Interim results from Finsbury Foods (AIM: FIF) represented a solid performance in difficult market conditions. Selling to the big supermarkets is never easy at the best of times, they have a lot of purchasing power and are rarely shy about flexing their muscles. However food manufacturers face plenty of other headwinds at the moment.
Commodity prices were already on the rise before sterling’s devaluation made things worse; so there’s serious raw material cost pressures on food manufacturers. For example butter has risen from £1,800 a tonne to £3,500 over the last year – not good news if you make a lot of cakes and croissants. On top of that, the increase in the ‘living wage’ is pushing up labour costs. Finsbury’s FD Steven Boyd says this is a phase the industry has to go through from time-to-time and there are plenty of conversations about price rises going on with the supermarkets at the moment.
An initial response has been to cut back on promotions and discounts, which is a form of price increase the company can control. The impact of this shows up in the flat sales line and the volume decline in the cake segment. However despite these pressures, the company has been able to raise margins and push profits up 4 per cent through its internal efficiency programmes. It continues to invest in automation and ways to raise productivity, which is vital for long term success in this sector.
As the second half unfolds Mr Boyd expects to see some recovery in pricing. An element of this will be through playing with weights and measures to maintain important retail price points (offering a bit less for the same price), but either way as consumers we will end up paying more for our cakes and pastries.
As well as an efficiency-focused capex programme, Finsbury has an active acquisition pipeline and current debt levels give it headroom if the right deal comes along. The shares are on a reasonable 11.4 times p/e for the current year, which is tempting for a well-managed company if we look through current conditions.