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Bakkavor Group Annual Report 2011

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MEETING CONSUMER DEMAND EFFICIENTLY

KEY DEVELOPMENTS

Maintained our market-leading position in our core UK fresh prepared foods market

Invested in core category businesses to support future growth and efficiency

Achieved inflation recovery target

Rationalised our UK Produce business

Developed our Rest of World business

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WHAT WE DO AND HOW WE DO IT

RUNNING THE BUSINESS WITH INTEGRITY INVESTING IN FUTURE GROWTH

AWARDS

7 Grocer Own Label Awards, UK

3 Quality Food Awards, UK

1 American National Restaurant Association Award for Product Innovation, US

1 Innovafel Product Innovation Award, Europe

1 European Supply Chain Excellence Award for Innovation in Technology

4 Supplier recognition awards from key customers

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NET SALES

CONTENTS

ADJUSTED EBITDA*

FREE CASH FLOW

£1.64bn: 2010

£132.0m: 2010

£62.3m: 2010

Bakkavor Group is a leading manufacturer in the fresh prepared foods market, specialising in developing private label products for top global grocery retailers and well-known international foodservice operators. We have over 50 manufacturing facilities, employ over 18,000 employees and make over 6,000 products.

FAST READ

Chairman and CEO’s address 2Snapshot of Bakkavor 4What we do and how we do it 6Why we are in the right market 8Our vision, strategy and risks 10

BUSINESS REVIEW

Market trends 14Business review 18Our responsibility 22

OUR GOVERNANCE

Our Board of Directors and Management Board 28Corporate governance 30Our risks 32Directors’ Report 34

FINANCIAL STATEMENTS

Independent Auditor’s Report 38Consolidated Income Statement 40Consolidated Statement of Comprehensive Income 41Consolidated Statement of Financial Position 42Consolidated Statement of Changes in Equity 43Consolidated Statement of Cash Flows 44Notes to the Consolidated Financial Statements 45Company Income Statement 100Company Statement of Financial Position 101Company Statement of Cash Flows 102Notes to the Company Financial Statements 103

Corporate information 108

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LeftÁgúst GudmundssonChief Executive Officer

RightLýdur GudmundssonNon-executive Chairman

SALES REVIEW

In a very challenging economic environment, Bakkavor has maintained market share and its market-leading positions in its key categories. Once again in 2011 we experienced the strongest performance in our core business segment, UK Prepared, bolstered by encouraging sales growth in ready meals, the largest category in which we operate.

The increase in sales over the year has been predominantly driven by volume growth, coming in part from our ongoing participation in promotional activity and successful product launches, together with price increases.

INFLATION RECOVERY IN LINE WITH GUIDANCE

Input inflation for the year was £31.2 million across the Group, in line with previous management guidance, and resulted in a 190 basis point reduction to Adjusted EBITDA margin. As expected, we have recovered approximately two-thirds of these costs through price increases to our customers without threatening our sales and market-leading positions in key product categories. Further recovery was achieved through product reconfiguration and supply chain efficiencies.

We have made great progress with our strategic objectives, delivering growth in sales, inflation recovery in line with targets, and the exit of certain non-core business. We have achieved this in a tough year characterised by restricted consumer budgets and intense cost inflation.

We remain focused on our strong, long-standing relationships with key customers and we continue to drive product innovation and quality whilst delivering further operational efficiencies. We are confident that we have the team and strategy in place to succeed in this environment.

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CAPITAL EXPENDITURE ON TARGET

Throughout 2011 we have focused on a series of capital projects to consolidate our market-leading positions and support our growth objectives. We have invested in a wide array of targeted projects in the UK, these included: a new frying facility in our Katsouris business; a stone-baked pizza oven at our site in Holbeach; and a dedicated nut and sesame handling factory at our Caledonian operation. In North America, we also invested in our houmous production lines. We retain a high degree of flexibility in our capital programme in order to be able to respond to consumer demands and manage the broader cash requirements of the business.

SUCCESSFUL OVERHEAD COST FOCUS

Despite an increase of 6.0% in overheads in the first half of the year through the impact of inflation, good volume growth and a number of specific initiatives, a renewed focus in the second half of 2011 limited the overall increase in the full year to only 3.4%. We continue to drive efficiencies and expect further improvements in 2012.

ONGOING REVIEW OF NON-CORE OPERATIONS

The characteristics of the Produce industry have changed markedly in recent times. As a result, we embarked on a careful review of our Produce operations resulting in a significant remodelling over 2011. We closed our Exotic Farm Produce operation in the first half of 2011, as this business had been loss-making for some time, and rationalised our English Village Salads business following a significant reduction in volume arising from the loss of a contract with a major customer in May 2011. Since then, conditions have not improved at English Village Salads and we have commenced a period of consultation with employee representatives to discuss the ongoing viability of this business. In September 2011, we completed the disposal of Bakkavor Traiteur in France, a non-core business specialising in the production of fish-based products.

CONTINUED EXCELLENCE IN NEW PRODUCT INNOVATION

During 2011, we launched over 1,400 new and improved products across the Group demonstrating our ongoing support of our key customers, our dedication to stimulating consumer interest and our focus on delivering growth through incremental sales. Highlights included the launch of a number of new lines including nutritionally balanced, healthy-eating and vegetarian products, a complete Mexican range, premium salad options, a range of fresh prepared foods into Canada and new sandwich and salad lines in the Far East. As testament to our innovative culture we were delighted to receive 12 industry food quality awards, four supplier recognition awards from our customers, and a European supply chain award.

FINANCING AND COVENANTS

In February 2011, the Group’s balance sheet was strengthened through refinancing our existing debt facilities. Under these new arrangements, the Group has placed all financing under one funding structure, extended the repayment profile and diversified its funding base with the issuance of a seven year £350 million listed bond, and new bank facilities comprising a £260 million term loan and a £120 million revolving credit facility.

These bank facilities are subject to a series of covenants set by the lenders. At the date of this report, the Group has complied in all respects with these covenants and we also believe we are adequately placed to manage future covenant compliance successfully despite the challenging macroeconomic environment. In the event that conditions worsen, the Group has the flexibility to react by accessing additional working capital arrangements that we have already agreed with key retail customers. Further actions available to management may also include a reduction to our capital expenditure programme and further supply chain improvements.

EMPLOYEES

At Bakkavor, we continue to be immensely proud of the calibre of our employees and their passion and loyalty to the Group and we would like to thank them for their contribution. Management remains focused on providing training to ‘grow our own’ people and enable them to develop to the best of their abilities.

OUTLOOK

Early trading in 2012 suggests that market conditions continue to be difficult and the outlook for consumer spending remains subdued. We expect inflation will continue to affect our financial performance albeit at a lower rate. Against this backdrop, we will continue to prioritise our strong relationships with our customers and innovative product development as well as strategic focus on our core operations. This will enable us to maintain our market-leading positions and drive further sales growth.

Lýdur GudmundssonNon-executive Chairman

Ágúst GudmundssonChief Executive Officer

PRODUCT INNOVATION

WINNER OF 12 Industry food quality awards

NEW PRODUCT LAUNCHES

For more detail on our strategyP.10

KEY DEVELOPMENTS

• Maintained market share• Received 10 industry awards and two customer awards for product quality/innovation• Invested in core category businesses

• In line with our strategy we have remodelled our produce business• Closed Exotic Farm Produce• Rationalised English Village Salads

KEY CUSTOMERS

UK PREPARED UK PRODUCEWe are market leader in 12 of our 16 product categories.

Strategic business remodelling.

31 FACILITIES79% OF GROUP SALES 2 FACILITIES5% OF GROUP

SALES

Sandwiches & wraps••

4 Bakkavor Group Annual Report 2011

UNITED KINGDOM

OUR GR

OUP

We are a leading manufacturer and employer in the fresh prepared foods market, specialising in developing private label products for top global grocery retailers and well-known international foodservice operators. Our core market is the UK – the largest fresh prepared foods market in the world.

Tesco, M&S, J Sainsbury, Waitrose, Asda, Morrisons, The Co-operative

PRODUCT CATEGORIES United Kingdom Continental Europe Rest of World

57 FACILITIES18 PRODUCT CATEGORIES

Ready meals•••

Ready to cook meals•••

Soups

•••Bakery

products•••

Pasta

•Prepared

vegetables•••

Sandwiches & wraps

Fresh produce

Ethnic snacks

Leafy salads

Conveniencesalads

Dips

Dressings Desserts & pastries

Smoothies

Ready meals

Ready to cook

meals

Pizza

Soups Sauces

Stir fries

Bakery products

Pasta Prepared vegetables

Prepared fruit

Sauces

•••Dips

•••Fresh

produce•

FINANCIAL PERFORMANCE

UK PREPARED

Like-for-like sales (£m) Like-for-like sales (£m)Adjusted EBITDA (£m) Adjusted EBITDA (£m)UK PRODUCE

09* 09* 09* 09*10 10 10 1011 11 11 111,323

+4%

*2009: 53 weeks

1,27

41,2

32

85(19%)

*2009: 53 weeks

108

156

101(14%)

*2009: 53 weeks

117

115

0(133%)

*2009: 53 weeks

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KEY DEVELOPMENTS

• Italian pizza business gained significant wins in new territories for 2012 • Awarded contract for Green Giant brand development in France and Spain• Sold Bakkavor Traiteur – non-core French business

• Expanded US product range and customer base• Entered Canadian grocery retail market• Restructured and upgraded Chinese business

KEY CUSTOMERS

8 FACILITIES12% OF GROUP SALES 16 FACILITIES4% OF GROUP

SALES

United Kingdom14,850 80%

Continental Europe1,530 8%

Rest of World2,180 12%

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CONTINENTAL EUROPE REST OF WORLDOpportunities to grow by trading in new regions and with new brands.

Developing our foothold in the US, Canada and the Far East.

GROUP

McDonalds, Albert Heijn, Intermarché, Leclerc, Auchan, Carrefour, Comigel Yum! Brands, Costco, Woolworths SA, Fresh & Easy, Trader Joes, Loblaws

09* 10 1113

2108 18,000

137

(18%)

*2009: 53 weeks

09* 10 111,678

+2%

*2009: 53 weeks

Like-for-like sales (£m) Adjusted EBITDA (£m) Number of employees

Sandwiches & wraps

Fresh produce

Ethnic snacks

Leafy salads

Conveniencesalads

Dips

Dressings Desserts & pastries

Smoothies

Ready meals

Ready to cook

meals

Pizza

Soups Sauces

Stir fries

Bakery products

Pasta Prepared vegetables

Prepared fruit

Ethnic snacks•

Leafy salads

•••Convenience

salads•••

Dressings

•••Prepared

fruit•••

Smoothies

•Pizza

•••Stir fries

•Desserts &

pastries•••

1,643

1,650

09* 09* 09* 09*10 10 10 1011 11 11 11208

+1%

*2009: 53 weeks

20321

1

62+10%

*2009: 53 weeks

5852

5(52%)

*2009: 53 weeks

1111

2(52%)

*2009: 53 weeks

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CONTINENTAL EUROPE REST OF WORLD

Adjusted EBITDA (£m) Adjusted EBITDA (£m)Like-for-like sales (£m)Like-for-like Sales (£m)

CASE STUDY

Our innovationIn 2011 we launched a successful new range of soups under our ‘New York Soup Company’ brand. These were developed by our chefs, whose inspiration came from the flavours they experienced in the delis and soup bars of New York. Here we illustrate the process in taking these soups from idea to launch.


PRODUCTTWEAKS

TESTED ON PRODUCTION LINE

DISCOVERY Gathering ideas from sources all around the world: restaurant menus, top chefs, consumers, and market research; not forgetting flashes of inspiration.

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PROJECT APPROVALPutting together a business plan and product brief. Is it a commercial proposition? Can it be made? And where?

DEVELOPING AND TESTINGDeveloping the product, selecting ingredients and packaging, evaluating food safety and quality.• does it taste delicious?• can it be made safely?• to the required standard?• to the required quantity?• at the right cost?

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Chicken Jambalaya Soup

3PRESENT TO CUSTOMERPresent the concept to the customer, agree on critical path, launch plans, product tweaking, re-presenting, approval.

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OUR APPROACH

We have a strong track

record of adapting quickly to

market conditions and developing

successful products in short lead

times. During 2011 we launched over

1,400 new products for our customers

to delight their consumers and

grow our business across

the Group.

DISTRIBUTIONAll of our fresh products are shipped via refrigerated trucks. We operate a just-in-time distribution model, delivering over 35,000 pallets of our products each week from all of our UK sites, up to four times a day, to our customer depots.

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BACK TO DISCOVERY

SUCCESS

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INSTRUCTIONSAND TESTS

PACKAGING FINALISED

AVAILABLE ON SUPERMARKET SHELVES

PURCHASED AND EATEN BY CUSTOMERS

FINAL APPROVALFactory products benchmarked, tasted against kitchen samples, tested on production line. Cooking instructions, nutritional info and shelf life checked and packaging finalised.

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PRODUCT PERFORMANCEIs it selling? Who’s buying it? Does it need improving? What can we learn from the project?8

PRODUCT LAUNCHMeanwhile. behind the scenes, our commercial and marketing teams have been working with the customer on in-store merchandising and category plans ready for launch.

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For more detail on our business performance

P.18


LONG-TERM CONSUMER TRENDS

CHANGING DEMOGRAPHICS = CHANGING MEAL OCCASIONS

• Starting families later in life

• Ageing population

• Increase in single-person households

• Less traditional household structures

LIFE IS SPEEDING UP = QUICKER MEAL SOLUTIONS

• Faster pace of life

• 24/7 lifestyles

• Expect services and products to be accessible ‘round the clock’

• Online connectivity

ANXIETY = AFFORDABLE REWARDS

• Feeling time-pressured

• Increasing concerns about the cost of living and the global economy

• De-stressing with affordable treats (often food)

HEALTH CONCERNS = A FOCUS ON BODY AND MIND

• Global obesity

• Striving for a work/life balance

SUSTAINABILITY AND TRUST = FOOD PROVENANCE AND ASSURANCE

• Consumer ‘detectives’

• Online empowerment

• Concerns about environment and corporate responsibility

GROWTH IN EMERGING MARKETS = SHIFTING DIETS

• Fast-growing middle class

• Higher disposable incomes

• Shift towards Western diet

• Rapid urbanisation

The fresh prepared foods market is one of the most advanced, dynamic and resilient food sectors in the world. We have been operating in this market for over 40 years and are excellently positioned to benefit from the positive long-term trends in our market place.

OVERWEIGHT ADULTS IN THE WORLD

OF THESE ARE OBESE

SourcesIGD: Shopper Vista, UK Convenience forecasts to 2016, Feb 2012Deloitte: Consumer 2020Nielsen: Private Brands U.S Outlook 2011Internetworldstats.com

NEW CONSUMERS ARE EXPECTED TO ENTER THE GLOBAL MIDDLE CLASS EACH YEAR

AGREE THAT PRIVATE LABEL PRODUCTS ARE A GOOD ALTERNATIVE TO BRANDED EQUIVALENTS

REACHING 800m BY 2020

AVERAGE NUMBER OF SHOPPING CHANNELS USED BY UK SHOPPERS

World population up 21%

by

2050

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LONG-TERM RETAILER TRENDS

WHAT DOES THIS MEAN FOR BAKKAVOR?

These long-term consumer and retail trends are promising for Bakkavor. Smaller households, higher disposable incomes, rapid urbanisation and faster-paced lives create a demand for food that is quick and easy to buy and prepare, such as fresh prepared foods.

On the retail side, our expertise in private label, diversified product range, a partnership approach and strategic geographical investments mean that we are well placed to benefit from future developments.

GLOBAL EXPANSION AND CONSOLIDATION

• Top global retailers continue to gain share through consolidation and expansion

• Expanding into new geographic regions which offer the most growth potential

STRATEGIC FOCUS ON PRIVATE LABEL BRANDS

• To build consumer loyalty

• To strengthen corporate brand

• To improve retailer margin

• This necessitates partnership approach

MULTI-CHANNEL INVESTMENT

• Focusing on delivering convenience and choice through multi-channel retailing e.g.

• Convenience stores

•Online shopping

CORPORATE RESPONSIBILITY HIGH ON AGENDA

• Information required to uphold corporate reputation and appease consumer demand

• Necessitates strong working relationships with trusted suppliers

INTERNET USERS GLOBAL POPULATION

SINGLE PERSON HOUSEHOLDS IN

CONVENIENCE STORE SALES IN THE NEXT 5 YEARS

CONSUMERS WANT TO KNOW MORE ABOUT WHERE AND HOW GROCERIES ARE PRODUCEDIN THE UK

For more detail on market trendsP.14

World population up 21%

by

2050


1 Leading market positions in attractive markets We are leaders in fresh prepared food market sectors,

which are set to grow more quickly than other areas of the food industry.

2 Diversified and innovative product portfolio We have over 6,000 products, across 18 different product

categories, with a range of diversified price points to suit most budgets.

3 Well positioned for future growth in key markets We have 13 operations in the key future growth regions of North America and China.

4 Strong long-term relationships with key retailers We trade with eight of the top 10 leading global retailers

and develop products hand-in-hand with them to help them differentiate their brands.

5 In-depth understanding of our markets and consumers We invest in detailed consumer research and information

about future market trends in order to develop and launch products which fit consumer lifestyles.

6 Award-winning innovation and product development Innovation is one of our core values and we appreciate third

party recognition of our achievements – in 2011 we won 17 awards for the quality of our products, innovative category management and innovative processes.

7 High-quality, experienced management board Our Management Board is comprised of industry experts

with over 150 years' experience in the food sector.

8 Well-invested, modern and efficient facilities We have invested £180 million in our operating sites over

the last five years and are committed to further capital expenditure to improve efficiency and allow expansion.

HAVING NO. 1 POSITIONS IN HIGH POTENTIAL, FAST-GROWING FRESH PREPARED FOODS MARKETS

PRODUCTIVE, STRONG LONG-TERM RELATIONSHIPS WITH THE LEADING RETAILERS, IN WHICH INNOVATIVE PRODUCT DEVELOPMENT CAN FLOURISH

CONTINUED FOCUS ON GREATER EFFICIENCY AND COST REDUCTION

FOCUS ON CASH FLOW AND DEBT REDUCTION WHILST MAINTAINING CAPITAL INVESTMENT

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OUR STRATEGY IS TO DRIVE PROFITABLE GROWTH THROUGH:

WHY WE ARE IN A STRONG POSITION TO DELIVER OUR STRATEGY

OUR VISION

Our vision is to be

recognised and respected

as the world’s leading

fresh prepared foods

provider.

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FINANCIA

L RIS

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PRICEINFLATION

GROUP TECHNICAL DIRECTO

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CHIEF FIN

ANCIAL

OFF

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See CorporateResponsibilityReport page [x]

See Business Reviewpage [x] and FinancialReview page [x]

LOSS OF KEYEMPLOYEES

FOODSAFETY

HEALTHAND SAFETY

COVENANTCOMPLIANCE

INTERESTRATES,

LIQUIDITYAND CREDIT

CUSTOMERRELATIONSHIPS

CONSUMERUNDERSTANDING

OPERATIONAL RISKS

MA

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CEO

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THE KEY RISKS WE NEED TO MANAGE IN ORDER TO ACHIEVE OUR STRATEGY

Our decentralised model empowers our management to identify, evaluate and manage the risks they face proactively. The management of principal risks is assigned to key members of the Management Board. It is their responsibility to report to the Board on a monthly basis regarding the actions associated with each of those risks.

For more detail on our risksP.32

See Our responsibilityP.22

See Business review P.18

See Business review P.18

See What we do and how we do it

See Market trends

P.6

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of consumers expect to eat more ‘five a day’ in the next months

of our waste in the UK was diverted from landfill

Our UK Prepared business segment grew by

people were recruited onto our Accelerated Management Scheme

In our 2011 Business Review we share with you some of our market insights into the key trends which are driving consumer demand for fresh prepared foods, our business performance during the year and our corporate social responsibility priorities.


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Fatima is a team co-ordinator at our Bakkavor Meals site in Sutton Bridge, Lincolnshire, which specialises in manufacturing Indian ready meals. The large industrial ovens used to cook and cool the meals are capable of handling 8,000 packs at any one time – in 2011 we produced over 28 million packs.

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CASE STUDY

Our Tesco Finest Italian Chicken, Bacon & Fontal Calzone was just one of our products to win a ‘Gold’ at the 2011 Grocer Own-Label Awards.


CONVENIENCE

The convenience store sector is now worth £33.6 billion in the UK and forecast to reach £42.2 billion in 2016 (Source: IGD Jan 2012)

Today’s food trends

are influenced by people’s

attitudes and behaviour which are

ultimately shaped by a strong set of

global macroeconomic factors.

In this section we look at the way in

which some of these factors influence

our consumers and our retail

customers and how we have acted

upon them.

1SMART SHOPPING

With ongoing economic uncertainty, household budgets squeezed by higher food and energy prices as well as wage freezes, consumers are becoming ‘smarter shoppers’, spending more cautiously and increasingly looking for value for money.

The convenience and affordability of fresh prepared foods means that consumers already perceive our products as good value (it is often cheaper to buy a prepared meal than to cook one from scratch, for example). In this highly competitive retail climate, our customers will maintain a keen focus on promotional activity and the development of competitively-priced private label ranges in order to stimulate consumer spend.

Our actionWe have made it our priority to ensure demand for our products is maintained in today’s tough climate. We work closely with our retail customers to support their value-for-money credentials, where commercially viable, and we also use the benefits of our scale to make our products as cost-effectively as possible. We have a strong track record of adapting quickly to market conditions, developing successful products in short lead times and supplying large promotional volumes on demand.

CONVENIENCE IS KING

Faced with the fast pace of modern life, consumers are looking for products and services that reduce complexity, save time and are available when and where they need them. Food purchasing, preparation and cooking are no exception to this rule.

Our retail customers have invested heavily in delivering convenience to consumers through different store formats, online food shopping, home delivery services and offering a wide variety of meal solutions.

Our action We make over 6,000 fresh semi-prepared and fully-prepared foods which allow consumers to be involved in preparing and cooking food as little or as much as they want. Many of our products feature in ‘top-up shop’ baskets and people are buying fresh prepared foods online with increasing confidence. Our role is to ensure that we continue to innovate and launch products which cater for consumer choice and that our products are accessible to all consumers no matter where and when they shop.

CASE STUDY

Waitrose Essential soups We launched ‘Essential Waitrose’ soups in October 2011. The entire ‘Essential’ range has grown to be a £1 billion ‘brand’ for Waitrose.

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HEALTH

The global macroeconomic factors

below are not short-term factors; they

will evolve and continue to influence

people’s lives over the longer term:

• Economic uncertainty

• The cost of living

• Technological advances

• Demographic shifts

• Urbanisation

• Health issues

• Concern for the environment

HEALTHY BODY HEALTHY MIND

Striving for a healthy lifestyle has been top of the consumer agenda for some time through efforts to reduce obesity and its associated illnesses. Government campaigns have increased awareness of the importance of a balanced diet, the benefits of increased fruit and vegetable consumption (‘5 a day’) and modest portion sizes. With increasingly busy lifestyles and anxiety about the future, consumers are looking at ways to reduce stress by taking control of their personal well-being as a whole – the mind, body and spirit.

Our actionAs the majority of products we make are for retailer private label ranges we are focused on supporting our customers to deliver their health and well-being targets. This includes for example, using store cupboard ingredients, significantly reducing salt and saturated fat, providing clear nutritional information on pack and of course, developing tasty recipes that offer the right balance of ingredients for a healthy diet. In 2011 we were pleased to win a Quality Award for one of our healthy products – our Marks and Spencer omega 3 boost salad bar.

3CASE STUDY

Ranges with healthy benefitsOur customers have invested considerably in the development, branding and communication of ranges with healthy benefits. Recipes have been specifically developed to encourage fruit and vegetable consumption as well as naturally balanced diets with ranges in the UK such as Marks & Spencer’s “Simply Fuller Longer” and Waitrose’s “Love Life”.

