C&C Group plc (CCR) Earnings Call Transcript & Summary

Hello, and welcome to the C&C Group PLC Full Year 2022 Half Year Results Conference Call. [Operator Instructions] Just to remind you, this conference call is being recorded. Today I'm pleased with David Forde, the CEO. Please go ahead with your meeting.

Good morning, ladies and gentlemen, and welcome to the C&C Half Year Conference Call. My name is David Forde. I'm the CEO. And I'm joined by my colleague, Patty McMahon, who is our CFO. In the next 30 minutes or so we want to give you a brief update as to where we've got to as a company. And as I said, then we will open up to Q&A. I refer you to Slide 2, to the disclaimer. And now I'd like to move on to Slide 3. And I think for many of you that would've been on this call 6 months ago when we did our end-of-years, I think we were certainly looking at an uncertain time, a difficult time to exactly predict how the industry and a company like ourselves, how we were going to navigate our way out of COVID. But I think you will have seen from our results that we're probably ahead of consensus, possibly ahead of where the external world expect us to be. And I think that is good news. I think what's most encouraging is that are outlet-based. I mean, we are a business that relies heavily on the on-trade. And what we've seen is that the outlet base has opened up quite significantly. And we are now trading with around 90% of the outlets that we were trading with pre the pandemic. That's good news. Patty is going to demonstrate later how our revenues in those outlets is also beginning to come through very, very strongly. We've relied very, very heavily through the pandemic on the off-trades as the on-trade was closed. And again, I think what we've seen, and again I'll show you a little bit later what the momentum that we've had for some of our key brands in the off-trades that has continued through the half, and that gives us great confidence for the future. As I said to you 6 months ago, brands are extremely important to C&C, and we're committed to investing in our brands, and that we have done with Bulmers, with Magners and with Tennent's. We've invested more heavily than normal. And we've seen that strengthen the equity of these brands. And again, I'm going to talk about that in a little bit more detail when we talk about the strategic update. We've also talked about our journey towards 1 C&C in GB, and that has commenced. We're making good progress. And we're pretty confident that we're building a stronger, more integrated business in the U.K. that has an even more compelling proposition to offer customers across the on-trade. And as we said, it's also incredibly important that we continue to commit to our sustainability agenda regardless of the challenges that COVID has presented to C&C. Our guiding light is that we want to be a company that is well-respected by consumers, by customers and by society at large. And we will continue to do what's right for the planet and in the category that we compete. It's fair to say particularly in GB there have been challenges around the supply chain. And again, what we have tried to focus on is understanding what we can control, control the controllable. We have a very, very strong in-house logistics infrastructure, and we have worked very, very hard with our colleagues and with our customer to try and smooth out and to deal with the many, many challenges that undoubtedly the supply chain constraints have presented. And again, we'll talk a little bit more in detail about the type of actions that we have taken to mitigate those challenges in the short term. Again, we will also talk in a bit more detail later about cost. And there is no doubt that we're heading into an inflationary period, but how we're going to mitigate cost and importantly how we will use price to ensure that we're well insulated from cost increases moving forward. And as you know, during the half, we did have a rights issue. We have strengthened the balance sheet. But also in the last half we've demonstrated again something that C&C has always been great at, which is managing working capital very effectively, managing cash very effectively. And we are beginning to see that the balance sheet of C&C has strengthened significantly in the first half of the year. And that gives us a lot of confidence moving forward. And with that now I'm going to pass over to Patty. And he's going to take you through the financials in more detail. Thank you.

