AG BARR p.l.c. Interim results

                                                                                                               22 September 2020

 

A.G. BARR p.l.c. ("A.G. BARR" or the "Group")

 

INTERIM RESULTS FOR THE SIX MONTHS ENDED 25 JULY 2020

 

 

 

A.G. BARR p.l.c., which produces and markets some of the UK's leading drink brands, including IRN-BRU, Rubicon and Funkin, announces its interim results for the six months ended 25 July 2020.

Financial summary

	July 2020	July 2019	Change
Revenue	£113.2m	£122.5m	(7.6)%
Profit before tax (before exceptional items)*	£16.6m	£13.9m	19.4%
Statutory profit before tax	£5.1m	£13.5m	(62.2)%
Operating margin before exceptional items*	15.1%	11.7%	343 bps
Earnings per share before exceptional items*	10.52p	9.83p	7.0%
Net cash flow from operating activities	£24.0m	£11.7m	105.1%
Net cash at bank	£30.4m	£4.6m	+£25.8m

 

Covid-19 response

○    Successfully introduced range of enhanced safety and hygiene measures across all operations

○    Swift action taken to control costs, conserve cash and underpin financial stability

○    Maintained continuity of production and continued to deliver high levels of service and quality

○    Brought to a close use of the Government's Job Retention Scheme by end July

○    Strong teamwork across the Group supporting our year to date performance

 

Performance headlines

 

○    Barr Soft Drinks : Value share of total UK soft drinks market up 1.2%

○   Funkin : Sales decline of 34% driven by very challenging hospitality sector - within this retail and on-line sales grew by over 170%

○  Pre-tax exceptional charge of £11.5m related to ongoing business re-engineering programme and impairment of Strathmore brand and assets

○    Cash flow generated from operations of £30.1m

○    Strong balance sheet and with £30.4m of net cash at bank

○    Dividend position remains under review - dividend payments are expected to resume in 2021

 

Roger White, Chief Executive, commented:

"We remain on course to deliver a full year performance in line with the revised expectations we communicated in the July 2020 trading update.  We have continued to invest in our core brand equity for the long term, maintained our quality and service standards and remain a profitable and cash generative business in a robust drinks sector.  We are confident that our business will continue to prove its resilience for the balance of this year and beyond."

 

For more information, please contact :

A.G. BARR     0330 390 3900                                    Instinctif Partners      020 7457 2020

Roger White, Chief Executive                                              Justine Warren

Stuart Lorimer, Finance Director                                          Matthew Smallwood

* Items marked with an asterisk are non-GAAP measures.  Definitions and relevant reconciliations are provided at the end of this announcement.

 

Interim statement

 

The first 8 weeks of the new financial year continued the strong momentum with which we exited the 2019/20 financial year.  However, the circumstances which have arisen as a result of the COVID-19 pandemic have significantly impacted life and business in the UK and beyond. 

 

As previously communicated, the UK lockdown measures introduced on 23 March 2020, and the resultant changes in consumer purchasing and consumption patterns, have unsurprisingly had an adverse impact on the Group's trading.

 

For the six months ended 25 July 2020 the Group delivered revenue of £113.2m (2019/20 : £122.5m).

 

In March 2020, as the crisis began to unfold, we took swift action to conserve cash and underpin our financial stability.  Despite the difficult prevailing circumstances and subsequent impact on our revenue and product mix, the business generated positive cashflow for the 26 weeks ended 25 July 2020 and, as a result of our cost control measures, delivered profit before tax and exceptional items^* of £16.6m, a 19.4% increase on the same period in the prior year (H1 2019/20 : £13.9m).  Taking into account exceptional items, detailed below, statutory profit before tax was £5.1m, a 62.2% decrease on the prior year. (H1 2019/20 : £13.5m).

 

Soft drinks market

 

IRI Marketplace data for the 26 weeks to 26 July 2020 records the total UK soft drinks market increasing in value by 0.2% and in volume by 0.6%.  While the overall market has proven resilient in the circumstances, there is a notable difference between the value growth in carbonates (up 7.3%) and the value decline in stills (down 7.8%).

 

Despite our revenue decline across the past 26 weeks, we have grown our market value share of soft drinks, both in Scotland and in England and Wales, reflecting the unusual market dynamics being experienced.  The closure of the hospitality sector, where availability of market data is more limited, has contributed significantly to our fall in revenue.  Our strong performance in the more widely measured channels, such as take-home, has driven our improved market share position.  Against this backdrop our broad and balanced coverage across the full spectrum of shopping channels and formats has proven effective.

