2 March 2022                                                                                                                               

Nichols plc

2021 PRELIMINARY RESULTS

Nichols plc ('Nichols' or the 'Group'), the diversified soft drinks Group, announces its Preliminary Results for the year ended 31 December 2021 (the 'period').

·      Vimto Brand value in the UK +6.3%³

o  Vimto squash outperformed the dilutes market by +10.4%³

o  Vimto Brand value +13.2%⁴ since 2019 versus the wider soft drinks market of +11.0%⁴

·      Vimto Brand continues to progress internationally, with revenue +21.0% (underlying⁵ +9.8%)

o  Africa and Rest of World significantly ahead

o  Underlying⁵ Middle East revenues broadly flat (-2.0%)

·      Out of Home (OoH) continues to recover from the pandemic with revenues +77.4%

o  Revenues -31.4% versus 2019, with Q4 improving run rates versus pre-Omicron

o  Fixed costs still weighing heavily on overall financial performance

·      Gross margin improvement to 45.2% (2020: 41.8%)

o  Completion of Middle East marketing investment

o  Significant volume recovery in OoH

·      Continued strong cash performance, Free Cash Flow⁶ +£17.5m (2020: £17.6m)

o  Cash Conversion⁷ at 103% (2020: 186%)

·      OoH impairment review completed and strategic review commenced

·      Exceptional charge of £39.5m 

o  £36.2m of this attributable to non-cash impairment of OoH Goodwill

o  £0.6m operational review and restructuring (cumulative £0.9m)

o  £2.6m net liability relating to tax and interest on historic incentive schemes

·      Final dividend of 13.3p proposed, reflecting 2x cover⁸

1 Excluding Exceptional items

2 EBITDA is the statutory profit before tax, interest, depreciation, and amortisation

3 Source: Nielsen, Total Coverage 12 months to 1 January 2022

4 Source: Nielsen, Total Coverage 12 months to 1 January 2022 vs. 12 months to 4 January 2020  

5 Excluding the impact of the Group's marketing investment in the Middle East

6 Free Cash Flow is the net increase in cash and cash equivalents before acquisition funding and dividends

7 Cash Conversion is the Free Cash Flow / Adjusted Profit After Tax

8 Dividend cover is adjusted basic earnings per share divided by the dividend per share

John Nichols, Non-Executive Chairman, commented:

"The continued strengthening of the Vimto brand, both in the UK and internationally, combined with the benefits of our diversified business model, has ensured another resilient financial performance in the period. We have achieved significant outperformance of the Vimto brand in dilutes in the UK, and we delivered solid growth internationally, particularly in Africa where we continue to grow, and critically delivered a robust performance in the Middle East. In this, my 50th year with the Group, I would like to wholeheartedly thank everyone for their efforts.

The Coronavirus pandemic has continued to present significant challenges for us all throughout 2021. Our first and most important objective continued to be the protection and wellbeing of our employees and customers. Throughout these difficult times, I have been delighted to witness how our colleagues have pulled together and consistently demonstrated their values and commitment to our business.

The Group enters 2022 with excellent momentum and in a strong financial position. The Group's Adjusted PBT¹ expectations for the year FY22² are unchanged, whilst we remain mindful of the well-publicised inflationary pressures which are now being realised.

In the medium term for 2023 we expect continued revenue growth as well as inflationary and legislation cost pressure. We expect to see high single digit growth in Group Adjusted PBT¹ versus FY22.

The Board believes the Group is well positioned to deliver against its long-term growth plans."

1 Excluding exceptional items

2 FY22 expectations refers to a Group compiled market consensus of adjusted PBT £25.2m

Contacts

Notes to Editors:

Nichols plc is an international diversified soft drinks business with sales in over 73 countries, selling products in both the Still and Carbonate categories. The Group is home to the iconic Vimto brand which is popular in the UK and around the world, particularly in the Middle East and Africa. Other brands in its portfolio include SLUSH PUPPiE, Feel Good, Starslush, ICEE, Levi Roots and Sunkist.

This announcement contains inside information for the purposes of Article 7 of Regulation (EU) No 596/2014

Chairman's Statement

The continued strengthening of the Vimto brand, both in the UK and internationally, combined with the benefits of our diversified business model, has ensured another resilient financial performance in the period. We have achieved significant outperformance of the Vimto brand in dilutes in the UK, and we delivered solid growth internationally, particularly in Africa where we continue to grow, and critically delivered a robust performance in the Middle East. In this, my 50th year with the Group, I would like to wholeheartedly thank everyone for their efforts.

The Coronavirus pandemic has continued to present significant challenges for us all throughout 2021. Our first and most important objective continued to be the protection and wellbeing of our employees and customers. Throughout these difficult times, I have been delighted to witness how our colleagues have pulled together and consistently demonstrated their values and commitment to our business.

As Out of Home (OoH) recovers from the impact of the pandemic, management focus has ensured a strengthening of our balance sheet in the period, with cash and cash equivalents at the end of the period at £56.7m (2020: £47.3m). We are now well positioned to deliver our long-term growth plans as the impact of the pandemic subsides.

Trading

Total Group revenues for the period were £144.3m, an increase of 21.6% compared to 2020 and importantly, broadly in line with pre-Covid 2019 levels.