Lovely. Thank you, David. And good morning, everybody. Turning first to Slide 4, on the summary of our H1 results and a strong recovery. We're treading ahead of plan. Revenue at EUR 657 million, with 65% up year-on-year. And that represented about 73% of FY '20 pre-COVID levels for the 6 months. Notably, that revenue trend improved to 95% of FY '20 in Q2. And that was aided by decent weather, clearly the Euro championships and the all-important easing of the on-trade restrictions. However, I would highlight that some restrictions did remain in place throughout that entire period. In Ireland, for example, it was the end of July before indoor hospitality reopened. And operating profit of EUR 16 million reflects that strong Q2, as well as EUR 9 million of cost savings in the half. And the total at EUR 5 million of furlough support and temporary salary reductions. We ceased the furlough supports games earlier in the summer. And the group was breakeven in terms of profit in May. And it was profitable again from June onwards. Looking at it by segment, GB, Ireland and our international divisions were all profitable in H1. Matthew Clark Bibendum losses were restricted to EUR 4.3 million in the half, and that's EUR 16 million improvement year-on-year. Our net debt was EUR 246 million post-IFRS16. And clearly strengthened following our rights issue earlier this year. And that means we're very well-positioned to obviously meet our remaining tax deferral obligations of about EUR 42 million, our working capital requirements as we continue to recover. And most importantly, I think to realize our growth potential in the medium term. Turning to Slide 5 now and on a closer look at our cash flows in H1. With working capital inflow of EUR 12.4 million, it's clearly a very pleasing outcome for us. And David's already mentioned free cash flow conversion at 85%, it is particularly pleasing. The main driver of that was the debtor securitization facility and an inflow of about EUR 70 million and the half. And that more than offset the deferred tax payments that I mentioned, and an investment of stock. We invested about EUR 27 million, I think, in stock in the first half of the year. Given the strength of our post-raise balance sheet, we returned also to more normalized supplier trading terms in Q2, and that's clearly assisted in our management of working capital. Debt collection continues to be good, and we've written back another EUR 1.8 million, a further write back of EUR 1.8 million from our COVID bad debt provisions that we created at the end of FY '20. For clarity we had EUR 53 million of tax deferrals on our balance sheet at the end of August, and EUR 42 million of that becomes repayable in H2. Lastly, on this slide, and we have and will continue to invest in network improvements, growth CapEx, and behind the ESG commitments that David's already referenced. If I turn now to Slide 6. Trading momentum coming back into Q2 was really encouraging. Obviously restrictions were still in place in many key areas, and that's impacted our throughput, our rate of sale. Overall it remained below FY '20 levels, which again is understandable given the restrictions. Last month we transacted with at 90% of the number of distribution points that we transacted with in the same period 2 years ago. And as you can see from this chart that the volume and throughput line, I think it's the orange line there, has improved recently too. And that's a really encouraging sign and an important sign, I think, of solid underlying consumer demand in the on-trade. If we turn to Slide 7 for more detail on the shape of that recovery in H1. And as I've said earlier, H1 net revenue represented 73% of FY '20 pre-COVID levels. And within that Matthew Clark Bibendum was at 66% of FY '20. And that's clearly impacted by Matthew Clark's on-trade bias. And so it's typically exposed to about 90% of the revenue in Matthew Clark Bibendum comes from the on-trade. And again, reminder that that was despite the restrictions that were in place on the capacity constraints that David's alluded to already. In GB as a division, the restrictions were eased ahead of Ireland generally. And again, mix of channel revenue, the Euro championships, all supported net revenue back up to 85% of FY '20 levels. Ireland's recovery in the top line looks the strongest of all the divisions, and that's despite the lasting restrictions in Ireland. And I'd remind everybody that Budweiser is in the FY '22 numbers, and that wasn't a feature of -- or it wasn't a feature really in FY '20 because that's a big -- it's a big difference to call it out there. In our presentation in May we outlined our focus from a brand and portfolio perspective, and we called out cider and premium beer specifically. And whilst it's difficult to read massively into H1 or this recovery data, and the build back in Q2 has been really encouraging for both cider and premium beer. So cider's net revenue in Q2 represented about 91% of same period 2 years ago pre-pandemic. And for premium beer net revenue was actually in growth compared to 2 years ago, representing 105% of Q2's number prepandemic. So that's really encouraging. Equally, on the margin side, premium beer margins are already back to FY '20 levels. The cider margins, not quite back to FY '20 levels, and that's largely impacted by channel mix. That is the Irish on-trade opening later than GB. In May we also spoke about distribution system strength. And David will cover it all shortly. But here we see Q2 net revenue in wholesale was at 100% of FY '20 levels for the quarter, and that's with cash gross margins improving on prepandemic levels. Turning to Slide 8. And whilst the recovery trends are clear, so too are the impacts of some of the macro conditions that we face into. Firstly, the well-publicized logistical capacity constraints that are impacting our sector and so many other sectors place considerable pressure on our system and on our people. We've met these challenges with operational efficiency initiatives. I'll call out a couple of them now. And we're rationalizing the product range, our SKU count. And that speeds up picking, frees up space in depots and generally attempts to make life a little bit easier and a little bit more streamlined for our people and our customers as well as our suppliers, of course. We've introduced minimum order values, which improves margin per drop, delivery. And again, simplifies the supply chain for us. We're actively limiting the number of deliveries per customer as well. Again, that's not only good practice and environmentally sound, it also improves our overall cost to serve at a time when the cost to deliver is increasing due to people and driver shortages. We've highlighted before OTIF, which is our measure of on-time in full. We've talked about it previously in Matthew Clark Bibendum. It was key to restoring the business in 2018. And pre-COVID, prepandemic levels we regularly enjoyed maybe 95%, 96% was a good OTIF number for us. Currently, we're at about 75. In different circumstances that would be unacceptable. But with inbound OTIF from our suppliers who typically don't own their own delivery fleet, at the end of August, it was at 36%, not the usual 95%. You get a sense of the challenges that we're facing into. That said, I think we're faring well, relatively speaking, and we'll touch on that a little bit later on. The second macro headwind is cost, clearly, and direct people, energy, et cetera, and the spread is pretty broad. And we previously announced EUR 80 million of cost reduction program. Hedge positions and operational efficiency initiatives that I've just talked about provide some protection this year. But the headwinds are expected to become more obvious for us into FY '23. To that point, we'll take price increases to protect value chains. We've communicated these price increases to our on-trade customers earlier this month. And they will become effective next month. And look, these are controlled, and from my point of view, very pleasing set of numbers. And despite the obvious macro challenges, we remain really enthusiastic for the medium-term opportunities and potential for this business. So thank you. And I'll pass you back to David.

