Hilton Food : Interim results for the 28 weeks to 14 July 2019

RNS Number : 7143L

Hilton Food Group PLC

10 September 2019

10 September 2019

Hilton Food Group plc

Interim results for the 28 weeks to 14 July 2019

Expanding operational scale and new high growth protein diversification

Hilton Food Group plc, the leading specialist international food packing business, is pleased to announce its interim results for the 28 weeks to 14 July 2019.

Financial and strategic highlights

• Volume includes 50% share of the Australian, Portuguese and Dutch joint venture activities

• Adjusted results represent the IFRS results before deduction of acquisition intangibles amortisation £1.3m (2018: £1.3m) and IFRS 16 lease adjustments as detailed in the Alternative Performance Measures section. Unless otherwise stated financial metrics in the Financial and strategic highlights, Review of operations and Financial

review refer to the Adjusted results

• Net (debt)/cash represents cash, financial asset less borrowings. IFRS net debt excluding IFRS 16 includes IAS 17 finance lease liabilities of £1.6m
• Volume and revenue growth of 6.8% and 6.5%* respectively driven by contribution from both UK meat and Seachill, further progress from our operations in Australia and from the new Dalco and HFR Food Solutions businesses
• Operating profit up 14.6%* to £26.7m and basic earnings per share up 9.0%* to 22.8p
• Investment in vegetarian product manufacturer, Dalco and acquisition of sous vide manufacturer HFR Food Solutions both completed during the period
• Significant capex including new facilities opened in Brisbane, Australia at the end of July & Poland fresh convenience foods
• Increase in Tesco UK retail packed red meat to 100% since June 2019
• Interim dividend increased from 5.6p to 6.0p, an increase of 7.1%

* On a constant currency basis

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

"Hilton has expanded its operational scale and diversified into new high growth proteins whilst delivering continued increases in volume and profit. Our new factory in Brisbane, Australia began production ahead of schedule and we also opened our fresh convenience foods facility in Poland. In the UK we are now packing 100% of Tesco retail packed red meat. Investments in vegetarian and sous vide manufacturers increases the new protein offerings we can supply to our retailer partners.

Our financial position remains strong and we are well positioned to capitalise on future growth prospects both in domestic and overseas

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markets as they arise. Our full year results are expected to be in line with the Board's expectations."

This interim management report contains forward-looking statements. Such statements are based on current expectations and assumptions and are subject to risk factors and uncertainties which we believe are reasonable. Accordingly Hilton's actual future results may differ materially from the results expressed or implied in these forward-looking statements. We do not undertake to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Review of operations

The Group is presenting its interim results for the 28 weeks to 14 July 2019, together with comparative information for the 28 weeks to 15 July 2018. The interim results of the Group are prepared in accordance with IAS 34 as adopted by the European Union (EU).

Hilton's business is based on a total partnership approach with its customers and suppliers forged over many years. We operate production facilities in seven countries across Europe and Australia and also work with a number of joint venture partners. The wide geographical spread of the Group's operations is a significant strength of our business model.

Hilton's results are reported in Sterling and are therefore 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 14 July 2019 the average exchange rates for these overseas currencies have generally weakened against Sterling compared with the corresponding period in 2018 which has the effect of reducing revenues by 0.9%.

The overall performance in the period saw healthy growth in volumes, revenues and profits with the UK businesses performing strongly plus a good start following our investment in Dalco.

Western Europe

Operating profit of £26.9m (2018: £24.9m) on turnover of £856.0m (2018: £810.1m)

This operating segment covers the Group's meat businesses in the UK, Ireland, Holland, Sweden and Denmark plus the Portuguese joint venture as well as the sous vide and fish businesses in the UK and the new Dutch vegetarian joint venture. Volume increased 5.9% primarily reflected higher UK volumes including strong growth at Seachill which was boosted by business wins and an encouraging contribution from our share of the new Dalco business. There was also volume growth in Ireland, Denmark and Portugal although Dutch volumes were a little lower. Turnover increased by 6.5% on a constant currency basis reflecting the higher volumes. Operating margins were steady at 3.1% (2018: 3.1%).

We continued to make good progress in a number of our markets including now supplying 100% of Tesco UK red meat. Dalco has performed well since our investment completed at the end of January 2019.

Central Europe

Operating profit of £1.0m (2018: £1.2m) on turnover of £48.5m (2018: £51.5m)

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. Volumes declined by 11.7% with constant currency sales down 3.5% amid continuing challenging market conditions. Operating margins were slightly lower at 2.1% (2018: 2.3%).

The new fresh food facility opened successfully during the period with further products launched including ready meals, soups and hummus.

Central costs and other

Net operating cost £1.2m (2018: £2.5m) on turnover of £7.6m (2018: £2.0m)

This segment includes the results of our operations in Australia and also central costs.

