Northern Foods hoping for touch of magic

The Leeds-based group yesterday reported flat annual underlying profits and sales as it ditched unprofitable contracts and came under

increasing competition.

Northern is ramping up advertising on the flagging Goodfella's brand in an attempt to replicate success shown with Fox's biscuits, where it is now second in the market. The brand has been hit hard by competition from German pizza maker Dr Oetker, which owns Chicago Town.

"Repeat purchase is the key we are focusing on," said chief executive Stefan Barden. "But it will take time. We are expecting any improvement in sales in the second half.

"It will be a slow burn to start with – we are turning the downward trend around. But it's certainly not make or break."

However, worries over the group's ballooning pension scheme deficit drove shares down three per cent to 46.75p. They have fallen 30 per cent since the start of the year.

Northern maintained its final dividend at 2.95p, making a total 4.5p dividend, but some analysts are concerned Northern may be forced to cut the payout to top up its pension pot.

Mr Barden said trading was "solid", with sales edging one per cent higher to 977m in the 53 weeks to April 3.

Northern reported flat underlying pre-tax profits at 39.2m. But once pension scheme financing was included, pre-tax profits fell 28 per cent to 34m.

"This year will continue to be a further year of investment but also the improvement starting to come through in the second half," said Mr Barden. However, he expects "challenging market conditions" to continue, with more competition, a tough consumer environment and commodity inflation pressure.

Goodfella's was relaunched in April in a range of 33 varieties. Advertisements featuring a Pizza Fairy will run during the World Cup.

"We hope that the top line begins to toughen up from 19-20 per cent market share," he said. "The competitive environment has changed. Just to (spend) more money on the old proposition was not the answer.

"We have repositioned the brand to focus far more on a character. la Vinne, it's a different methodology but the same idea."

Vinnie, an animated cross between a panda and dog, was used to

spearhead sales of Fox's biscuits, which now command a 10.7 per cent market share. Profits at the bakery business grew six per cent to 21.8m.

Dumping lower-margin own-brand business helped operating profits at its frozen business – which includes Goodfella's – grow 46 per cent to

13.6m.

But profits at its ready meals arm suffered due to the wind-down of its Hull site, offsetting a stronger performance from sandwiches and salads. Chilled division's operating profits fell 16 per cent to 19.2m.

Net debt fell 23.7m to 183m, keeping it well within covenants.

Northern warned pension scheme liabilities "will continue to be unpredictable as interest rates and inflation remain volatile". Its deficit more than doubled to 149.7m from 71.5m a year earlier.

It faces a triennial valuation of its pension scheme in March 2011, but some analysts warned the group may need to cut its dividend following the review.

Finance director Simon Herrick insisted the intention was to maintain the dividend. "You can never say never, but at the moment there is no intention internally to be cutting the dividend."

Dividend key to attitudes

Analysts focused on the security of Northern Foods' dividend.

Investec put its target price of 72p under review.

"The key to share price performance will remain the security of the dividend payment," said analyst Nicola Mallard.

Panmure Gordon analyst Damian McNeela said underlying profits had been slightly higher than expected due to cost savings but added: "Given that trading conditions are likely to remain challenging we maintain our current forecasts and reiterate our sell recommendation."