Annual Report 2014

GROUP CHIEF FINANCIAL OFFICER’S REVIEW

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RESULTS FOR THE YEAR

C&C is reporting net revenue of €620.2 million (up 30%), operating profit(i) of €126.7 million (up 10.6%) and adjusted diluted EPS(ii) of 29.5 cent (up 5.7%).

On a constant currency basis(iii), the net revenue and operating profit results for the year represent an increase of 34.0% and 13.1% respectively. Operating margin, before exceptional items, was 20.4%, a decrease of 3.8 percentage points on a constant currency basis, primarily reflecting the impact of the Group’s acquired lower margin wholesaling business in Ireland.

The Group is pleased with these results as it considers FY2014 a transition year for the business as it evolves from a consumer pull model to a multi beverage, trade-led model in domestic markets while positioning the Group for sustainable international growth. Significant work was completed on integrating the newly acquired businesses with the Group’s existing business and restructuring the business model in the Group’s various markets to best meet customer requirements. Consequently, and as discussed in further detail below, the Group incurred significant one-off costs which in accordance with the Group’s accounting policies have been classified as exceptional items. Furthermore, the integration process together with increased capital investment to build capacity in the USA and increased customer investment via trade lending adversely impacted the cash generation performance of the business.

Consistent with the Group’s stated strategy of moving towards a multi-beverage model in domestic markets, the Group completed the acquisition of M. & J. Gleeson (Investments) Limited and its subsidiaries, a supplier and distributor of beverages in Ireland, on 7 March 2013 for a consideration of €12.4 million; and acquired a 50% interest in Wallaces Express Limited, Scotland’s largest wines and spirits wholesaler (‘Wallaces’), for a consideration of €11.8 million on 22 March 2013. Subsequent to the year end date the Group announced the acquisition of the remaining 50% of Wallaces for a consideration of €12.0 million. The financial results for the current financial year include a full year’s contribution from both the newly acquired Gleeson wholesaling business and the Vermont Hard Cider business in the US acquired during the previous financial year.

The key financial performance indicators are set out on this page.

The performance of each of the Group’s reporting segments is discussed in detail in the Operations Review. In summary the key drivers of this financial performance were:-

  • A robust but transitional year for ROI following the acquisition of the Gleeson group and the integration of both businesses. The organic business benefited from the good summer weather with the Bulmers brand outperforming the LAD market.
  • Continued competitiveness in the UK Cider market and increased commoditisation of brands had a negative impact on the performance of the Group’s cider brands in the UK with volumes down 11.0% and price/mix down 4.0% on a constant currency basis. Recent category trends show local, craft cider brands performing well and in line with this market trend, the Group increased its focus on the Shepton Mallet Cider Mill regional and craft cider brands stalling the rate of decline.
  • A strong performance by Tennent’s UK. Volumes fell 1.6% primarily driven by reduced sales in Northern Ireland and to GB off-trade multiples. However, in Scotland (where approximately 60% of Tennent’s UK volume is sold), the independent free trade volumes grew by 11.3 % reflecting brand strength and the Group’s increased investment in this channel. Operating profit increased by 18.9% on a constant currency basis.
  • Transitional year in the US but positive growth in Magners key markets of Australia, Canada and France. Performance in the US following the acquisition of Vermont Hard Cider Company (‘VHCC’) was significantly impacted by heavy competition and by the disruptive effect of optimising the Group’s wholesaler network and consolidating and integrating the Group’s US businesses. Cider growth rates in the US remain attractive and the Group will focus on implementing initiatives to establish a sustainable long term position in this market.
  • Currency: The Group consolidates the results from foreign currency subsidiaries using the average actual rate for the period. The average actual sterling rate for FY2014 was €1:£0.846 representing a 4% weakening of sterling versus the equivalent prior year rate. The average actual USD rate for FY2014 weakened 3% versus the equivalent for FY2013. The application of these rates to last year’s net revenue reduces reported FY2013 net revenue by €13.4 million and reduces reported operating profit by €2.9 million.

