RGD.L Regulatory News (RGD)

20 December 2018

Real Good Food plc

("Real Good Food" or "the Company")

Half year results for six months ended 30 September 2018

Real Good Food plc, (AIM: RGD) the diversified food business, today announces its half year results for the six months ended 30 September 2018.

Financial highlights

· Revenue from continuing operations of £30.4 million (2017: £31.9 million)

· Underlying adjusted EBITDA* from continuing operations, profit of £0.9 million (2017: loss of £0.4 million)

· Loss before tax of £9.1m (2017: loss of £3.4 million) includes £6.3m goodwill impairment charge

· Underlying financial performance benefited from cost savings despite weaker trading in Food Ingredients

· Haydens Bakery Ltd sold for £12m in September, enabling bank term loan to be fully repaid and putting cash back into the business

· Net debt at 30 September 2018 of £29.9 million (2017: £35.8 million), being predominantly shareholder loans offset by £10.5 million of net cash on the balance sheet (2017: £0.7 million)

Operational highlights

· Corporate governance:

· Business:

Current trading

· Trading remains in line with our modest expectations for the year

· Focus on profit improvement and growth, whilst managing net debt

* Adjusted EBITDA represents earnings before depreciation, amortisation, impairments, significant items, finance costs and tax.

Hugh Cawley, Chief Executive said:

"The first half saw significant, progressive corporate activity, including further restructuring of the Group to focus on our two core divisions, Cake Decorations and Food Ingredients. At the same time, the underlying performance of these continuing operations improved, reflecting the cost savings made.

"The performance of these continuing operations remains in line with our modest expectations for the year. Overall, the Board remains confident, but far from complacent, in the future prospects for the Group and reiterates that the performance of, and prospects for, what is now a smaller and more focused group, have improved considerably." 

Enquiries:

About Real Good Food

Real Good Food plc is a diversified food business serving a number of market sectors including retail, manufacturing, foodservice and export. The Company focuses on three main markets: Cake Decoration (Renshaw and Rainbow Dust Colours), Food Ingredients (Brighter Foods) and Premium Bakery (Chantilly Patisserie).

The information communicated in this announcement contains inside information for the purposes of Article 7 of the Market Abuse Regulation (EU) No. 596/2014.

Overview

Results

The period under review saw significant, progressive corporate activity, including further restructuring of the Group to focus on our two core divisions, being Cake Decoration and Food Ingredients. At the same time, the underlying performance of continuing operations improved, reflecting the cost savings made across the Group. Overall a profit was reported on continuing operations at the Group underlying adjusted EBITDA level (underlying adjusted EBITDA is defined as earnings before significant items, impairment, interest, tax, depreciation and amortisation) of £0.9 million compared to a loss in the same period last year of £0.4 million.

The loss before tax was £9.1 million (2017: loss of £3.4 million), after taking account of the impairment of goodwill in Cake Decoration of £6.3 million. Whilst this impairment reflects the fact that the fortunes of that division took a downturn in the recent past, the directors are equally sure that the business has strong longer-term potential and that it will be restored to greater profitability over the coming months; a sensible view has necessarily nonetheless been taken of today's value, resulting in this adjustment. With regards to the other contributors to the loss before tax, the material reduction in significant costs in the period was more than offset by the additional interest charges on the shareholder loans.

The results of corporate activity during the period first became evident in April 2018, when we concluded the sale of the business and assets of Garrett Ingredients Ltd to Kent Foods for c.£1.9 million. A long-standing component of the Group, this relatively small-scale trading business was felt to be better suited to being part of a larger group. During September 2018, we next concluded the sale of Haydens Bakery Ltd to the Icelandic food group, Bakkavor Group plc, for £12.0 million, also in line with the Group's clearly stated strategy of disposal where there is greater value for the Group's shareholders through a sale than through continued ownership. There has also been further significant progress announced separately today.

