EU reforms pose threat to Greencore's sugar division

Greencore said yesterday that its sugar business faced an uncertain future due to impending EU sugar regime reform and warned that it faced "hard decisions" in the year ahead.

Chief executive David Dilger said the company would await the conclusion of the EU review of the sugar regime before deciding the best route forward for the business.

"We have taken hard decisions in 2005 and this coming year may require further decisions," he said. Earlier this year, the company closed its sugar processing facility in Carlow, with the loss of 190 jobs, retaining a single plant at Mallow, Co Cork.

Mr Dilger dismissed compromise proposals being put forward by the EU Commission as "appeasement". He said the company was "doing everything to create an environment where we can stay in business."

The uncertainty surrounding the sugar regime was among a number of factors which hit profits in the company's ingredients and agribusiness division.

Overcapacity in the malt sector, allied to sharply increased energy costs, helped drive operating profits down by 11 per cent to €41.4 million in what Mr Dilger called "the most hostile market conditions every seen by either business". Sales were down by 6 per cent to €493 million, while operating margins slipped to 8.4 per cent from 8.9 per cent.

However, this was offset by a strong performance from the group's convenience foods division, which accounts for nearly two-thirds of its business.

Overall, the food group reported a 6.4 per cent increase in pretax profit to €77.7 million. Turnover was up marginally, by 1.2 per cent to €1.34 billion, while earnings per share rose by 4.3 per cent to 33.8 cent per share, slightly shy of market expectations. As a result, shares in the group slipped by 4 per cent to €3.01 in early trade before later recovering to close at €3.12, just two cent lower on the day. Greencore announced an unchanged dividend of 12.63 cent.

While Greencore remains confident of delivering further sales and profit growth in its convenience food business in 2006, the outlook for its remaining businesses is more mixed. While Irish Sugar should turn in a "satisfactory" performance this year, as the rationalisation benefits from last year's restructuring flow through, the outlook for 2007 and beyond remains unclear.

The company's malt business has also suffered from oversupply and while capacity closures should help sentiment, an upturn is not expected until 2007.

However, the convenience foods business remains a strong performer. It delivered like-for-like sales growth of 7.5 per cent to €846.4 million and operating profit growth of 16.4 per cent to €67.7 million. Operating margins in the division rose to 8 per cent from 7.4 per cent.

Supermarket groups such as Tesco, Sainsbury and Asda account for 70 per cent of Greencore's turnover. Convenience stores such as Spar, which sell Greencore sandwiches in Britain, account for 14 per cent of revenues.

Greencore took an exceptional charge of €103.6 million in the year ended September. Of this, €65.4 million related to the restructuring at Irish Sugar, while the sale of its British pizza division, which lost more than €5 million last year, involved a once-off cost of €40 million.

The company said its net debt at the end of September stood at €398 million, an increase of €11 million on the year, reflecting the acquisition of UK sandwich maker Oldfields and redundancy costs at Irish Sugar. The company expects to reduce debt levels by around €40 million in 2006.