Significant Factors Affecting Our Results of Operations
Our consolidated results of operations have been affected by a number of factors, including acquisitions and dispositions, restructuring programs, our business
strategies, currency fluctuations and industry trends.
Acquisitions and Dispositions
Our strategy is to focus on key United Kingdom and continental Western European markets and on profitable branded growth. As a result of these strategies, we have
made a number of acquisitions and dispositions, which have affected our results of operations. The following is a summary of the material acquisitions and dispositions undertaken since
December 30, 2001, apart from the Transactions, see Item 7. B."Major Shareholders and Related Party TransactionsRelated Party Transactions."
-
-
On
August 2, 2004, having received final approval from the Portuguese competition authorities, we completed the acquisition of Triunfo from Nutrinveste SGPS, S.A. As
a result of the acquisition of Triunfo, which was effective from August 1, 2004, we are the leading biscuit manufacturer and marketer in Portugal. Triunfo manufactures some of the most
well-known brands in the Portuguese biscuit sector, including:
Proalimentar, Hookie, Clasicas, Waferland, Corintia
and
Chipmix
. The purchase consideration
paid was €39.2 million.
-
-
On
August 16, 2004 we completed the sale of our Benelux snacks business to Roger & Roger S.A. We received a small consideration for the disposal but incurred
costs of disposal in excess of the consideration. We recorded a net loss of £3.8 million in connection with this disposal. The results of this business through the date of disposal
have been reflected as discontinued operations.
-
-
On
September 20, 2004, having received final approval from the United Kingdom competition authorities, we completed the acquisition of Jacob's from Danone. Jacob's is
a United Kingdom biscuit and snacks manufacturer and marketer with a strong presence in the savory biscuit and crackers and crispbread segments of the United Kingdom biscuit market. The purchase
consideration paid to Danone in respect of the acquisition was £207.7 million. Under the terms of the sale and purchase agreement, the purchase price may be adjusted in the event
actual working capital and net debt varied from pre-agreed levels. Final agreement as to whether or not such an adjustment is required may need to be determined by independent arbitration,
however this is not expected to result in an adjustment of more than 2% of the purchase price. Transaction costs associated with the acquisition were £4.2 million, excluding the
cost of refinancing our senior credit facility. The acquisition of Jacob's has strengthened our brand portfolio, particularly in the savory biscuit segment. Jacob's portfolio of well-known
brands
includes:
Jacob's Cream Crackers, Club, Cheddars, Thai Bites
and
Twiglets
. In addition, Jacob's are
licensed to manufacture and market the Nabisco brand
Ritz
in the United Kingdom and Ireland and the Danone brand
TUC
in the United Kingdom.
Restructuring Programs
We have an ongoing comprehensive cost-savings program, focusing on improved manufacturing efficiency and overhead cost control.
During
2002 we closed our Ede biscuit factory in the Netherlands and subsequently sold the site. We also sold Aguilar, one of our three biscuit manufacturing facilities in Spain,
transferred some of the production undertaken at that facility to our other Spanish biscuit facilities and entered into a manufacturing supply agreement. We also sold a small biscuit factory in
Hatton, Scotland. During 2002, cash expenditure on our restructuring programs was £36.1 million.
During
2003, we announced a proposal to close our biscuit factory at Ashby-de-la-Zouch by the end of 2004 to improve our
factory utilization and enable us to effectively support growth in our priority brands. We transferred approximately one-third of production to other sites and completed the first phase of
the redundancy program. We closed our small dry mix facility in Tunisia, transferring production to our dry mix facility at Montornes in Spain, to reduce organizational complexity. During 2003, cash
expenditure on our restructuring programs was £32.3 million.
During
2004, cash expenditure on our restructuring programs was £37.9 million. During the year, we sold our loss-making Benelux snacks business and
incurred restructuring costs in connection with a rationalization program to facilitate the sale. We are in the process of integrating Triunfo into our Southern Europe business segment and in
particular integrating our existing Portuguese marketing activity with Triunfo and we are in the process of integrating Jacob's into our UK business segment. We also completed the closure of our
biscuit facility at Ashby-de-la-Zouch. We transferred the remaining two-thirds of production to other facilities in the United Kingdom and completed the
redundancy program. Approximately 880 employees were made redundant as a result of the closure and approximately 410 new jobs were created at other sites in connection with the transfer of production.
Over the two-year implementation period, we incurred total restructuring and related capital expenditure of approximately £42.9 million in connection with this closure,
as well as a non-cash charge of £10.8 million for fixed asset impairment.
Business Strategy
Our strategy is to deliver profitable branded growth funded by cost release. A key platform for this strategy is to ensure strong growth from our most important
brands. We have prioritized our markets and identified brands that have a strong current consumer image, financial scale, high margins and growth potential. We have continued to prioritize marketing
support and innovation behind these priority brands to drive higher levels of profitable branded growth. The remaining branded and retailer-branded products will continue to be managed to maximize
their profit contribution.
Currency Fluctuation
Although the majority of our sales are generated in the United Kingdom, our operations are geographically diverse, and in 2004, we had sales in approximately 100
countries and 24 manufacturing facilities located in six countries, which had reduced to 22 facilities in six countries by the end of 2004. As a result, our financial position and results of
operations are subject to both currency transaction risk and currency translation risk.
Currency Transaction Risk
Due to our geographically diversified customer base, we generate a portion of our revenues from sales in currencies other than those in which we regularly operate
and incur expenses. We also have long-term borrowings and related interest payment obligations in currencies other than pounds sterling.
We
hedge against currency transaction risk by matching cash inflows in a particular currency with our costs and interest payments in the same currency. We enter into forward foreign currency contracts
to hedge against our exposure to foreign currency exchange rate fluctuations in, among other things, the purchase of raw materials and in our International Sales business. From time to time, we also
purchase forward foreign currency contracts to hedge against expected net exposure to foreign currency exchange rate fluctuations with particular contractual commitments. As of January 1, 2005,
we had total forward currency contracts equivalent to £67.7 million, with an aggregate unrealized net gain of £0.1 million on those instruments at that date.
Currency Translation Risk
The financial condition and results of operations of our overseas subsidiaries are measured and recorded in the relevant domestic currency of the jurisdiction in
which the subsidiaries are located and then translated into pounds sterling for inclusion in our consolidated financial statements. In 2002 and 2003, the depreciation of the pound sterling against the
euro had a positive impact on our sales and operating profit as reported in pounds sterling. In 2004, the appreciation of the pound sterling against the euro had a negative impact on our sales and
operating profit. We borrow in local currencies, as appropriate, to minimize the impact of currency translation risk from our overseas operations on our balance sheet.
Industry Factors
Our financial condition and results of operation are also influenced by industry trends. In recent years, there has been increased consolidation among the major
grocery retailers in the United Kingdom as well as in continental Western Europe. These consolidations have concentrated sales channels, increased the bargaining power of the major grocery retailers
and intensified price competition among these retailers. As a result, grocery retailers and manufacturers frequently engage in pricing campaigns such as "Everyday Low Price" and "Buy One Get One Free"
in order to promote their products and gain market share. These campaigns have generally lowered our margins by increasing our
short-term promotion costs, but this effect is partially offset by the additional sales made as a result of these campaigns.
Since
2003, it has become more difficult to recover the full effect of cost inflation from retailers in the United Kingdom. Price competition between retailers has also reduced retail
prices for some retailer-branded products, affecting demand for our branded product offering. On some "key-value" branded items, retail prices have been reduced; however, this has reduced
the incentive for retailers to support these products with in-store promotions.
Retailers
focused on offering a reduced choice but lower price range to consumers (discount formats) are continuing to grow at a faster rate in our markets, notably in Northern Europe
and in Ireland. These retailers typically carry few branded goods, with their own-branded products priced at a significant discount to manufacturer-branded products and traditional
supermarket own-label products. This has tended to contribute to the price competition in the grocery retail market.
Consumer
demand for food products has been strongly influenced by the trends toward out-of-home eating and away from the traditional
three-meals-a-day eating pattern. Consumers now demand convenience foods, including biscuit and snack products that offer greater variety, healthier alternatives and more
portable and practical packaging. These trends have added to the significance of convenience and impulse channels. Retailers in these distribution channels generally seek branded products with high
turnover.
