The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

AML Foods yesterday said it was “not terribly excited” about its first quarter net income more than doubling to $1.346 million, a result aided by a further 20 per cent reduction in shrinkage during that period.

Gavin Watchorn, the BISX-listed food retail and franchise group’s chief executive, told Tribune Business that despite the 105.5 per cent increase from the prior year’s bottom line, he and his management team were “not getting too caught up”.

Despite enjoying two strong back-to-back quarters, Mr Watchorn said AML Foods wanted to see how its traditionally weaker second and third quarters - covering the summer months and period to end-October - panned out before starting to celebrate.

AML Foods delivered improved profits despite top-line sales remaining flat year-over-year, declining slightly from $35.989 million in the three months to end-April 2013 to $35.379 million this time around.

The bottom line growth was instead due to increased efficiencies in areas such as buying and warehouse management, coupled with reduced shrinkage, which drove the company’s margins higher and resulted in a 5.9 per drop in the cost of sales - from $25.302 million to $23.82 million year-over-year.

And the improvement also came despite AML Foods’ Business Licence fee more than doubling year-over-year, rising by 186 per cent to $465,000 from $250,00 for the first quarter.

This sucked a further $265,000 away from the company’s bottom line, and appears to have been ‘broken out’ in the accounts to show shareholders and the investing public the impact of the Government’s 2013-2014 Budget tax increases.

Outlining some of the driving factors behind AML Foods’ improved showing, Mr Watchorn said the group had been able to boost margins by slashing shrinkage by 30 per cent over the past six months.

Inventory levels were cut by $2 million in the first quarter, aiding cash flow and boosting operational efficiency, with AML Foods looking for a greater reduction as Value-Added Tax (VAT) approaches.

And an early $2.5 million payment on its preference shares, which was due to be made this December, has reduced AML Foods’ interest charges by $175,000 per year - a benefit that will start to show in the current quarter.

The BISX-listed group has also announced a $0.02 per share dividend payment this quarter, based on the first quarter results, and while not quite in line with its ‘50 per cent of earnings’ pay-out policy, Mr Watchorn said it would be in line with this come year-end.

Meanwhile, Carl’s Jr was “beating expectations” after its first 30 days, giving AML Foods “encouragement” to press on with its search for a second site and further expansion for the hamburger chain.

Describing the results as “reasonably solid” given the current economic environment, Mr Watchorn conceded that the group may have “underestimated” the impact AML Foods’ growth strategy over the past three years had on management’s ability to run the business.

“We’re just focused on our business, and from an internal perspective we’ve got a period of stability,” he told Tribune Business, adding that the two Solomon’s Fresh Market stores, Freeport expansion and addition of Carl’s Jr had diverted resources away from day-to-day management.

Emphasising that he was “proud” of AML Foods’ management team for accomplishing what they did, Mr Watchorn added: “When you divert that amount of resources to growth and expansion projects, you don’t focus on your business like you should have.

“We saw some of that in the second and third quarter last year, and we’re just very much focused on the day-to-day business and being able to improve purchasing, logistics and warehouse management, and that in turn is helping us to manage shrinkage.

‘To get better results on flat sales, the key is to manage everything in-house, and we’ve done a good job managing those areas in-house.”

The AML Foods chief said shrinkage had dropped as a result of “tying down high theft areas”, and also from better buying, logistics and warehouse management, which meant there was less inventory/

“We’re just focused on every facet of the business, and drilling down and drilling down to make better management decisions,” Mr Watchorn said. “We’re incredibly focused on the job in hand right now, and everybody is moving in the right direction. You’re seeing that in the bottom line.”

Mr Watchorn said AML Foods’ inventory levels had “come down quite a bit”, and was looking to reduce them further prior to VAT.

“It’s a bonus because you’ve freed up cash flow, are operating more efficiently, and generating the same sales off a lower inventory,” he said.