Thank you very much, Patty. And I will now move on to Slide 10. And again, just to remind you that for the medium and long term we remain committed to our strategic choices and to our 3 strategic pillars. And that is namely how do we continue to build an attractive portfolio of owned and agency brands within C&C, how can we continue to reinforce and build our system as the preeminent last mile drinks distribution system in the U.K. and Ireland. And again, as I said earlier, how do we continue to play our part in ensuring that we are a sustainable company and that we are doing the right things for the planet and for society within the U.K. and Irish markets moving forward. And if I dive into those in a little bit of detail, I have one slide on each. And looking at brands, we've talked about committing to our brands and maybe fueling our brands for growth. And in the last half we increased our investment in brands by somewhere in the region of EUR 5 million versus last year, about EUR 3 million versus 2 years ago. So again, really, it's deciding to invest behind our brands. And in particular, Bulmers, we've launched a new campaign on Bulmers. And we've also launched a campaign focusing on sustainability of the Bulmers brand, the [ No Bees No Bulmers ] campaign. What we're seeing is that the brand health of Bulmers continues to increase. And what we've seen is that the price premium that Bulmers is commanding in Ireland has increased. And most important what we're seeing is that the value share and the volume share of Bulmers is back in growth. And you will recall that for many years, the Bulmers brand had been under pressure in Ireland, it had been losing market share. That position in the last year has been reversed. And as I said, it's -- the brand is back in growth. The health of the brand is growing. And what we're seeing is our nearest competitor in the market is losing volume and value market share, and its pricing in the market is decreasing, whereas Bulmer's pricing in the market is increasing. And that is a real sense of the affinity that consumers have with the Bulmers brand in Ireland. And we also grabbed the opportunity, which is rare for any Scotts on the call, but Scotland did make it to the Euro championships. It had been the first time in many decades. And again, for Scotland's most-loved beer, it was the appropriate time for us to get behind the nation to get behind the football fans for a period. And again, we grabbed that opportunity with Tennent's. And we were very, very visible across both the on-trade and the off-trade. And again what we've seen is that despite the scale of the Tennent's brand in Scotland, it's still managed to notch up its share. In GB, our story with Magners has been a little bit more challenging. It's been an incredibly aggressive environment from a pricing point of view insider over the past 6 months. We've attempted to maintain the premium on Magners and not discount as aggressively as some of our competitors. What we see is we did give up a little bit of share. But again, in the last month or 6 weeks or so, we're beginning to see that recover. In the on-trade, as Patty said, we're back to trading with 90% of our outlets. But to give you a sense, with a brand like Tennent's, Tennent's is trading in 94% of the outlets that we were trading in August '19. So what you see is our brands are in the right outlets. Our brands are in the winning outlets in the market. And as we also said, we started to roll out our premium beers. And we consider Scotland a very interesting test market in terms of our capacity to build our premium beer portfolio across the U.K. and Ireland. But we have begun now to roll out Heverlee, Menabrea and our agency brand Innis & Gunn more aggressively in the market. And as Patty had indicated, we're seeing very, very strong growth of albeit a very, very small base in our premium beer business at this moment in time. But what it gives me is it gives me confidence that with our brands and with our distribution power we have the capacity to get the right brands into the right outlets at the right price points for our customers and our consumers. And whether, as I said, it's in premium side or in premium beer, there is at least evidence at this moment in time that when we put the right brands in the right outlets, we are able to deliver growth and to capture share from our competitors. So as I said, by and large, early days on I would say our brand refocus, but the idea that we can continue to build premium brands and trade consumers up there, I have increasing confidence that we will be able to deliver that in the weeks, months and years ahead. And if I move on to Slide 12. Of course, again, a lot of work going on our system. As you are aware, in GB we had 3 companies, TCB in Scotland, our beer business; Matthew Clark, our wholesale business; and Bibendum wine, our premium wine business. And we remain convinced that if we can bring and streamline those offers, we can become even more attractive to consumers. We have the potential to offer the most premium beer and cider brands together with a fantastic wholesale system and together with an outstanding wine portfolio. And in that context, we're streamlining our business to strengthen that proposition to consumers. We had 3 managing directors in the U.K., we had 3 management teams. We had 3 back offices supporting each of those individual business units. And we're now in the process of streamlining that under 1 strong management team in the U.K. C&C GB. We will still retain the commercial brands, TCB, Matthew Clark and Bibendum, but we are actively stripping out all the necessary cost and duplication in the back offices at this moment in time. We are also working on our network. And we have now moved to one truck delivering to one outlet. Heretofore, we may have had a Bibendum truck and a Matthew Clark truck called to the same outlet in England and Wales. Equally in Scotland, you may have encountered outlets where a Matthew Clark truck and a TCB truck called to the same outlet. That we have now eliminated. We have created one strong logistics and warehousing footprint in the U.K. And we've just recently opened our latest distribution center in Edinburgh. We've consolidated our Matthew Clark distribution center in Glasgow into the TCB distribution center. So one venue now in Glasgow. And more or less, at this stage, our logistics and warehousing footprint is complete. So one customer, one delivery with an enlarged range of product from C&C GB moving forward. And as I also said, we want to be a technology-driven business in U.K. and Ireland. And again, e-commerce and in particular B2B is an important element of that. And here I'll just give you a sense of the progress we're making in transitioning our customers from what I would call the more traditional ways of engaging, and whether that's through customer contact centers, whether that's true sales reps taking orders, but we're moving now to a more technology-driven business where you see there in Scotland, where 56% of all orders are now coming through our B2B portal. In Matthew Clark it's 59%. Since we last talked, we've really just turned on B2B in Ireland, and we're already up at 32% of all orders coming in through online. And in November of this year, next month, we will turn on Bibendum to B2B ordering as well. What we see is customers like the B2B portal. They engage more deeply with our ranging when they order online. They order more products via online than they do through the more traditional methods, whether that's customer contact center or phone calls, et cetera. So again, our ambition to transition all of our customers to online engagement and online interaction, that journey is well underway. And that we'll continue to pursue in the months and years ahead. And finally, on our sustainability agenda, again a lot that we're very proud, a lot that