ACCOUNTING POLICIES+-

As required by European Union (EU) law, the Group’s financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the EU, which comprise standards and interpretations approved by the International Accounting Standards Board (IASB) and the International Financial Reporting Interpretations Committee (IFRIC), applicable Irish law and the Listing Rules of the Irish Stock Exchange and the UK Listing Authority. Details of the basis of preparation and the significant accounting policies are outlined on this page.

FINANCE COSTS, INCOME TAX AND SHAREHOLDER RETURNS+-

Net finance costs increased to €11.0 million (2013: €4.9 million), primarily reflecting a full year’s debt drawdown to finance the acquisition of VHCC in December 2012, a marginal reduction in the effective interest rate and increased finance-related costs following the setting up of a non-recourse debtor factoring facility in August 2013. On a time-weighted basis the average drawn debt increased from €49 million during FY2013 to €300 million during FY2014. Net finance costs are also inclusive of an unwind of discount on provisions charge of €0.9 million (2013: €1.0 million) and a loss of €0.1million (2013: nil) on movement in fair value of derivative financial instruments.

The income tax charge in the year excluding the charge in relation to exceptional items and equity accounted investees amounted to €15.1 million. This represents an effective tax rate of 13.1%, a reduction of 1.5 percentage points on the prior year. The reduction is primarily due to the impact of acquisitions on the Group’s profile and the geographical mix of profits. The effective tax rate at 13.1% continues to reflect the fact that the majority of the Group’s profits are earned in jurisdictions, which have competitive tax rates relative to European averages.

Subject to shareholder approval, the proposed final dividend of 5.7 cent per share will be paid on 15 July 2014 to ordinary shareholders registered at the close of business on 30 May 2014. The Group’s full year dividend will therefore amount to 10.0 cent per share, a 14.3% increase on the previous year. The proposed full year dividend per share will represent a payout of 33.9% (FY2013: 31.4%) of the full year reported adjusted diluted earnings per share. A scrip dividend alternative will be available. Total dividends paid to ordinary shareholders in FY2014 amounted to €31.0 million, of which €27.9 million was paid in cash, €0.1 million was accrued with respect to LTIP (Part I) dividend entitlements, while €3.0 million or 10% (FY2013: 25%) was settled by the issue of new shares.

Exceptional items

As noted above, FY2014 represented a year of restructuring, integration and consolidation. Consequently costs of €20.7 million were incurred, which due to their nature and materiality were classified as exceptional items for reporting purposes, a presentation which, in the opinion of the Board, provides a more helpful analysis of the underlying performance of the Group.

The items which were classified as exceptional include:-

(a) Restructuring costs of €6.1 million: comprising severance and other initiatives arising from the integration of the Group’s Irish businesses following the current year acquisition of the Gleeson group and from cost cutting initiatives at the Group’s manufacturing facilities resulted in an exceptional charge before tax of €6.7 million (2013: €1.2 million). This charge is reduced by a defined benefit pension scheme curtailment gain of €0.6 million due to the reduction in headcount numbers and the reclassification of these employees from active to deferred members. A curtailment gain arises where the value of the pension benefit of a deferred member is less than that of an active member.

(b) Acquisition-related costs of €1.1 million: comprising professional and other related fees primarily attributed to the acquisition of the Gleeson group.

(c) Integration costs including write-off of redundant legacy IT assets of €5.6 million: primarily relating to the integration of the acquired Gleeson and VHCC businesses with the Group’s existing business and the resulting streamlining of its IT requirements leading to the write-off of IT assets no longer required.

(d) Redeployment of a bottling line incurring costs of €7.4 million: during the financial year a bottling line was redeployed from the Group’s cider manufacturing facility in Clonmel to its cider manufacturing facility in Shepton Mallet, Somerset. Costs of €6.6 million were incurred in this regard. As a result of this deployment an existing PET line with a value of €0.8 million in Shepton Mallet became redundant and was written off.

(e) Other costs of €0.5 million: includes costs incurred in relation to the upgrading of the Group’s listing on the Official List of the UK Listing Authority from a standard listing to a premium listing offset by the release of an excess onerous lease provision.