Seasonality and Accounting Periods
Due to the nature of our business and the food industry in general, we manage our business and financial accounting on a weekly basis. Our fiscal year consists of
52 calendar weeks and is divided into 13 periods, each consisting of four calendar weeks. Our first fiscal quarter consists of four four-week periods, totaling 16 weeks, and our remaining
three fiscal quarters each consist of three four-week
periods,
totaling 12 weeks. Every five or six years, we lengthen the final period of our fiscal year to five weeks, so that our fourth quarter consists of 13 weeks and our fiscal year consists of 53
weeks. Our 2003 fiscal year consisted of 53 weeks. Our next fiscal year, covering 2005, will consist of 52 weeks and will end on December 31, 2005.
Southern
Europe presents its financial information based on 12 calendar months and a fiscal year ended December 31. Its results are included in our consolidated results on the
following basis:
Southern Europe
quarter ended
|
|
Corresponding
UB fiscal quarter
|
March 31
|
|
Quarter 1 (16 weeks)
|
June 30
|
|
Quarter 2 (12 weeks)
|
September 30
|
|
Quarter 3 (12 weeks)
|
December 31
|
|
Quarter 4 (12/13 weeks)
|
The
difference in reporting periods does not have a material effect on reported results.
Jacob's
currently presents its financial information based on 12 calendar months and a fiscal year ended December 31. Until Jacob's accounting systems are fully integrated into
the UK business, its results will be consolidated on the same basis as the Southern Europe business.
As
a result of the seasonality of our sales and our fiscal accounting conventions, our results of operations for any given fiscal quarter will not necessarily indicate our results for
the full year. For a description of the seasonality of our business, see Item 4.B. "Information on the CompanyBusiness OverviewSeasonality."
The
following table shows our sales per quarter and the average sales per four-week accounting period in 2004, by fiscal quarter:
Continuing Operations
|
|
52-week Period Ended January 1, 2005
|
Sales
|
|
First
Quarter
(Periods 1-4)
(16 weeks)
|
|
Second
Quarter
(Periods 5-7)
(12 weeks)
|
|
Third
Quarter
(Periods 8-10)
(12 weeks)(1)
|
|
Fourth
Quarter
(Periods 11-13)
(12 weeks)(2)
|
|
|
(£ million)
|
UK
|
|
211.6
|
|
162.4
|
|
163.4
|
|
238.1
|
Northern Europe
|
|
51.9
|
|
35.6
|
|
41.0
|
|
41.1
|
Southern Europe
|
|
45.2
|
|
48.1
|
|
53.5
|
|
53.2
|
International Sales
|
|
10.6
|
|
11.2
|
|
23.0
|
|
20.2
|
|
|
|
|
|
|
|
|
|
Total
|
|
319.3
|
|
257.3
|
|
280.9
|
|
352.6
|
|
|
|
|
|
|
|
|
|
Average per 4-week period
|
|
79.8
|
|
85.8
|
|
93.6
|
|
117.5
|
|
|
|
|
|
|
|
|
|
-
(1)
-
Includes
£3.0 million of sales from Triunfo
-
(2)
-
Includes
Jacob's and Triunfo sales. The average per 4-week period in the fourth quarter excluding sales derived from these businesses would have been
£95.1 million.
Results of Operations
The following table summarizes the results of our continuing operations for 2002, 2003 and 2004. Continuing operations include Triunfo from August 1, 2004
and Jacob's from September 20, 2004, the dates of their respective acquisition, but exclude the results of the Benelux snacks business, which was sold on August 16, 2004, and which are
now disclosed as discontinued operations. The financial data
presented
below has been derived from and should be read in conjunction with our consolidated Financial Statements included elsewhere in this annual report.
|
|
2004
|
|
2003
Restated(2)
|
|
2002
Restated(2)
|
|
Continuing Operations
|
|
(£ million)
|
|
(% total
sales)
|
|
(£ million)
|
|
(% total
sales)
|
|
(£ million)
|
|
(% total
sales)
|
|
Sales
|
|
1,210.1
|
|
100.0
|
|
1,170.7
|
|
100.0
|
|
1,154.7
|
|
100.0
|
|
Cost of sales
|
|
(760.4
|
)
|
(62.8
|
)
|
(709.3
|
)
|
(60.6
|
)
|
(688.3
|
)
|
(59.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
449.7
|
|
37.2
|
|
461.4
|
|
39.4
|
|
466.4
|
|
40.4
|
|
Distribution, selling and marketing expenses
|
|
(253.2
|
)
|
(20.9
|
)
|
(248.9
|
)
|
(21.3
|
)
|
(252.8
|
)
|
(21.9
|
)
|
Administrative expenses
|
|
(101.0
|
)
|
(8.4
|
)
|
(96.1
|
)
|
(8.2
|
)
|
(96.5
|
)
|
(8.3
|
)
|
Other income/(expenses)
|
|
8.2
|
|
0.7
|
|
(1.5
|
)
|
(0.1
|
)
|
6.0
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Group operating profit before goodwill amortization and operating exceptional items
|
|
103.7
|
|
8.6
|
|
114.9
|
|
9.8
|
|
123.1
|
|
10.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business profit(1)
|
|
164.0
|
|
13.6
|
|
170.9
|
|
14.6
|
|
175.9
|
|
15.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
(1)
-
Business
profit from continuing operations is the primary measure by which our management monitors our business performance. Business profit from continuing operations represents the
profit or loss from continuing operations before interest, tax, depreciation, amortization, share of profit of joint ventures and exceptional items. Due to our highly leveraged status, we believe that
business profit also provides useful information to our investors and lenders regarding our ability to meet future debt service requirements, our cash-generating capability and our ability
to comply with financial covenants. Business profit by segment and reconciliations of business profit to profit before interest for 2002, 2003 and 2004 are set out in Note 4 of Notes to the
Financial Statements included elsewhere in this annual report.
-
(2)
-
The
amounts for 2002 and 2003 have been restated to reflect the revised definition of turnover (see Note 2 of Notes to the Financial Statements).
Until
2004, our operations were divided into seven segments, reflecting our internal operational management structure. The segments comprised UK Biscuits, Northern Europe, Southern
Europe, UK Snacks, General Export and Central. The seventh segment, Other, comprised our Benelux snacks business which was sold in August 2004 and the results of which have now been classified
as discontinued operations. During 2003 we further reviewed our business operations in the United Kingdom and as a result, at the end of 2003, we created a single UK business unit by merging our UK
Biscuits and the UK Snacks business units. This change to the UK business structure will help us meet our strategic objectives and current and future business needs. In particular, we believe that
this will enable us to meet our growth objectives in the United Kingdom market by working more effectively with key customers and addressing consumer needs in the broader snacking market.
We
now manage through a region-based organizational structure with five segments. These segments comprise:
UK
|
|
Markets and manufactures biscuits, cakes, savory snacks, packaged nuts and crisps in the United Kingdom and markets biscuits, cakes, savory snacks, packaged nuts and crisps in the Republic of Ireland. The results of Jacob's have been included in this
segment from the date of acquisition.
|
Northern Europe
|
|
Markets and manufactures biscuits in France, the Netherlands and Belgium.
|
Southern Europe
|
|
Markets and manufactures biscuits, dry dessert mixes, fruit juice, canned meat and tomato products in Iberia. The results of Triunfo have been included in this segment from the date of acquisition.
|
International Sales
|
|
Exports branded products to approximately 100 countries around the world through third party distributors (formerly General Export).
|
Central
|
|
Includes corporate governance costs, including executive costs, and the costs of our legal, company secretarial, pension administration, tax and treasury functions.
|
The
results for 2002 and 2003 have been restated to reflect the current management structure. UK Biscuits and UK Snacks results have been combined and reported as UK and the results of
Benelux snacks have been excluded from continuing operations.