In order to bring stability to the Group's funding arrangements, the half year also featured the issue of £8.8 million of Convertible Loan Notes (CLNs) to the major shareholders, who have shown continued support for the Group, and an over-subscribed Open Offer of a further £1.0 million. This allowed us to repay the rump of the existing bank term debt. The Group was also able to reduce the level of its external debt and the repayment of outstanding asset financing through the application of the business sales proceeds. Although the Group's level of debt outstanding remains higher than a business such as Real Good Food should have, these financing actions have provided much needed clarity and stability to enable the Group to move forward and invest in growth. Furthermore, the Group's balance sheet retains a significant tangible asset base and net assets significantly in excess of the Group's current stock market capitalisation.

Investment in growth

Within the core business, we started to invest modestly in new capacity for identified growth with new customers in Brighter Foods, with a new unit and production line expected to cost in the region of £2.5 million. The business is well-placed to capitalise on its unique capabilities to meet the growing demand for production capacity within the snack bars sector. The commissioning of an investment in Renshaw's soft icing capacity is also progressing, positioning the Company well for the uplift in demand seen within this category.

Proposed further disposal

Discussions around the future of the R&W Scott business concluded that it, too, could yield greater value to stakeholders of Real Good Food through its disposal, notwithstanding the solid improvements that have been achieved in its performance. We are delighted to be able to announce today that discussions to effect such a disposal have come to fruition, and that the details of this transaction, being a sale to the management team, are the subject of a separate announcement.

Corporate Governance

It is clear and demonstrable from experience that there is an undeniable correlation between strong corporate governance and strong corporate performance, and so considerable efforts have been expended in improving the former in light of the Group's recent issues. The exercise carried out earlier this year in cooperation with Ernst & Young, akin to the exercise required prior to applying for a stock market listing, demonstrated where and how it was necessary to improve. Apart from the clear need for independent non-executive directors - and we are fortunate indeed to have secured the services of two well qualified and appropriately experienced independent NEDs in the last three months - it was also clear that a variety of much less visible internal controls and governance mechanisms were required, including the establishment of closer and more collaborative relationships with our professional advisers.

Governance is, of course, an area where continuous improvement and vigilance is necessary, so, although we believe we have made significant and material strides in all areas of governance, which is already delivering benefits in how the business is being managed, we are determined to continue our progress in the coming months.

Board Changes

Since the year ended 31 March 2018, the Board has appointed two independent Non-Executive Directors. Mike Holt was appointed 7 August 2018 (also as Chair of the Audit and Risk Committee) and Steve Dawson was appointed 19 September 2018. Mike has held a number of Board level executive roles, giving him significant public market experience, whist Steve is an experienced specialist in food and beverage brands in the UK and in North America. These appointments have not only added expertise but also mean that we now have a better balance of executive, non-executive, and independent non-executive directors, in line with our commitment to improve corporate governance.

Outlook and Current Trading

The performance of the continuing operations remains in line with our modest expectations for the year, including continuing cost rationalisation, and investing to grow, whilst remaining cognisant of the importance of Christmas trading for Cake Decoration in particular.

Our priorities for the second half of the year are to establish the solid foundations for sustainable profit improvement and growth in the core businesses, including delivering on the investment in Brighter Foods and Renshaw; to finalise the re-shaping of the Group; including the disposal of R&W Scott Ltd announced today; continuing focus on management of net debt; to continue the improvement in our corporate governance practices and last but not least, to start to re-engage more fully with our stakeholders.

Overall, the Board remains more confident, but far from complacent, in the future prospects for the Group and reiterates that the performance of, and prospects for, what is now a smaller and more focused group, have improved considerably.

