Thorntons : Final Results

For immediate release                                                                                                                    10 September 2014

Thorntons Plc ("Thorntons" or "the Company")

Announcement of Full Year Results

for the 52 weeks to 28 June 2014

Thorntons announces full year results with a 60.4% increase in profits as its strategy continues to deliver.

Financial

·    Revenues increased by 0.6% to £222.4 million (2013: £221.1 million)

·    Profit before tax and exceptional items increased by 60.4% to £7.5 million (2013*: £4.7 million)

·    EBIT margin increased to 4.5% (2013*: 3.4%)

·    Basic EPS 7.8p (2013*: 4.6p)

·    Cash generated from operations £4.6 million (2013: £8.3 million)

·    Net debt £32.9 million (2013: £27.5 million)

Operational

·    Successfully delivered our strategy to rebalance the business, revitalise our brand and restore profitability

-       FMCG division grew by 7.8% to £111.0 million (2013*: £103.0 million):

-       Sales in UK Commercial, our largest channel, increased by 9.7% to £99.4 million (2013*: £90.6 million)

-       International sales grew by 4.9% to £6.4 million (2013: 6.1 million). Prospects for our International channel continue to be encouraging, although it is still a small proportion of overall sales

-       Private label sales fell by 17.5% to £5.2 million (2013: £6.3 million)

-       Significant investment committed to our manufacturing facilities

·    Retail division delivered 1.1% growth in like-for-like sales over the period (2013: 0.8% decline), our best performance for more than six years:

-       Own Store sales were £94.9 million (2013*: £102.5 million) with a net 36 stores closed during the year in line with the strategy

-       Consumer Direct sales increased by 14.3% to £6.4 million (2013*: £5.6 million)

-       Franchise sales rose by 1.2% to £8.6 million (2013: £8.5 million)

Jonathan Hart, Thorntons' Chief Executive, commented:

"We are pleased with these results which indicate continued strong recovery in our profitability and are testament to the strategy we put in place just over three years ago. The challenging environment and subdued consumer sentiment make our progress all the more notable. Our growth plans are not reliant on an economic upturn and we will further evolve our strategy as we move towards becoming an international FMCG business with a strong UK multi-channel retail presence. Since the year end we have successfully refinanced the business to support this growth and transformation.

"As we continue to grow our FMCG business, the timing of orders will increasingly cause fluctuations in our quarterly reported sales figures without necessarily affecting overall annual performance, as the past year has shown.  We anticipate further growth in our UK Commercial channel during the first half of the current financial year. However, we expect this to be at a more modest level as a result of strong prior year comparatives, the continually changing marketplace and a marked reduction in the first quarter. Overall, we are confident that we can improve EBIT margin further and maintain positive profit growth for the full year, in line with market expectations** driven by strong annual sales growth in our UK Commercial channel."

For further information please contact:

Nadja Vetter / Emma Crawshaw / Georgina Hall, Cardew Group                 T: 020 7930 0777

* Comparative figures for 2013 have been restated to reflect the adoption of IAS 19 (revised) in the financial year under review and the reclassification of costs to reflect a change in the structure of operating segments.

** the Board considers market expectations for the financial year ended 27 June 2015 are best defined by taking the range of forecasts of PBT published by analysts who consistently follow the Group. The current range of pre-exceptional PBT forecasts as at 9 September 2014, of which the Board is aware, is £9.4m to £10m, with consensus at £9.65m  (FY2014: £7.5m)

This document contains certain statements that are forward-looking statements. They appear in a number of places throughout this document and include statements regarding our intentions, beliefs or current expectations and those of our officers, Directors and employees concerning, amongst other things, our results of operations, financial condition, liquidity, prospects, growth, strategies and the business we operate. By their nature, these statements involve uncertainty since future events and circumstances can cause results and developments to differ materially from those anticipated. The forward-looking statements reflect knowledge and information available at the date of preparation of this document and, unless otherwise required by applicable law, the Company undertakes no obligation to update or revise these forward-looking statements. Nothing in this document should be construed as a profit forecast. The Company and its Directors accept no liability to third parties in respect of this document save as would arise under English law.

Chairman's Statement

These results mark the end of the first three year plan set out in the summer of 2011 to transform Thorntons into an international multi-channel Fast Moving Consumer Goods ("FMCG") company with a strong UK multi-channel retail presence; and I am pleased to report that we have made significant progress towards achieving this long-term objective.

The last year has seen the continuation of subdued consumer sentiment and expenditure as well as a further intensifying of the competitive environment amongst both grocery retailers and confectionery manufacturers. Against this background our progress is even more encouraging.