In Australia the Group operates a joint venture with Woolworths, under which it earns a 50% share of the agreed service fees charged by the joint venture company based on the volume of retail packed meat delivered to Woolworths' stores produced by its plants in Bunbury, Western Australia and Melbourne, Victoria. We took full operational control of these plants from July 2018 and also operate a satellite facility in Brisbane, Queensland which opened during the first half of 2018.

Volumes, including our share of the JV, increased by 26.8% during the period underpinned by production at the Brisbane satellite facility. Constant currency sales, which excludes the JV activities, increased by 293%. Operating profit increased to £4.7m (2018: £1.8m) primarily reflecting the higher volumes.

Our new facility in Brisbane opened ahead of schedule on 29 July 2019 with production transferring across from the satellite facility which has now closed. Production will continue to ramp up over the coming months and work continues to construct a new facility in New Zealand which is on schedule.

Central costs at £5.9m (2018: £4.3m) were higher as we progressively increase resources to manage our growth successfully.

Strategic progress

During the period Hilton invested in a 50% shareholding in Dalco Food BV, the leading vegetarian product manufacturer based in Oss in the Netherlands, enabling us to diversify into a further protein and significantly expand into the fast-growing vegetarian market. We also completed the acquisition of HFR Food Solutions Limited, a UK sous vide manufacturer enabling us to leverage our expertise in manufacturing meat products in a new added value segment with major retailers and food service customers. This acquisition also further diversifies the proteins we supply in the UK into pork and poultry.

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In addition we are now supplying Tesco UK with 100% of their retail packed red meat.

Investment in our existing facilities

Hilton continues to invest in all its 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 during the period was £56.8m (2018: £40.6m) which included the accelerated investments in the new Australian facility in Brisbane and Central Europe fresh food factory both of which have now opened and also further investments in the UK to expand capacity to cater for the higher share of Tesco's red meat.

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. Our short and medium term growth is underpinned by new facilities opened in Australia and Poland and under construction in New Zealand, expanding the fish category and developing the vegetarian and ready to cook sous vide categories.

The Group is well equipped for future growth and expects results for the full year to be in line with the Board's expectations. Hilton'sfinancial position remains strong and we continue to explore opportunities to invest and grow the business in both domestic and overseas markets.

Financial review

The Group has adopted IFRS 16, applying the modified retrospective approach, and has not restated comparatives for the reporting period ended 30 December 2018, as permitted under the specific transitional provisions in the standard. As a result, with the exception of revenue, the statutory results for the first half of 2019 are not directly comparable with those of the first half of 2018. However, in order to provide a meaningful comparison between the two reporting periods, financial results for the period to 14 July 2019 excluding the impact IFRS 16 are also presented. Unless otherwise stated financial metrics in the Financial and strategic highlights, Review of operations and Financial review refer to the Adjusted results

Hilton's underlying financial performance continued to be good. Volumes increased by 6.8% reflecting growth in Western Europe and Australia. Turnover increased by 5.6% to £912.1m (2018: £863.6m) and by 6.5% 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 2019 was £26.7m, 13.3% higher than in the previous year (2018: £23.6m) and 14.6% higher on a constant currency basis attributable to Western Europe, including a contribution from the new Dalco joint venture, and Australia. IFRS operating profit excluding IFRS 16 for the first 28 weeks of 2019 was £25.4m (2018: £22.3m) and £26.2m including IFRS 16. The operating profit margin increased to 2.9% (2018: 2.7%).

Net finance costs excluding IFRS 16 increased to £2.2m (2018: £1.3m) mainly reflecting higher borrowings relating to capital expenditure. Interest cover

was 12 times (2018: 17 times). Net finance costs including IFRS 16 were £6.3m.

The adjusted taxation charge for the period excluding IFRS 16 was £4.8m (2018: £3.9m) representing an effective underlying tax rate of 19.5%, an

increase on last year (2018: 17.4%) including a higher level of income in Australia taxed at higher rates. The IFRS taxation charge including IFRS 16 was

£4.5m (2018: £3.6m) representing an effective underlying tax rate of 22.8%.

Net income, representing profit for the year attributable to owners of the parent, of £18.6m was 7.5% above last year (2018: £17.3m) reflecting higher

operating profit partially offset by higher interest and taxation charges. IFRS net income excluding IFRS 16 was £17.5m (2018: £16.2m) and including IFRS 16 was £14.2m.

Basic earnings per share in the first 28 weeks of 2019, at 22.8p, were 7.5% above last year's level reflecting the growth in operating profit. IFRSbasic earnings per share excluding IFRS 16 were 21.5p (2018: 20.0p) and including IFRS 16 17.4p.

EBITDA excluding IFRS 16 increased to £39.2m for the period (2018: £35.5m) reflecting the increase in operating profits together with higher depreciation charges. IFRS EBITDA including IFRS 16 was £49.2m.

