Barr (A.G.) Regulatory News (BAG)

23 September 2014

A.G. BARR p.l.c.

INTERIM RESULTS FOR THE 6 MONTHS ENDED 27 JULY 2014

A.G. BARR p.l.c., the soft drinks Group, which produces and markets some of the U.K.'s leading brands, including IRN-BRU, Rubicon and Strathmore water, announces its interim results for the 6 months ended 27 July 2014.

Key Points

● Total turnover increased by 5.4% to £135.7m (2013: £128.7m)

● Profit on ordinary activities before tax and exceptional items increased by 14.6% to £19.0m (2013: £16.6m). Underlying profit before tax and exceptional items, allowing for £0.6m of non-recurring income recognised in the period related to the early exit of contractual arrangements with Orangina, was £18.4m an increase of 11.0%

● *Underlying earnings per share increased by 13.1% to 12.8p (2013: 11.3p)

● A strong financial position

○ ROCE at 23.1% on a rolling 12 month basis

○ Underlying free cash flow of £11.2m reflecting strong summer trading

● Net debt of £3.7m; annualised net debt/EBITDA ratio is below 0.2 times

● Balanced growth profile across all core brands with positive impact from both innovation and marketing activities

● Interim dividend of 3.11p per share (2013: 2.825p), an increase of 10.1% on the prior year

Commenting on the results, Roger White, Chief Executive said:

"We have delivered strong, balanced growth across our core brands in the year to date, with volume growth well ahead of the total market. We have traded well across all channels and have benefited from the excellent execution of our Commonwealth Games sales and marketing plans.

Market conditions across the soft drinks category and general consumer environment are challenging, however we plan to maintain our increased levels of investment in our brands, people and assets across the rest of the year and we remain confident in the long term potential of the business."

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*Underlying earnings per share exclude the effect of exceptional items after tax on the basic earnings per share calculation. In the 6 months ended 27 July 2014 these exceptional items after tax represented a charge of £2,011,000 (2013: £3,035,000).

The term "underlying" is not defined in IFRS and therefore may not be comparable with similarly titled measures reported by other companies. Underlying measures are not intended as a substitute for, or a superior measure to, IFRS measures.

Reconciliations of underlying measures to IFRS measures for earnings per share in respect of each period are provided in the earnings per share note.

Interim Statement

A.G. BARR has continued to outperform the soft drinks market and we are pleased to report continued strong growth in both sales and profit in the period. This is a particularly good result when account is taken of the strong prior year comparative performance of the business. This progress has been achieved by the consistent and successful execution of our growth strategy in what remains a very competitive and challenging retail, consumer and regulatory environment.

Trading

Total revenue was £135.7m for the 6 months ended 27 July 2014, which is an increase of 5.4%. Volume in the period grew by 6.2%, with the Strathmore water brand contributing significantly to this strong volume performance. In value terms, carbonates grew by 4.5% and still drinks by 6.3%.

The total soft drinks market, as measured by Nielsen, grew by 0.8% in value terms, with a volume decline of 1.2%. The market has progressively weakened across the reporting period, partially reflecting strong weather-driven trading in the early summer months of the prior year.

Our well balanced channel approach insulates us to a degree from the current challenges in the retail landscape but we have also continued to increase investment in our brands, people and assets to ensure we can win in this increasingly complex and volatile marketplace.

Our investment in our brands has been significant and consistently increasing over recent years and this year is no different. Alongside our sustained growth in brand investment, we have continued our long term drive to improve efficiency in our asset base and we have also benefited from a more stable raw material cost environment, allowing us to further invest in increased levels of marketing, innovation and consumer promotional activity.

In the period, we have seen our gross margins and operating margins improve by around 100bps as we benefited from the efficiencies related to volume growth and improved cost control.

Pre-exceptional profit before tax of £19.0m was delivered. Stripping out the benefit of £0.6m related to the early termination of our Orangina contract with the recently formed Lucozade Ribena Suntory Group, our pre-exceptional profit before tax was £18.4m, a growth of 11.0% over the prior year.

Driven by the execution of our long term development strategy, we have delivered a well balanced growth profile in the period, with value growth of 6.5% in England and Wales, 4.5% in Scotland and 4.9% internationally.

All of our core brands have grown ahead of the market, with Strathmore water in double digit growth benefiting from increased distribution, innovation and further sector growth.

