Cranswick has now released its final results for the year ended 2016.
Revenues increased when compared to 2015 as a £1.7M fall in European revenue was more than offset by a £64.7M growth in UK revenue and a £3.4M increase in ROW revenue. Depreciation was up £2.9M, cost of inventories increased by £26.1M and other cost of sales grew by £17.5M. Biological asset movements were £3.3M less negative than last year and the gross profit increased by £22.6M. Selling & Distribution costs increased by £4.4M, R&D expenses increased by £791K and other admin expenses grew by £6.1M. We then see a £4.6M goodwill impairment and the amortisation of acquired intangibles were up £725K to give an operating profit some £5.5M above that of 2015. Loan interest costs fell by £473K but some other finance costs increased modestly. After tax expenses increased by £1.7M the profit for the year came in at £45.4M, a growth of £4.1M year on year.
Total assets increased by £16.5M when compared to last year driven by a £13.9M growth in cash, an £8.4M increase in the value of plant & equipment, a £2.6M growth in the value of freehold land and buildings, a £1.7M growth in trade receivables and a £1.5M increase in assets under construction, partially offset by a £4.6M decrease in goodwill, a £3M fall in inventories, a £1.4M decline in the value of customer relationships, and a £1.4M fall in prepayments and accrued income. Total liabilities declined during the year as a £4.5M growth in other payables and a £1.5M increase in provisions was more than offset by a £21.3M fall in revolving credit facility loans, a £1.7M decline in deferred tax liabilities and a £1.2M fall in the pension deficit. The end result was a net tangible asset level of £228.3M, a growth of £41.7M year on year.
Before movements in working capital, cash profits increased by £11.5M to £89.8M. There was a large cash inflow from working capital and after tax payments came in at £83.4M, a growth of £29.9M year on year. The group spent £34.3M on property, plant and equipment and after small payments relating to government grants and the sale of assets, the free cash flow was £49.9M. Of this, £14.6M went on dividends and £22M was used to repay borrowings to give a cash flow of £13.9M and a cash level of £17.8M at the year-end – great stuff!
The improved performance reflected additional volumes and a full year contribution from Benson Park compared to the five months contribution last year, along with operational efficiencies generated by previous investments and a good performance from the pasty business. Underlying revenue grew by 4.7% with underlying sales volumes ahead by 10%.
Volumes in most of the categories that the group operate are either growing slowly or in modest decline, although premium segments of these categories continue to materially outperform. Examples of this trend are premium bacon and sausage which are showing strong volume growth whereas the overall categories are slightly down.
Pig prices remained relatively stable in the first half of the year compared to the volatility experienced in the previous three years, but then fell sharply in the second half and in particular, in Q4. The UK pig price fell 15% during the year and was on average 17% lower than last year. Improvements in productivity and prolificacy together with lower feed costs helped to partly offset the impact of these lower prices.
Total export volumes grew by 23% compared to last year. There was volume growth of 32% in Far Eastern markets, 7% in the US and 8% in the rest of the world. Further opportunities are being explored and the range or products being exported is continually being developed.
Fresh pork sales grew by 9% driven, in part, by the recovery of business with one of the group’s principal retail customers in the second half of last year. UK retail fresh pork sales as a whole fell 9% year on year due to a fall in pig prices during the year. The recent pulled pork advertising campaign resulted in a 19% increase in shoulder joint sales during the campaign. The next phase of redevelopment of the Norfolk facility is now underway. This £6M investment to replace the existing abattoir will increase capacity, improve efficiencies and facilitate the site’s push for USDA accreditation.
Cooked meat sales fell 4% reflecting overall category deflation and lower volumes to one retail customer. Volumes for the category returned to growth in Q4, however. Further substantial capital investment at the Sutton Fields facility will upgrade staff amenities and refurbish both high and low risk production areas to enable expansion into new categories with existing customers and develop further capability to supply “slow-cook” and food to go ranges to manufacturing and food service customers. A major three year capital investment programme at the Valley Park facility will refurbish the fabric of the site and upgrade chilling and storage facilities to support future growth. New slicing capacity is also being added to the Milton Keynes operation to accommodate a substantial additional volume which will come on stream in H2 of the new year.
Sausage sales were 1% higher supported by strong volume growth of 5%. The premium sector of the market is the main driver of growth as consumers are prepared to pay a modest premium for a step change in quality. Premium beef burger volumes were up 18% and further capital investment to upgrade mixing and filling equipment is underway at the Lazenby facility in Hull to support substantial additional business which will come on stream in the first half of the coming year. In addition, they are investing £2M to reinstate sausage production capabilities at the Norfolk facility to accommodate new butcher’s choice sausage business from one of the main retail customers.
Bacon and gammon sales were 12% ahead as continued development of the hand-cured air-dried bacon was supported by strong premium gammon sales. This growth was underpinned by gaining sole supply status for premium bacon and gammon with one of the main retail customers shortly before the end of H1. Several new products were launched with both existing and new customers in the run up to the peak Christmas trading period. The redevelopment and conversion of the former Kingston Foods site in Milton Keynes into a gammon facility was completed during the year and it is now targeting a new sector of the bacon and gammon market.