Source: IGD ShopperVista Dec 2011

46% of consumers expect to eat more ‘5 a day’ in the next months.

For more detail on our vision and strategy

P.10


ENJOYMENT AND INDULGENCE

With tighter household budgets to manage, in-home entertainment has become increasingly popular. For such occasions, ready-made food favourites and foods designed specifically to share give consumers the opportunity to treat themselves, families and friends within an affordable budget and with little preparation.

Whether people are looking to share an Indian, Italian or Oriental meal or a ready-made pizza, fresh prepared foods offer an extensive choice for a night in. Our retail customers have taken this trend on board by promoting in-home dining through ‘meal deals’ offering for example, a choice of starters, main courses, side dishes, and desserts at a set price. Our customers are also keen to provide consumers with products that match the latest cuisines and restaurant trends as part of this in-home dining experience.

Our actionWe participate regularly in ‘meal deal’ promotions and, given our extensive range of fresh prepared foods, often with several products at one time.

As a perfect treat to share whilst eating in we developed and launched a new Mexican range for one of our retail customers in 2011. These are being produced across our different sites and include meals, sharing kits, side dishes, breads and dips.

5NOSTALGIA WITH A TWIST

When times get tough consumers often look back to the past for comfort and reassurance. This has translated into a renewed interest in classic dishes, ingredients and techniques. With consumers more willing to experiment with foods, the ‘classics’ are being re-invented with modern twists.

In response to this trend our customers have focused on providing a strong range of classic dishes. Classic British chilled ready meals are now the third largest range in the UK, worth over £300 million a year, and with sales growing by 9% these ‘classics’ are outpacing the total ready meals market.

Our actionAs part of our extensive range of fresh prepared foods we make a number of classic recipes in categories such as ready meals, side dishes and desserts. These include ‘bubble and squeak’ mash, Lancashire hotpot and luxury trifle to name just a few.

CASE STUDY

Ready for a night in Our new Mexican range includes products such as chipotle chicken fajitas, paprika-roasted potatoes with chorizo, and mini corn bread.

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At Bakkavor, we pride ourselves on knowing our markets, customers and consumers in depth and using this knowledge to develop and launch successful products – giving us market-leading positions and a recognised reputation for innovation.

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SUSTAINABILITY

Over 75% of our packaging can be recycled or is made from recyclable materials

of online consumers worldwide trust recommendations from people they know, while 70% trust consumer opinions posted online. (Source: Nielsen Global Online Consumer Survey Q3 2011)

6SUSTAINABILITY

Consumers are striving to incorporate ‘sustainability’ into their lifestyles with actions such as recycling and choosing brands with sustainable credentials fast becoming part of normal routines.

Our retail customers are successfully integrating social and environmental issues into their private label strategies, communicating them publicly and encouraging people to ‘shop with their feet’. Whilst interest in sustainable products is growing, retailers are mindful that the success of such products still depends on their simplicity, convenience and affordability.

Our actionAt Bakkavor we understand the sustainability issues in the food chain and are committed to focusing on these. We are actively minimising waste and energy usage, ensuring our food packaging is recyclable or made from recyclable materials and evaluating our logistics arrangements from an environmental perspective.

7TRANSPARENCY AND PROVENANCE

With over two billion consumers connected online and four billion mobile phone users, people have access to vast amounts of information and the popularity of social media means that news travels fast. This has boosted consumer empowerment as there are now many ways to research, compare and review key interests such as information on businesses and their practices often with the added benefit of online anonymity. As a result consumers are increasingly confident in sharing the information they have found as well as their personal views.

This trend has resulted in our retail customers placing more emphasis on being open about how they work at a consumer and corporate level to protect their reputation and build consumer loyalty and trust. In turn this means there is greater pressure on their suppliers for proof of corporate responsibility and provenance - particularly for private label products bearing the retailers’ names.

Our actionFor Bakkavor, this means we must demonstrate actively that we are ‘doing things right’ – operating to high standards of food safety, working closely with our customers and suppliers to ensure we have robust product traceability systems in place, sourcing raw materials responsibly and providing consumers with detailed and accurate information on pack. We aim to ensure our customers and consumers have confidence in the products we make.

CONSUMER RECOMMENDATION

CASE STUDY

Affordable treats Cheesecakes are a popular dessert choice and now come in a number of different flavours. Our passionfruit, mango and raspberry cheesecake made for Tesco’s Finest range was the winner of the ‘Other Seasonal Occasions’ category at the 2011 Quality Food Awards in the UK.

For more detailed information please refer to Our Corporate Responsibility Report

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TRADING OVERVIEW

Our positioning within the fastest-growing segment of the retail food market, coupled with further new business wins and our support of retailers’ pricing initiatives and promotion campaigns, meant that we saw continued good volume growth in 2011 despite subdued consumer spending. However, participation in such competitive initiatives has impacted our price margins and increased our promotional costs, putting downward pressure on our profit performance.

Input inflation also had a significant impact on our profit for 2011 as we experienced substantial rises in raw material costs across all of our key commodities. Double-digit increases were seen in ingredients such as meats, flour and sugar and we were also impacted by a rise in the cost of many vegetables due to poor weather conditions. In addition, dairy costs remained high throughout the year which, combined with wheat and sugar price rises, led to increased purchasing costs particularly in our pizza, bread and desserts businesses.

We were successful in recovering two-thirds of our 2011 inflationary costs through price negotiation with customers and took the opportunity to hedge against future positions where possible which helped contain the cost of inflation. We are starting to see more stability in raw material costs but remain wary and do not foresee a significant easing in this inflationary environment in the immediate future. We remain committed to driving operational efficiencies and performance across all our businesses in order to offset these impacts on our profit margin.

GROUP SALES

We continued to achieve good underlying sales growth for the year despite tough trading conditions, with sales for the Group increasing by 2.1%, underpinned by sound growth in our UK Prepared business segment. Group sales were £1,677.7 for 2011, compared with £1,643.2 million the previous year, an increase of £34.5 million. In line with expectations, sales in our UK Produce segment declined due to the closure of our Exotic Farm Produce business and reduced volume through our English Village Salads business. The Group manages its business through four segments. The sales performance of each business segment is on page 19.

GROSS PROFIT

In 2011, the Group reviewed the accounting for direct and indirect costs and as a result has changed its measure of gross profit. The effect of this review was to reclassify certain indirect overheads from cost of sales to administrative expenses. In the Directors’ view, this provides a more accurate representation of the Group’s performance and also provides the external markets with a more comparable measure to our competitor peer group. As a consequence of this reclassification, the Group has restated the 2010 gross profit margin from 14.4% to 27.3%. The gross profit margin for 2011 was 26.1%, a decline of 1.2% from the restated 2010 gross profit margin. Further details are provided in the next section.

ADJUSTED EBITDA2

The Adjusted EBITDA for the Group was £107.7 million in 2011, compared with £132.0 million in 2010, a decrease of £24.3 million or 18.4%. Adjusted EBITDA margin fell by 160 basis points from 8.0% in 2010 to 6.4% in 2011.

The inflation effect on our raw materials of £31.5 million, would alone have created a 190 basis points reduction to full year margin. Adjusted EBITDA was also impacted by the wider economic environment which restricted consumer budgets and increased promotional activity. Reconciliation to Adjusted EBITDA2

FY 2011 FY 2010 £m £m

Operating (loss)/profit (18.3) 79.4Add: Depreciation 43.9 44.3Amortisation 9.4 9.4Impairment of assets 76.9 -Exceptional items (7.2) (12.7)Loss on disposal of property, plant and equipment 0.3 0.3Loss on disposal of subsidiary and associate 2.6 -Bakkavor Group ehf. management/royalty charge 1.2 12.3Share of results of associates (1.1) (1.0)Adjusted EBITDA 107.7 132.0

Throughout the year, management implemented actions to reduce the effect of these pressures through a combination of increasing prices, reconfiguring our products, hedging against further raw material price increases where possible and reducing the Group’s overhead base. The effect of these actions was particularly apparent in the final quarter of 2011, when compared to the same period in 2010, margins reduced by only 30 basis points against the full year margin reduction of 160 basis points. The effects outlined were apparent across all the segments of the Group. In addition, the results for the UK Produce and Rest of World segments were further reduced by the closure of Exotic Farm Produce and additional start-up costs for our Canadian operations respectively.

We experienced another year of sound underlying sales growth in our key markets in 2011, with performance underpinned by good sales uplifts in our core UK Prepared business.

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NET SALES ADJUSTED EBITDA2 TURNOVER BY BUSINESS SEGMENT

£1.64bn: 2010 £132.0m: 2010

UK PreparedOur core sales derive from the UK Prepared business which primarily supplies private label products to all the major grocery retailers in the UK. UK sales in this segment amounted to £1,323 million in the full year. A like-for-like¹ increase of 3.9% on 2010 with strong performances achieved in ready meals, ready to cook meals, soups, wraps and the prepared fruit categories. As part of our constant drive for innovation to stimulate consumer interest and sales, we developed and launched over 700 new

UK Produce This business segment sells fresh produce to retail customers in the UK. Our like-for-like1 UK Produce sales declined by 19% in 2011 in line with our expectations. Sales dropped from £108.5 million in 2010 to £84.9 million in 2011, reflecting the closure of Exotic Farm Produce in May 2011 and reduced sales volumes at our English Village Salads site due to a contract loss with a major customer in May 2011. As conditions have not improved at English Village Salads we have commenced a period of consultation with employee representatives to discuss the ongoing viability of the business.

79% UK Prepared 5% UK Produce 4% Rest of World 12% Continental

Europe

products into the UK market over the year. In addition, in recognition of the quality of our products, we won 10 UK industry food awards and received two supplier awards for our market-leading work in the ready meals and leafy salads categories.

CONTINENTAL EUROPE

UNITED KINGDOM

REST OF WORLDWe have operations in France, Spain, Italy, Belgium and the Czech Republic, which manufacture a variety of fresh prepared foods for grocery retailers and foodservice operators in mainland Europe and, in the case of our Italian pizza business, across the world. Sales in the full year amounted to £208.0 million, up by £5.1 million compared with 2010, with like-for-like1 sales increasing by 1%. We saw good sales growth across our prepared foods businesses in Belgium, Italy and France; however reduced sales prices, increased competition and tighter margins within our French leafy salads business continued to dampen sales growth in the region. In September 2011 we sold Bakkavor Traiteur, a non-core fish spreads business based in France.

The Rest of World segment represents sales to retail and foodservice customers in North America and the Far East. Combined like-for-like1sales growth increased by 10% in the full year with combined sales rising from £57.8 million in 2010 to £62.3 million. Sales growth in the Group’s US business remained strong in 2011, benefiting from sales to new and existing customers and new product launches. We also entered the Canadian retail market in the year, producing a range of fresh prepared foods for Canada’s leading retailer from a new

site based in Ontario. Whilst our operation in Canada remains in the start-up phase, expanding our fresh prepared food range into further stores is already ongoing as we move into 2012. In Asia, after a weak start to the year sales showed signs of improvement in the second half with increased volumes and a slight easing in raw material costs. In December 2011, we announced the acquisition of the remaining shares in Gastro Primo, a food and beverage supplier in Hong Kong in which we have held a minority share since 2008.

SALES BY BUSINESS SEGMENT

2 Adjusted EBITDAExcludes restructuring costs, asset impairments and those additional charges or credits that are a one-off in nature and significance.

1 Like-for-like salesDefined as statutory sales plus share of revenue generated by associates less those sales from business closed in the prior year, and is on a 'constant currency' basis.


TAX

Our loss before tax of £77.4 million was predominantly driven by a one-off impairment charge to fixed assets of £76.9 million. Such an impairment is a non-deductible expense for tax purposes and so the Group’s tax credit for the year is £2.4 million (2010: £14.2 million charge).

REFINANCING

At the end of 2010, the Group had bank debt of £605.6 million which was due to mature in 2012. During early 2011, the Group completed a refinancing exercise to diversify its funding sources and extend its repayment profile. The Company issued on 7 February 2011 £350 million of 8.25% Senior Secured Notes due in 2018.

Both the Notes and the bank debt are secured by fixed and floating charges over the assets of Bakkavor Finance (2) plc and its significant subsidiaries.

The Company has also significantly extended the maturity of its bank debt by securing a £260 million term loan and a £120 million Revolving Credit Facility (RCF) in February 2011; both facilities mature in June 2014. As at 31 December 2011, the term loan was fully drawn whilst only £13.7 million of the RCF was drawn.

The bank facilities are subject to a series of covenants set by the lenders. Financial covenants are measured quarterly and include an assessment of leverage (the ratio of net debt to EBITDA); cash flow cover (the ratio of finance charges to cash generated from operations); interest cover (the ratio of finance charges to EBITDA) and capital expenditure limits.

At the date of this report, the Group has complied in all respects with the terms of its borrowing agreements, including these financial covenants. In completing an assessment of our going concern, we naturally consider our future compliance with covenants. Please refer to the Going Concern section on page 34 of our Directors' Report for further details.

IMPAIRMENT

Each year the Group is required to assess the appropriateness of its goodwill carrying value by comparing asset values with the future cash flows expected to be generated from those assets. An impairment charge of £71.2 million, representing an impairment of less than 10% of our goodwill carrying value, has been recognised due to the combination of adverse trading conditions and management's decision to exit certain low-margin businesses. A further impairment charge of £5.7 million has also been recognised in respect of certain tangible and intangible fixed assets. The Directors are confident that the carrying value of the remaining goodwill and other assets are appropriately stated.

OPERATING LOSS

The company incurred an operating loss of £18.3 million (2010: profit of £79.4million). This loss has been driven by our lower adjusted EBITDA and the one-off impairment charge to fixed assets of £76.9 million. Further losses were incurred from the restructure of certain overseas operations as outlined in the Corporate Activity section on page 21.

NET DEBT AND INTEREST

The Group’s net debt increased marginally in the year to £591.4 million (2010: £585.4 million). This increase was mostly driven by costs of £19.1 million associated with the Group’s refinancing, which has achieved a simplified funding structure with extended maturity dates. For further details please refer to the Refinancing section.

Net finance costs have reduced from £67.8 million in 2010 to £65.2 million in 2011. The comparative charge is impacted by an accelerated amortisation of capitalised refinancing costs of £11.8 million. Adjusting for this item, net finance costs have risen during the year as a consequence of increased interest rates under the new financing arrangements.

EXCEPTIONAL ITEMS

Exceptional items are those that, in management’s judgement, should be disclosed by virtue of their nature or amount. Exceptional items comprised:

52 weeks 52 weeks ended ended 31 December 1 January £m 2011 2011

Defined benefit pension scheme credit 12.0 15.8Restructuring costs (7.9) (3.7)Fire insurance claim – 0.6Legal settlement 3.1 – 7.2 12.7

The exceptional non-cash credit of £12.0 million in 2011 (2010: £15.8 million), relates to the defined benefit pension scheme. This has arisen due to changes to the scheme regarding future discretionary increases in 2010 and the closure of the Group’s scheme to future accrual in March 2011.

During the year, the Group incurred certain one-off costs as part of a restructuring programme to improve long-term operating performance. The costs incurred to implement this restructuring amounted to £7.9 million, of which the majority (£6.8 million) comprised redundancy costs.

Finally, the Group received £3.1 million following the conclusion of a legal settlement in respect of a trading dispute.

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PENSIONS

At 31 December 2011, the IAS 19 net retirement benefit surplus was £9.3 million (2010: £11.8 million surplus). The market value of scheme assets decreased by £9.1 million due to a reduction in the scheme’s asset performance. Despite this, the present value of the scheme liabilities has fallen by £6.6 million, predominantly due to the closure of the scheme to future accrual. The effect of this change to scheme liabilities has been recognised as an exceptional item in the income statement.

CASH FLOW

FY 2011 FY 2010Free cash flow 3 £m £m

Adjusted EBITDA 107.7 132.0Working capital 4.9 11.8Pensions (cash and non-cash) (4.4) (0.3)Interest paid (44.3) (57.8)Tax paid (3.4) (2.6)Capital expenditure (net) (39.9) (20.8)Free cash flow 20.6 62.3Refinancing costs (19.1) (1.6)Acquisitions and disposals (2.2) (16.7)Exceptional items (4.5) (3.6)Net movement in cash before financing activities (5.2) 40.4

FREE CASH GENERATION FROM OPERATIONS

The reduction in free cash generation in the year is attributable to an increase in capital expenditure and a lower profit performance. Offsetting this was a reduction in interest payments arising from the payment profile attached to the Senior Secured Notes. These notes were launched in February 2011 and interest is payable semi-annually each year in February and August. Therefore in the year of issue only one semi-annual interest payment was made. The significant improvements in working capital achieved in 2010 were sustained in 2011.

CAPITAL EXPENDITURE

We have maintained our focus on capital projects with net expenditure totalling £39.9 million, which will support our growth objectives and strengthen our market-leading positions within the sector. In line with this strategy we have continued to invest in a broad range of projects primarily within our UK businesses. We retain flexibility in our discretionary capital spend in order to respond to the economic environment and manage the broader cash requirements of the business as a whole.

DIVIDENDS

The Directors do not recommend a final dividend to ordinary shareholders. This with the interim dividend of nil pence makes a total of nil pence for the period (2010: nil pence).

CORPORATE ACTIVITY

On 7 April 2011, the Group acquired the remaining 10% of Italpizza Srl as required under the initial purchase agreement.

On 7 September 2011, the Group disposed of its interest in Bakkavor Traiteur.

The Group made two small acquisitions in the Far East. On 3 November 2011, the Group acquired the minority interest of Bakkavor China Limited. On 21 December 2011, the Group acquired the remaining 52% share of Gastro Primo Limited in Hong Kong.

In addition to the above transactions, the Group closed the operations of Exotic Farm Produce and commenced a period of employee consultation with English Village Salads to discuss its ongoing viability.

3 Free Cash FlowThe amount of cash generated by the business, after meeting all its obligations for interest and tax, and after investments in tangible assets.

£20.8m: 2010

NET CAPITAL EXPENDITUREFor more detail on our financialsP.40

THE PLACE TO WORK THE PARTNER OF CHOICE CARING FOR OUR COMMUNITY

We are committed to providing a safe working environment and rewarding our employees for their commitment.

We aim to be the partner of choice for all who deal with us.

We focus on reducing our direct environmental impact and supporting our local communities. 1 2 3

MANAGING OUR CSR

Our framework ensures compliance with the legislation relevant to our global operations and, where appropriate for our business, we look for opportunities within our CSR framework to create competitive advantage.

Our Group Technical Director, Ann Savage, is responsible for the Group’s CSR policies

and performance and reports monthly to the Management Board. She is supported by the Group CSR Manager and Group SHE Auditor whose roles are to embed and monitor sound CSR practices across the business.

We take a continuous improvement approach to the development and sharing of good practice across the business through conferences, workshops and our

Group Employee Forum. On a day-to-day basis, we co-ordinate the activity of various Action Teams (e.g. Energy, Waste and Health and Safety Action Teams) who focus on providing solutions and testing new technologies and practices for wider application across the business. These teams are typically made up of a variety of internal key stakeholders and, when required, selected external experts.

Our three identified areas of Corporate Social Responsibility (CSR).

GROUP TECHNICAL DIRECTOR

GROUP CSR MANAGER(HEALTH AND SAFETY, ENVIRONMENT)

ACTION TEAMSGROUP SAFETY, HEALTH

AND ENVIRONMENT AUDITOR

Specialised teams focusing on key improvement areas (e.g. energy, waste, and H&S) who embed CSR in the businesses

Monitors and reports business unit compliance

Management Board member reports monthly to Board on CSR progress and priorities

Responsible for implementing CSR strategy and co-ordinating improvement activity across the Group

LeftAnn SavageGroup Technical DirectorResponsible for Bakkavor’s Corporate Social Responsibility.

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HEALTH AND SAFETY (H&S)

Our responsibility is to take every reasonable step to secure and protect the Health and Safety of our employees across the Group.

In 2011 our total number of accidents reduced by 17% from 2010. Although we did not achieve our stretching target of a 20% year-on-year reduction our major accident rate was 37% better than the Health and Safety Executive’s industry average. Our targets remain in place for 2012.

Our objective is to develop a pro-active accident prevention culture within the Group and we are committed to focusing on our five identified H&S priority areas, drawing on external expertise to help us address the root causes of accidents and implement leading-edge solutions to prevent them.

EMPLOYEE RETENTION

Our aim is to nurture a dynamic, inclusive and values-led working environment which recognises, rewards and promotes our employees fairly. We are committed to ‘growing our own’ people and, alongside established appraisal and self-development systems, we have wide-ranging training and development programmes.

For the second year in a row we beat our target of filling at least 50% of our vacancies internally.

Employee retention is a key measure and we have set ourselves a retention target of 90% for managers and 75% for our site-graded employees. For the second year in a row we have hit or exceeded our targets, achieving retention rates of 90% for managers and 91% for site-graded employees in 2011.

TRAINING AND DEVELOPMENT

We have an established two year Accelerated Management Scheme (AMS) – a fast-track programme for new graduates and current employees, giving them hands-on experience in jobs alongside trainers and mentors. AMS participants specialise in one of six core areas of strategic importance to the business: Manufacturing, Product Development, Technical (food safety), Produce (procurement), Purchasing, and Finance. We recruited 16 people onto the Scheme in 2011.

Following a successful pilot in 2011 we will be implementing the Bakkavor Apprenticeship Scheme (BAS) later in 2012. We aim initially to train over 20 A-level leavers across three functions: Manufacturing, Technical and Development.

Bakkavor is one of the first manufacturers to pioneer Food Technical and Development apprenticeships in the UK.

DIVERSITY

We are proud of our multi-cultural workforce. We aim to nurture an inclusive working culture by complementing our existing policies with the launch of a ‘Better Together’ self-audit tool in 2012.

Disabled employeesBakkavor Group gives full and fair consideration to employment applications made by people with disabilities. We offer equal opportunity to all disabled candidates and employees who have a disability or who become disabled during the course of their employment. A full assessment of the individual’s needs is undertaken and reasonable adjustments are made to the work environment and/or practices in order to assist those with disabilities.

Equal opportunitiesBakkavor Group is an equal opportunities employer. Equal opportunities are offered to all regardless of race, colour, nationality, ethnic origin, sex (including gender reassignment), marital or civil partnership status, disability, religion, belief, sexual orientation, pregnancy and maternity, age or trade union membership. All candidates and employees are treated equally in respect of recruitment, promotion, training, pay and other employment policies and conditions. All decisions are based on relevant merit and abilities.

EMPLOYEE INVOLVEMENT

One of the biggest challenges as a large, decentralised food company is ensuring we communicate effectively and encourage employee engagement across, and within, our businesses.

We provide open channels of communication between employees and management through regular Site Employee Forums (SEFs) and the annual Group Employee Forum (GEF) where matters of common concern are discussed and learnings, best practice and ideas are shared. This enables positive policy development and the communication and discussion of operational changes. We also publish a quarterly Group newsletter which updates all employees on activities across the Group.

TEMPORARY LABOUR

We have seasonal requirements for additional temporary resource and, in the UK, we work closely with a selected group of temporary labour providers all of whom are fully accredited and licensed. All UK temporary workers are subject to UK legislation.

1 THE PLACE TO WORK

At Bakkavor we focus on doing things the right way: ensuring we consider the needs of those that matter to us – our employees, customers, consumers, suppliers, local communities, our shareholders and lenders – as well as reducing our environmental impact where we have direct control. We have values and systems in place to ensure we do this right and keep doing it right. In this section we update you on our progress during the year.

Ann SavageGroup Technical Director


OUR SUPPLIERS

We have developed the most successful relationships with our suppliers who understand customer service, food safety excellence, a quest for continuous improvement and the importance of innovative, forward thinking. These criteria form part of our supplier selection process and are essential in meeting our long-term needs.

Ethical auditingBakkavor supports the United Nations’ Universal Declaration of Human Rights and the core conventions of the International Labour Organisation. We, and our suppliers, are required to comply with all local and national laws covering working hours and conditions, Health & Safety, rates of pay, terms of employment and minimum age of employment. We carry out ethical audits on our suppliers based on risk-assessment and customer specifications.

