Financial review

Group revenue increased by 9% to £11.1bn with growth again achieved in every business segment. On a constant currency basis and with last year’s revenues restated on to a comparable 52 week basis, the underlying revenue increase was also 9%.

Adjusted operating profit increased by 1% to £920m and movements in currency exchange rates had no material effect on this result. This profit benefited from lower restructuring charges compared with the previous year, particularly in grocery. When the 2010 result is adjusted on to a 52 week basis, year-on-year profit growth was 3%. In calculating adjusted operating profit, the amortisation charge on non-operating intangibles and any profits or losses on disposal of non-current assets are excluded. Together, these items amounted to £78m this year compared with £90m last year.

No profits or losses arose on the sale and closure of businesses this year compared with a profit of £28m last year on the disposal of the Polish sugar operation in November 2009. These profits are excluded from the calculation of adjusted earnings, and revenue and profit from disposed businesses are disclosed separately in the segmental analysis.

Finance expense less finance income of £92m compared with a charge of £76m last year, as the level of average net debt throughout the year was consistently higher than last year, driven partly by the effect of substantially higher commodity costs on working capital. Other financial income of £7m compared with an expense of £8m last year and related primarily to the net income on retirement benefit schemes, being the expected return on scheme assets less the charge on pension scheme liabilities.

Profit before tax fell slightly from £763m to £757m. The reduction included the lower profit on sale or closure of businesses this year, partly offset by this year’s small profit on sale of property, plant and equipment compared with last year’s loss. Adjusted to exclude these items, underlying profit before tax increased by 1% to £835m.

The tax charge of £180m included an underlying charge of £205m, at an effective rate of 24.6% (2010 – 26.8%) on the adjusted profit before tax. The reduction in the effective rate is a result of the enacted reduction in the UK corporation tax rate from 27% to 25% (2010 – 28% to 27%), yielding a credit of £12m from the calculation of deferred tax liabilities at the lower rate, together with the agreement, with tax authorities, of liabilities for several open years in a number of jurisdictions around the group. Proposed future reductions in the UK tax rate to 23% will be reflected in the year that the relevant legislation is substantively enacted. With increasing profitability in jurisdictions with a higher corporate tax rate than the UK, we expect the group’s effective tax rate to be higher in future years.

The overall tax charge for the year benefited from a £25m (2010 – £27m) credit for tax relief on the amortisation of non-operating intangible assets and goodwill arising from acquisitions. No tax arose on the profit on disposal of non-current assets.

Earnings attributable to equity shareholders were £541m, £5m lower than last year, and the weighted average number of shares in issue used to calculate earnings per share was 788 million, consistent with last year. Earnings per ordinary share were 1% lower than last year at 68.7p. Adjusted earnings per share which provides a more consistent measure of performance increased by 2% from 72.2p to 74.0p.

The interim dividend was increased by 4% to 7.9p and a final dividend has been proposed at 16.85p which represents an overall increase of 4% for the year. In accordance with IFRS, no accrual has been made in these accounts for the proposed dividend which is expected to cost £133m and will be charged next year. Dividend cover, on an adjusted basis, remains at three times.

Non-current assets of £7,039m increased by £546m as a result of an increase in property, plant and equipment of £524m which was driven by the high level of capital expenditure in the year net of depreciation. Working capital was again tightly managed and average working capital across the year expressed as a percentage of sales revenues was little changed from last year despite much higher commodity costs. However, the absolute level of working capital was substantially higher and at the year end was £231m greater than last year. Provisions were £69m lower than last year end as a large proportion of those created for restructuring were utilised. Provisions that were acquired with the Azucarera sugar business were settled during the year with a corresponding recovery from the vendor. Net borrowings at the year end were £469m higher than last year at £1,285m as a consequence of the high level of capital investment and the funding of working capital.

A currency gain of £91m arose on the translation into sterling of the group’s foreign currency denominated net assets. This resulted from a strengthening of the euro, Australian dollar and Chinese renminbi against sterling at the end of the year. The group’s net assets increased by £431m to £6,175m.

The high level of capital expenditure, much of which was incurred on projects in progress, and only a modest increase in operating profit, saw return on capital employed (ROCE) for the group fall from 17.8% to 15.8% this year. Sugar and Agriculture both delivered an improvement through higher profits but the lower profit at Primark and Ingredients combined with recent investment meant a significant reduction in their returns. The average level of capital employed in Grocery increased by 22% reflecting higher working capital, driven by higher commodity costs, and by capital investment in our production facilities to improve the efficiency of our operations and expand capacity. ROCE fell as a result but some of the investment has still to deliver benefits. ROCE is calculated by expressing adjusted operating profit as a percentage of the average capital employed for the year.

Net cash flow from operating activities was £736m compared with £1,172m last year. This substantial reduction reflects the reversal of last year’s £193m working capital inflow to an outflow of £199m this year and is the consequence of substantially higher commodity costs and growth in the business.

We continued to invest in the future growth of the group with a net £825m spent on property, plant and equipment and intangibles net of disposals during the year. Capital expenditure amounted to £794m of which £314m was spent by Primark on the acquisition of new stores and the fit-out of new and existing stores. Expenditure elsewhere was incurred on a wide variety of projects, the largest of which were: completion of factory expansion and construction of a new power co-generation plant in Swaziland; the new meat factory in Australia which is almost complete; the Vivergo bioethanol plant in Hull which is scheduled to begin operation next spring; new yeast plants in Mexico and Shandong province in China and expansion of dry yeast capacity at Xinjiang in China and Casteggio in Italy, all of which are in progress.

We invested £53m on acquisitions, principally deferred consideration payable on acquisitions made in previous years and the buyout of the non-controlling interests in the beet sugar business in China.

Cash and cash equivalents totalled £341m at the year end. These were managed during the year by a central treasury department, operating under strictly controlled guidelines, which also arranges term bank finance for acquisitions and to meet short-term working capital requirements, particularly for the sugar beet and wheat harvests.

The group has total committed borrowing facilities amounting to £2.3bn, half of which is provided under a syndicated, revolving credit facility which does not mature until July 2015. £1.4bn was drawn down on these facilities at the year end. The strength and breadth of the 12 banks in the syndicate provide support for our financial needs and reflect the scale and international presence of the business. The group also had access, at the year end, to £750m of uncommitted credit lines under which £214m was drawn.

Pensions are accounted for in accordance with IAS 19 Employee benefits and on this basis, liabilities in the group’s defined benefit pension schemes exceeded employee benefit assets by £44m compared with last year’s deficit of £99m. This improvement was primarily due to an increase in the market value of the UK scheme’s investments in government bonds in line with falling yields, and a deficit reduction contribution made to the UK scheme. The last triennial actuarial valuation of the UK Pension Scheme was undertaken in 2008 and revealed a funding deficit of £163m which, by agreement with the Trustees, the Company is eliminating with five deficit payments of £30m each, the third of which was made in March 2011. Total contributions to defined benefit plans in the year amounted to £70m (2010 – £66m).

For defined contribution schemes the charge for the year is equal to the contributions made which amounted to £51m (2010 – £45m).