1 March 2023                                                                                                                               

Nichols plc

2022 PRELIMINARY RESULTS

Nichols plc ('Nichols' or the 'Group'), the diversified soft drinks Group, announces its Preliminary Results for the year ended 31 December 2022 (the 'period').

Financial highlights

·      Group revenue increased by 14.3% to £164.9m (2021: £144.3m)

o  Still products +8.2% to £78.3m (2021: £72.4m)

o  Carbonated products +20.4% to £86.6m (2021: £71.9m)

·      UK revenues increased by 13.7% to £127.0m (2021: £111.6m)

o  UK Packaged route to market sales +2.9%

o  UK Out of Home (OoH) recovery continues post pandemic, with revenues +42.8%

·      International revenues +16.1% to £38.0m (2021: £32.7m)

o  Middle East revenue +20.4% (+11.3% excluding 2021 marketing investment)

o  Significant progress in Africa continued with revenue +15.0%

o  ROW markets revenue +12.7%, supported by strong OoH recovery in Europe

·      Maintained Adjusted PBT Margin at 15.1%, despite significant inflationary pressures (2021: 15.1%)

·    Continued strong cash performance with FCF³ of £14.6m (£18.9m excluding historic HMRC incentive scheme tax settlement during the year) (2021: £17.5m)

o  Cash conversion⁶ at 72% (2021: 103%)

·      Exceptional charge of £11.1m; £8.7m attributable to non-cash impairment of OoH intangible and fixed assets

·     Proposed final dividend of 15.3p, up 15.0% year-on-year and reflecting 2x cover⁷, in-line with the Group's dividend policy. If approved at the Group's AGM, the full year dividend of 27.7p would represent a 19.9% increase year-on-year

Strategic and Operational highlights

·     Vimto's brand value in the UK +3.0%⁸

o  Continued outperformance of the dilutes market, by +2.3%⁹

o  Significant and continued progress in the ready to drink  market, with brand value +15.9%⁹

·    Successful transfer of Dilutes contract manufacturing to faster and more efficient lines in H1, supporting a more favourable underlying cost of goods

·     Strategic review of the OoH route to market completed, with opportunities for net margin improvement identified. Actions have commenced and will continue to be implemented throughout FY23 with benefits largely realised in FY24 and beyond

·     Segmental reporting and separate strategic focus between Packaged and OoH businesses from FY23

John Nichols, Non-Executive Chairman, commented:

"Vimto continues to perform well both in the UK and internationally and despite ongoing inflationary pressures, which accelerated during the second half, the brand has ensured a robust financial performance for the Group. In the UK we have again seen the brand outperform in dilutes and continued to make significant progress in the ready to drink subcategory. Internationally, we continued to see solid growth across all regions. In particular, it was pleasing to see strong underlying growth in both the Middle East and Africa given the importance of these markets to the Group.

The Board currently expects FY23 Adjusted PBT¹ to be in line with FY22 and market expectations¹⁰, with International ahead and OoH behind initial market forecasts. The Board remains confident of significant progress in FY24 as inflationary pressures abate and the benefits of the Out of Home Strategic Review are realised.

With a long-term track record of growth, a proven and diversified strategy in the UK and internationally, a quality range of brands and a strong balance sheet, the Board remains highly confident that the Group is very well positioned to deliver its long-term growth plans."

References:

1 Excluding Exceptional items

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

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

4 Adjusted return on capital employed is the adjusted operating profit divided by the average period-end capital employed

5 Statutory return on capital employed is the operating profit divided by the average period-end capital employed

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

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

8 Source: Nielsen IQ RMS data for the Total Soft Drinks category for the YTD ending 31 December 2022 for the GB Total Coverage market

9 Source: Nielsen IQ RMS data for the Dilutes and RTD Stills categories for the 12 months to 31 December 2022 for the GB Total Coverage market

10 FY23 market expectations refers to a Group compiled consensus of adjusted PBT of £25.1m

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.

For more information about Nichols, visit: www.nicholsplc.co.uk

This announcement contains inside information for the purposes of Article 7 of the Market Abuse Regulation (EU) 596/2014 as it forms part of UK domestic law by virtue of the European Union (Withdrawal) Act 2018 ("MAR"), and is disclosed in accordance with the company's obligations under Article 17 of MAR.

Chairman's Statement

It gives me great pleasure to write to our shareholders in what is my final report as Non-Executive Chairman of Nichols. 

Vimto continues to perform well both in the UK and internationally and despite ongoing inflationary pressures, which accelerated during the second half, the brand has ensured a robust financial performance for the Group. In the UK we have again seen the brand outperform in dilutes and continued to make significant progress in the ready to drink subcategory. Internationally, we continued to see solid growth across all regions. In particular, it was pleasing to see strong underlying growth in both the Middle East and Africa given the importance of these markets to the Group.