OUR SHAREHOLDERS AND LENDERS

We are committed to open communication with all stakeholders, whilst being conscious of the need to respect commercial sensitivities.

OUR CUSTOMERS

Food safetyMillions of people eat our products every day. We have a duty to make food that is safe for people to eat. We have a clear Food Safety Policy and the Bakkavor Management Board is accountable for its effective implementation.

Partnership approachWe are committed to providing our customers with outstanding service, quality, innovation and value. We commission regular consumer research to ensure we stay ahead of emerging trends and we build strong relationships with customers across all levels of the business so that we can develop and make innovative and commercially viable products.

In 2011, our innovation was recognised and rewarded externally with 12 food industry food quality awards.

We work closely with our customers and industry bodies to promote sustainable development throughout the supply chain. Our Group Technical Director sits on the Institute of Grocery Distribution (IGD)’s Industry Sustainability Group and three UK retailer-led working groups. Current projects under review include water stewardship and energy reduction solutions within the supply chain.

We work collaboratively with both suppliers and customers to support specific initiatives as set out in our customers’ Corporate Responsibility agendas.

2 THE PARTNER OF CHOICE

POOLING OUR NEW PRODUCT DEVELOPMENT

RESOURCES

In September 2011, we launched a

new range of 20 Mexican products for

one of our customers, demonstrating

our ability to develop complementary

products around the Group and our

commitment to innovation and

customer service.

Being on the Manufacturing AMS has given me a diverse understanding across the business, including production, planning, development and technical. It has helped my management skills and my ability to deliver decisions in a fast-moving environment.

In 2011 we received four awards from our major retail customers for: Outstanding Category Management in Meal Solutions, Innovation in the leafy salads category, Leadership in the Community, and Environmental Stewardship.

Gillian WarnockManufacturing AMS participant

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OUR VALUESOUR ENVIRONMENT

We are committed to complying with relevant legislation and managing the direct impacts of our businesses on the environment. We focus on five key areas over which we have immediate control: Energy, Water, Waste, Packaging and Transport.

WasteWe have exceeded our targets to divert waste from landfill ahead of schedule for two years running, achieving better than 90% and 98% in 2010 and 2011 respectively. This was achieved through a focus on innovative waste segregation, recycling initiatives and increased food waste destined for anaerobic digestion.

In 2011 we reduced the absolute quantity of waste sent to landfill by 20,000 tonnes, beating our 2012 target ahead of schedule.

TransportIn 2011 we won the ‘Innovation in use of Technology’ category at the European supply chain excellence awards for pioneering a bespoke web portal to manage movements of materials in ‘real time’, enabling more efficient haulage planning.

OUR COMMUNITIES

We expect our local management teams to understand the issues facing their communities and we encourage them to support local initiatives. At the annual Group Employee Forum we reward sites that have made the most positive impacts in their local communities.

At the 2011 Forum our Good Neighbour Award was presented to our Bakkavor Pizza site based in Holbeach St. Marks, Lincolnshire. This site has forged a strong relationship with its local community and offers 24-hour child care facilities as well as a community gym at the site.

In 2011, the Group donated £158,000 to charitable organisations. (2010: £123,000)

In 2011 we sponsored the University of Nottingham’s Summer School in Food Sciences.

3 CARING FOR OUR COMMUNITY

WASTE

CASE STUDY

Zero waste to landfill at Isleport Foods, Highbridge, UKIn 2011 Isleport Foods achieved a 100% success rate for recycling food waste, cardboard, factory waste, tins, plastics and effluent solid waste. A Dissolved-Air Flotation Plant to treat waste water has been installed and a new system of waste segregation introduced so that waste is recycled or used for energy via the local bio digestion plant.

CASE STUDY

Bakkavor Spalding raised over £70,000 for local causes and employee eventsOver 40 charities and local clubs benefited from the proceeds of Bakkavor Spalding’s staff shop in 2011 including Cancer Research, the Royal Hospital for Neuro-Disability and the Gedney Royal British Legion. Employees were also rewarded throughout the year with a day out to Newmarket Races, a festive Christmas night out to see the pantomime production of ‘Aladdin’ and a subsidised trip to London.

tonne reduction in landfill waste in 2011

1. CUSTOMER CARE2. CAN DO3. TEAMWORK4. INNOVATION5. GETTING IT RIGHT / KEEPING IT RIGHT

In 2012 we are relaunching our company values across the Group to ensure they remain ‘alive’ within our business.

For more information please see Risk Management

P.32


Edit is a Production Operative at our Bakkavor Spalding site in Lincolnshire. She is holding one of the 3.5 million white cabbages we use annually to make coleslaw and stir fry mixes for our UK customers. We buy our white cabbages from local farmers with whom we have long-term relationships.

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The Group has built its leading position in fresh prepared foods over four decades. It success is underpinned by strong principles and high standards regarding food safety, customer service, consumer understanding and innovation.

principal risks to the business identified. How we aim to mitigate these can by found on page 32.

combined years of experience in the food industry – the members of our Management Board team are food experts in their own right.

core values which define our approach to all aspects of our business:Customer care, Can do, Teamwork, Innovation, Getting it right / Keeping it right.


BOARD OF DIRECTORS

Ásgeir ThoroddsenNon-executive Director

Ásgeir has served on Bakkavor Group ehf.’s Board of Directors since 2000. He is a lawyer and has been a partner in a Reykjavík law firm since 1977 and an attorney to the Supreme Court of Iceland. He is also Chairman of Intrum Iceland hf., Frjálsi lífeyrissjóðurinn and Íshestar ehf. Ásgeir holds a Cand. Juris degree from the University of Iceland and a degree in Public Administration from New York University.

Lýdur GudmundssonNon-executive Chairman

Lýdur founded Bakkavor Group with his brother Ágúst and has served on its Board of Directors since its founding. He served as Chief Executive Officer of Bakkavor Group ehf. from 1986 to 2006, and has served as the Chairman of the Board of Directors since 2006. Lýdur was educated at the Commercial College of Iceland.

Ágúst GudmundssonChief Executive Officer

Ágúst founded Bakkavor Group ehf. with his brother Lýdur in 1986 and has served on the Board of Directors since the Company’s founding. He has served as Chief Executive Officer of Bakkavor Group ehf. since 2006, having previously served as the company’s Executive Chairman between 1986 and 2006. Ágúst was educated at the College of Ármúli in Reykjavík, Iceland.

Bjarni Th. BjarnasonNon-executive Director

Bjarni was elected to Bakkavor Group ehf.’s Board of Directors in May 2010. He is Chairman of Arctica Finance hf., an Icelandic advisory firm, and serves as an independent consultant. Bjarni has held various corporate advisory positions in Icelandic banks and the financial sector. He is a member of the Board of Árvakur hf., Byrjun hf., and Arctica Finance hf.. Bjarni holds a BSc degree in Mechanical Engineering from the University of Iceland and an MBA from the Southern Methodist University.

Halldór B. LúdvígssonNon-executive Director

Halldór was elected to Bakkavor Group ehf.’s Board of Directors in May 2010. He serves as a Managing Director of Arion Bank’s corporate finance division, previously having served as Chief Executive Officer of Maritech, an international technology company. Halldór is a member of the Board of Atorka hf., Klakki hf., Eingabjarg ehr., Landey ehf., Reiknistofa Bankanna hf., and Interbulk plc. He holds a Masters degree in Mechanical Engineering and a BSc in Computer Science.

To read our Directors’ ReportP.34

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MANAGEMENT BOARD

Peter Gates Chief Financial Officer

Peter was appointed Chief Financial Officer of Bakkavor Group in November 2010. He has worked in a number of international companies, including Saatchi & Saatchi Co. plc and Avis Europe plc. Peter spent much of 2009 at Bakkavor as Interim Group Treasurer. He is a Chartered Accountant and a member of the Association of Corporate Treasurers. Peter has a BSc (Hons) degree in Economics from the University of Southampton.

John GormanPresident – Bakkavor USA Inc.

John took up his current position in January 2012, prior to which he worked as the Group’s Business Director of Fresh Meal Solutions in the UK. John has over 30 years experience in chilled food, 22 of which have been at Bakkavor and Geest. He has held senior roles in Operations, Technical and New Product Development and senior offices with a number of UK Food and Drink research organisations and associations. John studied Food Technology at Manchester Metropolitan University.

Steve BroadbentSector Managing Director

Steve is Managing Director of the Convenience Foods sector in the UK. He joined Bakkavor in 1997 as a General Manager and held various roles in manufacturing, general and senior management before taking his current position. He entered the food industry in 1982 as a Graduate Trainee (Manufacturing) at Express Dairy UK Ltd (later a part of Northern Foods) and has a BSc (Hons) in Applied Biochemistry from Brunel University.

Mike EdwardsSector Managing Director

Mike is Managing Director of the Meals Solutions sector in the UK. He joined Bakkavor in 2001 as a Manufacturing Manager and has held various general and senior management roles within the Group before taking his current position. Prior to joining Bakkavor Mike worked in general management at Heinz. He has a BA (Hons) in Business Studies from the University of Portsmouth.

Ann SavageGroup Technical Director

Ann was appointed Group Technical Director in 2004. She is responsible for Food Safety, Health and Safety management, Manufacturing Excellence and Environmental management at Bakkavor. Ann has more than 30 years of experience in technical, research and development and manufacturing roles within the retail and food industry. She studied at the Open University and has a Postgraduate Diploma in Management Studies from Nottingham University.

Ivan ClinganSector Managing Director

Ivan is Managing Director of the Prepared Produce sector in the UK. Since joining Bakkavor in 1990 Ivan has worked in various financial, general and senior management roles before taking his current position. Prior to Bakkavor he worked at Nestlé. Ivan has a BA (Joint Hons) in Finance and Economics from the University of Stirling and is a Qualified Accountant (CIMA).

As of March 2011, the Management Board was enlarged to include all members of the Senior Management Team and UK sector Managing Directors.

Einar GustafssonManaging Director – Bakkavor Asia

Einar was appointed Managing Director for Bakkavor Asia in 2005 and has served within the Group for six years. He began his career at Deloitte Consulting, after which he successfully turned around two businesses in the seafood industry. Einar has a BSc degree in Business Administration from the University of Southern California and an MBA from Columbia Business School.

Gordon PatesChief Executive Officer Bakkavor UK and Europe

Gordon was appointed Chief Executive Officer of Bakkavor UK in 2009 and Chief Executive Officer of Bakkavor Europe in January 2011, and is responsible for our operations in the United Kingdom and Continental Europe. Gordon joined the horticulture division of Geest in 1969 and spent 10 years in the produce business before moving into the prepared produce and prepared food businesses in the late 1990s.

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OPERATIONALRISKS

MARKETRISKS

FINANCIALRISKS

GOVERNANCE

OUR FRAMEWORKThere are three elements to Bakkavor’s Governance Framework as outlined below:

Controls and compliance Policies and procedures to mitigate Bakkavor’s portfolio of risk. The Board is responsible for the overall system of internal control and for reviewing the effectiveness of the system. The Management Board carries out its duties through the use of the company’s Internal Audit Function.

Risk management Process by which our key risks are identified and addressed.

Governance Our approach to overseeing the Group’s risk and compliance programme.

INTRODUCTION

The current economic and business environment underscores the need for continued high standards of Corporate Governance. In order to ensure these are observed, the Company operates within a Governance Framework which we believe identifies all the elements of a sound approach to governance and responsibility.

The Board, together with its senior management team, collectively known as the ‘Management Board’, uses this framework to set and monitor governance and responsibility objectives, identify improvement opportunities and ensure that activities align with business strategy. Through this Framework we provide assurance to all our stakeholders that Bakkavor is a well-managed, responsible company.

GOVERNANCE

For Bakkavor, Governance is about making sure that:• we have assessed our strategic options

and we are taking the business in the right strategic direction;

• the Management Board leads and manages effectively and is accountable in their actions;

• the Group has appropriate controls;

• we are considering the interests of all our stakeholders in making executive decisions.

CONTROLS AND COMPLIANCE

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How do we make this happen? At Bakkavor, we believe that effective governance is realised through leadership and collaboration. The Management Board sets the strategic objectives of the Group, determines investment policies, agrees on performance criteria and delegates to management the detailed planning and implementation of those objectives and policies in accordance with appropriate risk parameters. The Management Board monitors compliance with policies and achievement against objectives by holding management accountable for its activities through monthly performance reporting and budget updates. In addition, the Management Board receives regular presentations from directors of key group functions (for example; marketing, human resources and legal) enabling it to explore specific issues and developments in greater detail.

The Governance Framework adopted by the Board is cascaded down the organisation through our five core values, which define our approach to all aspects of our business. Our values are: Customer care, Can do, Teamwork, Innovation and Getting it right/ Keeping it right.

RISK MANAGEMENT

Our decentralised model empowers the management of our businesses to identify, evaluate and manage the risks they face on a timely basis. Key risks and internal control procedures are reviewed at Group level by the Management Board and the management of principal risks is assigned to key members of the Management Board. It is their responsibility to report to the Board on a monthly basis regarding the actions associated with each of those risks. For a summary of our risks, refer to page 32.

CONTROLS AND COMPLIANCE

The Board conducts an annual review of the Group’s systems of internal control. The internal control systems provide an ongoing process that identifies, evaluates and manages the risks that are

significant in relation to the fulfilment of the Group’s business objectives. The system also supports management’s decision-making, improves the reliability of business performance, and assists in the preparation of the Company’s consolidated accounts.

The Board has delegated authority to the Audit Committee to regularly monitor internal controls and conduct an annual review. Each year the Audit Committee meets to discuss and approve the nature and scope of the audit programme for the year. The Audit Committee then instructs the Internal Audit Function to undertake the agreed schedule of audits during which the effectiveness of the controls operating within the business are reviewed. The Group’s Internal Audit Function, which comprises both employees and resources provided by RSM Tenon, has the skills and experience relevant to the operation of each business.

In addition to our Internal Audit Function, the completion of comprehensive internal control questionnaires is required from all Financial Controllers within each business unit. These self-assessment representations are designed to ensure that any material control breakdowns are highlighted and the operation of internal controls is addressed within the respective business units. The results of these representations are initially reviewed by Internal Audit before being reported to the Audit Committee.

AUDITOR

The Audit Committee is also responsible for the appointment of the Company’s auditor. On an annual basis the Committee reviews the relationships the Company has with our auditor and considers the level of non-audit services provided by the auditor. For 2011, the Group’s auditor is Deloitte LLP. The engagement of Deloitte LLP for non-audit services requires approval from the Group Financial Controller. If non-audit services exceed £100,000 or

impede on the auditor independence, the Audit Committee reviews these services to ensure the objectivity of the external auditor is not impaired. A list of non-audit services provided by Deloitte LLP in 2011 and the associated fees has been provided in Note 6 of the Group’s financial statements.

DISCLOSURE OF INFORMATION TO AUDITOR

Each of the persons who is a Director at the date of approval of this Annual Report confirms that:• so far as the Director is aware, there is

no relevant audit information of which the Company’s auditor is unaware; and

• the Director has taken all the steps that he ought to have taken as a Director in order to make himself aware of any relevant audit information and to establish that the Company’s auditor is aware of that information.

This confirmation is given and should be interpreted in accordance with the provisions of s418(2) of the Companies Act 2006.

Deloitte LLP has expressed its willingness to continue in office as auditor and a resolution to reappoint them will be proposed at the Company’s Annual General Meeting.

For more detail on our risksP.32

Our Board remains committed to practising good Corporate Governance and to setting high standards throughout the Group.


In 2010 Bakkavor Group formally identified 28 risks to its business. Of these, eight are considered to be key risks, the successful mitigation of which is paramount to the day-to-day running of our business and the achievement of our long-term vision. We share these with you below.

Failing to make safe products would damage our reputation in the industry and could also, ultimately, jeopardise the industry’s long-term prospects.

Millions of people eat our products every day. We have a duty to make food that is safe for people to eat.

Compromising on the Health and Safety of our 18,000 employees would damage our reputation within the industry.

In order to achieve our growth objectives, we require a strong financial platform. An inability to repay interest rates or a downgrading in the Group’s credit rating would impair our ability to secure future financing.

We have a duty of care to take every reasonable step to secure and protect the Health and Safety of our employees across the Group. A relatively high proportion of our employees (over 80%) work in fast-moving manufacturing environments.

We are a relatively highly leveraged company and therefore exposed to the external risk of interest rate fluctuations and the market’s view of our credit rating.

We would be unable to fulfil our strategic growth objectives without the recruitment, development and retention of talented and loyal people who understand and respect our values.

We have a highly experienced senior management team which is passionate about the business and whom we consider to be a key competitive strength.

We work with a concentrated number of some of the largest food retailers and foodservice providers in the world and we aim to be their supplier of choice.

Our diverse and innovative product range is critical to developing customer relations and future growth.

Bakkavor spends over £800 million on ingredients and packaging every year and may be exposed to fluctuating prices in significant areas of expenditure.

We are subject to banking covenants as part of our term loan agreement.

Given the size and relatively small number of customers, any major customer loss would have a significantly negative impact on our turnover, manufacturing efficiency and profit.

Investing in product areas which fail or under perform is costly in terms of resource, profitability and our reputation with our customers.

In the short term, increases in cost prices adversely affect individual product margins. In the longer term, the inability to pass on significant commodity cost increases within a reasonable timeframe would impact the Group’s profit negatively.

In order to achieve our growth objectives, we require a strong financial platform. Breaching any covenant would destabilise our platform for growth and impair our ability to secure future financing.

FOODSAFETY

HEALTH AND SAFETY

INTEREST RATES, LIQUIDITY AND CREDIT

LOSS OF KEYEMPLOYEES

CUSTOMER RELATIONSHIPS

CONSUMERUNDERSTANDING

COMMODITYPRICE INFLATION

COVENANTCOMPLIANCE

1

2

8

3

456

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WHAT MAY HAPPEN IF WE GET IT WRONGWHY THIS RISK AFFECTS USKEY RISK AREAS

FINANC

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ISKS

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Ann SavageGroup Technical Director.Reports monthly to the Management Board.

Our Group Technical Director is accountable for H&S management across the Group and reports monthly to the Management Board on agreed H&S KPIs. The senior management teams are responsible for H&S on their sites. A H&S Champion sits on the site executive management team and manages a H&S professional who is responsible for reporting H&S matters to the executive management team and putting into action site-specific H&S plans. We employ a CSR Manager who ensures continuous improvement through coaching and support, and compliance. The Group SHE Auditor reports on and monitors business unit compliance on behalf of the CSR Manager. We train all operational employees in Health and Safety.

These risks are actively managed by the Group’s Treasury Department. The Treasury function operates within the framework of strict Board-approved policies and procedures which are explained further in Note 29 of the Group Financial Statements.

We use Hazard Analysis Critical Control Point (HACCP) principles to identify the food safety controls required in our businesses. All operational staff are trained in food safety using documented procedures derived from the HACCP plan. We ensure compliance through audit of our sites and our suppliers of key raw materials, using a combination of internal and external food safety experts.

We communicate our values internally in order to provide our employees with a cohesive framework. We recruit, appraise, reward and develop our employees against these values. We are committed to ‘growing our own’ people and provide relevant training to help our employees reach their potential. We have developed a ‘talent bank’ of employees based on performance and potential and we identify opportunities for them to grow within the business.

Gordon PatesChief Executive Officer Bakkavor UK & Europe.Reports monthly to the Management Board.

Peter GatesChief Financial Officer. Reports monthly to the Management Board.

Customer care is one of our five values. We invest in significant resource to manage and develop deep and long-lasting relationships with our customers, ensuring that our customers have access to dedicated Bakkavor employees at all levels of the decision-making process. At a senior management level we appoint Customer Champions to manage customer relations and long-term strategic account planning.

We regularly commission consumer research and communicate its results to our marketing and product development teams. Market trends and Bakkavor’s market share performance are discussed at each Bakkavor Management Board meeting.

Through its central procurement team the Group aims to leverage its scale and strong supplier relationships to achieve the requisite balance between price, quality, availability and service levels. Where possible it is the Group’s policy to pass on commodity price increases. Equally, it seeks to reduce costs and make products as efficiently as possible in order to offset time lags and other barriers to achieving price increases.

Bakkavor Group reviews its projections and covenant position at least monthly. The Group believes it is adequately placed to manage this risk successfully despite the current uncertain economic outlook and challenging macroeconomic conditions. Mitigating actions in 2011 included successful price negotiations, cost reduction programmes and enhanced working capital policies, all of which will continue into 2012. The Directors consider that the Group has the flexibility to weather any further deteriorating market conditions through implementing previously agreed early settlement arrangements with our core customers and reducing our capital expenditure programme. Further actions available to management include supply chain improvements and additional cuts to discretionary spend.

HOW WE AIM TO MITIGATE OUR RISKS WHO MANAGES THIS RISK


The Directors present their annual report on the affairs of the Bakkavor Finance (2) plc Group (the ‘Group’), together with the financial statements and auditor's report, for the 52 weeks ended 31 December 2011. Comparatives are for the 52 weeks ended 1 January 2011.

PRINCIPAL ACTIVITIES

The Group is a leading provider of fresh prepared food products in the United Kingdom. Our customers include some of the United Kingdom’s most reputable and well-known grocery retailers, including Tesco, Marks & Spencer, J Sainsbury, Waitrose, Asda and Morrisons, which sell our products to their customers predominately under their respective private labels. We have also established a significant presence in development markets for fresh prepared and private label food products, including Europe, the United States and China. Our industry expertise and relationships with eight of the world’s ten leading grocery retailers in these geographical regions have us well positioned to lead the growth in the fresh prepared and private label food markets. The subsidiaries principally affecting the profits or net assets of the Group in the period are listed in Note 8 to the Company only financial statements.

RESULTS FOR THE YEAR

The loss for the year after taxation and exceptional items was £75.0 million (2010: profit after tax of £7.2 million). Exceptional items for the year included an impairment charge against the Group’s assets, predominantly goodwill, of £76.9 million. Further details of the Group’s financial performance are outlined in the Business Review.

GOING CONCERN

The Directors, in their detailed consideration of going concern, have reviewed the Group’s future cash forecasts and revenue projections, which they believe are based on prudent market data and past experience, and believe, based on those forecasts and projections, that it is appropriate to prepare the financial statements of the Group on a going concern basis.

In arriving at this conclusion the Directors considered the Group’s financing arrangements, which comprise £380 million of bank facilities committed to June 2014 and £350 million of seven year listed bonds issued in February 2011. Importantly, the Group’s liquidity remains particularly strong with £106.3 million of facilities undrawn as at 31 December 2011.

The bank facilities are subject to a series of covenants set by the lenders. Financial covenants are measured quarterly and include an assessment of leverage (the ratio of net debt to EBITDA, being earnings before interest, tax, depreciation and amortisation); cash flow cover (the ratio of finance charges to cash generated from operations); interest cover (the ratio of finance charges to EBITDA); and capital expenditure limits. The key financial covenant is leverage, which must be less than 5.75 times at 31 December 2011 and less than 5.0 times at 31 December 2012. At 31 December 2011 the leverage ratio of net debt to EBITDA was 5.5 times. At the date of this report the Group has complied in all respects with the terms of its borrowing agreements, including its financial covenants.

The Group believes it is adequately placed to manage covenant compliance successfully despite the challenging macroeconomic environment. In the event that conditions worsen, the Group has the flexibility to react by accessing additional working capital arrangements that we have already agreed with key stakeholders. Further actions available to management may include a reduction to our capital expenditure programme and further supply chain improvements. Should this situation change, we believe that constructive discussions with our lenders would enable the covenant to be reset, although we recognise that this could result in increased costs to the business.

Consequently the Directors have a reasonable expectation that the Company and the Group have adequate resources to comply with these covenants and meet their liabilities as they fall due for a period of at least 12 months from the date of approval of the financial statements. For this reason, they continue to adopt the going concern basis in preparing the financial statements.