In line with our strategy, we are changing our business model to reflect the continually evolving nature of shopper behaviour reflected in today's multi-channel retail environment. This requires us to have our product available wherever, whenever and however our customers choose to shop; whilst at the same time retaining critical mass in our supply chain to maintain the efficiency of our manufacturing and supply chain operations.

These results bear testament to the success with which we are managing this approach. Sales increased by 0.6% to £222.4 million (2013: £221.1 million). Reported pre-tax profit before exceptional items increased by 60.4% to £7.5 million (2013: £4.7 million, restated for the revisions to IAS 19).

We continue to manage the planned reduction in our Retail division's Own Stores estate whilst supporting those stores that have a long-term future with investment, in order to differentiate and enhance the shopper experience of Thorntons. This vision is also shared by our key franchise partners.

In our FMCG division we continue to build distribution in our UK Commercial channel to broaden availability, strengthen our seasonal offer and create an enhanced all year round gifting range.

Our international expansion continues as we seek out how best to exploit individual markets and we are pleased with the steady progress we are making here.

Of particular note this year has been the performance of our manufacturing and supply chain operations which have delivered handsomely in terms of productivity, quality and service.

The Board has authorised significant capital expenditure in our Alfreton factory to expand capacity in our core activities of decorated moulding and filled chocolates. When coupled with recent investments in robotic packing, this ensures that Thorntons retains world class standards in key areas of our manufacturing capabilities.

In June 2014, we extended our relationship with DHL and signed a long-term agreement to create a new centralised distribution hub to manage our evolving supply chain, further improve service levels and provide us with capacity for future growth.

We remain mindful of the need to focus on strengthening and innovating our product range whilst continuing to offer value for money. Keeping our offer fresh and relevant, especially at the key seasons, remains at the core of our strategy.

Colleagues and Directors

Our performance is very much dependent on the skills and enthusiasm of our colleagues; both in Alfreton at our factory and head office, and across our retail estate.  Our franchise and supply chain partners have also all contributed and I would like to thank everyone for their continued support and commitment.

We recognise that as the business evolves, it will require us to recruit individuals with additional skills. This applies not only to the executive team but also to the Board.  As a result of Keith Edelman's decision to step down as a Director in October 2014, we will be seeking a replacement with FMCG experience. Keith has made a significant contribution to the regeneration of our retail business, for which we are very grateful. We wish him well for the future.

Dividend

The Board will not be recommending the payment of a dividend this year. This will be kept under review as the Company's financial performance improves and we remain committed to returning to a progressive dividend policy when the performance of the business allows and the Company has sufficient distributable reserves.

The continued transformation of Thorntons requires outstanding skills in strategic analysis and executional excellence. I believe we have these competencies in place and, as such, remain optimistic of further progress in the coming year.

Paul Wilkinson

Chairman

9 September 2014

Chief Executive's report

The year under review completes the first phase of the transformation of Thorntons, in line with our strategy established three years ago, and I am pleased to report that we maintained the positive momentum that was established over the first two years.

Despite the impact of the challenging economy on our shoppers and many of our trade customers, we made good progress over the year, improving sales, reducing costs and delivering further significant improvements in profit growth.

Sales in the year increased by 0.6% to £222.4 million (2013: £221.1 million). Pre-exceptional operating expenses reduced by £2.2 million to £88.4 million (2013: £90.6 million). Reported pre-tax profit before exceptional items increased by 60.4% to £7.5 million (2013: £4.7 million restated for the revisions to IAS 19).

Strategy

Three years ago we set out our plans for the transformation of Thorntons from a UK retail business with growing commercial sales to an international multi-channel FMCG company with a strong UK multi-channel retail presence. As we come to the end of this period we are able to demonstrate the positive progress we have made notwithstanding the continued challenges of the economy. Despite the impact that these challenges have had on our business performance, we can reflect on a period of progressive recovery and strengthening, based on our key strategy of rebalance, revitalise and restore. Our approach is working and delivering results.

Rebalance - ensuring that our products are available where our shoppers want to buy them

In terms of rebalancing our business we are on track with the right-sizing of our retail estate, to establish a sustainable and profitable portfolio, supported by a new merchandising and trading team that are delivering results. Our UK Commercial growth has been sustained and in the last year we saw half of our sales (and significantly more of our volume) being made through our FMCG division for the first time.

