Boparan Holdings Limited is a leading diversified Food manufacturer with strong positions in Protein, Chilled and Branded categories, has released its second quarter (Q2) consolidated results for the 13 weeks ended 31 January 2015.

Second quarter 2015 operational highlights

Overall adjusting for the effects on the business of one-off items, performance stabilised and was in line with guidance given at the company's Q1 announcement.

Price deflation continues and volumes are generally lower and, against this background, like-for-like (LFL) sales were broadly flat at £807.3 million.

Adjusted operating profit was £13.1 million, not significantly changed from £13.3 million in Q2 2014.

One-off and exceptional items amounted to £20.7 million (Q2 2014 exceptional items: £26.3 million).

Retained loss after tax was £16.7 million, compared to a loss of £27.4 million last year.

Price deflation and other challenges contributed to a £3.6-million reduction in adjusted operating profit in the company's Protein division.

Chilled LFL sales were up 2.9 per cent with another quarter-on-quarter improvement in operating profit.

Branded products achieved a modest operating profit in the quarter and LFL sales were broadly similar to the same period last year.

EBITDA for the quarter was £15.1 million (Adjusted EBITDA was £32.5 million; Q2 2014: £36.1 million).

Working capital continued to be tightly managed with net cash balances of £127.5 million.

The business has an revolving credit facility (RCF) of £60 million, which remains undrawn at the quarter end.

CEO's comments

Ranjit Singh, CEO of 2 Sisters Food Group, said: “This has been another challenging quarter for the Group. Against this tough backdrop, yet again we have delivered for our customers over the key Christmas trading period. Given the hurdles we are currently facing, we have delivered a creditable performance and are stabilising the business.

“In our Protein business, I take great pride in our continued industry-leading investment in the fight against Campylobacter but the market remains very tough. In addition, we have had to deal with the fall-out of avian influenza outbreaks, as well as further negative sentiment from consumers around the release of the FSA’s Campylobacter figures for retailers.

“However, we continue to integrate the division following the Vion acquisition and we are taking action to deliver efficiency and output improvements across our sites.

“A year ago, our Chilled division’s profitability was impacted by the aftermath of "horsegate". I am pleased to report that a year on, we are making steady progress, with like-for-like sales up 2.9 per cent and another quarter-on-quarter improvement in operating profit.

“Our Branded Products continue to operate in aggressive markets and continue to see pressures on sales mix and promotions. Branded achieved a modest operating profit in the quarter and LFL sales were similar to the same period last year. We continue to invest in quality and marketing at Fox’s biscuits.

“This is the toughest commercial environment I can recall for many years with substantial changes at many of our larger customers. We expect conditions to remain difficult but are firmly focused on delivering quality and value to all our customers.”

Impact of AI and one-off item

During the period, the company's business results were impacted by two issues, one of which (AI) was notified at its previous quarterly announcement.

The outbreaks of AI across Europe disrupted the business in a number of ways. For a limited period of time, the business suffered a shortfall in availability of chickens in the Netherlands, which impacted both sales and the operational efficiency of the business. The outbreaks also resulted in the closure of a number of overseas markets for the company's by-products. This impacted the returns it was able to make from these products as well as the need to write down stock values. The combined impact of these factors on the profit of the Protein Division in the quarter amounted to £6.2 million.

In the fourth quarter of FY 2014, the business implemented a new IT system at one of its Protein sites. The company says it has now come to light that the managerial, operational and accounting controls around this system required significant improvement. The company estimates that the results for the quarter have been adversely affected by £11.2 million due to production inefficiencies and stock write-offs. Controls have now been strengthened in all areas and a thorough audit of this implementation has been undertaken to ensure any subsequent implementations are adequately supported.

Q2 15 performance

Group like for like (LFL) sales for the quarter decreased by 1.3 per cent. Group total sales were down 6.0 per cent compared to Q2 2014, which included contributions from Corby and Avana (businesses which were disposed of in FY 2014).

Adjusted operating profit was stable at £13.1 million (2014: profit £13.3 million) and after accounting for the effect of AI, one off and exceptional items an operating loss of £7.6 million was incurred (2014: loss £13.0 million).

The loss for the quarter after interest and taxation was £16.7 million (2014: loss of £27.4 million).

Protein

On the back of substantial deflation within UK poultry, the Protein division saw LFL sales decreasing by 2.8 per cent for Q2 and reported a £3.6-million reduction in adjusted operating profit.

The company says it is currently in the process of re-engineering our UK poultry business to realise operational and cost efficiencies and deliver the right products to its customers at the right time.

Chilled

LFL Chilled sales were up 2.9 per cent as the division moves into recovery phase. This is a strong performance in a competitive market and profitability continues to recover.

In the 'Food to Go' business, the commissioning of our new bakery at Gunstones gives the company best-in-sector quality and its ready meals business continues to perform well with the complete relaunch of the M&S Taste range in the quarter.

Subsequent events

As part of the ongoing process to improve efficiency, on 20 February 2015, the Group announced it had entered into consultation to reorganise operations at its Llangefni poultry processing site and on 26 February 2015, the Group also announced it had entered into consultation to reorganise operations at its Fox’s Biscuits sites.

Outlook

The tough trading conditions for food manufacturers and retail customers look set to continue.
External factors have adversely impacted the poultry division’s performance, and the company is working hard internally to mitigate this and improve efficiency and effectiveness at all its UK poultry sites.

Group profitability in Q3 is expected to continue to be negatively affected by the effects of AI, as international boundaries remain closed to the products.

Despite the prevailing conditions, the company is seeing improved performance across parts of the Group, such as in its Chilled division, and it will continue to address the challenges to improve margin by addressing the cost base and improving the operational effectiveness of the manufacturing sites.