As Out of Home (OoH) recovers from the impact of the pandemic, the Group's OoH Strategic Review is now complete, with opportunities for net margin improvement identified. Actions are expected to be implemented throughout FY23, with benefits being realised largely in FY24 and beyond. Given the differing strategic challenges between our Packaged and OoH routes to market, the Group will be segmented during FY23 to ensure appropriate strategic focus exists for each of its two proposed operating segments.

Trading

Total Group revenues for the period were £164.9m, an increase of 14.3% compared to 2021, with all routes to market and geographies progressing in the period.

Revenue of Still products increased by 8.2% to £78.3m (2021: £72.4m), driven by the strong performance of the Vimto Squash and RTD brands in the UK and the progression of Vimto Cordial in the Middle East. Revenue from Carbonated products increased 20.4% to £86.6m (2021: £71.9m), driven largely by the recovery of the Group's OoH Dispense business as outlets fully reopened following the pandemic, and by continued strong growth in Africa.

In the UK, revenue increased by 13.7% versus last year to £127.0m (2021: £111.6m) as the OoH route to market, and in particular the Dispense business, recovered post the pandemic. The Vimto brand continued to progress by +3.0% to £105.9m, according to Nielsen¹.

Sales across our International markets were £38.0m, an increase of 16.1% (underlying +13.4% adjusting for the impact of the completion of the Group's marketing investment in the Middle East in 2021) versus the prior year (2021: £32.7m). Revenue in Africa increased 15.0%, following a 17.1% growth last year which was particularly pleasing given the long-term opportunity presented by these markets.

Share Buyback

On 14 December 2021, the Group announced its plans to conduct on-market purchases under a share buyback programme. This included the intention 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 (AGM) at that time, held on 28 April 2021 (the 'Buyback').

The Buyback was put in place to meet the Group's future obligations under its SAYE Option Scheme and/or Long-Term Incentive Plan. The Buyback was completed on 5 April 2022 and was funded from the Group's existing cash resources. All Ordinary Shares repurchased are now held in treasury. The weighted average price paid was 1428.18 pence and the total cost of the Buyback in the period was £5.5m.

Dividend

Considering the Group's improved performance in the period and in-line with the Group's stated dividend policy of broadly 2x cover, the Board today proposes a final dividend of 15.3p which, together with the interim dividend paid, would result in a full year dividend for 2022 of 27.7p, representing a 19.9% increase year-on-year.

Subject to approval at the Group's AGM on 26 April 2023, payment will be made on 4 May 2023. The ex-dividend date and record date will be 23 March and 24 March 2023 respectively.

1 Nielsen IQ RMS data for the Total Soft Drinks category for the YTD ending 31 December 2022 for the GB Total Coverage market

Chair Succession

I announced at the last AGM that, after 15 years in the role, it was my intention to retire as Non-Executive Chair once a suitable replacement had been identified. On 11 January 2023, the Board was pleased to announce the appointment of Elizabeth (Liz) McMeikan as the Group's next Non-Executive Chair. In Liz, the Nominations Committee have identified an outstanding candidate with significant experience in consumer-facing businesses and public company boards.  

Liz joined the Group as a Non-Executive Director on 1 February 2023 and will become Non-Executive Chair on 26 April 2023 following the conclusion of the AGM on that date, subject to her re-appointment as a Director.

I am delighted to remain on the Board as a NED, taking the second of the two Nichols family Board seats, agreed as part of the Relationship Agreement signed in July 2020 alongside my son James Nichols.

Outlook

The Group has a proven, diversified, and international business model. However, it is not immune to the significant and accelerating inflationary pressures impacting the wider consumer and soft drinks markets. Whilst FY23 will be a challenging year as cost of living pressures impact consumer demand across all routes to market, the Group will continue to seek to mitigate these pressures through both cost efficiency and revenue management. Throughout FY22, this has helped the Vimto brand continue to grow in the UK and internationally, which the Board is confident will continue in FY23.

The Board currently expects FY23 Adjusted PBT¹ to be in line with FY22 and market expectations², with International ahead and OoH behind initial market forecasts. The Board remains confident of significant progress in FY24 as inflationary pressures abate and the benefits of the Out of Home Strategic Review are realised.

With a long-term track record of growth, a proven and diversified strategy in the UK and internationally, a quality range of brands and a strong balance sheet, the Board remains highly confident that the Group is very well positioned to deliver its long-term growth plans.

John Nichols

Non-Executive Chairman

1 March 2023

1 Excluding exceptional items

2 FY23 market expectations refers to a Group compiled consensus of adjusted PBT of £25.1m

Chief Executive Officer's Statement

I am incredibly proud of the Group's strong performance in 2022, which is a great testament to the commitment, resilience and determination of the entire Nichols team as we navigated what was a challenging and volatile trading environment. The teams should be very pleased with what we have achieved this year, delivering strong sales growth across all our key geographies.

