Half-year Report

6 September 2023

Bakkavor Group plc

Strong first half performance, with momentum continuing into H2 - upgraded full year outlook

Bakkavor Group plc (the "Company") and its subsidiaries ("Bakkavor" or "the Group"), the leading international provider of fresh prepared food ("FPF"), today announces its unaudited half year results for the 26-week period ended 1 July 2023 ("H1 2023").

Strong financial performance and balance sheet strengthened further

·    Like-for-like ("LFL") revenue¹ up 7.4%, driven by price, as well as volume recovery in China

·    Reported revenue up 7.9%, which includes the impact of currency

·    Adjusted operating profit¹ up 2.1% to £43.4m

·    Operating profit up 12.7% to £46.3m, including £2.9m of exceptional income³ related to China

·    Strong free cash¹ generation of £51.6m, up £15.0m

·    Leverage¹ improved by 0.1x to 1.8x (31 December 2022: 1.9x)

·    Operational net debt¹ reduced by £16.2m (31 December 2022: £284.9m)

·    Basic earnings per share of 4.4p (H1 2022: 4.4p)

·    Interim dividend of 2.91p, up 5.0% on the prior period

Restructuring plans across three focus areas driving performance ahead of management expectations

1. Leaner organisational structure realising synergies and efficiencies ahead of expectations

2. Clear and focused regional priorities had meaningful positive impact on H1 2023 performance

·    UK: Volume outperformed the market and inflation mitigated through price recovery and internal levers;

·    US: Business stabilised and operational improvement plans starting to deliver

·  China: Volume recovery leads to reduced operating losses; simplified operations with associate disposal

3. Enhanced focus on cash management, with capital spend targeted at productivity investments and working capital improvement, resulting in reduction in debt and leverage

·    Actions set to deliver £17m savings in FY23, ahead of initial £15m forecast, and £25m annualised

Confident in a strong full year performance, Group outlook upgraded

·    With positive momentum expected to continue, the Group anticipates FY23 adjusted operating profit at least in line with prior year of £89.4m, c.£4m ahead of current consensus²

·    Revised outlook underpinned by restructuring savings, strong pipeline to support UK share gains albeit volumes remain under pressure, delivery of embedded changes in the US and ongoing volume recovery in China

·    Strong cash generation expected to deliver further improvement in net debt

1.     Alternative performance measures are referred to as 'like-for-like', 'adjusted', 'underlying' and are applied consistently throughout this document. These are defined in full and reconciled to the reported statutory measures in Note 21. 

2.     Based on company compiled consensus ("Consensus") which includes all covering analysts. Adjusted operating profit Consensus for FY23 at £84.7m with a range of £82.0m to £86.3m. Last updated on 4 September 2023.

3.     For detail of exceptional items please refer to Note 4.

Mike Edwards, CEO, commented:

"I am pleased with the strong performance the Group has delivered in the first half, and the momentum this has created as we move through the rest of the year. As ever, the great people we have in the business have been fundamental to our success and I would like to thank them for their relentless hard work and commitment.

"Our continued market share gains in the UK reflects our consistent delivery for customers and demonstrates that our broad product range continues to meet the needs of shoppers during the cost-of-living crisis.

"Internationally we have seen good progress too, with operational improvement plans now starting to fuel enhanced profitability in the US. In China, post-Covid volume recovery is underpinning much reduced operating losses.

"We are confident in delivering an upgraded full year performance, with adjusted operating profit now anticipated to be at least in line with last year and ahead of current market expectations. This is underpinned by the execution of our restructuring, which is driving performance and synergies across the business ahead of our expectations. I am also pleased that we now have momentum building in all three regions, which is positive as we look forward.

"This, coupled with an improved balance sheet, mean the Group is in a strong position to capitalise on its opportunities through the remainder of this year and beyond."

Presentation

A copy of these results is available on our website: https://www.bakkavor.com/en/investors/results-and-presentations/default.aspx

We will be presenting to analysts in-person and via a webcast at 09.00am on 6 September 2023 through the Investor section of the Group's website at: https://brrmedia.news/BAKK_HY23. The presentation can also be accessed via a replay service shortly after the presentation has concluded.

