Patrick McMahon, who’s been double jobbing as chief executive and chief financial officer at drinks group C&C since late last week, was keen to show a little support for the cider and beer maker’s beaten-down stock at the earliest opportunity.
Within hours of the company behind Bulmers cider and Five Lamps beers unveiling its full-year results on Wednesday (for the year to the end of February), McMahon and his chairman, Ralph Findlay, snapped up a little over £61,000 (€70,230) of C&C shares.
It followed an almost 15 per cent share slump in London last Friday, to levels last seen in 2009. That was the result of the group revealing that McMahon’s previous boss, David Forde, had quit and that it will take a €25 million profit hit in its current financial year on foot of a botched implementation of a new warehousing management software system at its UK wholesale unit.
C&C’s acquisition five years ago of the distribution business, Matthew Clark and Bibendum, the UK’s largest independent supplier of beers, wines, spirits, ciders and soft drinks to the on-trade sector, was something of a coup as the company’s previous owner, Conviviality, imploded under the weight of borrowings and tax liabilities.
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The deal followed years of C&C share price stagnation, with the mid-noughties heyday of its Magners cider in the UK far behind it. The group rued a disastrous $305 million (€284 million) purchase in 2012 of US cider group Vermont – it accepted $20 million to get rid of Vermont two years ago.
C&C, where Forde joined as CEO in late 2020 from Heineken with a €1.42 million signing bonus, indicated in March that the roll-out of a new tech system at Matthew Clarke and Bibendum was taking longer than expected and may have “some” effect on service and profits.
Investors learned of the actual cost last week, and C&C offered more details on Wednesday, when it reported full-year results. It included a €4 million hit from delayed price increases, as much as €10 million of additional running costs, and an expected loss of €10 million of business, as its ability to deliver full orders on time dropped in recent months.
McMahon said that the main source of lost business has been from pub owner-operators – or what are known as independent free-trade customers. These are a “promiscuous” lot, by all accounts, according to McMahon.
But C&C has been here before and bounced back. It managed to quickly reverse Matthew Clark and Bibendum’s haemorrhaging of customers at the time of the 2018 acquisition and, again, after the unit was forced to shut down its IT systems two years ago when it was struck by a cyberattack.
“I think there’s every reason to believe that we will win those customers back in the second half of the year because it won’t be the first time,” McMahon told analysts on a call.
The problem is that this is a customer group that is shrinking by the day. C&C estimates that more than 15,600 – or 12 per cent – of independent free-trade pubs or leased outlets have closed across the UK and Ireland since just before the pandemic.
And while there has been some growth in locations owned by pub chains during the period, they strike harder bargains with suppliers. The hope for C&C is that the technology efficiencies from the new systems, when all the issues are ironed out, will ultimately boost distribution operating profit margins to its target of 4 per cent. The results for the past two years were 3.1 per cent and 1.1 per cent, respectively.
The IT fiasco took the spotlight off what was otherwise a solid set of results for the group’s cider and beer business, and its ability to pass on rising costs to customers.
While spirits and wines were all the rage as people were looking to celebrate a return to pubs post-lockdown, spirits sales fell by almost 8 per cent – by volume – in Britain last year. Wine sales declined by more than 6 per cent. By contrast, cider and beer rose between 2.7 per cent and 3.7 per cent, according to C&C.
The volume of Bulmers sold in Ireland, for example, grew by 9.1 per cent, helped by a 57.6 per cent growth in the on-trade in the aftermath of the pandemic. While the introduction of minimum unit pricing for alcohol in the Republic early last year dented off-trade volumes, it boosted pricing.
Group free cash flow soared 165 per cent to €75.3 million, even as it endured train strikes in the UK during the key Christmas trading period and households found themselves under pressure amid the cost-of-living crisis.
Together with proceeds from the sale of its minority stake in UK pub chain Admiral Taverns last May, the cash generated helped reduce net debt by 44 per cent to €153 million. The debt position equated to 1.3 times group earnings before interest, tax, depreciation and amortisation (Ebitda), below its targeted range.
C&C, many shareholders will remember, had a €442 million net debt mountain two years ago, following the worst of the pandemic – before it went about raising the equivalent of about €174 million through a share sale.
The company this week proposed a €15 million dividend payout, its first since 2019.
C&C’s restored healthy balance sheet had analysts questioning on Wednesday whether some deal making may be on the cards.
“There seems to be a lot of bolt-on opportunities at the moment, particularly in the branded space, with, I think, a lot of craft brewers finding it difficult going right now, not having maybe secured route to market,” said McMahon said on the call.
“We’re looking at a lot of things, and opportunities are definitely out there. However, we’re pretty clear on what our priority is: which is fixing Matthew Clark right now. That’s going to be our big, big focus for the next quarter.”
Wise decision, given how the debacle has shaken confidence in the group.
