Real Good Food: FY 2021-2022 Final Results

Liverpool / UK. (rgf) British Real Good Food Company PLC (RGF), the food manufacturing business specialising in Cake Decoration, announces its final results for the year ended 31 March 2022. Overview:

Financial highlights

  • Revenue from continuing businesses increased by 8.3 percent to GBP 40.4 million (2021: GBP 37.3 million).
  • Adjusted underlying Ebitda* from continuing activities for the Group was GBP 0.7 million (2021: GBP 0.2 million), despite the impact of covid on the continuing business.
  • Brighter Foods sold to The Hut Group (THG) in May 2021 generating GBP 36.4 million cash for the Group.
  • Net debt significantly reduced to GBP 25.5 million (2021: GBP 48.8 million).

Operational highlights

  • Cake Decoration launched 69 new products in the year with in-year revenues of approximately GBP 1.8 million.
  • Initiated a rebranding, range rationalisation and recipe improvement programme.
  • Unprecedented increases in the cost of raw materials and energy in recent months continue unabated and pose significant challenges.
  • In response, the Group has hunkered down, controlled costs and protected revenues where possible.

Current trading

  • Post year end programme to reduce costs saving GBP 1.4 million per year from the end of Q3.
  • FY23 expected to be a very challenging and loss-making year but the business is being strengthened to be more resilient and ready to benefit from a more favourable trading environment.
  • The Group has the support of its Loan Holders and major shareholders to navigate this difficult time.
  • The Board remains open to divesting the continuing businesses for the right value at the right time.

Mike Holt, Executive Chairman commented: «The Group made a good start to the year and expected to build on this during the seasonally busier second half of the year. Market conditions changed during Q3 and have remained extremely challenging as noted in our trading updates in April and earlier today. To mitigate this, we are putting into effect a more radical programme of reform to reduce costs, protect revenues and preserve the inherent value of the Group. This involves the refinancing of the Group and discussions are underway with potential lenders,» he said in his Statement and Business Review.

Overview

With the easing of covid restrictions and post-Brexit uncertainty, the Group started the year well. For the first six months to 30 September 2021, revenue and Ebitda were well ahead of last year. Underlying adjusted Ebitda was GBP 0.7 million compared to a (covid-impacted) loss of GBP 0.8 million in the prior year and an Ebitda profit of GBP 0.2 million for the first half of FY20 (our pre-covid benchmark).

Further progress was expected in our seasonally busier second half of the year, but revenue was much lower than had been anticipated (particularly during our peak Q3 period) due to severe shortages and erratic deliveries of certain key ingredients and services, compounded by high absence rates because of the Omicron variant of covid, which affected our ability to fulfil customer orders. Significant input cost increases during Q4 also impacted profitability due to the inevitable lag effect on cost-to-price pass through to customers. These are sector-wide issues but their effect on us was more pronounced due to our seasonality. Underlying adjusted Ebitda was marginally positive for the six months to 31 March 2022, compared to a GBP 1.1 million profit in the prior year and GBP 1.9 million loss in FY20 (our pre-covid benchmark). International sales, which had been expected to show double digit growth, were 35 percent lower in the second half of the year and 14 percent lower for the full year; due to a combination of supply chain shortfalls and the loss of some USA business to local supply.

For the year as a whole the Group improved on its FY21 performance but not FY20, with a GBP 0.7 million underlying adjusted Ebitda on continuing activities. Whilst disappointing and frustrating, the results mask improvements that did add value in the year and will add future value once prevailing market conditions normalise. New product revenues from the launch of 69 new products, accounted for 4.5 percent (GBP 1.8 million) of sales, this includes the introduction of bakers’ caramel for the retail market and other luxury products, which make stylish and quality cake decorating at home easier and more accessible. Work also started on reformulating product recipes to reduce the cost and complexity of product manufacture and this rather than new product launches will be a key focus area for the new financial year.

Brighter Foods

In May 2021, we sold our majority stake in Brighter Foods Limited to The Hut Group for GBP 35.6 million which valued the business at GBP 43.0 million. The timing of the sale coincided with the end of the lock-in period of Brighter’s Chief Executive and Founder. At GBP 43.0 million, the sale represented 8.6 times annualised FY20 Ebitda and 11.7 times FY21 Ebitda. The sale enabled us to effectively halve the level of shareholder loans (from GBP 45.6 million to GBP 22.0 million) and to eliminate the pension scheme deficit on an «on-going basis» (by the injection of GBP 8.5 million into the Scheme’s assets).

Renshaw Rebranding

In 2021, Renshaw conducted research on the Cake Decorations Market1. Qualitative insights were gathered from a consumer consulting board of 40 bakers, and these were then tested with a group of 1000 UK bakers of various skill levels from beginners to professionals1. A study into the beliefs and behaviours of lapsed and declining consumers of RTR (ready to roll) icing2 was also undertaken; last year, 1.6 million new shoppers entered the category but 1.5million exited3, so addressing their key concerns, the greatest being a lack of confidence, could make a transformational difference to the category.

The results have led to a more inclusive brand proposition. The new improved recipe will continue to provide the functionality that regular users love, whilst also making it easier to knead, roll and correct slight imperfections which anyone can make, to ensure a positive experience even for the first-time user. The vanilla flavour has been increased to enhance the eating experience whilst for consumer packs there’s also a fun and approachable new look and name change. From September, consumer packs will encourage cake decorators to «just roll with it» if things take a direction they hadn’t originally planned, to celebrate the perfectly imperfect creations that make a handmade product so special. In response to consumer feedback the product will be renamed Fondant Icing (after all it’s not strictly «ready to roll» as a quick knead wakes up the gum system and makes the product easier to use).

