Given his insistence that Britvic’s first-quarter trading update represented “a solid start to the new financial year”, Simon Litherland must have been scratching his head yesterday at the subsequent fall of more than 6 per cent in the share price.
The issue appears to be costs. Britvic predicted that its “business capability programme”, involving the closure of its Norwich factory and the introduction of new bottling lines and warehousing in Rugby, would incur about £35 million to £40 million of one-off costs this year.
That’s quite a hefty hit, although Mr Litherland, chief executive of the the Robinsons and Pepsi producer, pointed out that the programme would deliver significant cost and commercial benefits.
The group also warned investors that the recent administration of Palmer & Harvey, the wholesaler, had resulted in it having to absorb “a number of one-off costs”, even if there would be no long-term impact as customers were being supplied by other wholesalers. With analysts forecasting a hit on profits of no more than £1 million to £2 million, there appears to be little threat to full-year forecasts of about £201 million.
In trading terms, the first quarter, encompassing the period to December 24, was decent. Revenues rose by 3.3 per cent to £337.2 million, even if on an underlying basis, excluding the impact of the £55 million acquisition last year of Bela Ischia, a Brazilian soft drinks group, the increase was a more modest 0.7 per cent.
Its core British division lifted revenues by 1 per cent, but there was a marked difference in performance between its two businesses. While carbonates fizzed to a market-beating 4.9 per cent increase in revenues, this was offset by a 6.6 per cent decline in its stills division.
The main driver for its carbonates growth was demand for its sugar-free Pepsi Max, which, according to Nielsen, the market researcher, achieved a record market share for the 12 weeks to December 9. In terms of volume Pepsi Max is now the biggest low or no sugar cola across the convenience and “impulse” sector, ahead of Diet Coke.
Conversely, Britvic’s stills business suffered a 4.4 per cent slump in volumes, although Robinsons Refresh’d — a ready-to-drink, all-natural spring water and juice drink to consume “on-the-go” — achieved retail sales of £7.4 million since its launch almost a year ago, making it the top-selling new soft drinks launch of the year. In truth, much of the stills volume decline had been anticipated, reflecting a rationalisation of a number of Robinsons product lines ahead of the impending launch in the grocery sector of the more premium Robinsons “fruit creations” and cordials ranges.
Elsewhere, Britvic experienced a mixed first quarter. While revenues in Ireland and Brazil were boosted by acquisitions, rising by 16.5 per cent and 22.6 per cent, respectively, France was down 5 per cent in a “subdued market”. On an organic basis, Brazil was down 6.5 per cent amid a “challenging consumer environment”.
While the introduction in April of a soft drinks industry levy in Britain and Ireland will bring a degree of uncertainty, Mr Litherland insisted that the group was “well placed to navigate this, given the strength and breadth of our brand portfolio and exciting marketing and innovation plans”.
Phil Carroll, a beverages analyst at Shore Capital, described it as “quite a lacklustre update”, although the strong carbonates performance and the promise of an improvement from Robinsons provides comfort.
The shares closed 49½p down at 734½p last night.
ADVICE Hold
WHY Greater efficiencies should boost already solid trading
SSE
SSE cheered utility investors yesterday with an upbeat trading statement and an upgrade on its profit guidance for the year.
The company consists of three main divisions: a retail business supplying gas and electricity to almost five million households; a networks business operating electricity cables in Scotland and the south of England; and a generation business comprising gas plants and wind farms.
Its dividend record is well known. It has increased its payout at least in line with inflation every year since 1999 and it reiterated yesterday that it was on course to do so again this year. With its shares trading just above £13 yesterday, the stock is yielding almost 7 per cent, based on last year’s dividend.
This appears to reflect the uncertainty hanging over its retail business. Government plans to cap prices have posed the biggest threat to SSE’s prized payout in years, threatening to squeeze profits in a division that is already losing customers. SSE’s plan is to spin off this troublesome division into a new company, merged with Npower’s retail unit, which it hopes will leave a more attractive proposition in its largely regulated renewables and networks rump.
Tempus said in November that if SSE successfully offloaded that retail operation, it might look again like a traditional defensive utility stock worth buying (although it’s worth noting that the networks business is facing rising political and regulatory risk of its own that could temper this advice).
Buying SSE now, though, would be a much riskier prospect. The Npower merger — on track for completion late this year or early next — is facing opposition from politicians and unions. A phase two inquiry by the competition watchdog seems likely. Even if the deal was to go through, existing SSE shareholders would remain exposed to the challenges facing retail, since they would be handed shares in the new company.
SSE argues that the new merged beast can be more efficient, but this is likely to be the result of a challenging period of integration in a tough market with competitive and regulatory pressures.
ADVICE Hold
WHY Retail risks remain, despite positive update