Having experienced unprecedented trading conditions in recent years because of the Covid-19 pandemic, 2022 was another challenging and unpredictable year. We saw rapidly rising inflation, increased cost of living pressures on consumers and experienced a number of logistical challenges relating to the strike action that occurred in Spain during the first half of 2022 that, whilst not affecting the overall year performance, did cause a phasing issue H1 to H2. Whilst our teams have had to be flexible and continuously adapt to changing circumstances, I am really pleased that our clear strategy and diversified business model have enabled us to successfully overcome the challenges throughout the year and, ultimately, deliver returns for our shareholders.

The performance of the Vimto brand was central to the Group's success in 2022. Vimto's unique flavour continues to be loved by consumers across the globe. In the UK, the brand saw growth of 3.0%¹ during the year, once again outperforming the dilutes and ready to drink (RTD) subcategories.

One of the Group's key strategic focus areas in 2022 was to drive further operational excellence, with the objective of delivering enhanced levels of product availability and ensuring our consumers can enjoy our brands on a daily basis. A key initiative that has been successfully delivered to drive this during the year was the transition of our dilutes contract manufacturing to more efficient and faster lines that has increased our capability and capacity at an underlying favourable cost of goods position.

 Happier Future

At the beginning of the year, we shared our Happier Future sustainability commitments with our stakeholders, and I am pleased to report that in 2022 we made strong progress against our three key pillars of:

·      Everyone Matters - looking after our Nichols plc family and giving back to our local communities

·     Products We're Proud Of - developing products that allow consumers to make healthier choices, strengthening our approach to responsible sourcing, and continuing to find sustainable packaging solutions

·      Owning Our Climate Impact - ensuring we are conducting our business in the most sustainable way to protect the world around us

Our people are focused on embedding our commitments and pledges in these key areas across all our business practices. Sustainability is front of mind for everyone, and key to our day-to-day decision-making. Some of our key highlights during the year included launching our first Camp Vimto programme which is focused on raising aspirations and driving opportunities for young people in the communities we serve and ensuring that we continue to launch a range of No Added Sugar (NAS) products to offer our consumers a balanced choice of product range. Within our Owning Our Climate Impact pillar we have delivered on transitioning all our Nichols UK sites to be operating on 100% renewable energy. You can read more on our Happier Future strategy and progress during the year in our FY22 Annual Report.

 UK Soft Drinks¹

The UK soft drinks market delivered value growth during 2022 of 9.2% with a total market value of £10.5bn (2021: 9.6bn). However, market sales volumes declined 2.1% year-on-year, mainly due to the impact of cost of living pressures on consumers and despite the easing of trading and social restrictions imposed during the Covid-19 pandemic. This value growth reflected price increases seen across the market in response to inflationary pressures.

The Vimto brand continued to perform well in 2022 and, once again, delivered strong value sales of £105.9m. This was a result of the continued investment in its distribution channels, product availability, innovation, promotions and strong marketing campaigns.

1 Nielsen IQ RMS data for the Total Soft Drinks, Squash, Flavoured Carbonates and RTD Stills category for the YTD ending 31 December 2022 for the GB Total Coverage market

The dilutes category continued to be a segment where we flourished. I am incredibly proud to say that Vimto is the only UK dilutes brand to have achieved growth pre, during, and post Covid. Building on the momentum of our brand re-launch in 2021, Vimto dilutes continues to gain market share from peers and during 2022 we further cemented our clear No.2 position in the market. Vimto Squash is the fastest-growing dilutes brand and outperformed the sub-sector by 2.3% in 2022.

Our Vimto Still RTD range experienced significant value growth in 2022, achieving 15.9% year-on-year sales growth, and a +3.8% market outperformance. This has been achieved as a result of winning several new listings for our products across a range of key outlets during the year.

2022 has been a challenging year for our Carbonates portfolio. We have faced significant cost of goods pressures in what is a highly competitive subcategory. As a result we have focused on protecting our margins which has resulted in both value (-3.3%) and volume decline (-16.4%).

Innovation continued to be a key growth driver in 2022 as we launched a range of exciting new products that all share the unique and distinctive Vimto taste experience. We remain passionate and committed to providing consumers with the opportunities to make balanced and informed choices when it comes to healthy hydration, with all our Packaged products now High in Fat, Salt and Sugar (HFSS) compliant. Our product launches in 2022 included:

·      Vimto Zero Cherry, Raspberry & Blackcurrant Sparkling

·      Vimto Zero Blackberry, Raspberry & Blueberry Still

·      Two new NAS dilutes flavours - Vimto Orange and Pineapple, and Vimto Mango and Passionfruit

Following its launch in 2021, summer 2022 saw the return of Vimto's highly successful 'Find Your Different' marketing and advertising campaign. Building on the strength of its activation last year, the multi-media campaign continued to drive a strong uplift in overall brand awareness, consideration and engagement, whilst highlighting the benefits of our fortified squash flavour range. Our fully-integrated campaign ran on platforms including TV, video on demand, digital, social media and in cinemas. The campaign was seen by around six million consumers in total, with 80% of this group sitting within our key target audience of families.

