Patties Posts Solid Results Prior to Acquisition Vote

What a difference a year makes. Patties’ Foods managed exit from the frozen fruit business last December has considerably bolstered its bottom line as the Bairnsdale, Victoria, Australia-based company reported net profit after tax of AUD $13.0 million for fiscal year 2016 versus $2.1 million in FY15. Excluding frozen fruit, net profit was $16.5 million for the full year that ended on June 30.

The positive results were posted not long before shareholders are scheduled to vote August 26 on a bid by Pacific Equity Partners’ Australasian Foods Bidco unit to buy the company for AUD $232 million in cash, plus a special dividend payment. The board of directors has endorsed the proposal.

A costly recall of the company’s Creative Gourmet and Nanna’s brands of frozen berry products from retail stores in the first quarter of 2015, triggered by a Hepatitis A scare in February, contributed greatly to an 88% plunge in profits for Patties Foods for the previous fiscal year. Before the recall, the berries business accounted for 13% of annual sales.

Isolating the frozen fruit business from FY16 results, the bakery sector registered sales growth of 4.6% (+$10.1 million). This performance was fundamentally stronger due to solid sales of savory brand products.

Allowing for a significant item of -$1.3 million pre-tax (-$1.1 million post-tax) relating to costs incurred from the scheme of arrangement restructuring, the underlying core bakery EBIT (excluding frozen fruit) of $25.4 million amounted to +15.1% over FY15. Significant items in FY15 were -$14.7 million pre-tax and -$13.4 million post-tax. Particularly encouraging was the increase in underlying bakery EBIT in the second half of financial year of +25.0%, compared to +7.2% in 1H15.

Commenting on the results, Chairman Mark Smith remarked: "The solid and increasing underlying 15.1% EBIT growth of our core bakery business is very pleasing given our increased investment in brand marketing and product innovation. The decision to comprehensively re-structure the business 12 months ago continues to deliver effective cost control and operational efficiency improvements.”

pattties pies racks 1The strategic move to get out of the frozen fruit business by selling the Creative Gourmet brand to Entyce Food Ingredients has enabled the company to fully concentrate on driving its profitable bakery business and iconic food brands such as Four'N Twenty, Patties, Herbert Adams, Nanna's and Chefs Pride.

The company reportedly ranks as the fourth largest purchaser of beef in Australia, utilizing more than 130 tons per week to make meat pies. That adds up to approximately 40,000 cattle per annum.

Managing Director and CEO Steven Chaur added: "Our core bakery business continued to perform solidly over the past 12 months through our focused strategy in delivering premium savory innovation, creating customer differentiation, operating a leaner organization and achieving continuous improvement programs in the bakery. Our brands continued to exceed the market growth in all sales channels, with Patties growing revenue +6.2%, Four'N Twenty +13.2%, Herbert Adams +11.6%, and Nanna's +12.2%.”

Overall the bakery segment grew at +4.6%, offsetting a revenue decline of -19.4% in its contract manufacturing business against the prior year as the company chose not to renew two unprofitable private label contracts. Positively, these contract exits were offset with improved operational performance and branded sales of higher margin new products.

“Over the financial year, management worked diligently to mitigate the residual effects of the February 2015 frozen berries recall,” said Chaur. “As at the end of June 2016, Patties Foods had practically exited all its remaining frozen berries stocks and successfully transitioned Creative Gourmet.”

The company continues to expand its share of the competitive savory pastry market in all sales channels. In the in-home grocery sector, branded business has grown to command a 52% market share of the $295 million total frozen savory category, with all brands growing their respective segment share. In the out-of-home channel, Patties Foods has a 64% share of the Petrol and Convenience (P&C) segment, which grew at +10.1% to $125 million.

During FY16 the company launched a range of new products and campaigns, as detailed below:

  • mini pizzasThe Patties brand, which is celebrating its 50th year anniversary in 2016, grew revenue by +6.2% overall, driven by +11.4% growth in the in-home sales channel through innovations such as mini pizzas, a cheeseburger party pie and a vibrant new packaging makeover. Foodservice launches included two new sous vide slow cooked party pies and new savory finger foods.
  • herbert adams CHILLED PorkThe premium Herbert Adams brand continues to be an industry success, with the introduction of a first to market range of sous vide slow cooked meat pies. Range extensions included new premium flavors such as Smoky Pulled Pork, Lamb and Rosemary, RSPCA Chicken & Chorizo and two party pie offerings. In the in-home sector, the brand has extended into the chilled foods segment with an assortment of premium single box slow cooked pies. The Herbert Adams label now commands 15% value share of total supermarket frozen savory sales and continues to grow strongly at +21.6%.
  • FNT PARTY PIESFour'N Twenty’s rollout of the sous vide slow cooked "Real Chunky" pie range in the P&C channel accelerated brand growth to become the market leader and grew out of home revenues by an impressive +20.3%. Grocery launches included a sous vide “Super Chunky” pie range, a limited time cheeseburger pie offering and an Australia-shaped party pie for Australia Day, helping to boost brand revenue +7.1% in the sales channel.
  • In the fourth quarter Chefs Pride debuted a range of nine premium sous vide slow cooked protein-based meal solutions targeted at the catering sales channel. The line also includes an innovative “snip and serve” range of seven premium ready-to-serve meat pie fillings targeted at the high street “scratch bakery” market. Early sales to foodservice distributors have reportedly been very positive.

Over the past 12 months the company’s Bairnsdale bakery continued to make capital investments and deliver solid performance improvements. Key highlights include a significant reduction in inventory, improved production reliability, increased consumer satisfaction and a 50% reduction in the lost time injury frequency rate.