The following table summarizes the results of our business segments for 2002, 2003 and 2004:
Continuing Operations
|
|
2004
|
|
2003
Restated(2)
|
|
2002
Restated(2)
|
Sales
|
|
(£ million)
|
|
(% total
sales)
|
|
(£ million)
|
|
(% total
sales)
|
|
(£ million)
|
|
(% total
sales)
|
UK.
|
|
775.5
|
|
64.1
|
|
734.4
|
|
62.7
|
|
756.5
|
|
65.5
|
Northern Europe
|
|
169.6
|
|
14.0
|
|
179.8
|
|
15.4
|
|
157.6
|
|
13.6
|
Southern Europe
|
|
200.0
|
|
16.5
|
|
185.6
|
|
15.8
|
|
161.2
|
|
14.0
|
International Sales
|
|
65.0
|
|
5.4
|
|
70.9
|
|
6.1
|
|
79.4
|
|
6.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
1,210.1
|
|
100.0
|
|
1,170.7
|
|
100.0
|
|
1,154.7
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
2003
|
|
2002
|
Business Profit:
|
|
(£ million)
|
|
(% segment
sales
|
|
(£ million)
|
|
(% segment
sales
|
|
(£ million)
|
|
(% segment
sales
|
UK.
|
|
102.5
|
|
13.2
|
|
114.3
|
|
15.6
|
|
134.5
|
|
17.8
|
Northern Europe
|
|
24.0
|
|
14.2
|
|
22.2
|
|
12.3
|
|
12.0
|
|
7.6
|
Southern Europe
|
|
36.6
|
|
18.3
|
|
31.3
|
|
16.9
|
|
23.6
|
|
14.6
|
International Sales
|
|
13.0
|
|
20.0
|
|
15.8
|
|
22.3
|
|
18.0
|
|
22.7
|
Central
|
|
(12.1
|
)
|
|
|
(12.7
|
)
|
|
|
(12.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
164.0
|
|
13.6
|
|
170.9
|
|
14.6
|
|
175.9
|
|
15.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
(1)
-
The
amounts for 2002 and 2003 have been restated to reflect the revised definition of turnover (see Note 2 of Notes to the Financial Statements).
Sales by Geographic Destination
Our sales from continuing operations by geographic destination for 2002, 2003 and 2004 were as follows:
|
|
2004
|
|
2003
Restated(1)
|
|
2002
Restated(1)
|
Sales by Geographic Destination
|
|
(£ million)
|
|
(% total
sales)
|
|
(£ million)
|
|
(% total
sales)
|
|
(£ million)
|
|
(% total
sales)
|
U.K. and Ireland
|
|
774.5
|
|
64.0
|
|
731.5
|
|
62.5
|
|
749.3
|
|
64.9
|
Continental Europe
|
|
380.0
|
|
31.4
|
|
386.1
|
|
33.0
|
|
344.7
|
|
29.9
|
Other
|
|
55.6
|
|
4.6
|
|
53.1
|
|
4.5
|
|
60.7
|
|
5.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
1,210.1
|
|
100.0
|
|
1,170.7
|
|
100.0
|
|
1,154.7
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
(1)
-
The
amounts for 2002 and 2003 have been restated to reflect the revised definition of turnover (see Note 2 of Notes to the Financial Statements).
Turnover
We have revised the definition of turnover to reflect emerging best practice in the United Kingdom provided by Application Note G to Financial Reporting
Standard 5 "Reporting the Substance of Transactions" ("FRS 5"). As a result of this change, certain payments to customers are now reported as a direct deduction from revenue rather than within
distribution, selling and marketing costs.
Our
turnover now reflects sales to third parties after trade discounts and excludes sales-related taxes. Trade discounts include sales incentives, up-front payments and other
non-discretionary payments. We derive our sales from manufacturing and marketing biscuits and savory snacks in the United Kingdom, Ireland, France, the Netherlands and Belgium and from our
export business. We also derive revenues from marketing and manufacturing biscuits, dry dessert mixes, fruit juice, canned meat
and
tomato products in Iberia. Our principal geographic market is the United Kingdom and Ireland, which accounted for approximately 64% of the sales of our continuing operations in 2004. Sales of our
branded products represented approximately 85% of our 2004 sales, with the remainder representing retailer-branded products.
Cost of Sales
Our cost of sales includes the costs of ingredients, packaging materials, direct labor and manufacturing overhead. The major ingredients we use are flour, sugar,
cocoa and chocolate, dairy products, fats and oils, nuts, fruits, potatoes and flavorings. Our labor costs include salaries, hourly wages and other direct costs of employment. Productivity
improvements and restructuring programs have reduced labor costs. Manufacturing overhead includes the cost of utilities, plant supervision and management costs, technical and engineering support
costs, health and safety compliance costs, maintenance and insurance costs, quality control costs and depreciation expenses relating to manufacturing equipment.
Distribution, Selling and Marketing Expenses
Our distribution expenses represent the cost of warehousing our products and transporting them to our distributors and retail customers. Our selling expenses
represent operating costs associated with our sales force, including employee compensation and commissions. Our marketing expenses consist of advertising expenses and marketing overhead costs. Our
distribution, selling and marketing expenses also include costs associated with new product development.
Administrative Expenses
Our administrative expenses consist primarily of costs associated with our finance, human resource, procurement, information technology and general management
functions.
Business Profit
Business profit from continuing operations for the 52 weeks ended January 1, 2005, which includes currency translation losses of
£1.1 million, decreased by £6.9 million, or 4.0%, from £170.9 million in 2003 to £164.0 million. After deducting the
increase attributable to Jacob's and Triunfo, underlying business profit decreased by £23.7 million, or 13.9%, to £147.2 million. The reduction in business profit
in 2004 is principally due to lower business profit in our UK and International Sales businesses partially offset by continued business profit growth in our Northern Europe and Southern Europe
businesses. The reduction in business profit in our UK business was due to cost inflation, increased promotional costs and a change in product and customer mix resulting in proportionally higher sales
of lower-margin products, partially offset by savings generated by our cost-reduction initiatives.
The
business profits from continuing operations for the 52 weeks ended January 1, 2005 would have been £176.9 million if both Triunfo and Jacob's had been
acquired as of the beginning of the financial year. This pro forma result does not include any anticipated cost savings or other effects of integration of Jacob's or Triunfo. Accordingly this amount
is not necessarily indicative of the results that would have occurred if the acquisitions had occurred on the date indicated, or that may result in the future.
Fiscal 2004 (Year ended January 1, 2005) compared to Fiscal 2003 (Year ended January 3, 2004)
Continuing Operations
The following discussion relates to our continuing operations. Amounts for 2003 have been restated to reflect the reclassification of our Benelux snacks business
as discontinued operations and to reflect the revised definition of turnover, see "Results of OperationsTurnover" above.
Turnover
|
|
2004
|
|
2003
|
|
%
|
|
|
|
(£ million)
|
|
|
|
Turnover from continuing operations
|
|
1,210.1
|
|
1,170.7
|
|
3.4
|
|
Less: Triunfo
|
|
(8.6
|
)
|
|
|
|
|
Less: Jacob's
|
|
(61.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted turnover from continuing operations
|
|
1,139.8
|
|
1,170.7
|
|
(2.6
|
)
|
|
|
|
|
|
|
|
|
Turnover
from continuing operations increased from £1,170.7 million in 2003 to £1,210.1 million in 2004, an increase of
£39.4 million, or 3.4%. After deducting the increase attributable to the inclusion of Triunfo and Jacob's, underlying sales decreased by £30.9 million, or 2.6%,
including currency translation losses of £7.5 million.
Our
strategy in relation to our brands is to drive growth in our priority brand sales by providing increased focus and marketing investment behind our priority brands and to manage
non-strategic brands and retailer brands to maximize profitability. Total priority brand sales, excluding Jacob's and Triunfo, grew by 0.2% across our business in 2004, reflecting an
increasingly competitive Western European market.
Sales
of branded products increased by 4.8% due to sales growth in Southern Europe and to the sales from Jacob's and Triunfo that we acquired in 2004. The growth was offset by decreased
sales in our UK and Northern Europe businesses. The decline in our UK business was due to the particularly challenging biscuit and snacks market environments in 2004. Northern Europe's performance has
been adversely impacted by the retailer price war in the Netherlands in the first quarter of 2004 and the impact of the Sarkozy price directive in France, which has forced retail price reductions on
leading brands in all key fast moving consumer goods sectors.
Sales
of our less profitable, non-branded products declined in 2004 by 3.5%. Additional non-branded business in Jacob's was offset by a reduction in the supply of
products to Danone. While the majority of these contract sales have now ceased, we continue to supply a small number of products. Additional details on our turnover are provided within the analysis of
our segmental performance.
