15 Finsbury Food Group Annual Report & Accounts 2017
Strategic Report
Group Systems
The Group will, during the next financial year, complete the upgrade of its business systems across UK bakery. The ERP system is the latest version of the existing system within the Fletchers business acquired in 2014. Recognising the inherent risks to a systems upgrade, an appropriate Corporate Governance structure has been put in place, a Steering Committee comprising senior operational management from both businesses and chaired by an independent implementation specialist with KPMG engaged to independently assess and advise the Board on progress and risks to the business associated with the program. The fact that the new ERP system is the latest version of the existing system in operation within the Fletcher’s business is also a significant risk reduction factor.
Dividend
Commodity and Labour Pressures Bakery entails the use of commodities whose price is determined by worldwide demand and macro-economic factors. Commodity pressures have increased as a consequence of a number of factors; 1) A step change in the value of Sterling against both the Euro and Dollar following the Brexit vote. 2) The commodity cycle which, in the recent past, has been relatively low. The cycle has seen significant increases in the price of a number of commodities which are over and above any exchange rate deterioration. Finally, 3) European policies particularly in the areas of butter and sugar.
The Group maintains a high level of expertise in its buying team and will consider long-term contracts where appropriate to reduce uncertainty in input prices. The team also cultivates strong relationships with major suppliers to ensure continuity of supply at competitive prices. Regular renovation and innovation in our product range can help to manage margin pressures in an effective manner as far as the competitive environment allows. The Group also purchases forward foreign currency in order to minimise the fluctuation of input costs linked to future currency conversion rates.
The National Living Wage is driving forward the cost of labour ahead of inflation and demand related adjustments. More recently the future availability of labour has become a concern. Ongoing capital investment and improvements in operational efficiency help reduce the impacts of both labour availability and cost as well as material inflation.
Pension Fund Deficit The Group has one defined benefit pension scheme within its Memory Lane Cakes Limited business in Cardiff. The scheme was closed to new members in 2010 to reduce the funding risk to Memory Lane Cakes. The valuation of the scheme on a technical provision basis as well as the underlying performance of the invested assets can cause large fluctuations in valuations. There is an agreed deficit recovery plan fixed until September 2023 or until a new schedule is agreed based on the next valuation which will be at 31 December 2018.
Cyber Security The Group is exposed to random and malicious attacks from cyber criminals. The maintenance of protections software is one tool in the fight to protect our data. In addition, the Group is investing to implement common information systems across all companies with standardised protection, operating requirements and security protection. Finally, real time back-up, training and regular communication pulls the Group’s defences together.
Subject to shareholder approval at the Company’s AGM on 22nd November 2017, the final dividend of 2.0 pence per share will be paid on 22 December 2017 to all shareholders on the register at 24 November 2017 and will be recognised in the financial year ending 30 June 2018.
Financial Review
Continuing Group revenue for the 52 week period to 1 July 2017 was up 0.3% to £314.3 million (2016: £313.5 million 52 weeks, £319.7 million 53 weeks). Operating profit margins were 5.5% (2016: 5.3%). Capital investment, improvement in operational efficiency and product mix are the main drivers for the improvement in margin. Administrative expenses have decreased despite inflationary pressures. This decrease is driven by continued focus on overhead control, operational improvements and efficiencies from record levels of capital investment. The prior year also included a charge of £2.8 million for the cancellation of legacy share options.
Grain D’Or Business
The Group’s Grain D'Or business was acquired as part of the Fletchers acquisition in October 2014, it is a producer of premium baked products for the UK pastry sector and based in London. The business has been historically loss making and despite the implementation of a range of initiatives to improve the business, including strict cost control and new working practices, the site remained loss making in the year to 1 July 2017. The Company now proposes to close the site. A formal consultation with representatives of the workforce commenced on 1 September 2017. The consultation is expected to conclude mid October 2017. Until this consultation period concludes uncertainty remains over the use of the assets. In light of this, a decision has been taken to impair the assets used in the business by £4.0 million in the year to 1 July 2017.
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