The Glasgow 2014 Commonwealth Games provided us with a great platform for much of our brand building actions across our portfolio of core brands - IRN-BRU, Rubicon, Barr and Strathmore. We not only provided all of the venues and athletes with these brands on an exclusive basis but Strathmore was also highly visible on the "field of play" across all of the Games venues.

The 'BORN TO SUPPORT' campaign for the IRN-BRU brand was executed on-pack, in all media channels and in store, not just during the Games but across the whole of the reporting period. The brand received unrivalled media coverage during the Games and reinforced its unique status in consumer drinks repertoires when the national media focus was on Glasgow.

The Games were hugely successful in overall terms and we are delighted to have played our part. Our brand building activities across the period have continued to build long term consumer loyalty and increased levels of awareness for all of our core brands.

Innovation has also played an important role in our performance, with the development and launch of a number of new products in the period - Rubicon Coconut Water, IRN-BRU ice cream and BARR XTRA Cola, all of which provide further strength to our portfolio.

A major part of our recent asset investment has been in our new site at Milton Keynes. We have made excellent progress in optimising Phase l of our investment in this site and have announced plans for Phase ll, with the introduction of carton packaging capacity at the site. Associated with this investment is the planned closure of our Tredegar site, announced in May 2014, which will cease operations in early 2015. We are especially grateful for the continued professional approach of all of the team at Tredegar at this difficult time.

Exceptional charges amounting to £2.5m have been incurred in the first half of the year. Following a number of organisational structural changes that were announced last year, some £0.7m of redundancy related costs have been incurred in the six months to 27 July 2014 in our finance, telesales and supply chain operations. In addition, as a consequence of the planned closure of the Tredegar site, we have recognised £1.0m of redundancy related costs and an impairment charge of £1.4m in relation to the site and assets. A pension curtailment credit of £0.5m has been recognised to reflect the decrease in the number of employees within the defined benefit pension scheme.

Balance Sheet

The Group continues to benefit from a strong balance sheet. In the 6 months ended 27 July 2014 net assets increased to £156.8m.

Property, plant, equipment assets and intangible assets have increased by £1.6m, reflecting the continued investment in our asset base. Capital expenditure during the period amounted to £4.6m, a combination of normal operational replacement, continued investment in commercial assets and expansionary projects. Expansionary projects have included the refurbishment of a recently purchased office facility to establish a centralised Finance Service Centre, together with the initial expenditure (£2.4m) associated with the Business Process Redesign ("BPR") Project. The BPR project will fundamentally improve our core business processes and replace the supporting information technology footprint.

The strong trading performance across June and July has led to an increase in working capital requirements. This was further exacerbated by the timing of the half year end being 27 July, with significant balances receivable at the end of the calendar month. This decreased materially post the period end and we expect that, in line with previous experience, these working capital balances will unwind as we progress through the year. Inventory has remained broadly in line with levels reported last year although our inventory holding period has reduced by 3.4%, offsetting the increase in trading activity. Towards the end of the year we would expect inventory levels to increase as we build our holding ahead of the planned Tredegar site closure and the implementation of our BPR project in the first quarter of 2015/16.

The Group continues to benefit from low leverage, having repaid £15m of bank facilities towards the end of the last financial year. Net debt at 27 July 2014 stood at £3.7m, slightly behind the year end closing position, having paid the final dividend in June, but £12.1m lower than the July 2013 position. Current leverage of net debt to EBITDA is below 0.2 times.

Free cashflow of £11.2m was generated in the 6 month period. This was £6.9m less than in the comparable period in the prior year, arising from the increased working capital requirements referred to above which were partially offset by a 12% increase in EBITDA and receipts from the disposal of a distribution site.

Dividend

The Board has declared an interim dividend of 3.11 pence per share, payable on 17 October 2014 to shareholders on the register on 3 October 2014. This represents an increase on the prior year of 10.1%, reflecting the Board's confidence in the current financial position and the future performance of the Group.

Board Update

As previously announced we are delighted that Stuart Lorimer is expected to take up the role of Finance Director in December 2014 after a 22 year career at Diageo. John Nicolson, currently Deputy Chairman, will succeed Ronnie Hanna as Chairman at the end of December 2014. This succession planning process is now well underway.

Current Trading and Outlook

We have delivered a strong start to the current year. We expect the market conditions under which we operate to remain both dynamic and challenging. The lack of underlying market volume growth will continue to make trading competitive across all channels. The summer weather, after a good start in July, struggled to match the previous year's high temperatures and August developed into a more subdued period of both weather and resultant market performance. Despite tough weather driven comparatives, based on our well invested brands, strong operating model and excellent business momentum, we remain confident in the long term potential of the business.

