Northern Foods prepared for the tough times

NORTHERN Foods is bracing itself for a double dip recession and yesterday unveiled a divisional restructure to streamline it for tough times ahead.

Strong sales of ready meals and salads helped the Leeds-based group lift second quarter like-for-like sales by 7.1 per cent, and Northern said "decisive actions" will help keep it on track.

"We don't know whether there's going to be a double dip or not but we're planning for it and keeping a weather eye open on it," said chief executive Stefan Barden.

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The group is to downsize from five divisions to just two – branded and chilled – which each contribute roughly half of Northern's revenues.

It warned this will mean 6m in exceptional costs, partly as a result of redundancies. It is understood these will come from senior management rather than shop floor positions.

However, the group hopes to recoup at least as much in annual savings.

The branded division will encompass labels such as Goodfella's pizza, Fox's biscuits and Matthew Walker Puddings.

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Its chilled business includes sandwiches, salads, sushi, ready meals and Northern's new contract to supply meals for short-haul British Airways flights.

Along with other UK food producers, Northern faces the combined challenges of tighter consumer spending and higher commodity prices.

A spokesman said Northern is seeing commodity inflation running at two to four per cent, with spikes from ingredients such as cheese – up 20 per cent year on year. It expects inflation to be between three and six per cent next year, although it is trying to combat this with hedging, price increases, changing ingredients and fewer promotions.

Northern's pension deficit is also weighing heavily on shares, which have lost more than a third of their value over the past year.

Yesterday shares edged up 0.5 per cent to 46p.

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Northern increased its output of value products at the start of the recession to capitalise on consumers trading down. This meant more work with value retailers such as Aldi and Lidl, as well as more value lines with the big four supermarkets.

Mr Barden said this means the group is well placed if consumer spending shrinks further.

"If it happens again we can react very quickly and deliver what the retailers want," said Mr Barden.

First half like-for-like sales – in the 26 week to October 2 – were up three per cent. Its second quarter like-for-likes, up seven per cent, were driven by its chilled division.

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Chilled sales surged 16.4 per cent in the second quarter, thanks to more efficient ready meals factories. The group's new salad contracts with British AIrways and Costa Coffee also helped.

Northern said it is beginning to stem the tide of falling sales in its frozen division, which have been driven down by its decision to shed marginal contracts and stiffer competition.

They were down 16.2 per cent on a like-for-like basis in the second quarter, versus a 24.9 per cent decline in the first quarter.

It has managed to claw back some of the market share lost by Goodfella's pizza when rival Chicago Town upped its advertising. This grew to 21.1 per cent from 16.3 per cent in May, but remains some way off its peak market share of about 32 per cent.

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Second quarter bakery sales grew 10.9 per cent compared with a 5.6 per cent drop in the first quarter. Biscuit volume growth returned to "normal" levels after a slump during the World Cup when Northern scaled back promotions.

The group said it has a good order book for both Matthew Walker and supermarket own brand Christmas puddings. It expects to sell at least as many as last year's 17m total.

Net debt will be around 220m, and Northern said its financial position is strong and it continues to trade in line with expectations.

What the analysts say

Shore Capital analysts Clive Black and Darren Shirley reiterated a hold recommendation, but warned the 6m restructuring costs from Northern Foods' divisional streamlining may lead to downgrades.

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"Whilst we believe the new structure makes commercial sense given the complementary skill set required across the branded portfolio, we are somewhat disappointed that it will be accompanied by a restruct-uring charge," they said.

They also called for clarity on the group's pension commitments, which have dragged down its share price.

"If operating cash flows can remain stable and the pension requirements manageable, then we believe there is perhaps considerable scope for capital appreciation," they said.