Divisional Business Reviews

Cake Decoration

Cake Decoration manufactures sugarpaste, marzipan, soft icings, mallows and caramels, under the Renshaw Professional brand and for private label. The division also produces a range of edible glitters, dusts, powders, food paints and pens for the sugar craft sector, through the Rainbow Dust Colours brand. Renshaw Europe and Renshaw Americas sell these products in their respective territories

Total revenue at £22.2 million (2017: £22.5 million) was broadly flat for the first half. Some encouraging revenue growth has been seen in Renshaw North America and Rainbow Dust Colours. The UK market remains challenging, however, and offsets the benefits seen in these units. Underlying adjusted EBITDA at £1.3 million is an improvement of £0.8 million on the prior year. The improvement over the prior year relates to the cost savings made within the year and a stronger gross profit. The loss before tax stood at £5.5 million and reflects an impairment charge of £6.3 million. The Cake Decoration division is a core division for the Group and is currently in turnaround. The investments made in manufacturing capability in the last couple of years have not yet started to deliver the returns that could be expected, for example, and the Board believes that the current valuation, reflected here, necessarily and materially underplays the potential value of this division.

Food Ingredients

Brighter Foods manufactures snack bars, both branded and own label, targeted at the growing health and 'healthy lifestyle' markets.

The period saw an overall decline in revenue of 16% with underlying adjusted EBITDA at £1.4 million (2017: £1.8 million), or £0.4 million behind prior year. The phasing of revenue at Brighter Foods is more heavily weighted to the second half in this financial year when compared to the prior year due to the timing of promotional products and new product launches. Although the underlying adjusted EBITDA performance for Brighter Foods is behind its equivalent period last year due to lower revenue, full recovery of the shortfall is expected in the full year. Profit before tax of £0.6 million (2017: £1.0 million) is £0.4 million behind the prior year.

Premium Bakery

RGF Patisserie (Chantilly) manufactures, sells and distributes premium dessert products to its UK foodservice customer base.

Revenue grew by 4% on the previous year, though underlying adjusted EBITDA in the period was slightly behind as a consequence of commodity costs and mix. RGF Patisserie (Chantilly) was part of Haydens Bakery in the prior year and was set up as a separate legal entity on 31 July 2018, in order to allow the separate sale of Haydens Bakery Ltd.

Head Office

The Group functions of Finance, Information Services, Technical, and Innovation provide support and best practice guidance to the businesses as required. Since the beginning of the new financial year each business now has resources allocated directly to help understanding and management of its operations as a stand-alone unit.

The underlying adjusted EBITDA loss was £1.8 million, an improvement of £0.9 million on the prior year owing to the cost savings made. The loss before tax of £4.2 million reflects the reduction in significant costs in the period which were more than offset by the additional interest charges on the shareholder loans.

Finance Review (continuing operations)

Group revenue for the six months ended 30 September 2018 was £30.4 million (2017: £31.9 million). Group revenue was 5% behind prior year as a result of poor trading in the Food Ingredients division. Gross profit on the continuing business for the overall Group was £9.2 million (2017: £9.2 million). The Cake Decoration gross profit in the first half was better than prior year however this has been offset by the reduction in gross profit seen in the Food Ingredients division.

Underlying adjusted EBITDA for continuing operations at £0.9 million was £1.3 million ahead of prior year principally reflecting the cost savings made across the Group. Loss before tax for the 6 months ended 30 September 2018 at £9.1 million was £5.7 million behind the same period in the prior year. This reflected the gain within underlying adjusted EBITDA of £1.3 million plus reductions in significant costs of £0.6 million and depreciation and amortisation of £0.1 million which were offset by the additional interest charges on loans of £1.4 million, and the impairment charge of £6.3 million within Cake Decoration.

Net debt at 30 September 2018 amounted to £29.9 million (2017: £35.8 million). Net debt was principally from loans and accrued interest from shareholders of £26.0 million, convertible loan notes ("CLNs") at fair value of £8.4 million, asset financing of £1.9 million, Brighter Foods government grant of £0.3 million and revolving credit facilities of £3.8 million. Following the sale of Haydens Bakery Ltd, cash in the bank stood at £10.5 million with the bank term loan fully repaid. Net debt is calculated as total borrowings less cash and cash equivalents (see note 9).