There has also been a range rationalisation, as even professionals were confused at times with which product to use. Each product in the more focused portfolio has a clear description front of pack to help guide the consumer, and on the back, there are simple step by step instructions and top tips plus a QR code with content to educate and inspire.

The objective of the rebrand, supported by ongoing communications throughout the year will be to stem, (and potentially reverse over time) the decline we have seen in fondant icing, retaining more of the new and existing shoppers and encourage greater frequency of purchase.

Wavertree Property

Shortly after the year end, we sold our Wavertree property to Tutum Property Limited. The property was purchased in 2015 and housed the Renshaw Academy until August 2019. Since then, it had been used as the New Product Development Centre and by Renshaw’s marketing team. These were relocated onto Renshaw’s main manufacturing site at Crown Street, Liverpool bringing the Renshaw business together on one site. The sale made a small loss but generated net cash proceeds of GBP 0.9 million of which, GBP 0.3 million has been spent on creating an Innovation Centre adjacent to the factory at Crown Street.

Dividend

Consistent with previous years, the Board is not recommending the payment of a dividend for the year. The Board’s focus is on reducing the level of debt and investing in Renshaw and Rainbow Dust Colours to deliver the best possible returns for shareholders.

Corporate Governance

The Group is governed through the Board and its Audit Committee and Remuneration Committee. The Board is very conscious of its related party connections and dealings. As appropriate, myself, Gail Lumsden (Senior Independent Non-Executive Director) and Maribeth Keeling (Chief Financial Officer) meet independently of the Board to discuss matters concerning Loan Note Holders and major Shareholders.

Strategy

Following the sale of Brighter Foods, the Group now has two trading units focused on the design and manufacture of products for decorating cakes, biscuits and desserts; JF Renshaw and Rainbow Dust Colours. The Group sells branded and private label products across multiple channels.

Within the UK, the main markets are retail products for home bakers, and ingredients for manufacturers of cakes, biscuits, and desserts, along with bakery shops and foodservice outlets serviced via a wholesaler network.

Internationally, CDD, (Cake Decoration Division) operate in retail, and the specialist home bakery market. Here customers are now spending less than they did during covid lockdowns. Although new customers to the category are still baking, they are doing so less often.

In UK retail, CDD has moved with the consumer who is becoming increasingly price conscious. CDD has therefore focused on delivery of appropriate products to not just the major multiples but also specialist retailers and bargain stores. Although the Home Baking market has declined since the growth seen during lockdowns, at GBP 1.5 billion RSP3 (retail sales prices) it remains ahead of pre-covid levels. The prediction for the year ahead is that sales across retail will see a further decline as recessionary spending habits kick in, whilst many will continue to bake as a way of relaxing, for others it may be more economical to switch to a bought in product.

Meanwhile, the UK sales of ready-made bakery goods have grown by 1.3 percent/GBP 185 million over the last year to GBP 14.6 billion RSP. CDD has enhanced its relationship with customers through innovation and cross selling Renshaw and Rainbow Dust products into this channel.

Predictions for the year ahead are more difficult; on the plus side we have seen in previous recessionary environments a strong demand for affordable indulgences, and as mentioned above a potential trade off with home baking. But with unprecedented cost increases across fuel, energy and food, disposable income will be reduced which could lead to a drop in consumption.

In summary, the aim is to maximise value for shareholders by leveraging productive capacity by growing revenue (through product innovation and new customers) and improving operational performance. The Group is open to divesting parts of the remaining and continuing businesses for the right value at the right time. The Group has a valued heritage, and the strategy is to leverage this with new products and class leading service.

Outlook

The unprecedented increases in the cost of raw materials and energy in recent months continue unabated and pose significant challenges to the whole sector. Since 1 January 2022, the cost of sugar has doubled, and glycerine and butter have increased by 87 percent and 82 percent respectively. It is anticipated that for the current financial year (to 31 March 2023), the increased cost of raw materials and other costs of production will exceed GBP 5 million given current cost levels. These increases are being passed through to customers but, in an environment of spiralling cost inflation, the lag effect is more prominent. Price increases have been secured but they have become incessant. They are also likely to depress demand with household incomes being under pressure from rising energy pricing and other costs. Volumes for the first five months of the new financial year are 29 percent down on the same period of last year and 16 percent lower than our pre-covid benchmark (FY20). Assuming the current hyper-cost inflation and its impact on demand continues, the Group will be loss-making at Ebitda level.

The Group is determined to hunker down, control costs, maximise savings opportunities and protect revenues. Wage inflation has been held at 3 percent and a voluntary redundancy programme was agreed in May 22 which will reduce 51 jobs during Q3 saving GBP 1.4 million per year. Given the pressure on the business, a more radical reform of the Group has just been signed off by the Board and Loan Note Holders to significantly reduce overhead costs, re-set pricing and achieve further manufacturing efficiencies in order to return the business to profitable growth. Successful implementation of the recovery plan is expected to return between GBP 2 million and GBP 4 million in Ebitda under current market conditions. Negotiations with customers have already begun to address the widening gap caused by cost inflation and market distortions that have arisen in recent years.

The Board is confident that the right actions are being taken and has secured the support of Loan Note Holders, including the pledge of additional funding of GBP 1.0 million, the documentation has not yet been signed. The Group is also, with the support from advisors, in discussions to secure an additional GBP 1.5 million of new funding as part of a refinancing of the asset backed facility with a new funder, currently provided by Leumi ABL.

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