Tuesday 12 September 2017

Hilton Food Group plc

Interim results for the 28 weeks to 16 July 2017

Further territorial growth and strategic progress

Hilton Food Group plc, the leading specialist international meat packing business, is pleased to announce its interim results for the 28 weeks to 16 July 2017.

Financial and Strategic Highlights

* Volume includes 50% share of the Australian and Portuguese joint venture activities (2016 restated)

· Volume growth driven by Australia, Ireland, Sweden and Portugal partly offset by challenging market conditions in Central Europe

· Turnover up 3.3% on a constant currency basis, reflecting raw material prices increases, enhanced by favourable currency translation

· Operating profit up 1.4% on a constant currency basis after absorbing start-up costs in Europe, initial Queensland costs and weaker trading in Central Europe,

· Portuguese joint venture has started well with significant volumes

· Agreement since the end of the half year to supply fresh food to Tesco Central Europe

· Continued strong cash generation and an ungeared balance sheet

· Interim dividend increased from 4.6p to 5.0p, an increase of 8.7%

Commenting on the results, Chief Executive Robert Watson OBE said:

"Hilton delivered strong volume and profit growth during the period. Our strategic progress continued with entry into Portugal and expansion recently announced in Central Europe where beef deboning has commenced and a fresh food factory will be developed. The initial work on our new factory in Queensland, Australia continues with the planning approvals process well advanced. We remain committed to growing our business through innovation and product development as well as exploring a range of new expansion opportunities to further our geographic reach."

Enquiries:

This announcement contains inside information.

Forward looking information

This interim management report contains forward looking statements. Such statements are unavoidably subject to risk factors associated with, amongst other things, economic, political and business developments which may occur from time to time across the countries in which the Group operates.  It is believed that the expectations reflected in these statements are reasonable, but all forward looking statements and forecasts are by their nature speculative and involve risk and uncertainty, quite simply because they relate to events and depend on circumstances that will occur in the future.

Review of operations   

The Group is presenting its interim results for the 28 weeks to 16 July 2017, together with comparative information for the 28 weeks to 17 July 2016 and the 52 weeks to 1 January 2017. The interim results of the Group are prepared in accordance with IAS 34 as adopted by the European Union (EU).

The wide geographical spread of the Group's operations across Europe and more recently into Australia has resulted in progressively reducing Hilton's dependence on any one national economy, which is a significant strength of the business model.

Hilton's results, as reported in Sterling, are sensitive to changes in the value of Sterling compared to the range of overseas currencies in which the Group trades. Over the 28 weeks to 16 July 2017 the average exchange rates for these overseas currencies have strengthened against Sterling compared with the corresponding period in 2016. The Euro, Danish Krone, Swedish Krona all strengthened by 7% to 10%, the Polish Zloty by 13% and Australian Dollar by 17%.

The overall performance was good with an improved performance in Western Europe aided by Portuguese joint venture partly offset by weaker trading in Central Europe and start-up costs.

Western Europe

Operating profit of £20.0m (2016: £18.1m) on turnover of £643.6m (2016: £586.6m)

This operating segment covers the Group's businesses in the UK, Ireland, Holland, Sweden, Denmark and the new Portuguese joint venture. Volume growth of 12.8% included an excellent start by the Sohi Food Solutions joint venture in Portugal as well as higher volumes in Ireland and Sweden although market conditions in Holland remain challenging.

Turnover increased by 4.1% on a constant currency basis boosted by higher raw material prices increases and favourable mix.

Hilton has continued to grow volume and profit despite consumer spending remaining subdued across Europe and competitive retail markets. In this environment we have continued to concentrate on product and packaging innovation and development with our customers, extending the range of products supplied and maintaining our unremitting focus on product quality, integrity and traceability. The higher volumes and favourable currency translation increased segment profitability.

Central Europe

Operating profit of £0.4m (2016: £1.3m) on turnover of £47.1m (2016: £45.3m)

Our facility at Tychy in Southern Poland supplies Ahold stores in the Czech Republic and Slovakia, Tesco stores in the Czech Republic, Hungary, Poland and Slovakia and Rimi stores in Latvia, Lithuania and Estonia. 

As anticipated the business continued to be challenged by a highly competitive and price sensitive landscape. Volumes fell 20.6% compared to last year with turnover as reported in Sterling down by 7.9% on a constant currency basis. Operating profit was correspondingly lower and additionally there were also start-up costs as the business continues to expand its product range including the launch of a beef deboning operation.

Central costs and other

Net operating cost £1.6m (2016: £2.1m)

This segment includes the service fee income from our Australian joint venture of £2.3m (2016: £1.5m), Australian start-up and support costs of £0.6m (2016: £0.2m) and central costs of £3.3m (2016: £3.4m).

In Australia the Group operates a joint venture with Woolworths, under which it earns a fifty per cent share of the agreed fees charged by the joint venture company for operating certain Woolworths' meat processing and packing plants, based on the volume of retail packed meat delivered to Woolworths' stores.

Volumes in Australia grew by 15.1% across the plants in Bunbury, Western Australia and Melbourne Victoria in line with the agreed plan. Service fee income increased by 33.1% over 2016 on a constant currency basis reflecting the higher volumes and incentives. Higher start-up and support costs relate to the development of a new plant in Queensland which we will build and operate.

Strategic progress

The Group continued to make good strategic progress in the first half during which the joint venture in Portugal commenced production and a beef deboning operation started in Central Europe. Work on our new factory in Queensland, Australia continues with the planning approvals process well advanced. We also invested in a 50% stake in Foods Connected Limited, a software company that develops tools to help companies in the food and retail sectors. Since the end of our half year we announced expansion in Central Europe where a fresh food factory will be developed to produce sandwiches, pizza, ready meals and soups.

