Chief executive's review
We have successfully adapted our business to the current retail environment. We are working hard to create a strong business to serve the millions of people who buy our products every day
Dear Shareholder,
Northern Foods – a stronger,
better balanced business
Three years ago, management laid out
a clear, simple strategy focussed on the
single key performance indicator (KPI) of
creating ‘above market average rate of
sale products’. The strategy is built on a
foundation of producing great tasting food
from superior insights into recipe science
and food technology, together with our
long standing culinary capabilities.
Today, this strategy is beginning to show results. Northern Foods is now less reliant on any single retailer and has a growing representation with discount retailers and in value products, which now account for around a fifth of our business. This complements our strength in the premium market. Our 2008/09 year end results demonstrate Northern Foods’ ability to continue delivering a resilient performance in challenging economic conditions.
During 2008/09 we overcame £52.3m of inflation. A quarter of the products which we sell in the UK are manufactured in Ireland so we also tackled the appreciation of the Euro head on. This was a further headwind of £5m.
Despite all this we have been able to report:
- sales up 4.6% to £975.2m (underlying revenue7 up 5.0%);
- profit from operations* up 8.9% to £52.7m.
Whilst these results underline our resilience, the management team remains determined to drive further growth from this stronger and more sustainable business.
Northern Foods – many opportunities in the food sector
Food is a good market in which to operate during a recession. Today, total UK food expenditure continues to grow, as it has in previous downturns. Management believes that there are many profitable opportunities available for an innovative manufacturer like Northern Foods.
Over the past few years, the big four retailers have seen relatively similar market share growth. Despite much press comment, absolute changes in their sales are small from year to year; but all are growing. A key plank in each retailer’s strategy is to win more sales from each customer already within their store and to increase their customers’ loyalty. As they seek to build loyalty through greater differentiation in their product offerings, we believe they will focus more on building their own label ranges.
Northern Foods is well positioned to support specific retailers achieve their differentiation goals:
- we have created and supported many of the new food markets over the past 30 years, especially in chilled food; for example chilled ready meals, chilled sandwiches and chilled salads;
- we have a deserved reputation in the industry for being a leader in quality and innovation, which we value and want to build upon;
- we are investing in new initiatives in recipe science and food technology.
In addition, we have two strong brands, with opportunities of their own:
- the Fox’s management team has rebuilt the Fox’s brand and refreshed customer relationships. In 2008/09 we grew brand sales by 10.5% to exit the year with a 52 week value brand share of 9.3% (ACN Scantrack 52 w/e 21/03/09);
- whilst Goodfella’s has been impacted recently by a strong Euro (all our frozen pizza is made in Ireland and will be again this year), we are working on restaging our brand and manufacturing base.
Northern Foods – working hard to capitalise upon new opportunities
We have key initiatives in hand and investment opportunities are anticipated to materialise as the recession ends.
We are in the detailed planning stages of several important projects:
- our investment in a new facility, together with DHL, will deliver on-board catering to British Airways; this investment offers British Airways better quality food at substantially lower costs than incumbent suppliers;
- we are evaluating a ‘state of the art’ biscuit facility, which offers good cost saving potential compared to our two existing facilities at Batley and Uttoxeter;
- it is our intention, in due course, to re-open our Fenland site with a number of next generation technologies.
Although acquisitions are not essential to our strategy, we are alert to opportunities. We believe further opportunities may begin to crystallise as the full extent of the recession become clear. A number of food companies, historically funded by cheap debt, are in a weak position. The credit crunch will expose the poor profitability of the private label UK food manufacturing base over the next five years (branded manufacturers have always made strong returns, and continue to do so).
We believe that the current changes in the economic environment have yet to be fully understood. Your management team remains cautious for 2009/10. We do not want to undermine our strong industry position by moving too quickly. We intend to restart investment when we see the economy recover and when we have greater clarity on financial markets.
Northern Foods – preparing for investment
Management continues to strengthen the business, generating cash and ensuring that we operate from a position of financial strength:
- in 2008/09 we generated £35.4m of free cash flow8 before restructuring, which covers our dividend payment of £20.7m at 4.50p per share 1.7 times;
- we have secured a new revolving credit facility with completion of a new £250m Forward Start banking facility through to July 2012, which replaces the existing £460m facility in July 2010. Effective April 2009, the current £460m facility was reduced to £305m. This new facility positions us well in these uncertain times;
- we continue to manage our pension schemes. In consultation with employees, we have ended our Defined benefit schemes for existing employees in the leadership population, moving to a Defined contribution scheme. In parallel we are working to reduce the volatility of historic liabilities.
We continue to invest in talent, hiring more senior management with global FMCG experience as well as investing in our own. Today our senior teams are well balanced, with about a third being new hires over the last two years.
Above all, we continue to invest in the fundamentals of what we do – ‘making great tasting food that people want to buy, again and again...and again’. We have created a new role of Chief Scientist, and have redefined roles to focus on innovation through science and technology. Our initial progress in this area has already been noted with interest by our customers, who know that our goal is simply to continue giving them the highest rate of sale products in the market place.
Looking ahead
Northern Foods is a stronger, better balanced business today than it was three years ago, as we continue to strengthen our position within the UK food industry. We are investing in the business to ensure that it can capitalise upon the new opportunities in the food sector which are emerging in these turbulent times.
Your management team, indeed everyone at Northern Foods, is excited about the opportunities that are developing. We are all working hard to create a strong business to serve the millions of people who buy our products every day – the definitive sign of quality and value for money.
Stefan Barden
Chief Executive
27 May 2009
+4.6%
sales up 4.6% to £975.2m (underlying sales up 5.0%)
£52.7m
profit from operations* up 8.9% to £52.7m
Our strategy is built on a foundation of producing great tasting food from superior insights into recipe science and food technology, coupled with our long standing culinary capabilities
Northern Foods is a stronger, better balanced business today than it was three years ago