C&C reports higher profits despite software woes

Good news for shareholders in C&C Group (CCR) as management reinstated the final dividend, yet the move failed to support the stock’s valuation on results day. The market reacted negatively to news from the Ireland-based drinks business that the implementation process for ERP software (linked to advanced warehousing management) had proved to be “significantly more challenging and disruptive than originally envisaged”.

The disruption fed through to a deterioration in service levels which were exacerbated by increased seasonal trading volumes. The group allocated further resources to remedy the problem at the beginning of May. It’s difficult to gauge when the remedial measures will “permanently restore service to normal levels”, but the group booked a one-off charge of €25mn (£21.7mn) relating to the issue.

Despite the software problems, the group can point to a solid performance from its core business. The producer of Bulmers, Tennent’s and several other highly visible brands increased cash profits by 46.7 per cent to €117mn, while free cash flow shot up by 165 per cent to €75.3mn, leaving the way open for the dividend reinstatement. Available liquidity stood at €470mn at the end of February, and net debt as a proportion of cash profits fell to a multiple of 1.3. Quite an achievement given the group’s target range stands at 1.5-2.0 times.

Management’s focus on supporting profitability resulted in a 240-basis point increase in branded margins to 19.6 per cent, aided by the introduction of Minimum Unit Pricing and effective cost pass-through to punters, although the pricing intervention in Scotland and Ireland has depressed off-trade sales to an extent. Meanwhile, distribution margins have grown to 4.3 per cent from 3.9 per cent in FY 2022.

Inflationary cost pressures are still with us, but demand for alcohol is relatively price inelastic, so net revenues were driven by 4.2 per cent volume growth and price/mix growth of 14.2 per cent. The performance of core brands Bulmers and Tennent’s was described as “resilient”, as both grew market share year-on-year, helped along by C&C’s increased marketing spend.

Current trading volumes are in line with management expectations and C&C plans to adopt a progressive dividend policy. Management cautioned that the succession of interest rates hikes to counter inflation could cause “a longer-term shift in customer purchasing behaviour”, but there’s scant evidence of this thus far – people like a drink whether circumstances are straitened or not. The shares trade in line with their long-term average of 12 times adjusted consensus earnings, so we remain on hold. Hold.

Last IC view: Hold, 161p, 27 Oct 2022