AG Barr have now released their interim results for the year ending 2020.
Revenues declined when compared to the same period of last year with an £11.4M decrease in carbonates revenue and a £4M decline in still drinks revenue. Cost of sales also declined to give a gross profit £7.9M lower. Depreciation was up £1.7M but other operating costs declined by £5.3M. There was £400K of redundancy costs and a £100K loss from an associate to give an operating profit £4.6M lower. Finance costs were up £100K but tax charges fell by £1M which meant the profit for the period was £10.8M, a decline of £3.7M year on year.
When compared to the end point of last year, total assets increased by £500K driven by an £11.1M growth in property, plant and equipment, a £3.2M increase in inventories and a £900K investment in an associate, partially offset by a £12.8M decrease in cash and a £1.3M decline in receivables. Total liabilities also increased during the period as a £2.8M fall in pension obligations, a £2.1M decrease in payables and a £2M decline in current tax liabilities was more than offset by an £8.1M increase in lease liabilities and a £4.4M growth in bank borrowings. The end result as a net tangible asset level of £101.9M, a decline of £4.8M over the past six months.
Before movements in working capital, cash profits declined by £2.8M. There was a cash outflow from working capital but this was lower than last time and after tax payments increased by £500K, the net cash from operations was £11.7M, a decline of £300K year on year. The group spent £8.4M on capex and £1M on acquisitions to give a free cash flow of £2.3M. This did not cover the £1.6M of lease payments and £1M of shares bought by the employee share scheme, let alone with £2.5M spent on own shares and £14.4M on dividends so the cash outflow for the half year was £17.2M and the cash level at the period-end was £4.6M.
The gross profit in the Carbonates business was £40.6M, a decline of £6.4M year on year. The gross profit in the Still drinks business was £5.3M, a decrease of £2.1M when compared to first half of last year. The gross profit in the Others business was £4.8M, a growth of £600K when compared to the first half of 2019.
There were a number of adverse factors affecting the business including the introduction of the soft drinks levy, the significant impact on demand and supply related to CO2 shortages and a long hot summer. The group benefited last year from one-off trading factors and favourable weather and this, combined with some specific brand challenges saw a deterioration in financial performance.
During the period, the total UK soft drinks market value was down 0.6% and volume declined 4.1% but in the last 13 weeks, market performance was notably weaker with value down 6.3% and volume declining 8.7% which reflects the strong comparative last year.
During the period the group moved away from prioritising volume and returned to the value-driven approach and reducing promotional activity. This transition, combined with the disappointing weather has had a volume impact across the portfolio, exacerbated by specific brand challenges in Rockstar and Rubicon. They are now seeing positive indications of consumer acceptance of this new price and promotional positioning. Early indications are that increased average realised prices are compensating for the reduction in volume.
There has been encouraging initial trade and consumer response to the recently launched Irn-Bru Energy range, which initially launched in Scotland and is now planned to roll out across the wider UK market later in the year.
The group are taking action to address the issues related to Rockstar and Rubicon, including the planned launch of three new Rockstar products in the Autumn and recipe improvement for Rubicon but the benefit of these actions will not be seen until later in the second half of the year. These activities combined with an easing of prior year trading comparatives across the second half of the year give the board confidence of meeting full year expectations.
Funkin performed strongly and the recent launch of ready to serve nitro-infused premium cocktails in cans is exceeding expectations with strong rates of sale and a number of significant listings secured across a range of channels including travel operators and large multiple grocers.
The group will complete the £14M investment in their ingredients handling and processing assets at Cumbernauld in early 2020 and during the period they spent £8.4M on this project.
In June the group made a 20% investment in Elegantly Spirited at a cost of £1M. The business is a brand builder, marketing and selling a range of non-alcoholic distilled spirits. During the period the business made a loss of £100K.
Going forward, despite continued economic uncertainty the board expect to meet the revised profit expectations for the year.
At the current share price the shares are trading on a PE ratio of 18.4 which rises to 22.2 on the full year forecast. After a 2.5% increase in the interim dividend the shares are yielding 2.9% which falls to 2.8% on the full year forecast.
Overall then this has been a rather tricky period for the group. Profits were down, net assets declined and the operating cash flow fell. Once lease payments and share purchases for the employee scheme are taken into account, there was not free cash. Both the still and fizzy businesses are struggling, although Funkin is still doing well. There have been strong comparatives but the group are struggling to make both Rockstar and Rubicon work and the market hasn’t reacted well to their price increases. With a forward PE of 22.2 and yield of 2.8% these shares still don’t look great value.
On the 28th January the group released a trading update covering the year as a whole. Pre-tax performance is expected to be at the top end of current market expectations, just ahead of £37M. Revenue is expected to be around £255M.
The group faced a combination of challenging trading conditions during the year, particularly across the summer period. In addition they adjusted their promotional and pricing position to align more closely with the market which reduced volumes but delivered an increase in average realised price, re-establishing their consumer pricing position.
The Rockstar and Rubicon recovery plans are now being implemented; Irn Bru has returned to growth in Q4 and Funkin continues to perform strongly. They have completed the first phase of their business re-engineering programme. The associated exceptional costs of £2M are expected to almost entirely be offset by a one-off exceptional gain related to the removal of a wind turbine at the Cumbernauld site.
The £30M share repurchase programme completed during the period. The external landscape remains challenging but they exit the year with encouraging momentum which the board expect to continue into 2020.