NAIRN’S Oatcakes has reported a “significant reduction” in underlying profits amid challenging conditions linked to the war in Ukraine and a “post-Covid” rise in ingredient, packaging, and energy costs – and warned that the trading environment continues to be tough.

New accounts show the Edinburgh-based company, which can trace its roots back to a small bakery that began life in 1896, lifted turnover by 7.2% to £43.8 million in the year ended May 20, driven mainly by increasing prices to customers.

However, profits were hit by “unprecedented cost inflation impacting all areas of the business”, including ingredients, packaging, labour, energy, and distribution costs.

The company, which manufactures oatcakes and biscuits for sale at home and abroad, reported that pre-tax profits had tumbled to £3.5m from £7.2m, though the prior year included income of £2.17m from the settlement of an insurance claim relating to Covid disruption.

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The accounts were lodged shortly after Nairn’s announced that long-standing managing director Martyn Gray was retiring from executive duties. He will be replaced in the top job by current finance director Colin Dingwall, though will remain on the board of the privately owned company as a non-executive director.

Mr Dingwall joined the firm in 2016 and was previously director of finance and investor relations at C&C Group, the drinks firm which owns Tennent’s Lager.

Writing in the accounts, Mr Dingwall said: “The company faced challenging trading conditions during the financial year to 20 May 2023 with unprecedented cost inflation impacting all areas of the business. The war in Ukraine and post-Covid supply tightness impacted key ingredient, packaging, and energy costs.

“The company has not been able to pass the full extent of these supplier cost increases onto customers through price increases. This has resulted in a significant reduction in underlying profitability in the year. In addition, the previous financial year included a one-off benefit from an insurance claim.”

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He added: “In determining levels of customer prices increases, the business actively considers affordability of its product range to consumers. Operating profit was better than internal forecasts due to stronger gross margins, foreign exchange gains, and cost savings.”

Mr Dingwall notes in the accounts that while sales volumes had grown during the year – turnover of its gluten-free and non-gluten ranges rose in the domestic market – growth was affected in the latter part by “higher retailer selling prices and slowing consumer demand”.

He said that Nairn’s export business, which sees it ship products to more than 30 countries, “endured a more difficult year with turnover down on the previous year”.

The accounts state that overseas turnover dipped to £5.835m from £5.975m, as UK sales increased to nearly £38m from £34.9m.

Mr Dingwall said: “The inflationary environment led to subdued consumer demand in existing markets. Entry to new markets was limited as distributors focused on working with existing brand owners to mitigate the impact of inflation. Turnover in the year was broadly in line with external forecasts.”

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Mulling the picture post-year end, Nairn’s incoming managing director, Mr Dingwall, said tradition conditions “remain challenging”.

“Although there are some positive signs that cost inflation is easing, consumer demand remains subdued in both domestic and export markets which limits potential for sales volume growth in the short term,” he said.

“However, the company believes that its business model is sufficiently resilient to weather the current climate and that there are long-term growth opportunities in both gluten-free and non-gluten free categories for its healthy product range.”

Nairn’s, which is ultimately owned by Peffermill Holdings, paid dividends of £2.43m during the year, compared with £3.06m the time before. A further £450,000 of dividends were approved and paid in relation to the year ended May 20,2023, subsequent to year end.

The accounts show that the company employed an average of 226 people over the period, up from 219. Payroll costs increased to £9.83m from £9.16m.