Cost of Sales
|
|
2004
|
|
2003
|
|
%
|
|
|
(£ million)
|
|
|
Cost of sales from continuing operations
|
|
760.4
|
|
709.3
|
|
7.2
|
Less: Triunfo
|
|
(5.2
|
)
|
|
|
|
Less: Jacob's
|
|
(37.1
|
)
|
|
|
|
|
|
|
|
|
|
|
Adjusted cost of sales from continuing operations
|
|
718.1
|
|
709.3
|
|
1.2
|
|
|
|
|
|
|
|
Cost
of sales from continuing operations increased from £709.3 million in 2003 to £760.4 million in 2004, an increase of
£51.1 million, or 7.2%. After deducting the increase attributable to the inclusion of Triunfo and Jacob's, underlying cost of sales increased by £8.8 million, or
1.2%. This compared to a sales decrease of £30.9 million, or 2.6%, for the year. This is predominantly due to prime-cost inflation in the UK, which we were not able to
recover through price increases to our customers. Cost savings achieved through the implementation of manufacturing-efficiency projects have partially mitigated the inflation increase. We have also
continued to achieve savings through our "eSourcing initiative," which allows suppliers to tender for contracts on-line. We continue to implement changes in ways of working across our UK
and Northern European supply chains. This requires significant organizational changes that, together with our other manufacturing-efficiency programs, are expected to continue to deliver benefits
throughout 2005.
Gross Profit
|
|
2004
|
|
2003
|
|
%
|
|
|
|
(£ million)
|
|
|
|
Gross profit from continuing operations
|
|
449.7
|
|
461.4
|
|
(2.5
|
)
|
Less: Triunfo
|
|
(3.4
|
)
|
|
|
|
|
Less: Jacob's
|
|
(24.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted gross profit from continuing operations
|
|
421.7
|
|
461.4
|
|
(8.6
|
)
|
|
|
|
|
|
|
|
|
Gross
profit decreased from £461.4 million in 2003 to £449.7 million in 2004, a decrease of £11.7 million, or 2.5%. This equated
to a gross profit margin of 37.2% in 2004 compared to 39.4% in 2003. After deducting the increase attributable to the inclusion of Triunfo and Jacob's, underlying gross profit decreased by
£39.7 million, or 8.6%, and underlying gross profit margin was 37.0%. This reduction in gross profit margin was the result of a decline in gross profit margin in the UK business due
to increased promotional costs, price realignments on certain key products, pressure on trading terms from major retailers, higher sales of lower margin products and prime cost inflation, which was
partially offset by savings generated from our procurement and manufacturing cost savings initiatives.
Distribution, Selling and Marketing Expenses
|
|
2004
|
|
2003
|
|
%
|
|
|
|
(£ million)
|
|
|
|
Distribution, selling and marketing costs from continuing operations
|
|
253.2
|
|
248.9
|
|
1.7
|
|
Less: Triunfo
|
|
(1.6
|
)
|
|
|
|
|
Less: Jacob's
|
|
(8.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted distribution, selling and marketing costs from continuing operations
|
|
243.2
|
|
248.9
|
|
(2.3
|
)
|
|
|
|
|
|
|
|
|
Distribution,
selling and marketing expenses increased from £248.9 million in 2003 to £253.2 million in 2004, an increase of
£4.3 million, or 1.7%. After deducting the increase attributable to the inclusion of Triunfo and Jacob's, underlying costs decreased by £5.7 million, or 2.3%.
There was a small reduction in expenditure on marketing to support our priority brands. Other distribution, selling and marketing overheads increased in 2004 in our key UK distribution channels,
including food service and van delivery. Savings from cost-reduction initiatives offset these increases.
Administrative Expenses
|
|
2004
|
|
2003
|
|
%
|
|
|
(£ million)
|
|
|
Administrative expenses from continuing operations(1)
|
|
101.0
|
|
96.1
|
|
5.1
|
Less: Triunfo
|
|
(0.5
|
)
|
|
|
|
Less: Jacob's
|
|
(2.6
|
)
|
|
|
|
|
|
|
|
|
|
|
Adjusted administrative expenses from continuing operations(1)
|
|
97.9
|
|
96.1
|
|
1.9
|
|
|
|
|
|
|
|
-
(1)
-
Excluding
operating exceptional items from continuing operations of £19.2 million (2003: £56.2 million), which are discussed separately.
Our
administrative expenses increased from £96.1 million for 2003 to £101.0 million in 2004, an increase of £4.9 million, or
5.1%. After deducting the increase attributable to the inclusion of Triunfo and Jacob's, our underlying administrative costs increased by £1.8 million, or 1.9%, due to overhead cost
inflation, partially offset by savings from cost-reduction initiatives. Amounts due under our management incentive schemes for 2003 and 2004 were limited due to performance targets not
being met in the UK. Certain performance targets were met in Northern Europe, Southern Europe and Jacob's.
The
majority of administrative costs are directly related to the operations of our business units and consequently charged to, and reflected in, the segmental operating results. The
balance of administrative costs that are not included within the segmental results are considered to be central costs and represent corporate governance costs, including executive costs, and the costs
of our legal, company secretarial, pension administration, tax and treasury functions. These costs decreased from £12.7 million in 2003, to £12.1 million in 2004.
Other Operating Expense/Income
Our other operating expense/income consists principally of royalties received in connection with long-standing licensing arrangements for some brands
in Japan and the United States, the results of undertaking hedging in connection with foreign currency transactions and any other amounts that arise from time to time that it is appropriate to include
as other expense/income.
Other
operating income for 2004 amounted to £8.2 million compared to a £1.5 million expense for 2003. The income in 2004 was primarily the result of
hedging our foreign currency transactions, which due to fluctuations in the exchange rates during that period, particularly in connection with our U.S. dollar transactions, resulted in gains. The
expense in 2003 was primarily the result of hedging our foreign currency transactions, which due to fluctuations in the exchange rates during that period, particularly in connection with our U.S.
dollar transactions, resulted in losses. Some of the losses were offset by gains arising in North America in our International Sales business.
Amortization of Goodwill and Intangible Fixed Assets
Goodwill amortization was £37.7 million for 2004 compared to £36.5 million for 2003. The charge reflects the amortization of
goodwill arising on the UB acquisition completed in April 2000, the acquisitions of UB Iberia and UB Tunisia completed in July 2000 and April 2001, respectively and the
acquisitions of Triunfo and Jacob's completed in August 2004 and September 2004, respectively. The increase in the charge for 2004 compared to 2003 reflected the additional goodwill
amortization charge in connection with the goodwill and intangible fixed assets associated with the Triunfo and Jacob's acquisitions.
Interest
Interest amounted to £163.2 million in 2004 compared to £158.2 million in 2003, and arose mainly on the debt incurred in
connection with the UB acquisition. After adjusting for the non-cash interest
payable
to related companies amounting to £98.0 million in 2004 and to £89.2 million in 2003, the interest charge decreased from £69.0 million
in 2003 to £65.2 million in 2004. This decrease was due to a lower amortization charge on deferred finance costs in 2004, along with a credit in respect of amortization of debt
premium arising on the issue of additional senior subordinated notes on February 16, 2004. The decrease was partly offset by higher interest payable on our senior credit facility following the
refinancing on September 20, 2004, and interest payable on the additional senior subordinated notes.
Taxation
We had a tax charge of £3.7 million for 2004 compared to a tax credit £10.2 million for 2003. The
year-on-year movement of £13.9 million was due to an increase of £16.4 million in the deferred tax charge arising under Financial
Reporting Standard 19 "Deferred Tax," an increase in the current-year current tax charge of £2.6 million and an increase in the prior-year current tax credit
of £5.1 million.
Adoption of International Financial Reporting Standards ("IFRS")
We are adopting IFRS for our 2005 fiscal year. In order to do this, we have implemented a conversion process. This process involves the establishment of a
transition calendar, identification and quantification of the main differences between U.K. GAAP and IFRS, identification of the impacts on reporting systems, and preparation of training programs for
the employees who will be impacted by IFRS adoption.
We
have identified a number of differences between U.K. GAAP and IFRS that will affect us. These differences include, but are not limited to, the presentation of financial instruments
and the accounting for goodwill, pensions, business combinations and asset impairment.
We
intend to present a quantified analysis of the differences resulting from the initial adoption of IFRS in our first quarter report for 2005.
