Losses widen at food group 2 Sisters as costs eat into profit margins

THE acquisition of Dutch food group VION’s UK poultry and red meat processing businesses impacted severely on the trading performance of Birmingham-based poultry business 2 Sisters, latest accounts show.

Annual accounts lodged with Companies House show that in the 52 weeks to July 27, 2013, losses at 2 Sisters widened from £1.3m in 2012 to £13.3m.

2 Sisters, a subsidiary of Boparan Holdings, had announced the acquisition in March 2013.  The company had said the move would help it meet growing demand from its existing poultry business as well as diversifying its offering into red meat products.

The move contributed to the firm swelling its workforce by almost 1,000 people, to 4,927.

2 Sisters, which supplies chicken to the likes of Tesco, Sainsbury’s and KFC, made a number of food industry acquisitions over the last three years – including the Harry Ramsden’s fish and chip shop business and Northern Foods.

The expansion of the business also brought with it the problem of escalating costs eating into profit margins.

In their report, the 2 Sisters directors state: “As we enter the new financial year, the increase in feed ingredient prices remains a challenge to the business, as it is for many other food manufacturers. The company is working with customers to recover feed inflation and drive volume and invest in capacity and efficiency.”
Nevertheless, the company said its balance sheet was strong and the business continued to benefit from investment in product development.

“The directors regard investment in this area as essential for continuing success in the medium to long term,” said the report.

The financial KPIs used by the firm show an increase in turnover to £855.1m (2012: £778m). However, gross profit margin declined to 5.6% compared with 7.8% in the previous year. Net assets declined to £51.1m (2012: £64.4m).

It said gross profit margin and operating profit had both decreased in the year, primarily due to a change in sales mix and the difficult trading conditions experienced over the year from increased feed prices.

It said the UK poultry market was expected to see continued pressure due to the impact of inflation and changes in promotional dynamics by some retailers.

In October last year the company announced the closure of its poultry cooking site at Haughley Park in Suffolk as part of efficiency measures. It said the anticipated effect of this was not included in the latest set of accounts.

Despite the losses, the company said its operation was protected through its parent company, which had said it would provide any financial support should it be required.

“The company is in a net assets position and does not have any exposure to external debt as working capital and short term cash flow requirements are managed through a combination of retained earnings and financial support from the parent company, Boparan Holdings,” it said.

“The Boparan Holdings Group has two main sources of finance. The bond comprises £400m of senior notes due 2018 at an interest rate of 9.875% and €340m of senior notes due April 2018 at an interest rate of 9.750%. The Revolving Credit Facility (RCF) of £40m expires in April 2016. The company and other group subsidiary companies are cross guarantors of the bond whereby they absolutely and unconditionally guarantee the principal and interest on the senior loan notes.

“The same companies are cross guarantors in respect of the Boparan Holding Group’s £40m RCF which is a facility of Boparan Holdings Ltd. This facility was undrawn at the balance sheet date (November 22, 2013).”

It said group forecasts indicated there would be no breach of financial covenants for at least 12 months from the date of approval of accounts and the directors had assessed the future activities and cash flow of the business and did not foresee any problems.

The company said it purchased a significant quantity of raw materials each year and while impacted by cost prices it sought to offset these in the form of price rises to its customers. It said it looked to mitigate this by using the strength of its buying power.