Both the Still and Carbonates product categories have recovered strongly in the period. Revenue of Still products increased by 10.2% to £72.4m (2020: £65.7m), now ahead of 2019 (£71.7m), driven by the strong performance of the Vimto Squash brand in the UK. Revenue from Carbonated products increased 35.8% to £71.9m (2020: 53.0m; 2019: £75.3m), driven largely by the gradual recovery of the Group's OoH route to market as outlets reopened, and by strong growth in Africa.

In the UK, revenue increased by 21.8% versus last year to £111.6m (2020: £91.6m) as the OoH route to market recovered and the Vimto brand progressed. For the first time, Vimto brand's value in the UK has exceeded £100m, and increased by +6.3% according to Nielson¹, with Vimto Squash outperforming the dilutes market by +10.4%.

Sales across our International markets were £32.7m, an increase of 21.0% (underlying +9.8% adjusting for the impact of the completion of the Group's marketing investment in the Middle East) versus the prior year (2020: £27.0m). Performance in Africa at +17.1% was particularly pleasing given the long-term opportunity presented by these markets.

Share buy back

On December 14, 2021, the Group announced its intention to conduct on-market purchases under a share buyback programme to repurchase up to 453,486 ordinary shares of 10p each in the capital of the Group (the "Ordinary Shares"), representing up to approximately 1.2 per cent of the Group's issued share capital, pursuant to the authority obtained at the Group's most recent annual general meeting, held on 28 April 2021 (the "Buyback").

The purpose of the Buyback is to meet future obligations under the Group's SAYE Option Scheme and/or Long-Term Incentive Plan. The Buyback will be funded from the Group's existing cash resources and all Ordinary Shares repurchased will be held in treasury. Repurchases may be made up to and including 23 August 2022. Any repurchases made following the Group's 2022 annual general meeting will be conditional on further shareholders' approval being obtained. During December 2021, the Group repurchased 68,000 Ordinary shares under this authority, with a nominal value of £6,800.

Dividend

In 2020 the Board advised a dividend policy of broadly 2x cover, which balances shareholder distributions with the investment needs and growth opportunities of the business post-pandemic.

The Board therefore propose a final dividend of 13.3p, which together with the interim, results in a full year dividend for 2021 of 23.1p. The ex-dividend date will be 24 March 2022 and payment will be made on 5 May 2022 subject to shareholder approval at the Group's AGM on the 27 April 2022. 

1 Nielsen Total Coverage 12 months to 1 January 2022

Outlook

The Group enters 2022 with excellent momentum and in a strong financial position. The Group's Adjusted PBT¹ expectations for the year FY22² are unchanged, whilst we remain mindful of the well-publicised inflationary pressures which are now being realised.

In the medium term for 2023 we expect continued revenue growth as well as inflationary and legislation cost pressure. We expect to see high single digit growth in Group Adjusted PBT¹ versus FY22.

The Board believes the Group is well positioned to deliver against its long-term growth plans.

1 Excluding exceptional items

2 FY22 expectations refers to a Group compiled market consensus of adjusted PBT £25.2m

John Nichols

Non-Executive Chairman

2 March 2022

Chief Executive Officer's Statement 

The value of the Group's diversification across both the UK and internationally has once again in 2021 proved to be pivotal to the success the business has achieved. The Vimto brand has been the driving force of growth both at home and abroad, and its unique flavour and taste continues to be loved by consumers around the globe.

One of the key challenges during the year has been maintaining the availability of our products in our customers' outlets. Globally, we have seen a number of shortages on key ingredients, logistical challenges and insufficient labour availability in certain markets. I am pleased we have shown extremely strong resilience to maintain excellent service levels and ensure our consumers can still enjoy our brands every day through our enhanced focus on operational excellence.

The soft drinks market in the UK has proved to be extremely resilient during 2021. Growth in the UK on-trade sector has been strong as we observed fewer restrictions and closures across the hospitality sector versus 2020. Within the UK retail sector, the momentum that was built in 2020, as more people consumed products at home, has continued into 2021 with robust growth being delivered both in stores and via growing online platforms.

All the international geographies we operate in have suffered a number of challenges similar to those felt in the UK, but our brands have shown to be very resilient and demonstrated their strength. Our continued focus on driving growth across a range of global markets throughout the year has proved beneficial. We have delivered excellent in-market execution across the Middle East, Africa, Europe and the USA. As a result, we have driven growth and market share gains in all these markets.

We continue to build long-term partnerships with several key customers and distributors both in the UK and abroad who I would like to thank for their continued loyalty and support.

UK Soft Drinks

(statistics given below are as measured by Nielsen for the 12 months to 1 January 2022)

In 2021, volumes in the £9.6bn UK soft drinks market grew by +2.3%, whilst value sales grew by +8.5% versus the prior year. Within the soft drinks market, the strongest value growth was delivered across the Energy, Water and Flavoured Carbonates sub-categories, whilst Mixers, Dilutes and Lemonade all suffered declines versus 2020.

The soft drinks category remains intensely competitive and promotionally driven. However, we continue to add value by focusing on strong in-market execution, product innovation and new distribution gains.

