AG Barr has now released its final results for the year ended 2016.
Revenues declined when compared to last year as an £8.5M fall in carbonates revenue and a £1.1M decrease in still drinks revenue was partially offset by a £7.4M increase in other revenue. Underlying cost of sales decreased by £3.5M and there was also no redundancy and impairment costs related to the Tredegar site which accounted for about £3M last year so the gross profit was £4.1M above that of 2015. There was no compensation from the terminated Orangina contract which contributed £747K last time, depreciation was up £600K, amortisation increased by £800K and there was a £319K reduction in profits from asset sales. Share based payments did fall by £400K, however, and other underlying operating expenses declined by £819K before last year’s £900K redundancy cost was mostly offset by a £500K pension curtailment gain to give an operating profit £3.3M above that of last year. Finance costs increased by £600K due to interest costs on the pension deficit, but tax costs were down £1.6M which meant that the profit for the year came in at £34.3M, a growth of £4.3M year on year.
When compared to the end point of last year, total assets increased by £14.4M, driven by a £26.6M growth in intangible assets, a £5.7M increase in property plant and equipment and a £1M growth in derivative financial assets, partially offset by an £18.6M decline in cash and a £1.1M fall in inventories as the prior year inventory build in advance of the Tredegar site closure was unwound. Total liabilities declined during the year as a £13.7M fall in current payables and a £5.4M decrease in pension obligations was partially offset by a £4.5M growth in non-current payables, a £3.5M increase in deferred tax liabilities and a £3.2M growth in borrowings. The end result is a net tangible asset level of £72.6M, a decline of £3M year on year.
Before movements in working capital, cash profits increased by £3.1M. There was a large cash outflow through working capital, with a big fall in payables due to the 53 week year meaning that month-end supplier payments occurred before the year-end, and after tax payments fell by £231K, the net cash from operations came in at £29M, a decline of £15.5M year on year. The group then spent a net £13.8M on property, plant and equipment along with £4.8M on intangible assets before the £15.7M spent on the acquisition meant that before financing there was a cash outflow of £5.2M. The group took out a net £2.5M in new loans but spent £2M on the employee share scheme and paid out £14.3M in dividends to give a cash outflow for the year of £19.1M and a cash level of £6.2M at the year-end.
The gross profit in the Carbonates business was £98.6M, a decline of £1.1M year on year. In a competitive market the division delivered market share gains in a deflationary environment. The IRN-BRU brand held market share and the partnership Rockstar brand continued to grow both overall volume and value share. Gross margins benefited from favourable commodity pricing and supply chain savings and increased 1.3 percentage points to 52%.
The gross profit in the Still drinks and Water business was £16.9M, a fall of £1.8M when compared to last year. There was modest volume growth but the business was impacted by general market deflation and price repositioning of the Sun Exotic brand. Margins in this division were impacted as promotion pricing pressure and Rubicon availability challenges in the summer offset very positive growth in the Snapple brand following the new franchise agreement.
The gross profit in the “Other” division, which includes the acquired Funkin cocktails business, rental income for vending machines and ice cream, was £5.6M, a growth of £4.1M when compared to 2015. This year the division was dominated by the first time inclusion of the Funkin cocktail mixer business and last year by the discontinued Orangina and Findlay businesses. Funkin performed well in a growing market and syrups, purees and mixers all grew volume and value.
In February, the group acquired Funkin, a business that offers a broad range of premium cocktail solutions including fruit purees, cocktail mixers and syrups, for a total consideration of £22M which included contingent consideration of £4.5M. The acquisition generated goodwill of £15.7M and the business contributed £1.3M of operating profit during the year.
The second half of the year saw sales and performance recover as the group stabilised their operating platform following a significant level of investment and consequential change across the summer.
The UK soft drinks market has not yet appeared to have benefited from the improvement in underlying consumer purchasing power and the group have seen the impact of general price deflation, poor summer weather and retail competition feeding through to the overall performance. The market was down in value terms by 1.8% with volumes flat and within this performance, carbonates were down 1.5% in both value and volume whole stills were up slightly in volume but down 2% in value.
The growth driver in overall soft drinks was water, offset by significant value declines in fruit juice, dilutables, sports drinks and some areas of carbonates. Previously much of the market growth has been delivered by the significant growth in carbonated energy but this sector grew by only 1% in volume terms and was flat in value terms in the period. The market has seen growth in sugar free products, lower sugar brands and premium products such as those in mixers, and these have outperformed the overall category.
The group have created a select portfolio to develop in their chosen overseas markets and they expect to see continued growth in this area of the business. During the period, the international business grew revenue by nearly 30% on last year and would have grown by over 40% if measured on a constant currency basis. The push to develop outside the UK is also allowing them to build more significant relationships with their partners, Rockstar and Dr Pepper Snapple.
To ensure success in the UK market, the group are focusing their marketing efforts on their lower and no sugar products and are substantially reducing the sugar content of their portfolio to reflect consumers’ changing preference. They have already made progress in this area, reducing the average calorific content of the owned portfolio by nearly 9% in four years, and they anticipate the scale of this change to accelerate over the next year as they reduce their exposure to high sugar products where appropriate.
The expansion plans continued with the acquisition of land and the subsequent warehouse build at Milton Keynes along with the new glass line in Cumbernauld which will enable the group to bring the Snapple brand production in-house over the coming year. In the year ahead, capex is anticipated to continue at a similar level with the completion of several key expansion projects including the new flexible glass line in Cumbernauld and the warehouse expansion at Milton Keynes.
