Produce Investments has seen its annual operating profits fall by nearly 28%, claiming "highly challenging market conditions" driven by price wars in the major supermarkets hit the UK potato supplier's sales.
An "exceptional growing season" in 2014 saw a bumper potato crop of 5.74m tonnes up from 5.58m in 2013 and 4.49m in 2012. That resulted in the subsequent deflationary impact on potato prices which, chief executive Angus Armstrong said was largely responsible for the group's total turnover falling to GBP178.4m (US$273.1m) from GBP191.8m 12 months earlier.
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The drop in sales, combined with costs linked to a series of measures to improve efficiency, led to operating profits for the year falling to GBP8.1m against GBP11.1m in 2014. Net profit was GBP5.6m, versus GBP7.8m.
Alongside the results for the year to 27 June, Produce Investments warned it may have to close its packing centre in Kent following a cut in future volume orders from 2016 from a key customer that will see its market share with the retailer fall to a minimum 25% from around 40%.
Armstong said it was "disappointing" to see its market share and volumes fall with a core retail customer but said that had been it been offset to some extent by the company's first three-year fixed-margin agreement with the same retailer.
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He explained: "We are extremely pleased to have achieved this arrangement, a first for our business, and a signal of market confidence in Produce Investments and a positive step forward."
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By GlobalDataThe company has also had to manage the fall out from a metal contamination issue at one of its processing subsidiaries, Swancote Foods, which resulted in a major product recall of potato salad and ready meal products after metal had been detected in some lines.
Armstrong conceded the contamination issue was "extremely disappointing" but stressed "a number of process improvements have been initiated" to try and "restore customer confidence" in the business.
The impact of the product recall, which Produce Investments predicted will be between GBP0.3m and GBP1.5m, will be felt in its 2016 financial figures.
The company has undertaken a number of measures in the last year to improve operational efficiencies. This has included the closure of its Tern Hill packing facility for £2m; investment in new technology at Floods Ferry and Duns; an improvement in the performance of man hours per tonne to 9% to year to date; and the integration of the Jersey Royal Company in to the business.
A reduction in net debt to GBP20.7m from GBP24.5m led to the board’s directors agreeing to increase the full year dividend to 7.165p up from 6.825p as a reflection of the company's confidence in its future. The final dividend will be paid on 3 November to ordinary shareholders on the register at close of business on 16 October.
Armstrong explained: "While the market is expected to remain challenging, there are signs of a more balanced supply and demand environment and consequent improved pricing. In addition, with the closure of our Tern Hill facility and a number of investments made at our remaining packing sites, we have significantly improved our operational efficiencies. This remains a key focus for us as we continue to align capacity with demand."
He added: "We are confident that our recent acquisitions, coupled with the rationalisation of our fresh packing sites, places us in a much stronger position to deal with the external pressures facing our industry. The board, and the management team, remain confident that Produce Investments is well placed to grow organically and to take advantage of any acquisition opportunities that might arise in the future."
The company has also announced it has added Neil Davidson, a former executive of Arla Foods and a current non-executive director of Morrisons, to its board of directors.
