Ice cream company refuses to dwell on negative

Standard & Poor’s (S&P) said the North Yorkshire-based ice cream maker’s profitability will be lower this year than it previously hoped, but held the company’s long-term debt rating stable at B+.

Like all food manufacturers, R&R has been hit hard by surging commodity costs during 2011.

However, Europe’s third-biggest ice cream maker insisted it is one of the lowest-cost ice cream makers and is passing on higher costs to retailers.

Last month the company published results for the January to end-June period which showed its gross margin declined by 3.4 percentage points year on year.

Gross margin fell to 24.4 per cent during the first half, from 27.8 per cent during the same period a year earlier, as higher prices ate into its profits.

“The rating actions reflect a reduction in R&R’s margins in the first half of 2011 due to a lag between increases in commodity prices and actions to increase product prices,” said S&P.

“Earlier this year, we anticipated that R&R would be able to improve its debt metrics materially with free operating cash flow and probable acquisitions.

“However, we believe that increasing commodity prices will weaken EBITDA (earnings before interest, tax, depreciations and amortisation) margins for the year ending December 31, 2011.”

R&R chief executive James Lambert said S&P was tarring all food manufacturers with the same brush, adding the company is increasingly strengthening as it invests a 350 million euro bond issue raised late last year.

He said R&R is gearing up for more acquisitions, after completing a 27 million euro deal for Pilpa earlier this month, and buying Rolland last summer.

“I don’t particularly get why they (S&P) have done it,” he said. “Our business is the same.

“It’s a bit like looking at all countries as one.

“The issue is there’s food inflation. All they want to know is ‘Have we got the power to pass it on?’

“(But) our risk has not changed and we will be generating cash.

“When all that comes in (funds are fully invested) we will have a very strong cash flow and fast-growing business.”

R&R’s interim results showed ingredients costs surged 43 per cent to 84.7 million euros from 59.1 million a year earlier.

As a result of this and higher finance costs, the company fell to a 1.5 million euro pre-tax loss, versus 2 million euro profits a year earlier. Revenues were up 27 per cent at 266.2m euros.

The company said while some of its margin fall was down to the dilutive effect of Rolland sales, “the rest is down to higher levels of promotions in the UK and price increases not achieved in Europe”.

R&R, based in Leeming Bar, supplies chains including Britain’s Tesco and Asda and France’s Carrefour. It said UK sales were more promotion-led than in Europe.

The company’s results showed it struggled to force through price increases in Europe “as our competitors have not sought to recover price increases to the same extent”. However, R&R said it is now in talks to increase prices abroad. “We believe sales price increases will be industry-wide,” it said.

Mr Lambert added: “If inflation in food is one to two per cent it’s quite difficult to get a price increase because everybody just sits on it.

“But when food inflation is 10-15 per cent, which is what it is in the UK, there’s an issue.

“We can prove that the price of sugar has doubled but we’re not going to put less sugar in.”

He added most of R&R’s price rises in Europe will feed through between January and March 2012, where it typically has 12-month contracts.

S&P is looking for the company to bring its ratio of EBITDA to cash interest closer to 2.5x in 2012. It warned a downgrade could follow if the company’s profitability does not improve and the ratio drops to 2x.

“We believe that ratings downside could stem primarily from extraordinary spikes in raw material prices, which could prevent a near-term improvement in credit measures or weaken liquidity,” said the ratings agency.

Mr Lambert said R&R continued to invest, with a £20m overhaul of its Yorkshire operations to drive innovation. He added the company had at least 75 million euros of its bond issue to spend on acquisitions, and was “actively pursuing” these.

R&R was formed from the merger of Richmond Ice Cream and Roncadin by owner Oaktree Capital Management.

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