Subsequent Event
Our biscuit factory in Carlisle was subject to heavy flooding over the weekend of January 8 and 9, 2005 as a result of bad weather conditions in the local
area. Carlisle is our second largest facility, in terms of utilization, in the United Kingdom and produces a range of products including
Carr's Table
Water
,
McVitie's Ginger Nuts
,
Crawford's Bourbon Creams
and
Crawford's Custard Creams
. The facility has 12 production lines and manufactures biscuits with a sales value of approximately
£112 million per annum.
Following
the initial response aimed at ensuring the health and safety of our employees, the Carlisle site team focused on cleaning up the facility and restoring mains services, both of
which were substantially achieved in the first four weeks, finalizing the assessment of damage, and re-establishing production activity as quickly as possible. In addition, we took steps
to source lost production at our other facilities and through third-party manufacturers as appropriate. Our Carlisle employees are all now back on site and they continue to support all aspects of the
recovery plan, including production, training, plant start-up preparation and business-in-the-community projects. We currently have two production lines
in operation making
Crawford's Custard Creams
and
McVitie's Fruit Shortcake
, and anticipate starting up
another four production lines by around the middle of April. These six production lines account for over three-quarters of the production at the site. In addition, two wrapping lines are operating,
handling product baked elsewhere, and we are able to mould
McVitie's Gold Bars
on a further line.
In
accordance with normal practice, and as required under the terms of the Senior Credit Facility, we carry insurance. The material damage insurance we carry covers the costs of the
clean up and the cost of repairs of plant and machinery or replacement where necessary. We are working with loss adjusters to establish which items of plant can be repaired and which will require
replacement. Our insurers have agreed in principle that material damage claims will be reimbursed on a basis that results
in
minimal impact on our cash flows. Our first claim for £4.5 million, less a deduction of £1.0 million to cover our insurance excess, has been paid. We also
carry substantial business interruption insurance, which allows us to claim for a period of up to 30 months after an event. Business interruption insurance claims are more complex and we are
working on the methodology with our insurers. It has been accepted, in principle, that periodic payments should apply to these claims as well. We have submitted an interim claim to cover losses up to
the end of the second period of 2005 in the sum of £5.6 million. Our insurers have recommended payment of £5.3 million of this, which we expect to receive
shortly. In addition, we are in discussion with the North West Development Agency concerning a grant that they have offered to assist in the reopening of the site.
Segmental Performance
The following discussion includes references to "constant exchange rates." Constant exchange rates state the results of our previous year presented at the same
internal exchange rate as that used to translate the results of the most recent year. The constant exchange rate numbers are our non-GAAP, internal numbers and are not audited, however, we
believe that they are useful in our Segmental Performance to explain important trends within our business segments.
UK
On September 20, 2004 we acquired a 100% interest in Jacob's from Danone. Jacob's is a biscuit and snacks business with a strong presence in the savory
biscuit and crackers and crispbread segments of the United Kingdom biscuit market. This acquisition has significantly strengthened our brand portfolio, particularly in the savory biscuits and crackers
and crispbreads segment. Jacob's owns a number of well-known brands and products that are long-established and well-recognized by retailers and consumers. Some of
these, such as
Jacob's Cream Crackers
and
Club
have become household names in the United Kingdom. Other
popular Jacob's brands include:
Cheddars, Thai Bites, Jacobites, Gem's, Family Circle, Jacob's Fig Rolls
and
Twiglets
. In addition, Jacob's are licensed to
manufacture and market the Nabisco brand
Ritz
in the
United Kingdom and Ireland and the Danone brand
TUC
in the United Kingdom.
Sales
increased from £734.4 million in 2003 to £775.5 million in 2004, an increase of £41.1 million, or 5.6%. After deducting the
increase attributable to Jacob's, sales decreased by £20.6 million, or 2.8%. We continued to experience challenging trading conditions in our UK business.
McVitie's
core sales increased by 4.0% in 2004 compared to 2003. This was predominantly due to sales growth in the every day biscuits
segment, partially offset by lower sales in the same period in the every day treats segment.
McVitie's Jaffa Cake
sales decreased marginally by 0.6% in
2004 compared to 2003. The continued success of the new promotional program and marketing plan was offset by increased in-store support. Sales of
go
ahead!
demonstrated strong growth of 3.6% in the highly competitive healthier market, through the successful launch of
go ahead! Yogurt
Breaks
and
go ahead! Crispy Rice Cracker
s. Sales of
Penguin
declined by 13.4%
due to competitive pressures in the declining chocolate biscuit bar segment, although sales in the last quarter of 2004 improved.
McVitie's
cake sales
showed continued strong growth of 6.5% in 2004 compared to 2003 due to the continuing success of existing ranges, supported by the launch of
McV Slices
.
In total, branded biscuit sales declined by 0.7% in 2004 compared to 2003. Non-branded sales increased by 0.8% and contract sales to Danone decreased by 50.0% in the same period. The
Danone contract, a legacy from the UB acquisition, had substantially reduced by the end of 2002, although we continue to supply a small number of lines.
The
United Kingdom savory snacks market remained highly competitive. However,
McCoy's
sales increased 15.0% in 2004 compared to 2003 due
to a successful marketing campaign and an increased multi-pack range.
KP
nuts sales grew by 2.5% in 2004 compared to 2003, due to growth in
sharing formats and increased grocery listings.
Mini Cheddars
sales have declined by 8.6% due to constraints on capacity as a result of the transfer of
production from the Ashby-de-la-Zouch factory in line with our plan. This transfer has now been successfully completed. The competition for promotional activity
within retail stores in 2004 was significant and contributed to the decline in the sales of
Hula Hoops,
Mini Cheddars
and
Skips
compared to 2003. Overall, branded snacks sales decreased by 6.1% in 2004 compared to 2003 and
non-branded sales increased by 0.5% in the same period.
Business
profit decreased from £114.3 million in 2003 to £102.5 million in 2004. The decline in business profit was the result of increased
promotional costs in our snacks business, price realignment on certain key products, pressure on trading terms from major retailers, higher sales of lower-margin products and cost inflation partially
offset by savings generated from our cost-saving initiatives. As a result of this our gross profit margin declined from 38.0% in 2003 to 34.3% in 2004. Excluding the effect of Jacobs, the
gross profit margin declined to 33.8%.
In
2004, we closed our biscuit factory at Ashby-de-la-Zouch. Production has been transferred to our other biscuit factories in the United Kingdom.
In
January 2004, we disposed of our High Wycombe site where our research and development facility is located. We received net proceeds of £3.9 million and as
part of this transaction we leased back one-quarter of the site, retaining sufficient accommodation to continue our research and development activities.
Our
biscuit factory in Carlisle was subject to heavy flooding over the weekend of January 8 and 9, 2005 as a result of bad weather conditions in the local area. Following the
initial response aimed at ensuring the health and safety of our staff, the Carlisle site team focused on cleaning up the facility and restoring mains services, both of which were substantially
achieved in the first four weeks, finalizing the assessment of damage, and re-establishing production activity as quickly as possible. In addition, we took steps to source lost production
at our other facilities and through third-party manufacturers as appropriate. We currently have two production lines in operation making
Crawford's Custard
Creams
and
McVitie's Fruit Shortcake
, and anticipate starting up another four production lines by the middle of April. In
addition, two wrapping lines are operating, handling product baked elsewhere, and we are able to mould
McVitie's Gold Bars
on a further line. We have
made good progress with our insurers and loss adjusters in connection with our material damage and business interruption claims. Our first material damage claim has been paid and we anticipate a
payment on account of our first business interruption claim shortly, see "Subsequent Event" above.
Northern Europe
Sales decreased from £179.8 million in 2003 to £169.6 million in 2004, a decrease of £10.2 million, or
5.7%. In local currency, sales decreased by 5.8%, from €254.4 million in 2003 to €239.7 million in 2004. The lower sales were due principally to the
impact of the retailer price-war in the Netherlands which involved major brands including our own
Verkade
and
Sultana
brands, competitive pressures in
Belgium and the Sarkozy directive in France.
At
constant exchange rates, priority-brand biscuit sales declined by 4.5% and branded biscuit sales declined 6.8% in 2004 compared to 2003. This was due to a slight decline in sales of
Sultana
and
Verkade
products in the Netherlands and lower sales of
Delacre
and
BN
products in France.
