AG Barr have now released their final results for the year ended 2019.
Revenues increased when compared to last time as a £5.7M decrease in still drinks revenue was more than offset by a £7.2M growth in carbonates revenue. Cost of inventories grew by £10M to give a gross profit £8.2M lower. Depreciation was up £700K but other operating expenses fell by £10.2M. There was no gain on the sale of a distribution site, which netted £2.5M last time and there was a £700K GBP pension equalisation charge. Offsetting this was £900K fall in the sugar reduction programme costs and £300K less reorganisation costs which meant the operating profit was £800K lower. Finance costs reduced by £400K but the tax charge was up £1M to give a profit for the year of £35.8M, a decline of £1.4M year on year.
When compared to the end point of last year, total assets increased by £10.3M driven by a £6.8M growth in cash, a £5.9M increase in plant, equipment and vehicles, a £2.4M growth in inventories and a £1.2M increase in trade receivables, partially offset by a £4.6M decline in assets under construction and a £1.2M decrease in software assets. Total liabilities also increased during the year as a £1.7M decline in pension obligations was more than offset by a £2.4M increase in trade payables. The end result was a net tangible asset level of £163.5M, a growth of £10.1M year on year.
Before movements in working capital, cash profits increased by £2.5M to £55.1M. There was a cash outflow from working capital but this was less than last time so after tax payments increased by £1.6M, the net cash from operations was £44.4M, a growth of £2.3M year on year. The group spent £8.9M on capex to give a free cash flow of £35.5M. Of this, £10.3M was used to buy their own shares and £17.9M went on dividends to give a cash flow for the year of £6.8M and a cash level of £21.8M at the year-end.
The gross profit in the carbonates division was £100.1M, a growth of £6M year on year, driven by Irn-Bru, Barr Flavours and Rubicon Spring. The Barr flavours range has made excellent progress and the board expect to deliver further progress in 2019 due to increased levels of distribution gained in the second half of 2018
The gross profit in the still drinks and water division was £14.7M, a decline of £1.4M when compared to last year. While the performance of Rubicon still juice drinks has been impacted by the overall decline in the fruit drinks category, the brand as a whole has grown by nearly 8% in volume terms reflecting the significant growth of Rubicon Spring. Strathmore gained less benefit from the significant weather related demand across the hot summer months and was impacted by competitive pricing.
The gross profit in the other division was £7.7M, an increase of £300K when compared to 2018. The Funkin business continued its strong growth trajectory with revenue growth of 9%. They made significant progress across core business development in the on-trade along with the exciting launch of draught cocktails, initially focused on outdoor events and now expending into higher volume on-trade pubs, bars and restaurants. Following their initial entry into the home cocktails market with the growing Shaker Pack product, the next step will be the launch of nitro cocktails in can format which will be launched into the market in the first half of 2019, further supporting their strategy of building the brand from its existing strong base in the on-trade into the wider consumer market.
This was a tricky year for the market. Carbon dioxide shortages during a period of hot weather, snow disruption and a number of customer business failures together with the implementation of the soft drinks levy led to significant changes in pricing, promotional and demand factors in the wider market.
The implementation of the levy has led to distortions in both value and volume performance in the market. Unit pricing changes and shifts in promotional dynamics have been evident across the full year. The total UK soft drinks market saw value up 8.1% and volume up 3%. This was particularly evident in the carbonates category where value grew 11.6% and volume increased by 2.7%. In regular colas, value grew 1.9% while volume declined by 22%. The only sector in decline was juice drinks which continues this long term trajectory as consumers choose water, flavoured water or traditional carbonates. Overall Barr soft drinks volume share grew by 11%.
Last year saw the reformulation of the group’s biggest brands and the implementation of the soft drinks levy. The group placed an intentional short term trading focus on volume across the core carbonates business as they established where market pricing and promotions would sit after the levy came in. This has given some short term boosts to their volume growth.
The group expect to see the overall soft drinks market performance stabilise in 2019 as the comparisons start to include the levy. They expect to revert back to their long-term strategy of value over volume as they do so.
They have seen a significant amount of change in their partnership brands across the period. They launched new partnerships with Bundaberg and San Benedetto in early 2018 which have got off to a strong start with the brands making good progress. The Snapple brand has not made as much progress as they would have liked but the change in ownership of the parent company has led to a positive change which they hope will lead to a more autonomous position for the group allowing them to focus on growth over the long term.
Rockstar progress has slowed in the period, down 3.1% in volume terms in a challenging marketplace where significant competitive investment and activity have dented the strong prior year performance. The group expect to launch a number of new Rockstar products in order to regain sales momentum. They have regained momentum in their international sales performance with revenue growth of 8.6% as their business development plans delivered strongly in Ireland, Sweden and Germany.
The board forecasted that operating margin would see a moderate reduction as they continued to support brand development, innovation, customer service and flexibility. They were also impacted by unplanned CO2 shortages, unprecedented seasonal demand which led to suboptimal operating conditions and additional operating costs during the summer months. Going forward they expect moderate cost inflation in the coming year which they expect to offset through “management actions” (whatever that is) which should see margins stabilise.
Given the largely UK-based sales profile, the current assessment is that the specific issue of the Brexit will not have a significant impact on the business other than through its effects on forex and the procurement of raw materials
During the year there was a charge of £700K for the past service cost in respect of the equalisation of GBP benefits following a high court judgement.
As far as capex is concerned, the major project this year has been the replacement and upgrade of the liquid to line processes in the Cumbernauld factory. Cash spend on this £13M investment was lower than originally planned due to rephrasing of both operational activity and supplier payments, however the project remains on schedule with commissioning planned for 2020. As a consequence, capex in 2020 is expected to be higher than previously guided.
For Brexit, a steering group has considered the implications both for transition disruption in the 3-4 months after an exit and for the longer term strategy. Action has been taken to mitigate short term transitory issues by increasing forex coverage and inventory levels of strategic raw materials. Given the UK focus of the commercial activities and the largely UK sourced supply base, the current assessment is that an exit from the EU will not have a significant strategic impact on their business and is not a principal risk.
Going forward, the political and economic climate in the UK indicates that 2019 will be another uncertain year for UK-based businesses. For soft drinks this is likely to be made all the more challenging by further regulation and ever changing consumer dynamics. Despite this, the board have confidence in their growth strategy.
At the current share price the shares are trading on a PE ratio of 26.3 which reduces to 25.2 on next year’s consensus forecast. After a 7% increase in the dividend the shares are yielding 2% which is forecasted to remain the same next year. At the year-end the group had a net cash position of £21.8M compared to £15M at the end of last year, which was higher due to the change in timing of the capex investments and share buy-backs.
Overall then this seems to have been a decent year in a fairly tricky market. Profit was down but this was due to last year’s distribution site sale, otherwise it would have increased. Net assets grew and the operating cash flow improved with good free cash generation (although capex will rise next year). The carbonates and other business is doing well but the stills sector is struggling somewhat due to a general fall in the juice market. The group seems to have successfully overcome Co2 shortages and the soft drinks levy but this performance comes at a price and the shares look pricey with a forward PE of 25.2 and yield of 2%. This should be a great investment at the right price.