In addition to our broadcast communications, we also ran two promotions across our Carbonates and RTD ranges, including our 'Big Cash Giveaway' and 'Love Potion' initiatives in the impulse sector. Both incentivised shoppers with the chance to win cash instantly when buying our products.

Our Levi Roots brand had another successful year, delivering strong value growth of 5.3%. This has been driven by an increase in the number of distribution points across wholesale and convenience channels, alongside a successful sales distribution drive, ensuring that the Levi Roots brand is readily accessible for both retailers and consumers.

Our Feel Good brand continues to see accelerated customer and consumer demand, with year-on-year volume and revenue growth. This was driven by strong distribution gains for multi-packs into new grocery retailers as well as new listings for our single serve range in the on-trade. In addition to our retail distribution wins, our new direct to consumer partnership will unlock more growth for the brand online.

In April 2022, Feel Good launched an exciting new partnership with Project Seagrass, a marine conservation charity dedicated to global seagrass meadow protection. We supported the protection of the UK's first seagrass nursery in Wales through our #youbuyweplant programme.

Throughout 2022, we continued to work closely with all our customers across our UK grocery, foodservice, discounter, and wholesale channels to ensure their needs are at the heart of our operations. The strength of these relationships is paramount to ensuring our end consumers can enjoy our products each day.

 UK On-Trade

Similar to the broader hospitality industry, our Out of Home route to market experienced another challenging 12 months in 2022.

During the year, we supported our key customers and partners as they faced numerous challenges resulting from increasing energy costs to rising inflation and supply shortages. Throughout the year, we remained focused on maintaining strong service levels and always maximising product availability, thereby ensuring all of our customers' drinks equipment were fully operational, and that our deliveries arrived on time and in full.

I am satisfied with the OoH route to market's performance in 2022, as it continued to recover from the impact of the pandemic to deliver sales growth of 43% versus 2021. Nonetheless, its performance during the second half of the year slowed to +5% against tougher post-Covid comparatives and many channels were impacted by the accelerating cost of living crisis which resulted in reduced footfall and consumer spending in our key leisure outlets.

Strong innovation and marketing programmes have once again been fundamental in driving the performance of our brands across key leisure and hospitality venues. Synchronising with movie launches has become an increasingly important part of our ICEE brand's strategy, driving brand visibility by trialling the product in venue. In 2022, this included collaborating with Paramount Pictures and Cineworld on the 'ICEE Challenge', a cinema advert reel led by Johnny Knoxville, to support the launch of the Jackass Forever movie.

During the year, we also launched our 'ICEE Big Flavour Vote', inviting fans to select their preferred new flavour from a range of three. As a result, the winning flavour, Mango & Passion Fruit, was launched in July across a range of cinema venues and was focused on driving incremental consumers to the brand on a more regular basis.

We continue to have strong relationships with our key partners including Coca-Cola, Pepsi, Irn-Bru, Ocean Spray and Sunkist. This year, we also introduced the Old Jamaica Ginger Beer brand on draught in the UK as part of an exclusive partnership. The strength of these partnerships underpinned double digit revenue growth versus last year on our core dispense branded offerings. In addition, in November we launched our new Vimto Out of Home website, providing customers with a more user-friendly experience, where they can easily view our portfolio and service offering in full. The website will be at the heart of future trade engagement plans.

Out of Home Strategic Review

As previously announced, in 2022 we conducted a strategic review of our OoH route to market as we assessed the significant impact of the pandemic on this channel. The review has allowed us to create a clear strategy that we believe will deliver significant additional net margin gains through a range of actions that will be implemented during 2023, with the benefits being largely realised in 2024 and beyond.

The OoH route to market's financial performance was heavily impacted by the Covid-19 pandemic, reflecting the lower margin and higher level of operational gearing that exists compared to our Packaged route to markets, particularly when its full operational costs and overheads are factored in.

The OoH dispense business is serviced on a regional basis through both owned distribution channels and third party distributors. OoH also services several national frozen contracts which cannot be serviced profitably without a wholly owned national distribution network.

The strategic review performed by the Company during 2022 provided clarity on the financial performance of OoH. It also identified that OoH operates with distinct operations, customers, products and, in part, suppliers.

