Nicholas Grove: Patties Foods, the manufacturer of frozen food icon such as Four'N Twenty pies, last month delivered a $19.5 million profit for the 2012 financial year, as well as an 8.2-cent dividend, that was slightly above Morningstar's expectations. But what does the year ahead hold for the company? To give us an idea, I'm joined by the company's Managing Director, Greg Bourke.
Greg, thanks very much for your time today.
Greg Bourke: Thanks, Nick.
Grove: First of all, Greg, in your results you indicated that you expected rising input costs and tough trading conditions in the year ahead. What is Patties doing to counter this?
Bourke: Yes Nick, well, there is two things there - the issue around tough trading conditions and the rising input costs. The tough trading conditions are well documented within the financial media and that's all around the conservatism and caution of consumers at the moment. When you add into that, the whole flight-to-value that we talk about within the business, consumers are becoming very sensitive around pricing and they are looking for specials all the time. So, what we need to do is get their minds out of the position of pricing and look at the new products. New products are certainly very important part of our business.
The other side of this rising input costs, as we have heard there is drought in the U.S. and we're seeing right now flour prices are increasing. Within the business, we have a target of zero cost increases across the business. So we are achieving that by offsetting our input costs that we get with efficiencies built within the business, and we've done that with the investment in automation in the packing room that we've got in our operations in Bairnsdale. We're commissioning right now robotic palletizing and also packing equipment and that's taking a lot of cost out of our business.
Grove: Can investors expect more of the same when it comes to dividends in the 2013 financial year?
Bourke: Well Patties does generate a lot of cash, and we have a tradition of increasing our dividends as our profits in earnings increase. The Board's got a target, if you like, of around 60% payout ratio. We're keeping to that, we see that that policy will remain in place for the next few years and that's even without expected increase capital expenditure and as we invest in working capital to support growth within the business. But we still see the dividends will grow in line with earnings as we move forward.
Grove: Also Greg, you've previously mentioned that Patties focus on some export opportunities. Could you elaborate on some of these?
Bourke: Export is an exciting opportunity for Patties. We've been traditionally domestic-only business, but we have noticed that now as we continue to reduce our cost and we have very efficient manufacturing capability, we're now finding that we are competitive in some of SKUs in a number of markets. We're looking at the U.K., we're looking at U.S. and also Asia Pacific.
A number of opportunities are there and the challenge for us is to make sure that we get the right one that meets our needs and at the moment we're certainly targeting the U.K. and we think there may be some future in U.S. as well. It could be range of products, not necessarily single-serve pies, probably going to be in our party range. Whilst the world does not have a taste for meat pies as Australia does, there is a trend toward more entertaining products and hors d'oeuvres and finger food and our party range is ideal for that market, so we're exploring that.
Grove: Finally Greg, are there any potential acquisitions on the cards for Patties this year? What sort of criteria to any possible acquisitions have to meet?
Bourke: We've got a very strong balance sheet and we have capability for acquisitions. We're very careful in what we look at and we have been looking at some over the last 12 months or so. We have a very firm process and a robust criteria for acquisitions. I suppose, typically, people think that we're probably going to expand into the pie category, that's not necessarily the case. There are opportunities in dessert range and entertainment range and we're just looking at a number of assets at any one time to see if there is something right for Patties. The right business will be something that is a branded business now or has the capability to take our brands into a new space. So, we're very careful in the way we look at these things. We're cautious and we'll get the right one over time.
Grove: Greg, thanks very much for joining us.
Bourke: Thanks, Nick.