Nichols builds capacity and streamlines its supply chain

Shareholders in Nichols (NICL) were the beneficiaries of a 27 per cent hike in the half-year dividend, mirroring revenue growth in its UK domestic market. You could say it’s a recovery play, at least judging by comments from eponymous non-executive chairman John Nichols: "In the UK, the Vimto brand continues to outperform the broader squash market, and the group's out-of-home route to market experienced good growth as the wider leisure sector continues to recover from the impact of the pandemic”.

The soft drinks producer, whose Vimto brand is a favourite during Ramadan, has been targeting efficiencies through the re-ordering of its UK operational supply chain. Measures have been taken to move its ‘dilutes’ segment to a new contract manufacturer in a bid to boost manufacturing capacity and take advantage of higher speed lines and more efficient bottling processes.

Everything comes at a cost, so Nichols has had to take on one-off hits linked to additional storage capacity, along with restructuring costs and legal fees. In all, the group incurred £1.2m of exceptional costs during the year (H1 2021: £0.3m). And distribution expenses were on the fly, increasing by 9.6 per cent to £4.7m due to a combination of higher trading volumes and significant inflationary pressure. Leaving aside one-off impacts, the adjusted operating profit increased by 24.2 per cent to £11.2mn.

Operations were hobbled through the first quarter of 2022 as disruption to shipments impacted its international business with US shipments constrained by container shortages and there were further difficulties linked to industrial action in Spain. The upshot was that international revenues contracted by 7.2 per cent to £17.6mn.

The gross margin fell by 160-basis points to 42.8 per cent, reflecting an unfavourable sales mix, specifically the higher proportion of lower-margin UK carbonate revenues as the ‘out-of-home’ market recovers post-pandemic. Revenues from this corner of the market increased by 131.9 per cent, albeit from a vastly reduced base.

The recovery in the out-of-home business has necessitated a re-investment into working capital, so debtors and inventories are £8mn higher than at the year end. That’s unavoidable, but inventory levels have also been elevated due to increased ingredient and packaging costs. And it’s those costs which will have an outsize bearing on full-year profitability if macroeconomic challenges persist. Management has taken measures to mitigate cost pressures and efficiencies should follow from the supply chain changes, but with the shares trading at 23 times consensus earnings, the market appears to be up to speed with the changes. Hold.

Last IC view: Hold, 1,434p, 3 Mar 2022