Real Good Food is a food business serving a number of market sectors including retail, manufacturing, wholesale, food service and export. The group now focuses on cake decoration, food ingredients and premium bakery.
The group has a number of different subsidiaries operating in various markets. Napier Brown distributes bulk sugar and manufactures and supplies packed sugar to the retail and industrial food sectors which is the business that is being discontinued. Garrett Ingredients distributes bagged sugar and dairy products to the industrial food sector; Renshaw manufactures and supplies marzipan and ready to roll icing to the industrial and retail sectors; R&W Scott manufactures and supplies chocolate coatings and jam to the industrial and retail sectors; and Haydens manufactures and supplies ambient cakes and desserts to the retail sector.
Real Good Food has now released its final results for the year ended 2015.
Overall revenues declined by £5.7M as a £3.8M growth in Renshaw revenue, a £1.3M increase in European revenue, a £1.1M growth in Haydens revenue and a maiden £755K contribution from Rainbow Dust was more than offset by a £12.2M fall in Garrett revenue reflecting the fall in commodity prices within the business. Cost of sales also fell, however, to give a gross profit some £3.6M ahead of last year. Distribution costs then increased by £1.3M and admin expenses were up £1.8M which meant that operating profit was £531K above that of last year. We then see a growth in interest costs and the pension costs which produced a pre-tax profit for continuing operations of £1.6M, which was flat year on year. A large swing to a tax payment compared to a rebate last year, partly relating to some £502K of current year losses not recognised compared to some adjustments to previous years in 2014, plus the £4M loss from the discontinued operation drove the group into a loss of £3.4M, a deterioration of £2.8M year on year.
Overall, total assets fell by £3.6M when compared to 2014 as a growth in goodwill was unable to offset declines in receivables and inventories. In contrast, total liabilities grew during the year as a decline in borrowings was more than offset by increases in payables (annoyingly the split for the liabilities relating to the discontinued business doesn’t include different payables), and a £2M growth in the pension obligation. The end result is a net tangible asset level of -£941K, a deterioration of £11.1M year on year. This is a bit of a weak balance sheet but this business sale should go some way to repairing it.
Before movements in working capital, cash profits fell by £1.6M to £1.1M. There was a cash inflow from working capital, however, in particular a decline in receivables and inventories due to the reduction in the cost of sugar, which fell 25%, which meant that after there was a £1.3M positive swing to a tax rebate, the net cash from operations grew by £3M to £3.7M. The group then spent £1.4M on capex and £1.2M on an acquisition which gave a cash flow of £911K before financing. The group took out an additional loan to pay back some of the revolving credit facility which left them with a cash outflow of £1.9M for the year and a cash level of £6.6M at the year-end.
The group figures for the year were dominated by the market issues in sugar which impacted both Napier Brown and Garrett Ingredients. The first half of the year was badly affected by the problems associated with the British Sugar dispute and while this was resolved from the start of the second half of the year, the sharp fall in sugar market prices made trading conditions very tough. The home baking market, however, has been in growth for a number of years, fuelled by media activity, in particular the Great British Bake Off. Within this market, the fastest growing sector has been cake decorating.
The underlying operating profit at the Garrett business was £520K, a decline of £650K year on year. The business was hit by dramatic deflation in both its core commodity markets of dairy and sugar. Excess sugar stocks in Europe had a particular impact on the spot market which is the business’ main focus, while the dairy market was also hit by price falls caused by a combination of factors including the weather and EU sanctions against Russia. Both volumes and revenue fell significantly and while trading margins were well managed, profits fell accordingly. Distribution operations were withdrawn from the Napier Brown site in the autumn of 2014 and this process was completed by the end of the year.
The business undertook a new engagement with its customers at the Ice Cream Alliance Exhibition in February and will look to build on this. Priorities going forward include new sources of dairy, new added value ingredients and developing a logistics offering. In addition, the new management team is working on a strategy to support its commodity trading operation with other value added products and services with a number of initiatives being pursued focusing on the needs of the customer base.