The business is evolving quickly to embrace and support the requirements of both trade customers and shoppers in this fast-changing environment. Additionally, our strategy has proved flexible to both external and internal challenges and the multi-channel nature of our distribution has provided protection for our business. We announced our International strategy at the end of our second year and are making steady progress, learning and investing as we go.

Revitalise - the Thorntons brand

The revitalisation of our brand has seen our brand positioning clarified, our visual identity evolved, and products unified across channels with significant progress made in a total review and refresh of our ranges. Good progress has been made with innovation for both the key seasons as well as the challenge of year-round gifting. We have started a journey towards putting shoppers at the heart of everything we do and, over the past year, our shoppers have begun to see the results of this. We have made excellent progress in our Own Stores through our Customer Experience Programme and our stores have a significantly improved look and feel. The merchandising across all our channels has undergone a step-change and is significantly better co-ordinated.

Restore - our profitability to industry competitive returns

Despite the challenge of increasing input costs during the course of the year and the continuing highly-promotional and competitive nature of the marketplace, our actions have delivered further improvement in pre-exceptional earnings before interest and taxation ("EBIT") margin to 4.5% (2013: 3.4%). This performance continued the positive profit trajectory established during 2012/13. Our strategy of rebalancing has clearly proved correct as we have grown our higher contribution margin FMCG division whilst reducing our lower contribution margin Retail division. Our efforts in this regard continue to be supported by an evolving cost and margin-focused business culture.

Our rebalance, revitalise and restore strategy is working well and we will maintain and evolve this as we enter the next three-year phase of our journey towards establishing Thorntons as an emerging international FMCG business with a strong UK multi-channel retail presence. More detail can be found on this in the Looking Ahead section below.

Our Market

The overall confectionery market remains robust and of significant size at £3.9 billion. It maintained a 2% growth in value over the past year, driven by price rather than volume. Thorntons' focus within this is the Total Boxed Chocolate market, which grew 3% over the past year to £748 million. In the UK Commercial channel, we retained our position as one of the top three brands within the boxed chocolate market with an 11.5% market share (2013: 11.9%) and also remained a clear leader in our core inlaid boxed chocolate market, with a 34.5% share (2013: 35.2%).

The total gifting market, at £39.4 billion, is more than ten times the size of the confectionery market and similarly grew at 2% over the past year. Gifting confectionary remains ideally placed within this market as an affordable gift at typically lower price points than other gift alternatives. Insight into this gifting market continues to inform our marketing and product development strategies to make our products more relevant for gifting. There is significant opportunity for us at key occasions, in particular Christmas, birthdays and those impulsive "just because" gifts, where currently confectionery takes a smaller share than usual.

The past year has seen a significant increase in the market price for cocoa. We employ a number of proven approaches to manage these challenges including seasonal range changes, forward purchasing, product engineering and ingredient optimisation. However, alongside a number of our competitors, we were obliged to increase our prices during spring 2014.

The year in review

FMCG division

Total sales in the FMCG division grew by 7.8% to £111.0 million (2013: £103.0 million). Sales in this division, which comprise our UK Commercial, Private label and International sales channels, now account for half of the Company's total sales, and this is anticipated to continue to grow as the rebalancing of the business continues.

UK Commercial sales

UK Commercial sales increased by 9.7% to £99.4 million (2013: £90.6 million) reflecting another strong year of sales growth. The UK market remained highly competitive and promotional as shoppers continued to seek value. Our strategy of broadening our distribution, in particular towards the convenience retailers, provided excellent growth in this sector, helping to protect us from some of the challenges experienced by our mainstream grocery customers.

During the year we invested further in growing and strengthening our sales, customer marketing and category teams and this performance reflects their combined efforts. As part of our overall strategy to restore the profitability of the Company, we also made a conscious decision to shift the balance of our efforts in this division towards channel contribution, rather than just growing top-line sales and market share. As a consequence we saw declines in sales and market share in some categories (e.g. twist-wrap and single-flavour) where our proposition, volumes and category margins were somewhat weaker.

Over the past year variations in timings of stock requirements by our larger grocery partners have skewed our quarterly reported performance figures on more than one occasion. In the last year, this was most notable after Christmas (our second and third fiscal quarters), reflecting the demands from the grocers for early spring stock-builds. It is important to note that as we continue to grow our business in this sector, we anticipate that these quarterly variances will become a more significant feature of our Company annual sales profile making quarterly comparisons less significant. These variances are not necessarily expected to affect overall annual performance, as demonstrated in the last year.