ENQUIRIES

About Bakkavor

We are the leading provider of fresh prepared food in the UK, and our presence in the US and China positions the Group well in these, high-growth markets. We leverage our consumer insight and scale to provide innovative food that offers quality, choice, convenience, and freshness. Around 18,500 colleagues operate from 44 sites across our three markets supplying a portfolio of over 2,900 products across meals, pizza & bread, salads and desserts to leading grocery retailers in the UK and US, and international food brands in China. Find out more at www.bakkavor.com.

LEI number: 213800COL7AD54YU9949

Disclaimer - forward-looking statements

This statement includes forward-looking statements. By their nature, forward-looking statements involve risk, uncertainty and other factors, which may cause the actual results and developments of the Group to differ materially from any results and developments expressed or implied by such forward-looking statements. You should not place undue reliance on any forward-looking statements. These forward-looking statements are made as of the date of this statement. The Group is under no obligation to publicly update or review these forward-looking statements other than as required by law.  

CHIEF EXECUTIVE'S OVERVIEW

Our decisive actions are driving a strong performance

The Group has had a strong start to the year, despite market conditions remaining tough, and we feel positive about both our first half performance and the momentum we take into the second half.

Reported revenue growth was up 7.9%, and, excluding the impact of currency, LFL revenue was up 7.4%. This growth was led by price with volume broadly flat. Volume reflected a strong recovery in China post-Covid, and while UK volumes were marginally down we continued to outperform the market. Good underlying growth in the US was offset by the loss of volume with a single customer as previously reported.

Despite the first half having the challenges of continued supply chain disruption, inflation and weak underlying UK volume, Group adjusted operating profit was up 2.1% to £43.4m. The execution of our restructuring plans (as set out in our full year results in March) was key to our delivery and will continue to support second half performance. Operating profit was up 12.7% to £46.3m and included the one-off benefit from simplifying our operations in China.

Restructuring plans support performance and synergies ahead of plan

1.   Leaner organisational structure fuelled synergies and efficiencies

Our new leadership structure has created renewed focus and purpose, and the pace at which our teams have embraced and embedded these changes has been reflected in our overall performance. Specifically, operational alignment around our Meals and Bakery sectors in the UK has fuelled operational synergies and efficiencies ahead of our expectations.

2.   Clear and focused regional priorities established good momentum

UK: We are delivering against our aggressive plan to mitigate softer market volumes and ongoing cost inflation. Our focus on volume, by ensuring strong availability of our products despite significant supply chain disruption, targeted innovation and net business gains, has seen us continue to outperform the market. We have continued to work closely and collaboratively with our customers on price recovery, and our two factory closures, completed ahead of plan, have ensured we continue to use internal levers to protect profitability. All of this provides good momentum for the second half of the year. 

US: Through our renewed focus on profitability we have stabilised the business and established a strong platform for future improvement. We have put in place a new leadership team and implemented factory efficiency initiatives and cost reduction plans. With these changes now embedded, profitability is starting to improve, with momentum expected to build through the remainder of the year.

China: We have delivered against our two clear priorities resulting in reduced losses in the region. Our operational team has successfully delivered against the strong build back of volume post-Covid and commercially we have continued to diversify our business, again seeing significant growth with our retail customers through H1 2023. We expect the steady recovery post-Covid to continue through 2023. 

3.   Enhanced focus on managing cash supported improvement in debt and leverage

We have reduced capital expenditure and been more targeted in our allocation of spend, with productivity initiatives prioritised. Working capital has improved as we have focused on stock management, with momentum expected to continue in the second half. Combined, this has contributed to a £16.2m reduction in net debt and seen leverage reduce by a 0.1 turns to 1.8x.

The accelerated delivery of our plans, outlined above, is now expected to result in £17m of savings in FY23, ahead of our initial forecast of £15m, and £25m on an annualised basis. We also expect the momentum created by our new structure to continue to unlock new benefits in the second half and into next year which ensures we are in good shape to deal with ongoing macro-headwinds.

Further progress in supporting our people and sustainability

As ever, the great people we have in the business are fundamental to our success and I would like to thank our teams for their relentless hard work and commitment. We recognise our people are the best in the industry, and despite the cost pressures faced by the business, we have continued to invest in them.