RESEARCH AND DEVELOPMENT

The main focus of the Group’s research and development expenditure is product innovation. Further information on the Group’s developments is contained in the Fast Read section called What we do and how we do it.

FUTURE DEVELOPMENTS

As we enter the new financial year, the ongoing macroeconomic pressures on consumers and retailers combined with increased commodity prices remain a challenge for the business. Despite this, the Directors are of the opinion that the strategic actions implemented in 2011, coupled with the significant capital investment across the Group, leave the Company in a stronger position to compete with these economic pressures. Further detail on future prospects is outlined in the Chairman and CEO's Address and the Business Review.

DIRECTORS AND THEIR INTERESTS

The Directors, who served throughout the period and to the date of this report, were as follows:

Director Appointed

A Gudmundsson L GudmundssonA ThoroddsenB BjarnasonH Lúðvígsson

21 January 20117 March 20117 March 20117 March 20117 March 2011

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As part of the Group’s refinancing, the Company, Bakkavor Finance (2) plc, was incorporated as a holding company of the Group. Both A Gudmundsson and P Gates were appointed Directors on the date of incorporation, 21 January 2011. On completion of the refinancing agreement, being 7 March 2011, P Gates resigned from the Board of Directors to allow for the Directors of the Company’s parent, Bakkavor Group ehf, to be appointed.The Company has made qualifying third party indemnity provisions for the benefit of Directors which remain in force at the date of this report.

DIVIDENDS

The Directors do not propose payment of a dividend for the year ended 31 December 2011 (2010: £nil).

FINANCIAL RISK MANAGEMENT POLICIES AND OBJECTIVES

Information on the Group’s financial risk management objectives and policies and on the exposure of the Group to relevant risks in respect of financial instruments is set out in the Our Risks section.

SUPPLIER PAYMENT POLICY

The Company’s policy, which is also applied by the Group, is to settle on appropriate terms of payment with suppliers when agreeing the terms of each transaction, and to ensure that suppliers are made aware of those terms of payment and subsequently comply with those terms. Trade creditors of the Group at 31 December 2011 were equivalent to 60 (2010: 53) days’ purchases, based on the average daily amount invoiced by suppliers during the year.

CHARITABLE AND POLITICAL CONTRIBUTIONS

During the period the Group made charitable donations of £158,168, principally to local charities serving the communities in which the Group operates (2010: £123,000).

No political donations were made during the period (2010: nil).

STATEMENT OF DIRECTORS’ RESPONSIBILITIES

The Directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulations.

Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have elected to prepare the financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union. Under Company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and the Group and of the profit or loss of the Group for that period. In preparing these financial statements, International Accounting Standard 1 requires that Directors:• properly select and apply accounting

policies;

• present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information;

• provide additional disclosures when compliance with the specific requirements in IFRSs are insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity's financial position and financial performance; and

• make an assessment of the Group’s ability to continue as a going concern.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Group’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and the Group and enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

By order of the Board

Ágúst GudmundssonDirector27 February 2012

INDEX TO PRINCIPAL DIRECTORS' REPORT DISCLOSURESInformation required to be disclosed in the Directors' Report can be found on the following pages:

AuditorsBoard of DirectorsCharitable donationsCreditor payment policyDirectors’ responsibilitiesDisclosure of information to auditorEmployee involvement

Employees with disabilitiesEqual opportunitiesGoing concernPolitical donationsPrincipal activities and Business reviewProfit and dividends

31283535353123

232334351835

Information Page number(s) Information Page number(s)


INPUT INFLATION COSTS RECOVERED

Our Adjusted EBITDA was impacted by high input inflation in 2011. We have recovered approximately two-thirds of these costs through price increases, product reconfiguration and supply chain initiatives.

CAPITAL INVESTMENT

We are focused on investing in our ‘Centres of Excellence’ – specific businesses that we have identified to bolster our future competitive advantage.

PACKS ON PROMOTION IN OUR MARKETS AT ANY ONE TIME

Promotions are part and parcel of doing business in the current economic climate. By actively supporting our customers we aim to control our promotional mix to drive volume growth, stimulate consumer spend and manage the impact on margins.

We have maintained market share and market-leading positions in a period marked by reduced consumer spending and high input inflation. Despite these tough conditions we have made strategic investments in our businesses to support future growth and efficiency, achieved our inflation recovery target and won 12 awards for product innovation.

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Trevor has worked at Bakkavor for over 15 years and is one of our Executive Development Chefs. Prior to joining us, Trevor worked in some of the finest restaurants in Australia, Europe and the UK, including the Michelin-starred Inverlochy Castle in Scotland. Trevor mentors and works with development teams across the Group and is passionate about bringing culinary excellence to the business.


To the members of Bakkavor Finance (2) plc

We have audited the financial statements of Bakkavor Finance (2) plc for the 52 weeks ended 31 December 2011 (‘period’) which comprise the consolidated income statement, consolidated statement of comprehensive income, consolidated statement of financial position, consolidated statement of changes in equity, consolidated statement of cash flows, and the related notes 1 to 39, Company income statement, Company statement of changes in equity, Company statement of financial position, Company statement of cash flows, and the related notes 1 to 13. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union.

This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed.

Respective responsibilities of Directors and auditor

As explained more fully in the Directors’ Responsibilities Statement, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s (APB’s) Ethical Standards for Auditor.

Scope of the audit of the financial statements

An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Group’s and the parent Company’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the Directors; and the overall presentation of the financial statements. In addition, we read all the financial and non financial information in the annual report to identify material inconsistencies with the audited financial statements. If we become aware of any apparent material misstatements or inconsistencies we consider the implications of our report

Opinion on financial statements

In our opinion the financial statements:

• give a true and fair view of the state of the Group’s and the parent Company’s affairs as at 31 December 2011 and of the Group’s loss and Company’s loss for the period then ended;

• have been properly prepared in accordance with IFRSs as adopted by the European Union; and• have been prepared in accordance with the requirements of the Companies Act 2006.

INDEPENDENT AUDITOR’S REPORT

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Separate opinion in relation to IFRSs as issued by the IASB

As explained in note 2 to the financial statements, the Group in addition to applying IFRSs as adopted by the European Union, has also applied IFRSs as issued by the International Accounting Standards Board (IASB).

In our opinion the group financial statements comply with IFRSs as issued by the IASB.

Opinion on other matter prescribed by the Companies Act 2006

In our opinion the information given in the Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements.

Matters on which we are required to report by exception

We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion:

• adequate accounting records have not been kept by the parent Company, or returns adequate for our audit have not been received from branches not visited by us; or

• the parent Company financial statements are not in agreement with the accounting records and returns; or• certain disclosures of Directors’ remuneration specified by law are not made; or• we have not received all the information and explanations we require for our audit.

Christopher Robertson (Senior Statutory Auditor)for and on behalf of Deloitte LLPChartered Accountants and Statutory Auditor Birmingham, UK27 February 2012


*Restated 52 weeks ended 31 December 52 weeks ended 1 January 2011 2011 Before Before non- Non- non- Non- recurring recurring recurring recurring £m Notes items items Total items items Total

Continuing operations

Revenue 4 1,677.7 – 1,677.7 1,643.2 – 1,643.2

Cost of sales* (1,239.8) – (1,239.8) (1,193.9) – (1,193.9)

Gross profit 437.9 – 437.9 449.3 – 449.3

Distribution costs* (85.5) – (85.5) (83.4) – (83.4)

Other administrative costs* (298.3) – (298.3) (287.9) – (287.9)

Exceptional items (net) 7 – 7.2 7.2 – 12.7 12.7

Bakkavor Group ehf management/royalty charge (1.2) – (1.2) (12.3) – (12.3)

Impairment of assets 8 – (76.9) (76.9) – – –

Total administrative costs (385.0) (69.7) (454.7) (383.6) 12.7 (370.9)

Loss on disposal of subsidiary 31 – (1.0) (1.0) – – –

Loss on disposal of associate 32 – (1.6) (1.6) – – –

Share of results of associates after tax 17 1.1 – 1.1 1.0 – 1.0

Operating profit/(loss) 6 54.0 (72.3) (18.3) 66.7 12.7 79.4

Investment revenue 10 0.1 – 0.1 0.1 – 0.1

Finance costs 12 (65.2) – (65.2) (67.8) – (67.8)

Other gains (net) 11 6.0 – 6.0 9.7 – 9.7

(Loss)/profit before tax (5.1) (72.3) (77.4) 8.7 12.7 21.4

Tax 13 3.2 (0.8) 2.4 (10.6) (3.6) (14.2)

(Loss)/profit for the period (1.9) (73.1) (75.0) (1.9) 9.1 7.2

Attributable to:

Equity holders of the parent (0.4) (73.1) (73.5) (2.3) 9.1 6.8

Non-controlling interests (1.5) – (1.5) 0.4 – 0.4

(1.9) (73.1) (75.0) (1.9) 9.1 7.2 *Cost of sales, distribution costs and other administrative costs have been restated for the 52 weeks ended 1 January 2011. Refer to note 5 for the impact of this restatement.

CONSOLIDATED INCOME STATEMENT

52 WEEKS ENDED 31 DECEMBER 2011

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52 weeks 52 weeks ended ended 31 December 1 January

£m Notes 2011 2011

(Loss)/profit for the period (75.0) 7.2

Other comprehensive (expense)/income

Exchange differences on translation of foreign operations (2.1) (0.1)

Net exchange gains recycled to income statement on disposal of subsidiary 31 (0.4) -

Actuarial (loss)/gain on defined benefit pension schemes 36 (18.9) 8.9

Tax relating to components of other comprehensive income 13 5.0 (2.5)

(16.4) 6.3

Total comprehensive (expense)/income (91.4) 13.5

Attributable to:

Equity holders of the parent (89.9) 13.1

Non-controlling interests (1.5) 0.4

(91.4) 13.5

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME



£m Notes 31 December 2011 1 January 2011

Non-current assetsGoodwill 14 667.1 739.9Other intangible assets 15 35.7 49.2Property, plant and equipment 16 307.7 314.6Interests in associates 17 10.0 12.2Other investments 18 0.1 0.1Trade and other receivables 20 – 0.3Retirement benefit asset 36 9.3 11.8 1,029.9 1,128.1

Current assets Inventories 19 62.5 56.6Trade and other receivables 20 190.1 189.7Assets classified as held for sale 21 – 7.9Derivative financial instruments 24 0.4 1.0Cash and cash equivalents 22 30.1 40.8 283.1 296.0

Total assets 1,313.0 1,424.1

Current liabilities Trade and other payables 27 (315.2) (311.3)Current tax liabilities (17.3) (17.9)Borrowings 23 (32.6) (56.1)Obligations under finance leases 26 (0.8) (2.8)Provisions 28 (1.8) (1.8)Derivative financial instruments 24 (17.9) (24.8) (385.6) (414.7)

Non-current liabilities Trade and other payables 27 (0.3) (0.2)Borrowings 23 (586.3) (564.3)Obligations under finance leases 26 (1.8) (3.0)Provisions 28 (10.6) (12.7)Deferred tax liabilities 25 (27.1) (36.5)Amounts due to other group companies 37 – (205.0) (626.1) (821.7)

Total liabilities (1,011.7) (1,236.4)

Net assets 301.3 187.7

Equity Share capital 30 0.1 0.1Share premium 30 302.4 96.6Merger reserve 30 45.2 45.2Capital reserve 30 4.0 4.0Translation reserve 30 23.7 26.2Retained earnings (75.3) 12.1

Equity attributable to equity holders of the parent 300.1 184.2Non-controlling interests 1.2 3.5

Total equity 301.3 187.7

The financial statements of Bakkavor Finance (2) plc and the accompanying notes, which form an integral part of the consolidated financial statements, were approved by the Board of Directors on 27 February 2012. They were signed on behalf of the Board of Directors by:

A Gudmundsson Director

31 DECEMBER 2011

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

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Equity attributable to equity holders of the Company Non Share Share Merger Capital Translation Retained controlling Total £m capital premium reserve reserve reserve earnings Total interests equity

Balance at 2 January 2010 0.1 96.6 45.2 4.0 26.3 (2.1) 170.1 2.8 172.9

Profit for the period – – – – – 6.8 6.8 0.4 7.2

Other comprehensive income for the period – – – – (0.1) 6.4 6.3 – 6.3

Total comprehensive income for the period – – – – (0.1) 13.2 13.1 0.4 13.5

Acquisition of subsidiary – – – – – 1.0 1.0 0.7 1.7

Dividends paid – – – – – – – (0.4) (0.4)

Balance at 1 January 2011 0.1 96.6 45.2 4.0 26.2 12.1 184.2 3.5 187.7

Loss for the period – – – – – (73.5) (73.5) (1.5) (75.0)

Other comprehensive income for the period – – – – (2.5) (13.9) (16.4) – (16.4)

Total comprehensive income for the period – – – – (2.5) (87.4) (89.9) (1.5) (91.4)

Acquisition of subsidiary – – – – – – – (0.8) (0.8)

New shares issued – 205.8 – – – – 205.8 – 205.8

Balance at 31 December 2011 0.1 302.4 45.2 4.0 23.7 (75.3) 300.1 1.2 301.3


CONSOLIDATED STATEMENT OF CHANGES IN EQUITY


52 weeks 52 weeks ended ended 31 December 1 January £m Notes 2011 2011

Net cash generated from operating activities 33 35.8 76.5

Investing activities:

Interest received 0.1 0.1

Dividends received from associates 1.0 1.3

Purchases of property, plant and equipment (41.8) (20.9)

Proceeds from disposals of property, plant and equipment 1.9 0.1

Payment of contingent consideration 32 – (9.9)

Payment of deferred consideration 32 (4.6) (6.8)

Acquisition of subsidiary net of cash acquired 32 (0.2) –

Disposal of subsidiary net of cash disposed of 31 2.6 –

Net cash used in investing activities (41.0) (36.1)

Financing activities:

Dividends paid to non-controlling interests – (0.4)

Increase in borrowings 352.2 –

Repayments of borrowings (354.5) (32.2)

Repayments of obligations under finance leases (2.9) (4.3)

Net cash used in financing activities (5.2) (36.9)

Net (decrease)/increase in cash and cash equivalents (10.4) 3.5

Cash and cash equivalents at beginning of period 40.8 37.4

Effect of foreign exchange rate changes (0.3) (0.1)

Cash and cash equivalents at end of period 30.1 40.8


CONSOLIDATED STATEMENT OF CASH FLOWS

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General information

Bakkavor Finance (2) plc (the “Company”) was incorporated in the United Kingdom under the Companies Act 2006 on 21 January 2011 as a Limited Liability Company for the purpose of becoming an intermediate holding Company of the group previously headed by Bakkavor Holdings Limited and being the issuing Company of senior secured notes. On 4 February 2011 the Company was registered as a Public Limited Company and issued 50,000 £1 ordinary shares to Bakkavor Finance (1) Ltd. On 7 February 2011 the Company issued a seven year £350 million listed bond and refinanced the existing bank facilities through a term loan and RCF facility of £380 million that will expire on 30 June 2014. The Company’s ultimate parent Company and controlling party is Bakkavor Group ehf, a Company registered in Iceland. The address of the registered office is given on page 108. The principal activities of the Company and its subsidiaries (the “Group”) comprise preparation and marketing of fresh prepared foods and the marketing and distribution of fresh produce. These activities are undertaken in the UK, Continental Europe, Asia and the US and products are primarily sold through high street supermarkets.

In the current year, the Group has adopted the following interpretations with no material impact on the financial statements of the Group:

IFRS 1 (Revised) First Time Adoption of IFRSs – Improvements to IFRSsIFRS 7 (Revised) Financial Instruments: Disclosures – Improvements to IFRSsIAS 1 (Revised) Presentation of Financial Statements – Improvements to IFRSsIAS 24 (Revised) Related Party Disclosures – Definition of Related PartiesIAS 27 (Revised) Consolidated and Separate Financial Statements – Improvements to IFRSsIAS 32 (Revised) Financial Instruments: Presentation – Classification of Rights IssueIAS 34 (Revised) Interim Financial Reporting – Improvements to IFRSsIFRIC 13 Customer Loyalty ProgrammesIFRIC 14 IAS 19 – the Limit on a Defined Benefit Asset, Minimum Funding

Requirements and their InteractionIFRIC 14 (Nov 2009)IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments

1

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED


1

2

General information continued

At the date of authorisation of these financial statements, the following Standards and Interpretations which have not been applied in these financial statements were in issue but not yet effective (and in some cases have not yet been adopted by the EU):

IFRS 1 (Revised) First Time Adoption of IFRSs – Fixed Dates for certain exceptions with Date of Transition to IFRSs

IFRS 7 (Revised) Financial Instruments: Disclosures – Transfers of Financial AssetsIFRS 9 (Revised) Financial Instruments: Classification and MeasurementIFRS 10 Consolidated Financial StatementsIFRS 11 Joint ArrangementsIFRS 12 Disclosure of Interests in Other EntitiesIFRS 13 Fair Value MeasurementIAS 1 (Revised) Presentation of Financial Statements – Comprehensive IncomeIAS 12 (Revised) Income Taxes – Recovery of Underlying AssetsIAS 19 (Revised) Employee Benefits – Post Employment and Termination Benefits ProjectIAS 27 (Revised) Separate Financial StatementsIAS 28 (Revised) Investments in Associates and Joint VenturesAmendments to IAS 32 (Dec 2011)Amendments to IFRS 7 (Dec 2011)Amendments to IFRS 1 (Dec 2010)IAS 24 (revised Nov 2009)Amendment to IAS 32 (Oct 2009)IFRIC 20

With the exception of IFRS 9 Financial Instruments, the Directors anticipate that the adoption of these Standards and Interpretations in future periods will have no material impact on the financial statements of the Group. The adoption of IFRS 9 Financial Instruments which the Group plans to adopt for the year beginning on 30 December 2012 will impact both the measurement and disclosures of Financial Instruments. It is not practical to quantify the future impact of the application of IFRS 9.

Significant accounting policies

Basis of accounting

The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs). The financial statements have also been prepared in accordance with IFRSs adopted by the European Union.

These financial statements are presented in Pounds Sterling because that is the currency of the primary economic environment in which the Group operates. Foreign operations are included in accordance with the foreign currency policy set out below.

The financial statements have been prepared on the historical cost basis, except for the revaluation of financial instruments. The principal accounting policies adopted are set out below.

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Significant accounting policies continued

Corporate Reorganisation

In February 2011 a corporate reorganisation was completed in order to establish Bakkavor Finance (2) plc as an intermediate holding Company of the Group and was accounted for using the principles of merger accounting. As the corporate reorganisation did not have a direct result on the Group and the underlying business has operated for all periods, the Board of Directors have prepared the financial statements to present all years on a comparative basis as if the Company had existed for all periods. Therefore the comparative figures and the first 20 days of January 2011 relate to its indirect parent, Bakkavor Holdings Limited.

Going Concern

The Directors have reviewed the historical trading performance of the Group and the forecasts through to March 2013, to assess the level of finance required across the Group. Refer to page 34, for the Directors’ consideration of going concern.

Basis of consolidation

The Group financial statements comprise the financial statements of the parent undertaking and its subsidiary undertakings, together with the Group’s share of the results of associated undertakings made up to a 53 or 52 week period ending on the Saturday nearest to 31 December. Where the fiscal year 2011 is quoted in these financial statements this relates to the 52 week period ending 31 December 2011. The fiscal year 2010 relates to the 52 week period ending 1 January 2011.

Subsidiaries

Subsidiary undertakings are included in the Group financial statements from the date on which control over the operating and financial policies is obtained, and cease to be consolidated from the date on which control is transferred out of the Group. Control exists when the Group has the power directly, or indirectly, to govern the financial and operating policies of an entity so as to obtain economic benefits from its activities.

Associates

An associate is an entity over which the Group is in a position to exercise significant influence, but not control or joint control, through participation in the financial and operating policy decisions of the investee. Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies. The results and assets and liabilities of associates are incorporated in these financial statements using the equity method of accounting. Investments in associates are carried in the balance sheet at cost as adjusted by post-acquisition changes in the Group’s share of the net assets of the associate, less any impairment in the value of individual investments.

Goodwill within the associate is separately identifiable at the date of acquisition. Any negative goodwill is credited in profit or loss in the period of acquisition.

Where a Group company transacts with an associate of the Group, profits and losses are eliminated to the extent of the Group’s interest in the relevant associate. Losses may provide evidence of an impairment of the asset transferred in which case appropriate provision is made for impairment.

2



2Significant accounting policies continued

Business combinations

Business acquisitions with third parties are accounted for using the purchase method. The cost of the acquisition is measured at the aggregate of the fair values, at the date of exchange, of assets given, liabilities incurred or assumed, and equity instruments issued by the Group in exchange for control of the acquiree. The acquiree’s identifiable assets, liabilities and contingent liabilities that meet the conditions for recognition under IFRS 3 are recognised at their fair value at the acquisition date.

Goodwill arising on business combinations is recognised as an asset and initially measured at cost, being the excess of the cost of the business combination over the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities recognised. If, after reassessment, the Group’s interest in the net fair value of the acquiree’s identifiable assets, liabilities and contingent liabilities exceeds the cost of the business combination, the excess is recognised immediately in profit or loss.

The interest of minority shareholders in the acquiree is initially measured at the minority’s proportion of the net fair value of the assets, liabilities and contingent liabilities recognised.

Where a business combination is achieved in stages, the Group’s previously-held interests in the acquired entity are re-measured to fair value at the acquisition date (i.e. the date the Group attains control) and the resulting gain or loss, if any, is recognised in profit or loss.

Goodwill

Goodwill arising on consolidation represents the excess of the cost of acquisition over the Group’s interest in the fair value of the identifiable assets and liabilities of a subsidiary, associate or jointly controlled entity at the date of acquisition. Goodwill is initially recognised as an asset at cost and is subsequently measured at cost less any accumulated impairment losses. Goodwill which is recognised as an asset is reviewed for impairment at least annually. Any impairment is recognised immediately in profit or loss and is not subsequently reversed.

For the purpose of impairment testing, goodwill is allocated to each of the Group’s cash-generating units expected to benefit from the synergies of the combination. Cash-generating units to which goodwill has been allocated are tested for impairment annually, or more frequently when there is an indication that the unit may be impaired. If the recoverable amount of the cash-generating unit is less than the carrying amount of the unit, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro-rata on the basis of the carrying amount of each asset in the unit.

On disposal of a subsidiary, associate or jointly controlled entity, the attributable amount of goodwill is included in the determination of the profit or loss on disposal.

Other intangible assets

Intangible assets have finite useful lives over which the assets are amortised on a straight line basis. The amortisation charge for each period is recognised as an expense on the following basis:

• Customer relationships and customer contracts – 10 years.

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Property, plant and equipment

All property, plant and equipment is stated in the statement of financial position at cost less any subsequent accumulated depreciation and subsequent accumulated impairment losses.

Depreciation is charged so as to write off the cost or valuation of assets, other than land and properties under construction, over their estimated useful lives, using the straight-line method, on the following bases:

Buildings 2% – 5%Fixtures and equipment 5% – 33%

Freehold land is not depreciated.

Assets held under finance leases are depreciated over their expected useful lives on the same basis as owned assets or, where shorter, over the term of the relevant lease.

Reviews of the estimated remaining useful lives of and residual values of individual productive assets are performed annually, taking account of commercial and technological obscelence as well as normal wear and tear. All items of property, plant and equipment are reviewed for impairment when there are indications that the carrying value may not be recoverable.

The gain or loss arising on the disposal or retirement of an asset is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in the income statement.

Impairment

The useful economic lives of intangible assets are determined based on a review of a combination of factors including the asset ownership rights and the nature of the overall product life cycle.

Intangible assets and property, plant and equipment are tested for impairment when an event that might affect asset values has occurred. An impairment loss is recognised, in the Income Statement, to the extent that the carrying amount cannot be recovered either by selling the asset or by the discounted future earnings from operating the assets in accordance with IAS 36 “Impairment of Assets”.

Goodwill is tested annually for impairment. Any impairment losses are written off immediately.