23 September 2014

Consolidated Condensed Statement of Changes in Equity

1 General information

A.G. BARR p.l.c. ('the Company') and its subsidiaries (together 'the Group') manufacture, distribute and sell soft drinks. The Group has manufacturing sites in the U.K. and sells mainly to customers in the U.K. with some international sales.

The Company is a public limited company, which is listed on the London Stock Exchange and incorporated and domiciled in the U.K. The address of its registered office is A.G. BARR p.l.c., Westfield House, 4 Mollins Road, Cumbernauld, G68 9HD.

This consolidated condensed interim financial information does not comprise statutory accounts within the meaning of section 434 of the Companies Act 2006. Statutory accounts for the year ended 26 January 2014 were approved by the board of directors on 25 March 2014 and delivered to the Registrar of Companies. The comparative figures for the financial year ended 26 January 2014 are an extract of the Company's statutory accounts for that year. The report of the auditor on those accounts was unqualified, did not contain an emphasis of matter paragraph and did not contain any statement under section 498 (2) or (3) of the Companies Act 2006.

This consolidated condensed interim financial information is unaudited but has been reviewed by the Company's Auditor.

2 Basis of preparation

This consolidated condensed interim financial information for the six months ended 27 July 2014 has been prepared in accordance with the Disclosure and Transparency Rules of the Financial Conduct Authority (previously the Financial Services Authority) and with IAS 34 Interim financial reporting as adopted by the European Union. The consolidated condensed interim financial information should be read in conjunction with the annual financial statements for the year ended 26 January 2014, which have been prepared in accordance with IFRSs as adopted by the European Union.

Going concern basis

The Group meets its day-to-day working capital requirements through its bank facilities. After making enquiries, the directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. The Group's forecasts and projections, taking account of reasonable sensitivities, show that the Group should be able to operate within available facilities. The Group therefore continues to adopt the going concern basis in preparing its consolidated condensed interim financial statements.

3 Accounting policies

The accounting policies applied are consistent with those of the annual financial statements for the year ended 26 January 2014, as described in those annual financial statements except as noted below.

Changes in accounting policy and disclosures

(a) New and amended standards adopted by the Group

IFRS 10 Consolidated financial statements, IFRS 11 Joint arrangements, IFRS 12 Disclosures of interests in other entities, and subsequent revisions to IAS 27 Separate financial statements and IAS 28 Investments in associates and joint ventures are new and revised standards that are mandatory for adoption for accounting periods beginning on or after 1 January 2014 for EU endorsed IFRS reporters. These new and revised standards do not have a material impact on the Group.

(b) New standards, amendments and interpretations issued but not effective for the financial year beginning 27 January 2014 and not adopted early

There are no IFRSs or IFRIC interpretations that are issued but have not been adopted early for the year beginning 27 January 2014 that have a material impact on the Group.

4 Principal risks and uncertainties

The directors consider that the principal risks and uncertainties which could have a material impact on the Group's performance in the remaining 26 weeks of the financial year remain substantially the same as those stated on pages 18-21 of the Group's annual financial statements as at 26 January 2014, which are available on our website, www.agbarr.co.uk.

5 Financial risk management and financial instruments

The Group's activities expose it to a variety of financial risks: market risk (including foreign exchange risk, cash flow and fair value interest rate risk and price risk), credit risk and liquidity risk.

The condensed interim financial statements should be read in conjunction with the Group's annual financial statements as at 26 January 2014 as they do not include all financial risk management information and disclosures contained within the annual financial statements. There have been no changes in the risk management policies since the year end.

6 Segment reporting

The Group's management committee has been identified as the chief operating decision-maker. The management committee reviews the Group's internal reporting in order to assess performance and allocate resources. The management committee has determined the operating segments based on these reports.

The management committee considers the business from a product perspective. This led to the operating segments identified in the table below: there has been no change to the segments during the period (after aggregation). The performance of the operating segments is assessed by reference to their gross profit before exceptional items. Exceptional items are reported separately in note 8.

There are no intersegment sales. All revenue is from external customers.

Other segments represent income from water coolers for the Findlays 19 litre water business, rental income for vending machines, the sale of ice-cream and other soft drink related items such as water cups.