For the first time in its 113 year history, the Vimto brand achieved value sales worth in excess of £100m, a significant milestone and an achievement that all of our people should be extremely proud of.

Within the UK packaged sector, our dilutes portfolio delivered very strong growth. It significantly outperformed the market and gained share versus our competitors. As a result of this out performance, we have firmly consolidated our position as the No.2 brand in the dilutes market.

Our still Ready-to-Drink portfolio delivered double digit growth in the UK marketplace, with our 500ml range being the standout performer across all the sectors it operates in.

It is also pleasing that our carbonates range delivered +8.8% growth, driven by our performance across our cans portfolio.

Delivering strong growth across all three sub-categories we operate in has been encouraging against the tough market conditions we faced during 2021.

We have also continued to ensure that all of our new product innovation and marketing activity heavily focuses on driving our 'No Added Sugar' ranges as part of our healthier future strategic commitments and, as a result, we have made strong progress across the year.

In 2021, innovation has again been at the core of our growth. We have launched two new flavours across the range and moved our broader flavours range into a 2L dilutes format. We have also fortified our dilutes portfolio with the addition of Vitamin C and D and brought to market a brand new look to our packaging. Launching new flavours and concepts are crucial to ensuring we attract new consumers to the Vimto brand and stay relevant to their changing needs and tastes.  

Core to the brand's growth in 2021 has been the introduction of our new marketing campaign Find Your Different, which first aired in the spring. It was launched with two through the line executions - one focused on a masterbrand campaign to drive top of mind awareness and a dilutes vitamin D campaign to target parents and families. It was a fully integrated campaign across TV, Video on Demand, Digital, Outdoor and Social. We also ensured we supported the activity in store across our key national accounts.

Our Levi Roots brand had another successful year in 2021. Strong growth of +24.7% was achieved, with the core flavours and pack formats delivering this uplift. The key focus has been on new distribution gains and strong in-market execution.

During 2021, we relaunched our Feel Good brand into the marketplace. We have repositioned the brand as a 100% natural product with a strong set of ESG commitments. We have successfully started to build distribution both in single and multipack formats across the retail, foodservice and convenience channels in the UK.

We continue to work in partnership with all our customers across the UK grocery, foodservice, wholesale and discount channels. It has been more important than ever during 2021 to have these strong relationships in place, and we will continue to put our customers' needs at the heart of what we do to ensure all our consumers can enjoy our products every day.

The UK On-Trade

Following an extremely tough year in 2020 for the UK On-Trade, we have seen the sector recover strongly in 2021 as outlets reopened. However, the industry has had to face challenges with some restrictions still in place impacting footfall, as well as staff shortages and logistics issues.

New trends have emerged across the sector due to the pandemic, with consumers now much more positive about "al fresco" dining and visiting outdoor hospitality venues, a boom in the suburbs as people are shifting away from visits to city centres and consumers adopting a "live for the moment" mindset.

I am pleased with our progress across our Out of Home (OoH) business, as we have delivered +77.4% sales growth versus 2020. However, versus 2019, the channel is still down -31.4% due to some restrictions remaining in place.

Encouragingly, year-on-year growth has been delivered across all the channels we operate in within OoH. A key driver of this has been due to the support we have provided to our customers throughout the last two years, which has enabled them to reopen their businesses as restrictions have eased. As a result, we have also retained a number of key contracts with important customers.

Innovation remained important during 2021, and we launched ICEE and Starslush ZERO (no sugar) products to complement our current ranges. These launches support our ambition to offer consumers balanced and healthier choices. Consumer feedback to date has been extremely positive regarding the new additions.

During the year, we continued to ensure we invested in exciting marketing campaigns across the sector, which included in-outlet and digital campaigns.

Finally, we secured a long-term agreement to be the exclusive partner to distribute the global No.1 uncarbonated frozen brand - SLUSH PUPPiE.

However, the OoH drinks market has been significantly impacted by the pandemic with the prolonged closure of many outlets. Whilst recognising the hospitality trade has shown growth and is beginning to return to pre-Covid-19 levels, it is doing so at a pace slower than previously forecast and the margin progression after overheads anticipated previously is now not likely to be achieved without transformational change, in terms of how the Group services the trade and its wider customer base. Therefore, a full strategic review into the Group's OoH route to market has commenced.

Throughout 2021 we continued to focus on supporting our customers and partners across our entire OoH channel. Ensuring that our valued customers received the right service to guarantee product availability during the various challenges the industry encountered has demonstrated the resilience of our supply chains and delivery model. I am extremely proud of the team's focus and commitment to support our partners during this challenging period and throughout the ongoing recovery from the impact of the pandemic.

Vimto International

During 2021 the challenges presented by the Covid-19 pandemic and supply chain restrictions in the UK have been echoed across all our International markets. Considering these challenges, I feel extremely proud that the teams have delivered +21.0% sales growth versus 2020. It is particularly pleasing that this growth has been delivered across all our key markets through strong execution, innovation, new and exciting marketing campaigns and new distribution wins.