Going forward, market conditions in the core UK soft drink market are not expected to substantially change. Top line growth remains under pressure and changes to consumer preferences offer challenges and opportunities. Although the details of the Chancellor’s proposed soft drinks levy are still to be consulted upon, the board believe that their brand strength, ongoing product reformulation and innovation will allow the, group to minimise the financial impact on the business from implementation in April 2018. Based on the proposed metrics, the board expect at least two thirds of the portfolio will be lower or no sugar and would be levy free at that time. In the rest of the portfolio they expect that brand loyalty and consumer preference will drive continued demand.
At the year-end, net debt stood at £11.3M compared to a net cash position of £10.3M at the end of last year. At the current share price the shares are trading on a PE ratio of 17.8 which falls modestly to 17.5 on next year’s consensus forecast. After a 10% increase in the total dividend, the shares are now yielding 2.5% which increases to 2.6% on next year’s forecast.
Overall then this was a rather mixed year for the group. Profits were up but underlying profits were broadly flat; net tangible assets fell modestly; and while the operating cash flow did fall, this was due to a decline in payables and the cash profits increased. The cash generation was OK, but there was not enough free cash to cover the dividends let alone the acquisition, which was an essential one in my view.
Both the carbonate and stills business suffered from price deflation, driven by retail competition, and were not helped by poor summer weather and both of these businesses saw profits fall. The saving grace was the acquired Funkin business which drove the profits in the “other” division considerably higher and were it not for this acquisition, these results would have been much worse.
Going forward, the market remains subdued and is not helped by the proposed levy of high sugar drinks, which will include about a third of the group’s portfolio. The forward PE of 17.5 and dividend yield of 2.6% do not fully reflect the outlook for the market in my view and despite this being a quality company with a very solid balance sheet, I am not looking to buy in just yet.
In the annual report there is a bit more detail on how the individual brands are performing.
Irn Bru delivered a resilient performance, growing its share of the other flavour carbonates category in the year. Its position in Scotland remains very strong, supported by some marketing initiatives such as special edition tartan packs and their Made in Scotland from Girders anniversary campaign. The significant growth potential for the brand lies in England and Wales, however, and the group are looking to increase brand awareness in the region through their first national TV advertising campaign which delivered a significant increase in consumer brand awareness.
Irn Bru Sugar Free continued to show growth in popularity, aligned to the increasing consumer trend towards lower and no sugar products, and now accounts for more than a third of purchases. Irn Bru Sugar Free increased its share of the UK carbonates market, up 2%.
The fruit juice marker performance across the past year has been weak with value declining 6%. Rubicon’s performance has been broadly in line with the market but Rubicon carbonates has proved to be more resilient. Despite the difficult environment, the group have continued to invest in the brand equity and remained focused on their brand strategy with the “It’s a Family Thing” campaign reinforcing the brand’s strong position with ethnic consumers and the “Believe in Beach” campaign developing the brand as a mainstream offering through a new national TV ad.
The overall category performance in soft drinks was once again driven by growth in water. Total Strathmore volumes increased in the year but in the current deflationary market, value declined slightly. Sparkling water delivered a strong performance, though. The year saw a lot of Strathmore sports sponsorships from Scottish Rugby to the World Gymnastics Championships, increasing brand visibility. The Barr range of flavoured carbonates has developed further in the year with new limited editions and an impactful outdoor advertising campaign for Xtra Cola. The full range is now categorised as lower or no sugar, following a considerable reformulation programme, in response to changing consumer preferences.
Within a growing cocktail market, the Funkin brand has performed extremely well with UK sales in particular delivering a strong performance. Consumer dynamics remain very positive with cocktail distribution increasing. The group are working on some brand development over the next year.
The ten year agreement with the Dr Pepper Snapple group, which started at the beginning of 2015, is progressing to plan. The focus in the first year of this partnership has been on building brand awareness and redeveloping the brand identity for the UK and Europe. Snapple is now available in twelve European markets and, with strong revenue growth in its first year, is poised for success in 2016.
In May the group confirmed a long-term license agreement with the Moscow Brewing Company to manufacture, sell and distribute their Irn-Bru brand in Russia. The business is a leading Russian brewer who holds the license for a variety of premium soft drinks. With their well-established sales and distribution network, combined with increased sales and marketing focus and investment, the board are confident of delivering in the country.
Also, on the 27th April the group announced that Commercial Director Jonathan Kemp sold 4,896 shares at a price of nearly £30K. He still owns 20,729 shares in the company.
On the 2nd August the group released a trading update covering the first half of the year. In the period the UK soft drinks market performance has been challenging with continued deflation and volume declines with value down 0.8% and volume down 0.4% and indications are that the poor weather across June and July will further adversely impact the total market performance. Despite this backdrop, the group have maintained overall market share but anticipate that revenue will be down 2.9% on a like for like basis.
In the period they announced a new IRN-BRU zero sugar variant and launched three major new lower sugar products which are all showing encouraging early signs and is part of a move to reduce sugar across the portfolio. A new £5M glass bottling line at Cumbernauld is now operational, allowing in-house production of Snapple and offering future product development potential. During the period, the group closed the defined benefit pension scheme to future accrual.
The weaker Sterling following the Brexit vote will not have a significant impact this year but it is anticipated input costs will increase in 2017. The balance of the summer will remain an important trading period but assuming market conditions improve and their second half plans deliver, the board expect to meet their profit expectations for the full year. These seem to be big assumptions to me and I am staying out for now pending further clarity.