PATTIES FOODS LIMITED Australia's Favourite Food
How we're making
a good company great
ANNUAL REPORT 2015
Annual General Meeting
The 2015 Patties Foods Ltd Annual General Meeting will
be held at 2.00 p.m. on Thursday, 19 November 2015 in Boardrooms 1 and 2 at Minter Ellison Lawyers, level 23, 525 Collins Street,
Melbourne, Victoria 3000.
Game changing
Successful launches of innovative new products across all brands including installing the latest new sous vide (or slow cooked) technology for our Herbert Adam's Slow Cooked and FOUR'N TWENTY Real Chunky range, placing us at the forefront of innovation in our category.
Being the best
Patties Foods Limited continues to invest in marketing and manufacturing technology for its icon brands and deliver improved manufacturing efficiencies, lower conversion costs and the highest quality food products.
Contents
Chairman's Review
CEO's Report
In the Home
Out of the Home VI Manufacturing VII Board of Directors VIII Financial Report
Growth is on the menu
Over the coming 12 months, our strategy remains focused on delivering profitable growth; expanding our savoury business; continuing to optimise our cost base and; delivering further efficiency gains from our Bairnsdale bakery.
Chairman
In the 2015 financial year, Patties Foods Ltd (PFL) performed solidly, despite the significant impact of the Frozen Berries recall. The recall was the primary reason for the approximate $14.6m reduction in net profit after tax compared with the previous year.
However, it is important to note that total company revenue grew by +3.7% despite the effects of the frozen berries recall, which indicated that the savoury business performed solidly with all core brands growing revenue and profit. This positive result was driven by more effective marketing, product and manufacturing innovation, channel focus and expense control.
There were successful launches of innovative new products across all brands including installing the latest new sous vide (or slow cooked) technology for our Herbert Adam's Slow Cooked and FOUR'N TWENTY Real Chunky range, placing us at the forefront
of innovation in our category.
The effect of the frozen berries recall on Frozen Fruit sales and substantial increases in beef prices on inventory resulted in the net debt to equity ratio increasing to 54.7% at 30 June 2015 (47.5 % at 30 June 2014) with total cash flow generated from operations
in FY15 reducing to $5.3m. Accordingly, Net Debt increased by $10.5m to $74.2m (30 June 2014 $63.7m).
The Patties Board each contribute their diverse skills and great depth of relevant business experience, together with a strong commitment to Patties high performance values and strong Corporate governance.
I would like to thank all Directors for
their contribution.
Net Profit After Tax (NPAT) for FY15 was $2.1m
vs $16.7m in FY14 after taking a non cash impairment charge of $10.3m against the Frozen Fruit intangible assets and an inventory provision against slow moving fruit of $3.0m. Importantly, the underlying NPAT of $15.4m was in line with market guidance provided
in June 2015 of approximately $15.0m.
A more comparable underlying NPAT of approximately $17.0m versus $16.7m in FY14 would have been achieved, after allowing for the reduced margin from the lower post recall sales of Frozen Fruit in the second half.
There was no interim dividend paid due to caution around the financial impacts of the frozen berries recall at the time. The total dividend per ordinary share for FY15 is 5.0 cps (FY14: 7.1 cps) representing an
underlying pay-out ratio of 45% (FY14: 59%).
Safety Culture is a top priority, and the Board is pleased with progress in 2015 of the safety and injury management strategies that were implemented throughout the business.
Our refreshed Strategic Growth Roadmap
was implemented in 2015, which has at its centre, the drive for sustainable growth
of our core brands and a rigorous focus on productivity improvements and cost control. A major company reorganization delivered in excess of $3m savings in overheads and was able to deliver over $2.8m in further operational and purchasing savings.
Patties Foods, with its sound business fundamentals and stable of iconic market leading brands, remains focused on driving earnings growth and building shareholder value. We continue to invest in people, safety, innovation and technology, and leverage our strong manufacturing, marketing, sales and distribution capability to drive growth for our core brands.
Our focus on driving for growth is evident with our core brands growing sales revenue versus the year prior: FOUR'N TWENTY (+5.1%), Patties (+7.6%), Herbert Adam's (+11%) and Nanna's sweet pastry
products (+19%).
On behalf of the Board, I would like to thank our Managing Director and CEO, Steven Chaur, along with the Management team, and all of our employees for their commitment, team work and collaboration. I would also like to commend the PFL team for their professional handling of the many challenges associated with the Frozen Berries recall.
A special thank you to all stakeholders and, in particular, our shareholders for their support.
On behalf of my felIow Directors, we all very much look forward to welcoming you at the Annual General Meeting in November.
FY15 was a very challenging year for Patties Foods Limited, as a result of the highly publicised national frozen berries recall and substantial increases
in beef prices.
