Northern plc Foods | Annual report 2007/08 Annual Making great tasting food Northern Foods plc 2180 Century Way Thorpe Park Leeds LS15 8ZB Tel: 0113 390 0110 Annual report 2007/08 Fax: 0113 390 0211 www.northernfoods.com Contents 56 Consolidated income statement 101 Company cash flow statement IFC Financial and operating highlights 57 Consolidated balance sheet Company statement of recognised 02 Chairman’s statement 58 Consolidated cash flow statement income and expense 04 Chief executive’s report 59 Reconciliation of net cash flow Company statement of changes 08 Performance review to movements in net debt in equity 26 Corporate social responsibility report Consolidated statement of 102 Notes to the Company financial 32 Board of directors and recognised income and expense statements company secretary Consolidated statement of 112 Five year record 33 Directors’ report changes in equity 113 Shareholder analysis 36 Corporate governance report 60 Notes to the consolidated financial 114 Financial calendar 42 Directors’ remuneration report statements Company information 54 Statement of directors’ responsibilities 99 Independent auditors’ report – Company 115 Investor information 55 Independent auditors’ report – Group 100 Company balance sheet 116 Principal operations Financial highlights: > Continuing profit before taxation* up 25.3% at £50.1m (2006/07: £40.0m) > Profit for the period £34.5m (2006/07: loss £22.5m) > Adjusted EPS1 20.9% ahead at 7.88p (2006/07: 6.52p) > Strong cash management continues to drive low net debt2 at £200.2m (2006/07: £174.2m) > Robust balance sheet – continuation of share buy-back programme in 2008/09 > Proposed dividend up 5.9% at 4.50p (2006/07: 4.25p) £m 2007/08 2006/07 Continuing operations Revenue* 931.9 888.5 Operating margin* 5.2% 5.1% Profit from operations* 48.4 45.7 Profit before taxation* 50.1 40.0 Return on invested capital* (ROIC3) 11.0% 10.2% Adjusted earnings per share (EPS) 7.88p 6.52p Group Profit before taxation and restructuring items 50.1 41.3 Free cash flow4 39.0 83.0 Basic EPS 7.08p (4.60p) Dividend per share (proposed) 4.50p 4.25p Designed and produced by 35 Communications Food photography: David Loftus * An asterisk denotes results for continuing operations (except where otherwise stated) and profit is stated before restructuring items. ‘Continuing’ People and location photography: Igor Emmerich and Philip Gatward operations exclude businesses which were sold (‘discontinued’) in 2006/07. ‘Restructuring items’ which relate to significant restructuring events and the impact of the Fletchers fire in the 52 weeks ended 31 March 2007 are presented as a separate ‘Restructuring items’ column within their relevant We would like to thank our employees at the following sites for their Consolidated income statement category. Presentation of these items in a separate column helps to provide a better indication of the Group’s underlying assistance in the photography featured within this report: Fox’s Biscuits (Batley), business performance. ‘Restructuring items’ include costs or income associated with the restructuring of businesses, gains or losses on the disposal Gunstones Bakery, Northern Foods Technical Services, Pennine Foods, of businesses and assets and financial instrument gains and impairments arising from the Group’s restructuring activities Solway Foods (Corby), The Pizza Factory and Thorpe Park. 1 Adjusted earnings per share (EPS) is basic EPS for continuing operations before restructuring items and is reconciled to earnings per share in the financial statements Printed at St Ives Westerham Press Ltd, ISO14001 and CarbonNeutral® 2 Net debt is defined as total borrowings (including both short and long term bank loans, bonds, loan notes and finance leases) less cash and cash equivalents and short term investments This report is printed on regency Satin paper. This paper comprises of virgin 3 ROIC is profit from operations before restructuring items for continuing operations divided by a 13 month average invested capital (net equity adjusted wood free pulp from well-managed forests. It is manufactured at a mill that to exclude retirement benefit obligations net of deferred tax, and net debt, together with accumulated goodwill previously written off) has been awarded the ISO14001 certificate for environmental management. 4 Free cash flow is net cash from operating activities, adjusted for special pension contributions, less net capital expenditure, plus interest received. The mill uses pulps that are elemental chlorine free (ECF) and the inks Net capital expenditure is purchase of property, plant and equipment (PPE) less grants received and proceeds from sale of PPE used are all vegetable oil based. This paper is totally recyclable. Good progress Operating in first year of the Group’s three year highlights strategic plan 2007/08 Strong Chilled and Continued focus on Bakery performances; above average market action plan initiated growth and operational to address Frozen simplification, delivering performance revenue and profit improvements Bolt-on acquisition Significant commodity strategy extending cost increases