The past year also saw some significant swings in market share across our key grocery customers, reflecting some of the challenges in this sector and, in particular, reflecting the higher than normal levels of non-seasonal stock carried over from the autumn selling season into spring. This had an effect on both Valentine's and Mother's Day sales where our offer wasn't optimised and market share suffered. Combined with the aforementioned early spring stock-build, this created a significant variation in the performance of this channel across the two halves of the year.

We did, however, see excellent sales of our seasonal specialities at both Christmas and Easter, driven by the launch of our Snowman licence range and our new Harry Hopalot character respectively. Sales of Christmas specialities grew 68% delivering a share of 6.3% (2013: 4.3%). The Easter specialities market grew 12% year on year. Pleasingly, our growth in this area reflected this as we broadly retained our share at 4.9%.

At an overall level we are planning for similar levels of growth in the near term and continue to invest in people, marketing and systems to enable this to be achieved.

International sales

International sales grew by 4.9% to £6.4 million (2013: 6.1 million). While only accounting for approximately 3% of Company sales today, we remain confident in the growth prospects for Thorntons as a premium brand outside of the UK. We are still in the early phase of market evaluation, testing and development. During the year we added to our leadership team with the appointment of an experienced Director of International Development to aid this growth.

In the year we established a new relationship with a distributor in Australia, enabling us to begin to develop a year-round business with local support and representation. Australia continues to be a key focus, along with South Africa and the UAE. Additionally, over the past year we have seen a positive response from prospective customers in the United States resulting in some modest, but nevertheless encouraging, listings. We anticipate that this market is likely to become the largest international market for us over the coming year.

Our tax and duty-free business continues to grow and is focused on the UK and UAE although there are also encouraging opportunities emerging elsewhere. We have established some promising relationships with several of the major global grocers and are optimistic that these can become key platforms for establishing Thorntons across many markets.

Private label

Private label sales fell by 17.5% to £5.2 million (2013: £6.3 million) as our largest customer made changes to their product strategy. At just over 2% of Company sales, UK private label is a small part of our business. We are happy to participate in these relationships where we can deliver acceptable margins and where the Thorntons brand is not in direct competition with the products which we supply, but this is not core to our strategy.

Manufacturing operations & supply chain

Over the past year we have announced several key investments to ensure that our manufacturing operations and supply chain develop in line with our business needs. These decisions have been driven by the desire to improve capacity, capability and productivity.

The first half of the year saw the installation of our third robot-packing machine, which is now running at full capacity and driving further efficiency improvements across our boxed chocolate ranges.

At the half year, we announced the most significant investment in our manufacturing lines for more than twenty years, aimed at increasing capacity in boxed chocolates and hollow decorated products, both key categories where we enjoy significant competitive advantage. These new manufacturing lines will become operational during the second half of the 2014/15 financial year.

In June 2014, we extended our relationship with DHL, our logistics provider, in order to improve the service levels provided to our customers, as well as enable our planned future growth. Our commitment to them will result in their investment in a brand-new state-of-the-art warehousing and distribution facility, which will significantly increase capacity and productivity, as well as enhance customer service. This new warehouse will be brought into service progressively over the autumn of 2014.

Over the last year, our production output increased by over 9% to 22 million kilogrammes whilst overheads continued to be leveraged through our focus on productivity and efficiency. Our procurement strategy is strongly geared towards mitigating risks on commodity purchases in the face of inflationary pressures, primarily on cocoa.

Our key operational pillars of Quality, Safety and Delivery have all shown pleasing improvements in their key performance indicators with safety in particular showing strong improvement in the reduction of both lost-time and reportable accidents.

In order to enable the business to progress with its strategy we have increased the number of permanent employees in our factories to 973, an increase of 59 over the year. In order to further improve capability, productivity and product skills across our teams in supply chain, we have delivered an unprecedented level of training over the past year, focusing on NVQ apprenticeship programmes in food manufacturing excellence and business improvement techniques (including lean manufacturing).

Retail division

Total Retail sales, which include Own Stores, Consumer Direct and Franchise sales, declined by 5.6% to £111.4 million (2013: £118.1 million).

The high street economy showed no sign of improvement over the year. In this respect, we are pleased with the 1.1% growth in like-for-like sales over the period (2013: 0.8% decline). As the leading multi-channel confectionery retailer in the UK, this was our best performance for over six years, and demonstrates a significant achievement in establishing a more stable and confident Retail division.

Own Stores

Total sales declined by 7.4% to £94.9 million (2013: £102.5 million) as a result of the continuing store closure programme. The programme remains on track and 39 stores were closed (2013: 35) over the course of the year. Two of these stores were re-sited and one new store opened, leaving a total of 260 stores at the year end (2013: 296).

