Real Good Food has now released its interim results for the year ending 2016.
It is a real annoyance that the group does not include the split by business area for last year in its set of results so I have had to delve into the half yearly report for 2015. Unfortunately the totals don’t equal the amount stated in the most recent accounts so I have had to include an adjustment to take it back to the correct level – this is most irritating and I don’t understand why I have had to do this. Anyway, total revenues increased by £1.1M but it seems that revenues in most of the businesses have declined, although there was a maiden £1.6M contribution from Rainbow Dust. Cost of sales then fell to give a gross profit £1.9M above that of last year. Distribution costs increased by £254K and admin costs grew by £685K which meant that operating profit was £990K ahead. Due to a large increase in finance costs, however, as a result of the loan note repayment, the pre-tax loss from continuing operations was £216K, an improvement of just £167K year on year. We then see a big gain on the disposal, however, so that the profit for the year came in at £9.3M compared to a loss of £4.7M last time.
When compared to the end point of last year, total assets declined by £36.3M as the group disposed of the £41.4M of assets related to the discontinued business and cash fell by £2.3M. This was partially offset by a £4.4M growth in inventories and a £3M increase in receivables. Likewise, liabilities also fell. The group disposed of the £27.3M of liabilities relating to the discontinued business and also reduced borrowings by £16.6M. The end result is a net tangible asset level of £21.2M, an increase of £10.1M from the end point of last year and clearly shows how much the disposal has improved the balance sheet.
Before movements in working capital, last year’s cash loss swung by £5.1M to a cash profit of £2.1M. There was a big cash outflow from working capital, however, with increases in inventories and receivables combined with a fall in payables that in addition with a £757K increase in interest paid and a £614K adverse movement in tax, meant that the net cash outflow from operations stood at £12.4M, a growth of £7.8M year om year. The group also spent £1.5M on capex but this and the operating loss was easily covered by the £41.2M cash injection from the disposal which meant that before financing, there was a £27.3M cash inflow. This was used to pay back borrowings with an £8.3M repayment of the bank loan and a £21.2M repayment of the revolving credit facility. The end result is a cash outflow of £2.3M over the half year period and a cash level of £4.3M at the end of the half.
The underlying operating profit in the Renshaw business was £2.2M, a growth of £156K when compared to the first half of 2015. Volumes were slightly down on a like for like basis but this was largely due to the ending of a third party manufacturing contract, in line with the strategy of improving sales and margin mix. Early signs are that the important Christmas trading period will be strong and sales in overseas territories such as the US and Australia continue to make good progress. In addition to these sales initiatives, considerable work is underway to upgrade the product range and to invest in flexible manufacturing systems which will improve customer service. The group have also started plans to increase the warehouse capacity at the Liverpool site which once completed will bring an immediate cost benefit by reducing outside storage costs.
The underlying operating profit in the Garrett business was £232K, a decline of £41K year on year. The sugar and dairy markets continued at unprecedented lows during the first half of the year, bringing greater competition and as a consequence, despite a similar volume and product mix, revenues were about 30% below last year, although as seen above, operating profit held up better. Following the sale of Napier Brown, the team are focusing on pursuing a number of added value initiatives such as targeting of new sectors including the Sports Nutrition market. While there are some signs that sugar prices will rise following the new October contract season, the dairy markets remain volatile.
The underlying operating loss in the R&W Scott business was £170K, an improvement of £100K when compared to the first half of last year. Sales volumes were slightly down on the last year, but as seen, gross margin did improve reflecting the strategy of improving the sales mix and migrating the business towards added value accounts and new products. Operational improvements were delivered in materials control and stock management and an investment has been made in additional capacity for the new pie filling business. The second half of the year will see the completion of a significant capital investment programme which will give the business the manufacturing profile it requires to maximise its sales growth opportunities.
The underlying operating profit in the Rainbow Dust business was £694K compare to nothing in the first half of last year. Integration following the acquisition is now complete and overall sales continued to show significant year on year growth with the operating profit following a similar trend. Over 500 new accounts were registered to the website in the first half of the year which suggests that this growth trend is sustainable. New warehouse capacity designed to serve the sugar craft sector will be in place early next year and the team is working with the European business to identify additional market opportunities in the continent with a number of new product launches planned for the second half of the year.
The underlying operating profit in the Haydens bakery business was £77K which was flat year on year. The critical trading period in Q3 in the run up to Christmas has so far been promising with a strong presence of products in Waitrose, Costa, M&S, Aldi and Morrisons. A new sales manager for the foodservice sector has also already delivered a number of new opportunities and the business is undergoing a major overhaul of its identity to reflect its new strategy and ability to serve a broader customer base.
The underlying operating profit in the European business was £21K compared to a loss of £235K in the first half of last year. The introduction of new business systems to integrate order and stock management in the warehouse and the installation of a new labelling machine will enable a more bespoke service offering. A new “tropical” recipe of sugar paste has also been launched to meet the requirement for a firmer product in hotter climates in Southern Europe. The focus is now to grow market share across all European geographies and the second half should benefit from sales growth in the important German market, where two new sales reps have been recruited.
Apparently the largest proportion of profit is made in the second half of the year over the Christmas period.
During the period the group repaid the loan notes of £2.774M to Napier Brown Ingredients, a company who non-executive director Mr. Ridgwell has a beneficial interest. Together with this amount, the group also repaid the accrued interest of £277K, interest for the period of £47K and a redemption fee of £902K. I have to say I am a bit uncomfortable about this. Mr Ridgwell is one of the largest shareholders of the company and the redemption fee in particular seems very excessive – nearly 33% of the total amount of the loan!