Over the coming 12 months, our strategy remains focused on delivering profitable growth; investing in our icon brands; expanding our savoury business; continuing to optimise our cost base and; delivering further efficiency gains from our Bairnsdale bakery.
I take this opportunity to thank our
Despite these pressures, the company has proactively worked to help mitigate any long-term effects and focus on driving its core savoury business, which continues
to perform solidly and has gained profitable market share in all key sales channels.
During the year, the company pursued its 3-Stage rebuilding program and through its first 'Restore Basic Operating Conditions' stage, the company;
delivered a major company reorganisation which resulted in excess of $3.0M in overhead savings and a further $2.8M
in operational and purchasing savings to help offset the significant impact in beef costs
In the In-Home channel, PFL grew
at +7.6% in sales revenue, all our core savoury brands grew in market share assisted by improved shelf ranging and promotional effectiveness.
In the Out of Home channel, PFL won major accounts nationally with branded savoury products in the Petrol & Convenience, End Users and major Distributor channels.
Was able to mitigate substantial market increases in beef prices through more effective procurement, wholesale price increases and forward purchasing. This however resulted in higher levels of short term inventory and debt over the past year.
Was able to manage and contain
the impact of the Frozen Berries recall with customers, consumers, suppliers and regulatory authorities, whilst continuing to focus on growing our core Savoury business.
Our Bairnsdale bakery continues to progress toward best in class on product quality, reliability and operational efficiency through new and experienced bakery leadership; engineering and automation improvements and; two successfully commissioned major capital projects.
Our sales focus remains on delivering profitable sales relationships and channel mix; improving promotional cost effectiveness; seeking new opportunities in the Grocery and Out of Home channels and; accelerating our 'fewer-bigger-better' innovation pipeline through new technologies and premium savoury products.
Further highlights for the year were:
We invested an additional $1.6m in brand support, mainly in FOUR'N TWENTY brand activation and assisting the successful launch of innovative new savoury products.
The Company grew its total share of the key Petrol and Convenience
channel and; won the AACS 'National Supplier of the Year' in this growing 'Food on the Go' channel.
Accelerated Continuous Improvement programs at the Bairnsdale Bakery with a strong emphasis on savoury
manufacturing excellence, including the successful installation of a new Pie Line 2 tunnel oven and in-house Sous Vide cooking technologies.
Patties Foods Limited remains a vibrant Australian food company with strong growth prospects derived from a multiple sales channel business model, category leading brands and supported by a best-in-class automated bakery operation in East Gippsland.
board and management team for their professionalism, energy and focus during the difficult past twelve months. I would also like to thank all our hard working and skilled team of employees who continue to make
a difference every day.
$m | June 15 | June 14 | +/- |
Net Sales Revenue | 256.9 | 247.7 | +9.2 |
Cost of Goods sold | 172.1 | 161.2 | +10.9 |
Gross margin | 84.8 | 86.5 | -1.7 |
Operating expenses | 52.5 | 52.6 | -0.1 |
EBITDA (underlying) | 32.3 | 33.9 | -1.6 |
Depreciation & Amort. | 8.4 | 7.9 | +0.5 |
EBIT (underlying) | 23.9 | 26.0 | -2.1 |
Interest | 3.7 | 3.7 | +0.1 |
NPBT (underlying) | 18.8 | 22.4 | -3.6 |
Tax | 3.4 | 5.7 | -2.3 |
NPAT (underlying) | 15.4 | 16.7 | -1.3 |
Significant items (after tax) | 13.4 | 0.0 | +13.4 |
NPAT (reported) | 2.1 | 16.7 | -14.6 |
EPS | 1. 5 | 12.0 | -10.5 |
EPS (underlying) | 11.1 | 12.0 | -0.9 |
ROE (underlying) | 11. 4% | 12.4% | -0.3% |
Net Asset Backing (cents) | 96 | 99 | -2 |
DPS (cents) | 5.0 | 7.1 | -2.1 |
Earnings Summary
49.9% Patties Foods
19.1% Competitor 1
3.7% Competitor 2
5.9% Competitor 3
15.5% Private Label
5.9% Others
Grocery Frozen Dessert Pies Market Share % FY1555.1% Patties Foods
23.2% Competitor 1
19.4% Private Label
2.3% Others
In the home
Grocery Frozen Fruit Market Share % FY1539.0% Patties Foods
7.9% Competitor 1
44.7% Private Label
% Others
Exciting
Innovation
Patties Foods' strength continues to be in
Savoury pastry products. It maintains its branded
leadership at 49.9% in a competitive grocery market as consumers continue to expect high quality, great value products with Patties.
No.
1
Growing Sales revenue by +7.6%, all core savoury brands grew in market share; assisted by improved shelf ranging and promotional effectiveness.
