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Original Source: FD (FAIR DISCLOSURE) WIRE
OPERATOR: Thank you for standing by and welcome to the Northern Foods trading update conference. At this time all participants are in a listen-only mode. There will be a presentation followed by a question and answer session (OPERATOR INSTRUCTIONS). I must advise you that this conference is being recorded today, Thursday March 27, 2008.
I would now like to hand the conference over to your speaker today, Stefan Barden. Please go ahead, sir.
STEFAN BARDEN, CEO, NORTHERN FOODS PLC: Good morning everyone, thank you very much for joining myself and Jez here this morning. Today we've issued a trading update and a pre-close statement for our fourth quarter and for the full year ending March 29, 2008. This statement is based on the Group's management accounts to date, and our full year results will be announced on May 27, in eight weeks' time.
I think a key headline is that the management team have made good progress during the year in delivering against our strategic plan and, as a result, we've seen steady improvements in both profitability and return on invested capital. Trading in quarter four continues to meet expectation with underlying revenues up 3.9% over the corresponding prior year quarter. This on flat volumes.
Today we're guiding the market the Group PBT will be ahead of the median market consensus. We're encouraged by this steady performance improvement and our focus on developing products which provide consumers with above average rate of sale is being achieved through a constant focus on quality, innovation and on service.
Despite strong commodity inflation and uncertain times for the UK consumer we do believe that we're making solid progress in realizing the potential of the business. We will continue to eliminate low margin and low volume products from our range as well as progressively re-orientating the Group towards markets growing at circa 5% or more. The outlook for commodity prices does remain volatile. However, we continue to fully recover commodity cost increases in Q4 as we have done throughout the year.
Turning quickly to the divisions, the Chilled division continued to grow strongly in the fourth quarter with underlying revenues up 5.5%. Full year underlying revenue for the division grew 5.4% and underlying operating margin has also continued to improve. For clarity, our definition of underlying revenue excludes acquisitions, so these numbers do exclude the impact of the recent Ethnic Foods acquisition.
Turning quickly to Frozen, the division's underlying revenue grew 2.8% in the fourth quarter and the recovery of significant commodity inflation drove prices up 5.1% on volumes that declined modestly. However, a key point to note is that the strengthening euro exchange rate is adversely affecting profitability in this area.
The Bakery division showed encouraging signs of recovery with the fourth quarter underlying revenue up 1.1%. We think this is a very good performance as we've been eliminating low value products, we've been exiting unprofitable private label contracts and we've stopped large, but only marginally profitable, promotions. All of these actions have helped improve the Bakery division margins. And average prices were up 7.5% as a result of the commodity cost increase. We believe that progress across all of these divisions will continue into the new fiscal.
Finally, on a different note, you will also see that we've issued a separate R&S statement. That the Group has decided to disclose the impact of the net pension financing credit as a financing item in the income statement rather than within profit from operations. This change is in line with developing market practice.
Thank you very much for your attention, and Jez and I are now happy to take your questions.
OPERATOR: We will now begin the question and answer session. (OPERATOR INSTRUCTIONS). Your first question comes from [Corinne Mahler] from Lehman Brothers. Please ask your question.
CORINNE MAHLER, ANALYST, LEHMAN BROTHERS: Good morning and congratulations for the strong trading update. My first question is on input cost pressures going into fiscal year '09. Given the inflationary pressures we continue to see in oil, wheat and vegetable oils as well, could you share your view with us on your capacity to fully recover the inflation in fiscal year '09?
STEFAN BARDEN: Okay, hi Corinne. I think there's a number of parts to this answer. I think the first thing is how do we view inflation, the second thing is how do we recover it? In terms of our view of inflation, we believe that most of the inflation in our markets was seen at the last harvest. And going forward we're more concerned on things like oil, as you mentioned, and how that will feed indirectly into our supply chain. However we don't see big changes in these commodity movements until the next harvest times.
In terms of recovery, we fully recovered the cost increases that we needed last harvest, the back end of -- well during quarter three, and we're covered through to the next harvest. And therefore we can see pressures that will move commodity prices up at that time and also that will move them down. For example, more land is being cultivated with arable crops, however, demand for them continues to rise. So we are playing a waiting game to see what we will need to do at that moment in time.
Similarly we're looking at oil, and we're looking at other commodity increases as well. We have to remember that wheat is a far smaller part of our input costs than it was when we had the bakery divisions that we sold to Vision just over a year ago.
CORINNE MAHLER: Right, but could you quantify the impact going into H2 '09 because your previous guidance was GBP40 million of additional input cost pressures between H2 '08 and H1 '09, which has been fully recovered. But what is the picture for H2 '09, and could you also give us your exposure to oil as a percentage of sales?
STEFAN BARDEN: We are fully covered up to the next harvest and so it's difficult to say what further input costs will we have to recover. So we're keeping a watching brief on it. And oil at the moment is a relatively small part of our input cost, really the energy costs in our bakeries, pizzas and biscuits in particular.
I think the key point, Corinne, is if this inflation begins to come through into our input costs will we be able to recover? And I think the point there is that the manufacturing industry in general will have to recover this. It's not going to be about us taking price rises on an individual basis. There is not enough slack within the manufacturing industry as a whole for these input costs to be absorbed, and therefore they will have to be passed through to the retailers. And the retailers, whatever they say, in my view, they actually pass them on to the consumer at the end of the day. I think that's the key point. When we see them we will have to take the necessary action together with all the other suppliers in the industry.
CORINNE MAHLER: Right, so pricing will be again the key element to offset the cost inflation and do you see any scope to further generate cost savings?
STEFAN BARDEN: Well I think there's two ways to this, I think when you're looking at commodities impacting the whole of a particular sector then they will be passed through. There is just not enough slack, certainly in the manufacturer supply base to actually absorb them. I think separately when you look at cost savings, cost savings are, in my personal view, they're something that each manufacturer does of its own right and they should try and keep as much of that as possible.
I do not subscribe to the view that cost savings need …