Our growth across the African continent in 2021 has been extremely strong, delivering sales growth of +17.1% versus last year. This has been delivered through a combination of our integrated marketing campaigns, new flavours, extending our pack formats and a strong focus on market execution in a number of our core markets. In Algeria, we launched a new 2L pack format across our carbonates range. This was aimed at capturing the take home/multi-serve opportunity in the market and has been well received by our customers and consumers across the country. In Sudan, we launched a range of still products to extend our portfolio in this market. We have invested in strong marketing campaigns to drive consumer awareness and the resulting sales performance has been positive.

The Middle East market has once again proved extremely resilient, delivering +33.6% sales growth versus 2020. This has been against tough market conditions due to rising taxes and conflicts taking place across the region.  

Our long-standing (over 90 years) partner, Aujan Coca-Cola Bottling Company (ACCBC), delivered another outstanding marketing campaign during Ramadan. The "Sweet Togetherness" campaign - which promoted the introduction of a No Added Sugar product alongside themes of togetherness, health, cooking and value for money - was heavily focused on driving awareness via online channels. The campaign was extremely popular and reached 2.5 billion views on TikTok and 2.5m views on YouTube.

Our partner in the Yemen faced many operational challenges due to the ongoing hostilities in the country, but still delivered a robust performance on the back of strong in-market execution and distribution gains.

2021 has again seen us deliver another strong performance across the USA with our long-standing partners, the Ziyad brothers. Through excellent in-market execution and strong marketing campaigns, we delivered +21.6% sales growth versus the previous year.

Across all of our European territories, we again focused on expanding new points of distribution for our core products within key customers, which resulted in us delivering market share gains and positive sales momentum.

Summary

As we focus on 2022, I have no doubt that we will continue to operate in a challenging and changing environment that will continue for a sustained period. Inflationary headwinds are going to be a key threat which we will aim to mitigate through savings realised as part of our operational change programme and the implementation of appropriate pricing strategies.

Over many years, soft drinks has proven to be a highly resilient category which has again been evident in 2021. I feel confident that given our high brand equity, diverse business model, strengthened balance sheet, clear ESG commitments and exceptional people, we can continue to achieve our long-term strategic objectives and deliver continued profitable growth.

Andrew Milne

Chief Executive Officer

2 March 2022

Chief Financial Officer's Statement

Revenue

Group revenues were £144.3m, an increase of 21.6% compared to 2020 and, encouragingly, broadly in line with 2019 levels.

Both the Still and Carbonates product categories have recovered strongly in the period. Revenue of Still products increased by 10.2% to £72.4m (2020: £65.7m), now ahead of 2019 (£71.7m). Revenue from Carbonated products increased 35.8% to £71.9m (2020: 53.0m; 2019: £75.3m).

The Group's packaged routes to market delivered another year of strong growth both in the UK and internationally.

UK packaged revenues improved by 8.5%, driven by the performance of the Vimto & Levi Roots brands. There was a particularly strong performance within the Multiple and Discount Retailers, where revenues increased by 7.0% (2020: increase of 9.5%), as distribution points increased significantly over the pandemic period (2020 and 2021) and consumers increasingly chose Vimto. Revenues across Convenience, Delivered Wholesale and Cash and Carry recovered in 2021 following the severity of 2020's lockdowns and increased by 11.3% (2020: decrease of 10.9%).

International revenues improved by 21.0%.

Africa revenues improved 17.1% (2020: increase of 7.4%) with significant progress achieved across our African markets. Middle East revenues increased by 33.6% (2020: decrease of 36.8%) with in-market volumes performing resiliently through Ramadan despite the challenges posed from the introduction of the Sweetened Beverage Tax in 2020. The Group's marketing investment in the region (reported as part of the Group's revenue line) was, in agreement with our local partner, completed during the year. Underlying revenues were broadly flat, decreasing by 2.0% versus 2020. Our rest of world markets continued the momentum of the prior period with revenue growth of 14.2% (2020: increase of 17.3%), with the US and Europe continuing to perform well, building on increased brand awareness generated within the Middle East and Africa.

Our OoH route to market continues to recover from the impact of the pandemic, with revenues up by 77.4% versus 2020, when the OoH route to market was severely impacted by closures due to the pandemic and subsequent lockdowns. Revenues remain down by 31.4% versus 2019. We are encouraged that trade within the hospitality industry has begun to show growth and return towards pre-Covid-19 levels, with Q4 in particular seeing improving run rates pre the emergence of the Omicron variant. However, the long-term impact of Covid-19 on the hospitality industry remains uncertain. As a result, and as previously announced, due to the ongoing challenges in the OoH market, the Board has carried out an impairment review into its OoH route to market and will recognise an impairment charge of £36.2m in the current year. In addition, the Board has commenced a strategic review of the Group's OoH route to market.

The impact of movements in foreign exchange rates on revenue year-on-year was immaterial, at approximately £0.6m adverse.

Gross Profit

Gross profit at £65.2m was £15.6m higher than 2020 (£49.6m) and 3.4 percentage points higher at 45.2% (2020: 41.8%). Of this increase, £9.4m resulted from the additional volumes delivered across all of the Group's routes to market in the period. The current gross margin percentage is more aligned to the years immediately preceding the pandemic (2019: 47.6%, 2018: 45.7%, 2017: 45.7%).