The gross profit before exceptional items from the segment reporting is reconciled to the total profit before income tax as shown in the consolidated condensed income statement.

All of the assets of the Group are managed by the management committee on a central basis rather than at a segment level. As a result no reconciliation of segment assets and liabilities to the consolidated condensed statement of financial position has been disclosed for any of the periods presented.

7 Seasonality of operations

Approximately half the revenues and operating profits are usually expected in both of the first half and second half of the year.

8 Operating profit

The following items have been charged or credited to operating profit during the period:

Inventories are stated at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completing production and selling expenses. During the six months to 27 July 2014, £51,000 of inventory has been written down in accordance with the Group's accounting policy.

During the six months to 27 July 2014 the contract for the production and selling of Orangina was terminated by the recently formed Lucozade Ribena Suntory Group. This resulted in compensation of £746,000 being received by A.G. BARR p.l.c., with £600,000 relating to the compensation for the six months to 25 January 2015.

The following exceptional items have been charged or credited before operating profit:

During the six months to 27 July 2014 A.G. BARR p.l.c. announced the closure of its manufacturing site at Tredegar. This has resulted in an impairment charge of £1,365,000 in respect of buildings and plant at the site. £3,000 of redundancy related costs were incurred in the six months to 27 July 2014. A further £957,000 of redundancy costs have been provided for.

Redundancy, recruitment and training costs in relation to the finance, telesales, demand and supply planning operations within England were incurred during the periods presented and treated as exceptional.

As a result of the finance, telesales, distribution, demand and supply planning reorganisation, a curtailment in the Group's retirement pension plan has arisen. This has resulted in an exceptional credit arising from the reduction in the retirement benefit obligation following a reduction in the number of employees remaining with the scheme. The value of this credit is £523,000.

Construction of a new production site at Crossley in Milton Keynes commenced in July 2012 with plant commissioning and associated training costs treated as exceptional in the year to 26 January 2014 and the six months to 28 July 2013. The site commenced manufacturing in July 2013.

During the year to 26 January 2014, A.G. BARR p.l.c. and Britvic plc worked together on a proposed all-share merger which was subsequently referred to the Competition Commission and following clearance, finally aborted. Professional, legal fees and certain employee related costs incurred in relation to the proposed merger and related Competition Commission enquiry have been treated as exceptional for the year to 26 January 2014 and six months to 28 July 2013.

9 Tax on profit

The interim period tax charge is accrued based on the estimated average annual effective income tax rate of 22.3% (six months ended 28 July 2013: 24.0%; year ended 26 January 2014: 17.8%). An exceptional tax credit of £532,000 (2013: £325,000) has been recognised in the six months to 27 July 2014 as a result of the exceptional items incurred in the period.

10 Earnings per share

Basic earnings per share have been calculated by dividing the earnings attributable to equity holders of the parent by the weighted average number of shares in issue during the year, excluding shares held by the employee share scheme trusts.

For diluted earnings per share, the weighted average number of ordinary shares in issue is adjusted to assume conversion of all potentially dilutive ordinary shares. These represent share options granted to employees where the exercise price is less than the average market price of the Company's ordinary shares during the period. The number of shares calculated as above is compared with the number of shares that would have been issued assuming the exercise of the share options.

The underlying EPS figure is calculated by using Profit attributable to equity holders before exceptional items:

11 Dividends paid

An interim dividend of 3.11p per share was approved by the board on 23 September 2014 and will be paid on 17 October 2014 to shareholders on record as at 3 October 2014.

The notice of Annual General Meeting for the year ended 26 January 2014 omitted the resolution seeking shareholder approval for the payment of a final dividend of 8.19p per ordinary share. Accordingly, the Board declared a second interim dividend for the year ended 26 January 2014 in place of the proposed final dividend. The interim dividend did not require the approval of shareholders. The amount of this interim dividend was 8.19p per ordinary share. This dividend was paid on 6 June 2014 to all shareholders who were on the Register of Members on 9 May 2014.

12 Intangible assets

The additions for the six months to 27 July 2014 represent internally generated software development costs and third party consultancy costs incurred in relation to the Business Process Redesign project.

The amortisation charge for the six months to 27 July 2014 represents £126,000 (six months ended 28 July 2013: £126,000; year ended 26 January 2014: £253,000) of charges for the Rubicon customer list.

13 Property, plant and equipment

The closing balance includes £2,465,000 (as at 28 July 2013: £1,227,000; as at 26 January 2014: £940,000) of assets under construction.