Of particular note is the consistent performance delivered across all the seasons. This reflects the outstanding effort from the Retail Trading and Operations teams. Furthermore our aim of delivering a profitable and sustainable Own Stores channel has seen a progressive margin improvement (across the second half of the year in particular).

This position has been achieved by a relentless focus on improving the experience for our shoppers, a consequence of our investment in our stores, merchandising, proposition and people. Combined, this investment supports our efforts to ensure our stores are the place where we bring our brand to life; delivering an engaging and personalised experience to our shoppers.

Over the year, we invested in a further 13 store refurbishments, bringing the total completed so far in the last three years to 28. The refitted stores are delivering sales growth in line with our targets and we anticipate up to a further 20 refurbishments over the coming year.

At the start of the last financial year we restructured our Thorntons Direct channel, integrating the corporate gifting part within our Own Stores business. This has allowed us to leverage the strength of the existing relationship between our store managers and local businesses, and focus the balance of this channel at building our predominantly consumer online business.  

Consumer Direct

Consumer Direct sales increased 14.3% to £6.4 million (2013: £5.6 million). After the challenges resulting from the launch of our new website in the autumn of 2012, last year saw a return to growth as we met the needs of our online shoppers with compelling gift offers.

Our online proposition is very different to the rest of our business; with a focus on higher-priced, bespoke and personal gifting. Nevertheless, we remain committed to developing this online opportunity, investing appropriately and optimising the link with our Own Stores with the intent to focus on the bottom line contribution from this channel.

Franchise

Franchise sales increased by 1.2% to £8.6 million (2013: £8.5 million). The continued attraction of the Thorntons brand to the card and gift retail market resulted in the addition of seven franchise locations during the year, of which the majority were additional locations for existing franchisees. We did, however, lose 18 franchise locations due mainly to the effect of the economy on our independent franchisees or to poor performance. New locations were gained at typically higher sales per location than those which we lost and contributed to a pleasing year for our Franchise team. This resulted in 175 franchise locations at the year end (2013: 186).

Despite the ongoing challenges in the high street, our franchisees responded well to, and benefitted from, the product innovation, developments in merchandising and customer service that we introduced during the year.

Our focus remains on encouraging and supporting our franchisees to deliver the desired Thorntons brand experience, thereby supporting our overall retail strategy. During the year seven locations installed the new franchise fit-out, which reflects the new brand visual identity bringing the total in this new format to 13. As franchisees seek renewal of their agreements we continue to pursue their commitment to upgrading to this new style.

Customers, brand and product innovation

Thorntons' position in the 'premium' sector of the chocolate market is clear: Thorntons being an affordable treat, worth paying at little extra for. Our ongoing focus on innovation and marketing investment remains an important factor in supporting and building our brand position.

During the year, we saw good progress in revitalising our brand through the continued refreshment of our product ranges, further excellent progress at the key Christmas and Easter seasons and innovation in product and merchandising.

As the leading premium chocolate brand in the UK, Thorntons' brand positioning continues to present opportunities. The breadth of our offer to our shoppers is becoming clearer as we progress our range refresh and further roll-out our new brand look and feel. The first half of the period saw the successful launch of our Classics range in both single and double layers across all our channels, followed by the launch of our "Nostalgia" range of toffee and fudge which provided new opportunities for distribution into our UK Commercial channel. In the second half, our new "Indulgence" range was launched in our Retail division and initial sales have been encouraging.

Our Christmas seasonal performance was strong, led by a refreshed Advent calendar range, which included growth of our range of calendars for grown-ups. We also launched our new Snowman licence range with excellent results across all channels. At Easter, in addition to further innovation in our core eggs, we launched our own Easter character, Harry Hopalot. Harry had a very positive impact on our Easter performance and we have exciting plans to establish him further as an Easter icon in the year ahead.

Valentine's and Mother's Days saw mixed results; positive in our Retail division, weaker in our FMCG division. Despite new inlaid boxes with seasonal messages, our performance was hampered by some non-seasonal stock remaining in some of our trade customers from the previous autumn, as well as a trend towards low-priced "token-gifting" in the grocers. Father's Day and the growing "gift for teacher" season saw improved performance with new lines contributing to good growth in the last quarter of the financial year.

Our focus on year-round and personalised gifting saw further online growth of our hampers and alphabet truffles, and a significant step-up in the number of shoppers taking advantage of our finishing touches of gift-wrap, tags and bows, reflecting the success of our store teams in delivering a bespoke experience to our shoppers.