Sultana
sales were
2.2% lower and
Verkade
sales were 1.0% lower in 2004 compared to 2003. This was due primarily to strong pricing pressures. The impact of pricing
pressures reduced following the first quarter of 2004 due to the success of our recovery plan. The launch of
Sultana Yo Fruit
is exceeding expectations
and gaining a significant foothold in the healthier segment. The launch of
Verkade Sponge Bob
and
Dora
also exceeded expectations and gained approximately 10% of the children's biscuit market in six months. In France, sales of
Delacre
and
BN
were down 6.3%
and 5.4%, respectively, reflecting market decline and increased competition from hard discounters and retailers' own-brand
products. The
BN
decline was partially offset by the continued success of
Houba
and
Spiderman
launched at
the end of the first quarter of 2004. In Northern Europe we have focused on higher-margin products and manufacturing efficiencies
to increase gross margins from 43.6% in 2003 to 44.2% in 2004. Other cost-saving initiatives are being implemented to deliver further improvements in manufacturing efficiency. In addition,
we are progressing our project to harmonize and upgrade our enterprise resource planning operating system.
Notwithstanding
lower sales performance, as a result of the improved gross profit margins and strict cost control, business profit of £22.2 million in 2003 increased
to £24.0 million in 2004, an increase of £1.8 million or 8.1%.
Southern Europe
In August 2004, we acquired Triunfo, the leading manufacturer and marketer of biscuits in Portugal, increasing our share of the Portuguese biscuit market
from 16% in 2003 to 39%. Triunfo is the leading biscuit manufacturer in Portugal and holds some of the most prestigious brand names in the Portuguese biscuit sector, including:
Proalimentar, Hookie, Clasicas, Waferland,
Corintia
and
Chipmix
.
Sales
increased from £185.6 million in 2003 to £200.0 million in 2004, an increase of £14.4 million, or 7.8%. After deducting the
increase attributable to Triunfo, sales increased by £5.8 million, or 3.1%. In local currency, sales increased by 10.1%, from €267.2 million in 2003 to
€294.3 million in 2004. After deducting the increase attributable to Triunfo, sales increased by €14.5 million, or 5.4%.
At
constant exchange rates, priority-brand sales increased by 12.1% and branded sales increased by 10.0% in 2004 compared to 2003. Sales of
Filipinos
increased by 13.1% in the same period due to the
continued success of new products such as
Filipinos
Holes
, launched in 2003, and support from a successful marketing and promotional campaign.
Oreo
sales increased by 23.8% due to
a strong
promotional campaign and the launch of
Mini Oreo
at the end of the second quarter of 2004.
Fontaneda
sales increased by 13.2% in 2004 compared to 2003, supported by an effective media campaign and the successful launch of
Fontaneda Sin
in
March 2004. Sales of
Chiquilin
decreased by 2.7% over the same period. We launched
Geli-Fruit
in March 2004 under our
Royal
brand, which was well received by retailers
and sales have been encouraging. Marketing expenditure, which increased by 16.3% in 2004 compared to 2003, has supported the sales performance.
Business
profit increased from £31.3 million in 2003 to £36.6 million in 2004, an increase of £5.3 million, or 16.9%. This
reflected profits from Triunfo, which we acquired in August 2004, an increase in sales of higher-margin products and cost-saving initiatives, offset by an increase in marketing
expenditure. Our strategy of focusing on higher-margin products and manufacturing efficiencies has resulted in an increase in gross margins from 42.2% in 2003 to 43.8% in 2004. Excluding the impact of
Triunfo, the gross profit margin was 43.9%.
International Sales
Our strategy for International Sales is to manage the existing portfolio of revenues to improve the overall profitability of our export business by prioritizing
investment and reducing activity in non-profitable areas. Sales decreased from £70.9 million in 2003 to £65.0 million in 2004. This decrease was due
to significant decline in Nigeria, where a trade embargo severely restricted imports, adverse currency movements, particularly in the U.S. dollar, partially offset by volume increases in Central
America, Israel and Australia.
Business
profit decreased from £15.8 million in 2003 to £13.0 million in 2004 due to the reduction in sales and the adverse currency movements.
Discontinued Operations
Other
On August 16, 2004, we completed the sale of our Benelux snacks business to Roger & Roger S.A. The results of this business through the date of
disposal are reflected as discontinued operations. During 2004, through the date of disposal, this business had sales of £13.5 million and incurred a business loss of
£0.8 million. This compared to 2003 sales of £24.1 million and a business loss of £4.7 million for 2003.
Fiscal 2003 (Year ended January 3, 2004) compared to Fiscal 2002 (Year ended December 28, 2002)
Continuing Operations
The following discussion relates to our continuing operations. Amounts for 2003 have been restated to reflect the reclassification of our Benelux snacks business
as discontinued operations and to reflect the revised definition of turnover (see Note 2 of Notes to the Financial Statements).
Turnover
|
|
2003
|
|
2002
|
|
%
|
|
|
(£ million)
|
|
|
Turnover from continuing operations
|
|
1,170.7
|
|
1,154.7
|
|
1.4
|
Turnover
from continuing operations increased from £1,154.7 million in 2002 to £1,170.7 million in 2003, an increase of
£16.0 million, or 1.4%, including currency translation gains of £41.4 million.
Our
strategy in relation to our brands is to drive growth in our priority brand sales by providing increased focus and marketing investment behind our priority brands and to manage
non-strategic brands and retailer brands to maximize profitability. We made progress in achieving this strategy with total priority brand sales growth of 2.1% across our business.
Sales
of branded products decreased by 1.4% due primarily to sales growth in both Northern and Southern Europe. The growth in those businesses was offset by decreased sales in the UK,
due to the United Kingdom biscuits and snacks market environments proving to be particularly challenging in 2003.
Sales
of our less profitable, non-branded products grew in 2003 by 0.8% driven by growth in UK and Southern Europe. Additional details on our turnover are provided within the
analysis of our segmental performance.
Cost of Sales
|
|
2003
|
|
2002
|
|
%
|
|
|
(£ million)
|
|
|
Cost of sales from continuing operations
|
|
709.3
|
|
688.3
|
|
3.1
|
Cost
of sales from continuing operations increased from £688.3 million in 2002 to £709.3 million in 2003, an increase of
£21.0 million, or 3.1%. This compared to a sales increase of £16.0 million, or 1.4%, for the year. As a consequence, there has been a reduction in gross profit
margin predominantly due to higher levels of prime-cost inflation in the UK than has been seen historically. Cost savings achieved through the implementation of manufacturing-efficiency
projects has mitigated the inflation increase. We have also continued to achieve savings through our "eSourcing initiative," which allows suppliers to tender for contracts on-line. We
continue to implement changes in ways of working across our UK and Northern European supply chains. This requires significant organizational changes, which, together with our other
manufacturing-efficiency programs, are expected to continue to deliver benefits throughout 2004.
Gross Profit
|
|
2003
|
|
2002
|
|
%
|
|
|
|
(£ million)
|
|
|
|
Gross profit from continuing operations
|
|
461.4
|
|
466.4
|
|
(1.1
|
)
|
Gross
profit decreased from £466.4 million in 2002 to £461.4 million in 2003, a decrease of £5.0 million, or 1.1%. This equates
to a gross profit margin of 39.4% in 2003 compared to 40.4% in 2002. This reduction in gross profit margin was the result of prime-cost inflation, principally in the UK,
partially
offset by price increases on branded products, and by the savings achieved through our manufacturing-efficiency programs.
Distribution, Selling and Marketing Expenses
|
|
2003
|
|
2002
|
|
%
|
|
|
|
(£ million)
|
|
|
|
Distribution, selling & marketing costs from continuing operations
|
|
248.9
|
|
252.8
|
|
(1.5
|
)
|
Distribution,
selling and marketing expenses decreased from £252.8 million in 2002 to £248.9 million in 2003, a decrease of
£3.9 million, or 1.5%. The decrease compared to 2002 was the result of a decline in marketing expenditure. We increased expenditure on new product launches, marketing and promotions
to support our priority brands and reduced expenditure on advertising. The other categories of distribution, selling and marketing overheads remained at a similar level over both years. This was due
predominantly to an increase in selling and marketing overheads in connection with our key UK distribution channels, including food service and van delivery. Savings from cost-reduction
initiatives offset these increases. This was in line with our strategy of implementing cost-reduction initiatives to release funds to invest in priority-brand growth.