The underlying operating profit at the Renishaw business was £5.1M, a growth of £700K when compared to last year. Sales revenue was up nearly 9% with export sales being particularly strong as growth occurred across Europe, the US and Australia. Operationally the business coped well with the increased volumes, hence the increase in profit. While there are some indications that overall growth in the home baking market is beginning to plateau, the interest in cake decoration continues to be buoyant. A number of product initiatives were developed during the year including soft fondants and coloured marzipan. While growth is anticipated across all trade channels, the major areas for growth opportunities are identified as foodservice and export. The key strategy going forward is to grow export and B2B, upgrade the product offering and invest in new flexible capacity.
The underlying operating loss at R&W Scott was £260K, an increase of about £200K when compared to 2014. Sales volumes were marginally ahead but revenue was slightly down reflecting deflation in chocolate coatings. The growth in losses was also due to a planned increase in overheads as management was recruited to build a sustainable stand-alone business. A major foodservice contract was gained in jam which will give the business significantly increased scale in this market but servicing this contract caused a number of operational cost challenges which have now been rectified and leaves the business well placed to develop its jam offering to a wider customer base.
The development of the foodservice jam business has led to a new opportunity in pie fillings, sales of which began in August following an initial investment of £140K in specialist equipment. On the retail side, listings have been achieved for a Scott’s chocolate spread and a relaunch of the jam ranges, focusing on the “no added sugar” proposition which has been well received. Priorities going forward include a B2B jam offering and the implementation of the site investment plan.
The underlying operating profit at Haydens was £444K, a growth of £335K year on year. The business posted a modest sales growth of 4% on last year but a dramatic change in product mix following the decision to exit a number of product categories and concentrate on five main sectors gave rise to the increase in margins. Sales in Danishes, pies and tarts all showed increases of over 20%. The objective of broadening the customer base was achieved with three new national customers being added: Aldi, Caffe Nero and Asda. There are plans in place to invest in the bakery to ensure it has the capability to manage the growth and a number of new products are planned such as mini tarts and injected yum yums. Priorities going forward include new product development, developing new customers and investment in site infrastructure.
The underlying operating loss at the European business was £48K, a positive movement of £353K when compared to last year and the business just moved to a break-even EBITDA position by the end of the year. The major product focus has been on the Renshaw ranges of coloured sugar paste and marzipan, and the main geographic focus was on Benelux, France and Spain. The main marketing effort was directed at trade and consumer cake shows across Europe which are becoming increasingly popular. The development of a multi-lingual sales team each with a country focus has worked well and the move to a warehouse on the outskirts of Brussels was successfully implemented. The business is investing in local labelling to ensure that customers receive the product and format they need which will increase costs in the short term but help fast track the growth plans. Priorities going forward include a new warehouse, offering the Rainbow Dust offering and opening up new countries.
The underlying operating profit at the newly acquired Rainbow Dust was £418K. The business was acquired in January 2015 and is a specialist supplier of cake decorating products to the sugar craft industry, including coloured edible glitters, dusts, sprinkles and food paints. The total consideration was £7.5M representing an initial payment of £4M in cash and a further £3.5M in contingent considerations which is expected to be paid until the end of 2016. The transaction generated goodwill of £6.2M and given the profits made in just three months of ownership, this looks to be a good deal to me. The priorities going forward include the development of the management team, growing export sales and upgrading the warehouse.
The operating loss in the discontinued business was £3.9M compared to £2M last year. The discontinued business is the Napier Brown sugar operation and after the year-end, it was sold to Tereos Participations SA for £44.4M and £1.9M in transaction costs which seems to compare well to the net assets of £14.4M being held for sale.
During the year there was a modest number of “non-underlying” costs. Management restructuring costs of £568K (some of this is included in discontinued operations) related to restructuring of the sugar division and head office, and the £282K acquisition costs related to the purchase of Rainbow Dust Colours.