The group seems to have got a decent price for Napier Brown Sugar and made a profit on disposal of £9.4M and managed to sell the goodwill in the business for the full value of £12M so I am tempted to suggest that £21.4M in profit has been made – an excellent result really and the cash from the disposal has been used to repay the debt which has reduced from £36.3M at the half year point in 2015 to £3M at the end of this half year. The group has, however, entered into a new facility arrangement with Lloyds Bank, creating a £10M revolving credit facility which will fund future working capital requirements and assist in funding its capital projects.
At the start of the important Q3 trading period, the group has seen positive sales trend so far at both the cake decorating business and at Haydens. The board are therefore confident that the outcome for the full year will be in line with current market expectations. The group are also continuing to explore further earnings enhancing acquisitions.
No dividend is proposed for the first half of the year, much like last year. The group has, however, instructed its solicitors to begin the process to transfer its share premium reserve into distributable reserves and upon completion of this legal process, the board will consider the approval of a dividend to shareholders.
On the 20th November the group released further clarification regarding their repayment of the loan note. As mentioned earlier, the company has repaid the £2.8M loan note as well as interest of £324K and a redemption fee of £902K. The company agreed in 2014 to start interest payments when permissible under their banking facilities at a rate of 10% per annum until 2020 in recognition of the fact that no interest had been paid in relation to the loan since 2005.
Following the disposal and as the loan note and all accrued interest was fully due but it became apparent that there was a possible dispute in relation to the quantum of interest due as the total interest accrued and claimed since 2005 was in excess of £2.5M. The board decided that it was in the best interests of the company to settle this dispute and agreed to pay the loan note and accrued interest together with the payment of the redemption fee in full and final settlement of all or any claims relating to the loan note.
As we know, Patrick Ridgwell, a non-executive director of the company, has a beneficial interest in the company that provided the loan and also has a 32% in the company’s shares. The independent directors consider that the terms of the redemption fee were fair and reasonable as far as its shareholders are concerned. I am not fully aware of the conditions that led to the loan note being issued but I can only assume the company were in a desperate state but I am still not happy about all of this. Hopefully though the company can put this behind it and not enter into any dubious loans in future.
On the 25th November the group announced that a company owned by CEO Pieter Totte purchased 100,000 shares at a value of £53K which means he now owns 2.8M shares equal to about 4% of the company.
On the 10th December the group announced the acquisition of ISO2 Nutrition sports supplements brand from the administrators of Cre-8tive Health ltd for a nominal amount. The brand has developed a range of bodybuilding supplements, whey protein and sports nutrition products and are now one of the leading suppliers within the sports supplements market. Based in Swindon, the business will be integrated with Garrett Ingredients, with whom they have enjoyed a long standing relationship as a customer. This enables the group to enter a new channel which should help decrease their dependency on the diary and sugar commodities markets. Given the price paid for this, it could be an interesting roll of the dice.
Overall then this seems to have been a bit of a mixed half year for the group. There was a loss from continuing operations but this did improve year on year and if it were not for the extortionate loan note redemption fee, the group would have made a profit. Net assets improved considerably following the disposal and the balance sheet is now looking much better but there was a cash outflow at the operating level. This was due to a large increase in working capital, however, and cash profits improved – it is worth noting that even with a neutral working capital position the group would not have generated any free cash, however.
The Renshaw business continued to do well with an improved product mix and the Rainbow Dust acquisition really seems to be bedding in well. The European business also performed better and made a small profit and performance was flat at Haydens, although the Christmas trading apparently started well. Conditions were not so good at Garrett, where profits fell due to continued pressure on the prices of sugar and dairy but although still loss making, the performance at RW Scott improved despite a fall in volumes. The transformational news is the disposal, however. The group really seem to have got a good price for the business and as a result the balance sheet has been repaired and the shares seem investible. In fact I am tempted to take a nibble.
On the 1st February the group released a profit warning. The business has invested heavily in people, product and brand across all businesses as it executes its strategy of achieving the optimal operating platform from which to drive future growth. The board now expects that within the continuing business EBITDA will remain flat year on year as this investment, when combined with other one-off events in the various businesses (no clue as to what those might be), has led to a short-term impact on margins. As a result, they do not expect the final profit outcome for 2016 to meet current market expectations. The board is “confident”, however, that the negative impact on margins is short term.
The disposal of the Napier Brown business delivered an exceptional profit of £9.4M. As a result, the board expects total pre-tax profit and EPS to be significantly improved when compared to last year. In addition, net borrowings for the group will be substantially reduced following the inflow of the £44M from the disposal which has enabled the group to repay its borrowings.
This setback is disappointing as the group seemed to be in a really good position following the disposal. I am not rushing to buy in here until it is clear that the un-named issues are really temporary in nature.
On the 10th February the group announced the acquisition of Chantilly Patisserie for a total consideration of £1.75M to be satisfied from existing cash resources. The business is based in Devon, employs forty staff and produces hand-made frozen desserts, supplying the foodservice sector with customers such as Marston’s Brewery, Warner Leisure, Brakes and Country Range. Over the last nine months it made EBITDA of £400K and had net assets of £700K so this looks like a decent enough acquisition to me.
On the 26th April the group released an update covering the year ending 2016 where they confirmed that they expect to report EBITDA in line with current consensus expectations. They will be reporting an exceptional profit for the period, including £9.4M as a result of the sale of Napier Brown for a total consideration of £44.4M. This means that the board expects pre-tax profit to be about £13.9M. The sale resulted in a substantial improvement in the net debt position which they now expect to be £5M as of the end of the year compared to £30.1M at the end of last year.