The Real Good Food Company emerges much stronger from sugar price chaos

October was a landmark month for the Real Good Food Company (LON:RGD).

It marks the end of three years of chaos in the sugar market that has depressed the company’s sales and hit its earnings.

The unwinding of EU support could have been an unmitigated disaster for RGFC, which owns the Napier Brown sugar distribution business.

It sells to the big consumers such as United Biscuits, Nestle and Mars as well as the smaller food companies and also trades under the Whitworth brand, which is stocked by supermarkets and corner shops.

That the group has traded through the period profitably owes much to the shrewd management of food industry veteran Pieter Totte and his team at the Liverpool-headquartered group.

The outlook is far more certain now, with the price of sugar rising, though the full benefits of this improvement are unlikely to filter through until the 2011 results.

However, where there used to be a surplus of sugar, there is a now a shortfall, which will present its own unique problems going forward.

“We are now going into a new era with rising prices,” Totte told Proactive Investors.

“But at the same time we need to get hold of the product, which is more difficult than ever.

“That is not even a function of price, but a function of availability within the European sugar market.”

The company is addressing the problem by sourcing from producers in Germany, the Netherlands and France, as well as its normal UK suppliers, and outside the EU from Africa and the Caribbean.

It is just one example of how the Napier Brown business has sharpened up its act. Another is the decision to bring its logistics in house.

This gives the company control of deliveries, and helps save wasted time and costs.

Although the sugar business is a big part of the Real Good Food Company - it accounts for around 75 per cent of the company’s £216 million annual sales - it is not the be all and end all.

The group also comprises an ingredients operation called Renshaw, which is based in Liverpool and turns over around £40 million a year and Hayden’s, based in Devizes. The latter makes high quality patisserie and desserts, mainly for Waitrose but also Marks & Spencer.

A craft baker, Hayden’s turned over £21 million last year an increase of 15% over 2008, with over 40 new product lines being successfully launched in October last year. The problem in the past has been converting those increased sales into profits.

However Totte and his team have streamlined the manufacturing process, improved the pricing and filled a gap in the production schedule by producing frozen cakes for coffee shops.

“This business started as a craft business,” Totte says. “If you start building it at scale it becomes very difficult to control.

“I think we have now cracked it and I feel very positive about the business, particularly next year.

“We’ve got our business model now and have perfected it. We have what I call real-time costing and are now buying and selling at the right price.

“We will produce margins in future that will sit in the upper end of the scale compared with the rest of the sector. That’s where it should be and we are aiming to do.”

Renshaw, meanwhile, is a niche business with high barriers of entry that makes products such as marzipan and sugar glazing, but has an ambitious three-year plan to grow sales and earnings.

It means it is going into new areas such as the children’s market.

“We see a lot of opportunities there,” Totte says. “In the US young children see baking as a hobby on Saturday with mum in the kitchen.

“There are all sorts of products we can create on the back of it including children’s books that would be put onto video and turned into TV programmes.”

With the Real Good Food Company starting to fire on all cylinders, the emphasis now is increasing the company’s earnings while reducing its borrowings, which are just over £20 million.

Totte would like to see the company’s debts coming down to £15 million, though the interest payments are not as onerous as they might have been.

This is because the group swapped its term loans and overdraft for asset backed finance just months before the credit crunch took hold.

It has borrowed at interest rates at between two and a half and three points over the base rate using its debtor book and property as collateral.

The company’s broker Shore Capital predicts EBITDA this year will be similar to 2009 at £5.6 million, rising to £6.1 million in 2011.

However the company’s trading statement in the third week of November will be eagerly scanned for a possible upgrade to the 2011 figure based on an improved outlook for the company.

Shore’s analysis sees operating cash flow tracking EBITDA higher. However the group won’t be splashing out on acquisitions.

Neither will it be using the free cash to pay a dividend. Instead the funds will be recycled to expand the business organically, which Totte hopes will translate into capital growth of the share price.

“Everyone in this business is in it for capital gains as far as I’m concerned. I would like to see it that we have a stable, organically growing old-fashioned company that generates cash,” he says.

“That should do the business as far as the share price is concerned.