It is clear post the pandemic that the strategic challenges within our OoH route to market are quite distinct from those that exist within our Packaged route to markets. The likely long-term returns from OoH are lower and a different approach to the management of the business is required to deliver shareholder value in the long term.

The strategic review identified several immediate actions that will be implemented through FY23.

These actions include:

·    operating OoH as a distinct division within the Group

·    exiting underperforming contracts and product categories, including coffee and national frozen accounts

·   exiting the in-house central frozen region, which is considered sub scale and unprofitable and for dispense is already serviced by a distributor

·    reviewing processes to simplify the business ensuring a rationalisation of operating costs and central overheads; and

·   improving financial reporting, including divisional and regional reporting focusing on net profit and return on capital employed.

The Group incurred £0.5m of costs in the period, to prepare its recommendations for implementation. Implementation of these actions commenced in Q1 FY23 and additional exceptional costs will be incurred through the year as these recommendations are implemented.

The benefits from these actions will largely be realised during FY24.

Vimto International

I am pleased to report strong International sales growth of 16% in 2022. This was achieved despite the challenges posed by inflation, global supply chain challenges, and political instability in some of our international markets during the year.  

Double digit growth and market share gains were achieved across all our key geographies. Sales in MEAP (Middle East Asia Pacific) were up 20% supported by strong in performance in Yemen, despite the ongoing tragic civil war, and across the Gulf Cooperation Council (GCC). This was fuelled by strengthened in-store execution, effective integrated marketing campaigns and product innovation.

In its 96th Ramadan season, our partner in MEAP, Aujan Coca-Cola Bottling Company (ACCBC), launched the region's first ever Zero Sugar cordial, a limited-edition format which proved extremely popular. Outstanding market execution and a highly effective promotional campaign, including a spectacular take-over of the Burj Khalifa, helped ensure that sales across the season exceeded those achieved in 2021. We also achieved strong sales growth in our RTD ranges with the launch of a new campaign celebrating 'The Unique Taste of Sweet Togetherness'. In November, we launched a new Vimto citrus flavoured RTD product in a green can, targeted to drive incremental consumers to the brand.

Across all our key markets and geographies, we have continued to roll out our new Vimto branding, with Senegal, Cameroon and Mali all being delivered in Africa, as well as Sweden and Cyprus within Europe.

In Africa, sales growth remained strong at 15% year-on-year, as we increased our distribution network into Angola, Chad and the Central African Republic, and launched new flavour extensions into a number of existing markets.

Our investment in strong marketing programmes across key territories delivered further success, with seasonal activations around Valentine's Day, Ramadan and Tabaski within all key markets in Africa. In Algeria, we invested in a range of shopper activations and a first-ever digital campaign across Instagram and Facebook, which supported the delivery of record sales in 2022.

Inflation in North America proved extremely challenging to mitigate throughout 2022 and we saw demand for our products soften during the period. We continue to work in close collaboration with our partners in-market to ensure we maintain our key distribution points.

In Europe, positive sales growth of 23% was extremely encouraging in the context of the challenging market conditions. In Europe we are maintaining our strong focus on driving new distribution wins, improving product availability, and ensuring excellent in-market execution.

Looking Ahead

We have successfully delivered consistently strong performances across the breadth of the Group, through our diversified business model, clear strategy, strong brand equity and embedded ESG commitments, as well as the strength of our key partnerships and talent of our highly engaged people. Our outstanding portfolio of iconic brands has continued to grow across all markets in 2022, which remains at the heart of our success. We have a strong balance sheet and international reach.

Our performance this year is testament to the strength of our business. Whilst 2023 will undoubtedly bring challenges, as inflationary pressures are expected to persist and consumer confidence remains under pressure, the soft drinks category has proven to be highly resilient over many years and I expect that this resilience will continue to support our business growth.

I am confident that the momentum we have built will enable us to continue to deliver our long-term strategic objectives, achieve profitable growth and generate considerable returns for all our stakeholders.

Andrew Milne

Chief Executive Officer

1 March 2023

Chief Financial Officer's Statement

Revenue

Group revenues were £164.9m, an increase of £20.6m or 14.3% compared to 2021. The period was dominated by significant and accelerating inflationary pressures and, in H2 in particular, by the widely publicised cost of living pressures impacting consumers.

The Group's clear and long held value over volume strategy provided clear direction as we sought to mitigate these pressures through both cost efficiency and revenue management. Of the £20.6m revenue growth, £8.8m came from a combination of appropriate price recovery (+£8.0m), implemented in partnership with our customers, and the impact of the removal of the marketing investment (+£0.8m) in the Middle East in 2021 (reported as part of the Group's revenue line). The balance of revenue growth was generated by net improved volumes (both quantity and sales mix) across the Group's three routes to market. Throughout FY22, this balanced approach helped the Vimto brand to continue to achieve growth in the UK and internationally, whilst also protecting the Group's net margins.