Included within the additions for the six months to 28 July 2013 is £85,000 of interest in respect of the £15,000,000 facility utilised for the building work at Crossley, Milton Keynes.

14 Financial instruments

Non-current assets of £nil (at 28 July 2013: £26,000; 26 January 2014: £nil) relate to forward foreign currency contracts with a maturity of more than 12 months and are classified as fair value through the cash flow hedge reserve.

Current assets of £nil (at 28 July 2013: £981,000; 26 January 2014: £nil) relate to forward foreign currency contracts with a maturity of less than 12 months and are classified as fair value through the cash flow hedge reserve.

Current liabilities of £914,000 (at 28 July 2013: £15,000; 26 January 2014: £667,000) represents forward foreign currency contracts with a maturity of less than 12 months and are classified as fair value through the cash flow hedge reserve.

Non-current liabilities of £47,000 (at 28 July 2013: £7,000; 26 January 2014: £nil) relate to forward foreign currency contracts with a maturity of more than 12 months and are classified as fair value through the cash flow hedge reserve.

Fair value hierarchy

IFRS 7 requires all financial instruments carried at fair value to be analysed under the following levels:

Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities

Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices)

Level 3: inputs for the asset or liability that are not based on observable market data

The fair value of financial instruments that are not traded in an active market (for example, over-the-counter derivatives) is determined by using valuation techniques. These valuation techniques maximise the use of observable market data where it is available and rely as little as possible on entity specific estimates. The fair value of the forward foreign exchange contracts is determined using forward exchange rates at the date of the statement of financial position, with the resulting value discounted accordingly as relevant.

All financial instruments carried at fair value are Level 2.

Fair values of financial assets and financial liabilities

The table below sets out the comparison between the carrying amount and fair value of all of the Group's financial instruments, with the exception of trade and other receivables and trade and other payables.

The fair value of the current trade and other receivables and the current trade and other payables approximates to their book value as none of the balances are interest bearing.

The carrying value of non-current borrowings is disclosed before the deduction of the unamortised arrangement fee of £80,000.

For the current borrowings, the impact of discounting is not significant as the borrowings will be paid within 12 months of the year end date. The carrying amount approximates their fair value.

The fair values of the non-current borrowings are based on cash flows discounted using the current variable interest rate charged on the borrowings of 1.50% and a discount rate of 1.50%.

15 Provisions

The provision created during the period relates to redundancy costs associated with the closure of the Tredegar manufacturing site and the reorganisation of finance, telesales, distribution, demand and supply planning operations (note 8).

16 Borrowings and loans

Movements in borrowings are analysed as follows:

The reconciliation to net debt is as follows:

The undrawn facilities at 27 July 2014 are as follows:

During the six months to 27 July 2014, the Group negotiated two £10,000,000 revolving credit facilities with two banks. A total arrangement fee of £80,000 was incurred and will be amortised over the lives of the loans. The revolving credit facilities will expire in March 2017. A further £15,000,000 revolving credit facility was arranged in the year to 26 January 2013 and will expire in June 2015.

The directors confirm that the Group has sufficient headroom to enable it to meet the covenants on its existing borrowings. There are sufficient working capital and undrawn funding facilities available to meet the Group's ongoing requirements.

17 Retirement benefit obligations

The defined retirement benefit scheme had a deficit of £1,786,000 as at 27 July 2014. The reconciliation of the closing deficit is as follows:

The key financial assumptions used to value the liabilities were as follows:

18 Movements in own shares held by employee benefit trusts

During the six months to 27 July 2014 the employee benefit trusts of the Group acquired 196,769 (six months to 28 July 2013: 296,497; year to 26 January 2014: 422,130) of the Company's shares. The total amount paid to acquire the shares has been deducted from shareholders' equity and is included within retained earnings. At 27 July 2014 the shares held by the Company's employee benefit trusts represented 1,220,454 (28 July 2013: 1,211,680; 26 January 2014: 1,312,318) shares at a purchased cost of £6,718,828 (28 July 2013: £6,222,826; 26 January 2014: £6,797,544).

288,633 (six months to 28 July 2013: 296,497; year to 26 January 2014: 1,045,297) shares were utilised in satisfying share options from the Company's employee share schemes during the same period.

The related weighted average share price at the time of exercise for the six months to 27 July 2014 was £6.27 (six months to 28 July 2013: £5.24; year to 26 January 2014: £5.11) per share.

19 Contingencies and commitments