As noted previously the Group's Middle East marketing investment (reported as part of the Group's revenue line) was, in agreement with our local partner, completed during the year. £2.7m (2021: £0.8m investment, 2020: £3.5m investment) of the year-on-year improvement in gross profit was due to this change. Customer price and mix has further contributed £1.8m to gross profit largely due to a return of revenues from the Group's In-house and National OoH customers, effectively rebalancing the Group margins.

The Group was better placed in 2021 to plan for Covid-19 disruption, following the restructuring at our manufacturing site in Ross at the end of 2020 to more effectively align labour and volumes, combined with a consistent approach from the UK Government in terms of the easing of lockdown restrictions. Consequently, the costs associated with stock write off and under recovery seen in the previous year were not repeated (2021: £0.4m cost, 2020: £2.1m cost) and benefited margin by £1.7m versus the prior year. The Group continued to support its OoH customers with new for old stock following the reopening of outlets post the Q1 2021 lockdown.

During the year, the Group was prepared for and able to mitigate a large proportion of raw material and contract manufacturing inflation. However, in Q4 2021 significant inflationary pressures were experienced and are expected to continue through 2022.

Distribution Expenses

Distribution expenses within the Group are those associated with the UK packaged route to market and for OoH the distribution costs incurred from factory to depot. Final leg distribution costs within OoH are reported within Administration costs.

Distribution expenses totalled £9.1m (2020: £8.0m), an increase of 14.4%, due to a combination of higher trading volumes across both of our UK routes to market and significant inflationary pressure experienced since Q2 2021. In both routes to market, significant disruption was experienced through the summer and autumn months due to driver shortages. The Group entered into a new 5-year distribution arrangement in H2 2021 that both builds significant additional capacity, given the Group's growth plans, and improves efficiency.

Administration Expenses

Administration expenses, excluding exceptional items, totalled £34.1m (2020: £30.0m), an increase of £4.1m or 13.7%.

Through the early pandemic, in 2020, management focused on reducing discretionary spend and realigning marketing investment. This resulted in significant cost reductions; no bonuses or LTIPs were accrued and labour costs (recruitment etc.) were managed closely. The Group also benefited in 2020 from deferred consideration credits of £1.3m following completion of the Noisy Drink Company North West Limited and Adrian Mecklenburgh Limited acquisitions.

In 2021 the Group ran its highly successful 'Find Your Different' marketing campaign, investing an additional £1.9m. The campaign increased Vimto's awareness with new consumers, helping fuel the distribution expansion seen in the year and which is planned to continue into 2022.

Reinstatement of the Group's Bonus and LTIP schemes led to an additional £2.3m charge in the year.

Restructuring through 2020 meant costs reduced by £1.2m in the period; this was partly offset by an increase in staff related travel and entertainment costs of £0.5m. 

The detailed exercise, commenced in 2020, to trace and verify assets held at the Group's OoH customer outlets completed in the period and fully utilised the provision established in the prior period (£1.1m), resulting in a positive year on year comparison. Strict OoH capital allocation through 2020 and 2021 has meant the Group's depreciation charge has now peaked and is level in 2021 versus 2020.

Revaluation of working capital balances across the year resulted in foreign exchange losses. In comparison with prior year, the year on year impact is £0.4m adverse (2021: net loss £0.2m, 2020: net gain £0.2m).

Exceptional Costs

The Group has incurred £39.5m of exceptional costs during the year (2020: £5.1m), £38.9m of which is non-cash.

The impact of Covid-19 has resulted in a difficult period of trade for OoH with many outlets being closed for a prolonged period of time. Whilst trade within the hospitality industry has begun to show growth and return towards pre-Covid-19 levels, it is doing so at a slower pace than previously forecast and is only forecast to fully return to pre-pandemic levels through 2022. Growth projections beyond 2022 are expected to be lower than previously estimated given that a number of outlets are expected not to re-open and footfall is expected to be restricted for a prolonged period as staffing shortages and local restrictions/social distancing is either mandated or occurs naturally, as was experienced through 2021.

Whilst cost pressure is expected to be fully recovered within OoH, the gross margin progression anticipated previously is now not likely to be achieved without transformational change in terms of how the Group services the trade and its wider customer base. Overhead cost estimates have been reviewed and increased to reflect both inflationary pressures and the cost estimates required to serve the customer base, given the complexities of the current business environment and model. As a result, and in response to this challenging climate, during 2022 the Board has commenced a full strategic review into its OoH route to market in terms of customer and product mix, as well as ways to ensure appropriate margin and profitability going forward.

As a result of the impairment review, management have recognised an impairment charge of £36.2m in the current year, impairing the entire Goodwill held.

In Q4 2020 the Group commenced a review of its UK operational supply chains. The project has progressed steadily with significant change already implemented, including entering into new 5-year contract manufacturing and distribution arrangements that both build significant additional capacity, given the Group's growth plans, and improve efficiency. These specific projects are expected to be completed through 2022, with further foundation work progressing. As a result of this work, the Group has incurred a further £0.6m of costs (2020: £0.3m) in the year, with additional costs expected in 2022.