Following feedback from our 2022 Employee Engagement Survey, we have been focused on improvements to enhance the working experience at Bakkavor. I am particularly proud of our new 'Better Behaviour, Better Bakkavor' workshops for factory colleagues and in the wake of the ongoing cost-of-living pressures, our significantly enhanced staff shop offer with a new of range heavily discounted Bakkavor products.

Our sustainability KPIs are well-embedded with focused workstreams in place to deliver improvement and we are pleased with the good progress we have made in the first half. Our Group net carbon emissions reduced by 8.2% and food waste reduced by 165 basis points to 6.8%, both supported by the enhanced and more integrated operational focus we have brought to these areas.

Confident of a strong full year performance, ahead of current market expectations²

We are confident in delivering an upgraded full year performance ahead of current market expectations². Adjusted operating profit is now anticipated to be at least in line with the prior year, £89.4m.

The better than expected returns from our action plans, along with the positive momentum across all three regions, are key to this. In the UK, despite expecting volumes to remain under pressure, we are confident that our pipeline of activity will ensure we continue to outperform the market. In the US, we have clear line of sight of a profitable second half and in China we expect losses to be lower on a full year basis.

This, coupled with a stronger balance sheet, mean the Group is in a strong position to capitalise on its opportunities through the remainder of this year and beyond.

2.     Based on company compiled consensus ("Consensus") which includes all covering analysts. Adjusted operating profit Consensus for FY23 at £84.7m with a range of £82.0m to £86.3m. Last updated on 4 September 2023.

DIVISIONAL REVIEW

United Kingdom: Strong trading performance; continued market share gains and benefits from restructuring plan materialising

1. Alternative performance measures are referred to as 'like-for-like', 'adjusted', 'underlying' and are applied consistently throughout this document. These are defined in full and reconciled to the reported statutory measures in Note 21.

LFL and reported revenue increased by 7.6% to £913.7m, led by pricing as inflationary pressures persisted. Having consistently outperformed the market, which was down 3.3% in H1 2023, our volumes were down only 1.0% year-on-year.

Adjusted operating profit was up £1.1m to £44.8m (H1 2022: £43.7m). Inflationary headwinds remained significant through the first half of the year and we also had to contend with ongoing supply chain disruption. The impact of this, however, was more than offset by the benefit of our internal levers. Operating profit is also £44.8m, up £2.5m (H1 2022: £42.3m) as the prior year included £1.4m of adjusting items.

Outperforming the market

Cost-of-living pressures continued to impact the FPF market, with shoppers carefully managing their budgets. In overall terms FPF market volumes were down 3.3%, with salads and desserts which tend to be categories that are more discretionary purchases driving this overall decline. Through the period, whilst meals volumes were down, they were more resilient and fared better than the overall market, as did pizza and bread which saw volume growth.  Despite this challenging backdrop, we continued to gain market share in overall terms in the period and outperformed in three of our four categories.  

Our share gain has been underpinned by several factors. We have continued to deliver strong service levels to our customers which in turn ensures good availability of our products in store despite continued supply chain disruption. We have targeted our innovation to respond to changing consumer needs particularly in the face of cost-of-living pressures, which has seen many of our ranges outperform for our customers. For example, providing better value alternatives to eating out in our pizza and meals categories, as well as developing new meal deal offers that provide great value for consumers. Finally, we have continued to develop our customer relationships, which combined with the above, has further strengthened their confidence in Bakkavor's ability to help them deliver for their customers. This has resulted in us securing new business, again bolstering our market share. 

In meals, at home dining solutions have performed well with our research suggesting that over half of shoppers are eating out less and eating fewer takeaways compared to six months ago. The re-development of the oriental range for our biggest customers delivered incremental sales growth and re-established them as the market leader in this category. Despite the impact of inflation, meals continue to provide great value and we have seen particular strength in our Italian ranges. All of this has resulted in us seeing progressive share in the meals category. 

As a category, pizza and bread has performed strongly relative to the overall FPF market, being seen as an affordable and filling meal option with strong growth in 'value' ranges and meal deal volume as consumers again look for alternatives to takeaways and eating out. This is the one category that we have not seen share gain in, as our business mix means we are under-represented in the value tier, particularly in pizza.