Inventories

Inventories are stated at the lower of cost and net realisable value. Cost comprises direct materials and, where applicable, direct labour costs and those overheads that have been incurred in bringing the inventories to their present location and condition. Cost is calculated using the weighted average method. Net realisable value represents the estimated selling price less all estimated costs of completion and costs to be incurred in marketing, selling and distribution.

2




Assets held under leases

Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases.

Finance leases

Assets held under finance leases are recognised as assets of the Group at their fair value or, if lower, at the present value of the minimum lease payments, each determined at the inception of the lease. The corresponding liability to the lessor is included in the statement of financial position as a finance lease obligation. Lease payments are apportioned between finance charges and reduction of the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. The interest element of the finance cost is charged to the Income Statement over the lease period. Assets held under finance leases are depreciated over the shorter of the their expected useful lives or the lease term, taking into account the time period over which benefits from the leased assets are expected to accrue to the Group.

Operating leases

Rentals payable under operating leases are charged to income on a straight-line basis over the term of the relevant lease. Benefits received and receivable as an incentive to enter into an operating lease are also spread on a straight-line basis over the lease term. Income earned from operating leases is credited to the income statement when earned.

Revenue recognition

Revenue is measured at the fair value of the consideration received or receivable and represents amounts receivable for goods provided in the normal course of business, net of discounts, VAT and other sales-related taxes.

The Group sells fresh prepared foods and fresh produce. Revenue from the sales of these goods is recognised when all of the following conditions are satisfied:

• the Group has transferred to the buyer the significant risks and rewards of ownership of the goods;• the Group retains neither continuing managerial involvement to the degree usually associated with ownership

nor effective control over the goods sold;• the amount of revenue can be measured reliably;• it is probable that the economic benefits associated with the transaction will flow into the entity;• the costs incurred or to be incurred in respect of the transaction can be measured reliably.

As a result, revenue for the sale of these goods is generally recognised upon delivery to the customer.

2

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Foreign currencies

The individual financial statements of each Group company are presented in the currency of the primary economic environment in which it operates (its functional currency). For the purpose of the consolidated financial statements, the results and financial position of each Group company are expressed in Pounds Sterling, which is the functional currency of the Company, and the presentation currency for the consolidated financial statements.

In preparing the financial statements of the individual Companies, transactions in currencies other than the entity’s functional currency (foreign currencies) are recorded at the rates of exchange prevailing on the dates of the transactions. At each statement of financial position date, monetary assets and liabilities that are denominated in foreign currencies are retranslated at the rates prevailing on the statement of financial position date. Non-monetary items carried at fair value that are denominated in foreign currencies are translated at the rates prevailing at the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated.

Exchange differences arising on the settlement of monetary items, and on the retranslation of monetary items, are included in profit or loss for the period. Exchange differences arising on the retranslation of non-monetary items carried at fair value are included in profit or loss for the period except for differences arising on the retranslation of non-monetary items in respect of which gains and losses are recognised directly in equity. For such non-monetary items, any exchange component of that gain or loss is also recognised directly in equity.

For the purpose of presenting consolidated financial statements, the assets and liabilities of the Group’s foreign operations are translated at exchange rates prevailing on the statement of financial position date. Income and expense items are translated at the annual average rate, unless exchange rates fluctuate significantly during that period, in which case the exchange rates at the date of transactions are used. Exchange differences arising, if any, are classified as equity and transferred to the Group’s translation reserve. Such translation differences are recognised as income or as expenses in the period in which the operation is disposed of.

Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate.

Government grants

Government grants are not recognised until there is reasonable assurance that the Group will comply with the conditions attaching to them and that the grants will be received.

Government grants towards staff re-training costs are recognised as income over the periods necessary to match them with the related costs and are deducted in reporting the related expense.

Government grants relating to property, plant and equipment are treated as deferred income and released to profit or loss over the expected useful lives of the assets concerned.

Research and development

Research and developments costs comprise all directly attributable costs necessary to create and produce new products which are both new in design and those being modified. Expenditure on research and development is recognised as an expense in the period in which it is incurred.




Operating profit

Operating profit is stated after charging/crediting exceptional items (as presented in note 7), disposal of subsidiaries and associates, impairment of assets (as presented in note 8) and share of results of associates but before investment income and finance costs.

Retirement benefit obligations

Defined contribution plans

A defined contribution plan is a pension plan under which the Group pays fixed contributions into a separate entity, which then invests the contributions to buy annuities for the pension liabilities as they become due based on the value of the fund, hence the Group has no legal or constructive obligations to pay further contributions. Obligations for contributions to defined contribution pension plans are recognised as an expense in the Income Statement as employee service is received. Prepaid contributions are recognised as an asset to the extent that a cash refund or a reduction in future payments is available. Payments made to state-managed retirement benefit schemes are dealt with as payments to defined contribution schemes where the Group’s obligations under the schemes are equivalent to those arising in a defined contribution retirement benefit scheme.

Defined benefit pension plans

A defined benefit plan is a pension plan that defines the amount of pension benefit that an employee will receive on retirement, usually dependent on factors such as age, years of service and compensation.

For defined benefit schemes, the cost of providing benefits is determined using the Projected Unit Credit Method, with actuarial valuations being carried out at each statement of financial position date. Actuarial gains and losses are recognised in full in the period in which they occur. They are recognised outside profit or loss and presented in the statement of comprehensive income.

Past service cost is recognised immediately to the extent that the benefits are already vested, and otherwise is amortised on a straight-line basis over the average period until the benefits become vested.

The retirement benefit recognised in the statement of financial position represents the present value of the defined benefit obligation as adjusted for unrecognised past service cost, and as reduced by the fair value of scheme assets. Any asset resulting from this calculation is limited to past service cost, plus the present value of available refunds and reductions in future contributions to the scheme.

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Taxation

The tax expense represents the sum of the tax currently payable and deferred tax.

The tax currently payable is based on taxable profit for the year. Taxable profit differs from net profit as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the statement of financial position date.

Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from the initial recognition of goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the tax profit nor the accounting profit.

Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries and associates, and interests in joint ventures, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. The carrying amount of deferred tax assets is reviewed at each statement of financial position date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.

Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised. Deferred tax is charged or credited in the income statement, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity.

Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities on a net basis.

Capitalisation of finance costs

Finance costs are netted against the loan finance to which it relates. These costs, together with the interest expense, are allocated to the Income Statement over the term of the finance facility at a constant rate on the carrying amount.

Financial assets

All financial assets are recognised and derecognised on a trade date where the purchase or sale of a financial asset is under a contract whose terms require delivery of the financial asset within the timeframe established by the market concerned, and are initially measured at fair value, plus transaction costs, except for those financial assets classified as at fair value through profit or loss, which are initially measured at fair value.

Financial assets are classified into the following specified categories: financial assets at ‘fair value through profit or loss’ (FVTPL), ‘held-to-maturity’ investments, and ‘loans and receivables’. The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition.




Financial assets continued

Effective interest method

Income is recognised on an effective interest basis for debt instruments other than those financial assets designated as at FVTPL. The effective interest method is a method of calculating the amortised cost of a debt instrument and of allocating interest income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts (including all fees on points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the debt instrument, or, where appropriate, a shorter period, to the net carrying amount on initial recognition.

Financial assets at FVTPL

Financial assets are classified as at FVTPL where the financial asset is either held for trading or it is designated as at FVTPL.

A financial asset is classified as held for trading if:

• It has been acquired principally for the purpose of selling in the near term; or• On initial recognition it is a part of a portfolio of identified financial instruments that the Group manages

together and has a recent actual pattern of short-term profit-taking; or• It is a derivative that is not designated and effective as a hedging instrument.

A financial asset other than a financial asset held for trading may be designated as at FVTPL upon initial recognition if:

• Such designation eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise; or

• The financial asset forms part of a group of financial assets or financial liabilities or both, which is managed and its performance is evaluated on a fair value basis, in accordance with the Group’s documented risk management or investment strategy, and information about the Group is provided internally on that basis; or

• It forms part of a contract containing one or more embedded derivatives, and IAS 39 Financial Instruments: Recognition and Measurement permits the entire combined contract (asset or liability) to be designated as at FVTPL.

Financial assets at FVTPL are stated at fair value, with any gains or losses arising on remeasurement recognised in profit or loss. The net gain or loss recognised in profit or loss incorporates any dividend or interest earned on the financial asset and is included in the ‘other gains and losses’ line item in the income statement. Fair value is determined in the manner described in note 29.

Loans and receivables

Trade receivables, loans and other receivables that have fixed or determinable payments that are not quoted in an active market are classified as ‘loans and receivables’. Loans and receivables are measured at amortised cost using the effective interest method, less any impairment. Interest income is recognised by applying the effective interest rate, except for short term receivables when the recognition of interest would be immaterial.

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Financial assets continued

Impairment of financial assets

Financial assets, other than those at FVTPL, are assessed for indicators of impairment at each statement of financial position date. Financial assets are impaired where there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the investment have been affected.

Objective evidence of impairment could include:

• significant financial difficulty of the issuer or counterparty; or• default or delinquency in interest or principal payments; or• it becoming probable that the borrower will enter bankruptcy or financial re-organisation.

For certain categories of financial assets such as trade receivables, assets that are assessed not to be impaired individually are, in addition, assessed for impairment on a collective basis. Objective evidence of impairment for a portfolio of receivables could include the Group’s past experience of collecting payments, an increase in the number of delayed payments in the portfolio past the average credit period, as well as observable changes in national and local economic conditions that correlate with default on receivables.

For financial assets carried at amortised cost, the amount of the impairment is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the financial asset’s original effective interest rate.

The carrying amount of the financial asset is reduced by the impairment loss directly for all financial assets with the exception of trade receivables, where the carrying amount is reduced through the use of an allowance account. When a trade receivable is considered uncollectible, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited against the allowance account. Changes in the carrying amount of the allowance account are recognised in the income statement.

If in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, the previously recognised impairment loss is reversed through the income statement to the extent that the carrying amount of the asset at the date the impairment is reversed does not exceed what the amortised cost would have been had the impairment not been recognised.

Cash and cash equivalents

Cash and cash equivalents comprise cash on hand and short-term bank deposits with an original maturity of three months or less, and other short-term highly liquid investments that are readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value.

Derecognition of financial assets

The Group derecognises a financial asset only when the contractual rights to the cash flows from the asset expire; or it transfers the financial asset and substantially all the risks and rewards of ownership of the asset to another entity.




Financial liabilities

Financial liabilities held by the Group are classified as other financial liabilities at amortised cost and derivatives at FVTPL.

Financial liabilities at FVTPL

Financial liabilities are classified as at FVTPL where the financial liability is either held for trading or it is designated as at FVTPL.

A financial liability is classified as held for trading if:

• It has been incurred principally for the purpose of disposal in the near future; or• It is a part of an identified portfolio of financial instruments that the Group manages together and has a recent

actual pattern of short-term profit-taking; or• It is a derivative that is not designated and effective as a hedging instrument.

A financial liability other than a financial liability held for trading may be designated as at FVTPL upon initial recognition if:

• Such designation eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise; or

• The financial liability forms part of a group of financial assets or financial liabilities or both, which is managed and its performance is evaluated on a fair value basis, in accordance with the Group’s documented risk management or investment strategy, and information about the Group is provided internally on that basis; or

• It forms part of a contract containing one or more embedded derivatives, and IAS 39 Financial Instruments: Recognition and Measurement permits the entire combined contract (asset or liability) to be designated as at FVTPL.

Financial liabilities at FVTPL are stated at fair value, with any resultant gain or loss recognised in profit or loss. The net gain or loss recognised in profit or loss incorporates any interest paid on the financial liability. Fair value is determined in the manner described in note 29.

Other financial liabilities

Other financial liabilities, including borrowings, are initially measured at fair value, net of transaction costs. Other financial liabilities are subsequently measured at amortised cost using the effective interest method, with interest expense recognised on an effective yield basis. The effective interest method is a method of calculating the amortised cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the financial liability to its net carrying amount on initial recognition.

Derecognition of financial liabilities

The Group derecognises financial liabilities when, and only when, the Group’s obligations are discharged, cancelled or they expire.

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Derivative financial instruments

The Group’s activities expose it primarily to the financial risks of changes in foreign currency exchange rates and interest rates. The Group uses foreign exchange forward contracts and interest rate swap contracts to manage these exposures. The Group does not use derivative financial instruments for speculative purposes.

The use of financial derivatives is governed by the Group’s policies approved by the Board of Directors, which provide written principles on the use of financial derivatives. Changes in the fair value of derivative financial instruments are recognised in the income statement as they arise.

Derivatives embedded in other financial instruments or other host contracts are treated as separate derivatives when their risks and characteristics are not closely related to those of host contracts and the host contracts are not carried at fair value, with gains or losses reported in the income statement.

Provisions

Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that the Group will be required to settle that obligation and a reliable estimate can be made of the amount of the obligation.

The amount recognised as a provision is the best estimate of the consideration required to settle the present obligation at the statement of financial position date, taking into account the risks and uncertainties surrounding the obligation. Where a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows.

When some or all of the economic benefits required to settle a provision are expected to be recovered from a third party, a receivable is recognised as an asset if it is virtually certain that reimbursement will be received and the amount of the receivable can be measured reliably.

A restructuring provision is recognised when the Group has developed a detailed formal plan for the restructuring and has raised a valid expectation in those affected that it will carry out the restructuring by starting to implement the plan or announcing its main features to those affected by it. The measurement of a restructuring provision includes only the direct expenditures arising from the restructuring, which are those amounts that are both necessarily entailed by the restructuring and not associated with the ongoing activities of the entity.

Present obligations arising from onerous contacts are recognised and measured as provisions. An onerous contract is considered to exist where the Group has a contract under which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it.

Contingent liabilities

A contingent liability is a possible obligation that arises from past events and the existence of which will only be confirmed by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the Group or the amount of the obligation cannot be measured reliably. A contingent liability is not recognised but it is disclosed in the notes to the financial statements. When an outflow becomes probable, it is recognised as a provision.



3Critical accounting judgements and key sources of estimation uncertainty

Critical judgements in applying the Group’s accounting policies

The following are areas of particular significance to the Group’s financial statements and include the application of judgement, which is fundamental to the compilation of a set of financial statements:

Going concern

The Directors, in their detailed consideration of going concern, have reviewed the Group’s future cash forecasts and revenue projections, which they believe are based on prudent market data and past experience, and believe, based on those forecasts and projections, that it is appropriate to prepare the financial statements of the Group on a going concern basis.

In arriving at this conclusion the Directors considered the Group’s financing arrangements, which comprise £380m of bank facilities committed to June 2014 and £350m of seven year listed bonds issued in February 2011. Importantly, the Group’s liquidity remains particularly strong with £110m of facilities undrawn as at 31 December 2011.

The bank facilities are subject to a series of covenants set by the lenders. Financial covenants are measured quarterly and include an assessment of leverage (the ratio of net debt to “EBITDA” (Earnings before interest, tax, depreciation and amortisation); cashflow cover (the ratio of finance charges to cash generated from operations); interest cover (the ratio of finance charges to EBITDA) and capital expenditure limits. The key financial covenant is leverage which must be less than 5.75 times at 31 December 2011 and less than 5.0 times at 31 December 2012. At 31 December 2011 the leverage ratio of net debt to EBITDA was 5.5 times. At the date of this report the Group has complied in all respects with the terms of its borrowing agreements, including its financial covenants.

The Group believes it is adequately placed to manage covenant compliance successfully despite the challenging macro economic environment. In the event that conditions worsen, the Group has the flexibility to react by accessing additional working capital arrangements that we have already agreed with key stakeholders. Further actions available to management may include a reduction to our capital expenditure programme and supply chain improvements. Should this situation change, we believe that constructive discussions with our lenders would enable the covenant to be reset, although we recognise that this could result in increased costs to the business.

Consequently the Directors have formed a reasonable expectation that the Company and the Group have adequate resources to meet their liabilities as they fall due. For this reason, they continue to adopt the going concern basis in preparing the financial statements.

Impairment of goodwill and other intangible assets

Impairment reviews in respect of goodwill are performed annually unless an event indicates that an impairment review is necessary. Impairment reviews in respect of definite life intangible assets are performed when an event indicates that an impairment review is necessary. Examples of such triggering events include a significant planned restructuring, a major change in market conditions or technology, expectations of future operating losses, or a significant reduction in cash flows.

The Group has recently undergone an internal restructuring, which also triggered a re-evaluation of its cash generating units (‘CGUs’). As a consequence, the Group has increased the number of CGUs across the business to reflect the revised lowest level of identifiable cash flows. This re-organisation does not impact the level at which information is reviewed by the chief operating decision maker and as a consequence our reporting segments (as defined in note 4) remain unchanged.

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3Critical accounting judgements and key sources of estimation uncertainty continued

Impairment of goodwill and other intangible assets continued

The recoverable amount of CGUs are determined based on the higher of net realisable value and value-in use calculations. These calculations require the use of estimates.

The Group has considered the impact of the assumptions used on the calculations and has conducted sensitivity analysis on the impairment tests of the CGUs carrying values. See note 14 for further details.

Fair value of derivatives and other financial instruments

Derivative financial instruments and certain other financial assets are recorded at fair value in the statement of financial position. The fair value of the financial instruments that do not have quoted market prices requires significant judgement and estimates. The Directors use their judgement in selecting an appropriate valuation technique for these financial instruments. Valuation techniques commonly used by market practitioners are applied.

For derivative financial instruments, assumptions are made based on quoted market rates adjusted for specific features of the instrument. Other financial instruments are valued using a discounted cash flow analysis based on assumptions supported, where possible, by observable market prices or rates. The estimation of fair value of unlisted shares includes some assumptions not supported by observable market prices or rates. These assumptions are based on past and expected future performance. Details of the assumptions used and of the results of sensitivity analyses regarding these assumptions are disclosed in note 29.

Pensions

The Group maintains a number of defined benefit pension plans for which it has recorded a pension asset or liability. The pension asset/liability is based on an actuarial valuation that requires a number of assumptions including discount rate, mortality rates and actual return on plan assets that may necessitate material adjustments to this asset/liability in the future. The assumptions used by the Group are the best estimates based on historical trends and the composition of the work force. Details of the principal actuarial assumptions used in calculating the recognised asset/liability for the defined benefit plan is given in note 36.

Recognition of deferred tax assets and current tax provision

The recognition of deferred tax assets is based upon whether it is probable that sufficient and suitable taxable profits will be available in the future against which the reversal of temporary differences can be deducted. Where the temporary differences related to losses, the availability of the losses to offset against forecast taxable profits is also considered. Recognition therefore involves judgement regarding the future financial performance of the particular legal entity or tax group in which the deferred tax asset has been recognised.

The Group operates in various countries and its income tax returns are subject to audit and adjustment by local tax authorities. The nature of the Group’s tax exposures is often complex and subject to change and the amounts at issue can be substantial. The Group develops an estimate of the potential tax liability based on the tax positions taken, historical experience and its internal tax expertise. These estimates are refined as additional information becomes known. Any outcome upon settlement that differs from a recorded provision may result in a materially higher or lower tax expense in future periods. The impact of any such adjustments is disclosed in note 25. The Group had unrecognised deferred tax assets as a result of unused tax losses of £17.9 million (2010: £18.9 million), available for offset against future profits. Deferred tax assets are not recognised on the losses carried forward to the extent that it is not probable that the losses will be utilised.



4Segment information

The chief operating decision-maker has been defined as the executive Directors. They review the Group’s internal reporting in order to assess performance and allocate resources. Management has determined the segments based on these reports.

The Group is geographically diverse and within the UK operates primarily within the prepared food and produce markets. Management assess the performance of the Group based on geographic location and splits the UK business into Prepared and Produce segments.

As at the statement of financial position date, the Group is organised as follows:

• UK Prepared Foods: The preparation and marketing of fresh prepared foods for distribution in the UK.• UK Produce: The marketing and distribution of fresh produce in the UK.• Continental Europe: The preparation and marketing of fresh prepared foods and the marketing and distribution of

fresh produce in Europe.• Rest of World: The preparation and marketing of fresh prepared foods and the marketing and distribution of

fresh produce in the rest of the world.

The Group’s segment measure of profit represents operating profit before exceptional items (as presented in note 7), disposals of subsidiaries, associates and property, plant and equipment, impairment of assets (as presented in note 8), management charges and share of results of associates.

Measures of total assets are provided to the chief operating decision-maker; however cash and cash equivalents, short term deposits and some other central assets are not allocated to individual segments. Measures of segment liabilities are not provided to the chief operating decision-maker.

The following table provides an analysis of the Group’s segment information for the period to 31 December 2011:

UK UK Continental Rest £m Prepared Produce Europe of World Unallocated Total

Revenue 1,322.5 84.9 208.0 62.3 – 1,677.7

Segment profit/(loss) 60.6 (1.3) (3.5) (1.4) – 54.4

Exceptional items 10.1 (1.6) (0.5) (0.8) – 7.2

Impairment of assets (23.5) (13.8) (25.4) (14.2) – (76.9)

Bakkavor Group ehf management charge (1.2)

Loss on disposal of subsidiary (1.0)

Loss on disposal of associate (1.6)

Loss on disposal of property, plant and equipment (0.3)

Share of results of associates 1.1

Operating loss (18.3)

Investment revenue 0.1

Finance costs (65.2)

Other gains (net) 6.0

Loss before tax (77.4)

Tax 2.4

Loss for the period (75.0)

Other segment information

Depreciation and amortisation (40.3) (1.2) (8.8) (3.0) – (53.3)

Adjusted EBITDA 100.9 (0.1) 5.3 1.6 – 107.7

Capital additions 31.6 0.1 3.7 1.1 – 36.5

Total assets 1,082.6 7.8 115.9 64.5 42.2 1,313.0

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4Segment information continued

The following table provides an analysis of the Group’s segment information for the period to 1 January 2011:

UK UK Continental Rest £m Prepared Produce Europe of World Unallocated Total

Revenue 1,274.0 108.5 202.9 57.8 – 1,643.2

Segment profit/(loss) 77.0 (1.0) 1.7 0.3 – 78.0

Exceptional items 14.9 (0.1) (1.5) (0.6) – 12.7

Bakkavor Group ehf royalty (12.3)

Share of results of associates 1.0

Operating profit 79.4

Investment revenue 0.1

Finance costs (67.8)

Other gains 9.7

Profit before tax 21.4

Tax (14.2)

Profit for the period 7.2

Other segment information

Depreciation and amortisation (40.1) (1.3) (9.3) (3.0) – (53.7)

Adjusted EBITDA 117.4 0.3 11.0 3.3 – 132.0

Capital additions 24.0 0.2 3.1 1.5 – 28.8

Total assets 1,116.3 40.6 171.9 77.6 17.7 1,424.1

Major customers

In 2011 the Group’s five largest customers accounted for 75% of total revenue (2010: 75%), with no single customer representing more than 28% (2010: 28%) of our global revenue. The Group does not enter into long-term contracts with its retail customers.



5

6

Cost of sales and other administrative costs restatement

The Group has reviewed the basis of calculation of the gross profit. As a result of this review the calculation has been amended. This is considered necessary to give a more accurate representation of the Group’s performance and to provide a more comparable measure to that of our competitor peer group. The gross profit restatement includes a reversal of historic overhead reclassifications and the extraction of distribution costs previously included with its gross profit.