Safety, wellbeing and operational resilience

 

As the COVID-19 pandemic has evolved, safety and wellbeing have been our number one priority.  Having successfully introduced a range of enhanced safety and hygiene measures across all our operations, we have maintained continuity of production and continued to deliver a high level of customer service and quality.

 

We would like to thank our colleagues and teams across the business who have worked tirelessly to support our customers and consumers in these challenging times.

 

Business performance

 

As detailed in our July 2020 trading update, during lockdown we saw significant changes in consumption and purchasing patterns across our customer channels as well as notable shifts in sales mix, related to brand and product formats.  As lockdown measures eased we began to see a gradual return to pre-COVID-19 shopping and consumer dynamics.

 

We are pleased to report that the IRN-BRU brand has grown revenue by 1% in the first half of the financial year versus the corresponding period in 2019/20, continuing the positive momentum which the brand delivered across the second half of the prior year.  We have continued to invest in a range of IRN-BRU focused consumer marketing activities both prior to and during lockdown, including digital and social activity and a Scottish TV advertising campaign. 

 

Following a difficult 2019 for the fruit drinks sub category, to which our Rubicon brand was not immune, we have continued our Rubicon brand recovery plan including introducing reformulated products, new packaging design, and delivering a national marketing campaign focused on our Rubicon carbonated products.  Despite our actions, Rubicon sales declined by 9% over the first 6 months of the financial year, reflecting the COVID-19 market disruption and in particular the impact on the key Ramadan trading period.  We will continue to pursue our recovery strategy and remain confident in our long term approach. 

 

The Barr Flavours carbonated range has continued to build on the strong growth it delivered last year, with sales up 13% benefiting from further increased levels of distribution.

 

Our contract with Rockstar terminated on 23 August 2020 and, while we will continue to manufacture, sell and distribute Rockstar energy drinks up to 1 November 2020, thereafter the brand will cease to be part of the Barr Soft Drinks portfolio.  We have now agreed that we will continue to manufacture Rockstar products on a contract packing basis until the end of January 2021.  In accordance with the terms of the contract, a one-off compensation payment, currently being finalised, will be received by the Group in the second half of the current financial year.

 

Our business re-engineering programme, which commenced in 2019/20, identified a number of actions to simplify our operations and reshape our internal supply chain by rationalising and reducing the complexity of our portfolio and routes to market.  As part of this programme, we will cease to produce and sell the franchise brand Snapple during the first half of 2021/22.  Snapple accounted for less than 1% of revenue in 2019/2020. 

 

Clearly, the hospitality sector has been significantly challenged by the lockdown measures over recent months.  Across the first six months of the financial year, Group sales to our hospitality customers fell by c.65%, peaking at c.95% during the full lockdown period.

 

The Strathmore brand in particular has been impacted given the significance of its sales in this sector.  Whilst we are seeing some recovery across hospitality, it will take time for the sector to regain momentum and as such we do not anticipate Strathmore returning to pre-COVID-19 sales levels in the foreseeable future.  Regrettably, as a consequence we have reduced our manufacturing workforce at our Forfar site and the brand and asset valuations have been impaired, as outlined below.

 

For the Funkin business, sales declined by 34% reflecting the hospitality sector challenges, however within this retail and on-line sales grew by over 170%, with the nitro infused ready-to-drink cocktails in particular delivering a strong performance.  The Funkin brand remains a significant long-term growth opportunity in both the recovering on-trade and in the retail channel, where the brand is gaining momentum.  In support of our drive to build Funkin into a relevant consumer brand we will deliver, during the second half of the financial year, our first Funkin TV advertising campaign in partnership with Sky alongside the launch of a number of new and exciting products across the Funkin portfolio.

 

Exceptional items

 

In the period, we have reported a pre-tax exceptional charge of £11.5m (£10m non-cash and £1.5m cash).  This covers :

 

●    our ongoing business re-engineering programme, which commenced in 2019 and has been extended in 2020 in light of the impact of COVID-19.  In the first 6 months of the current financial year £1.5m costs are primarily associated with redundancy payments related to this programme which will complete in January 2021; and

 

●    following a review of our intangible asset brand valuations, a £10m impairment of our Strathmore brand and assets which has been significantly affected by the challenges in the hospitality sector.

The 2019/20 comparator was a £0.4m net cash charge.

 

Cash Flow

 

Cash flow generated from operations* of £30.1m was £14.1m higher than the corresponding period in the prior year.  This was driven by higher operating profit, before non-cash exceptional items, and inflows driven from working capital.

