FY15 Half Yearly Results

Solid revenue growth driven by investment in branded growth initiatives.

Subsequent event arising from voluntary frozen berries recalls.

 

The Board of Patties Foods Limited (PFL) today announced the Company’s financial result for the half year ended 31 December 2014.

 

Net Profit After Tax (NPAT) for the half year ended 31 December 2014 (1H15) was $8.2m. A more comparable underlying NPAT for this period is $9.0m (1H14: $8.8m). In line with market guidance, the underlying 1H15 NPAT delivered a 3.0% growth on the previous corresponding period. This compares to the last financial year’s full year underlying NPAT decline of 2.0%.

 

The non-recurring significant after tax item of $792k related to the cost of implementing an organisation restructure.

 

Revenue grew by 9.1% with positive revenue growth in our iconic core brands of FOUR’N

TWENTY, PATTIES, HERBERT ADAMS and NANNA’S. Profit margins were impacted by an important and strategic investment in core brand marketing and input cost increases, primarily meat. These were offset by the early benefits of the organisational restructure, ongoing productivity improvements and a price increase.

 

Commenting on the results, Chairman, Mr Mark Smith said: “The solid revenue growth of 9.1% indicates that our investment in core brands and innovation is gaining good traction. It is noteworthy that this momentum has been supported by effective cost control, operational efficiency improvements and the organisational review to improve business process and reduce costs.”

 

Regarding the frozen fruit recall, the Chairman added, “On the 14th of February 2015 Patties Foods instigated a voluntary recall of Nanna’s frozen mixed berries in the interest of public safety based on the epidemiological advice from the Victorian Department of Health and Human Services, regarding a possible link to the Hepatitis A virus. As a further public safety measure this was followed by a precautionary recall of Creative Gourmet frozen mixed berries and Nanna’s frozen raspberries.”

 

“Patties Foods does have in place a rigorous microbiological testing programme for all its overseas sourced frozen fruit and berry products, as well as our products proudly produced here in Australia, in line with the Australian Food Standards.”

 

“Patties is acting in full cooperation with the State and Federal Health Authorities, the Department of Agriculture and FSANZ. Whilst the source of the Hepatitis A virus is still unconfirmed, further detailed tests are being conducted by Patties Foods and the relevant authorities.”

 

Managing Director and CEO, Mr Steven Chaur said, "Over the past 6 months, the business has been focussed on the 'Restore Basic Conditions' stage of our 3 phase business improvement program. This initial focus is simply to do what we do much better, with a focus on driving step change performance and quality improvements in our bakery operations; retaining, gaining and engaging with our key customers; investing in our icon brands; challenging the business cost structure and executing with excellence all our new product launches in the field.”

 

“Of significance over the first half was our decision to comprehensively reorganise the Patties Foods business structure. Although this strategic organisational review did result in restructuring costs, the key focus was to improve our decision making processes; speed to market on innovation; reduce business complexity; increase productivity and to reduce our fixed cost base."

 

“Despite the pressures of a competitive market, as the market leader, Patties Foods continues to invest in its icon brands, multi-channel service model and quality savoury products through all its customer channels. For example, our 'Paint the Town Yellow' sales activation program and our new Real Chunky product launch have been a key element of returning our iconic FOUR'N TWENTY brand back into growth over the half year.”

 

“During the half, all our core brands have grown in net income and market share versus the prior corresponding period in both the Grocery and the Out of Home channels."

 

“We have experienced significant cost pressures from major commodity inputs such as beef. As a result, we took the decision to forward purchase beef in anticipation of the rapidly increasing Australian export beef demand and therefore, domestic beef prices. Ahead of a planned major Christmas shutdown to install a new oven, the Company also built inventory of its key savoury products. These tactical decisions resulted in a temporary increase in inventory levels and accordingly net debt. This pressure will diminish as this inventory is utilised during 2H15.”

 

Capital Management

 

PFL maintained a solid balance sheet with a net debt to equity ratio of 55.9% at 31 December 2014 (46.8% at 30 June 2014). However this was temporarily impacted by making significant meat inventory purchases to defend against appreciating market prices. Accordingly, the total cash flow generated from operations in 1H15 was -$3.1m and Net Debt increased to $78.7m

(30 June 2014 $62.8m). Furthermore, interest cover increased slightly to 7.2x (FY14: 7.1x).

 

Subsequent Event –Voluntary and Precautionary Frozen Berries Recalls

 

Following notification from the Victorian Health Department on the 13th February 2015 of potential Hepatitis A contamination, on the 14th of February 2015, Patties Foods Limited (PFL) initiated the first of three voluntarily recalls on certain products in the Frozen Berry category.

 

The voluntary and precautionary recalls were in the interest of public safety and PFL has not to date identified a potential link to Hepatitis A through its normal product testing regime. PFL continues to work proactively with the Health Authorities and has initiated a rigorous supplementary testing process specifically around Hepatitis A, with a view to determining whether as a matter of fact its products are the source for the identified cases. Areas of potential financial impact on asset values and future earnings include principally redundant inventory, out of pocket costs and expenses associated with the product recalls and supplementary product testing, loss of future earnings and intangibles impairment. These areas need to be balanced against avenues of potential recovery.

 

At 31st December 2014 there was $1.7m of inventory on hand with best before dates in the range of the recall product, the realisable value of which cannot be currently determined. The net potential financial impact is therefore impossible to ascertain at this early stage, although it is possible that ultimately the impact could prove to be material. Accordingly no provisions have been made in the result at 31 December 2014 as released on 24th February 2015.

 

Further details are explained in the financial reports in Note 11 - Events occurring after the reporting period.

 

Dividend

 

The Board considered declaring an interim dividend. However due to the current uncertainties around the potential but as yet unknown effects resulting from the voluntary frozen berries recall, the Board has prudently determined to defer consideration of an interim dividend until matters and their financial impacts become clearer.

 

Outlook

 

Following the successful launch of new savoury products with Patties Pie Bites; Herbert Adam's Slow Cooked pies and; FOUR'N TWENTY Real Chunky beef pie, during 2H15 we expect to see revenue growth in our savoury business continue through additional new product launches; additional marketing investment in our brands; continued strong field sales activation and; the commencement of new supply contracts to national Out of Home customers.

 

Management continue to focus on cost inflation mitigation plans for the remaining half year through wholesale price increases; reduced overheads; improved bakery production performance and reduced discretionary spending.

 

In addition, the net potential financial impact of the voluntary frozen berries recalls is impossible to ascertain at this early stage, although it is possible that ultimately the impact could prove to be material.

 

The company is diligently working on the tactical management of the issue whilst we establish strategies to recover and ensure that the total business impact is minimised.