The salads category has been less resilient than meals, impacted by availability issues as well as cost-of-living pressures leading consumers to reduce purchase of fresh cut products opting for cheaper wholehead produce equivalents. Despite this challenging backdrop, there were two dynamics that ensured we gained share. First, we effectively navigated industry-wide availability challenges ensuring our biggest customer in this category outperformed the market, with our service levels being exceptional through the peaks we saw for the Coronation and the Summer period. Secondly, we successfully onboarded new business in prepared fruit which further extended our market share gain.

Desserts volumes have been most impacted due to their more discretionary nature, higher cost inflation and reduced promotions as HFSS legislation started to come in to force. Despite this, we outperformed the market with our mix of business being favourable as we saw our biggest categories, cream cakes, trifles and cheesecake, performing much stronger than potted desserts performing less favourably. Our performance was also supported by strong growth in our The Delicious Dessert Company brand, which is continuing to attract new, younger consumers to the category.

Restructuring and targeted investment underpin strong operational performance

Our operational delivery has helped close the gap in inflation recovery.

It has been fuelled by the synergies realised from our new UK structure, which is now aligned to two operating sectors; Meals and Bakery, as well as the benefits we have seen from closure of two factories and associated consolidation of volume across our other sites.

The investment in our new manufacturing system is now complete, with RedZone live in all UK factories. This is underpinning strong operational improvement as our manufacturing teams now have access to live performance data and trend analysis. Another important benefit of the system is that it signposts us to opportunities to invest behind performance, removing bottlenecks and points of inefficiency, creating a pipeline of future opportunities.

Our ongoing targeted and disciplined approach to capital investment has seen us prioritise spend on productivity initiatives with the £10m strategic investment in a new automated craft bread line at our Crewe site, to increase productivity, as well as capacity, now nearing completion. This investment also includes the replacement of nitrogen chilling with a low carbon energy solution which delivers a cost saving whilst also helping reduce our carbon emissions.

Successfully mitigated supply chain challenges and ongoing inflationary pressures, however significant improvement in labour availability is a positive dynamic

We continued to experience supply chain disruption which has impacted availability, notably in fresh produce and fruit, largely due to adverse weather patterns being experienced across Europe and other parts of the world. Whilst this had some impact on sale in certain sub-categories, generally our scale and breadth has helped insulate us from this.

Inflationary pressures have remained significant across the cost base, and the majority of the Group's £91m inflation in H1 2023 was borne by the UK, mainly due to two key factors. First, items where we had successfully hedged and therefore beaten the market last year, have been exposed to current market pricing as we have taken new positions this year. The key examples of this would be grocery items, such as tomatoes and oil, as well as energy. Secondly, labour, where inflation continues to be fuelled by movements in the National Living Wage. There are some pockets of deflation in certain commodities such as dairy, although prices remain elevated and in overall terms we are still operating in an inflationary environment, however, we are hopeful that inflation is now past its peak.

Our ongoing focus on operational efficiency, value optimisation and tight cost control, along with the continued support we have received from our customers on price, has helped to mitigate the impact.

There have been some positive developments from a people perspective. Vacancy levels are much reduced and we have good availability of agency staff. We have accelerated our investment in our people recognising that their contribution is key to the success of our business, with our key initiatives outlined earlier. We have made good progress with our labour plans, continuing to enhance our factory rates of pay and broader benefits.

Confident momentum will continue in second half

Following the delivery of a strong performance in H1 2023, the UK business takes good momentum into the second half. Our restructuring plans will continue to deliver benefits, operational efficiency initiatives are well-embedded, and we will maintain a tight control of costs. Whilst we are likely to see soft underlying volumes in the second half as the cost-of-living pressures continue, we are confident of continuing to outperform the market given the strong pipeline of opportunities we can see.

United States: Plans embedded to support improvement in profitability

1. Alternative performance measures are referred to as 'like-for-like', 'adjusted', 'underlying' and are applied consistently throughout this document. These are defined in full and reconciled to the reported statutory measures in Note 21.