Dividend

No dividend is proposed for the six months ended 30 September 2018 (2017: nil).

Impairment

The Cake Decoration division is a core division for the Group and is currently in turnaround. The investments made in manufacturing capability in the last couple of years have not yet started to deliver the returns that could be expected, for example, and the Board believes that the current valuation, reflected here, necessarily and materially underplays the potential value of this division. Plans to improve the strategic positioning, service delivery and commercial performance of this business are also in progress.

Pension Scheme

The Group offers a defined contribution scheme for all current employees that is funded on a monthly basis. In addition, the Company operates a defined benefit scheme that was closed to new members in 2000.

In the 6 months to 30 September 2018 the deficit in the defined benefit scheme reduced by £0.7 million to £5.8 million compared to 31 March 2018. The plan assets increased by £0.1 million to £13.6 million and the plan liabilities are £19.3 million compared to £20.0 million at 31 March 2018 (see note 7).

Disposals

In the period a loss on disposal was recorded for Haydens Bakery Ltd of £2.1 million and a gain on disposal of £0.1 million was recorded for Garrett Ingredients Ltd (see note 11).

Assets and Liabilities Held for Sale

The Board has stated that, for any business where value realisation for stakeholders of Real Good Food plc would be better achieved through disposal to a third party, it would consider favourably the possibility of a sale. Following a review of the prospects of R&W Scott Ltd, a subsidiary of the Group, substantial progress was made towards a sale of that company before 30 September 2018, and the disposal of R&W Scott Ltd has been announced separately today (see note 12).

Cash Flow

The net increase in cash and cash equivalents for the period was £7.8 million. Cashflow from disposals, investor loans, CLNs and the open offer amounted to £23.7 million. The cash received was principally used to pay the Brighter deferred consideration of £4.5 million, fund capital expenditure of £1.3 million, pay down the term loan, revolving credit facilities and asset backed finance totalling £8.6 million, and fund working capital of £1.5 million.

This report was approved by the Board on 20 December 2018 and is signed on its behalf by:

Hugh CL Cawley

Chief Executive Officer

Introduction

We have been engaged by the Company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 30 September 2018, which comprises the interim financial statements and associated information.

We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

Directors' responsibilities

The interim report, including the financial information contained therein, is the responsibility of and has been approved by the directors. The directors are responsible for preparing the interim report in accordance with the rules of the London Stock Exchange for companies trading securities on AIM which require that the half-yearly report be presented and prepared in a form consistent with that which will be adopted in the Company's annual accounts having regard to the accounting standards applicable to such annual accounts.

Our responsibility

Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review.

Our report has been prepared in accordance with the terms of our engagement to assist the Company in meeting the requirements of the rules of the London Stock Exchange for companies trading securities on AIM and for no other purpose. No person is entitled to rely on this report unless such a person is a person entitled to rely upon this report by virtue of and for the purpose of our terms of engagement or has been expressly authorised to do so by our prior written consent. Save as above, we do not accept responsibility for this report to any other person or for any other purpose and we hereby expressly disclaim any and all such liability.

Scope of review

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, ''Review of Interim Financial Information Performed by the Independent Auditor of the Entity'', issued by the Financial Reporting Council for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 30 September 2018 is not prepared, in all material respects, in accordance with the rules of the London Stock Exchange for companies trading securities on AIM.

BDO LLP

Chartered Accountants

Manchester

20 December 2018

BDO LLP is a limited liability partnership registered in England and Wales (with registered number OC305127).

* 30 Sept 2017 is restated for the acquisition accounting of Brighter Foods Ltd (see note 3).

* 30 Sept 2017 is restated for the acquisition accounting of Brighter Foods Ltd (see note 3).

* 30 Sept 2017 is restated for the acquisition accounting of Brighter Foods Ltd (see note 3).