Gross Profit

Gross profit at £71.0m was £5.8m higher than 2021 (£65.2m) and 2.1 percentage points lower at 43.1% (2021: 45.2%). Excluding the impact of the input costs aligned to the price recovery implemented in partnership with our customers gross profit % was consistent with 2021.

Significant volume growth was seen in both the Group's OoH and International routes to market and improved gross profit by approximately £5.7m. Reduced volumes in the UK Packaged route to market, where quantity declines were marginally offset by positive changes to the sales mix, resulted in a negative gross profit impact of £0.9m. The removal of the marketing investment (reported as part of the Group's revenue line) in the Middle East in 2021 supported year-on-year gross profit comparisons by £0.8m.

Underlying cost of goods inflation approached 14% across the year, with mitigating actions successfully implemented to reduce this to closer to 10%. Mitigating actions included the successful transfer of the Group's UK dilutes contract manufacturing volume to faster and more efficient lines in H1 following completion of its UK operational supply chain review.

The impact of movements in foreign exchange rates on gross profit was favourable at +£0.2m.

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 administrative expenses.

Distribution expenses totalled £10.7m (2021: £9.1m), an increase of 17.0%, due to a combination of net higher trading volumes across the UK and ongoing and significant inflationary pressure. The Group entered a new five-year distribution arrangement in H2 2021 that became operational during 2022, resulting in both significant additional capacity as well as opportunities for improved efficiency in the coming years.

Administration Expenses

Administration expenses excluding exceptional items totalled £35.7m (2021: £34.1m), an increase of £1.6m or 4.7% year-on-year, largely related to increases in net payroll and staff related costs in response to cost of living increases. 

Exceptional Costs

The Group has incurred £11.1m of exceptional costs during the year (2021: £39.5m), £8.7m of which is non-cash.

Review of UK packaged supply chain 

In Q4 2020, the Group commenced a review of its UK operational supply chains. The project has progressed steadily with significant changes implemented, including the Group entering several new five-year contract manufacturing and distribution arrangements that both built significant additional capacity, in-line with the Group's growth plans, and improved efficiency. These projects, which completed during 2022, resulted in £1.5m of exceptional costs in the period (2021: £0.6m, 2020: £0.3m).

Out of Home Strategic Review

In Q1 2021 the Group commenced a strategic review into its OoH route to market, to consider customer and product mix as well as review ways to enhance net margin and profitability going forward. The Group incurred £0.5m of costs in the period to prepare its recommendations for implementation. Additional costs will be incurred through 2023 as these recommendations are implemented. These additional implementation costs are one-off in nature and will be treated as exceptional.

Impairment of intangible and fixed assets

The impact of Covid-19 resulted in a difficult period of trade for OoH from 2020 through 2021, with many outlets being closed for a prolonged period of time. Whilst trade within the hospitality industry has reopened post the pandemic, the impact of the war in the Ukraine, and its impact on inflation and cost of living pressures have meant that whilst trade within the hospitality industry initially returned to pre-Covid levels, growth is significantly slower than previously forecast in the short term and saw a significant slowdown in Q4 as inflationary pressures impacted consumers. Certain sectors of the hospitality industry, for example Cinema, Holiday and Theme Parks where our frozen business operates, have seen significant volume decline all year versus pre-pandemic revenues.

In line with market expectations, we anticipate that growth projections for OoH beyond 2022 will be lower than previously estimated, given the economic outlook and change in consumer patterns.

Whilst cost pressure is expected to be fully recovered within OoH, the gross margin progression anticipated previously is not now likely to be achieved, despite there being significant opportunities to enhance net margin through better alignment of our customer and product mix with our cost base.

The Group's cost of capital has increased, largely due to macro-economic factors affecting all businesses, from 8.2% to 13.1%. This has resulted in a higher threshold required to support the carrying values of assets.

As a result, management have recognised a further non-cash impairment charge of £8.7m, in the current year, impairing all the remaining intangible assets (£4.8m) within our OoH route to market and a proportion of its fixed assets (£3.9m). In 2021, as previously announced, the Group impaired the Goodwill generated from previous OoH acquisitions (2021: £36.2m).

Historic incentive scheme

The Group has now settled with HMRC the £4.3m tax and interest charges relating to a historic incentive scheme and will now commence recovery of debts from current and previous management who had indemnified the Company. The Group incurred legal costs in the period of £0.1m in relation to the case.

Group Systems Review

The Group has commenced a project to implement a new enterprise resource planning (ERP) system, which is expected to be operational through 2024. Initial review costs of £0.3m were incurred in the period.

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.

Finance Costs

Net finance income of £0.4m (2021: £0.1m loss) was significantly up on the prior year, as the Group ensured the best return for its deposits following the Bank of England interest rate rises.