LFL revenue was down 4.2% to £111.6m. This reflects good underlying growth, up 11%, offset by the loss of volume from a single customer as we re-shape our business. Including the impact of currency, reported revenue was up 0.9% to £117.6m.

Operating profit of £0.1m, down £3.0m on H1 2022, but in line with expectation with momentum building quarter on quarter. As reported at the year end, our focus is very much on improving efficiency and controlling cost with a progressive trend through the first half of the year, which gives us confidence in momentum building through the remainder of the year.

US strategic and operational actions

As highlighted in our year-end statement, we are switching our focus from growth to profit in the short-term. In the first half of the year this has seen us stabilise the business and establish a strong platform for future improvement.

We have new leadership in place, with our US operations now being led by a Chief Operating Officer. Under this new leadership, we have completed a cost base review and have implemented granular performance improvement plans at each of our sites. Our primary focus from a performance perspective has been on labour efficiency where we have looked to improve the robustness of our planning, optimise shift patterns and balance labour across our lines.

In 2023, we have seen inflationary pressure ease and have the benefit of price increases secured in 2022 that help mitigate the higher prices we continue to pay for key raw materials.

Our focus on profit has meant our approach to growth has been more measured. Our commercial activity has therefore focused on doing a better job for our customers, improving both quality and service with an emphasis on driving core volume. We are also pleased to confirm that we have reached agreement on settlement terms in relation to the previously reported legal dispute.

We move into the second half with the leadership team fully populated, with key new appointments in customer leadership, site leadership at our two biggest factories and people leadership. Now this is in place, we have the resource and capability to execute our plans as we re-shape our business.

Targeting a profitable second half

Given our focus on delivering sustainable profits from a stable business, we anticipate minimal growth in the second half and into 2024 as we continue to re-shape the business. As a result of this, we continue to pause our strategic capital expenditure as we seek to drive efficiency and maximise capacity utilisation from our existing assets.

We fully expect our embedded plans to deliver a profitable second half and to bring adjusted operating profit for the full year in line with 2022. 

Whilst we are less focused on growth in the short-term, consumer demand for our fresh prepared products remains strong and we remain very positive and confident about the opportunity for long-term growth and profitability in this attractive market.

China: Post-Covid recovery in volumes supports improved profitability

1. Alternative performance measures are referred to as 'like-for-like', 'adjusted', 'underlying' and are applied consistently throughout this document. These are defined in full and reconciled to the reported statutory measures in Note 21.

Trading recovered to pre-Covid levels with LFL revenue of £59.7m up 35.1% against a softer H1 2022 due to regional lockdowns. Including the impact of currency, reported revenue was up 34.0% to £59.1m.

Increased sales supported an improvement in profitability, with an adjusted operating loss of £1.5m, £2.8m lower than H1 2022.

Adjusted operating loss excludes £2.9m of exceptional income; £1.5m of proceeds from the sale and leaseback in Hong Kong and a £1.4m net gain on the sale of our two associate investments, as we simplified our operations. 

China strategic and operational actions

The rebound in consumer spending post-Covid has supported a strong recovery in volumes and has seen revenues from our foodservice customers increase significantly. In addition, we remain absolutely committed to building our presence in retail to diversify the business, and as a result our retail sales grew 50% on H1 2022 as we launched new products and expanded our ranges. Retail now comprises c.20% of our overall business.

The increase in volumes across our factory footprint has delivered an improved operational performance and supported significantly reduced losses as we start to benefit from better utilisation of our sites. The benefit of our efficiency gains has also helped to mitigate the impact of wage inflation. The labour market has remained tight but we continue to manage this effectively without disruption.

H2 2023 expected to be broadly in line with H1

Looking forward, we anticipate the post-Covid recovery in volumes to continue steadily, albeit the year-on-year growth rate is expected to moderate in H2, compared to H1, given stronger prior year comparatives where there were fewer lockdowns. We remain focused on building volume to leverage the significant capacity headroom afforded by our well-invested footprint and continuing to diversify into retail.

This market continues to offer a significant growth opportunity, but in turn this is attracting greater competition which is putting margins under pressure. Our focus is on driving performance to help offset these pressures. We expect H2 2023 adjusted operating loss to be broadly in line with H1.