In previous annual reports, the Group reported a contingent liability in respect of historic contracts with some of its senior management relating to incentive schemes which were designed to motivate, retain and engage those key employees. HMRC were of the view that the arrangements should have been taxed as employment income, which the Group and its advisors had previously disputed. During the period  a  tribunal was convened to consider the dispute of the Group's scheme as well as similar schemes operated by other companies. Subsequent to the year end, the tribunal found that the arrangements should have been taxed as employment income. Accordingly, as at 31 December 2021, the Group has recognised a net liability of £2.6m in relation to this ruling, being a reasonable estimate of the final outcome, including the Group's additional tax liability, interest costs and amounts expected to be recovered.

Due to the one-off nature of these charges, the Board is treating these items as exceptional costs and their impact has been removed in all adjusted measures throughout this report.

Operating Loss/Adjusted Operating Profit

Adjusted operating profit at £21.9m was up £10.2m, an 88.1% increase on prior year (2020: £11.7m). An operating loss of £17.6m (2020: £6.6m profit) is after charging exceptional items of £39.5m (2020: £5.1m charge) during the period. For reference adjusted operating profit in 2019 was £32.4m.

Finance Costs

Net finance costs of £0.1m (2020: £nil) were broadly in the line with the prior year.

Loss before tax/Adjusted profit before tax and tax rate

Reported loss before tax was £17.7m (2020: £6.5m profit). Adjusted profit before tax increased by 87.9% to £21.8m (2020: £11.6m). The tax charge on adjusted profit before tax for the period of £4.8m (2020: £2.2m) represents an effective tax rate of 21.9% (2020: 18.7%). The increase in effective tax rate is largely due to deferred tax balances as at 31 December 2021 being recognised at 25%, following an amendment to the UK Corporation Tax rate being enacted during the year to increase the rate of tax from 19% to 25% with effect from 1 April 2023.

For reference profit before tax in 2019 was £32.4m.

Balance Sheet and Cash and Cash Equivalents

The Group has continued to focus on the strength of its balance sheet during the period.

As noted above, management have recognised an impairment charge of £36.2m during the period, impairing the entire Goodwill held for the Group.

Strict OoH capital allocation through 2020 and 2021 has meant that the Group's investment in property, plant and equipment reduced by £3.0m.

The Group invested £3.8m into Inventories during the year to ensure security of customer service given the volatility experienced in UK supply chains and to protect stock levels, given changes planned through H1 2022 to the Group's Dilutes contract manufacturing arrangements.

The unwind of working capital experienced in 2020, that led to a cash conversion of 186% in that year, has largely been protected. Cash conversion for the period was 103%. The increase in Trade and other Receivables by £7.0m (2020: decrease of £8.6m versus 2019) was more than offset by the Group's increase in Trade and other Payables, up by £7.1m (2020: decrease of £1.6m versus 2019) and Provisions increase of £4.2m.

The Group recorded a net £2.6m liability (recorded within both Other Receivables and Provisions), representing the additional tax liability and interest costs arising from the HMRC ruling into the treatment of the Group's historic incentive schemes for some of its senior management.

The Group again delivered a strong Free Cash Flow of £17.5m (2020: £17.6m). Cash and cash equivalents at the end of the year were £56.7m (2020: £47.3m).

The Group has focused significantly on cash management throughout the pandemic years of 2020 and 2021, with particular emphasis on balancing the needs of its various stakeholders by working flexibly with shareholders, staff, customers, and the UK Government as events developed. At the same time, the Board has remained focused on ensuring the Group remains well positioned to deliver both our long-term growth plans.

Earnings per share

On an adjusted basis, diluted earnings per share (EPS) was 46.09 pence (2020: 25.54p). Total adjusted EPS increased to 46.15p pence (2020: 25.56p) with basic EPS at -60.04 pence (2020: 13.14p).

Pensions

The Group operates two employee benefit plans, a defined benefit plan that provides benefits based on final salary, which is now closed to new members, and a defined contribution group personal plan. At 31 December 2021, the Group recognised a surplus on its UK defined benefit scheme of £5.3m (2020: surplus £0.3m).

With the agreement of Trustees, assets were transferred from equities to reduce the overall value at risk (£10m to £5m) during the year, securing the gains achieved over the last 2 years. Funding, assets versus liabilities, is now at 108% versus 83% at the time of the last valuation (April 2020).

David Rattigan

Chief Financial Officer

2 March 2022

CONSOLIDATED INCOME STATEMENT

For the year ended 31 December 2021

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

For the year ended 31 December 2021

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

As at 31 December 2021

CONSOLIDATED STATEMENT OF CASH FLOWS

For the year ended 31 December 2021

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

As at 31 December 2021

NOTES

1.    Basis of Preparation

The preliminary financial information does not constitute statutory accounts for the financial years ended 31 December 2021 and 31 December 2020, but has been derived from those accounts. The accounting policies remained unchanged from those set out in the 2020 annual report.

Statutory accounts for 2020 have been delivered to the Registrar of Companies and those for the financial year ended 31 December 2021 will be delivered following the Group's Annual General Meeting. The auditors have reported on those accounts and their reports were unqualified, did not draw attention to any matters by way of emphasis, and did not contain a statement under 498(2) or 498(3) of the Companies Act 2006.

