Real Good Food Company - Driving growth through independence

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The Alternative Investment Market (AIM) would seem to be an unusual place for a company with such high revenues - £215.6 million during 2009.  As Aimzine found out during a recent meeting with Pieter Totte, the ebullient Dutch Executive Co-Chairman of Real Good Food Co (LON:RGD), it is a natural habitat for a company such as his. Pieter nurtures an entrepreneurial culture within RGD which comes from an emphasis on operational independence and it is his firm belief that such a high revenue business is perfect for the AIM market. 

“That is what the AIM market was setup for in 1995.  We are a natural example of such a business type”.

The business

RGD is split into three core business operations:

1. Napier Brown – Sugar – Supplying sugar to food manufacturers sourced from the UK, mainland Europe and around the world
2. Renshaw – Ingredients – Supplying a range of high quality food ingredients primarily to the bakery sector
3. Hayden’s Bakeries – Producing chilled and ambient premium patisserie and dessert products to retail grocery

The Napier Brown business accounts for approximately 74% of total turnover, Ingredients 16.2% and Bakery 9.8%.

The Flying Dutchman

From Pieter’s viewpoint, when he took executive responsibility for RGD in November 2009 (he had been with the group for a number of years in a non-executive director capacity), the business was heavily centralised.  His first important decision was to cut away at the centralised structure that had typified the business and he then introduced independent business units which had complete autonomy for their performance. 

For each of the three major business units, Pieter introduced their own Chief Executives who reported directly to him and the board. These units were run as profit centres, had their own strategic plans for the next 3 years and all their current and future performance were measured against this plan.  Essentially, he was fostering and harnessing the independent nature of all these business units whose creative and business talent had laid latent for some years. copyright of Aimzine Ltd. No part should be copied, without prior consent.

“It was just a case of re-energising the three business units by giving them their independence and by fostering responsibility and creativity I can now see great things on the horizon”.

The Sweet Taste of Sugar – Napier Brown

It is quite surprising how many traditional brands exist within the RGD stable.  The most well known is the “Whitworths” brand – icing and caster sugar that every child must surely remember from their parent’s kitchens in years gone by.  Of all three RGD subsidiaries, Napier Brown contributes the largest amount in terms of revenues totalling £168.0 million for 2009.

Napier Brown is the largest independent non-refining sugar distributor, sourcing global sugar for over 30 years.  The main operation is based in Normanton, near Leeds, supplying over 1,000 customers and employing some 150 people in processing, storage and logistics.

The fly in the ointment has come from the European Union through European Sugar reform, whereby there was a forced 30% reduction in EU production due to a substantial sugar mountain with prices falling some 36% from initial enactment of this legislation.  However, stability is beginning to return to the sugar market and there is an expectation that prices will once again rise by Quarter 4 2010.  Indeed, Pieter believes it is possible that prices may appreciate by approximately 10% over the next 2 years as there will be more supply constraints, with demand increasing once again.

Aside from price appreciation, Napier Brown has now been split into 4 separate operating business units:-

1. The Bulk business unit is a high volume operation for large industrial customers.  In essence, this is a simple business model based on the cost of sugar plus delivery. 
2. The Bagged business unit is slightly more complex in that it provides full, mixed and consolidated loads from 1 tonne bags to 12.kg bags.  Sugars can be granulated, sieved and milled.  In addition specialist brown sugars are offered, including fair trade and organic sourced.  Customers are typically medium sized industrial users to wholesalers. 
3. The Retail business unit provides the full Whitworth branded product plus own label Napier Brown product. 
4. The Garretts business unit (Thornbury) provides specialist knowledge and product within the trading and wholesaling of dairy ingredients, with strengths in the ice cream sector. Pieter is particularly proud of this business unit stating: “Garretts alone generates revenues of £20 million, with an EBITDA of 10% (i.e. £2 million) and I think that this is a wonderful specialist business to be in and is greatly undervalued at present”.

What is extremely important to stress is that all 4 of the Napier Brown business units are run as separate profit centres and this has greatly incentivised those that are working within them.

The key financials are that Napier Brown generated an EBITDA margin of £3.3 million in 2009.  As already stated, with the introduction of the EU Sugar regime, prices have plummeted.  However, as prices are expected to stabilise and increase again then there is scope for a significant improvement to this EBITDA figure going forward.

Sugary Renshaw ingredients

Renshaw’s supplies some of the largest food manufacturers in the UK with marzipan, sugarpaste, caramel, soft icings, mallows and beverage syrups.  Customers include Northern Foods, Fox’s Biscuits, Finsbury Food Group, Greencore amongst a whole line of bluechip clients. 

Approximately 30% of product is used directly within Manufacturing, 27% within Retail, 24% within Wholesale and Sugarcraft and 17% for straight export.

Pieter makes great play of the possibilities for export growth within this subsidiary.  Whilst supplying the largest US provider of “Craft and Celebration products” - Wilton’s – for a number of years, there is still a huge opportunity to export similar product into Europe, Canada and South East Asia.

Due to the recent establishment of a new “Innovations Team”, new growth is expected to come from the increase in home baking and the crafting market, especially in the US and Northern Europe (Defined as Scandinavia, The Netherlands and Germany).  Renshaw’s the brand has also been re-launched, with a new website and enhanced company profile.