Administrative Expenses
|
|
2003
|
|
2002
|
|
%
|
|
|
|
(£ million)
|
|
|
|
Administrative expenses from continuing operations
|
|
96.1
|
|
96.5
|
|
(0.4
|
)
|
-
(1)
-
Excluding
operating exceptional items from continuing operations of £56.2 million (2002: £35.2 million), which are discussed separately.
Our
administrative expenses decreased from £96.5 million for 2002 to £96.1 million in 2003, a decrease of £0.4 million, or 0.4%.
The decrease in administrative expenses was the result of savings from cost-reduction initiatives, such as streamlining management and organizational alignment projects, and no payments
being made under the 2003 Senior Management Incentive Scheme as performance targets were not met, offset by overhead cost inflation.
The
majority of administrative costs are directly related to the operations of our business units and consequently charged to, and reflected in, the segmental operating results. The
balance of administrative costs that are not included within the segmental results are considered to be central costs and represent corporate governance costs, including executive costs, and the costs
of our legal, company secretarial, pension administration, tax and treasury functions. These costs increased from £12.2 million in 2002 to £12.7 million in 2003.
Other Operating Expense/Income
Our other operating expense/income consists principally of royalties received in connection with long-standing licensing arrangements for some brands
in Japan and the United States, the results of undertaking hedging in connection with foreign currency transactions and any other amounts that arise from time to time that it is appropriate to include
as other expense/income. Other operating expense/income for 2003 amounted to £1.5 million expense compared to income of £6.0 million for 2002. The expense in 2003
was primarily the result of hedging our foreign currency transactions, which, due to fluctuations in the exchange rates during that period, particularly in connection with our U.S. dollar
transactions, resulted in losses. Some of the losses were offset by gains arising in North America in our International Sales business. In 2002, our other income included gains from foreign currency
transaction hedges together with royalty income.
Goodwill Amortization
Goodwill amortization was £36.5 million for 2003 compared to £40.7 million for 2002. The charge reflects the amortization of
the goodwill arising on the UB acquisition completed in April 2000 and the acquisitions of UB Iberia and UB Tunisia completed in July 2000 and April 2001, respectively. The
reduction in the charge for 2003 compared to 2002 reflects the additional goodwill amortization charge of £4.2 million made in 2002 to reflect the impairment of goodwill attributed
to the Benelux snacks business.
Interest
Interest was £158.2 million in 2003 compared to £142.8 million in 2002, and arose mainly on the debt incurred in connection
with the UB acquisition. After adjusting for the non-cash interest payable to related companies amounting to £89.2 million in 2003 and to
£78.1 million in 2002, the interest charge increased from £64.7 million in 2002 to £69.0 million in 2003. This increase was due to accelerated
amortization on deferred finance costs partially offset by lower interest payable on our senior credit facility following our refinancing in April 2003.
Taxation
We had a tax credit of £10.2 million for 2003 compared to a tax credit of £15.6 million for 2002. The movement in the
year-on-year tax credit of £5.4 million was due to a decrease of £3.9 million in the deferred tax credit arising under Financial Reporting
Standard 19 "Deferred Tax," an increase in the current-year current tax charge of £1.1 million and a reduction in the prior-year current tax credit of
£0.4 million.
Segmental Performance
The following discussion includes references to "constant exchange rates." Constant exchange rates state the results of our previous year presented at the same
internal exchange rate as that used to translate the results of the most recent year. The constant exchange rate numbers are our non-GAAP, internal numbers and are not audited, however, we
believe that they are useful in our Segmental Performance to explain important trends within our business segments.
UK
Sales decreased from £756.5 million in 2002 to £734.4 million in 2003, a decrease of £22.1 million, or
2.9%. Sales decreased by 1.8% after excluding the effect of the decline in contracted sales made to Danone.
Sales
of
McVitie's
core increased by 1.8% due to the launch of
McVitie's a:m
and the
success of the
McVitie's Big Packs,
both launched in the first quarter of 2003. Sales in 2003 were impacted by the prolonged period of exceptionally
warm weather in the third quarter compared to the third quarter of 2002, which adversely affected sales of chocolate biscuits, and the impact of the substantial relaunch of the
McVities's
range in the
second quarter of 2002. Sales of
McVitie's Jaffa Cakes
increased by 5.3%
supported by a successful promotional campaign and the launch of
Jaffa Mini Bags
at the end of the third quarter of 2003. Sales of
go ahead!
and
Penguin
decreased in 2003 compared with 2002. Sales of
go
ahead!
were impacted by new entrants in the healthy snacking segment. Sales of
Penguin
and other branded biscuits were impacted
by increased competition from new entrants in the chocolate biscuit bars segment and the adverse effect of the exceptionally hot weather in the third quarter of 2003.
McVities's
cake sales continued to
perform well, with sales increasing by 19.3%. This growth was supported by the launch of
Jaffa Mini Roll Bites
at the end of the third quarter in 2003,
Hob Nob
Flapjacks
in the third quarter of
2003 and the continued success of new products launched in 2002.
In
total, biscuit branded sales were down 3.1% during a challenging period of trade and competitor activity and unusually hot weather. Retailer-branded sales increased by 0.8% excluding
contracted sales to Danone, which decreased by 61.8%. The Danone contract was entered into at the
time
of the UB acquisition. While the majority of our contract sales ceased in 2002, we continue to supply a small number of products.
The
United Kingdom savory snacks market remained highly competitive with strong competition for promotional opportunities in multiples. Branded sales decreased by 4.8%. However, sales of
McCoys
increased
14.5% supported by the limited-edition launch of
McCoys Steak and Ale
flavor variant in
September of 2003, and
Mini Cheddars
sales increased by 5.5% supported by the launch of
Mini Cheddars
Peperami
in July 2003. Marketing investment reduced in 2003 due to the substantial investment in 2002 behind
Hula Hoops Shoks, Skips Buzz
Boltz
and
Skips Tickle Pickle
and the competition in 2003 for promotional activity. In 2003, we continued to invest in our
priority brands to drive growth while at the same time pursuing a longer-term brand-building strategy in a highly competitive market.
Business
profit fell from £134.5 million in 2002 to £114.3 million in 2003, a decrease of £20.2 million, or 15.0%. This reduction
was the result of a number of factors including volume decline on some branded biscuits due to the increased retail price differential between branded and retailer-branded equivalent products, reduced
promotional effectiveness due to intense activity from new entrants to the market, the adverse impact of hot weather on sales and production efficiency, the substantial reduction of sales under the
Danone contract and significantly higher levels of prime-cost inflation. The implementation of branded biscuit price increases and savings resulting from our cost-reduction
initiatives partially mitigated the impact of prime-cost inflation. Overall this reduced our gross margin from 40.6% in 2002 to 38.0% in 2003.
This
reduction was due to a decrease in sales volume and an increase in sales overhead expenditure in connection with our key UK distribution channels including food service and van
delivery with the intention of increasing long-term growth in these areas. Savings achieved in connection with cost-reduction initiatives offset this. We are promoting the sale
of products displaying strong growth potential and profitability and minimizing the impact of lost sales due to intense competition within the market.
Our
2003 performance demonstrated that our actions in managing costs and channeling marketing expenditure behind our priority brands helped us to minimize the effect of the challenging
and competitive market, thereby enabling us to pursue our long-term, brand-building strategy.
In
February 2003, following a detailed review of our UK biscuit manufacturing facilities, we announced our proposal to close our
Ashby-de-la-Zouch biscuit factory by the end of 2004. Following the conclusion of an employee consultation process, we began transferring production to our other UK
manufacturing facilities. During the fourth quarter of 2003, we transferred the production of approximately one-third of the products produced at this site and completed the first phase of
our redundancy program. The remaining phases were completed and the facility was closed at the end of November 2004.
On
April 17, 2003, we signed a put and call option agreement to acquire a company that runs the business of the supply and distribution of crisps and snack products via a van
sales force. The option agreement provides security in relation to this route to market.