FINANCIAL REVIEW

Revenue

Reported revenue increased by 7.9% to £1,090.4m (H1 2022: £1,010.2m). LFL revenue, which excludes only the impact of currency movements, grew by 7.4% to £1,085.0m (H1 2022: £1,010.2m). Of this growth, 7.8% was price while volume declined marginally, by 0.4%. Detail of reported and LFL revenue movements at a regional level is included in the divisional reviews.

Adjusted operating profit

Adjusted operating profit increased by £0.9m to £43.4m (H1 2022: £42.5m), due to the factors outlined below.

Input inflation continued to play a major part in our overall performance in the first half. We faced £91m of cost inflation, which represented a 10% increase on our total cost base, and this was driven by two major factors as outlined in the UK section; re-establishing previously hedged positions and labour inflation. Whilst there have been pockets of deflation, overall prices remain elevated, and we continue to operate in an inflationary environment. We expect an increase in costs at the lower end of our previous guidance of c.6% to 8% in 2023.

Continued support from customers meant that recovery of inflation through price increases was £79m in H1 2023, resulting in net inflation recovery of 87% across the Group. This includes the benefit annualization of price increases from 2022 as well as price increases secured in H1 2023.

Volumes being down 0.4% led to a small negative impact of £2m. Our own internal levers were, therefore, fundamental to powering the P&L. Productivity gains and better than expected savings from restructuring initiatives benefited performance by £15m in the first half of the year.

From a margin perspective, adjusted operating profit margin fell by 20 basis points to 4.0% (H1 2022: 4.2%). This reflects the dilutive impact of only recovering the absolute value of inflation, not margin, combined with an element of unrecovered inflation.

Operating profit 

Operating profit of £46.3m was up 12.7% (H1 2022: £41.1m), with margin improving by 10 basis points to 4.2% (H1 2022: 4.1%). The combination of exceptional and adjusting items, £4.3m, and the increase to adjusted operating profit of £0.9m resulted in the £5.2m improvement in operating profit.

H1 2023 operating profit includes £2.9m of exceptional income, excluded from adjusted operating profit, from simplifying our operations in China. Of this, £1.5m relates to a gain from the sale and leaseback of a property in Hong Kong and £1.4m from the net gain on disposal on the sale of our two associate investments.

H1 2022 adjusted operating profit excluded £1.4m of costs associated with the configuration and customisation of software as a service ('SaaS') projects, treated as an adjusting item. There were no costs relating to this in H1 2023.

Finance costs

Group profit before tax was £32.6m (H1 2022: £32.5m). This includes finance costs of £13.3m, up from £8.9m in H1 2022, impacted by continued rising interest rates during the period. The interest cost on the Group's bank facilities is SONIA plus a margin. To hedge against movements in SONIA the Group has £150m of fixed interest rate swaps for SONIA in place until March 2024, at an average rate of 37 basis points, and has continued to closely monitor its interest rate exposure. In July 2022, the Group put in place a further £30m of fixed rate interest swaps for SONIA from March 2023 until March 2026, at an average rate of 233 basis points. We expect the full year interest charge to be c.£28m, assuming UK base rates reach c.6% by the end of 2023.

Tax

The Group tax charge for H1 2023 was £7.5m (H1 2022: £7.0m), representing an effective tax rate of 23.0%. The underlying effective tax rate, which excludes exceptional items, adjusting items and change in fair value of derivative financial instruments, was 25.1% (H1 2022: 21.2%). The increase in the underlying effective tax rate is driven by an increase to the UK corporation tax rate, which became effective in April 2023, and is in line with the forecasted Group effective tax rate for FY23 of c.25%.

Earnings per share

Basic earnings per share remained at 4.4 pence in H1 2023 (H1 2022: 4.4 pence). This is due to the improvement in operating profit being offset by the increase in finance and tax costs.

Adjusted earnings per share decreased by 0.7 pence to 3.9 pence in H1 2023 (H1 2022: 4.6 pence), as it excludes the benefit of the exceptional income in H1 2023. Adjusted earnings per share also excludes the impact of adjusting items, £1.4m related to SaaS in H1 2022, and the change in fair value of derivative financial instruments.