Adjusted profit before tax/Profit before tax and tax rate

Adjusted profit before tax increased by 14.5% to £25.0m (2021: £21.8m). The tax charge on adjusted profit before tax for the period of £4.8m (2021: £4.8m) represents an effective tax rate of 19.0% (2021: 21.9%). Reported profit before tax was £13.8m (2021: £17.7m loss).

Adjusted Earnings per share/Earnings per Share

On an adjusted basis, diluted earnings per share (EPS) was 55.32 pence (2021: 46.09p). Total adjusted EPS increased to 55.38 pence (2021: 46.15p) with basic EPS at 31.86 pence (2021: -60.04p).

Cash and Cash Equivalents and Balance Sheet

The Group's focus on cash conversion continued and the Group achieved a cash conversion of 72% (31 December 2021: 103%).

The Group's FCF was fully utilised this year, undertaking a £5.5m treasury share Buyback to facilitate future servicing of the Group's SAYE Option Scheme and/or Long-Term Incentive Plan, alongside £9.4m for dividend payments made during the period.

Cash and cash equivalents at the end of the period remained strong at £56.3m (31 December 2021: £56.7m).

Working capital is now normalised post the pandemic and is reflective of the higher raw material and packaging costs experienced in the period. Capital expenditure of £1.2m was broadly consistent year-on-year (2021: £1.2m).

The Group's current Adjusted Return on Capital Employed progressed marginally at 27.2% (31 December 2021: 26.6%). Statutory Return on Capital employed is 14.2% (31 December 2021: 15.8% loss).

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 2022, the Group recognised a surplus on its UK defined benefit scheme of £4.1m (2021: surplus £5.3m).

During the year the Trustees were able, with the support of the Company, to further de-risk the assets held within the scheme. This is in addition to the de-risking work carried out during 2021. Assets versus liabilities is now at 122% versus 83% at the time of the last valuation (April 2020). The Company is now working with the Trustees to develop its future funding strategy ahead of the next valuation in April 2023.

David Rattigan

Chief Financial Officer

1 March 2023

CONSOLIDATED INCOME STATEMENT

For the year ended 31 December 2022

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

For the year ended 31 December 2022

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

As at 31 December 2022

CONSOLIDATED STATEMENT OF CASH FLOWS

For the year ended 31 December 2022

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

As at 31 December 2022

NOTES

1.    Basis of Preparation

The preliminary financial information does not constitute statutory accounts for the financial years ended 31 December 2022 and 31 December 2021, but has been derived from those accounts. The accounting policies remained unchanged from those set out in the 2021 Annual Report.

Statutory accounts for 2021 have been delivered to the Registrar of Companies and those for the financial year ended 31 December 2022 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, the potential impact of further Covid-19 restrictions in addition to a continued cost of living crisis. 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 OoH 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 return during the remainder of 2023 and the start of 2024.

During the year the Group experienced a period of significant inflation and a cost of living crisis against which a number of mitigation actions were introduced. These are largely evidenced in the results announced. Our modelling has sensitised the impacts of Russia's continued invasion of Ukraine, in particular their impact on global supply chains and macroeconomic inflationary factors.

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 provide resilience against these factors and the other principal risks that the Group is exposed to. At the 31 December 2022 the Group had cash and cash equivalents of £56.3m with no external bank borrowings.

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 accounts.

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.

The Group's OoH strategic review is now complete. Given the differing strategic challenges between our Packaged and OoH routes to market, the Group will be segmented during FY23 to ensure appropriate strategic focus exists for each of its two proposed operating segments.

A geographical split of revenue is provided below:

4.    Exceptional items

The Group incurred £11.1m of exceptional costs during the year (2021: £39.5m), £8.7m of which is non-cash.

Review of UK packaged supply chain 

In Q4 2020, the Group commenced a review of its UK operational supply chains. The project has progressed steadily with significant changes implemented, including the Group entering several new five-year contract manufacturing and distribution arrangements that both built significant additional capacity, in-line with the Group's growth plans, and improved efficiency. These projects, which completed during 2022, resulted in £1.5m of exceptional costs in the period (2021: £0.6m, 2020: £0.3m).

Out of Home Strategic Review

In Q1 2021 the Group commenced a strategic review into its OoH route to market, to consider customer and product mix as well as review ways to enhance net margin and profitability going forward. The Group incurred £0.5m of costs in the period to prepare its recommendations for implementation. Additional costs will be incurred through 2023 as these recommendations are implemented. These additional implementation costs are one-off in nature and will be treated as exceptional.

Impairment of goodwill, intangible and fixed assets

Following the annual impairment review of the Group's OoH cash-generating unit (CGU), the Group has incurred a non-cash impairment of £8.7m, impairing all intangible assets (£4.8m) and a proportion of fixed assets (£3.9m). Further detail is provided in note 6.