Savoury
Brand
Our iconic FOUR'N'TWENTY brand continues to hold its position as the number 1 brand in the savoury category nationally. The Herbert Adams brand brings exciting innovation to the channel with the installation of a sous
vide technology at the bakery leading to the
launch of the premium Herbert Adams' slow cooked range.
Market leader
with 55% share
Nanna's remains the market leader in the fruit pie segment with a strong 55.1% share in a segment growing at +3.0%. A packaging re-launch for Nanna's and new products helped deliver growth in FY15.
Patties Foods continues to actively participate in the Frozen Fruit category and as the Australian market slowly recovers, the Company will monitor and review progress.
The Frozen Fruit business represents approximately 13% of PFL income and less of earnings before interest and tax (EBIT).
Patties Foods is a well-regarded national supplier into the dynamic supermarket channel through national core ranging, Shopper Insights, new to category innovation and field support capabilities to ensure continued market growth by attracting more consumers to the freezer section to buy our iconic Australian brands.
Australian Savoury Market Value $M 2015 (est.)46.4% Chain & Independent Bakery 19.9% Grocery - Frozen
2.0% Grocery -Chilled
12.8% Petrol & Convenience 10.2% Cafe & High Street
8.5% Food Service &Catering
Petrol & Convenience Hot Savoury Market Share % FY1531.1% Patties Foods
32.7% Competitor 1
26.4% Private Label
9.8% Others
Out of the home
The Out of Home channel remains a focus for profitable future company growth.
Patties Foods estimates the Australian Market for savoury pastries at over $1.4Bn in retail sales with supermarkets having a 20% share of this total savoury pastry market. This presents significant growth potential for PFL.
The Out of Home channel has over 100,000 end users spread across multiple channels including P&C (Petrol and Convenience), Catering, Stadiums, Education, Aged Care, Cafes, local bakeries, Pubs and Clubs, Travel, traditional route and restaurants.
Patties Foods has well-known brands that cater for all the Out of Home customer needs. Our FOUR'N'TWENTY brand is the favourite brand in major stadiums around Australia. Eating a FOUR'N'TWENTY pie whilst watching the footy is an Australian tradition. FOUR'N'TWENTY continues to be the national market leader in innovation with the launch of FOUR'N'TWENTY Real Chunky range, which has the tenderest chunks of slow cooked meat of any nationally supplied pie in the market.
The Patties brand of party pies and party sausage rolls continue to be a favourite in the Catering channel. At any function,
Favourite
the party pies is always first to be consumed. Our savoury pies, sausage rolls and pasties are favourites in café's and Bakeries due
in Catering
to our consistent high service, supported
by a national team of dedicated sales people.
channel
Patties Foods (PFL) remains the market leader in the P&C channel with a total brand share of 31.1% and has a total market share of 53.3% with PFL brands and customer brands (produced by PFL). PFL was successful during FY15 in securing a number of key national accounts exclusively and was voted by the Australian Association
Market
Leader in
Innovation
of Convenience Stores (AACS) as 'Supplier of the Year' for 'Food on the go' category.
$2.8m+
delivered in
operational &
In FY15 our productivity, safety and efficiency programs at our Bairnsdale based bakery delivered improved results, with operational and production capability investment continuing
procurement
benefits
to improve our efficiencies, product quality and cost base.
With a new strong food industry experienced leadership group in place across the bakery, a new Value Stream Manufacturing (VSM) model was implemented during FY15, driving end to end improvement gains against key measures on each production line. Our 'make right first time' focus is ensuring consistent production quality everytime.
Line reliability and production uptime has been a key focus
to deliver improved efficiencies. Continuous Improvement programs in FY15 delivered over $2.8m in operational and procurement benefits. However the impact of rising meat prices
was felt during FY15 and they were mitigated by forward purchasing and wholesale price increases.
The FY15 Capital expenditure program was dominated by
a new tunnel oven installation over the December shut down which increased the pie line capacity with improved product consistency, reduced waste and maintenance cost savings. The category leading Sous Vide cooking equipment was also successfully commissioned which will significantly increase our capabilities to pursue new growth opportunities.
Over the coming 12 months our operational focus will continue to be on safety performance, Continuous Improvement, Bakery efficiency and product quality initiatives.
Manufacturing
Board of DirectorsThank you to all our hard working and skilled team of employees who
continue to make a difference every day.
Mark Smith
Chairman
Patties Foods achieved solid growth for its iconic core brands, growing total revenue by over 3% , despite the challenges and
significant effects of the frozen berries recall.
This result is a credit to our hard working employees, supported by our focus on innovation, investment, efficiency and the consistently high quality products made in our world class Bakery in Bairnsdale.
Curt Leonard
Deputy Chairman
With a renewed focus on process innovation and marketing of iconic Australian brands,
Patties provides a strong platform for future growth.
