AG Barr manufactures, distributes and sells soft drinks. It has manufacturing sites in the UK and sells mainly to customers in the UK with some international sales. As well as carbonates and still drinks, the group also derives income from water coolers, rental income for vending machines and sales of irn-bru and Rubicon ice cream along with other soft drink related items such as water cups. Some of the brands include Irn-Bru, Rubicon, Barr, KA, Strathmore, Simply, Tizer, D’N’B, St. Clement’s, Abbott’s and partnership brands include Rockstar and Snapple.
They have now released their final results for the year ending 2015.
When compared to last year, total revenue increased with a £381K growth in carbonates revenue, a £3.3M growth in other revenue, and a £3.1M increase in still drinks revenue. Cost of inventories fell during the year but last year’s £1M one-off costs at the Milton Keynes development was more than offset by a £1.4M redundancy cost at the Tredegar site and a £1.5M impairment cost of the same site this year. This meant that gross profits increased by £5.3M. The group also gained £747K in compensation from a terminated contract relating to the contract for the production and sale of Orangina that was terminated by Schweppes, but distribution costs grew by £1.6M. Operating leases also increased along with a detrimental movement in trade receivable impairments and a smaller growth in other admin expenses, although there was a lack of £2.1M of merger costs that occurred last year which gave a £4.2M increase in operating profit. A slight reduction in interest costs was more than offset by a growth in tax so that the profit for the year stood at just under £30M, a growth of £1.8M year on year.
When compared to the end point of last year, total assets increased by £27.9M driven by a £12.5M growth in cash levels, a £7.1M growth in software development costs relating to the implementation of the new ERP system, a £5.8M increase in assets under construction relating to the Milton Keynes phase 2 programme, and a £4.1M growth in trade receivables, partially offset by a £1.6M fall in freehold land and buildings. Total liabilities also increased during the year as an £18.4M growth in pension obligations, an £8.3M increase in trade payables and a £1.4M growth in accruals was partially offset by a £2.8M fall in deferred tax liabilities. The end result is a net tangible asset level of £125.6M, a decline of £5.5M year on year.
Before movements in working capital, cash profits increased by £6.2M to £48.1M. A large increase in payables, which were distorted by large capital creditors related to the installation of the Tetrapak line at Milton Keynes was partially offset by detrimental movements in inventories (partly related to the Tredegar site closure,) and receivables. A £1.4M extra pension payment, along with a lower tax and interest payment meant that the net cash from operations came in at £44.5M, an increase of £3.2M year on year. The group spent £7.1M of this on software development and £11.5M on the purchase of property plant and equipment to give a free cash flow of £26.6M. After a £13.1M payment of dividends and a net £1M purchase of shares by the employee scheme the cash flow for the year was an impressive £12.4M to give a cash level at the year-end of £25.4M.
The UK soft drinks market entered a deflationary phase towards the end of the year but over the year as a whole the market experienced a 0.2% volume decline and a 0.4% value growth. The year on year figures were impacted by exceptionally warm weather the year before and in volume terms carbonates declined by 1.3% following strong growth last year. The still category saw volumes increase by 0.8% with a 0.2% decline in values. The water category overtook cola to become the largest single category by volume. The energy category continued to experience growth with a 4.1% increase in values and fruit drinks also grew but significant declines continued in fruit juice, dilutes and sports drinks.
Geographically, sales in England and Wales, which account for about 60% of the total, grew by 3.5% and international sales increased by 7.9%. The situation in Scotland remained strong, growing by 1.2% but future growth potential lies outside Scotland.
The gross profit in the Carbonates division was £102.2M, a growth of £3M year on year. Total Irn-Bru sales grew by 1.6% with sugar free contributing strongly to this growth. The brand benefited from the sponsorship of the Glasgow commonwealth games. Sales of Irn-Bru ice cream was just under £1M. Sales of the brand in England and Wales increased by 5.6%, driven by increased sales in Northern England with sugar free growing by over 20%. Rubicon delivered a solid performance with growth of 3.4%. Across the Rubicon portfolio, carbonates have delivered growth of 8.1% with a 1.5% growth in stills reflecting the challenges of the juice market. Rubicon benefited from increased brand investment with the launch of Coconut Water which developed as a sub-category, and in January 2015 they launched the Rubicon brand into the chilled category, available in Mango, Guava and Lychee.
The Barr range of flavoured carbonates continued to grow steadily year on year with sales growth over 6%. The launch of Xtra Cola and the further development of new flavours and formats all helped to underpin the strong performance.
The gross profit in the still drinks and water division was £17.3M, an increase of £900K when compared to last year. Strathmore had a very good year with growth of over 20%. The development of the brand was supported by the huge level of awareness driven by the Commonwealth games sponsorship with athletes from around the commonwealth using the brand. Since then the group have partnered with Scottish Rugby to further promote the brand. The group have also launched Strathmore Twist into the growing flavoured water category and they expect this to show strong future growth.