The impact of the change is as follows:

As reported Restated 52 weeks 52 weeks ended ended 1 January Effect of 1 January £m 2011 change 2011

Revenue 1,643.2 – 1,643.2

Cost of sales (1,406.3) 212.4 (1,193.9)

Gross profit 236.9 212.4 449.3

Other distribution costs – (83.4) (83.4)

Other administrative costs (158.9) (129.0) (287.9)

Exceptional items 12.7 – 12.7

Bakkavor Group ehf royalty charge (12.3) – (12.3)

Total administrative costs (158.5) (212.4) (370.9)

Share of results of associates after tax 1.0 – 1.0

Operating profit 79.4 – 79.4

Operating (loss)/profit

(Loss)/profit for the period has been arrived at after charging/(crediting):


Depreciation of property, plant and equipment – owned 41.5 41.7

Depreciation of property, plant and equipment – leased 2.4 2.6

Research and development costs 5.6 5.5

Cost of inventory recognised as an expense 868.1 831.1

Write down of inventories recognised as an expense/(credit) 0.2 (1.2)

Amortisation of intangible assets included in other administrative expenses 9.4 9.4

Impairment of assets 76.9 –

Exceptional items (note 7) (7.2) (12.7)

Loss on disposal of property, plant and equipment 0.3 0.3

Loss on disposal of subsidiary (note 31) 1.0 –

Loss on disposal of associate (note 32) 1.6 –

Staff costs (note 9) 388.2 377.8

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6

7

Operating (loss)/profit continued

The analysis of auditor remuneration is as follows:

52 weeks 52 weeks ended ended 31 December 1 January £’000 2011 2011

Fees payable to the Company’s auditor for the audit of the Company’s annual accounts 85 –

The audit of the Company’s subsidiaries pursuant to legislation 549 650

Total audit fees 634 650

Tax services 313 38

Fees payable to the Company’s auditor and their associates for other services to the Group 281 75

Total non-audit fees 594 113

Of the total non-audit fees, £539,000 relates to the refinancing that was completed in February 2011.

Exceptional items (net)

Exceptional items are those that, in management’s judgement, should be disclosed by virtue of their nature or amount. Exceptional items are as follows:


Defined benefit pension scheme credits 12.0 15.8

Fire insurance claim – 0.6

Legal settlement 3.1 –

Restructuring costs (7.9) (3.7)

7.2 12.7

Defined benefit pension scheme

The exceptional non-cash credit of £12.0 million in 2011 and £15.8 million in 2010, relates to the defined benefit pension scheme. This has arisen due to changes to the scheme regarding future discretionary increases in 2010 and the closure of the defined benefit pension scheme to future accrual as at the end of March 2011.

Restructuring costs

In 2011, the Group incurred £7.9 million (2010: £3.7 million) of restructuring costs of which £6.8 million relates to redundancy costs and the remainder primarily comprises lease termination costs. The allocation of exceptional items by segment is shown in note 4 of the accounts.

Legal settlement

In 2011, the Group received £3.1 million (2010: £nil) from the settlement of a legal claim.



8

9

Impairment of assets


Impairment of goodwill 71.2 –

Impairment of intangible assets 4.0 –

Impairment of property, plant and equipment 1.7 –

76.9 –

The annual impairment review of the carrying value of goodwill and intangible assets has resulted in an impairment charge of £75.2 million in total. The majority of the goodwill and intangible assets have been impaired for the Produce, Europe and China businesses.

During the period, the Group also impaired property, plant and equipment by £1.7 million, in its UK businesses.

Staff costs

The average monthly number of employees (including executive Directors) during the year was:

2011 2010 Number Number

Production 15,730 15,593

Management and administration 1,815 1,625

Sales and distribution 873 896

18,418 18,114

Their aggregate remuneration comprised:


Wages and salaries 333.2 329.9

Social security and other costs 44.9 43.1

Other pension costs (10.1) (11.3)

368.0 361.7

Other pension costs includes £12.0 million of defined benefit pension credits (2010: £15.8 million) as per note 7.

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9

10

11

12

Staff costs continued

The Directors’ emoluments were as follows:

52 weeks 52 weeks ended ended 31 December 1 January £’000 2011 2011

Directors’ emoluments excluding pension contributions 819 3,189

Directors’ pension contributions 124 200

943 3,389

In addition one Director received £133,333 in the period for services provided in 2010.

The aggregate emoluments of the highest paid director were £596,520 (2010: £1,166,000). The accrued pension contributions of the highest paid director at 1 January 2011 were £77,250 (2010: £35,000).

Investment revenue


Interest on bank deposits 0.1 0.1

Other gains (net)


Increase in the fair value of derivative financial instruments 6.3 9.3

Foreign exchange (losses)/gains (0.3) 0.4

6.0 9.7

Finance costs


Interest on borrowings 59.7 46.3

Interest on obligations under finance leases 0.2 0.5

Amortisation of refinancing costs 3.8 11.8

Interest on loans from other group companies 0.7 8.1

Unwinding of discount on provisions 0.8 1.1

65.2 67.8



13Tax


Current tax 2.6 3.6

Deferred tax (note 25) (5.0) 10.6

(2.4) 14.2

Corporation tax is calculated at 26.5% (2010: 28%) of the estimated assessable (loss)/profit for the period. Taxation for other jurisdictions is calculated at the rates prevailing in the respective jurisdictions.

The (credit)/charge for the period can be reconciled to the (loss)/profit per the income statement as follows:

2011 2011 2010 2010 £m % £m %

(Loss)/profit before tax: (77.4) (100.0) 21.4 100.0

Tax at the UK corporation tax rate of 26.5% (2010: 28%) (20.5) (26.5) 6.0 28.0

Non-deductible expenses 20.9 27.0 4.0 18.7

Adjustment in respect of prior periods (0.8) (1.0) 3.3 15.4

R&D tax credits (1.7) (2.2) (0.3) (1.4)

Tax effect of utilisation of tax losses not previously recognised (1.0) (1.3) (0.8) (3.7)

Tax effect of losses carried forward 2.6 3.3 2.3 10.8

Overseas taxes at different rates 1.0 1.3 0.8 3.7

Release of deferred tax on IBA reversal (0.8) (1.0) (0.5) (2.3)

Deferred tax change in rate (2.1) (2.7) (0.6) (2.8)

Tax (credit)/charge and effective tax rate for the period (2.4) (3.1) 14.2 66.4

In addition to the amount credited to the income statement, a £5.0 million credit (2010: £2.5m charge) relating to tax has been recognised directly in other comprehensive income. No other tax charges have been recognised directly in equity.

During the year the relevant deferred tax balances have been re-measured as a result of the change in the UK main corporation tax rate to 26%, which was substantively enacted on 29 March 2011 and became effective from 1 April 2011; and to 25%, which was substantively enacted on 5 July 2011 and will be effective from 1 April 2012.

Further reductions to the UK corporation tax rate were announced in the March 2011 budget. The changes, which are expected to be enacted separately each year, propose to reduce the rate by 1% per annum to 23% by 1 April 2014. The changes had not been substantively enacted at the balance sheet date and therefore are not recognised in these financial statements.

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14Goodwill

£m

Cost

At 2 January 2010 739.7

Adjustment to consideration on acquisition of subsidiaries (note 32) (6.2)

Acquisition of business (note 32) 6.1

Exchange differences 0.3

At 1 January 2011 739.9

Adjustment to consideration on acquisition of subsidiaries (note 32) 0.1

Acquisiton of subsidiaries (note 32) 0.4

Disposal of subsidiary (note 31) (1.3)

Exchange differences (0.8)

At 31 December 2011 738.3

Accumulated impairment losses

At 2 January 2010 & 1 January 2011 –

Impairment (71.2)

At 31 December 2011 (71.2)

Carrying amount

At 31 December 2011 667.1

At 1 January 2011 739.9

Goodwill acquired in a business combination is allocated, at acquisition, to the cash generating units (CGUs) that are expected to benefit from that business combination. A summary of the allocation of carrying value of goodwill is as follows:

31 December 1 January £m 2011 2011

UK Prepared 604.1 627.6

Produce – 10.8

Europe 36.5 63.3

Rest of World 26.5 38.2

667.1 739.9

The recoverable amounts of the CGUs are determined based on value in use calculations.



14Goodwill continued

The following impairments have been recognised in the period:


UK Prepared 23.5 –

Produce 10.8 –

Europe 23.9 –

Rest of World 13.0 –

71.2 –

These impairments have arisen as a result of adverse trading conditions. Any favourable change in assumptions in future periods will result in additional headroom of value in use over net assets of the CGU. However any adverse changes would result in additional impairment.

The key assumptions used are as follows:

• Discount rates: Management uses post-tax rates that reflect current market assessments of the time value of money and the risks specific to the CGUs. The present value of the future cash flows is calculated using a pre-tax discount rate that ranges from 10.0% to 10.9%.

• Growth rates: The growth rates are based on industry growth forecasts. Changes in selling prices and direct costs are based on past practices and expectations of future changes in the market. The Group prepares cash flow forecasts derived from the most recent financial budgets approved by management for the next year and extrapolates cash flows for the following four years based on an estimated growth rate, determined by business unit, to provide a 5 year forecast. Cash flows are then extrapolated using a perpetuity growth rate of 2 per cent (2010: 2 per cent) which does not exceed the average long-term growth rate for the relevant markets.

The assumptions used, and the impact of sensitivities on these assumptions, are shown below:

UK Rest of £m Prepared Europe World

Sensitivity:

Head room of impairment test based on management assumptions 187.0 9.3 9.4

If the pre-tax discount rate were to be increased by a factor of 5% this would result in an increased impairment charge of £4.6 million and for an increase of 10% the impairment charge would increase by £20.4 million. A 10% reduction in the perpetuity growth rate would not result in any further impairment charge.

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15Other intangible assets

Customer Customer £m Relationships Contracts Total

Cost

At 2 January 2010 92.8 1.6 94.4

Exchange differences (0.1) – (0.1)

At 1 January 2011 92.7 1.6 94.3

Exchange differences (0.1) – (0.1)

At 31 December 2011 92.6 1.6 94.2

Amortisation

At 2 January 2010 (34.9) (0.8) (35.7)

Charge for the period (9.3) (0.1) (9.4)

At 1 January 2011 (44.2) (0.9) (45.1)

Impairment (4.0) – (4.0)


At 31 December 2011 (57.4) (1.1) (58.5)

Carrying amount

At 31 December 2011 35.2 0.5 35.7

At 1 January 2011 48.5 0.7 49.2

The impairment of £4.0 million in 2011 (2010: £nil) has arisen as a result of adverse trading conditions.

The breakdown of where the impairments have occurred is as follows:


Produce 1.3 –

Europe 1.5 –

Rest of World 1.2 –

4.0 –



16Property, plant and equipment

Land Fixtures and and £m buildings equipment Total

Cost

At 2 January 2010 108.8 391.9 500.7

Additions 3.5 25.3 28.8

Acquisition of subsidiary (note 32) – 0.6 0.6

Disposals (0.1) (3.6) (3.7)

Exchange differences 0.4 (1.6) (1.2)

At 1 January 2011 112.6 412.6 525.2

Additions 2.6 33.9 36.5

Acquisition of subsidiary (note 32) 0.1 0.1 0.2

Disposal of subsidiary (note 31) (2.0) (2.2) (4.2)

Disposals – (8.3) (8.3)

Reclassification from assets held for sale 6.1 – 6.1

Exchange differences (0.3) (1.8) (2.1)

At 31 December 2011 119.1 434.3 553.4

Accumulated depreciation and impairment

At 2 January 2010 (32.2) (137.7) (169.9)


Disposals – 3.3 3.3

Exchange differences (0.1) 0.4 0.3

At 1 January 2011 (38.6) (172.0) (210.6)


Disposals of subsidiary (note 31) 0.3 0.9 1.2

Disposals – 7.9 7.9

Impairment of assets – (1.7) (1.7)

Exchange differences 0.2 1.2 1.4

At 31 December 2011 (44.5) (201.2) (245.7)

Carrying amount

At 31 December 2011 74.6 233.1 307.7

At 1 January 2011 74.0 240.6 314.6

The carrying value of the Group’s fixtures and equipment includes an amount of £4.2 million (2010: £13.5 million) in respect of assets held under finance leases.

At 31 December 2011, the Group had entered into contractual commitments for the acquisition of property, plant and equipment amounting to £3.4 million (2010: £5.3 million).

During the period, the Group impaired property, plant and equipment by £1.7 million, in its UK Produce businesses.

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17Interests in associates


Aggregated amounts relating to associates

Total assets 15.9 17.0

Total liabilities (10.4) (11.3)

Net assets 5.5 5.7

Group’s share of associates net assets 2.0 3.7

Premium on acquisition 8.0 8.5

Interests in associates 10.0 12.2

Revenue 75.5 74.6

Profit for the period 3.0 2.2

Groups share of associates’ profit for the period 1.1 1.0

Details of the principal associated undertakings for the Group at 31 December 2011 are as follows:

Proportion of voting interest Place of registration Method ofName 2011 2010 and operation accounting

Manor Fresh Limited 27.5% 27.5% United Kingdom Equity

La Rose Noire Limited 45.0% 45.0% Hong Kong Equity

Manor La Rose Gastro Fresh Noire Primo £m Limited Limited Limited Total

Share of net assets/costs

At 2 January 2010 0.5 9.2 2.3 12.0

Share of profit after tax 0.3 0.8 (0.1) 1.0

Currency movement – 0.3 0.2 0.5

Dividend payment (0.3) (1.0) – (1.3)

At 1 January 2011 0.5 9.3 2.4 12.2

Share of profit after tax 0.3 0.8 – 1.1

Currency movement – 0.1 – 0.1

Dividend payment (0.2) (0.8) – (1.0)

Disposal of associate – – (2.4) (2.4)

At 31 December 2011 0.6 9.4 – 10.0

On 21 December 2011 the Group acquired 52% of Gastro Primo Limited in Hong Kong, to increase its ownership to 100%, for a cash consideration of US$1.0 million (£0.6 million) and deferred consideration of US$0.4 million (£0.3 million). The 48% already held has been accounted for as a disposal of associate, under IFRS 3 business combinations, which has resulted in a loss on sale of associate of £1.6 million being recorded in the income statement.



18

19

20

Other investments

Non listed investments £m held at cost

At 1 January 2011 and 31 December 2011 0.1

Inventories


Raw materials and packaging 48.2 44.2

Work-in-progress 2.4 2.1

Finished goods 11.9 10.3

62.5 56.6

Trade and other receivables


Amounts receivable from trade customers 164.8 165.8

Allowance for doubtful debts (3.2) (4.4)

Net amounts receivable from trade customers 161.6 161.4

Other receivables 10.7 11.9

Prepayments 17.8 16.7

190.1 190.0

Less: amounts receivable after one year

Other receivables – (0.3)

190.1 189.7

The average credit period taken on sales of goods is 36 days (2010 – 36 days). An allowance has been made for estimated irrecoverable amounts from the sale of goods of £3.2 million (2010: £4.4 million). Allowances of receivables are made on a specific basis based on objective evidence and previous default experience. Receivables are therefore deemed past due but not impaired when the contractual obligation to pay has been exceeded, but as yet no objective evidence or previous default experience indicates this debt will be irrecoverable.

The Directors consider that the carrying amount of trade and other receivables approximates to their fair value due to their short-term nature.

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20Trade and other receivables continued

The following table is an ageing analysis of trade receivables:


Not past due 145.3 142.4

Past due by 1 – 30 days 14.7 15.1

Past due by 31 – 60 days 1.5 4.1

Past due by 61 – 90 days 0.5 1.5

Past due by more than 90 days 2.8 2.7

164.8 165.8

Trade receivables renegotiated in 2011 that would have otherwise have been past due or impaired amounted to £nil (2010: £nil).

The majority of the Group’s customers are all leading UK retailers, representing more than 75% of the Group’s revenue and therefore hold favourable credit ratings. On this basis the Group does not see any need to charge interest, seek collateral or credit enhancements to secure any of its trade receivables due to their short term nature.

The following table is an analysis of the movement of the Group’s trade receivables allowance for doubtful debts:


Balance at beginning of the period (4.4) (3.1)

Allowances recognised on receivables (1.1) (1.5)

Amounts written off as uncollectible during the year 0.5 0.2

Amounts recovered during the year 1.5 –

Allowance reversed 0.3 –

Balance at end of the period (3.2) (4.4)

The following table is an analysis of the Group’s net trade receivables by currency:


GBP 125.3 127.4

USD 4.6 4.7

Euro 25.2 25.5

CZK 0.3 0.2

ZAR 1.7 1.5

RMB 3.3 2.1

CAD 0.1 –

HKD 1.1 –

161.6 161.4



21

22

23

Assets held for sale


Assets held for sale – 7.9

Property with a carrying value of £1.8 million was sold during the period to a third party for net cash consideration of £1.6 million, resulting in a £0.2 million loss on disposal.

The remaining properties classified as held for sale with a carrying value of £6.1 million (2010: £6.1 million) were re-classified during the period to property, plant and equipment. The decision to no longer classify the remaining properties as held for sale was taken by the Board of Directors as they believe it is unlikely that the properties will be sold during the next 12 months.

Cash and cash equivalents


Cash and cash equivalents 30.1 40.8

Cash and cash equivalents comprise cash held by the Group and short-term bank deposits with an original maturity of three months or less. The carrying amount of these assets approximates their fair value.

Cash balances include £3.1 million of restricted cash in respect of the net sale proceeds from the sale of Bakkavor Traiteur and a property sale. This balance is held within a separate account under the control of Barclays bank. In February 2012 the balance in this account will be used to prepay £3.1 million of the Company’s bank term loan as required under the terms of the Company’s banking agreement.

Borrowings


Bank overdrafts 4.1 2.1

Bank loans 262.8 618.3

8.25% senior secured notes 352.0 –

618.9 620.4

The borrowings are repayable as follows:

On demand or within one year 32.6 56.1

In the second year 16.6 563.8

In the third to fifth years inclusive 569.7 0.5

618.9 620.4

Less: Amount due for settlement within 12 months (shown under current liabilities) (32.6) (56.1)

Amount due for settlement after 12 months 586.3 564.3

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23Borrowings continued

Borrowings by currency


GBP 611.8 520.6

USD – 46.8

Euro 5.1 51.3

ZAR – 0.4

RMB 1.5 1.3

CZK 0.3 –

HKD 0.2 –

618.9 620.4

31 December 1 January 2011 2011 % %

The weighted average interest rates paid were as follows:

Bank overdrafts 1.78 2.63

Bank loans 6.93 4.02

£300 million (2010: £400 million) interest rate swaps and a collar were in place at 31 December 2011 against Group bank facilities, which expose the Group to fair value interest rate risk. Other borrowings continue to be arranged at floating rates, thus exposing the Group to cash flow interest rate risk.

The Directors estimate the fair value of the Group’s borrowings are not materially different from their book value due to the current rates available to the Group being in line with the rates agreed over the facilities and the relative costs of renegotiation of the debt as compared to the capital value.


Analysis of net debt


Borrowings (617.1) (620.4)

Unamortised fees 15.3 –

Interest accrual (17.1) –

Total borrowings (618.9) (620.4)

Finance leases (2.6) (5.8)

Net debt (591.4) (585.4)

On the 7 February 2011, Bakkavor Finance (2) plc issued a seven year £350 million listed bond and the Group also refinanced its main financing facilities in Bakkavor London Limited, Bakkavor Acquisitions (2008) Limited and Bakkavor China Limited through a term loan and revolving credit facility (RCF) of £380 million that will expire on 30 June 2014 arranged through Bakkavor Finance (2) plc. The majority of the Group’s loan facilities are therefore now through Bakkavor Finance (2) plc.



23

24

Borrowings continued

The Bakkavor Finance (2) plc bond and bank facilities are subject to various restrictive financial covenants including interest cover ratio (EBITDA as a multiple of finance charges), leverage (net debt as a multiple of EBITDA) and cashflow cover (cashflow as a multiple of finance charges). At 31 December 2011 the Group was in compliance with all such covenants. The key features of the bond and loans are as follows:

Bakkavor Finance (2) plc bond

Bakkavor Finance (2) plc issued on 7 February 2011 £350 million of 8.25% Senior Secured Notes due in 2018. Interest on the Notes is payable semi-annually each year on February 15 and August 15 with the first payment made on 15 August 2011. The Notes will mature on 15 February 2018. The Notes are secured by fixed and floating charges over the assets of Bakkavor Finance (2) plc and its significant subsidiaries.

Bakkavor Finance (2) plc bank facilities

Bakkavor Finance (2) plc has a term loan of £260 million and a Revolving credit facility (RCF) of £120 million which both expire on 30 June 2014. The Group has drawn £260 million of the term loan but has not drawn any of the RCF as at 31 December 2011. The RCF facility includes a £10 million ‘carve out’ for overdraft and £20 million for ancillary facilities. At 31 December 2011, £13.7 million of the ‘carve out’ was utilised.

The term loan is to be repaid in instalments with £5 million due in June 2012 and December 2012, followed by £10 million in June 2013 and December 2013. The balance is then due on termination in June 2014. The interest rate of the term loan at 31 December 2011 was a variable rate of 5.63% which represents LIBOR plus a margin of 4.5%. The bank facilities are secured by a floating charge over the assets of Bakkavor Finance (2) plc and its subsidiaries.

Bakkavor Estates Limited loan

The loan Bakkavor Estates Limited had at 1 January 2011 of £19.8 million from Kaupthing Singer & Friedlander was repaid on 10 January 2011.

Derivative financial instruments

Held for trading derivatives that are not designated in hedge accounting relationships:


Foreign currency contracts – included in current assets 0.4 1.0

Foreign currency contracts (2.0) –

Interest rate contracts (15.9) (24.8)

Included in current liabilities (17.9) (24.8)

Total (17.5) (23.8)

Further details of derivative financial instruments are provided in note 29.

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25Deferred tax

The following are the major deferred tax liabilities and assets recognised by the Group and movements thereon during the current and prior reporting period.

Accelerated Retirement tax Fair value Impairment benefit £m depreciation gains Intangibles Provisions losses obligations Total

At 2 January 2010 30.1 (9.5) 16.5 (3.3) (6.7) (3.7) 23.4

Charge/(credit) to income 4.6 2.9 (3.2) 1.9 – 4.4 10.6

Charge to equity – – – – – 2.5 2.5

Reallocation of deferred tax (5.1) – – – 5.1 – –

As 1 January 2011 29.6 (6.6) 13.3 (1.4) (1.6) 3.2 36.5

Charge/(credit) to income (7.3) 2.4 (4.4) 0.1 0.1 4.1 (5.0)

Credit to equity – – – – – (5.0) (5.0)

Translation of overseas balances 0.6 – – – – – 0.6

As 31 December 2011 22.9 (4.2) 8.9 (1.3) (1.5) 2.3 27.1

The credit to equity relates to retirement benefit obligation movements of £5.0 million (2010: £2.5 million charge).

Certain deferred tax assets and liabilities have been offset. The following is the analysis of the deferred tax balances (after offset) for financial reporting purposes:


Deferred tax liabilities 27.1 36.5

At the statement of financial position date, the Group has unused tax losses of £17.9 million (2010: £18.9 million) available for offset against future profits. Deferred tax assets are not recognised on the losses carried forward to the extent that it is not probable that the losses will be utilised.

The Group is not aware of any temporary differences associated with undistributed earnings of subsidiaries due to the availability of tax credits against such liabilities. The Group is in a position to control the timing of the reversal of any such temporary differences should they arise.

Temporary differences arising in connection with interests in associates are insignificant.



26Obligations under finance leases

Minimum lease Present value of payments lease payments

31 December 1 January 31 December 1 January £m 2011 2011 2011 2011

Amounts payable under finance leases:

Within one year 0.9 3.1 0.8 2.8

In the second to fifth years inclusive 2.3 3.3 1.8 3.0

3.2 6.4 2.6 5.8

Less: future finance charges (0.6) (0.6)

Present value of lease obligations 2.6 5.8 2.6 5.8

Less: Amount due for settlement within 12 months (shown under current liabilities) (0.8) (2.8)

Amount due for settlement after 12 months 1.8 3.0

It is the Group’s policy to lease certain fixtures and equipment under finance leases. The weighted average lease term outstanding is 4.5 years (2010: 4 years). For the 52 weeks ended 31 December 2011, the weighted average effective borrowing rate was 4.20% (2010: 4.46%). Interest rates are fixed at the contract date. All leases are on a fixed repayment basis and no arrangements have been entered into for contingent rental payments.

Obligations are denominated in Sterling (£0.2 million), Euro (£2.3 million) and Hong Kong dollars (£0.1 million) and the fair value of the Group’s lease obligations approximates their carrying amount. The Group’s obligations under finance leases are secured by the lessors’ rights over the leased assets.

