
Swallowfield has now released their final results for the year ended 2017.
Revenues increased when compared to last year with a £12.9M growth in UK revenue, a £2.4M increase in European revenues and a £4.6M growth in ROW revenue. Staff costs were up £2.4M and other cost of sales grew by £11.4M to give a gross profit £5.8M higher. Commercial and admin costs were up ££4M, there was a £343K increase in acquisition costs and no curtailment gain from the pension closure which brought in £645K last time. Despite this, operating profits increased by £894K. There was a small increase in finance costs and tax charges grew by £270K which meant that the profit for the year was £2.6M, a growth of £553K year on year.
When compared to the end point of last year, total assets increased by £15.5M, driven by a £5.1M growth in the value of brand names, a £3.3M increase in cash, a £2.4M growth in inventories, a £1.5M increase in good will and a £1.5M growth in the value of customer relationships. Total liabilities also increased during the year as a £1.6M decline in trade payables was more than offset by a £1.9M increase in the contingent consideration, a £1.7M growth in share based payment accruals, a £1.6M increase in pension obligations, a £1.5M growth in the bank loan, and a £1.1M increase in the CID facility. The end result was a net tangible asset level of £14.4M, a growth of £2.8M year on year.
Before movements in working capital, cash profits increased by £3.5M to £6.6M. There was a cash outflow from working capital and tax payments increased by £1.1M to give a net cash from operations of £3.9M, a growth of £1.3M year on year. The group spent £1.4M on capex and £9.4M on acquisitions so there was a cash outflow of £6.8M before financing. They then took in £8.2M from issuing new share capital and £2.5M from new loans so that after dividends of £675K were paid, there was a cash flow of £3.3M and a cash level of £4.1M at the year-end.
The profit for the Brands division was £2.9M. 78 new lines were launched in the year across 11 brands. Of particular note are a range of new beauty accessories launched under the new brand of Beautopia; a new line of Epsom salts under the Dr. Salts brand; and a new Retinol serum in the Super Facialist range. Further new ranges will be launched in Autumn 2017.
Progress has continued on the original Swallowfield brands. The Real Shaving Company has grown strongly in the year thanks in part to the good performance of a new gift range, but also the effect of digital marketing activity linked to the sponsorship of Somerset T20 cricket. The Bagsy Savannah Miller collection was launched in the year and has helped the group find new distribution opportunities for the brand. MR, the male hair loss brand, has seen rate of sale increase even further with the introduction of new packaging for the shampoo, conditioner and styling paste lines and continued impactful digital marketing activity.
There has also been good growth in the range of value brands such as Tru shave, aimed at the growing UK value retail sector. They have added new products to their offering and extended the number of retail customers to nearly all the national UK chains in this channel.
In September the group concluded a transaction to acquire a 70% shareholding in Sterling Shave Club. Over the last two years they have established a presence in the online subscription shave club sector. The business is currently at a relatively small scale and their investment has been modest. The entire consideration is to be invested into the business to support an enhanced marketing plan directed at accelerating membership recruitment and expanding the range of products available beyond the current range of blades and shaving products. The board expect a broadly neutral impact on group profitability in the current year, moving to a positive contribution in the following year.
Several group developed and produced products are now on shelf including Dirty Works Body Sprays and Happy Naturals footcare products. Many more projects are in progress covering not only new products but also the transfer of some existing products from other suppliers.
PR and marketing agencies were consolidated across the portfolio in the course of the year which has led to a better quality output at lower cost. On the supply side, they are leveraging their materials and packaging sourcing network to drive costs across the inherited Brand Arhitekts supply base. As part of this programme they have secured significant savings in freight and duty on shipments of gifts and accessories from China by combining their expertise and buying power.