presence in attractive successfully recovered growth markets Northern Foods makes great tasting food. From our 21 sites across the UK and Ireland, we produce outstanding branded and retailer own brand ready meals, sandwiches & salads, pizza, biscuits and puddings Chairman’s statement This has been a year of progress for Northern Foods Anthony Hobson Chairman Overview Our employees The challenging market in which we operate requires the very With a simpler business and a focused best from our colleagues within Northern Foods. I would like to strategy, we have improved profitability, thank all our employees for their commitment and efforts during the year, whether driving product innovation; superior service delivered an increased return on capital delivery to customers; or manufacturing efficiency. This year and maintained a strong balance sheet. we have also welcomed over 240 new colleagues to the Group through acquisition. Having successfully completed our radical disposal programme In May 2008 we announced proposals to mothball our Fenland in 2006/07, we are now growing selectively, but only where this Foods facility in Grantham, following a decision to resign supply will enhance shareholder returns. We completed three bolt-on of products from the site. This has been necessary due to a acquisitions during the year extending our presence in attractive lack of adequate returns and immediate prospects for the facility. growth markets. We continually drive to lower costs, whilst The Board very much regret the potential impact on the site’s targeting investment in developing our business and its talent. loyal workforce and we are currently working to support them Northern Foods is now leaner and fitter, and well placed for the through the consultation process. challenging environment in which we operate. Your Board Performance and dividend The Board has continued to benefit from the skills and depth In 2007/08, we increased our return on invested capital* (ROIC) of experience available to support the new management from 10.2% to 11.0%. This is a fundamental measure of performance team created last year. I thank colleagues for their continued for us, assessing the profit from our business operations commitment and support. There were no changes to the (excluding interest and pension financing) against the capital Board during the year. we have invested in assets and acquisitions. The Board has targeted a two percentage point increase in ROIC over three years, Summary with executive management incentivised against this target. Northern Foods has made good progress in the first year of the Group’s three year strategic plan. Performance has Faced with unprecedented commodity cost increases and improved, driven by innovation, greater efficiency and through volatile trading conditions, it is pleasing to report a 25.3% the elimination of unprofitable business. With a strong balance increase in the Group’s profit before tax* to £50.1m, together sheet, the Group is well placed for the challenging environment with a 20.9% improvement in adjusted earnings per share to in which we operate. 7.88 pence. Profit for the period was £34.5m (2006/07:loss £22.5m). Supported by an embedded culture of cash generation across Anthony Hobson the Group and a conservatively leveraged balance sheet, 27 May 2008 the Board is pleased to recommend a full year dividend of 4.50 pence per share, an increase of nearly 6%, giving a final dividend of 2.95 pence payable in August 2008. Our management disciplines are much improved, reflecting a harder edge and the roll out of a genuine performance culture. We remain true to our heritage of leading our markets in innovation, quality and customer service. These critical features are supported by a focus on efficiency by ensuring a competitive cost base and rigorously ensuring that all of our business is profitable. This approach will ensure that we are successful in the long term. However, I am pleased with the progress already visible across our portfolio. Whilst the Group operating margin* increased only marginally to 5.2%, performance in the Chilled and Bakery divisions improved markedly. A 130 basis point increase in the Chilled operating margin* and a 90 basis point improvement in Bakery demonstrates not only early success, but also the potential for further improvements. The combination of market and currency challenges, which have held back our Frozen performance, are disappointing, but plans are in place to improve this performance over time. +25.3 % +20.9 % +5.9% Profit before taxation* Adjusted EPS Proposed dividend up 25.3% at £50.1m up 20.9% to 7.88p up 5.9% at 4.50p Northern Foods plc | Chairman’s statement 3 Chief executive’s report Our progress is built on a simple strategy, which creates a clear point of difference between Northern Foods and other food companies Stefan Barden Chief Executive Dear Shareholders Our strategy Our progress is built on a simple strategy which creates a I am pleased to report that Northern Foods clear point of difference between Northern Foods and other is delivering steady top and bottom line food companies.