The emphasis we placed on improving the presentation of our brand resulted in further investment in merchandising in our Own Stores, in addition to our refit programme. Our brand presence in our FMCG division was enhanced through a mixture of dedicated Thorntons bays, front-of-store seasonal displays, off-shelf displays and other gifting trials in our grocery partners. Our front-of-store Snowman displays were a well-regarded highlight.

Our shoppers continued to respond positively to our efforts. In our Own Stores our relentless focus on delivering an outstanding experience has been rewarded with improvements across a number of key metrics: shopper satisfaction reached 88% during the year and averaged 82% (up from 65% two years ago); likelihood to revisit grew to 79% (up from 76% a year ago); and likelihood to recommend grew to 82% (up from 77% a year ago).

Thorntons remains top-of-mind for our shoppers and consumers, recording the highest spontaneous awareness and highest advocacy in the premium chocolate category as well as the second highest on both measures in the overall chocolate category. In addition, Thorntons delivers category leadership in measures such as "good for special occasions" and "made with care".

Looking ahead

As we look ahead to the next three years of our transformation journey we are confident in our strategy to become an international FMCG business with a UK multi-channel retail presence.

This strategy of rebalance and grow, revitalise and restore will be supported by five key business imperatives:

1.   Shopper focus - The relentless pursuit of satisfying the needs of our shoppers.

2.   Building brand equity - Investing in our brand, ensuring that we deliver a clear and consistent premium market position

3.   Grow the capability of our people - Encourage, support and invest in the capabilities of our people, our business processes and organisational structure.

4.   Accelerate FMCG growth - Maximise profitable sales in UK Commercial and drive sustainable sales in International.

5.   Drive Margin growth - Grow our business profitably.

Rebalance & Grow

FMCG division

As we look to increase the pace of our transformation towards an FMCG business, our organisation, structure, skills, processes and systems, which were all historically established to serve just one primary customer (our Own Stores), have for some time now experienced the challenges and pressures of meeting the varying demands of over one hundred trade customers in the UK and internationally. As a result, we are embarking on a programme to review the way in which we organise ourselves in order to best serve these new challenges. Over the past year we have delivered the largest ever investment in our people; in our stores, our factory and across our management teams and we are recruiting people with FMCG skills and experience and investing in systems to enable us to achieve our goals.

Resulting from this transformation will be the emergence of an FMCG core business, focused on delivering outstanding service to its customers, of which our Retail division will be the largest. This reorientation of our business will create the platform for success and development in the longer-term.

Growth in the UK Commercial channel will be driven by our plans to broaden distribution, furthering our progress into the convenience sector as well as developing business with mixed retailers who value our brand for its gifting credentials. Additionally, we remain confident in continued strong growth in the key seasons.

Over the next three years, we will see the more prominent emergence of International sales as a contributor to the business. In the long-term, we expect International to be a significant driver of growth. Our careful and structured approach to this opportunity remains key. We seek to establish a proven model that demonstrates that the brand will travel profitably and our core focus going forward will be on selective markets, global tax & duty-free and developing relationships with leading global retail partners.

Retail division

Our Retail division will continue to have the objective of enhancing and building the Thorntons brand profitably, although will develop a flexible, confident and somewhat independent approach as required for a retail business of this nature.

Over the next three years we will reach our target of 180-200 stores, almost half of which will have been refitted. We will continue to review our store portfolio on a detailed and frequent basis in order to ensure that our estate is optimised for our shoppers and our profitability. Our commitment to the high street remains - our stores will continue to play an important and vital part of bringing our brand to life with our store teams leading the way in delivering an outstanding experience for our shoppers.

Having now made the final step in the integration of our Consumer Direct online business within our Retail division we can expect this channel to have an increasingly clear and more focused proposition as part of our overall retail strategy going forward.

Our Franchise channel will expand to support our brand ambitions in locations where we do not have a company store. We will continue to develop relationships with independent and multiple franchisees who see the value of the Thorntons brand and who have a commitment to delivering our values and proposition.

Revitalising our brand

We have always invested in understanding our core consumer segments and understanding their needs. This will inform our product development over the coming years. Despite being the largest premium brand in the UK we are not yet the largest premium brand in the grocery market served by our UK Commercial channel and this is our key ambition. Achieving this will require us to develop a sharper brand-led focus.

As we evolve our business focus towards the needs of our customers and shoppers in the grocery market we will begin to target our product and category development towards fewer, bigger launches. We have identified five key areas of focus: inlaid boxed chocolates, the key seasons (Christmas and Easter) as well as three other categories where today we have a lower presence and where we believe that we have the brand and the opportunity to succeed. We currently have projects underway that will deliver over the next three years. These efforts will be supported by our excellent technical and new product development capabilities and our core product manufacturing capabilities.