The vast bulk of sales are made in the UK but the group is exposed to currency risk on purchases of almonds from the US but this risk is partially mitigated by an attempt to match sales in foreign currencies. The effect of a 10c strengthening of the US dollar against Sterling would result in a net £73K gain on payables/receivables with the opposite also being true. The group is also exposed to currency risk on the purchase of sugar from Europe, again mitigated by sales in foreign currencies. A 5c strengthening of the Euro against Sterling would have resulted in a £47K decrease in profits. In addition, the group is exposed to interest rate risk with a 1% increase in the applicable interest rate reducing profit by £369K.
It is worth noting that a loan note of £2.8M is owed to Napier Brown Ingredients, in which director Mr. Ridgwell has a beneficial interest. Agreement has been reached in principle that interest will be paid from April 2014 with all claims for interest prior to this being waived and accrued interest at the year-end stood at £277K. In fact, the group has quite an interesting shareholder register. The only two shareholders with over 3% of the company are Napier Brown Ingredients, controlled by non-exec Pat Ridgwell with 32% of the equity; and Omnicane International Investors, who seem to be a sugar cane grower and have nearly 29% of the share capital. The founder, Pieter Totte is currently CEO and executive chairman which is never a good combination in my book but the directors do seem to be fairly sensibly rewarded with no excess in evidence.
The group operates a defined benefits pension scheme which was closed to new members in 2000. It currently has a liability of £5.3M and base annual contributions were set at £264K with annual increases of 3% for the following two years. In addition, the group has agreed to make a one-off contribution of £166K payable at the rate of £11K per month starting in November 2013. The present value of the obligation is not huge, standing at £21.8M which means the deficit is a substantial percentage of this but it is unlikely to become too large.
As with any business, there are a number of risks. One being the reliance on some key customers, some of whom operate on contracts which are subject to annual renewals. Another key risk is the cost of raw materials with sugar, almonds and dairy all being major inputs. The group could also be impacted by changing consumer trends. Home baking seems to be riding high at the moment but this fad won’t go on forever with potential risks including concerns over obesity and healthier eating.
The group has £2.7M of unutilised tax losses that have not yet been recognised. And at the year-end the group had committed to the acquisition of £690K worth of property, plant and equipment.
Trading in the early months of the new year have begun well and with the funds being received from the sale of Napier Brown being received in May, they are now in a position to fast track some of the investment opportunities the board have identified which will include spend on jam, sauce and pie filling capability at R&W Scott; infrastructure at Haydens to support its growth; and increased capacity at the Renshaw site in Liverpool. They will also look at potential bolt on acquisitions. The group is also proposing to upgrade its facilities of the group innovation and development team by relocating them to a separate site in Liverpool which will free up space at the Crown Street site for Renshaw to expand its business.
At the current share price the shares trade on a huge PE ratio of 62.6 but this falls to a much more reasonable 10.6 on next year’s consensus forecast, although there is currently no dividend to be had here. At the end of the year, the group had net debt of £30.1M compared to £31.1M at the end of last year, but this debt was eliminated following the disposal.
Overall then this has been a difficult year for the group. Continuing profit fell, although this was due to the reversal of a tax rebate last year and pre-tax profit from continuing operations was flat. Net tangible assets also declined and were negative, but this should reverse when the cash from the disposal comes through. Operating cash flow did improve and provide some free cash but this was due to a reduction in working capital and cash profits fell. The main two factors affecting the group have been the reduction in sugar prices and dairy, along with the continued popularity of home baking in the UK.
By far the largest contributor of profits, Renishaw, improved its performance year on year as cake decorating continued to increase in popularity. Elsewhere, the Rainbow Dust acquisition looks to have added a useful profit source to the group and Haydens bakery also improved with increased sales of pies and tarts along with new customers. The European business, although it made a loss in the year, now seems to be at break even and improved its performance year on year. Elsewhere things were less rosy. Garrett saw profits decline as sugar and dairy prices fell – this business is attempting to expand into value added products; and RW Scott saw losses increased due to deflation in chocolate coatings, although the jam and pie filling products look as though they might improve things here going forward.