AG Barr kept prices keen as it turned in a strong first-half performance to remain on track to lift profits during its current year, despite the vagaries of the Scottish weather.
The Irn-Bru maker said it decided to not pass on the full impact of cost inflation to trade customers as consumers continue to struggle with the cost of living crisis.
The strategy paid off as the company highlighted strong trading across the group, which now includes energy drinks, cocktail mixers, and oat milk, as profits and revenue surged in the six months to July 30.
The impact of acquisitions was also cited as revenue surged by 33.2% to £210.4 million, aided by a full contribution from Boost Drinks which Barr acquired in a deal worth up to £32m in December.
But Barr said underlying sales were strong and were up by 10.4% on a like-for-like basis, which helped profits increase by 12.6% to £27.8m.
Outgoing chief executive Roger White told The Herald: “We made a conscious choice to under-recover inflation in the knowledge that it was going to be a tough time for consumers, and we wanted to make our products as affordable in the circumstances as possible.
“We have had the benefit in volume growth; the market is down 4% in volume terms, and we are up a couple of per cent, so there is a 6% delta there. The strategy from that point of view has allowed more people to participate more often in our range.
“Ultimately, it has impacted our margins, but our business has grown.”
The strong performance came despite a prolonged spell of poor summer weather and a previously flagged reduction in operating margins, to 12.5% from 16.2% in the first half of last year, as a result of cost inflation and the impact of the lower margin Boost business model.
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Barr, which in recent weeks has introduced a new energy drink, PWR-BRU, and a shake and serve product for the hospitality sector, reiterated its expectation of delivering a profit performance marginally above the top end of analyst consensus.
Analysts have pencilled in profits before tax of £47.12m on revenue of £402.92m for the year to the end of January, which compares with £43.5m and £317.6m last time.
Mr White, who will step down as chief executive and leave the company within 12 months of an announcement made to the City in August, said the group’s performance has unlocked cash which could potentially be used for product innovation and further acquisitions.
An interim dividend of 2.65p per share, up 6%, was announced, with the company ending the first half with £47.3m of cash and equivalents, which was down 22.8% from a year earlier as a result of acquisitions.
Barr’s soft drink business saw revenue increase by 38.9% to £181.9m in the first half, and by 11.3% to £145.8m on a like-for-like basis, driven by volume, price and mix, the company said. It noted that Irn-Bru revenue grew by 8% after gaining market share in England and Wales. Sales of Rubicon increased by 17% and Boost by 37%, helped by significant distribution gains.
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Barr’s Funkin cocktails business, which makes ready-to-drink products, mixers, purees, and syrups, increased revenue by 2.6% to £23.3m, with a strong performance in the off-trade offsetting slowing growth in the hospitality sector.
Mr White said: “It has been a tough period for hospitality, particularly later night operations where customers are largely a younger audience. That has been tough, and we have been impacted by that. But Funkin is a multi-channel business, and our take home business through retail has gone well. That has supported us well at a time when it has been quite tough for the hospitality sector.”
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Meanwhile, Mr White said acquisition activity would be driven by the “quality of the individual brands and businesses that we screen”, as opposed to filling gaps in the company’s product portfolio. He explained: “If something has got high growth potential or it has a synergistic benefit, not quite but almost regardless of the sector, we would screen it and look to see the quality of the brand and the growth potential and take that as our guiding light.”
Asked to comment on the outlook for costs, Mr White said: “Some of the very unwelcome and significant inflation of the last few years has worked its way through.
"We are not seeing sectoral deflation, but we are seeing a sort of flattening of the curve from an inflationary point of view. So, it is less of an inflationary environment than it was two years ago and probably 18 months ago. But there is still persistent inflation around, whether it is wage or material inflation. But the curve is definitely dropping down.”
Russ Mould, investment director at AJ Bell, said: “If those consensus forecasts are correct then AG Barr will grow its profits for the third straight year in the 12 months to January 2024 as it picks up the pieces in the wake of the damage done by lockdowns and the pandemic.
"The trade-off may well be that the company sacrifices some operating margin to achieve this, but shareholders could still be pleased if the outcome is a resumption of sustained growth, especially after the challenges that have faced the firm over the past decade or so.”
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