just On Call: Britvic says BRIC demand a "major factor" in cost warning
- Britvic shares slide as costs soar
- Emerging market demand hits prices
- Group eyes cost cutting elsewhere in business
Britvic finance director, John Gibney told analysts that prices going forward, will be “heavily dependent on crops”
Britvic has said that rising demand for juices from the world's emerging economies has been a major factor in the higher-than-expected input costs that will hit the company's profits in its current fiscal year.
Unprecedented rises in the price of key raw materials, such as PET plastics and sugar, have prompted Britvic to double its projected increase in input costs, the UK-based group said today (24 February).
It said that input costs are set to be between 9% and 11% higher in its current year, which runs to the beginning of October. That compares to guidance issued only one month ago of a 5% to 6% increase. Analysts said that the fresh guidance will lead to lower profits forecasts.
Speaking on an impromptu conference call this morning, Britvic's finance director, John Gibney, told analysts that prices going forward will be "heavily dependent on crops".
"A lot of the increases we have seen this year in juice prices reflect not only crops but also a significant increase in demand for products like apples and oranges from emerging economies," Gibney said. "That will be a continuing pressure on juice costs."
The Robinsons and Tango maker, which also holds the licence to PepsiCo drinks in the UK and Ireland, saw its share price slide by 10% in early trading on the London stock exchange today.
Asked whether costs could be lowered by re-negotiating prices with suppliers, Gibney said it would be "absolutely unusual" to do so.
"In terms of hedging, most of the products we are talking about tend to be more of a one year venture," he said. "Like juice, the pricing depends to be heavily dependent on the quality of the crops each year so it's difficult to get much hedging beyond that.
"In terms of negotiations, these happen yearly and that typically happens in the first quarter [with retailers]. There are some categories where suppliers have gone back because of an extraordinary increase in prices, but it is absolutely unusual to see those negotiations happen at any time other than the first quarter."
For PET plastics, which are heavily reliant on oil supply, Gibney said that it is particularly difficult to renegotiate prices with suppliers.
"They are subject to the same vagaries that we are," the finance director told analysts. "They can't fix the price in the market place and, therefore, no-one will give you a hedge because they will be exposed under those same circumstances. It's the nature of the market."
Gibney said that Britvic may be forced to cut costs in other areas, including employee bonuses.
"There are things that we can do, we do have contingency plans that we have managed throughout the year," Gibney said. "There are also some things we can do around the discretionary spend. What we won't do is something that will have a long-term material impact on the health of our products."
Britvic still expects full-year operating profits to be ahead of the GBP135m (US$217.4m) reported in its last fiscal year, to 3 October 2010.
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