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27Trade and other payables


Trade payables 197.1 183.8

Amounts payable to other group companies 0.1 0.7

Social security and other taxation 3.2 3.8

Put option consideration (note 33) – 5.0

Deferred consideration 0.3 –

Other payables 31.3 35.0

Accruals 83.5 83.2

315.5 311.5

Less: amounts due after one year:

Deferred consideration (0.1) –

Other payables (0.2) (0.2)

Trade and other payables due within one year 315.2 311.3

Trade payables and accruals principally comprise amounts outstanding for trade purchases and ongoing costs. The average credit period taken for trade purchases is 60 days (2010 – 53 days). No interest is incurred against trade payables.The Directors consider that the carrying amount of trade payables approximates to their fair value.

The following table is an analysis of the Group’s trade payables by currency:


GBP 143.7 131.9

USD 3.3 3.3

Euro 43.6 44.2

CZK 0.4 0.4

ZAR 1.7 1.4

RMB 3.4 2.6

CAD 0.2 –

HKD 0.8 –

197.1 183.8



28Provisions

Onerous leases and other Dilapidations £m provisions provisions Total

At 2 January 2010 7.3 11.6 18.9

Additional provision in the period 3.4 0.3 3.7

Release of provision (1.3) (3.4) (4.7)

Utilisation of provision (3.0) (1.5) (4.5)

Unwinding of discount 0.2 0.9 1.1

At 1 January 2011 6.6 7.9 14.5

Included in current liabilities 1.8 – 1.8

Included in non-current liabilities 4.8 7.9 12.7

At 1 January 2011 6.6 7.9 14.5

Increase of provision 3.0 – 3.0

Release of provision (2.8) (1.1) (3.9)

Utilisation of provision (2.0) – (2.0)

Unwinding of discount 0.4 0.4 0.8

At 31 December 2011 5.2 7.2 12.4

Included in current liabilities 1.2 0.6 1.8

Included in non-current liabilities 4.0 6.6 10.6

Onerous leases and other provisions

Onerous lease and other provisions include provisions related to unused premises. Of this, £5.2 million (2010: £5.5 million) relates to onerous leases and related costs that will be utilised over the term of the individual leases to which they relate.

Releases of provisions relate to where onerous leases have been reviewed due to changing circumstances and adjustments to the ongoing provisions are required. The release of provisions follows the original treatment which are released in administrative costs.

Dilapidation provisions relate to obligations under various property leases to ensure that, at the end of the leases, the buildings are in the condition agreed with the landlords. The provisions will be utilised at the end of the individual lease terms to which they relate.

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29Financial instruments

Capital risk management

The Group manages its capital to ensure that entities in the Group will be able to continue as a going concern while maximising the return to stakeholders through the optimisation of the debt and equity balance. The capital structure of the Group consists of debt, which includes the borrowings disclosed in note 23, cash and cash equivalents and equity attributable to equity holders of the parent, comprising issued capital, reserves and retained earnings.

The Group manages its capital by collating timely and reliable information to produce various internal reports such as capital expenditure and weekly cash reports, which enable the Board of Directors to assess the Group’s capital, and manage that capital effectively and in line with the Group’s objectives. The gearing of the Group is constantly monitored and managed to ensure that the ratio between debt and equity is at an acceptable level and enables the Group to operate as a going concern and maximise stakeholders return.

When the Group considers an acquisition, the Board of Directors will decide on how to fund that acquisition either through debt, equity or a mixture of both. The Board of Directors will look at the Group’s existing debt to equity ratio and the costs involved in financing debt or equity, before deciding on how to fund the proposed acquisition.

Gearing ratio

The gearing ratio at the year end is as follows:


Debt 621.5 626.2

Cash and cash equivalents (30.1) (40.8)

Net debt 591.4 585.4

Equity 301.3 187.7

Net debt to net debt plus equity percentage 66.2% 75.7%

Debt is defined as long and short term borrowings, such as bank loans, overdrafts and finance leases payable.

Externally imposed capital requirement

The Group is subject to externally imposed capital requirements on capital expenditure as a result of bank covenants (see note 23, Borrowings).


Details of the significant accounting policies and methods adopted, including the criteria for recognition, the basis of measurement and the basis on which income and expenses are recognised, in respect of each class of financial asset, financial liability and equity instrument are disclosed in note 2 to the financial statements.



29Financial instruments continued

Categories of Financial Instruments


Financial assets

Fair value through profit and loss:

Derivative financial instruments 0.4 1.0

Loans and receivables at amortised cost:

Trade receivables 161.6 161.4

Other receivables 10.7 11.9


202.8 215.1

Financial liabilities

Fair value through profit and loss:


Other Financial liabilities at amortised cost:


Put option consideration – 5.0



Amounts due to other group companies 0.1 205.7

Borrowings 618.9 620.4

Finance leases 2.6 5.8

868.2 1,080.5

The fair value of the financial assets approximates to their carrying value due to the short term nature of the receivables. Fair values have been determined as level 2 under IFRS 7.

The fair value of other financial liabilities at amortised cost approximates to their carrying value. The trade and other payables approximate to their fair value due to the short term nature of the payables. The finance lease fair value approximates to the carrying value based on discounted future cash flows.

Financial risk management

The Group is exposed to a number of financial risks such as access to and cost of funding, interest rate exposure, currency exposure and working capital management. The Group seeks to minimise these risks where possible and does this by constantly monitoring, reviewing, effectively managing and using derivative financial instruments as detailed in the Directors’ report. Use of financial instruments is governed by Group policies which are approved by the Board of Directors. The treasury function does not operate as a profit centre, makes no speculative transactions and only enters into or trades financial instruments to manage specific exposures.

To make sure the management of those financial risks faced by the Group remain effective, it is very important that any new businesses that are acquired by the Group are immediately integrated. This means the new business is providing timely and accurate information to the central Treasury department, so they can produce group reports on key financial risks that reflect the ultimate position of the Group at that time.

Further details on financial risks are provided within the Our Governance section on page 32.

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Market risk

The Group’s activities expose it primarily to the financial risks of changes in foreign currency exchange rates and interest rates. The Group enters into a variety of derivative financial instruments to manage its exposure to interest rate and foreign currency risk, including:

• Forward foreign exchange contracts to hedge the exchange rate risk arising on revenues and purchases in foreign currencies.

• Interest rate swaps to mitigate the risk of rising interest rates.

Market risk exposures are supplemented by sensitivity analysis. There has been no change to the Group’s exposure to market risks or the manner in which it manages and measures the risk.

Foreign currency risk management

Foreign currency risk management occurs at a transactional level on revenues and purchases in foreign currencies and at a translational level in relation to the translation of overseas operations. Board policy is for UK businesses to hedge transactional exposures using forward foreign exchange contracts wherever material. Transactional exposure in our overseas businesses, are generally not hedged, as receipts and payments are largely in their local currencies. The Group monitors foreign exchange rates to assess the potential impact on group profits if exchange rates move significantly and a summary of hedges in place are reported monthly to the Board of Directors.

The Group’s main foreign exchange risk is to the Euro and US dollar.

During the 52 week period to 31 December 2011, the Euro weakened against Sterling by 2.6%, with the closing rate at �1.1972 compared to �1.1671 at the prior period end. The average rate for the 52 week period to 31 December 2011 was �1.1529, a strengthening of the Euro of 1.1% versus prior year.

In the same period the US dollar, strengthened against Sterling by 0.7%, with the closing rate at $1.5541 compared to $1.5657 at the prior period end. The average rate for the period to 31 December 2011 was $1.6045, a 3.9% weakening of the US dollar versus the prior year.

The net foreign exchange impact on profit from transactions is a loss of £0.3 million (2010: gain of £0.4 million).




Foreign currency risk management continued

Foreign currency sensitivity analysis

A sensitivity analysis has been performed on the financial assets and liabilities to a sensitivity of 10% increase/decrease in the exchange rates. A 10% increase/decrease has been used, and represents management’s assessment of the reasonably possible change in foreign exchange rates. The sensitivity analysis includes only outstanding foreign currency denominated monetary items and adjusts their translation at the period end for a 10% change in foreign currency rates. The sensitivity analysis includes external loans as well as loans to foreign operations within the Group where the denomination of the loan is in a currency other than the currency of the lender or the borrower. A positive number below indicates an increase in profit where Sterling strengthens 10% against relevant currency.

Profit or (loss) Profit or (loss) 10% Strengthening 10% Weakening


Euro (1.1) 2.3 1.2 (2.5)

USD (1.0) 2.7 1.1 (2.9)

RMB 0.1 0.1 (0.1) (0.1)

ZAR (0.2) 0.1 0.2 (0.1)

Forward foreign exchange contracts

It is the policy of the Group to enter into forward foreign exchange contracts to cover specific foreign currency payments and receipts. The Group also enters into forward foreign exchange contracts to manage the risk associated with anticipated sales and purchase transactions to minimise the exposure generated.

The following table details the Sterling forward foreign currency contracts outstanding as at 31 December 2011:

Average exchange Foreign currency Contract value Fair value rate

(m)

(£m)

(£m)

Outstanding contracts 2011 2010 2011 2010 2011 2010 2011 2010

Buy Euros:

Less than 3 months 1.16 1.18 16.4 22.7 14.2 19.3 (0.5) 0.3

3 to 6 months 1.17 1.20 16.5 14.0 14.2 11.7 (0.3) 0.4

6 to 12 months 1.17 1.19 9.0 6.9 7.7 5.8 (0.1) 0.2

Buy US Dollars:

Less than 3 months 1.56 1.56 6.8 4.9 5.9 3.1 (0.1) –

3 to 6 months 1.59 1.55 2.0 5.9 1.2 3.8 0.1 –

6 to 12 months 1.58 1.56 1.4 1.6 0.9 1.1 – –

44.1 44.8 (0.9) 0.9

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Forward foreign exchange contracts continuedThe following table details the Euro forward foreign currency contracts outstanding as at 31 December 2011:

Average Foreign Contract Fair Fair exchange currency value value value rate (m) (€m) (€m) (£m)Outstanding contracts 2011 2010 2011 2010 2011 2010 2011 2010 2011 2010

Buy US Dollars:

Less than 3 months 1.37 – 0.5 – 0.4 – – – – –

6 to 12 months 1.38 1.32 10.4 2.0 7.5 1.5 (0.5) – (0.5) –

7.9 1.5 (0.5) – (0.5) –

The following table details the South African Rand (ZAR) forward foreign currency contracts outstanding as at 31 December 2011:

Average Foreign Contract Fair Fair exchange currency value value value rate (m) (ZARm) (ZARm) (£m)Outstanding contracts 2011 2010 2011 2010 2011 2010 2011 2010 2011 2010

Buy US Dollars:

Less than 3 months – 0.12 – 0.3 – 2.8 – 0.5 – 0.1

Buy Sterling:

Less then 3 months 12.72 – 0.2 – 2.8 – (1.6) – (0.1) –

3 to 6 months 12.93 – 0.1 – 1.0 – (0.4) – (0.1) –

3.8 2.8 (2.0) 0.5 (0.2) 0.1

Interest rate risk management

The Group is exposed to interest rate risk on borrowings. The risk is managed by maintaining an appropriate mix between fixed and floating rate borrowings. Interest rate risk management balances debt financing as a tool to improve the returns through leverage in the capital structure with the potential for an increase in interest rates to impact profits negatively. The Group operates a risk policy which broadly maintains the ratio between floating and fixed interest rates at 50:50. Since the Group refinancing in February 2011 most of the debt is now at a fixed rate but this will reverse to a large extent, as £250 million of interest rate swaps mature in the next 12 months. The Group also uses derivative financial instruments such as interest rate swaps and interest rate collars to minimise the risk associated with variable interest rates. As a result of this policy, at the year end 48% of the Group’s borrowings were covered by interest rate swaps and collars (2010: 65%). The remaining borrowings are mostly at fixed rates. The Group has issued £350 million of 8.25% fixed rate Senior Secured Notes that are listed on the Irish Stock Exchange (see note 23). Board approval is required for the use of any interest rate derivative.

Interest rate sensitivity analysis

Interest rate sensitivity analysis has been performed on the financial assets and liabilities to illustrate the impact on Group profits and equity if interest rates increased/decreased. This analysis assumes the liabilities outstanding at the period end were outstanding for the whole period. A 100 basis points increase or decrease has been used, comprising management’s assessment of reasonably possible changes in interest rates.

Profit/(loss) Profit/(loss) 31 December 1 January £m 2011 2011

Effects of 100 basis points increase in interest rate (0.7) (5.1)

Effects of 100 basis points decrease in interest rate 0.7 5.1

It is assumed that all other variables remained the same when preparing the interest rate sensitivity analysis.




Interest rate risk management continued

Interest rate swaps

Under interest rate swap contracts, the Group agrees to exchange the difference between fixed and floating rate interest amounts calculated on agreed notional principal amounts. Such contracts enable the Group to mitigate the risk of changing interest rates on the fair value of issued fixed rate debt held and the cash flow exposures on the issued variable rate debt held. The fair value of interest rate swaps at the reporting date is determined by discounting the future cash flows using the yield curves at the reporting date and the credit risk inherent in the contract, and is disclosed below. The average interest rate is based on the outstanding balances at the end of the financial year. £250 million of these interest rate swaps mature in the next 12 months.

The following table details the notional principal amounts and remaining terms of interest rate swap contracts and collars outstanding as at 31 December 2011:

Average contract Notional fixed interest rate

principal amount

Fair value

2011 2010 2011 2010 2011 2010 % % £m £m £m £m

Interest rate swaps

0 to 1 years 5.03 4.90 150.0 100.0 (4.4) (3.0)

1 to 5 years – 5.03 – 150.0 – (10.0)

Over 5 years 4.90 4.90 50.0 50.0 (9.9) (6.7)

Collars

0 to 1 years 4.37 – 100.0 – (1.6) –

1 to 5 years – 4.37 – 100.0 – (5.1)

300.0 400.0 (15.9) (24.8)

The interest rate swaps settle on a quarterly basis. The floating rate on the interest rate swaps is 3 months LIBOR. The Group will settle the difference between fixed and floating interest rates on a net basis.

Although one of the derivatives has a maturity of more than twelve months, it is expected that the derivative will be held for less than twelve months from the reporting period, and therefore has been presented as a current liability.

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Credit risk management

Credit risk refers to the risk of financial loss to the Group if, a counterparty defaults on its contractual obligations of the loans and receivables at amortised cost held in the balance sheet.

The Group’s main credit risk is attributable to its trade receivables. The Group’s top five customers, all leading UK retailers, continue to represent more than 75% of the Group’s revenue. These customers hold favourable credit ratings and consequently reduce the credit risk for the Group’s overall trade receivables.

The credit risk on liquid funds and derivative financial instruments is limited because the counterparties are banks with good credit ratings assigned by international credit rating agencies. Group policy dictates that Group deposits are shared between banks to spread the risk. Currently Group deposits are shared between banks that are counterparties in the Group’s secured committed bank facilities. Bakkavor Finance (2) plc current bank credit limit consists of a £260 million Term loan and a £120 million RCF facility, through a bank syndicate. Barclays Capital is the syndicate agent of this facility and they manage the syndicate and participation with other counterparties.

Processes are in place to manage receivables and overdue debt and to ensure that appropriate action is taken to resolve issues on a timely basis. Credit control operating procedures are in place to review all new customers. Existing customers are reviewed as management become aware of changes of circumstances for specific customers. The amounts presented in the statement of financial position are net of appropriate allowance for doubtful trade receivables, specific customer risk and assessment of the current economic environment. The carrying amount of financial assets recorded in the financial statements, which is net of impairment losses, represents the Group’s maximum exposure to credit risk.

Commodity risk management

The Group acquires substantial amounts of raw materials for its operations, including dairy, wheat and rapeseed oil. The Group is exposed to commodity price and supply risks for these raw materials. The Group takes actions to reduce overall material costs and exposure to price fluctuations. This is done in a number of ways. For example, the Group buys raw materials from suppliers all over the world, thereby decreasing geographic risk and frequently tenders to benchmark market prices. In general our requirements are managed using contracts for periods of between three to twelve months forward. The Group also manage any local currency exposure in line with agreed contracts.

Liquidity risk management

Liquidity risk refers to the risk that the Group may not be able to fund the day to day running of the Group. Liquidity risk is reviewed by the Board of Directors on a monthly basis. The Group manages liquidity risk by monitoring actual and forecast cash flows and matching the maturity profiles of financial assets and liabilities. The Group also monitors the drawdown of debt against the available banking facilities and reviews the level of reserves. Liquidity risk management ensures sufficient debt funding is available for the Group’s day to day needs. Board policy is to maintain reasonable headroom of unused committed bank facilities in a range of maturities at least 12 months beyond the period end.




Maturity profile of financial liabilities

The following table illustrates the Group’s financial liability obligations and when they fall due.


Due within one year:


Amounts due to other group companies 0.1 0.7

Put option consideration – 5.0







Total due within one year 328.4 348.3

In the second to fifth years inclusive:


Amounts due to other group companies – 205.0





Total due in the second to fifth years 376.8 778.9

Due after five years:

Borrowings 348.4 –

Interest on borrowings 43.2 –

Total due after five years 391.6 –

The weighted average interest rates for the Group’s borrowings are found in note 23 and in note 26 for Finance leases.

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30Share capital and reserves

Share Capital

31 December £m 2011

Issued and fully paid:

53,258 ordinary shares of £1 each 0.1

One ordinary share was issued to provide the Company with start up capital on 21 January 2011. On 3 February 2011, 1,200 ordinary shares were issued in consideration for the acquisition of Bakkavor Finance (3) Limited. On 4 February 2011, 50,000 ordinary shares were issued to Bakkavor Finance (1) Limited for a cash consideration of £50,000. On 7 February 2011, a further 2,057 ordinary shares were issued in consideration for the assumption by the Company’s parent Bakkavor Finance (1) Limited of an intra-Group loan owed by a Group subsidiary to the Company’s ultimate parent Company, Bakkavor Group ehf, which was subsequently capitalised.

Share premium

On 3 February 2011, £96.6 million of share premium was created in relation to the acquisition of Bakkavor Finance (3) Limited. Further to this, on 7 February 2011, the amount due to other group companies loan of £205 million, owed to Bakkavor Group ehf, was capitalised in exchange for shares.

Merger reserve

The incorporation of Bakkavor Finance (2) plc as an intermediate holding Company of the Group was accounted for using the principles of merger accounting.

Capital reserve

The capital reserve of £4.0 million arose in 2009 following the capitalisation of an inter-company balance between Bakkavor London Limited and Bakkavor Group ehf.

Translation reserve

The translation reserve represents foreign exchange rate differences arising on the consolidation of the Group’s foreign operations. The assets and liabilities of the Group’s foreign operations are translated at exchange rates prevailing on the balance sheet date. Income and expense items are translated at the average exchange rates for the period. Exchange differences arising, if any, are recognised in the translation reserve.



31Disposal of subsidiary

On 7 September 2011 the Group disposed of its interest in Bakkavor Traiteur SAS for a cash consideration of �1.9 million (£1.6 million), resulting in a loss on disposal of £1.0 million, net of £0.1 million of disposal costs. The loss on disposal includes £0.4 million of foreign currency translation gains recycled from the translation reserve to the income statement on disposal.The net assets of Bakkavor Traiteur SAS at the date of disposal and as at 1 January 2011 were as follows:

7 September 1 January £m 2011 2011

Property, plant and equipment 3.0 3.3

Inventories 0.3 0.6

Trade receivables 0.9 1.6

Trade and other payables (1.2) (2.2)

Bank overdraft (1.1) (0.7)

Finance lease (0.3) (0.5)

Attributable goodwill 1.3 1.3

Net assets 2.9 3.4

Disposal costs 0.1

Recycle net foreign exchange gains (0.4)

Loss on disposal (1.0)

Total consideration 1.6

Net cash inflow arising on disposal:

Cash consideration 1.6

Bank overdrafts disposed of 1.1

Disposal costs (0.1)

2.6

The disposal of Bakkavor Traiteur SAS does not qualify as a discontinued operation as defined by IFRS 5 Non-current assets held for sale and discontinued operations, as it does not represent a separate major line of business.

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32Acquisition of business

2011

On 21 December 2011 the Group acquired 52% of Gastro Primo Limited in Hong Kong, to increase its ownership to 100%, for a cash consideration of US$1.0 million (£0.6 million) and deferred consideration of US$0.4 million (£0.3 million). Gastro Primo held £0.4 million of cash at the date of acquisition. This has resulted in goodwill of £1.2 million being recognised and also a loss on disposal of an associate of £1.6 million being recorded in the income statement.

The net effect of the acquisition is as follows:

£m

Fair value of 100% of Gastro Primo 1.7

Book value and fair value of net assets acquired (0.5)

Goodwill on acquisition 1.2

The loss on disposal of an associate is as follows:

£m

Carrying value of original 52% investment in Gastro Primo 2.4

Fair value of 52% investment in Gastro Primo 0.8

Loss on disposal of an associate (1.6)

On 3 November 2011 the Group acquired the remaining 20% of Bakkavor China Limited that it did not own for a cash consideration of US$30,000, which resulted in the recognition of £0.8 million negative goodwill. This negative goodwill has been recognised in the income statement.

2010

MS Salads Marketing Limited

On 4 May 2010, a subsidiary company, English Village Salads Limited, acquired the trade and assets of the packaging and marketing business of MS Salads Marketing Limited from Hedon Salads Holdings Limited. In exchange for the assets acquired, English Village Salads Limited issued share capital to their current shareholders and the shareholders of Hedon Salads Holdings Limited on a basis that effectively transferred 30% of the Group’s ownership of English Village Salads Limited to the shareholders of Hedon Salads Holdings Limited.

The net effect of the acquisition is as follows:

£m

Fair value of shares issued 2.6

Book value and fair value of net assets acquired (0.6)

Goodwill on acquisition 2.0

Goodwill from the acquisition relates to benefits associated with the wider range of produce marketing experience in the combined business and anticipated future operating synergies from the combination.



32

33

Acquisition of business continued

Italpizza Srl

On 7 December 2010 a Put option in relation to the 10% non-controlling interest in Italpizza Srl was exercised by the option holder. As a result the Group was required to acquire the remaining 10% interest and a liability of �5.8 million (£5.0 million) was booked in the 2010 financial statements.

In April 2011, Italpizza Srl paid a dividend of �530,000 (£459,000) to the non-controlling interest. This transaction has reduced the consideration for the remaining 10% interest from �5.8 million (£5.0 million) to �5.3 million (£4.5 million). As a result of the decrease in consideration, the value of goodwill generated from the acquisition of the remaining 10% interest, has also been reduced from �4.8 million (£4.1 million) to €4.3 million (£3.6 million).

Other acquisitions

In 2010 £6.8 million of deferred consideration payments and £9.9 million of contingent consideration payments were made in relation to acquisitions transacted in previous periods. The contingent consideration payment related to the acquisition of Two Chefs on a Roll Inc. and was lower than the original estimate. This settlement has therefore had the impact of reducing the Group’s goodwill in relation to this acquisition by £6.2 million.

Notes to the statement of cash flows


Operating (loss)/profit (18.3) 79.4

Adjustments for:

Share of results of associates (1.1) (1.0)

Depreciation of property, plant and equipment 43.9 44.3

Amortisation of intangible assets 9.4 9.4

Loss on disposal of property, plant and equipment 0.3 0.5

Loss on disposal of subsidiary (note 31) 1.0 –

Loss on disposal of associate (note 32) 1.6 –

Impairment of assets 76.9 –

Net retirement benefits charge less contributions (16.4) (16.1)

Operating cash flows before movements in working capital 97.3 116.5

Increase in inventories (5.9) (6.2)

Decrease/(increase) in receivables 0.5 (8.3)

Increase in payables 13.3 41.0

Increase in exceptional creditor 1.5 0.7

Decrease in provisions (3.0) (5.4)

Cash generated by operations 103.7 138.3

Income taxes paid (3.4) (2.6)

Interest paid (64.5) (59.2)

Net cash from operating activities 35.8 76.5

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35

Contingent liabilities and commitments

The Group may from time to time, and in the normal course of business, be subject to claims from customers and counterparties. The Group regularly reviews all of these claims to determine any possible financial loss to the Group. No provision was considered necessary in the consolidated financial statements. In addition, there are a number of legal claims or potential claims against the Group, the outcome of which cannot at present be foreseen. Provision has been made for all probable liabilities.

