Bakkavors management insist the business is moving forward

Bakkavor's management insist the business is moving forward

Bakkavor, one of the UK's largest own-label food manufacturers, has had a tumultuous 12 months. The company even warned last year about the future of the business as a going concern after it missed a deadline to pay creditors. However, Bakkavor's management is keen to look forward and, speaking to Dean Best in this month's just-food interview, CEO Agust Gudmundsson and CFO Richard Howes maintain a quiet optimism about the company's future.

The message down the telephone is clear. Bakkavor is back.

The Iceland-listed food group, one of the largest convenience food makers in the UK, has attracted the headlines for the wrong reasons over the last 18 months.

Bakkavor, which supplies pizza, ready meals and salads to some of the UK's largest retailers, missed a debt repayment to its creditors in May, prompting the company to warn about the future of the business as a going concern if discussions with its lenders fell through.

The company's links to Iceland have also attracted negative publicity. Despite its listing in Rekyjavik, the bulk of Bakkavor's business is in the UK but the group was caught up in the fall-out from the near-collapse of the Icelandic economy in late 2008.

Eyebrows were raised when Bakkavor's founders bought a 39% stake in the business at the height of the Icelandic financial crisis. Bakkavor chairman and CEO Lydur and Agust Gudmundsson bought the stake from its heavily-indebted investment vehicle Exista and, while the two men insist the transaction was above board, the deal prompted Exista's creditors to argue the price paid for the stake was too low.

However, the transaction attracted the attention of Icelandic regulators and triggered an investigation, which still continues. Nevertheless, Bakkavor insists the investigation is a small part of a larger probe into the collapse of Iceland's banking system and points out is not related to its day-to-day operations.

The company's management, led by CEO Agust Gudmundsson and CFO Richard Howes, is keen to leave the last two years in the past and, with a revamped business, secured financing and a healthier looking balance sheet, insists the group can look forward with confidence.

Speaking to just-food on the day Bakkavor posted its 2009 results, CFO Richard Howes says a refinancing deal and Bakkavor's improved profits throughout the year meant the company could now look to the future and focus on its operating performance.

"We announced today the completion of the refinancing of our Icelandic holding company's debt, which, in essence, is a debt-for-equity swap and that by it's nature secures the funding position for the group between now and 2014," Howes says.

"The substantial in trading performance has de-leveraged the group quite considerably in the last year. Any concerns over our financial position are definitely put behind us following this refinancing."

Bakkavor booked an annual loss of GBP11.8m (US$18m) for 2009, compared to a loss of GBP154.2m a year earlier. Turnover was up 2% to GBP1.65bn. A restructuring programme, which involved factory closures in the UK, "significantly" improved profits, while Bakkavor reported a "considerable" increase in cashflow.

Moreover, Gudmundsson is keen to point out that the sales growth Bakkavor saw within in the UK had continued in the early part of 2010 when, he says, the business has "over-traded" against the market.

Gudmundsson, though, is quick to admit that growth rate will not last for the rest of 2010. He adds that, despite the fact Bakkavor believes its business will grow sales this year, challenging trading conditions in the UK will be a threat to margins.

"We are very concerned actually," Gudmundsson acknowledges. "We are seeing strong inflation in input costs, especially dairy at a very high level. We are seeing oil price going up which will reflect on packaging costs. There are a lot of signs out there that there will be quite substantial inflation in 2010 and there is quite a lot of promotional activity and very strong competition on the market. It's not going to be easy for sure and probably one of the most difficult trading years ahead that we have seen for  a long, long time."

Throughout our conversation, there is the sense that the heady days of Bakkavor's debt-fuelled expansion in the mid-Noughties, including the 2006 acquisition of Geest, has been replaced by a more measured, conservative, cautious tone.

A series of debt-financed deals meant that Bakkavor had over-extended itself and was a factor in the business missing that debt repayment last year but now, when talking about Bakkavor's ambitions to expand, perhaps through acquisition, the company's CEO is more circumspect.

Gudmundsson is keen to equate Bakkavor's caution on expansion with a general conservatism in business after the financial crisis. "It's not only Bakkavor that has changed. The whole world has changed in the last two years," he says. "What was considered to be valuable two years ago in terms of consolidation, I don't think that necessarily applies anymore. Out of 12 categories in which we operate, we are market leaders in 10. We intend to focus on strengthening our position, mainly through organic growth and product innovation, rather than buying up the competition."

Howes insists the UK categories in which Bakkavor operates will consolidate further but in a "different way" to M&A activity, perhaps through the reduction of more capacity following the recent moves from Northern Foods, Greencore and Bakkavor.

Looking overseas, Bakkavor remains cautious about the opportunities for expansion through acquisitions. Bakkavor has fledgling operations in the US and China and Gudmundsson does see some opportunities for M&A in these markets, at least in the medium term, but on a small scale.

"Overseas, things are a bit different. I could see some small acquistions in the next few years in Asia or the US but that would not be on a comparable scale to the big ones we made from 2005 to 2008," he explains.

Bakkavor made its first foray into the US two years ago and, since then, rival Greencore has also entered the market and talked up the potential for convenience food there. Gudmundsson insists Bakkavor has bolstered its business Stateside, even if the company's financial issues have held back any further plans for expansion.

"The US presents a good opportunity for us and we absolutely agree with Greencore on the point that there is an opportunity in the US on convenience food," Gudmundsson says.

"Although we have not been able to capitalise fully on the opportunities because of the financial position, we have used the time well to get to know the market, to strengthen our existing business and to lay out detailed plans for our growth going forward. We have now finalised the financial restructure of the group which will put us in a position to move on in the US or elsewhere."

Moving on. That seems to be the mantra at Bakkavor. After the financial problems at the business, which, combined with the economic downturn meant cuts in its core UK market had to be made, management believes the dust has settled and the company can look forward.

"We've built the best platform in our sector, certainly in the UK, and ever increasing platforms around the world," Howes says. "They are in place. We now need to spend time growing these businesses. We are in an integration and delivery phase and that is likely to last for at least a couple of years."