1. Preparation of the interim statements

General information

Real Good Food plc is a public limited company incorporated in England and Wales under the Companies Act (registered number 04666282). The Company is domiciled in England and Wales and its registered address is 61 Stephenson Way, Wavertree, Liverpool L13 1HN. The Company's shares are traded on the Alternative Investment Market (AIM).

The principal activities of the Group are the sourcing, manufacture, marketing and distribution of food and industrial ingredients.

The interim report will be posted on the Company's website and will be released via the Stock Exchange. Further copies of the interim report and Annual Report and Accounts may be obtained from the address above.

Basis of preparation

These condensed consolidated interim statements are compliant with the recognition and measurement principles of International Financial Reporting Standards (IFRS) as adopted by the European Union and interpretations issued by the International Financial Reporting Interpretations Committee (IFRIC) but does not include all disclosures required by IAS 34. The financial information for the six months ended 30 Sept 2018 and 30 Sept 2017 are not statutory accounts and as such, have not been audited, but have been reviewed by our auditors. The comparative financial information provided for the twelve months ended 31 March 2018 are not a complete set of statutory accounts. For the full 31 March 2018 statutory accounts, please refer to our website. The accounts are prepared on a going concern basis.

Discontinued operations

A discontinued operation is a component of the Group's business that represents a separate major line of business or geographical area of operations that has been disposed of or is held for sale, or is a subsidiary acquired exclusively with a view to resale. Classification of a discontinued operation occurs upon disposal or when the operation meets the criteria to be classified as held for sale, if earlier. When an operation is classified as a discontinued operation, the comparative income statement is presented as if the operation had discontinued from the start of the comparative period.

During the six months to 30 September 2018, the Group sold Garrett Ingredients Ltd and Haydens Bakery Ltd. Details of the discontinued operations are disclosed in note 11. At 30 September 2018, the assets and liabilities of R&W Scott Ltd are classed as held for sale. For further details please refer to note 12.

Any references to discontinued operations throughout this report refer to Garrett Ingredients Ltd, Haydens Bakery Ltd and R&W Scott Ltd.

IFRS standards and interpretations adopted

The Group has applied the same accounting policies in its interim consolidated financial statements as in its 31 March 2018 annual financial statements, except for those that relate to new standards and interpretations effective for the first time for periods beginning on (or after) 1 January 2018 and will be adopted in the 2019 annual financial statements. New standards impacting the Group to be adopted in the annual financial statements for the year ended 31 March 2019, and which have given rise to changes in the Group's accounting policies are:

· IFRS 9 Financial Instruments; and

· IFRS 15 Revenue from Contracts with Customers

Details of the impact of these two standards are given below:

IFRS 9 has replaced IAS 39 Financial Instruments: Recognition and Measurement. The impairment provision on financial assets measured at amortised cost (including trade and other receivables) has been calculated in accordance with the IFRS 9 expected credit loss model, which differs from the incurred loss model previously required by IAS 39. This has, however, not resulted in any increase to the impairment provision at 31 March 2018. The requirements of IFRS 9 have been followed in the treatment of the Convertible Loan Notes issued in the period.

IFRS 15 has replaced IAS 18 Revenue and IAS 11 Construction Contracts as well as various Interpretations previously issued by the IFRS Interpretations Committee. Most of the Group's revenue comes from products where delivery is the only significant performance obligation resulting in revenue being recognised under the new standard at the same point as it was before the adoption of IFRS 15. In addition, the Group offers rebates which have been fully provided based on expected sales over the duration of each agreement so, again, the adoption of IFRS 15 has not resulted in any accounting changes.

Details of other new and amended standards and Interpretations issued by the IASB that will apply for the first time in the next annual financial statements and are expected to impact the Group are given below:

Implementation of IFRS 16 Leases in the period starting 1 April 2019 will require us to capitalise assets financed through operating leases, and operating costs will be substituted by interest and depreciation. The Group has developed its plans to be able to report in accordance with the standard and will be applying the modified retrospective method. There will, therefore, be no impact on any comparative accounting period up to and including 31 March 2019 with the cumulative effect of initial application of the standard being recognised as an adjustment to the opening balance of equity at 1 April 2019.