Cash flow

Free cash generation of £51.6m was £15.0m higher than H1 2022 reflecting improved operating profit and an enhanced focus on working capital, partly offset by increased interest and tax payments. As part of our enhanced our focus on managing cash, as outlined earlier this year, we have sought to drive improvement in working capital, focused predominantly on inventory management. Our inventory levels had risen over the last two years to protect the business from supply chain disruption and to avoid significant levels of inflation. We have therefore been focused on returning to more normalised levels of inventory. We delivered significant progress in the first half of the year, thereby supporting the overall reduction in debt position and financing costs.   

Debt and leverage

Since December 2022, operational net debt has reduced by a further £16.2m to £268.7m at the end of H1 2023. This was primarily due to the strong improvement in free cash generation, along with the one-off benefit from simplifying our operations in China.

Leverage, the ratio of operational net debt to adjusted EBITDA, at H1 2023 improved by 0.1 times to 1.8 times. The Group's liquidity position remains strong, with headroom of over £200m against our core debt facilities of £485m. The Group continues to have comfortable headroom against all financial covenants.

We expect to continue to deliver an improvement in debt and leverage in the second half of the year. The two key drivers of this, after the expected improvement in profitability, are maintaining a tight control of capital expenditure focusing on productivity improvements as well as further working capital improvement materialising from our focus on stock management. We expect a further modest working capital inflow in H2 2023, resulting in a full year inflow of c.£20m.

Dividend

During the period the Group paid £24.0m in respect of the final dividend for FY22.

The improved strength of the Group's financial position and continued good cash generation, supports our long-term growth aspirations and commitment to increasing returns to shareholders. The Board has, therefore, resolved to pay an interim dividend of 2.91 pence per Ordinary share, up 5.0% on the prior period. The interim dividend will be paid on 13 October 2023 to shareholders registered on the record date at 5 September 2023.

Going forward, the Board expects to maintain a progressive dividend policy over the medium-term.

Investment and returns

The Group's ROIC for the 12 months to 1 July 2023 was 7.1%, in line with the year end (7.1%). Adjusted operating profit after tax saw a slight reduction due to the increased underlying tax rate in H1 2023, with the impact of this partially mitigated by the Group's continued control of capital spend, which has reduced invested capital.

The Group continues to expect an improvement in ROIC in the medium-term as previous investments deliver an increase in returns. With the Group's ongoing focus on managing cash, we expect the level of capital investment to remain in line with previous guidance at c.£50m for FY23. 

Pensions

Under the IAS 19 valuation principles, the Group recognised a surplus of £18.4m for the UK defined benefit scheme as at 1 July 2023 (31 December 2022: surplus of £12.8m). The plan assets largely maintained their value whilst the defined benefit obligations decreased due to increased bond yields, resulting in higher discount rates.

The Group and the Trustee agreed the triennial valuation of the UK defined benefit pension scheme as at 31 March 2022 in May 2023, which resulted in a funding shortfall of £2m. This funding shortfall increased in the following months due to the volatility in gilt rates which resulted in investment values falling by more than the reduction in liabilities. As a result of the increase to the funding shortfall, recovery plan for payments of £2.5m p.a. were agreed to be made through to 31 March 2025, with an extension through to 31 August 2025 if the scheme is in deficit at the end of December 2024 and the end of January 2025.

Capital allocation

We maintain a disciplined approach to capital allocation, with the overriding objective to enhance shareholder value. The allocation of capital is primarily split across capital investment, debt reduction to reduce financing costs given recent increases to base rates, and dividends. Inorganic opportunities are considered where they are a strategic fit for our business. In the medium-term, we remain committed to investing to enhance returns, maintaining leverage within the target range of 1.5 to 2.0 times, and a progressive dividend policy.