Growth in international revenues has been strong, led in particular by export sales to North America. Across the full portfolio of their brands, international sales now account for nearly a quarter of segment sales and they are investing to grow this further still. They have put in place dedicated resource to grow this area and have opened new distribution channels for a number of their brands in France, the Netherlands, Austria and Chile. Additionally they are extending the international reach of their Christmas gifting ranges with orders already having been received for the US, Turkey, Ireland and South Africa.
The profit for the Manufacturing division was £4.8M. Volumes of aerosol products continued to grow and they have progressed products that they expect will lead to the technology being introduced by other customers in the coming year.
There was particularly strong growth in Personal Care aerosols, cosmetic pencils and premium liquids. In each case, recently won contracts to support new product launches have been a major contributor. A partnership with a major European cosmetics company has supported a project to increase wood pencil capacity and improve cost efficiency at the Bideford site to meet growing demand. Further improvements in capacity and capability have been completed at the Wellington site with particular focus on Personal Care aerosols and Hot Pour products which enabled them to both extend existing contracts and win new ones.
Energy saving improvements continue at the Wellington site and line efficiency programmes continue to contribute to margin improvement across all sites. The investment in pencil automation in Bideford decreases cost per unit and increases capacity. The flexibility of their site footprint has enabled them to accommodate the needs of a major customer who needed to transfer sourcing form a dollar denominated supply chain out of Chine to a Euro-denominated supply chain. The first wave of products were produced for the Brand Architekts brands this year which will now be accelerated with significant volumes brought in-house over the nesxt year and a half.
The group’s strategic investment of a 19% shareholding in Shanghai Colour Cosmetics Technology was further re-valued upwards b £680K during the year. This improved valuation reflects a strong trading performance, supplying customers in Europe and the US, and in addition, a dividend of £100K was received in the year.
Overall there was revenue growth of 36%, but most of this was due to favourable currency movements and the Brand Architekts acquisition. Like for like growth at constant currency was 2%/
During the year the group had two customers that exceeded 10% of total revenues, being 13% and 11.5%. This is actually an improvement on the prior year, however, with two customers accounting for 18% and 19%.
After eight years as finance director, Mark Warren is retiring from his full time executive career and will be stepping down from the board. He will be replaced with Matthew Gazzard who served as finance director for four years at Thatchers Cider.
Going forward, the board expect the strong momentum in their branded business to continue, supported by a steady stream of new products, innovation and continued strong support for their brands across retail customers. In the manufacturing business, the outlook is solid with a steady flow of new product development and new contract wins that will impact the year ahead. This needs to be balanced against the normalisation of volumes on particularly large product launches that bolstered the first half performance, however. Both businesses have been challenged by increasing material and packaging costs resulting from the weakness in Sterling and global inflationary pressures. Some programmes have been put in place to mitigate this, however, and the board believe that these measures and the strong trading momentum will compensate.
At the current share price the shares are trading on a PE ratio of 23.2 which falls to 14.3 on next year’s consensus forecast. At the year-end the group had a net debt position of £3.6M compared to £4.3M at the end of last year. After a 68% increase in the total dividend, the shares are yielding 1.5% which increases to 1.8% on next year’s forecast.
Overall then this has been a year of good progress for the group. Profits were up, net assets increased and the operating cash flow improved, although there was no free cash due to the acquisition. The brands business seems to have good momentum behind it, bolstered by the acquisition but although the manufacturing business is doing well, it seems unlikely to repeat the large product launches that occurred last year. Nevertheless with a forward PE of 14.3 this looks decent value and I have bought back in.
On the 9th November the group released a trading update covering the first four months of the year where trading was in line with expectations. The group continue to see strong momentum in their branded business with the first half year being positively impacted by another year of growth in the Christmas gifting ranges and further retail distribution gains in the UK and France.
The manufacturing business is also performing steadily against strong prior year comparators. As previously indicated they are seeing volumes normalise against the significant new products launched in the first half of last year. There is now a fresh wave of new product launches and contract wins that will contribute to the full year performance and bode well for future momentum. This is likely to give a second half bias to the year in this segment.