Our range refresh will continue over the next eighteen months and its completion will signal the end of the most extensive change to Thorntons' products in our history.

As the revitalisation of our brand continues we will further invest in our people to ensure that they have the capability to deliver to the challenges ahead.

Restoring profitability

The past two years has evidenced consistent and progressive growth in EBIT margin driven largely by the rebalancing of sales and costs away from our Retail division where net contribution is lower and growing our FMCG division where net contribution margin is significantly higher. As we progress our strategy we anticipate further steady improvement towards our ambition of delivering industry competitive returns.

In the face of increasing input costs and in the absence of any evidence of recovery of shopper sentiment, we rely on our own actions to drive business performance. Our strategy is delivering results and we will continue to deploy the approaches that have served us well on our journey so far: skilful procurement, excellent technical skills and the leveraging of our manufacturing and supply chain efficiencies as well maintaining a disciplined cost and margin focused business culture.

Outlook

After the year end we completed the successful refinancing of our debt, thereby securing the funds to support the growth of our business for the next three years and continue our transformation into an international FMCG business with a UK multi-channel retail presence.

As our FMCG business grows, the timing of orders is increasingly likely to cause fluctuations in our quarterly sales figures making comparisons less significant, as the past year has shown. These short-term fluctuations reflect differences in timing of stock requirements without necessarily affecting overall annual performance. We expect these variations to become a more visible feature in our quarterly trading updates as we continue to succeed in growing our FMCG business.

Over the coming three years we will deliver sales growth in addition to achieving further improvement in EBIT margin. We anticipate further growth in our UK Commercial channel during the first half of the current financial year. However, we expect this to be at a more modest level as a result of strong prior year comparatives, the continually changing marketplace and a marked reduction in the first quarter.  We are confident that we can maintain our positive profit growth for the full year in line with market expectations driven by strong annual sales growth in our UK Commercial channel.

Jonathan Hart

Chief Executive

9 September 2014

Finance Director's reporT

Key performance indicators

The comparative figures for 2013 shown below have been restated to reflect the adoption of IAS 19 (revised) in the financial year under review and the reclassification of costs to reflect a change in the structure of operating segments. 

The six Key Performance Indicators ("KPI"s) that were identified in last year's Finance Directors' report as being those most reflective of the businesses progress on its "rebalance, revitalise & restore " strategy are set out in the table below.

I'm pleased to report that significant progress has again been made in most of these indicators in the year under review.

The paragraphs below summarise the key drivers behind the movements in these KPIs.

Revenue

Thorntons' sales are made through two key operating divisions: FMCG and Retail. The sales of these divisions are shown below.

An overview of the sales performance by division and the channels within each division is set out in the Chief Executive's report.  FMCG sales were broadly half of the Company's annual revenues and will continue to grow to be the largest division in the coming financial years.

Profit before taxation

Reported profit before taxation and exceptional items increased to £7.5 million (2013 restated: £4.7 million).

Group sales increased by 0.6% to £222.4 million (2013: £221.1 million) as growth in our FMCG division, both in the UK and internationally, more than offset the planned reduction of sales revenues in our Retail division in the year under review.  This trend is expected to continue over the coming financial years as the "rebalance" element of our strategy continues to be implemented.

We continue to make good progress in increasing divisional specific gross margins based on the strategic pricing and costing initiatives we have implemented.  As a consequence, we have again been able to offset the anticipated downward pressure on total Company gross margins as we rebalance to a more FMCG-focused business and maintain a broadly flat trajectory at 43.7% (2013 restated: 43.7%).

We have continued to remove costs from the business, with pre-exceptional operating expenses totalling £88.4 million (2013: £90.6 million), an improvement of £2.2 million year-on-year and an improvement of 126 basis points when expressed as a percentage of total revenues.

Exceptional items

The exceptional charge for the year under review is made up of the following items:

As a result of the performance of Retail Own Stores during the last four financial years, significant impairment and onerous lease charges have been incurred.  Assets are reviewed for impairment on a regular basis and a provision made where necessary.  A discounted cash flow is calculated for each retail store, including attributable overheads, using the Group's weighted average cost of capital.  The net book value of assets attributable to the retail store is impaired to the extent that the net present value of the cash flows is lower than the net book value.