Investment in our existing facilities

Hilton continues to invest in all its European facilities maintaining the state of the art levels required to service its customers' growth, extend the range of products supplied to those customers and deliver both first class service levels and further increases in production efficiency. This investment ensures that we can achieve low unit costs and competitive selling prices at increasingly higher levels of production throughput. Capital expenditure in the period was £4.4m (2016: £6.5m).

Outlook

Hilton continues to develop its business and deliver year on year volume growth through focusing on quality and value for money for the consumer. With new projects in Portugal and Queensland, Australia, well invested facilities, a broad geographic customer spread, and flexible procurement capabilities the Group is well equipped and expects results for the full year to be in line with the Board's expectations.

Hilton continues to explore further opportunities for expansion and is well placed to capture those opportunities as they arise. The Group's financial position remains strong and we remain committed to maintaining a strong balance sheet in line with our stated strategy as we invest in these opportunities to grow the business in both domestic and overseas markets.

Financial review

Hilton's overall underlying trading performance remained strong, despite competitive retail grocery markets and uncertain macroeconomic conditions. Volumes increased by 8.7% reflecting growth in Ireland, Sweden and Australia and also the start of the Portuguese joint venture. Turnover increased by 9.3% to £690.7m (2016: £631.9m) and by 3.2% on a constant currency basis. Further details of turnover and volume growth by segment are detailed in the Review of operations above.

Operating profit for the first 28 weeks of 2017 was 9.0% higher at £18.8m (2016: £17.3m) and 1.4% higher on a constant currency basis including new product start-up and support costs in Europe and initial Queensland costs as well as weaker trading across Central Europe. The operating profit margin at 2.7% was unchanged compared to last year.

Net finance costs, at £0.4m, were lower than last year (2016: £0.6m) due to reduced borrowings with Sterling and European inter-bank offered rates remaining close to historically low levels. Interest cover was 43 times (2016: 29 times).

The taxation charge for the period was £3.2m (2016: £3.3m), representing an effective underlying rate of tax of 17.6%, as compared with 19.7% last year predominantly due to higher joint venture income which is reported within operating profit on a post-tax basis under the equity method.

Profit after taxation, at £15.2m, was £1.8m or 13.4% above last year (2016: £13.4m) reflecting higher operating profit and the lower effective rate of taxation.

Basic earnings per share in the first 28 weeks of 2017, at 19.2p, were 13.6% above last year's level.

The Directors have approved the payment of an interim dividend of 5.0 pence per share, amounting to £3.7m (compared with an interim dividend of 4.6 pence per share in 2016) to be paid on 1 December 2017, to shareholders on the register at close of business on 3 November 2017.

In the first 28 weeks the Group generated £16.1m of cash inflow, before minorities, dividends and financing (2016: £13.9m). Cash balances at 16 July 2017 were £60.4m which, net of borrowings of £21.5m, resulted in a net cash position of £38.9m (£32.3m net cash at 1 January 2017).

At 16 July 2017 the Group had undrawn overdraft and loan borrowing facilities of £101.0m (£99.2m at 1 January 2017).

Going concern

The Group's bank borrowings are detailed in note 10 to the condensed consolidated interim financial information and the principal banking facilities which support the Group's existing and contracted new business are committed, with no renewal required until 2019. The Group is in compliance with all its banking covenants. Future expansion which is not yet contracted for, and which is not built into internal budgets and forecasts, may require additional or extended banking facilities and such future expansion will depend on our ability to negotiate appropriate additional or extended facilities as and when required.

The financial position of the Group including its cash flows, liquidity position and borrowings are described above, with its business activities and the factors likely to affect its future development, performance and position being covered in the Review of operations, above. As at the date of this report the Directors have a reasonable expectation that the Group has adequate resources and, having reassessed the principal risks, consider it appropriate to adopt the going concern basis of accounting in preparing the interim financial information.

The principal risks and uncertainties facing the Group's businesses

Hilton has well developed processes and structures for identifying and subsequently mitigating the key risks which the Group faces. The most significant risks and uncertainties faced by the Group, together with the Group's risk management processes are detailed in the review of Risk management and principal risks on pages 23 to 25 of the Hilton Food Group plc 2016 Annual report and financial statements. The principal risks and uncertainties identified in that report, which remain unchanged, were:

These risks and uncertainties are expected to remain unchanged for the remainder of the 2017 financial year. The UK's decision to leave the European Union is not considered a material risk as it will logically only affect product flows between EU countries and those outside the EU, which in the Hilton context are fairly limited, with most of Hilton's sales in each country made to its retail partner in that country.  The risks and uncertainties outlined above had no material adverse impact on the results for the 28 weeks to 16 July 2017.

11 September 2017

Statement of Directors' responsibilities

The Directors confirm that to the best of their knowledge:

(a)  the condensed consolidated interim financial information has been prepared in accordance with IAS 34 'Interim Financial Reporting' as adopted by the European Union;

(b)  the Financial review and Review of operations which constitute the 'interim management report' include a fair review of the information required by DTR 4.2.7R (indication of important events during the first 28 weeks and description of principal risks and uncertainties for the remaining 24 weeks of the year); and

(c)  the condensed consolidated interim financial information includes a fair review of the information required by DTR 4.2.8R (disclosure of related party transactions and any changes therein).

The Directors of Hilton Food Group plc were listed in the Hilton Food Group plc Annual report and financial statements 2016 on pages 34 and 35 and there have been no changes in Directors since 1 January 2017, a list is also maintained on the Hilton Food Group plc website at www.hiltonfoodgroupplc.com.

On behalf of the Board

Robert Watson OBE

Chief Executive

Nigel Majewski

Chief Financial Officer

Income Statement