Historic incentive scheme

The Group has now settled with HMRC the £4.3m tax and interest charges relating to a historic incentive scheme and will now commence recovery of debts from current and previous management who had indemnified the Company. The Group incurred legal costs in the period of £0.1m in relation to the case.

Group Systems Review

The Group has commenced a project to implement a new enterprise resource planning (ERP) system, which is expected to be operational through 2024. Initial review costs of £0.3m were incurred in the period.

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. The weighted average number of ordinary shares is calculated by adjusting the shares in issue at the beginning of the period by the number of shares bought back or issued during the period multiplied by a time-weighting factor. 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.    Property, plant and equipment and Intangibles

Impairment Review

Intangible assets which have indefinite useful lives, including the Group's acquired brands, are subject to annual impairment testing or more frequent testing if there are indicators of impairment.

Annual impairment reviews were performed on the intangible assets with indefinite lives, all of which relate the Group's OoH route to market. 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 resulted in a difficult period of trade for OoH from 2020 through 2021 with many outlets being closed for a prolonged period of time. Whilst trade within the hospitality industry has now opened post the pandemic, the impact of the war in the Ukraine, and its impact on inflation and cost of living pressures have meant that, whilst trade within the hospitality industry initially returned to pre-Covid levels, growth is significantly slower than previously forecast in the short term and saw a significant slowdown in Q4 as inflationary pressures impacted consumers. Certain sectors of the hospitality industry, for example Cinema, Holiday and Theme Parks where our frozen business operates, have seen significant volume decline all year versus pre-pandemic revenues.

Growth projections beyond 2022 are now expected to be lower than previously estimated given the economic outlook and change in consumer patterns.

Whilst cost pressure is expected to be fully recovered within OoH, the gross margin progression anticipated previously is not now likely to be achieved despite there being significant opportunities to enhance net margin through better alignment of our customer and product mix with our cost base.

The pre-tax discount rate applied to cash projections is 13.1% (2021: 8.2%) and cash flows beyond the five-year period are extrapolated using a 2% growth rate (2021: 2%). Based on the review it was concluded that the carrying value of the assets were not supported by the value in use calculated. As a result of this analysis, management have recognised an impairment charge of £8.7m in the current year, £4.8m in relation to the intangible assets and £3.9m relating to a proportion of the fixed assets. 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 rate estimates used to extrapolate cash flows beyond the forecast period

Revenue growth - We exit 2022 with a smaller OoH route to market than anticipated 12 months ago which in turn is significantly smaller than that anticipated pre-pandemic.

The impact of inflation on the UK economy and its resulting cost of living pressure for our consumers have meant that, whilst trade within the hospitality industry initially returned to pre-Covid levels, growth is significantly slower than previously forecast in the short term and saw a significant slowdown in Q4 2022. Certain sectors of the hospitality industry, for example Cinema, Holiday and Theme Parks where our frozen business operates, have seen significant volume decline all year versus pre-pandemic revenues.

Whilst we do expect growth to return in the medium term, the short-term impact of recent years' events - the pandemic, cost of living pressures, consumer spending habits - is significant for the OoH route to market.

Within the year-end impairment review revenue growth of 2% has been forecast from year five into perpetuity but before that we see slower growth than anticipated previously.

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 3% per year over the five-year period, starting from year one, would result in no impairment being required for OoH.

Gross margin - Whilst cost pressure is expected to be fully recovered within OoH, the gross margin progression anticipated previously is now not likely to be achieved despite there being significant opportunities to enhance net margin through better alignment of our customer and product mix with our cost base.

A softening of inflationary pressures and improvement in material input prices would lead to an improvement in the gross margin forecast. An increase of 3.3ppts in the gross margin by the end of the five-year forecast period would result in no impairment being required for OoH.

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 9% at the end of the five-year forecast period would result in no impairment to OoH.

Discount rate - Discount rates represent the current market assessment of the risks specific to the OoH 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 8.6% (i.e. -4.5ppts) 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 OoH CGUs' ongoing potential and is considered consistent with the drinks hospitality industry as a whole. An increase of 5.0ppts from 2% to 7% 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 2022 by an independent qualified actuary.

A summary of the pension surplus position is provided below:

8.    Provisions

The Group has now settled with HMRC the tax and interest charges regarding the historic incentive scheme provided for in the prior year annual report (£4.2m).

Recovery will now commence of debts from current and previous management who had indemnified the company. 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 (2021: £0.1m) 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 15.3p, which will become ex-dividend on the 23 March 2023 and paid, subject to shareholder approval to all shareholders on the register on 24 March 2023, on 4 May 2023. 

Annual Report

The annual report will be mailed to shareholders and made available on our website during March 2023. 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-