The provision for onerous leases is held in respect of leasehold properties for which the Group is liable to fulfil rent and other property commitments for stores from which either the Group no longer trades or for which future trading cash flows are projected to be insufficient to cover these costs. Amounts have been provided for the shortfall between projected cash flows and the property costs up to the lease expiry date on a discounted basis.

At the balance sheet date at the end of the year under review, the balance on the onerous lease provision stood at £2.3 million (2013: £2.4 million).

Underlying profit

Underlying profits for the year under review improved from £5.7 million (restated) to £8.9 million.

One-off store closure costs increased in the year under review primarily as a result of more store closures - 39 compared to 35 in 2013.

Operating margins

Pre-exceptional operating margins improved to 4.5% (2013 restated: 3.4%) reflecting the positive effect of our strategy.  The table below summarises the main contributors to the annual improvement.

Operating expenses

Operating expenses before exceptional items reduced by £2.2 million to £88.4 million (2013 restated: £90.6 million).  As a percentage of sales, operating expenses reduced from 41.0% in 2013 to 39.7% in 2014.

The reduction in operating expenses came primarily from the closure of 39 (2013: 35) Own Stores in the financial year under review and the continued tight cost control at all levels across the business.  During the year under review £1.2 million (2013: £0.7 million) of costs were incurred in respect of these closures.

Other operating income

Other operating income in the year under review decreased to £1.2 million (2013: £1.3 million), due to modest reductions in franchise fee income, licence income and rent receivable. 

Taxation

The post-exceptional tax charge for the year under review of £0.7 million (2013 restated: £1.2 million) comprises a current tax charge of £1.6 million (2013 restated: £0.8 million) and a deferred tax credit of £0.9 million (2013 restated: charge of £0.4 million), the latter mainly relating to actuarial losses in the year.

The current tax charge, at 27.0% (2013: 19.3%), is higher than the effective statutory rate of 22.5% due to prior year adjustments combined with the tax effect of permanently disallowable items and depreciation on non-qualifying assets.

Shareholders' returns and dividends

The improved operating results set out above have led to a basic earnings per share of 7.8p (2013 restated: 4.6p).

Despite the Group's improved profitability and cash position, the Board is not recommending the payment of a final dividend (2013: nil). The Board similarly proposed not to pay an interim dividend (2013: nil), resulting in no dividend payments being recommended for the full financial year under review (2013: nil). The Board aims to return to a progressive dividend policy when the "restore" element of our strategy delivers a satisfactory dividend cover ratio, sufficient distributable reserves and available cash resources.

Cash and debt

Cash generated from operations in the year under review was £4.6 million (2013: £8.3 million).  This deterioration was mainly due to a planned investment in inventories, reflecting the continued requirements of the "rebalance" towards a stronger FMCG business, and including a planned increase to ensure uninterrupted supply of finished goods during the installation of our new manufacturing assets and our warehouse relocation.

Net debt at the end of the year under review was £32.9 million, an increase of £5.4 million on the 2013 figure of £27.5 million, primarily reflecting the planned investment in both working capital and capital expenditure. As a result of these investments, balance sheet gearing increased from 150.6% to 179.4%.

After the year end, and following the approval of the amendment to our Articles of Association, we completed the successful refinancing of our working capital facilities in July 2014 via a new agreement with our existing three lenders. The new facilities represent an increased syndicated Revolving Credit Facility ("RCF") of £75.0 million (previously £57.5 million) combined with a bi-lateral overdraft facility of a further £5.0 million.  These increased RCF facilities run to October 2018 and provide the business with the funds required to continue its migration to a more FMCG-focussed operation and the inherent increased investment in balance sheet working capital that this will require. We are grateful for the continued support of our lender group.

Capital expenditure

Investment in fixed assets totalled £6.2 million (2013: £4.2 million) net of disposal proceeds, of which £1.3 million (2013: nil) was funded through new finance leases.

During the year under review £1.2 million (2013: £0.9 million) was spent on 13 (2013: eleven) new-format store refits. The balance of £5.0 million was spent on supply chain, IT projects and brand development.

Pensions

The IAS 19 pension scheme deficit increased from £22.7 million in 2013 to £27.7 million at the end of the year under review.  The main driver of this increase was the adverse impact of actuarial assumptions which increased the deficit by £8.8 million (2013: £2.7 million). The Group continues to pay £2.75 million per year by way of deficit funding, as agreed with the Scheme's Trustees and approved by The Pension Regulator.  The next triennial valuation will take place as at 31 May 2014 and is due to be finalised and agreed in 2015.

Mike Killick

Finance Director

9 September 2014

Notes to the financial statements