Going Concern

The Directors have considered the Group's business activities together with the factors likely to affect its planned future performance. The forecasts, based on sensitised versions of those submitted by the businesses, consider reasonable possible changes in trading performance and these assumptions have been projected which show that the business is able to operate with a sufficient level of headroom, providing all current debt facilities remain in place. The principal shareholders of the Group have shown considerable support for the working capital requirements and, having carefully considered the liquidity of the Company in line with the current strategy and future performance, the Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the next 12 months. Looking beyond that horizon, the Board is fully conscious of the significant potential cash demands from the repayment of shareholder loans, for example, and such matters will receive appropriate consideration, of course, well in advance of the due dates.

2. Segment analysis

Geographical Segments

The Group earns revenue from countries outside the United Kingdom, these represent 21.9% of the total revenue of the Group to 30 Sept 2018 (6 months to Sept 2017: 12.3%). The Cake Decoration division accounts for the majority of this turnover.

Business segments

The divisional structure reflects the management teams in place and also ensures all aspects of trading activity have the specific focus that they need in order to achieve our growth plans.

The Group operates in three main divisions, Cake Decoration, Food Ingredients and Premium Bakery. The Head Office functions of Finance, Human Resources, Technical, Marketing and Innovation provide support to the divisions in varying scale.

Unaudited segment analysis for these divisions for the six months ended 30 September 2018 is provided below, along with reconciliations to the underlying adjusted EBITDA:

Comparative unaudited segment analysis for the six months ended 30 Sept 2017* is:

Comparative audited segment analysis for the twelve months ended 31 Mar 2018 is:

3. Prior period restatement

The 31 March 2018 audit of the financial statements highlighted some errors within the acquisition accounting of Brighter Foods reported at 30 September 2017. In order to provide accurate comparisons within these interim statements, these errors have been corrected. The details of the restatements are provided below. The Annual Report and accounts for the year ended 31 March 2018 reflected the corrected treatment adopted here.

Long-term liability - Put option

Following the purchase of Brighter Foods Ltd, the Group entered into a shareholder agreement regarding the management stake whereby the senior management of Brighter Foods Ltd can elect to sell 50% of the management stake to the Group after March 2020, and 50% after March 2021. The consideration for the entire management stake will be based upon an agreed valuation formula, linked to profit, cash and capital expenditure of Brighter Foods Ltd in the years ending 31 March 2020 and 31 March 2021, and is capped at £8.0 million in aggregate.

The present value of the amount payable (£4.8 million), in the event of the exercise of the non-controlling interest put option, should have been recognised within long-term liabilities and equity. The restated balances are as follows:

Intangible asset - Customer relationships

The goodwill recognised within the acquisition accounting at 30 September 2017 has been recalculated, as the identifiable intangible assets on acquisition should have been allocated a value. This intangible asset also attracted a deferred tax liability. Through the creation of the intangible asset, and the resulting deferred tax liability, the net assets of the entity were amended which, in turn, generated a revision in the non-controlling interest. There should have been 6 months' amortisation on the intangible asset booked by 30 September 2017. The restated balances are as follows:

Other Adjustments

A further review of the acquired balance sheet highlighted the below adjustments in the fair value of net assets, which have also been restated:

Segmental Analysis - Head Office cost reallocation

In line with the Group strategy of allowing each business to understand its true cost base as a stand-alone business, during the 6 months ended September 2018, Head Office costs of £0.8 million have been re-allocated to the Cake Decoration division. In order to provide clear and consistent comparisons, the 6 months ended 30 September 2017 and 12 months ended 31 March 2018 have been restated. The restatement is reflected within note 2.