Sales of premium poultry from Benson Park grew by 24% when compared to the equivalent post acquisition period in both years. New business wins during the year, both with existing and new customers, leave the business well placed moving into the new year. The capital investment programme which was underway when the business was acquired is now complete. The enlarged factory footprint and new inline, flat bed cooking and spiral cooking equipment was commissioned ahead of the peak Christmas trading period. The £9M investment programme has substantially increased capacity and has improved operational efficiencies as well as enabling the business to offer a broader product range.
Pastry sales were 31% ahead of the prior year, continuing the positive development since the category was introduced. Operational performance at the site continued the marked improvement seen in the second half of the previous year and the category made a positive contribution to the overall group result. New product lines were launched which, couple with a strong Christmas programme, helped drive top-line growth. New spring product launches with the principal customer leave the business well placed to deliver further growth going forward.
Sales of continental products increased by 11% reflecting the UK consumer’s strong appetite for speciality continental products. Category growth was supported by new product launches and new retail contracts together with a continued focus on sourcing new artisan products from across Europe. The extension of the Guinness Circle facility to produce British cured meat products was completed during the year and will deliver a range of premium cured meats both under the Woodall’s rand and retail customer own label.
Sandwich sales grew 3%, supported by new contract wins brought on stream part way through the first half of the last year. Top line growth was supported by an improved operational performance as the business continued to strip out underperforming accounts and rationalise the product range. Part way through the year, however, the business received confirmation that a key account would not be extended beyond its current term which ended before the year-end.
Whilst the loss of the contract adversely affected the final four weeks of trading and is having a similar effect in the early part of the new year, a new substantial contract has been secured which is expected to come on stream during the early summer, leaving the outlook for the sandwich business far more secure.
During the year the group invested £34M in its asset base. This provided for additional capacity, the upgrading of equipment, improved operational efficiencies and increased resource in product innovation. Principal areas of investment were in fresh pork and cooked meats, including Benson Park. In addition there are a number of projects either underway or planned in the near term as the board seeks to increase capacity and enhance the quality and efficiency of their production facilities. The group have also contracted for future capex totalling a substantial £16.4M.
In April 2016, after the year-end, the group acquired CCL Holdings along with its subsidiary Crown Chicken, for a cash consideration of £39.3M. Crown Chicken breeds, rears and processes fresh chicken and also mills grain for the production of animal feed. The acquisition provides the group with a fully integrated supply chain for its poultry business. The total cash consideration was £43.2M and the acquisition generated £15.9M. There are no figures given for the profitability of the acquired business.
Following a change in the customer base of the Sandwiches business, an impairment review resulted in the recognition of a goodwill impairment of £4.6M. The board have stated that they have considered responses to varying EU referendum outcomes to ensure that it is well prepared but it is unclear as to how the group will be affected.
At the current share price the shares trade on a PE ratio of 20.7 which falls to 18 on next year’s consensus forecast. After a 10.3% increase in the dividend, the shares are yielding 1.8% which increases to 1.9% on next year’s forecast. At the year-end, the group had a net cash position of £17.8M compared to a net debt position of £17.3M at the end of last year.
Overall then this has been a strong year for the group. Profits were up, net assets increased and operational cash flow grew, with plenty of free cash being generated. Much of this growth has come from the previous acquisition of Benson Park but there was also growth in exports, fresh pork due to the recovery in business from a large customer, bacon & gammon and the pastry business which is now profitable. The only area where growth is not apparent is cold meats and sandwiches where the group lost a major contract.
A lot of investment is being made in the business and the above excellent performance is despite sluggish markets in general. This good news does seem to be baked into the share price, however, as the forward PE ratio of 18 and dividend yield of 1.9% is nothing to write home about. This is an excellent company but I feel the current uncertainty in the market is not really reflected in the share price and I have taken profits.
On the 25th July the group released a trading update covering Q1. Revenue in the three months was 11% ahead of the same period last year driven by strong volume growth. Underlying revenue was 5% higher with volumes up 12% as the benefit of lower input prices continued to be passed on to customers. Export volumes to Far Eastern markets were 60% ahead of the same period last year, reflecting both ongoing robust demand from the region and increased output from the two primary processing facilities.
The integration of Crown Chicken is progressing to plan with the business making a positive contribution in line with board expectations. During the period the group also continued to invest heavily across the asset base to increase capacity, add new capability and drive further operating efficiencies. Net debt stood at £22M at the period end compared to net cash of £18M at the year-end.
The group has also announced the sale of the sandwich business to Greencore for a cash consideration of £15M. Overall the board are confident in the group prospects for the current year.
On the 16th November the group announced that it acquired Dunbia Ballymena for cash. The business is a Northern Irish pork processing business which processes around 7,800 pigs each week. The transaction will be funded from the group’s existing debt facilities and is expected to be earnings neutral in the current year and earnings enhancing in 2018.