Northern Foods sees tough year ahead

By Rhys Jones

LONDON (Reuters) - Food manufacturer Northern Foods (NFDS.L) said it faced a tough year due to price rises of some ingredients and pressure from competitors, as it posted a lower-than-expected 5.4 percent drop in annual profit.

The company, which sells branded and private-label food and ready meals to retailers as diverse as Marks & Spencer (MKS.L) and Poundland, on Wednesday said pretax profit fell to 47.5 million pounds for the year ended March 28, ahead of analysts' forecasts.

Sales rose 4.6 percent to 975.2 million pounds. A poll of seven analysts by Reuters Estimates forecast pretax profit of 46 million pounds.

Chief Executive Stefan Barden said the outlook was tough.

"Retailers are trying to get a better price out of us every day but when you negotiate with a retailer you are effectively negotiating with your competitors. It's still difficult out there," Barden told Reuters.

Shares in Northern Foods, which have risen in value by a quarter in the last three months, were down 2 percent at 59.5 pence by 9:27 a.m., valuing the group at around 290 million pounds.

The firm, whose business with discount retailers accounts for about 20 percent of group sales, said raw materials costs rose 12 percent during the year and expects price inflation to continue.

"Commodity prices are fluctuating. Dairy is going down but protein is on the up, while the price of cocoa powder has doubled in the last year. We do not see deflation this year," said Barden.

The Leeds-based group's net debt rose 3.2 percent to 206.7 million pounds during the year but it agreed a new revolving credit facility (RCF) until 2012.

"We view this update as positive in the context of unprecedented economic headwinds. Although the outlook is cautious Northern Foods shares an attractive proposition," said Citigroup analyst Eamonn Ferry.

Earlier this month Premier Foods (PFD.L), Britain's biggest food manufacturer, said its expectations for 2009 were unchanged after it posted a 3 percent rise in sales for the first four months of the year.

Northern Foods said it expects analysts to trim the consensus forecast for 2009/10 pretax profit, which stands at around 40 million pounds, by around 5 percent due to a reduction in net pension financing.

Northern Foods' bakery division increased profit by over a third during the year, driven by higher biscuit sales, while its frozen and chilled food businesses saw profit fall 18.4 percent and 3.6 percent, respectively.

Group margins rose 20 basis points to 5.4 percent.

(Editing by Erica Billingham)