Northern Europe
Sales increased from £157.6 million in 2002 to £179.8 million in 2003, an increase of £22.2 million, or
14.1%. In local currency, sales increased by 1.7%, from €250.1 million in 2002 to €254.4 million in 2003. This was the result of our strategy of focusing
on priority brands while simultaneously reducing investment in non-strategic brands.
At
constant exchange rates, priority-branded biscuit sales rose by 2.9% and branded biscuit sales reduced by 0.3% as a result of growth in
BN
and
Sultana
sales offset by decline in
Delacre
and
Verkade
sales.
BN
sales increased by 11% across Northern Europe,
compared to 2002, as a result of the
continued success of
BN Mini Max
and
BN Petit Dejeuner
.
Sultana
sales showed strong growth of 7.7% during
the year due to the continued success of
Sultana Start
and
Sultana Fruit and Cereals
and the
successful
launch of
Sultana Fruit XS
in a snacking format. Sales of
Verkade
declined 4.3% due to
increased in-store support behind new products such as
Verkade Delichoc
and
Verkade Biskz
and
Chokz.
Sales of
Delacre
products declined in France by 5.0% due to the planned
de-listing of certain branded items and high seasonal temperatures during the second and third quarters of 2003 mitigated, in part, by the launch of
Delacre
Croustillant
.
A
key element of our business strategy has been to substantially improve the profitability of Northern Europe. Following the review of our supply chain processes across Northern Europe,
significant changes are being implemented, which are delivering improvements in manufacturing efficiency. Planning for the harmonization and upgrade of our enterprise resource planning operating
system is underway. By focusing on higher-margin products and achieving manufacturing cost savings, the margin improved from 40.9% in 2002 to 43.6% in 2003. As a result of improved margins and strict
cost control
and currency translation gains, business profit increased from £12.0 million in 2002 to £22.2 million in 2003, an increase of £10.2 million, or
85.0%.
Southern Europe
Sales increased from £161.2 million in 2002 to £185.6 million in 2003, an increase of £24.4 million, or
15.1%. In local currency, sales increased by 4.7% from €255.2 million in 2002 to €267.2 million in 2003. At constant exchange rates, sales increased
across the priority-brand portfolio with priority-branded biscuit sales increasing 12.5% and total branded biscuit sales increasing by 3.8%. This was due to successful brand advertising and
promotional campaigns for
Filipinos, Chiquilin, Fontaneda Core
and
Oreo.
We also benefited from the
marketing investment supporting new products such as
Fontaneda Diver, Minifilipinos
and
Chiquilin
Energy,
all of which were launched in 2002.
Business
profit increased from £23.6 million in 2002 to £31.3 million in 2003, an improvement of £7.7 million, or 32.6%. The
improvement in business profit was the result of sales growth, improvement in sales mix, implementation of price increases, cost-saving initiatives and currency translation gains, all of
which mitigated high levels of raw materials cost inflation.
International Sales
Our strategy for this business is to manage the existing portfolio of revenues to improve overall profitability by prioritizing investment and reducing activity
in non-profitable areas. Sales decreased from £79.4 million in 2002 to £70.9 million in 2003, a decrease of £8.5 million, or 10.7%.
This decrease in sales was due to a reduction in biscuit sales to the United States, affected by the weaker U.S. dollar, a biscuit import embargo in Nigeria and our exit from marginally profitable
contracts in Germany.
Business
profit decreased by £2.2 million from £18.0 million to £15.8 million due to the reduction in sales and a lower
off-setting gain from foreign exchange hedging contracts than we achieved in 2002. This was offset by savings achieved from cost-reduction initiatives, which continued to drive
improvement in the profitability of this business segment.
We
conducted a number of business reviews of the way in which we manage and conduct our business. As a result we reorganized the way we service our customers in North America in order to
increase our future sales potential and improve the profitability of the
Delacre
sales that we make in this region. We
outsourced marketing activity, which was previously undertaken in-house, to a third-party distributor with whom we already had a relationship. We also decided to cease production at our
dry dessert mix facility in Tunisia, which serviced customers in the Middle East. The facility was closed at the end of 2003 and predicted future volumes for this business are now fully serviced from
our dry dessert mix facility at Montornes in Spain. These activities are in line with our business strategy, to reduce complexity in our organizational structure, and have enabled us to focus our
resources more efficiently.
Discontinued Operations
Other
Benelux snacks sales decreased from £27.0 million to £24.1 million and the business loss increased from
£1.4 million in 2002 to £4.7 million in 2003. The snacks markets were particularly competitive in the Netherlands and Belgium during 2002 and this resulted in a
decline in our branded sales. The decrease in branded sales was partially compensated for by an increase in retailer-brand sales. This change in the Benelux sales portfolio drove an adverse mix and
hence an increase in business loss.
Exceptional Items (continuing and discontinued operations)
In 2004, we recorded a total of £19.5 million as exceptional items of which £19.8 million was recorded as an expense against
operating profit and £0.3 million was recorded as net non-operating profit. Exceptional items charged against operating profit comprised £4.9 million
in relation to closure of our biscuit factory in Ashby-de-la Zouch, £4.0 million in connection with the acquisition of Jacob's and Triunfo,
£2.3 million relating to the French Government-sponsored early retirement scheme entered into in 2002, £1.9 million relating to our Northern European
overhead-reduction program, £1.2 million in connection with our Southern Europe overhead-reduction program, £1.1 million in connection with the integration of our
UK businesses initiated in 2003, £0.7 million in connection with a provision, relating to anticipated costs in connection with surplus leasehold properties and
£3.7 million on restructuring projects to reduce costs in the UK and facilitate the sale of the Benelux snacks business.
Non-operating
exceptional items consisted of a loss of £3.8 million in connection with the disposal of our Benelux snacks business offset by a
£4.1 million profit on disposal of fixed assets.
In
2003, we recorded a total of £63.6 million as exceptional items, £61.7 million of which was recorded as an expense against operating profit and
£1.9 million as a net non-operating expense. We also recorded £3.5 million of other exceptional income.
Exceptional
items charged against operating profit comprised £18.6 million in relation to the closure of our biscuit factory in Ashby-de-la
Zouch, £17.6 million relating to asset impairment, £2.1 million in connection with a provision, relating to anticipated costs in connection with surplus leasehold
properties, £1.3 million in connection with our Southern European overhead-reduction program, £3.5 million relating to our Northern European overhead-reduction
program, £5.3 million relating to the French Government-sponsored early retirement scheme entered into in 2002, and £13.3 million in connection with other
overhead-reduction initiatives and manufacturing-efficiency programs.
Non-operating
exceptional items consisted of £2.1 million in relation to the costs associated with the closure of our dry mix facility in Tunisia and the
transfer of production to Spain partially offset by £0.2 million profit on disposal of fixed assets in the United Kingdom.
Other
exceptional income comprised £2.8 million which we received from Nabisco following the agreement not to acquire their Middle Eastern operations and
£0.7 million in relation to the release of accruals made in connection with the UB acquisition which were no longer required and the receipt of pre-acquisition amounts
not expected to be realized.
In
respect of 2002, we recorded a total of £12.0 million as exceptional items, £35.4 million of which was recorded as an expense against operating
profit and £23.4 million as a net non-operating credit, of which £12.3 million has been shown as an exceptional taxation refund.
Exceptional
items charged against operating profit comprised £11.9 million in restructuring charges relating to overhead reduction programs across the whole business,
£9.8 million in restructuring charges in connection with manufacturing-efficiency and overhead-reduction programs in the UK and Northern Europe, £3.6 million in
connection with a provision, relating to anticipated costs in connection with surplus leasehold properties, required under U.K. GAAP, £8.0 million in connection with fixed-asset
impairments and £2.1 million relating to factory closures.
Non-operating
exceptional items consisted of £25.1 million received in connection with an adjustment to the purchase price of Keebler Company, a business
sold by a subsidiary of United Biscuits to Inflo Holdings Corporation in 1996; £12.3 million received in relation to a claim for refund of withholding tax paid in connection with
the reorganization of the U.S. business of United Biscuits in 1992, of which £7.2 million was a refund of withholding tax and £5.1 million was interest
attributable thereto; £1.2 million profit on disposal of fixed assets; £0.8 million loss on disposal of the Hatton manufacturing facility in Scotland, and
£14.4 million loss on the disposal of the Aguilar biscuit manufacturing facility in Spain.