AG Barr grows sales ahead of market but profit margins squeezed

AG Barr, the maker of Irn-Bru and other soft drinks, said it had increased sales 8% in the first half of the year but profit margins were flattened slightly by increased investment and higher costs resulting from the weak pound.

In a trading update for the 26 weeks to 29 July, the FTSE 250 company said the sales performance was supported by the success of last year's new product launches, including Irn-Bru XTRA, which has now been launched in England and Wales, and the low-calorie Rubicon Spring juices, which was said to be gaining distribution across multiple channels.

Margins will see a "moderate impact" from the combined effects of an increase in investment in product innovation and marketing, plus slightly later than anticipated phasing of price increases and generally higher operating costs, including the effect of weaker sterling on input costs.

Analysts expected this would see the group to deliver flattish first-half profits before tax in the region of £17m.

Management said the company was "well positioned to deliver against our expectations across the balance of the year", though acknowledged the wider economic environment continues to be uncertain.

"We have a clear strategy and a strong commercial plan in place, and we remain confident that we will deliver a full year financial performance in line with the board's expectations."

The 8% sales gain came against a market backdrop where value increase by 3.5% and volume by 2.1%, according to IRI UK soft drinks data.

With the ever increase on healthy eating and drinking, AG Barr has been conducting a sugar-reduction programme that is expect to be completed by the end of the financial year next January, with the reformulated products are phased in across the next six months.

Investec analyst Nicola Mallard said it was a strong start to the year, with Barr’s volume performance good, driven by innovation and distribution gains, and she expects unchanged first-half profit of around £17m due to investment phasing and leave numbers unchanged for 2018 ahead of the portfolio changes planned for the second half.

"The focus in 2H will be delivering the changes to the portfolio and the group remains on track to deliver the target of 90% of the company-owned brands containing less than 5g of sugar by the end of the financial year.

"Considerable consumer testing has been done, with very encouraging results, and these products should sit well with growing consumer preferences for low/no sugar beverages."