Australian food manufacturer Patties Foods has recorded a 3 per cent increase in profit to $8.2 million for the first half of the 2015 financial year, but has said that it is still assessing the financial impact of the recent recall of its frozen berries products.

The result compares to the last financial year’s full year underlying Net Profit After Tax (NPAT) decline of 2 per cent. Patties said the non-recurring significant after tax item of $792,000 related to the cost of implementing an organisation restructure.

Iconic brands in the Patties Foods portfolio include Four’N Twenty, Herbert Adams, Nanna’s, Patties, Creative Gourmet and Chef’s Pride. Patties manufactures and markets food products for the supermarket, petrol and convenience, catering and general foodservice channels in all parts of Australia.

Financial impact of frozen berries recall

Patties said areas of potential financial impact on asset values and future earnings from the voluntary recall of its Nanna’s Mixed Berries, Nanna’s Raspberries and Creative Gourmet Mixed Berries products include principally redundant inventory, out of pocket costs and expenses associated with the product recalls and supplementary product testing, loss of future earnings and intangibles impairment.

The Company said these areas needed to be balanced against avenues of potential recovery. At 31st December 2014 there was $1.7 million of inventory on hand with best before dates in the range of the recall product, the realisable value of which could not be currently determined. Patties said the net potential financial impact was therefore impossible to ascertain at this early stage, although it was possible that ultimately the impact could prove to be material. Accordingly no provisions have been made in the result at 31 December 2014 as released on 24th February 2015.

Patties said its Board considered declaring an interim dividend. However, due to the current uncertainties around the potential but as yet unknown effects resulting from the voluntary frozen berries recall, the Board determined to defer consideration of an interim dividend until matters and their financial impacts become clearer.

Patties said the voluntary and precautionary recalls were “in the interest of public safety” and that the Company had not to date identified a potential link to Hepatitis A through its normal product testing regime. The Company continues to work proactively with the Health Authorities and has initiated a rigorous supplementary testing process specifically around Hepatitis A, with a view to determining whether as a matter of fact its products are the source for the identified cases.

The Company said it was working on the tactical management of the issue while it established strategies to recover and ensure that the total business impact is minimised.

Revenue growth through core brands

Patties recorded revenue growth of 9.1 per cent with positive revenue growth in its core brands of Four’n Twenty, Patties, Herbert Adams and Nanna’s.

The Company said profit margins were impacted by an important and strategic investment in core brand marketing and input cost increases, primarily meat. These were offset by the early benefits of the organisational restructure, ongoing productivity improvements and a price increase.

“The solid revenue growth of 9.1 per cent indicates that our investment in core brands and innovation is gaining good traction,” said Mark Smith, Patties Chairman. “It is noteworthy that this momentum has been supported by effective cost control, operational efficiency improvements and the organisational review to improve business process and reduce costs,” he said.

Business improvement program update

Managing Director and CEO, Steven Chaur said that over the past 6 months, Patties had been focussed on the ‘Restore Basic Conditions’ stage of its 3 phase business improvement program.

“This initial focus is simply to do what we do much better, with a focus on driving step change performance and quality improvements in our bakery operations; retaining, gaining and engaging with our key customers; investing in our icon brands; challenging the business cost structure and executing with excellence all our new product launches in the field,” Mr Chaur said.

Mr Chaur said that Patties had decided to “comprehensively reorganise” the Patties Foods business structure over the first half.

“Although this strategic organisational review did result in restructuring costs, the key focus was to improve our decision making processes; speed to market on innovation; reduce business complexity; increase productivity and to reduce our fixed cost base,” Mr Chaur said.

“Despite the pressures of a competitive market, as the market leader, Patties Foods continues to invest in its icon brands, multi-channel service model and quality savoury products through all its customer channels,” Mr Chaur said. “For example, our ‘Paint the Town Yellow’ sales activation program and our new Real Chunky product launch have been a key element of returning our iconic FOUR’N TWENTY brand back into growth over the half year,” he said.

Mr Chaur said that during the first half, all Patties core brands had grown in net income and market share versus the prior corresponding period in both the Grocery and the Out of Home channels.

“Significant cost pressures”

Mr Chaur said Patties had experienced “significant cost pressures from major commodity inputs such as beef” in the first half.

“As a result, we took the decision to forward purchase beef in anticipation of the rapidly increasing Australian export beef demand and therefore, domestic beef prices,” Mr Chaur said.

“Ahead of a planned major Christmas shutdown to install a new oven, the Company also built inventory of its key savoury products,” Mr Chaur said. “These tactical decisions resulted in a temporary increase in inventory levels and accordingly net debt. This pressure will diminish as this inventory is utilised during 2H15,” he said.

Subsequent Event –Voluntary and Precautionary Frozen Berries Recalls Following notification from the Victorian Health Department on the 13th February 2015 of potential Hepatitis A contamination, on the 14th of February 2015, Patties Foods Limited (PFL) initiated the first of three voluntarily recalls on certain products in the Frozen Berry category.

Outlook

Following the successful launch of new savoury products with Patties Pie Bites, Herbert Adam’s Slow Cooked pies and Four’N Twenty Real Chunky beef pie, Patties said it expected to see revenue growth in its savoury business continue in the second half of the 2015 financial year through additional new product launches, additional marketing investment in its brands, continued strong field sales activation and the commencement of new supply contracts to Out of Home customers.

Patties said its management team continued to focus on cost inflation mitigation plans for the remaining half year through wholesale price increases; reduced overheads; improved bakery production performance and reduced discretionary spending.

The Company said the net potential financial impact of the voluntary frozen berries recalls was “impossible to ascertain” at this early stage, although it is possible that ultimately the impact could prove to be material.

Earlier articles on the Patties frozen berries recall

Government berry havoc as Barnaby’s Agriculture department responsible for testing inadequacies

Patties facing class action by Slaters over Hepatitis A frozen berries

Hepatitis A crisis in frozen berries recall