Crisps and exchange rates

There is quite a lot of good business studies in this short article which provides an update on the financial performance of Tyrrells Crisps - the premium crisps firm that was originally founded by entrepreneurial Herefordshire farmer Will Chase.

Tyrrells is no longer a small, niche producer of premium potato chips. The business has grown rapidly since it was bought by venture capitalists Langholm Capital in 2008.  When Will Chase sold his business to Langholm for £40million in 2008, the business had sales of £13 million.  Just three years later, sales have risen to £22.2m, with growth driven by increased distribution in major retailers, expansion abroad and an expansion of the product portfolio through new product development.  The UK is still the main market for Tyrrells, however the growth in sales to emerging markets looks like it might be significant for Tyrrells over the next few years.  The firm has benefited from a weaker pound, which makes the price of Tyrrells products cheaper in overseas markets.

Remember the acronym: SPICED:

Stronger Pound = Imports Cheaper & Exports Dearer

The Tyrrells example is what happens when the Pound gets Weaker = imports more expensive and exporting cheaper.

The Telegraph article points to the high financial costs of the venture capital buyout.  The structure of the financing used to buy the business means that interest costs of over £5million per year are being incurred by the firm.  However, that really isn’t relevant in analysing the underlying profitability of the firm.  What matters is operating profit (i.e. the profit earned from trading rather than how the business is financed). 

You can work out operating profit from the article by adding back the interest costs to the reported loss for the year.  For example:

Reported loss: £(5.1)m
Add: interest on loan notes: £5.6m
Add: interest on bank loans: £0.5m
Add: refinancing costs: £0.5m

Suggests an operating profit of approximately £1.5million on sales of £22million.

Why did Langholm invest in Tyrrells?

Langholm describe their investment in Tyrells like this:

The business:

Tyrrells is a high growth and emerging brand of premium potato and root vegetable chips. The products are manufactured from “seed–to-chip” at Tyrrells Court Farm. 

Investment Rationale

- Strong sector growth driven by the consumer’s desire for better quality food and authentic ingredients with provenance.
- Strong independent distribution base with opportunities to strengthen the breadth and depth of distribution to increase availability.

How Value will be Created for Shareholders:

- Sharpened the brand positioning with a focus on building the brand personality and its engagement with its core consumers.
- Invested in factory expansion to meet growing demand.

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