Finsbury Foods have now released their interim results for the year ending 2015.
When compared to the first six months of last year, revenues increased by £20.9M due to the growth in UK bakery sales with like for like sales increasing by £4.9M and the acquisition accounting for the rest of the growth. Cost of sales also increased to give a gross profit some £10.2M ahead of last year. Core admin expenses increased by £8.3M and we saw £1.3M worth of transaction costs this year, which was clearly a non-recurring item. Nevertheless, operating profit still managed an £864K increase when compared to last time. There was an overall adverse movement in the value of interest rate swaps that are used to hedge against increases, and bank interest increased by £111K as a result of the new loan but tax was broadly flat on last year to give a profit for the period some £405K higher at £2.1M.
When compared to the end point of last year, total assets increased by £81.7M driven by a £25.7M increase in goodwill, a £23.1M growth in receivables, a £21.5M increase in property plant & machinery and a £6M increase in inventories. Liabilities also increased with a £28.6M growth in payables and a £16.7M increase in borrowings to give a net tangible asset base of £20.3M, an increase of £9.6M which is not too shabby.
Before movements in working capital, cash profits increased by £1.7M to £5.3M. Due mainly to an increase in payables, lower interest, and lower tax this became a net cash flow from operations of £6.2M, a £6.9M positive swing when compared to the first half of last year. This comfortably covered the capital expenditure of £1.7M but the main change during the period was the £53.8M spent on the acquisition. This was paid for by a £19.3M new loan and £33.7M received from the issue of new capital to give a cash flow of £686K and a cash pile of £1.3M. If we take out the acquisition, this was actually a rather good performance although the low level of capital expenditure is likely to change in the second half of the year with the full year figure at a similar level to 2014.
UK Bakery underlying operating profits were £3.8M in the first half of this year which represents a £1.8M increase when compared to the first half of last year. The improvement in performance was due to growth in cake market share on the back of both their licensed products and of brands, an improvement in production efficiency leading to lower cost of production and the benefits of increased automation from capital investment. The growth in profits seems mainly to be organic with a 72% like for like growth during the period. Profit margins increased from 2.6% to 3.9% but this remains below expectations with the group looking to find further efficiencies to improve this.
The cake business operates in a mature market with a value decline of 1.4% which makes the revenue growth look like a good achievement. Growth was driven by a successful Christmas trading period and the success of the Frozen Disney licenced celebration cake along with the own label round cake offering. Operating profit margin growth arose from increased efficiencies in the factory after significant capital expenditure over the past two years. The intention is to continue investing in capital expenditure within the cake business to improve margins further and increase product capability.
In the bread and morning good business, the results include two months of trading from the acquired Fletchers business which totalled £16M of revenue and £400K of operating profit. It is still early in the integration process but early indications are positive with the intention to invest in capital expenditure to improve productivity and increased product capability as in the cake business. Overseas operating profit was £595K in the first half of 2015 representing a £133K growth when compared to the first six months of 2014 with operating profit margins increasing from 4.1% to 5.3%. The overseas business primarily trades in France and as such is heavily exposed to the Euro and recent exchange rate performance so the increase in operating profits looks somewhat more impressive.
On the 30th October the group acquired Fletchers Group for £56.4M. Fletchers produces morning goods and specialist bread products for grocery retailers and foodservice customers. The acquisition generated £25.7M in goodwill and was satisfied in cash, partly raised by the issue of 59.3M new shares. Whilst the UK grocery market continues to be challenging, the wider economic environment is slowly improving and the broader channel, customer and product diversification achieved after the acquisition should benefit the group given the higher growth opportunities in areas such as foodservice. The decent first half performance is expected to continue into the second half of the year as the integration of Fletchers continues and starts to deliver scale and efficiency synergy benefits.
At the half year point, net debt stood at £25M compared to £11.8M at the same point of last year due to the Fletchers acquisition. After a more than three-fold increase in the interim dividend, the shares are now yielding 2.1% which increases to 3.4% for the full year on consensus forecasts.
Overall then this was a good update from the group. Profits improved when compared to the first half of last year, both organically and with regards the contribution from Fletchers. Nat assets improved and the balance sheet looks decent enough, although this is mostly due to the new equity issued during the year. There is also a decent cash flow with a strong free cash flow (not including the acquisition) that is more than enough to pay the dividend, although the cash pile at the end of the half year does look a bit meagre.
The cake market is a mature one, and also one that is declining but Finsbury seems able to increase market share with successes with the Disney Frozen cake, likely to decline as that franchise ages and the more evergreen own brand round cake. The acquisition seems like a great fit and the entry into the growing food service market looks a shrewd move. There is quite a bit of debt here now and the French business is susceptible to further Euro weakness but I see prospects here as being good as the acquisition beds in and a 3.4% predicted dividend yield for the year adds a further incentive. Having bought in here after the last positive statement, I am happy to continue holding.
We can see from the chart that the market seemed to approve of the results.
On the 7th April it was announced that Martin Lightbody had sold 1,500,000 shares at an approximate value of £1.1M. This seems to be profit taking as it was done shortly after a series of strong performances in the share price.
On the 6th May the group announced that it had acquired Johnstone’s Just Desserts from administrators FRP. Johnstone’s is a supplier to national coffee shop chains for whom it produces cake, including its renowned caramel shortcake. Last year it produced a turnover of some £9M. Finsbury intends to work with the current Johnstone’s management team at its existing site in East Kilbride and all 150 employees will remain with the company.
On the 16th July the group released a statement covering the full year trading. The strong trading in the first half of the year continued and the group will outperform its current profit expectations. Total revenues grew to £256.2M, an increase of 45.8% year on year with organic growth of 6.1%, primarily within cake. The Fletchers acquisition contributed £69.3M to revenues but the acquisition of Johnstones completed too late to be material. The overseas division grew by just 1% when compared to last year.
The second half performance benefited from the strong growth in revenues together with an earlier than planned delivery of the Fletchers acquisition synergy benefits. The strong performance was further complemented by capital expenditure, depreciation, debt and financing costs all being lower than originally forecast. The group continues to expect capital expenditure in the year ahead to increase as investment within the Finsbury and Fletchers business continued and the directors look to maximise the opportunity within Johnstones. Before everyone gets too excited, however, the board have reiterated that consumer markets remain challenging but it is anticipated that growth will be driven by the new acquisitions in the coming year.
This is an excellent update and I will look forward to pouring over the full year figures when they are released.