BALANCE SHEET STRENGTH, DEBT MANAGEMENT AND CASHFLOW GENERATION

Balance sheet strength provides the Group with the financial flexibility to pursue its strategic objectives. The Group has a committed €350.0 million multi-currency five year syndicated revolving facility and is permitted under the terms of the agreement to have additional indebtedness to a maximum value of €150.0 million, giving the Group total debt capacity of €500.0 million. The debt facility matures on 28 February 2017. As at 28 February 2014 net debt was €145.2 million reflecting a net debt: EBITDA ratio of less than 1.0x.

Total assets reported by the Group were €1,380.5 million at 28 February 2014 (2013: €1,200.3 million). The Group’s portfolio of market leading brands and related goodwill is valued at €718.9 million, representing approximately 52% of total assets (2013: €705.8 million).

Brand values and goodwill are assessed for impairment on an annual basis by comparing the carrying value of the assets with their recoverable amounts using value in use computations. Sensitivity analysis was performed on these calculations whereby the underlying assumptions (net revenue, operating profit, discount and terminal growth rates) were each negatively adjusted by 1 percentage point. Applying these individual assumptions, while holding all other assumptions constant, to the value in use computations did not indicate an impairment of the Group’s goodwill or brands.

Cash generation

Management reviews the Group’s cash generating performance by measuring the conversion of EBITDA to Free Cash Flow as we consider that this metric best highlights the underlying cash generating performance of the continuing business.

The Group’s performance during the year resulted in an EBITDA to Free Cash Flow(iv) conversion ratio of 40.9% (2013: 40.2%). The cash flow performance was adversely impacted by a number of factors including costs associated with integrating acquired businesses to reflect the new business model in Ireland, consulting and other costs directly related to the acquisition of businesses, increased financing costs, trade lending and capital expenditure. In addition taxation payments increased in line with an increased level of UK taxable profits and the expiration of UK accelerated capital allowances. A reconciliation of EBITDA to operating profit and a summary cash flow statement are set out below.

A summary cash flow statement is set out in Table 2 on this page.

Table 1 – Reconciliation of Operating profit to EBITDA(v)

2014

2013

€m

€m

Operating profit

106.0

110.0

Exceptional items

20.7

4.6

Operating profit before exceptional items

126.7

114.6

Amortisation/depreciation

24.0

21.7

 

 

EBITDA (v)

150.7

136.3

 

 

Table 2 – Cash flow summary

2014

2013

(restated)

€m

€m

EBITDA (v)

150.7

136.3

 

 

Working capital

0.7

(21.8)

Advances to customers

(14.3)

(16.7)

Net capital expenditure

(28.5)

(24.1)

Net finance costs

(8.3)

(1.9)

Tax paid

(13.7)

(8.5)

Exceptional items paid

(16.9)

(4.9)

Other(vi)

(8.1)

(3.6)

 

 

Free cash flow(iv)

61.6

54.8

Free cash flow conversion ratio

40.9%

40.2%

 

 

Free cash flow

61.6

54.8

Exceptional cash outflow

16.9

4.9

Free cash flow excluding exceptional cash outflow

78.5

59.7

Free cash flow conversion ratio excluding exceptional cash outflow

52.1%

43.8%

 

 

Reconciliation to Group Condensed Cash Flow Statement

 

 

Free cash flow

61.6

54.8

Proceeds from exercise of share options

5.0

3.5

Proceeds from the sale of shares held by Employee Trust

1.2

6.6

Proceeds from issue of new shares following acquisition of subsidiary

-

5.3

Drawdown of debt

76.2

251.2

Repayment of debt

(57.3)

(65.2)

Payment of issue costs

-

(2.8)

Acquisition of brand & business/deferred consideration paid

(8.6)

(233.5)

Acquisition of equity accounted investees

(12.0)

(2.9)

Dividends paid in cash

(27.9)

(21.2)

 

 

Net increase/(decrease) in cash & cash equivalents

38.2

(4.2)

 

 

Notes to the Chief Financial Officer’s Review

(i) Operating profit is before exceptional items. The prior year operating profit has been restated on adoption by the Group of revised IAS 19 Employee Benefits; please see Note 1 to the financial statements.