has been done again in the last 6 months. We have now transitioned on the environmental side, Wellpark. All of our brands have transitioned out of plastic into cards. That's done. And we're in Clonmel working through the exact same process. We're replicating what we did in Wellpark, now in Clonmel, and we're beginning now to move a lot of products out in card rather than in plastic. We have set ambitious targets on scope 1 and 2 for C&C, reducing our emissions by 12% by FY 2024. And we are now, I'm pleased to announce, in a position where in both Wellpark and in Clonmel, all of the energy that we use in those 2 large sites is now fully from renewable sources. So again, I think a real milestone on our sustainability journey from that point of view. On the social side, we have embraced ESG targets within the company for all colleagues, an element of all bonuses, which we have recently reintroduced, contains an ESG targets. Again, we are extremely conscious of creating a culture and an environment in C&C where colleagues really enjoy coming to work. And whether coming to work means working from home, working in an office or working in one of our manufacturing facilities, we want to create a culture and an environment where people feel proud, but also where we're embracing the flexibility that the new world offers us. And we've recently just announced our agile working policy, which has been very, very well-received by colleagues. Again, we all understand that the last 18 months have been challenging for our colleagues. And again, we have taken that very seriously within C&C. We've recently trained up 52 internal mental health champions to support colleagues from within the business, and that's supplementary to the employee assistance programs that we have externally for colleagues as well. So again, there's a lot of work being done by us to make sure that the environment our colleagues are in is something that's sustainable for the future and that we truly recognize the disproportionate efforts that they've made in the last 18 months, that that's valued and that we make sure that our colleagues are fit-for-purpose for the weeks and months ahead. And finally, on the governance side, I mean we're proud that COP has decided to come to our home, to Glasgow in Scotland. It's the home of Tennent's. Tennent's was this year awarded the most sustainable brewery in Scotland award by the Scottish brewers' association. And again, we're actively involved with COP. The Tennent's side of Wellpark is going to be used to showcase some of the latest initiatives on sustainability by a big manufacturing plant like ourselves. And we're busy working with government in Ireland on the implementation of MUP. Again, we have a lot of experience on the delivery of MUP in Scotland, and we've taken that best practice over to Ireland to engage with the authorities there and to make sure that that can be delivered as effectively as possible. And again, in our collaboration with Portman, which we recently rejoined. Again, I think it's highlighted our commitment to ensuring that alcohol is marketed and enjoined in a sustainable fashion within both the U.K. and Irish market. And we continue to invest in Portman, and we continue to roll out the drinkaware programs in terms of responsible drinking to our colleagues internally. So again, a lot of work taking place in the area of sustainability. I'm convinced that it's only sustainable companies that will win in the market. Consumers are demanding and customers more so today are demanding that they engage with suppliers that really have sustainability in their heart and souls. We are now hoping to get to a point of collaborating with our on-trade customers in GB to get to 0 carbon pubs. And the only way that our customers will get to 0 carbon pubs is if they really engage with suppliers like ourselves, and particularly last mile distributors like ourselves that are very, very efficient. And again, we're seeing lots of fantastic collaboration in that context. So again, I just wanted to give you a feeling across our 3 pillars of investing in brands, investing in our system and investing in ESG and sustainability that even in the last half year, a difficult half year, we continue to make progress. And in terms of the outlook, I refer you to Slide 15. And I think what you'll have seen from the slides that Patty has presented today, that -- that we have momentum, that we have growth, and that thankfully the business has returned to profit growth, and again, great cash generation. I think what you will see is that there's no doubt that we have headwinds, whether they're supply chain headwinds or whether they're cost headwinds, we are -- what you would see is that we're dealing with them very, very effectively. On the supply chain, I think the type of initiatives and actions we're taking with our colleagues in our supply chain will allow us to be one of the better-performing logistics and supply chain operators within the market. We are not where we want to be in terms of our service delivery to customers today, but I'm pretty confident we are better than most in the market at this moment in time. And we are striving hard to get back to the incredibly high standards that we've set in C&C in the past. And we will get back there in the not-too-distant future. We're working with our customers to ensure we deliver Christmas. Christmas is looking like it could be reasonably strong. There is a real sense that many, many consumers lost Christmas last year. Certainly in the work environment the Christmas party environment was completely lost. When we talk to our customers at this moment in time, there are encouraging booking signs. And what's clear is consumers will be getting out partying earlier. They'll be getting out in smaller groups, and they'll be looking to do it as safely as possible. There's even evidence that some Christmas parties this year may be -- may fall into January where people want to get over the Christmas period at home with their family of friends before they celebrate with their colleagues in work. But again, we're working on smoothing demand, simplifying our ranging to make sure that we can deliver the appropriate range to our customers so that they can deliver a great Christmas. As I said, we're well on the way to optimizing our C&C GB business. That will make us more efficient, more effective. But more importantly, we will deliver a better range of products and a better range of service to our customers in that market moving forward. And then, as I said, MUP, we're well on way. We've done a lot of work on our ranging, on our pack sizing and on our price point management to make sure that when MUP goes live we'll leverage the learnings from Scotland and make sure that we can maximize our position, maximize our brands in that new context, that new reality in Ireland. As to what's finally, then that leads us to the position where we're giving you some guidance today -- excuse me, on our profit expectation, where we indicate here that we expect a profit in the range of EUR 50 million to EUR 55 million. That's assuming current conditions prevail, that we don't have a return to significant restrictions and a difficult COVID environment again. But on that basis, we're guiding somewhere in the region of EUR 50 million to EUR 55 million. I think that restatement of guidance I suppose is indicative of a growing confidence that we have within C&C with regards to our business and its ability to continue to grow and prosper in the U.K. and Irish markets. And finally, in that context, we do invite you to our Capital Markets Day, which we will have on January 19, where we'll get more time, hopefully, to meet face-to-face and take you through in more detail the plans that we have for our company for the next number of years ahead. And with that now I'll wrap up, 30 minutes, and I'll hand over to Q&A.