As at 31 December 2011 the Group has purchase commitments for the next 12 months to guarantee supply and price of raw materials of £51.6 million (1 January 2011: £35.4 million).

Operating lease arrangements

The Group as lessee


Minimum lease payments under operating leases recognised as an expense in the period 10.4 10.2

At the balance sheet date, the Group had outstanding commitments for future minimum lease payments under non-cancellable operating leases, which fall due as follows:

Land and buildings Other


Operating leases which expire:

Within one year 6.1 6.6 3.9 3.8

Within two to five years 20.3 23.6 5.6 6.1

After five years 44.7 50.1 – 0.1

71.1 80.3 9.5 10.0

The Group leases various offices and operational facilities under non-cancellable operating lease arrangements. The leases have various terms, escalation clauses and renewal rights. The Group also leases plant and machinery under non-cancellable operating lease agreements.



36Retirement benefit schemes

The Group operates a number of pension schemes in the UK and overseas. These schemes are either trust or contract based and have been set up in accordance with appropriate legislation. The assets of each of the pension schemes are held separately from the assets of the Company.

In the UK, the two main schemes are a defined contribution scheme which is open to all UK employees joining the Group (full or part time) and the other a funded defined benefit scheme which was closed for future accrual in March 2011.

Pension credit/costs charged in arriving at profit on ordinary activities before taxation were:


UK defined benefit scheme net (credit)/charge (1.6) 3.5

UK defined benefit scheme exceptional credit (12.0) (15.8)

UK defined contribution scheme net charge 3.2 0.7

Overseas net charge 0.3 0.3

Total credit (10.1) (11.3)

The exceptional credit has arisen due to the defined benefit scheme closing to future accrual and closure of the scheme in March 2011.

Defined contribution schemes

The total cost charged to income of £3.5 million (2010: £1.0 million) represents contributions payable to these schemes by the Group at rates specified in the rules of the plans. No amounts were owing at the period end for the defined contribution schemes (2010: £nil)

Defined benefit schemes

A full actuarial valuation of plan assets and the present value of the defined benefit obligation for funding purposes was carried out at 31 March 2010 and was updated for IAS 19 purposes to 31 December 2011 by a qualified independent actuary. The projected unit cost method was used to value the liabilities and was conducted by Lloyd Cleaver a qualified independent actuary with Towers Watson Limited.

The major assumptions used in this IAS 19 valuation were:

31 December 1 January 2011 2011

Expected rate of salary increases – 4.40%

Future pension increases 2.95% 3.30%

Expected return on scheme assets 6.25% 7.34%

Discount rate applied to scheme liabilities 5.00% 5.50%

Inflation assumption (CPI) 2.00% 2.70%

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36Retirement benefit schemes continued

The mortality table is based on scheme specific postcode fitted SAPS tables with a 102% multiplier for male members and 108% multiplier for female members. Long cohort improvements are applied from 2002 to 2010. Future improvements are in line with CMIB improvements with a 1.0% pa long term trend, giving life expectancies as follows:

Males expected Males expected Females expected Females expected future lifetime future lifetime future lifetime future lifetime 2011 2010 2011 2010

Member aged 45 in 2010 41.6 41.5 43.9 43.8

Member aged 65 in 2010 22.1 21.9 24.1 24.0

The sensitivities regarding the principal assumptions used to measure the scheme liabilities are set out below:

Approximate impact Assumption Change in assumption on scheme liabilities

Discount rate Decrease by 0.1% Increase by 1.5% – 2.0%

Rate of inflation Decrease by 0.1% Decrease by 1.25% – 1.75%

Rate of salary growth N/A N/A

Rate of mortality Increased by 1 year Increase by 3%

Amounts recognised in income in respect of these defined benefit schemes are as follows:


Current service cost (1.1) (4.1)

Interest cost (9.0) (9.5)

Expected return on scheme assets 11.7 10.1

Past service cost – 15.8

Gain from curtailments 12.0 –

Total credit 13.6 12.3

All of the credit for the period has been included in total administrative expenses, except for the past service cost and gain from curtailments, which are shown within exceptional items. Actuarial gains and losses have been reported in the statement of recognised income and expense. At 31 March 2011 the scheme closed to future accrual and this has been allowed for in the liability calculations. The closure of the scheme has led to a £12.0 million credit to the income statement and is disclosed within exceptional items.

The actual return on scheme assets was a £4.8 million loss (2010: £22.9 million gain).

Cumulative amount of actuarial gains and losses recognised in other comprehensive income since the date of IFRS transition is £45.2 million loss (2010: £26.3 million loss).




The amount included in the balance sheet arising from the Group’s obligations in respect of its defined benefit retirement benefit schemes is as follows:


Fair value of scheme assets 170.6 179.7

Present value of defined benefit obligations (161.3) (167.9)

Surplus in scheme 9.3 11.8

Related deferred taxation liability (2.3) (3.2)

7.0 8.6

The assumptions used by the actuary are the best estimates chosen from a range of possible actuarial assumptions which, due to the timescale covered, may not necessarily be borne out in practice.

Movements in the present value of defined benefit obligations were as follows:


Opening balance (167.9) (169.6)

Current service cost (1.1) (4.1)

Interest cost (9.0) (9.5)

Contributions from scheme members (0.8) (2.5)

Benefits paid 7.9 5.9

Loss on change of assumptions (1.5) 1.7

Experience loss (0.9) (5.6)

Removal of future discretionary pension increases – 15.8

Gain from curtailments 12.0 –

Closing balance (161.3) (167.9)

Movements in the fair value of scheme assets were as follows:


Opening balance 179.7 156.4

Expected return on scheme assets 11.7 10.1

Experience (loss)/gain (16.5) 12.8

Contributions from the sponsoring Companies 2.8 3.8

Contributions from scheme members 0.8 2.5

Benefits paid (7.9) (5.9)

Closing balance 170.6 179.7

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The analysis of the scheme assets and the expected rate of return at the balance sheet date was as follows:

Expected return Fair value of assets

31 December 1 January 31 December 1 January 2011 2011 2011 2011 % % £m £m

UK equities 6.90 7.80 56.2 67.7

Overseas equities 6.90 7.80 57.5 61.9

Corporate bonds 4.20 4.90 35.9 31.1

UK government bonds 2.50 4.00 12.0 10.6

Property 5.60 6.40 8.7 8.7

Cash – – 0.3 (0.3)

170.6 179.7

31 December 1 January 2 January 27 December 29 December £m 2011 2011 2010 2008 2007

Fair value of scheme assets 170.6 179.7 156.4 127.9 168.6

Present value of defined benefit obligations (161.3) (167.9) (169.6) (127.5) (150.6)

Surplus/(deficit) in the scheme 9.3 11.8 (13.2) 0.4 18.0

Experience (losses)/gains adjustments on scheme liabilities:

Amount (0.9) (5.6) 3.5 4.9 (8.7)

Percentage of scheme liabilities (%) (0.56) (3.34) 2.06 3.84 (5.78)

Experience gains/(losses) on scheme assets:

Amount (16.5) 12.8 21.6 (51.3) (0.2)

Percentage of scheme assets (%) (9.67) 7.12 13.81 (40.11) (0.12)

The actual amount of contributions expected to be paid to the pension scheme during 2011 was £3.6 million (2010: £6.3 million). The employer contribution rate for 2011 was 13.2% of pensionable salaries until 31 March 2011 when the scheme closed to future accrual and so regular contributions ceased to be paid (except for deficit reduction contributions) (2010: 13.2%).

The next triennial valuation is scheduled to be carried out as at 31 March 2013.

The deficit reduction contributions have been agreed between the Group and the trustees. These are paid over a five year recovery period ending on 31 March 2016. The recovery contributions are paid monthly and the agreed rates were £2 million in the first year, £3 million in the second year and £4.5 million in the following three years.

The Group estimate the scheme liabilities on average fall due over 20 years.

The Trustees currently adopt a policy of 70% return seeking assets (equities) and 30% liability matching assets (bonds/property) which will be reviewed periodically. A review of the investment strategy is currently underway following the closure of the scheme to future accrual.

The Group and the Trustees work closely together in matters concerning the Bakkavor Pension Scheme. Regular meetings and correspondence on matters concerning the scheme are shared in an open manner between both parties.



37Related party transactions

Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note. Transactions between the Group and its associates are disclosed below. Transactions between the Company and its subsidiaries and associates are disclosed in the Company’s separate financial statements.

Trading transactions

During the period, Group companies entered into the following transactions with related parties who are not members of the Group:

Bakkavor Group management charge/trademark Sale of goods

Purchase of goods

Interest charge

licensing agreement

£m 2011 2010 2011 2010 2011 2010 2011 2010

Associates 0.2 – 0.1 0.2 – – – –

Bakkavor Group ehf. – – – – 0.7 8.1 1.2 12.3

In 2010, the Group paid a royalty fee to Bakkavor Group ehf under a Trademark Licensing Agreement whereby Bakkavor Group ehf has granted the Group a license to use the Bakkavor name and trademark. This agreement ceased in 2011. Also, in 2010 £1.2 million of cash was paid to Bakkavor Group ehf, which covered both trademark licensing agreement fees and interest costs.

In 2011, £1.2 million was paid to Bakkavor Group ehf relating to management charges.

Amounts owed to related parties£m 2011 2010

Bakkavor Group ehf. 0.1 205.0

Other related parties – 1.1

The amount of £205.0 million in 2010 owed to Bakkavor Group ehf is included in the non-current liabilities section of the Group balance sheet, amounts due to other group companies. The 2011 amount, of £0.1 million is included in the current liabilities section within Trade and other payables.

Loans between the Group and related parties are all based on varying terms of interest. Related party loans are repayable between one and five years and incur interest based on the three month libor rate plus 3%.

The amounts outstanding are unsecured. No guarantees have been given or received. No provisions have been made for doubtful debts in respect of the amounts owed by related parties.

Remuneration of key management personnel

The remuneration of the Directors and senior management, who are the key management personnel of the Company, is set out below in aggregate for each of the categories specified in IAS 24 Related Party Disclosures.


Short-term employee benefits 6.1 5.8

Post-employment benefits 0.7 0.4

6.8 6.2

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Events after the statement of financial position date

There were no significant events after the statement of financial position date.

Controlling party

The Company’s immediate and ultimate parent Company and ultimate controlling party is Bakkavor Group ehf, a Company registered in Iceland. The largest Group in which the results of the Group are consolidated is that headed by Bakkavor Group ehf. It has included this Group in its Group financial statements, copies of which are available from Thorvaldsenstraeti 6, 6th Floor, 101 Reykjavik, Iceland.


50 weeks ended 31 December £m Notes 2011

Continuing operations

Finance costs 4 (46.2)

Loss before tax (46.2)

Tax 5 12.2

Loss and total comprehensive income for the period (34.0)

The accompanying notes are an integral part of this income statement.

The Company has no recognised gains and losses other than the loss above, and therefore no separate Statement of comprehensive income is presented.

Share Share Retained Total £m capital premium earnings equity

New shares issued 0.1 302.4 – 302.5

Loss for the period – – (34.0) (34.0)

Balance at 31 December 2011 0.1 302.4 (34.0) 268.5

COMPANY INCOME STATEMENT

COMPANY STATEMENT OF CHANGES IN EQUITY



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COMPANY STATEMENT OF FINANCIAL POSITION

£m Notes 31 December 2011

Non-current assets

Investment in subsidiaries 7 929.4

Current assets

Amounts due from other group companies 11 12.2

12.2

Current liabilities

Borrowings 6 (35.7)

Amounts due to other group companies 11 (51.6)

Other payables (0.1)

(87.4)

Non-current liabilities

Borrowings 6 (585.7)

Net assets 268.5

Equity

Share capital 10 0.1

Share premium 10 302.4

Retained earnings (34.0)

Total equity 268.5

The financial statements of Bakkavor Finance (2) plc, company number 7501697, and the accompanying notes, which form an integral part of the Company financial statements, were approved by the Board of Directors on 27 February 2012. They were signed on behalf of the Board of Directors by:

A GudmundssonDirector



COMPANY STATEMENT OF CASH FLOWS

50 weeks ended 31 December £m 2011

Increase in payables 50.4

Cash generated by operations 50.4

Interest paid (43.1)

Net cash generated from operating activities 7.3

Investing activities:

Acquisition of subsidiary (627.1)

Net cash used in investing activities (627.1)

Financing activities:

Issue of shares 0.1

New borrowings 654.7

Repayment of borrowings (35.0)

Net cash generated from financing activities 619.8

Net increase in cash and cash equivalents –

Cash and cash equivalents at beginning of period –

Effect of foreign exchange –

Cash and cash equivalents at end of period –

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NOTES TO THE COMPANY FINANCIAL STATEMENTS

General information

Bakkavor Finance (2) plc (the “Company”) was incorporated in the United Kingdom under the Companies Act 2006 on 21 January 2011 as a Limited Liability Company for the purpose of becoming an intermediate holding Company of the Group previously headed by Bakkavor Holdings Limited. On 4 February 2011 the Company was registered as a Public Limited Company and issued 50,000 £1 ordinary shares to Bakkavor Finance (3) Limited.

As the Company was incorporated during the period, these Company financial statements are for the 50 week period to 31 December 2011 and therefore there are no comparative figures for the prior period.


The separate financial statements of the Company are presented as required by the Companies Act 2006. As permitted by that Act, the separate financial statements have been prepared in accordance with International Financial Reporting Standards as adopted by EU.

The financial statements have been prepared on the historical cost basis, except for the revaluation of financial instruments. The principal accounting policies adopted are the same as those set out in note 2 to the consolidated financial statements except as set out below.

Investments in subsidiaries are stated at cost less, where appropriate, provisions for impairment.

Employees, Directors and audit remuneration

Audit fees of £85,000 for the period ended 31 December 2011 have been borne by fellow Group Company Bakkavor Foods Limited. The Company has no employees and payments to Directors for the period ended 31 December 2011 have been borne by fellow Group Company Bakkavor Foods Limited.

Finance costs

50 weeks ended 31 December £m 2011

Interest on borrowings 41.1

Amortisation of refinancing costs 3.8

Interest on loans from other group companies 1.3

46.2

NOTES TO THE COMPANY FINANCIAL STATEMENTS CONTINUED


5

6

7

Tax

The charge for the period can be reconciled to the loss per the income statement as follows:

50 weeks ended 31 December 2011 £m %

Loss before tax (46.2) (100.0)

Group relief surrendered at tax rate of 26.5% 12.2 26.5

Tax charge and effective tax rate for the period 12.2 26.5

Borrowings

31 December £m 2011

Bank overdraft 9.7

Bank loans 259.7

8.25% senior secured notes 352.0

621.4

The borrowings are repayable as follows:

On demand or within one year 35.7

In the second year 16.0

In the third to fifth years inclusive 569.7

621.4

Less: Amount due for settlement within 12 months (shown under current liabilities) (35.7)

Amount due for settlement after 12 months 585.7

All borrowings are denominated in Pounds Sterling.

Investments in subsidiaries

Investment in Group £m Companies

Additions during the period 929.4

Balance at 31 December 2011 929.4

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8Subsidiaries

As at 31 December 2011, Bakkavor Finance (2) plc held investments in the share capital in the following Companies (ownership in dormant Companies have not been listed):

Place of registration Name and operation Principal activity Interest

Directly held investments:

Bakkavor Finance (3) Limited United Kingdom Holding Company 100%

Indirectly held investments:

Bakkavor Foods Limited United Kingdom Preparation and marketing of fresh prepared foods 100%

Heli Food Fresh AS Czech Republic Preparation and marketing of fresh prepared foods 100%

Anglia Crown Limited United Kingdom Preparation and marketing of fresh prepared foods 100%

Bakkavor Fresh Cook Limited United Kingdom Preparation and marketing of fresh prepared foods 100%

English Village Salads Limited United Kingdom Packaging and marketing of fresh produce 65%

Cinquime Saison SAS Group (includes 2 further subsidiaries) France Preparation and marketing of fresh prepared foods 100%

Centrale Salades France SAS France Preparation and marketing of fresh prepared foods 100%

Crudi SAS France Preparation and marketing of fresh prepared foods 100%

Sogesol SA Spain Preparation and marketing of fresh prepared foods 100%

S.B.L.P SAS France Preparation and marketing of fresh prepared foods 100%

Bakkavor Overseas Limited United Kingdom Importer and exporter of machinery and equipment 100%

Vaco BV Belgium Preparation and marketing of fresh prepared foods 100%

Bakkavor (SA) (Pty) Limited South Africa Preparation and marketing of fresh prepared foods 100%

Creative Food Group Limited (includes 13 further subsidiaries within Hong Kong and China) Hong Kong Produce and manufactures salad products 100%

Italpizza Srl Italy Manufacture of branded and private label pizza products 100%

Two Chefs on a Roll Inc USA Manufacture of custom and private label savoury and bakery products 100%

Bakkavor Foods Canada Inc Canada Preparation and marketing of fresh prepared foods 100%

Bakkavor Estates Limited United Kingdom Property management 100%

Bakkavor Finance Limited United Kingdom Group management services 100%

Bakkavor London Limited United Kingdom Holding Company 100%

Bakkavor Acquisitions (2008) Limited United Kingdom Holding Company 100%

Bakkavor USA Inc USA Holding Company 100%

Bakkavor USA Limited United Kingdom Holding Company 100%

Bakkavor (Acquisitions) Limited United Kingdom Holding Company 100%

Bakkavor Limited United Kingdom Holding Company 100%

Bakkavor Foods France United Kingdom Holding Company 100%

4G Financiere SAS France Holding Company 100%

4G SAS France Holding Company 100%

Bakkavor European Marketing BV Netherlands Holding Company 100%

Bakkavor China Limited United Kingdom Holding Company 100%

Bakkavor Asia Limited United Kingdom Holding Company 100%

Bakkavor Invest Limited United Kingdom Holding Company 100%

Bakkavor Pension Trustees Limited United Kingdom Holding Company 100%

Bakkavor Acquisition (2008) ehf Iceland Non-trading 100%

Bakkavor London ehf Iceland Non-trading 100%

Notsallow 256 Limited United Kingdom Non-trading 100%

Exotic Farm Prepared Limited United Kingdom Non-trading 100%

Cucina Sano Limited United Kingdom Non-trading 100%

NOTES TO THE COMPANY FINANCIAL STATEMENTS CONTINUED


8

9

10

Subsidiaries continued

Place of registration Name and operation Principal activity Interest

Indirectly held investments continued:

Bakkavor Central Finance Limited United Kingdom Non-trading 100%

Butterdean Products Limited United Kingdom Non-trading 100%

Bakkavor Overseas Holdings Limited United Kingdom Non-trading 100%

Exotic Farm Produce Limited United Kingdom Non-trading 100%

Bakkavor Maroc Morocco Non-trading 100%

Financial instruments

Foreign currency risk

The Company is not exposed to any foreign currency risk as its borrowings are all in Pounds Sterling.

Interest rate risk management

The Company is exposed to interest rate risk on borrowings. The risk is managed by maintaining an appropriate mix between fixed and floating rate borrowings. The Group uses derivative financial instruments such as interest rate swaps and interest rate collars to minimise the risk associated with variable interest rates.

Interest rate sensitivity analysis

Interest rate sensitivity analysis has been performed on Company borrowings of £324.3 million to illustrate the impact on profits and equity if interest rates increased/decreased. This analysis assumes the liabilities outstanding at the period end were outstanding for the whole period. A 100 basis points increase or decrease has been used, comprising management’s assessment of reasonably possible changes in interest rates.

31 December 2011 £’000 Profit/(loss)

Effects of 100 basis points increase in interest rate (3.2)

Effects of 100 basis points decrease in interest rate 3.2

All Company borrowings are denominated in Sterling.

Share capital and reserves

31 December 2011

Number £m

Issued and fully paid:

Ordinary shares of £1 each 53,258 0.1

One ordinary share was issued to provide the Company with start up capital on 21 January 2011. On 3 February 2011, 1,200 ordinary shares were issued in consideration for the acquisition of Bakkavor Finance (3) Limited. On 4 February 2011, 50,000 ordinary shares were issued to Bakkavor Finance (1) Limited for a cash consideration of £50,000. On 7 February 2011, a further 2,057 ordinary shares were issued in consideration for the assumption by the Company’s parent Bakkavor Finance (1) Limited of an intra-Group loan owed by a Group subsidiary to the Company’s ultimate parent Company, Bakkavor Group ehf. which was subsequently capitalised.

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Share capital and reserves continued

Share premium

On 3 February 2011, £96.6 million of share premium was created in relation to the acquisition of Bakkavor Finance (3) Limited. Further to this, on 7 February 2011, the related party loan of £205 million owed to Bakkavor Group ehf was capitalised in exchange for shares.

Related party transactions

Transactions

During the period, the Company entered into the following transactions with related parties.

Amounts owed by Amounts owed to related parties related parties £m 2011 2011

Group Companies 12.2 51.6

£51.6 million is a corporate loan owed to Bakkavor London Limited and £12.2 million is tax Group relief owed to Bakkavor Finance (2) plc by various other Group Companies.

These amounts are unsecured and will be settled in cash. No guarantees have been given or received. No provisions have been made for doubtful debts in respect of the amounts owed by related parties.

Amounts are denominated in Sterling. All related party payables and receivables are held at amortised cost.

Events after the statement of financial position date

There were no significant events after the statement of financial position date.

Controlling party

The Company’s ultimate parent Company and ultimate controlling party is Bakkavor Group ehf, a Company registered in Iceland. The largest Group in which the results of the Company are consolidated is that headed by Bakkavor Group ehf. It has included the Company in its Group financial statements, copies of which are available from Thorvaldsenstraeti 6, 6th Floor, 101 Reykjavik, Iceland.

The immediate parent of the Company is Bakkavor Finance (1) Limited.

The smallest Group into which the accounts are consolidated is Bakkavor Finance (2) Limited plc, copies of the financial statements of Bakkavor Finance (2) plc are available form West Marsh Road, Spalding, Lincolnshire, PE11 2BB, United Kingdom.


Bakkavor Group Head Office

3 Sheldon Square Paddington Central London W2 6HY Tel: +44 20 7266 6400

Bakkavor Registered office

West Marsh RoadSpaldingLincolnshirePE11 2BB

External Affairs

Tamarin Bibow Tel: +44 20 7266 6443 [email protected]

Auditors

Deloitte LLP4 Brindley PlaceBirminghamB1 2HZ

Principal bankers

Barclays Capital Royal Bank of Scotland PLC Rabobank International, London Branch Mizuho Corporate Bank, Ltd.

CORPORATE INFORMATION

Printed on Mohawk Superfine produced using ECF, FSC certified mixed source pulp from well managed and legally harvested forests. Mohawk Superfine is made Carbon Neutral with 100% of energy usage offset by Green e-certified wind certificates.D

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MEETING CONSUMER DEMAND EFFICIENTLY

KEY DEVELOPMENTS

Maintained our market-leading position in our core UK fresh prepared foods market

Invested in core category businesses to support future growth and efficiency

Achieved inflation recovery target

Rationalised our UK Produce business

Developed our Rest of World business

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WHAT WE DO AND HOW WE DO IT

RUNNING THE BUSINESS WITH INTEGRITY INVESTING IN FUTURE GROWTH

AWARDS

7 Grocer Own Label Awards, UK

3 Quality Food Awards, UK

1 American National Restaurant Association Award for Product Innovation, US

1 Innovafel Product Innovation Award, Europe

1 European Supply Chain Excellence Award for Innovation in Technology

4 Supplier recognition awards from key customers

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Bakkavor Group Annual Report 2011

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