The Real Good Food Company Interview Transcript with Pieter Totte, Executive Joint Chairman

by Harry Norman - 14/07/2011

"The Real Good Food Company plc is a leading UK bakery, ingredient and sugar group, offering a wide range of products to grocery retailers, wholesalers and manufacturers. "

The company was incorporated in February 2003 in the United Kingdom originally as an investment holding company to facilitate the acquisition of companies or businesses operating in the food sector. Its main country of operation is the United Kingdom. Following the hive up of the subsidiary companies, The Real Good Food Company plc is now a publicly quoted UK food group trading in the food sector.

The Real Good Food Company plc has at its heart an entrepreneurial spirit supported by a solid understanding of commercial realties, with its focus on the essentials of success; service excellence, innovation and customer development. Through progressive and productive partnerships with customers the company is creating a recipe for success and a solid platform for future growth.

Harry Norman: Hallo, this is Harry Norman for Proactive Investors and welcome to another Proactive audio interview.

Today is Wednesday the 22nd of June 2011 and I'm talking with Pieter Totte, Executive Joint Chairman of The Real Good Food Company, listed on the AIM market food producers sector. Stock ticker RGD; share price 64.5p; market cap 41.93 million pounds sterling; web address realgoodfoodplc.com.

Pieter, thank you very much for joining us for this interview.



Pieter Totte: A pleasure.



Harry Norman: Please give investors a brief introduction to The Real Good Food Company and its business strategy.



Pieter Totte: Real Good Foods was founded by myself in 2003 as an AIM quoted company. Today we have now four businesses, basically Napier Brown, Garretts, Renshaw and Haydens.

Its current strategy, if we look at the three year plan going forward to 2014, is very clear. We see lots of organic opportunities within the group which we are going to explore, like our brands, like our capacity, like our skill-set. And our strategy really is to double the size of the business in the next three years without acquisitions



Harry Norman: Are there any remaining legacies of the unwinding of the EU sugar regime for The Real Good Food Company Pieter?



Pieter Totte: The short answer is actually no. This is behind us. It won’t come back anymore because this is really an adjustment between the World Trade Organisation and the Common Market.

In 2015 that will be the last round where the so-called reference price will be removed and we then hopefully are in an open trade position globally without any protection as far as Europe is concerned. This is very good news for Real Good Food as it means that we can import sugar from the entire world.



Harry Norman: Would you talk us through the key points of The Real Good Food Company’s group financial results for the 2010 financial year and tell us how this financial year is shaping up for the group?



Pieter Totte: Last year was our last year as a consequence of year three price consequences of the sugar regime, which was our most difficult year as far as sugar is concerned. But we achieved our goal which meant that we came out with an EBITDA of 5.5 million which is basically flat to the year before.

Our earnings per share though went up from 1.3 to 2.3 and if you want to go into this year we’re very comfortable as far as what we've achieved and where we set our goals for the first half year which we have actually also told our shareholders at the AGM this month.

Our brokers have put our forecast up for this year from 8.6 to 9.6 million [EBITDA]. So that’s quite a jump from 5.6 last year to 9.6 this year. And I feel very positive that we will achieve that number for this current year.



Harry Norman: The Renshaw division produces and distributes products to the bakery sector in the UK and abroad and was the star of the show in 2010. Please tell us about the Renshaw business, its contribution to the group’s financial progress last year, and its prospects.



Pieter Totte: Well Renshaw is a very good example of all four of our businesses whom I consider to be quite strategically strong. They're all having their own niche.

And if I talk about Renshaw in particular, this is a business that earns probably 80/90% of the market in the UK. It produces own-label products for all the multiples.

And going forward, we are launching this year for the first time our own brand, Renshaw, in the home baking sector. We come out with about 70 products before the end of September which all hit the shelves as I speak; 46 new ones and the remainder are relabeling situations.

We feel we have a very strong brand in the business to business sector and professional bakers and our export particularly as well has great opportunities under our brand. We are exporting now to 32 countries, of which America is our largest export country which takes about 18% of our turnover this last year and growing.

So if look forward for Renshaw, there are two opportunities where we see growth. One is our own brand and the extension of our product range. And secondly is that we set up our export department which we haven’t had so far.

We are putting a man in charge specifically to explore our brand and products abroad. And that’s where we expect growth. And my view is that Renshaw in its three year plan should come home with a 75 million 10% bottom line in 2014.



Harry Norman: The Napier Brown division is a bulk independent non-refining sugar distributor. Please tell us about Napier Brown, how it contributed to the group’s financial progress last year and about Napier Brown’s business prospects.