[Operator Instructions] Our first question comes from the line of Patrick Higgins of Goodbody.

Firstly, just on the 3.5% price increase in GB. How has that been received by customers? And how should we think about, I guess, elasticity of demand? Are you guys moving ahead of the market? And could that potentially impact volumes as you go into the Christmas period? And secondly, just on, I guess, the competitive landscape in the U.K. distribution side of the business, have you seen potential share gains there? Just maybe just an update on that side of things. And then finally, when you look into next year, I guess aside from COVID, [ HEM ] and any kind of issues with the recovery, are there any reasons why you don't think you'll be able to recover back to pre-COVID levels of profitability, particularly given, I guess, the additional EUR 18 million of cost savings coming through?

Okay. Maybe I'll make a few comments, Patrick. And Patty can build in as well. I think on price, I think that there is a growing understanding with the trade that the cost pressures that we've experienced are genuine and real. I mean, I think that price discussions with customers are never straightforward. But I think in this case, at this moment in time, by and large most customers understand that there is real inflation in the cost base. I mean, we have increased salaries with our drivers. We have increased salaries with our warehouse staff. And we're also -- our customers are seeing -- if you're running a pub, hiring a chef, hiring wait staff, hiring front office outlet staff, that's also increasing in cost. So I think that we're pretty aligned on that. We've announced the price increase. It's 3.5%. It goes live on the 1st of November. And we will watch with interest the degree to which we can land that price and not see what's referred to as drift in the price increase over the next number of months. But I think that the discussions have been more constructive this time around than maybe they've been in the past. But it's always challenging. On the competition side, I think that there's no doubt that the supply chains are struggling. And the -- I think that our sense is -- and we have struggled as well. I mean our OTIFs are not at the levels that we would like them to be. We're normally somewhere between 97% and 98% on OTIF. So we're well off that. And what I found interesting was in a couple of cases we lost customers in the last couple of months. And what was interesting was we lost customers, but 2 weeks later they came back to us. So clearly, there were customers who thought maybe our service levels were not where they should be. They went elsewhere and they found that they were even worse than ours. So I think relatively speaking, our service levels are very competitive in the market, but they are challenged. I think some routes to market are beginning to feel it's very difficult. I mean we are a business that's balanced. We have a branded business and a distribution business. If you're a stand-alone distribution at this moment in time, I think it becomes more challenged. And so I think that's a sense of where we are there. Growing -- gaining market share has been difficult. I think the reason it's been difficult is because of the constraints we have on capacity. I think we are very reluctant to take on large new bits of business if we can't deliver an acceptable service level. So I think our future business book, if I could call it that, is pretty full, but we're happy to be very, very selective in terms of what type of business we take on. And I think our focus at this moment in time has been on optimizing the existing customer base and making sure that we are dealing with businesses where we make a fair return. And in some cases, there have been business for all kinds of legacy reasons where we have been making an, what I would call, consider an unfair or unattractive return, and we slowly try to migrate ourselves away from that. And then maybe on the -- I'll leave you on the COVID question.