2.    Going Concern

In assessing the appropriateness of adopting the going concern basis in preparing the Annual Report and financial statements, the Directors have considered the current financial position of the Group, its principal risks and uncertainties and the potential impact of future Covid-19 restrictions. The review performed considers severe but plausible downside scenarios that could reasonably arise within the period.

The estimated impacts of Covid-19 restrictions are primarily based around our Out of Home market and the potential for future lockdowns within the hospitality industry. Our modelling has sensitised trading within this market to reflect varying degrees of lockdowns with the most severe scenario assuming that some restrictions will persist throughout the whole of 2022. 

In addition to the further impacts of Covid-19, alternative scenarios, including the potential impact of key principal risks from a financial and operational perspective, have been modelled with the resulting implications considered.

In all cases, the business model remained robust. The Group's diversified business model and strong balance sheet entering 2022, combined with its strong cash generation in 2021, all provide resilience against these factors and the other principal risks that the Group is exposed to. At the 31 December 2021 the Group had cash and cash equivalents of £56.7m with no external bank borrowings. This equates to 87% of 2021 gross profit.

On the basis of these reviews, the Directors consider the Group has adequate resources to continue in operational existence for the foreseeable future (being at least one year following the date of approval of the Annual Report) and, accordingly, consider it appropriate to adopt the going concern basis in preparing the financial statements.

3.    Segmental Reporting

The Board considers the business from a product perspective and reviews the Group's performance based on the operating segments identified below. There has been no change to the segments during the period. Based on the nature of the products sold by the Group, the types of customers and methods of distribution, management consider reporting operating segments at the Still and Carbonate level to be reasonable, particularly in light of market research and industry data made available by Nielsen. Gross profit is the measure used to assess the performance of each operating segment.

A geographical split of revenue is provided below:

4.    Exceptional items

The Group has incurred £39.5m of exceptional costs during the year (2020: £5.1m), £38.9m of which is non-cash.

Following the annual impairment review of the Group's Out of Home Cash Generating Unit ('CGU'), the Group has incurred a non-cash impairment to Goodwill of £36.2m. Further detail is provided in note 6.

In Q4 2020 the Group commenced a review of its UK operational supply chains. The project has progressed steadily with significant change already implemented, including entering into new 5-year contract manufacturing and distribution arrangements that both build significant additional capacity, given the Group's growth plans, and improve efficiency. These specific projects are expected to be completed through 2022, with further foundation work progressing. As a result of this work, the Group has incurred a further £0.6m of costs (2020: £0.3m) in the year, with additional costs expected in 2022.

In previous annual reports, the Group reported a contingent liability in respect of historic contracts with some of its senior management relating to incentive schemes which were designed to motivate, retain and engage those key employees. HMRC were of the view that the arrangements should have been taxed as employment income, which the Group and its advisors had previously disputed. During the period a tribunal was convened to consider the dispute of the Group's scheme as well as similar schemes operated by other companies. Subsequent to the year end, the tribunal found that the arrangements should have been taxed as employment income. Accordingly, as at 31 December 2021, the Group has recognised a net liability of £2.6m in relation to this ruling, being a reasonable estimate of the final outcome, including the Group's additional tax liability, interest costs and amounts expected to be recovered.

Due to the one-off nature of these charges, the Board is treating these items as exceptional costs and their impact has been removed in all adjusted measures throughout this report.

5.    Earnings Per Share

Basic earnings per share is calculated by dividing the Group's profit after tax for the year by the weighted average number of ordinary shares in issue during the financial year. Diluted earnings per share is calculated by adjusting the weighted average number of ordinary shares in issue assuming the conversion of all potentially dilutive ordinary shares.

The earnings per share calculations for the period are set out in the table below:

Adjusted earnings per share before exceptional items has been presented in addition to the earnings per share as defined in IAS 33 Earnings per share, since, in the opinion of the Directors, this provides shareholders with a more meaningful representation of the earnings derived from the Groups' operations. It can be reconciled from the basic earnings per share as follows:

6.    Non-current Assets

Goodwill and intangible assets with indefinite lives are tested at least annually for impairment and whenever there are indications that the assets might be impaired. The recoverable amount of a cash-generating unit (CGU) is based on its value in use, being the present value of the projected cash flows of the CGU.

An annual impairment review was performed on the Goodwill (£36.2m) and Intangible assets with indefinite lives (£2.6m), all of which relate the Group's Out of Home Business. The value in use calculation uses cash flow projections from financial budgets approved by management in addition to annual growth projections for the next five years and into perpetuity.

The impact of Covid-19 has resulted in a difficult period of trade for Out of Home with many outlets being closed for a prolonged period of time. Whilst trade within the hospitality industry has begun to show growth and return towards pre-Covid-19 levels, it is doing so at a slower pace than previously forecast and is only forecast to fully return to pre-pandemic levels through 2022. Growth projections beyond 2022 are expected to be lower than previously estimated given a number of outlets are expected not to open and footfall is expected to be restricted for a prolonged period as staffing shortages and local restrictions/social distancing is either mandated or occurs naturally, as was experienced through 2021.