(ii) Adjusted basic/diluted earnings per share (‘EPS’) is before exceptional items. Prior year EPS has been adjusted in line with the prior year restatement of operating profit on adoption by the Group of revised IAS 19 Employee Benefits as outlined in Note 1 to the financial statements.

(iii) Constant currency calculation is set out on this page.

(iv) Free Cash Flow is a non GAAP measure that comprises cash flow from operating activities net of capital investment cash outflows which form part of investing activities. Free Cash Flow highlights the underlying cash generating performance of the on-going business. A reconciliation of FCF to Net Movement in Cash & Cash Equivalents per the Group’s Cash Flow Statement is set out on this page.

(v) EBITDA is earnings before exceptional items, finance income, finance expense, tax, depreciation, amortisation charges and Equity accounted investees’ profit after tax.

(vi) Other relates to share options add back, pensions charged to operating profit before exceptional items less contributions paid and net profit on disposal of PPE.

RETIREMENT BENEFIT OBLIGATIONS

In compliance with IFRS, the net assets and actuarial liabilities of the various defined benefit pension schemes operated by the Group companies, computed in accordance with IAS 19(R) Employee Benefits, are included on the face of the Group balance sheet as retirement benefit obligations.

The Group is reporting a retirement benefit obligation surplus of €1.4 million in relation to its UK defined benefit pension scheme and a deficit of €22.8 million in relation to its two ROI defined benefit pension schemes. All schemes are closed to new entrants. There are 5 active members in the NI scheme and 80 active members (less than 10% of total membership) in the ROI schemes. In line with a funding plan approved by the Pensions Board for the ROI schemes, the Group is committed to contributions of 14% of Pensionable Salaries to fund future pension accrual of benefits; a deficit contribution of €3.4 million; and an additional supplementary deficit contribution of €1.9 million , which C&C reserves the right to reduce or terminate on consultation with the Trustees and on advice from the Scheme Actuary that it is no longer required due to a correction in market conditions. The scheme actuaries advised that as at 31 December 2013 the schemes were on track to meet the minimum funding standard and risk reserve by 31 December 2016, the end of the funding period.

At 28 February 2014, the retirement benefit obligations on the IAS 19 (R) Employee Benefits basis amounted to €21.4 million gross and €18.8 million net of deferred tax (FY2013: €21.5 million gross and €18.8 million net of deferred tax). The movement in the deficit is as follows:-

€m

Deficit at 1 March 2013

21.5

Employer contributions paid

(6.8)

Actuarial loss

6.4

Charge to the Income Statement

0.5

FX adjustment on retranslation

(0.2)

Net deficit at 28 February 2014

21.4

 

The benefit of employer contributions of €6.8 million on the retirement benefit pension obligations on the IAS 19(R) basis was reduced by an actuarial loss of €6.4 million. The actuarial loss primarily arose as a result of a reduction in the discount rate applied to liabilities: ROI schemes reduced from 3.8% - 4.25% at 28 February 2013 to 3.4% - 3.6% at 28 February 2014. This loss was partially reduced by an experience gain of €8.4 million in relation to membership movements.

All other significant assumptions applied in the measurement of the Group’s pension obligations at 28 February 2014 are broadly consistent with those as applied at 28 February 2013.

FINANCIAL RISK MANAGEMENT+-

The most significant financial market risks facing the Group continue to include foreign currency exchange rate risk, commodity price fluctuations, interest rate risk and creditworthiness risk in relation to its counterparties.

The Board of Directors set the treasury policies and objectives of the Group, the implementation of which is monitored by the Audit Committee. There has been no significant change during the financial year to the Board’s approach to the management of these risks. Details of both the policies and control procedures adopted to manage these financial risks are set out in detail in note 23 to the financial statements.

Currency risk management

The Group’s reporting currency and the currency used for all planning and budgetary purposes is the euro. However, as the Group transacts in foreign currencies and consolidates the results of non-euro reporting foreign operations, it is exposed to both transaction and translation currency risk.

Currency transaction exposures primarily arise on the sterling, US, Canadian and Australian dollar denominated sales of its euro subsidiaries. The Group seeks to minimise this exposure, when economically viable to do so, by maximising the value of its foreign currency input costs and creating a natural hedge. When the remaining net exposure is material, the Group manages it by hedging an appropriate portion for a period of up to two years ahead. Forward foreign currency contracts are used to manage this risk in a non-speculative manner. The Group had no outstanding forward foreign currency contracts as at the year-end date.