Yes, yes, yes. So look, well, maybe I'll go back maybe just to the price increase on, Patrick, and just clarify. Look, I won't comment on our view on elasticity. What I would say though is we've gone out with a headline price increase of 3.5%. We don't need and wouldn't expect necessarily to hang on to all of that 3.5%. As I'm looking at the costs and some of the cost pressures, I'm seeing maybe mid- to high single-digit pressures at certain points for next year. So we need maybe -- only part of that price increase to offset the cost challenges that we've got. And David has already spoken to the customer reaction. I mean, look, we never want to be uncompetitive with our pricing. That's not what we're about. So again, we'll take a pragmatic view on pricing as it evolves. David's mentioned as well the competitive landscape and our share wins. And to give one example of how we're selling capacity more efficiently and addressing some of those unattractive returns that David has alluded to, we're selling less water today than we used to on the back of our trucks. So water is the lowest margin product that we transport around and we deliver. So we're actively focusing on not doing things like water and doing things that have a higher return on us. Look, lastly, and to pick up your point about FY '23. Look, I think we have to remain cautious. We've reinstated a profit expectation range of EUR 50 million to EUR 55 million for this year. I think that's, hopefully, indicates a degree of confidence, growing confidence that we've got. But I think it would probably be wrong to be too definitive about the challenges for next year. Maybe at the Capital Markets Day we can be a little bit more open. But those macro challenges, they're real. The actions we've taken are very real as well. And the price increase, the operational efficiency pieces, we feel very confident about. But we're not yet going to talk about FY '23 profitability.

Our next question comes from the line of [ Mandeep Sanger ] of Barclays.

I have a couple, if I may. The first one is in your rights issue presentation that you gave in May 2021, you gave an FY '22 sales base case recovery of 66% versus pre-COVID levels. Obviously currently the on-trade is operating much ahead of that in sort of the 90% range. How is your base case for FY '22 changed? And then just on the second question, you've commented on the strength of your balance sheet and the strong cash flow generation of the business. How should we start thinking about sort of potential -- the potential return to dividend payments come the end of the year? And maybe sort of what conditions would you need to see for you to be comfortable to returning to paying dividends? Those are my 2 questions.

I'll take both of those, if that's all right. So look, the rights issue base case scenario, and I remember saying at that time, designed to be prudent. It was a different time. I think we've been really encouraged with how the business has performed and how the sector has recovered in Q2. But clearly Q2 far exceeded the base case assumptions. And that's on a number of levels. I mean, the number of outlets reopening exceeded our base case assumption. And then throughput, frankly, and consumer demand has come back more strongly than we might have expected as well. So I think it's been a fantastic Q2. There have been some one-offs in there. Like I said the Euro championships, which we knew about, weather was good. I think the biggest single change is probably the consumer reaction to the restrictions being lifted. On the second point, the strong balance sheets and cash flows and how we might think about dividends. Well, look, we're still very focused on doing what's right for the business, making sure operationally we're positioned to take advantage of growth opportunities when they come. Clearly, our focus is on the capacity constraints now and being as efficient as we possibly can be. It's also on getting back to our stated leverage ambition of less than 2x net debt to EBITDA. I think at some point next year, clearly, as a Board, I think we'll talk about dividends. And we'll talk about capital allocation more generally. But if there's growth opportunities there to invest and win market share if conditions allow, I think that's all in the mix. But that's something for next year.

Our next question comes from the line of Alicia Forry of Investec.

My first question is on your full year guidance, which looks like it implies about 30 -- high-30s million euro of operating profit in H2, which is still quite a ways below precrisis levels despite the good momentum in the on-trade that you've been highlighting. I was wondering if you could discuss some of the biggest components of the cost headwinds that are offsetting the savings and price increases and therefore keeping operating profit so far below the pre-crisis level in H2? And then my second question is, I understand you're able to get your product to your customers in the on-trade business. But I was wondering if you're seeing any difficulty in getting your branded products delivered to off-trade channels in any areas where you're not in control of that journey? Are you seeing any difficulties there? And then a final sort of admin one. Will one C&C initiative change how you report the Matthew Clark Bibendum revenues and profit?