The Group has experienced unprecedented cost inflation towards the end of 2021 which will impact returns in 2022 and beyond. Whilst cost pressure is expected to be fully recovered within Out of Home, the gross margin progression anticipated previously is now not likely to be achieved without transformational change in terms of how the business services the trade and its wider customer base. Overhead cost estimates have been reviewed and increased to reflect both inflationary pressures and the cost estimates required to serve the customer base given the complexities of the current business environment/model. As a result, and in response to this challenging climate, during 2022 the Board has commenced a full strategic review into its Out of Home route to market in terms of customer and product mix as well as ways to ensure appropriate margin and appropriate profitability going forward.

The pre-tax discount rate applied to cash projections is 8.2% (2020: 8.2%) and cashflows beyond the five year period are extrapolated using a 2% growth rate (2020: 2%) (being the average of cashflow growth in years 3-5). Based on the review it was concluded that the fair value less costs of disposal were not supported by the value in use calculated. As a result of this analysis, management have recognised an impairment charge of £36.2m in the current year, impairing the entire Goodwill held. The impairment charge has been recognised as an exceptional item within these financial statements.

Key assumptions

The calculation of value in use is most sensitive to the following assumptions:

• Revenue growth

• Gross margin

• Overheads

• Discount rate

• Growth rates estimates used to extrapolate cash flows beyond the forecast period

Revenue growth - Based on the continued impact of coronavirus and subsequent hospitality lockdowns, the Board's view on the outlook for the industry recovery is that whilst there will be continued revenue growth, it will be at a slower pace than previously anticipated. Within the year-end impairment review, revenue growth of 1% per annum has been forecast for each of the five years. This compares to the previously assumed 3% revenue growth noted within the prior year review.

A faster rate of recovery would increase the value in use calculation and therefore reduce any impairment noted. A year-on-year increase in annual revenue of 4% per year over the five year period forecast would result in no impairment being required for Out of Home.

Gross margin - Based on the continued impact of coronavirus and  the impact of inflationary pressures including fuel, labour and materials, the gross margins forecast previously (2021 and previous impairment models) are not expected to be achieved without transformational change in terms of how the Group services the trade and its wider customer base. Gross margins included within the impairment review are based on budget expectations and anticipated changes over the five year forecast period.

A softening of inflationary pressures and improvement in material input prices would lead to an improvement in the gross margin forecast. An increase of 6ppts in the gross margin by the end of the five year forecast period would result in no impairment required for Out of Home.

Overheads - Overhead cost estimates have been reviewed and increased to reflect both inflationary pressures and the cost estimates required to serve the customer base given the complexities of the current business environment/model.

A reduction in overheads would result in an increase in the value in use calculation and thus a reduced impairment. A reduction in overheads by 13.7% at the end of the five year forecast period would result in no impairment to Out of Home.

Discount rate - Discount rates represent the current market assessment of the risks specific to the Out of Home CGU, taking into consideration the time value of money and risks of the underlying assets that have not been incorporated in the cash flow estimates. The discount rate calculation is based on the specific circumstances of the Group and is derived from its weighted average cost of capital (WACC). Adjustments to the discount rate are made to factor in the specific amount and timing of the future tax flows in order to reflect a pre-tax discount rate.

A reduction in the pre-tax discount rate to 4.5% (i.e. -3.7ppts) would result in no impairment.

Growth rate estimates - The long-term growth rate used to extrapolate the period of review is based upon management's expectations of the Out of Home CGUs' ongoing potential and is considered consistent with the drinks hospitality industry as a whole. An increase of 4ppts from 2% to 6% growth into perpetuity would be required for there to be no impairment.

7.    Defined Benefit Pension Scheme

The Group operates a defined benefit plan in the UK. A full actuarial valuation was carried out on 5 April 2020 and updated at 31 December 2021 by an independent qualified actuary.

A summary of the pension surplus position is provided below:

8.    Provisions

In previous annual reports, the Group reported a contingent liability in respect of historic contracts with some of its senior management relating to incentive schemes which were designed to motivate, retain and engage those key employees. HMRC were of the view that the arrangements should have been taxed as employment income, which the Group and its advisors had previously disputed. During the period a tribunal was convened to consider the dispute of the Group's scheme as well as similar schemes operated by other companies. Subsequent to the year end, the tribunal found that the arrangements should have been taxed as employment income.

Accordingly, as at 31 December 2021, the Group has recognised a provision of £4.2m in relation to this ruling, being the Group's additional tax liability and interest costs.

Included within other receivables is a reimbursement asset in respect of these historic contracts.

9.    Contingent consideration

Within the Consolidated Statement of Cash Flows there is a £0.1m (2020: £0.9m) cash outflow in relation to the payment of contingent consideration. These payments relate to contingent consideration paid for acquisitions made in previous financial years.

10. Dividends

The final dividend proposed is 13.3p, which will become ex-dividend on the 24 March 2022 and paid, subject to shareholder approval, on 5 May 2022. 

Annual Report

The annual report will be mailed to shareholders and made available on our website during March 2022. Copies will be available after that date from: The Secretary, Nichols plc, Laurel House, Woodlands Park, Ashton Road, Newton-le-Willows, WA12 0HH.

Cautionary Statement

This Preliminary Report has been prepared solely to provide additional information to shareholders to assess the Group's strategies and the potential for those strategies to succeed. The Preliminary Report should not be relied on by any other party or for any other purpose.

-Ends-