WINNING more work with Britain’s supermarkets helped 2 Sisters Food Group to surging annual sales and profits, but the poultry-to-pizzas giant warned the meat industry is caught in a “perfect storm” as feed costs soar and consumers remain wary.
The group, which bought Yorkshire’s Northern Foods last year, outstripped the market with like-for-like sales growth of 9.5 per cent in the year to the end of July.
Total sales were up 13.4 per cent to £2.34bn, and founder Ranjit Singh Boparan said the Midlands-based producer is on course to hit a £3bn sales target by 2015. Underlying earnings rose almost 12 per cent to £190.3m.
Food firms and meat producers in particular face a tough time as drought in North America, floods in Ukraine and a poor soya crop in South America inflate feed costs.
2 Sisters said it has made a “solid start to the year”, but remains cautious about the outlook. It has seen wheat prices surge by almost 30 per cent and soya by 40 per cent.
“Consumers are very cautious and very picky in where they spend. They do look for deals and inflation is coming through,” said Mr Boparan.
“We’ve got the perfect storm when you look at the environment, the weather and the world population, and the emerging countries start consuming protein. I think we’re definitely in for difficult and tough times in the protein market.”
The group is talking to retailers to pass on higher costs – something it said is “essential to secure the viability and supply of the poultry farming and processing capability in the UK”.
“This is where our advantage comes in” said Mr Boparan. “When you spend 20 per cent of your time with the customer you are strategically aligned to them – having these conversations are a lot easier.
“We try to negotiate as much inflation as we can and we recover the rest.”
The group is one of the biggest poultry suppliers to major retailers and recently won new poultry business with supermarket Sainsbury’s. It believes the meat will increasingly gain market share over other proteins.
Finance director Steve Henderson said pork and beef is three to four times more expensive to produce than poultry. Poultry requires 1.8 kilogrammes of feed to produce a kilo of meat, compared with six to 10 kilograms of feed for beef and pork, he said.
“Poultry has an advantage over other proteins,” said Mr Boparan. “As all the other proteins rise, poultry is going to be one of the successes.”
Hull-based sausage and bacon producer Cranswick recently said underlying sales growth slowed to five per cent in its first half. It is also pushing through price increases with retailers, as rising feed costs drive up pig prices.
2 Sisters’ poultry division increased underlying sales by 10.1 per cent over the year as it gained volumes with customers, although the growth rate slowed to 6.2 per cent in the fourth quarter.
Its chilled division increased like-for-like sales 10.5 per cent – with 11 per cent underlying growth in the fourth quarter –boosted by strong performance in ready meals, sandwiches and salads.
The group’s branded arm saw a “steady” performance in biscuits, where sales were driven by “higher promotional activity to meet the demands of cash-conscious consumers”. Its Goodfella’s pizza business now has a 20 per cent market share, up from 14 per cent in July 2011.
This helped the branded arm increase underlying sales 6.8 per cent – with an 18.1 per cent fourth-quarter leap.
Mr Boparan said the group expects to grow by five per cent this year versus market growth of four per cent.
“Our main focus today is in integration and driving the business forward,” he said.
2 Sisters has more than 18,000 staff, including over 2,000 in Yorkshire.
The entrepreneur, who founded 2 Sisters in 1993 after starting out behind a butcher’s counter, added his aim remains £3bn sales by 2015. “We will no doubt hit that target and hopefully a bit before.”
The £342m Northern Foods takeover early last year was funded through a high-interest £695m bond issue, yielding almost 10 per cent.
The group slashed net debt by £121m during the year, an 18.5 per cent fall, to leave it with a £533.8m debt balance. That brings its ratio of net debt to underlying earnings – expressed as EBITDA – down to 2.8 from 3.85 a year ago. It stood at more than four times when 2 Sisters bought Northern Foods.
“We’re very happy with a solid set of results,” said Mr Henderson. “Our virtuous circle is working –- we’ve been driving volumes, working with the customer and focusing on deleveraging.”
The group is targeting achieving investment grade – 2-2.5 times debt to EBITDA – which could earn it a re-rating with ratings agencies. This could in turn enable 2 Sisters to refinance at a lower rate. It generated net cash flow of £253.8m during the year.