John Schmoll
Chairman Audit & Risk Committee
Patties Foods has the hallmarks of a great investment... game changing product innovation, a clearly defined strategy focusing on profitable growth through expanding savoury business, optimisation of the cost base and
a disciplined, competent and dedicated team.
Steven Chaur
Managing Director
& Chief Executive Officer
FY15 was a year that definitely tested our entire team at Patties Foods on many levels. Despite these challenges, our remarkable employees remained resolute in delivering continued improvements in our business model; professionally dealing with a crisis and; in delivering against our Plan over the year.
We are looking forward to seizing additional growth opportunities as we embark on our 50th year of business in Australia in 2016.
It's such a vibrant time to be at Patties Foods.
Harry Rijs
Non-Executive Director
It is an absolute joy to see category growth in the historic channels in which we operate resulting from Patties Foods sound
investment in cutting edge baking technology and product innovation. This is a credit to the Patties team and our stakeholder partners and is characteristic of our proud and long standing history of baking high quality products and delivering the very best service.
Richard Rijs
Non-Executive Director
Although 2015 financial year was
a challenging one for Patties, I am very heartened by the professionalism and dedication of our amazing team to deal with some major distractions while still growing our core business and brands. Some great new product innovations, as in the Herbert Adams slow cooked beef pies, strong marketing campaigns, as well as the great improvements in the bakery will ensure a very strong future for the company going forward.
Greg Dhnaram
Non-Executive Director
A wonderful Australian success story. From humble beginnings, it will continue to grow with its fantastic people and brands as
it celebrates 50 years of business in 2016. The best is yet to come!
Directors' Report and Financial StatementsFor the year ended 30 June 2015
Contents
1 Directors' report
33 Corporate governance statement
43 Financial statements
97 Independent auditor's report to the members
99 Shareholder information
Patties Foods Limited Directors' report 30 June 2015
Directors' reportYour directors present their report on the consolidated entity (referred to hereafter as the Group) consisting of Patties Foods Limited (referred to hereafter as the Company) and the entities it controlled at the end of, or during, the year ended 30 June 2015.
DirectorsSteven C Chaur Gregory J Dhnaram J Curt Leonard Harry J Rijs Richard C Rijs John P Schmoll Mark G Smith
Principal activitiesDuring the year the principal continuing activities of the Group consisted of the manufacture and marketing of frozen food products.
Dividends - Patties Foods LimitedDividends paid to members during the financial year were as follows:
2015 $'000
2014 $'000Final ordinary dividend for the year ended 30 June 2014 of 3.9 cents (2013-3.9
cents) per fully paid share paid on 8 October 2014 5,427 5,424 Interim ordinary dividend for the year ended 30 June 2015 of Nil cents (2014-3.2
cents) per fully paid share - 4,453
5,427 9,877
In addition to the above dividends, since the end of the financial year the directors have recommended the payment of a final dividend of $6,497 (5.0 cents) per fully paid share expected to be paid on 8 October 2015. The dividend will be fully franked. Total dividends for FY2015 are therefore 5.0 cents per share (FY2014: 7.1 cents per share).
Significant changes in the state of affairsThere were no significant changes in the state of affairs of the Group during the financial year.
Patties Foods Limited Directors' report 30 June 2015 (continued)
Matters subsequent to the end of the financial yearNo other matter or circumstance has arisen since 30 June 2015 that has significantly affected, or may significantly affect:
the Group's operations in future financial years, or
the results of those operations in future financial years, or
the Group's state of affairs in future financial years.
The Group is a signatory to the Australian Packaging Covenant. Its sites are all compliant with EPA and other relevant governmental environmental targets and regulations. The Group is subject to environmental regulation in respect of its manufacturing activities as set out below.
In Victoria, the Group holds environmental licences for its manufacturing site. These licences require discharges to air and water to be below specified levels of contaminants, and solid wastes to be removed to an appropriate disposal facility. These requirements arise under the Environmental Protection Authority's regulations Clean Air Act 1961, Clean Waters Act 1970, Pollution Control Act 1970, Noise Control Act 1975, the Environmentally Hazardous Chemicals Act 1985 and Waste Avoidance and Resource Recovery Act 2001.
The Group is subject to the reporting requirements of both the Energy Efficiency Opportunities Act 2006 and the National Greenhouse and Energy Reporting Act 2007.
The National Greenhouse and Energy Reporting Act 2007 requires the Group to report its annual greenhouse gas emissions and energy use. The Group has implemented systems and processes for the collection and calculation of the data required and submitted its 2013/14 report to the Greenhouse and Energy Data Officer on 30 October 2014.
2
The directors are not aware of any breaches to the environmental requirements and are not aware of any infringement notices or fines being issued during the year.
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