Pieter Totte: Well last year was the worst year as a consequence of the sugar regime profit wise. [EBITDA], it came home on the bulk and the retail side combined with about 0.4% out of 108 million pounds turnover. Garretts came home with 4.6 out of 25.6 which is also partly sugar and dairy products.

But Napier Brown now going forward, I expect this year a number which is more in line with 4% of turnover. And I expect a growth of turnover of something in the order of 40%.

We service right from the top food manufacturers right down to the smaller food manufacturers. And we of course service the retail market under our brand name Whitworth and also own-label.

And our three year plan really sees that we are developing our brand names and that we are building that growth into the business.

I forecast personally that this business will go from 150 million this year which is the forecast in the marketplace but I expect this business to double in the next three years.



Harry Norman: The Garrett business, which was separated out from Napier Brown and focuses on supplying dairy ingredients to the UK ingredients and bakery market, did well in 2010. Please tell us about this business unit and its performance and prospects for this year.



Pieter Totte: It deals with the smaller food manufacturing industries on a national basis in this country. It had a turnover of about 26 million quid last year with a 4.6% margin.

It trades on a short basis. It has low stocks. It is a real trading business, a small team of people. And we are widening its range of ingredients, particularly on the dairy side.

And we are reinforcing our sales team because we go really national now from the North of Scotland right down to the bottom. So we see growth opportunities.

We also think that this business is now going slowly to the 30 million and in 2014 I expect it to grow to about 50 million.

And margin wise it’s [5%] [EBITDA] business, cash generative. And we are very fond of it. It’s got lots of opportunities and it operates in a segment where it hasn’t got an awful lot of competition.

It runs its products out of our distribution centre in Napier Brown in Normanton, combined with the sugar scenario, which is very efficient and can work on a just-in-time basis which is very attractive to industry.



Harry Norman: Haydens makes and distributes cakes, ambient and chilled patisseries and desserts, to the discerning retail grocery and food service customers such as Waitrose. Please tell us about Haydens’ 2010, the three year turnaround plan, and the factory modernisation and expansion.



Pieter Totte: We bought Haydens in 2003. It needed a lot of work. It did about 8 million pounds turnover. We've now grown it to roughly 30 million for this year.

We have the gross margin in the business but we have a lot of work to do on the modernisation of our plants and improving the tools we use.

We have successfully moved out of the factory our distribution centre, which opened two months ago, which is now one of the most modern picking and distribution centres in this particular sector; very well received by our customers.

And we now have therefore freed-up space in our base factory and the modernisation plan is now on the go. The first line is actually just installed and will be completed in the next two to three months.

We expect another 6% in margin to the bottom line. And I expect to be on that run rate in the course of next year which makes this business an 8% [EBITDA] business.

In turnover we expect this business to continue to grow at the same speed and will end up in 2014 in its three year plan to something like 75 million pounds. We have the space, we have the capacity, and we certainly have the clients for doing that.



Harry Norman: Well what is the group’s financial situation going forward?



Pieter Totte: We finished last year with a bank exposure of 19 million pounds. We have a vendor note still in the business of 2.7. So we finished roughly at 22 million pounds for the year.

Going forward, because of our profitability and our capital expenditure, we expect next year that we will also have growth, to have that slightly improved.

But then I can see going forward – depending on growth – that one can see that the gearing will go down. But in real numbers I can see a slight increase in that because you of course need more working capital to finance the turnover if you want to double it over three years. But the gearing is very low. The gearing is now down to 26.4%.



Harry Norman: What can investors expect from The Real Good Food Company over the next 12 to 18 months Pieter?



Pieter Totte: One will see growth on the top line and one will see growth at [EBITDA] level and one will see a decrease in gearing. And we feel we have some exciting things which are very difficult to tell you but I initiated last year to really start to expand our thoughts around our brands and that game is now starting and it will be very interesting to see next year what its progress is. But there’s a lot of value to be unlocked here.



Harry Norman: I take it it’s too early to start asking you about your dividend policy?



Pieter Totte: Well the interesting thing is that over the last two months I've learnt that the city is changing, particularly in the AIM company sphere, and are very much sort of saying, “Pieter have a look at it because it might again open up some funds that can only deal with you if you are paying out dividends.” So we might start to think next financial year to give that some good serious thought and it’s on the agenda to discuss.



Harry Norman: Remember Proactive Investors is not an investment advice service. Make sure you register at proactiveinvestors.co.uk for our weekly newsletter which will keep you informed about our articles, interviews and events. Thank you for listening.

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