Principal risks and uncertainties

The principal risks and uncertainties facing the Group are set out on pages 79 to 86 of the 2022 Annual Report and Accounts, published on 17 March 2023. The principal risks themselves remain unchanged as at 1 July 2023, and include, but are not limited to, consumer behaviour and demand, competitors, strategic growth and change programmes, reliance on a small number of key customers, food safety and integrity, health and safety, supply chain, availability, recruitment and retention of colleagues, Brexit disruption, covid pandemic, IT systems and cyber risk, climate change and sustainability, disruption to Group operations, treasury and pensions, and legal and regulatory. Developments through the first half of the year have, however, resulted in the risk profile of two of our principal risks reducing in likelihood and impact as outlined below:

Condensed Consolidated Income Statement

¹The Group presents its Condensed Consolidated Income Statement with three columns. The Directors consider that the underlying activities are more representative of the ongoing operations and key metrics of the Group. Details of exceptional items can be found in Note 4 and include material items that are non-recurring, significant in nature and are important to users in understanding the business, including restructuring costs and impairment of assets. In addition, the Group uses further Alternative Performance Measures which can be found in Note 21.

Condensed Consolidated Statement of Comprehensive Income

Condensed Consolidated Statement of Financial Position

Condensed Consolidated Statement of Changes in Equity

Condensed Consolidated Statement of Cash Flows

Notes to the condensed CONSOLIDATED INTERIM financial statements

1.   General information

Bakkavor Group plc is a company limited by shares, incorporated and domiciled in England, United Kingdom. Its registered office and principal place of business is Fitzroy Place, 5^th Floor, 8 Mortimer Street, London, W1T 3JJ, UK (Company number: 10986940). Its Ordinary shares are listed on the London Stock Exchange.

The principal activities of the Group comprise the manufacture of fresh prepared foods and fresh produce. These activities are undertaken in the UK and US where products are primarily sold through high-street supermarkets and China where products are primarily sold through foodservice operators.

The Condensed Consolidated Interim Financial Statements ("Interim Report") for the 26 weeks ended 1 July 2023 ("H1 2023") and 26 weeks ended 25 June 2022 ("H1 2022") do not comprise statutory accounts within the meaning of section 434 of the Companies Act 2006. Statutory accounts for the year ended 31 December 2022 were approved by the board of directors on 7 March 2023 and delivered to the Registrar of Companies. The report of the auditors on those accounts was unqualified, did not contain an emphasis of matter paragraph and did not contain any statement under section 498 of the Companies Act 2006.

The Interim Report has been reviewed, not audited.

The Interim Report has been prepared in accordance with the UK-adopted International Accounting Standard 34, 'Interim Financial Reporting' and the Disclosure Guidance and Transparency rules of the Financial Conduct Authority.

The Interim Report does not include all of the information and disclosure required in the Annual Consolidated Financial Statements and should be read in conjunction with the Bakkavor Group plc (the "Group") Annual Consolidated Financial Statements for the 53 weeks ended 31 December 2022, which have been prepared in accordance with UK-adopted International Accounting Standards, and any public announcements made by the Group during the interim reporting period.

Controlling parties

Two of the Company's Directors, Agust Gudmundsson and Lydur Gudmundsson, hold shares in the Company through their beneficial ownership of Carrion Enterprises Limited (the corporate holding structure of Agust Gudmundsson) and Umbriel Ventures Limited (the corporate holding structure of Lydur Gudmundsson). Umbriel Ventures Limited holds 142,303,505 ordinary shares (representing 24.56% of the issued share capital of the Company) and Carrion Enterprises Limited holds 142,103,505 ordinary shares (representing 24.52% of the issued share capital of the Company).

Lixaner Co Limited, a company owned and controlled by Sigurdur Valtysson, who runs the family office for Agust and Lydur Gudmundsson, holds 6,457,750 ordinary shares (representing 1.11% of the issued share capital of the Company).

Given the close relationship between the parties, Sigurdur Valtysson is to be considered as acting in concert with Agust and Lydur Gudmundsson for the purposes of the definition in the Takeover Code and the parties are controlling shareholders of the Company. The aggregate shareholding in the Company of Carrion Enterprises Limited and Umbriel Ventures Limited and their concert party group (Lixaner Co Limited) is 290,864,760 ordinary shares (representing 50.20% of the issued share capital of the Company).

Seasonality of operations

The Group's cash flows are affected by seasonal variations. Sales of fresh prepared food have historically tended to be marginally higher during the summer months and in the weeks leading up to Christmas.

2.   Significant accounting policies

Basis of accounting

The financial information has been prepared on the historical cost basis, except for the revaluation of financial instruments and retirement benefit plan assets (which are stated at fair value).