 

Capital expenditure in the half year was £2.8m (£8.4m in the first half of the prior year), reflecting our decision to put all discretionary capital programmes on hold.  Full year capital expenditure is estimated to be in the region of £6-8m (2019/20: £14.8m) as we recommence our capital investment programme in the second half of the financial year.

 

The combination of operational cash conservation, the temporary suspension of dividends, the lower capital expenditure and the drawdown of credit facilities has resulted in a closing cash position of £90.4m.

Balance sheet

 

We closed the 2019/20 financial year with a strong balance sheet and with £10.9m of net cash at bank.  We recognised quickly the uncertainty and disruption that could result from COVID-19 and took prudent steps to protect our business including the full draw down of our £60m revolving credit facilities, the implementation of cash conservation measures, such as pausing all discretionary capital programmes, suspending our dividends and further strengthening our working capital controls.

 

Our total working capital* has reduced from £25.2m as at 27 July 2019 to £13.2m as at 25th July 2020.  This reflects the impact of lower trading and improved inventory management following the first phases of our business re-engineering programme in the prior year, as well as the benefit of deferred VAT payments as part of the Government's COVID response measures.  To date our bad debt and overdue balances remain minimal, despite having extended credit to some of our smaller customers and having agreed repayment plans with others who have been particularly impacted by the on-trade lock down.

 

Dividend

 

We continue to keep our dividend position under review and, on the basis of our current underlying assumptions related to the UK's COVID-19 recovery, it is expected that we will resume dividend payments in 2021.

 

Outlook

 

Given the difficult prevailing circumstances the business has responded well to the challenges we have faced and has delivered a creditable performance in the first six months of trading, notwithstanding the relatively weaker comparatives of the prior year.

 

While UK-wide lockdown measures have been gradually lifted, there remains a continued high degree of uncertainty associated with further potential COVID-19 outbreaks, such as significant localised lockdowns, and the resulting impacts.

 

Our current scenario planning, based on an underlying assumption that the UK will not enter into a further significant period of lockdown, continues to indicate that our full year revenue performance for the year ending January 2021 will be in the region of 12-15% below the prior year, with a modest reduction in operating profit margin reflecting the impact of adverse sales mix and operational de-leverage, mitigated by our strong delivery of ongoing overhead cost savings. 

Despite the challenging environment, we have continued to invest in our core brand equity for the long term, maintained our quality and service standards and remain a profitable and cash generative business in a robust drinks sector.  We are confident that our business will continue to prove its resilience for the balance of this year and beyond.

 

John Nicolson                                                              Roger White

Chairman                                                                      Chief Executive

 

 

 

Consolidated Condensed Income Statement
		Unaudited			Unaudited			Audited
		6 months ended 25 July 2020			6 months ended 27 July 2019			Year ended 25 January 2020
		Before exceptional items	Exceptional items*	Total	Before exceptional items	Exceptional items*	Total	Before exceptional items	Exceptional items*	Total
	Note	£m	£m	£m	£m	£m	£m	£m	£m	£m
Revenue	6	113.2	-	113.2	122.5	-	122.5	255.7	-	255.7
Cost of sales		(64.9)	(0.3)	(65.2)	(71.8)	-	(71.8)	(149.6)	(1.1)	(150.7)
Gross profit	6	48.3	(0.3)	48.0	50.7	-	50.7	106.1	(1.1)	105.0
Other Income		-	-	-	-	-	-	-	1.8	1.8
Operating expenses		(31.2)	(11.2)	(42.4)	(36.4)	(0.4)	(36.8)	(68.0)	(0.7)	(68.7)
Operating profit	8	17.1	(11.5)	5.6	14.3	(0.4)	13.9	38.1	-	38.1
Finance costs		(0.4)	-	(0.4)	(0.3)	-	(0.3)	(0.6)	-	(0.6)
Share of results of associate		(0.1)	-	(0.1)	(0.1)	-	(0.1)	(0.1)	-	(0.1)
Profit before tax		16.6	(11.5)	5.1	13.9	(0.4)	13.5	37.4	-	37.4
Income tax expense	9	(4.9)	1.7	(3.2)	(2.8)	0.1	(2.7)	(7.6)	-	(7.6)
Profit attributable to equity holders		11.7	(9.8)	1.9	11.1	(0.3)	10.8	29.8	-	29.8
Earnings per share (p)
Basic earnings per share	10			1.71			9.57			26.50
Diluted earnings per share	10			1.71			9.55			26.49
Earnings per share before exceptional items	10			10.52			9.83			26.50
* Refer to Note 8