Yes. Again, look, maybe I'll take the first and the last one then, Alicia. Look, the guidance number is a positive. I think for H2 we're building back. I appreciate it's below pre-pandemic levels for H2. But I think that's part of the journey we're on, and we're building back. So I look at H2 -- sorry, Q2's revenue performance. You extrapolate that out, I think that gives a lot of comfort. I think it's right to be cautious about Christmas because we're not entirely sure exactly the sort of -- the shape of that and hence the range. But I'd see it as a positive. I mean, it's a natural sort of evolution of the build back. And clearly, we're not anticipating Matthew Clark to be at the level it was at in H2 last year, although the EBIT margin percentage is building back nicely, but it just won't be as high as it was 2 years ago. And that's just a factor of time, recovery and run rates. So again, I view it as a positive and a necessary link into hopefully more normalized trading completely for next year. I think the -- the last point around the segmental reporting. Yes, I think it might -- and again, we'll take some soundings on that in advance at the Capital Markets Day. Clearly, reporting Matthew Clark and Bibendum separately from GB isn't always useful. We don't want to lose the visibility, but we might look at how we best reported to give the best insight to you guys and investors going forward. So yes.

And maybe just, Alicia, on your second question. No, I think it's been well-documented in the trade that the retailers are struggling with their own supply chains and there's lots of talk of shelves being empty in certain categories. I think, again, as Patty alluded to, most notably in the likes of water. I think where the real struggle is in shipping a lot of product from the Far East for large retailers and the likes of Christmas toys and that type of stuff, bulky product, I think, will be a tremendous challenge into the year-end. If you think about our business, I mean, we're -- a couple of things. A, we're sourced locally in Ireland and the U.K. So we're very close to our retailers, but also our product is very, very valuable to retailers in terms of their customers. I mean, when you buy a case of beer or a case of cider, many retailers refer to that as a basket builder, it's quite often one of the most valuable products you can buy in a grocery store. So the trade are very supportive of making sure our product is available. And finally, I mean, we're already shipping product into our retailers for the Christmas build. I mean, they are struggling, I think, with bringing some product internationally. And what they're doing is that they're dealing with some of the domestic stuff quite quickly and even into the end of this month and early into November. We're working very hard with the large retailers to make sure that our stocks are available. So I don't foresee any significant issues on our side. I do think that generally that it may be a more challenging environment, broadly speaking, for large retail for the next couple of weeks and months. But again, I'm sure that they're working very hard to try and minimize the impact for their customers.

[Operator Instructions] Our next question comes from the line of Damian McNeela of Numis.

Yes, just a couple for me this morning. I think, David, you touched on the fact that some of the efficiency measures that you brought in, I was wondering if you could give us some color on how customers have reacted to that and whether there was a feeling that you can sort of increase adoption to help sort of drive profitability across the business. Then in terms of minimum unit pricing in Ireland, obviously you're working towards that. But is there any indication of timing on that front? And I was wondering whether -- clearly we had the autumn budget yesterday, it didn't make an appearance for England and Wales, but I was wondering if there was any sense of what the trade was, sort of thinking about on MUP in England and Wales would be. 2 for me, please.

I think to give you a sense on some of the -- some of the things we're talking about with our customers regarding efficiency, I mean I think the first thing is that customer engagement on working together to deliver, in particular, Christmas has never been higher. We are -- as Patty said, we're streamlining our ranging which again I think may have got too broad. And I think some customers are beginning to realize that 18 flavors of tonic and 17 or 18 gins in the back bar are not absolutely necessary, 5 or 6 gins and maybe 2 or 3 flavors of tonic will get them through the Christmas period. What we've also seen, we've introduced as an example minimum drop size. It's now at GBP 500. There were times where we might have dropped a few cases of beer or cider or water to an outlet GBP 50, GBP 60, GBP 70, we simply can't afford to do that anymore. The trade, they understand that. We would have done things like single bottle pick on wine in the past for, in some cases, low-level value wine. Now we say, no, it has to be a case. Again, I think customers understand that. So delivery frequency, in some cases, and maybe unnecessarily, we might have delivered twice or 3 times in a week to an outlet in the center of London. Now we're asking the question, will once a week do or going to be twice a week, but really eliminating unnecessary delivery. And by and large, what we're seeing is that the conversation, it's constructive because I think that the industry realizes that we're in this together and only through collaboration will we find a way through it. So I've never seen such constructive conversation, particularly with large customers, as we've seen. I'll give you an example, we have a large hotel chain in the U.K., and they've decided to give up some of their bedrooms to take in stock in October to be prepared for the busy November and December period. I've never seen that in my experience in the U.K. hospitality industry moving forward. So lots of very, very different initiatives being implemented. Just -- maybe I'll just -- I'll let Patty take the MUP question. But I think just on the budget, I think broadly speaking the first thing is I think the trade will have welcomed the budget. I think for the on-trade it was supportive. I think we still need to see the detail on the excise duty changes that the Chancellor referred to yesterday. By and large, the principle of lower alcohol products being taxed at a lower rate than higher alcohol. For a business, that sells a lot of beer and cider. That probably makes our category potentially more attractive. So that's, from our point of view, is positive. Of course we're an on-trade heavy business and for draft beer and draft cider, again to be advantaged potentially in the on-trade. I think that's also positive news. But I think more broadly, just the fact that government has acknowledged that our sector is important. Our sector has been through a difficult time, and that they're supporting it also with the duty relief. I think that has been a positive. I think on MUP, I'm certain that the governments in England will be watching MUP very carefully. I mean, it's happening in Ireland. It's happening in Northern Ireland. It's in Wales. It's in Scotland. You can imagine, in time there's going to be a lot of pressure in England to have a serious look at it.