Pieter states that historically, too much of this business has been manufacturing and customer led, whereas he has now pushed for a new focus of being more market and consumer led.  A three year plan has been developed whereby this subsidiary has a target of £50 million revenue by 2012.  During 2009, revenue was £37.8 million and EBITDA was £3.3 million (8.7% gross profit margin).  At the same margin the £50 million target would equate to an EBITDA of approximately £4.35 million.

The trading statement released on the 29 July 2010 also indicates that things are moving in a very positive way stating that:

“Renshaws has continued to see growth in volumes and profitability at levels well above management expectations, with sales overall up 14% year on year. Key features of this improvement have been strong export sales and the growing popularity of home baking and sugar craft in the UK”. 

Hayden’s – Where “Essential” meets “Simply Foods” with a dash of Costa Coffee

Unlike Napier Brown and Renshaws, Hayden’s have just three clients producing products which include Yum Yums, Danish, Buns and cakes as well as chilled desserts, pies, crumbles and tarts.  Far from this being seen on a superficial level as a weakness, Pieter explains that this is a very strong position to be in. 

“We are a specialist producer and our three clients appreciate the high consistency of our fresh bespoke product and ability to deliver on time.  It would not be easy for another supplier to easily replicate this, nor force us down on price.  This is borne out by my expected increase in sales over the next 2 to 3 years.  For example, I expect Waitrose to commit to 20% growth over and above their current order levels over the next 3 years.  We expect to increase head count to 400 by the end of the financial year.  We are also investing in further tools to support more handcrafted products”.

Waitrose, Marks and Spencer and Costa Coffee almost single handedly hog capacity at Hayden’s Devizes manufacturing site, which recently announced an increase in capacity via a 33,000 sq ft extension.  Traditionally, Hayden’s has reported losses, despite being at almost full capacity.  In order to tackle this deficit, Hayden’s have adopted a similar 3 year plan to Renshaws, with a new senior management team recruited and established.

This new management team have highlighted that there are too many manually driven processes in the business, as well as a lack of a coherent IT system.  As such, new manufacturing methods are being adopted and a new IT investment plan has been approved and is being implemented and phased in over 2 years.  The first phase goes live pre-Christmas 2010.

The ambitious 3 year plan expects revenues to hit £23.532 million in 2010, £27.004 million in 2011 and £30.691 million by 2012, where they were £21.087 million in 2009.  EBITDA is expected to hit £0.706 million in 2010, £1.163 million in 2011 moving to £1.916 million by 2012. So, there is clearly strong growth expected over the next three years within this subsidiary too.

Future Prospects

Pieter is very forthright when he says that:

“The group contains some great brands which have been simply ignored in the past and in terms of the possibilities not just here in the UK but also throughout the rest of the World, there is a great deal that we can leverage upon”.

Pieter’s watchwords are very much about keeping business simple - employing competent people, giving them responsibility for their own business units and managing this whole process from a de-centralised viewpoint.

Shareholder’s were treated to a very professional AGM where all three group Chief Executives presented at the meeting.  Shareholders were also presented with comprehensive plans detailing where growth and EBITDA were anticipated to reach in the coming years. There was a real sense of management acting in the interests of all shareholder’s and not just in the interest of management, which can be a common complaint in a number of small AIM companies.

When questioned on possible acquisitions in future years, Pieter is unequivocal in his belief that he is “not in the business of diluting existing shareholders.  We are in the business of growing organically and we have three tremendous businesses which have real growth prospects and which we haven’t really begun to exploit yet”.  Pieter is more interested in positive capital growth of RGD’s share price, having just over 3.7% of the business himself, he is aligned with improving this.  There was also a strong indication that whilst dividends would be desirable at some point in the future, surplus cashflow was to be used to pay down debt and to further invest in the business.

Individual Pieces greater than the Whole Pie - Financial Forecasts

The House Broker – Shore Capital – is indicating revenues of £221.0 million (2010), £223 million (2011) and £226 million (2012), with respective PBT on continuing operations of £2.3 million (2010), £2.8 million (2011) and £3.1 million (2012).

Net Debt levels are on the high side, at £24.1 million in 2009.  However this is a significant improvement on the 2008 level, which was £31.4 million. Further improvement is expected this year.

Asked on where he was comfortable regarding the current gearing level, Pieter stated that he would be happy “at around the £15 million mark”.

If the anticipated sugar prices appreciates by around 10% over the next 2 years, Renshaw continues with their tremendous growth and Hayden’s build on their recent 33,000 sq ft factory expansion in Wiltshire, thereby removing their operating loss, the broker forecast numbers will prove to be conservative.

Aimzine Comment

Trading on a prospective P/E of 8.60 (based off the Shore Capital EPS of 2.5p and a mid price of 21.5p) and a prospective P/E of 6.94 for 2011, there is a great deal of upside potential, especially as seems likely, the sugar price increase of 10% comes into play over the next 2 years as sugar supply side constraints take effect.  If the company successfully achieves its ambitions then investors will get a very sweet taste in years to come.

Written by Simon Murphy

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