Finsbury Food Group, the UK bakery products supplier, is performing strongly in a challenging market. Recent acquisitions have given a boost to results but the company, which makes lines under licence for groups like Ferrero’s Thorntons, as well as using characters like Spiderman and the Minions for its cakes, has also been enjoying sold underlying growth. Dean Best caught up with finance director Stephen Boyd to discuss Finsbury’s performance and its readiness to do more deals.
When Finsbury Food Group reported the results for the first half of its financial year earlier this month, the numbers caught the eye.
Revenues up 46% for the six months to 26 December. Operating profit 78% higher, pre-tax profits leaping 84%. Finsbury’s recent deal-making (in October 2014, Finsbury acquired UK baker Fletchers Group, following up that deal eight months later with a move for foodservice supplier Johnstone’s) added some bounce to the figures but there was some solid underlying growth to be seen, too. On a like-for-like basis, revenues grew 7.4%, operating profit was 21% higher year-on-year and pre-tax profits up 22%.
On 16 March, the day the results were announced, Finsbury’s shares closed up over 5% at 112.35p.
Speaking to just-food in the hours after the figures were issued, Finsbury finance director Stephen Boyd says “all areas of the business” were in growth. In November, Finsbury provided an update on trading for the first four months of the group’s financial year, revealing its like-for-like sales for those four months had grown by more than 10%. Given the 7% increase for the first six months of the fiscal period, was there any concern Finsbury’s top-line growth was slowing? Not at all, Boyd insists. “It’s not easing, it’s annualising against good growth in previous years. We’re still very delighted by the level of growth we’ve got.”
The double-digit growth in Finsbury’s underlying profits was driven not just by the higher sales but other factors, Boyd explains. “We have been investing in our business in either capital expenditure, with a view to improve profitability, or investing in people, with a view to improving the quality of the people as we become a more serious group. Also, market share growth always works to your advantage as you have better leverage of your properties, of your overhead cost, as you get bigger. And there has been an element of – it’s not significant – a more benign commodity environment, which has left us without the pressures that we’ve experienced in previous years of increasing commodity prices to manage. We haven’t had to face that this time.”
After the like-for-like sales growth, the purchases of Fletchers – a business focused on morning goods and bread, with half its sales made through the retail channel and half through foodservice – and of coffee shop supplier Johnstone’s drove Finsbury’s reported first-half numbers higher. At the time Fletchers was acquired, the business was generating annual sales of around GBP95 (US$136.8m). Johnstone’s, bought out of administration, was turning over around GBP9m. On that basis, Fletchers has had a bigger impact on Finsbury’s sales but the company is pleased with the performance of the two new assets.
“Both of those businesses have exceeded our expectations in every respect,” Boyd insists. “With Fletchers we are delighted with the growth that has been achieved in both foodservice and in retail. Johnstone’s likewise. Johnstone’s was a loss-making business in administration so we’ve had to grab hold of it, take control, and it is now profit-making and it’s revenue line is in growth too.”
The acquisitions boosted Finsbury’s presence in the UK foodservice market. Boyd says 22% of the group’s UK sales are now from the foodservice channel. The deals, for example, have led Finsbury to sell cake lines through foodservice to the extent, Boyd reveals, that that part of the business accounts for 3.5% of the company’s UK sales. With the UK grocery retail market extremely competitive and a sector where growth is, broadly, hard to come by, it would not be a surprise if Finsbury deliberately sought to grow the proportion of its sales made through foodservice.
Boyd insists Finsbury will look to “drive both elements”. He says Finsbury “trades with every single customer out there” in the retail channel and will look “to grow with all of them”. Finsbury, he explains, will continue to try to expand in foodservice organically by “leveraging the group’s infrastructure across the whole of the foodservice business”.
Nevertheless, the Finsbury finance chief says the company is open to doing more deals. “The foodservice element is an area of the market which is in bigger growth so we would expect foodservice, as a proportion of the group, to grow from its current 22%. Naturally, we would expect that to happen. And if an opportunity came to acquire in that area, we would like to see that 22% portion of the group grow even more. It is an attractive sector to us,” he says before adding: “Cake and bread is our core and if there are opportunities to consolidate or to get into better specialist niche areas, then yeah, we would do that as well. You can’t predict the timings of these. It’d be nice to predict the timings of these, but nobody does what you want them to do.”
When Finsbury announced its results, it was notable the emphasis the company placed on acquisitions, not just in the context of its recent deals but its desire to strike more. The group believes the Fletchers deal has made it more able to make acquisitions. Boyd also points to the GBP35m Finsbury raised from the City to part-fund the Fletchers deal and suggests investors would be open to another equity issue to fund transactions.
“This is a platform for further growth,” Boyd asserts. “We will be wanting to acquire in areas which make sense for us, foodservice, cake or bread, whether it be to consolidate the market or take opportunities in areas where there is niche capability. Raising GBP35m from the City was something that was new to us and new to the City. The fact that it’s gone well, I think we will have the support from the City if we want to do another one. That said, from a point of view of post-acquisition, we’re already at the level of debt which is one times EBITDA. We’ve already got a very strong balance sheet so if we wanted to we could go further and do acquisitions through debt. We’re in a lovely position on that particular one. We have choices.”
One recent deal that flew under the radar was Finsbury’s investment in Dr Zak’s, a UK-based supplier of protein-enhanced products. Last May, Finsbury paid GBP175,000 for 25% of Dr Zak’s, a business that markets high-protein bread, peanut butter and pasta. Boyd insists Finsbury has no desire to up its shareholding in Dr Zak’s but is hopeful the trend for protein-rich products seen in the US will gain traction in the UK.
“It’s one of these things that landed on our plate. We were already making their bread and we thought ‘Hang on a minute, we’re making your bread and you’re looking for a market global strategy to roll this out, we might as well help you, give you cash flow advantages, through cheaper prices and lower stock but own 25% of the business,'” Boyd says. “It’s really aimed at a particular sector – which in America is a huge sector – and we’re hoping that we are in an early strange with a bread product that is high in protein. It’s small at the moment, but it is growing. Let’s wait and see. It’s a little bit of a game that one and trying to be a player in advance, getting in in advance so that hopefully what will be an industry trend.”
The UK accounted for over 90% of Finsbury’s revenue in the first six months of its financial year. Its overseas business is Lightbody Europe, which trades mainly in France but also sells into the Benelux markets. Sales and profits from that side of the business were also up in the first half of the fiscal period.
“The French market [are] embracing licenced celebration,” Boyd says. “They prefer a ganache type of cake as opposed to a sugar-paste type of cake. Our celebration cake is very much sugar-paste. They didn’t really embrace the whole thing about celebration, but then suddenly we managed to get a listing of the Disney Frozen licence cake into one of the big supermarkets in France. That went like wildfire. It was very quickly followed by the Minions licence. Then every single retailer took them all and the French are being converted to sugar-paste celebration cake. The other aspect of it is … we’re selling Genius Foods gluten-free products into France. It’s not a licence arrangement, we’re just doing it as a distributor from our knowledge of that business when we used to own it three years ago.”
So, a solid first half of Finsbury’s financial year, helped by underlying growth and recent deals that diversified the company’s customer mix and product portfolio. And, despite acknowledging the “challenging” trading conditions it is operating in, Finsbury believes it can continue to grow – both organically and through acquisitions.