In addition, the Group seeks to partially manage its foreign currency translation risk through borrowings denominated in those currencies. Part of the Group’s multi-currency debt facility was designated as a net investment hedge of its US dollar subsidiaries.

The effective rate for the translation of results from sterling currency operations was €1:£0.846 (year ended 28 February 2013: €1:£0.813) and from US dollar operations was €1:$1.334 (year ended 28 February 2013: €1:$1.290). The effective rate for the translation of sterling currency revenue/net revenue transactions by euro functional currency operations resulted in an effective rate of €1:£0.86 (FY2013: €1:£0.86)

Comparisons for revenue, net revenue and operating profit for each of the Group’s reporting segments are shown at constant exchange rates for transactions by subsidiary undertakings in currencies other than their functional currency and for translation in relation to the Group’s sterling and US dollar denominated subsidiaries by restating the prior year at FY2014 effective rates. Applying the realised FY2014 foreign currency rates to the reported FY2013 revenue, net revenue and operating profit rebases the comparatives as shown in Table 3 on this page.

Table 3 – Constant Currency Comparatives

Year ended
28 February 2013

(restated)


FX
Transaction


FX
Translation

Year ended 28 February 2013
Constant currency
comparative

€m

€m

€m

€m

Revenue

ROI

133.8

-

-

133.8

Cider UK

195.8

-

(7.4)

188.4

Tennent’s UK

229.3

-

(8.8)

220.5

International

48.5

(0.6)

(0.7)

47.2

Third party brands UK

116.7

-

(4.5)

112.2

Total

724.1

(0.6)

(21.4)

702.1

 

 

 

 

Net revenue

 

 

 

 

ROI

92.2

-

-

92.2

Cider UK

137.8

-

(5.1)

132.7

Tennent’s UK

108.9

-

(4.2)

104.7

International

47.8

(0.6)

(0.6)

46.6

Third party brands UK

90.2

-

(3.5)

86.7

Total

476.9

(0.6)

(13.4)

462.9

 

 

 

 

Operating profit

 

 

 

 

ROI

38.7

0.6

-

39.3

Cider UK

31.3

(0.7)

(1.4)

29.2

Tennent’s UK

30.3

-

(1.2)

29.1

International

9.2

0.4

(0.1)

9.5

Third party brands UK

5.1

-

(0.2)

4.9

Total

114.6

0.3

(2.9)

112.0

 

 

 

 

Debt and interest rate risk management

It is Group policy to ensure that a structure of medium/long term debt funding is in place to provide it with the financial capacity to promote the future development of the business and to achieve its strategic objectives. The Group manages its borrowing ability by entering into committed loan facility agreements. Currently the Group has a multi-currency five year syndicated loan facility, entered into in February 2012 with seven banks including Bank of Ireland, Bank of Scotland, Barclays Bank, Danske Bank, HSBC, Rabobank, and Ulster Bank. The principal agreement provided the Group with debt capacity of up to €350.0 million.

The Group’s cash deposits are all invested on a short term basis with banks who are members of the Group’s banking syndicate.

Commodity price and other risk management

The Group is exposed to commodity price fluctuations, and manages this risk, where economically viable, by entering into fixed price supply contracts with suppliers. The Group does not directly enter into commodity hedge contracts. The cost of production is also sensitive to variability in the price of energy, primarily gas and electricity. It is Group policy to fix the cost of a certain level of its energy requirement through fixed price contractual arrangements directly with its energy suppliers.

The Group seeks to mitigate risks in relation to the continuity of supply of key raw materials and ingredients by developing trade relationships with key suppliers. The Group has over 60 long-term apple supply contracts with farmers in the west of England and has an agreement with malt farmers in Scotland for the supply of barley.

In addition, the Group enters into insurance arrangements to cover certain insurable risks where external insurance is considered by management to be an economic means of mitigating these risks.

Kenny Neison

Group Chief Financial Officer

For note references to the CFO Review please see page 33.