordion). At the period end date, the facility utilised was £36.2 million (2019: £47.1 million), giving £18.8 million (2019: £7.9 million) headroom plus a further £35.0 million (2019: £35.0 million) accordion.
11. Analysis of Net Bank Debt
|
|
At year ended 29 June 2019 £000 | Adjustment on transition to |
Cash flow £000 |
|
At year ended 27 June 2020 £000 |
Cash and cash equivalents |
| 12,358 | - | (2,185) |
| 10,173 |
Debt due after one year |
| (47,144) | - | 10,960 |
| (36,184) |
Hire purchase obligations* due within one year |
| (335) | 335 | - |
| - |
Hire purchase obligations* due after one year |
| (493) | 493 | - |
| - |
|
| (35,614) | 828 | 8,775 |
| (26,011) |
Unamortised transaction costs |
| 247 | - | (72) |
| 175 |
Debt net of unamortised costs |
| (35,367) | 828 | 8,703 |
| (25,836) |
In the previous year, the company only recognised lease assets and lease liabilities in relation to leases that were classified as 'finance leases' under IAS 17 Leases. The assets were presented in property, plant and equipment and the liabilities as part of the company's borrowings. Hire purchase obligations* previously recognised as finances Leases under IAS 17 are recognised as lease liabilities under IFRS 16 (see Note 9).
| ||||||
The table below is presented to demonstrate total debt as defined by our banking facility agreement. This excludes the lease liabilities created on transition to IFRS 16 for leases treated as operating leases under IAS 17. | ||||||
Cash and cash equivalents |
| 12,358 | - | (2,185) |
| 10,173 |
Debt due after one year |
| (47,144) | - | 10,960 |
| (36,184) |
Hire purchase obligations due within one year |
| (335) | - | 88 |
| (247) |
Hire purchase obligations due after one year |
| (493) | - | 268 |
| (225) |
Total net bank debt |
| (35,614) | - | 9,131 |
| (26,483) |
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