The gross profit in the “others” segment, including ice cream was £3.7M, an increase of £3.1M when compared to 2014. The group exited the non-core water cooler business in the second half of the year which was sold to Eden Springs, realising a small gain on the sale of the business. They have also exited the Findlays bottling site in East Lothian.
As far as the partnership brands are concerned, Rockstar continued to grow in line with the market following the prior year’s outstanding growth performance. The brand has recently launched Rockstar Energy Waters and has also expanded into Scandinavia. The Orangina brand exited the portfolio in July but in September the group launched a new partnership with Dr. Pepper Snapple group to develop the Snapple brand in the UK and on a wider European basis with the brand management moving to Barr in January 2015. This venture does have the potential to have quite an effect on future growth in my view.
During the year the group announced the closure of its manufacturing site in Tredegar. This resulted in an impairment charge of £1.5M in respect of buildings and plant at the site which have been written down to recoverable amounts. Some £485K of related redundancy costs were incurred during the year with a further provision of £942K being recognised. Also, as a result of the finance, telesales, distribution, demand and supply planning reorganisation, a curtailment of the pension plan has arisen. This resulted in an exceptional credit arising from the reduction in the pension obligation following a fall in the number of employees remaining in the scheme. The value of this credit was £523K. A tax credit of £687K has been recognised as a result of the total exceptional costs.
The investment in new carton facilities in Milton Keynes has progressed with the commissioning phase under way at the moment. The project has been delivered on time and within budget which has resulted in the Tredegar site being closed in February 2015. The new Milton Keynes facility in combination with the strong operating performance of the other sites will allow the group to improve their overall operating cost base and efficiency. In the coming year the expansion related capital expenditure is likely to continue with the focus being on the further investment at Milton Keynes and the implementation of the new ERP system in June.
Last year, certain freehold properties were transferred to a partnership in order to lease the properties to a group company and provide the pension scheme with a distribution of the profits. The group has the ability to control the partnership by making additional payments to the scheme and it is therefore treated as a consolidated entity and the value of the properties sold to the partnership and leased back to the company remain on the balance sheet. As part of the funding arrangement the group made a one off payment to the pension scheme of a hefty £20.4M to allow it to invest in the partnership and this was treated as a prepayment of pension contributions.
The group currently has a net cash position of £10.4M compared to a net debt position of £2.1M last year. Of the total £40M of loan facilities, some £15.1M was drawn down and £24.9M was left undrawn relating to £5M in the three year revolving credit facility, £15M in the revolving credit facility for Milton Keynes and a £5M overdraft. There are also £16.6M of outstanding operating lease commitments off the balance sheet.
After the year-end the group acquired Furkin Ltd, a company that offers a broad range of premium cocktail items such as fruit purees, cocktail mixers and syrups. The total cash consideration was £16.5M plus up to a further £4.5M in contingent consideration, funded by an extension to the existing credit facilities. The acquisition gives the group an opportunity to enhance their position in the on-trade and hotel, restaurant and café hospitality market segments.
Overall market conditions are expected to remain challenging. The UK soft drinks market is experiencing a period of price deflation which will make it more difficult for many businesses to deliver the top line growth of recent years. Whilst the year has started slowly, reflecting tough comparative trading and promotional phasing, the board are confident they will be able to “unlock the significant potential that Barr offers its shareholders in the year”. Whatever that means…
At the current share price the shares trade on a PE ratio of 22.8 which falls to 19.2 on next year’s consensus forecast which is certainly not cheap but you pay for quality I guess. After a 10% increase in the total dividend for the year, the yield is currently standing at 2.1% increasing to 2.3% on next year’s forecast.
Overall then this has been a steady year for the group. Profits increased year on year, as did operating cash flow and they produce plenty of free cash in what seems to be a very cash generative business. Net tangible assets did fall, however, when compared to last year. The soft drinks market as a whole is rather stagnant in this country although the energy and water categories are both increasing. For AG Barr’s brands, Strathmore water was the outstanding performer but the others seem to be growing faster than the market too for the most part. The partnership with Snapple looks interesting but the loss of Orangina is a little disappointing.
The new Milton Keynes site is likely to improve efficiency going forward but the high level of capital expenditure will continue into next year. There is a decent amount of net cash as a safety net but this has been spent on the Furkin acquisition which, although opening up a potentially interesting new market, seems to be rather expensive and no profit figures are given for the business. Going forward, the pressure from supermarkets to reduce prices is having a detrimental effect on the market and the group has made a slow start to the new-year. This is without doubt a quality business but given the market problems at a dividend yield of 2.3% and a PE ratio of 19.2 the shares look a little expensive to me.