In the first 28 weeks the Group absorbed £57.2m of cash outflow, before minorities, dividends and financing (2018: cash outflow £7.1m) which included significant capital expenditure comprising accelerated investments in the new Australian facility in Brisbane, Central Europe fresh food factory and UK capacity expansion. Net cash generated from operations at £2.1m (2018: £28.8m) included increased working capital movements to support new shellfish business and Brexit contingency planning as well as working capital associated with further development of existing businesses.

Cash balances at 14 July 2019 were £83.6m including the other financial asset comprising a treasury deposit which, net of borrowings of £180.9m, resulted in an IFRS net debt position including IFRS 16 of £97.3m. Net debt excluding IFRS 16 was £98.9m (£5.8m net cash at 15 July 2018 and £26.8m net debt at 30 December 2018) which includes IAS 17 finance lease liabilities of £1.6m. At 14 July 2019 the Group had undrawn committed loan facilities of £103.6m (£201.0m at 30 December 2018).

The Directors have approved the payment of an interim dividend of 6.0p per ordinary share (2018: 5.6p). This interim dividend amounting to £4.9m will be paid on 29 November 2019 to shareholders on the register at close of business on 1 November 2019.

Going concern

The Group's bank borrowings are detailed in note 11 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 2022. 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 24 to 27 of the Hilton Food Group plc 2018 Annual report and financial statements. The principal risks and uncertainties identified in that report, which remain unchanged, were:

• The Group is dependent on a small number of customers who can exercise significant buying power and influence when it comes to contractual renewal terms at 5 to 15 year intervals;
• The Group's growth potential is dependent on the success of its customers and the future growth of their packed food sales;
• The progress of the Group's business is dependent on the macroeconomic environment and levels of consumer spending which is influenced by publicity and the decline in the consumption of meat in the countries in which it operates;

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• Under growth conditions the Group's business is reliant on a small number of key personnel and its ability to manage growth and change successfully. This risk has increased with the Group's continued expansion with new customers and into new territories with potentially greater reliance on stretched skilled factory operatives resource and execution of simultaneous growth projects;
• The Group's current rate of global growth places significant demands on the effectiveness of integration and compliance across new political, legislative and regulatory environments. This risk is further compounded due to the enormity of the change and programme management activities;
• The Group's business is dependent on maintaining a wide and flexible global food supply base operating at standards that can continuously achieve the specifications set by Hilton and its customers;
• Contamination within the supply chain including outbreaks of disease and feed contaminants affecting livestock and fish and media concerns relating to these and instances of product adulteration can impact the Group's sales;
• Significant incidents such as fire, flood or interruption of supply of key utilities could impact the Group's business continuity; and
• The Group's IT systems could be subject to cyber attacks including fraudulent external email activity These kinds of attacks are generally increasing in frequency and sophistication.

These risks and uncertainties are expected to remain unchanged for the remainder of the 2019 financial year.

Overall we believe that the Hilton business is sufficiently resilient to withstand uncertainties surrounding Brexit whilst minimising disruption. Should a 'no- deal' scenario arise, it may affect our ability to hire employees, trade tariffs on imports may increase and could result in possible border delays, currency volatility and regulatory standards dis-harmonisation. Our exposure is somewhat mitigated through our predominantly local sourcing and operating model and regular meetings with relevant industry bodies. We have significant contingency measures already in place including rebalancing supply lines to minimise border crossings, flexible buying models and ongoing communication with suppliers to increase stock holdings and believe we are well prepared for any potential impact from a 'no deal' scenario.

The risks and uncertainties outlined above had no material adverse impact on the results for the 28 weeks to 14 July 2019.

Statement of Directors' responsibilities

The Directors confirm that these condensed consolidated interim financial statements have been prepared in accordance with IAS 34 'Interim Financial Reporting' as adopted by the European Union and that the interim management report includes a fair review of the information required by DTR 4.2.7 and DTR 4.2.8, namely:

1. an indication of important events during the first 28 weeks and their impact on the condensed interim financial statements, and a description of principal risks and uncertainties for the remaining 24 weeks of the financial year; and
2. material related party transactions in the first 28 weeks and any material changes in related party transactions described in the last annual report.

The Directors of Hilton Food Group plc were listed in the 2018 Hilton Food Group plc Annual report and financial statements and there have been no changes in Directors since 30 December 2018. A list of current Directors is maintained on the Hilton Food Group plc website at www.hiltonfoodgroupplc.com.

On behalf of the Board

Robert Watson OBE

Executive Chairman

Nigel Majewski

Chief Financial Officer

Income statement

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Statement of comprehensive income

The notes form an integral part of this condensed consolidated interim financial information.

Balance Sheet

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