Yes. And Damian, just to clarify, in the Republic of Ireland it's coming into effect in January. So in a couple of months' time. In the north of Ireland, there's less clarity around exact implementation. So that could be 12 months out, it could be 6 months out. We don't quite know. But it's coming into effect in January in the Republic. And as we've talked about previously, I mean, that's positive for a premiumly positioned brand like Bulmers, for example. So we like to think we're the MUP experts in C&C. So we're well-positioned to support that one.

And just as a follow-up on that, Patty, will that present challenges if Northern Ireland don't adopt it quickly. Do you think can -- how do you envisage mitigating any of those issues if they do arise? Yes. Look, I think for a period of time, and we hope it's months, not years, I think there's the opportunity for a bit of disruption. You don't have to drive too far from Dublin, for example, to be in the north of Ireland, and beer will be cheaper in the north of Ireland. I think once it's only beer, I'm not quite sure what the real incentive is going to be. Exchange rate fluctuations come into it as well. But undoubtedly, look, it's a temporary risk. Some people might be minded to drive up there and fill the car up with relatively cheap alcohol. But again, there's not a lot we can do about that in the short term. I think it will be a temporary issue, if it's an issue at all.

Our next question comes from the line of Cathal Kenny of Davy.

3 questions from my side. Firstly, just referencing Slide 8, the OTIFs and Matthew Clark, particularly the inbound OTIF from suppliers. Is there any sense that's improving? And obviously to lift your own OTIFs, are you totally now contingent in terms of the supplier side? I guess, moving beyond, I think you said 35% at the moment, which is incredibly low. Second question just relates to rate of sale within Matthew Clark and kind of revenue per drop. I'm just wondering in terms of how significant is the opportunity to lift that over the medium to long term? And finally, on Budweiser in Ireland, wondering, it looks in the statement that you made some good progress in the on-trade. I'm just wondering, could you elaborate on that, please? They are my 3 questions.

Yes. Look, I'll take them. And maybe David can jump in and correct me. But look, in terms of the OTIF improving, it's improving. I think it is. I think there's an awful lot of effort going in. There's an awful lot of collaboration from -- well, between us and our suppliers. So you'd like to think that that 30-odd 6% or whatever it was at the end of August, yes, I think it was 36%. And that will improve because we're talking a lot more, coordinating much better. What we're doing about it, and David talked about controlling the controllables, I mean we're building stock. We've invested, I think, EUR 27 million in stock in the first half of the year, things like that, that we can do. But clearly we can't convert 36% into 90%. I think we're doing a really good job of demonstrating the value of our route to market with the numbers that we've got, but building stock practically, simplifying our offer, doing all those operational efficiencies initiatives that we've outlined. They're practically the steps that we can do as we work with customers to improve those OTIF numbers. That's the first point. I think, look, the second one, the rate of sale and the revenue per drop improvements in Matthew Clark. I think maybe the best way for me to answer that one, Cathal, is to reference back to our 3% margin expectation for Matthew Clark as it was a couple of years ago. And remember, we got there just pre-COVID in Matthew Clark, we had operating -- or we had a EBIT percentage in excess of 3%. I think our ambitions have increased over the last little while, and I think we'd be targeting something in the high 3s going forward. And that's going to reflect improved revenue per drop, improved discipline, improved cost control and mix management. So that's probably how I'd answer that. Hopefully, that will be evident in P&Ls next year. On the Budweiser point, look, Budweiser is still predominantly an off-trade brand for us. I think we've previously talked, I think, about the volumes. And in H1 for us in Ireland, volumes were a little bit higher than 120,000 hectoliters. Almost all of that in truth comes from the off-trade. The on-trade is a slow build-back. The Budweiser brand has a lot of affinity in the trade. We're certainly very, very enthusiastic about it. But it's going to take time to build back. There's some very clever and very impactful initiatives around renewable energy for Budweiser that have gone down particularly well in the trade. We have signed up in excess of 400 new accounts. But I think the on-trade improvements and changing those trends will take a bit of time. It's predominantly an off-trade story for H1. And I would see that probably continuing for the next few reporting cycles, at least.

And we have no further questions at this time. So I'll hand back to David for closing comments.

Well, all I want to do is say thank you for taking the time. I hope you found this session useful. As I said, again, I think we're pleased, hopefully, to be putting some of our more difficult days behind us. We don't take for granted at all in C&C the challenges that lie ahead. But I think in the sense of controlling the controllable, I think -- and I hope you get confidence that in terms of what we can control, we're trying to mitigate challenges and exploit opportunities. And again, I would just go back to my final [indiscernible]. We're pleased to be reintroducing guidance. But more importantly, I would look forward to seeing you at our Capital Markets Day. It would be great to get together to meet face-to-face and to dive maybe even more deeply into our plans, but also give you the chance to ask even further questions about how we continue to grow this company into the future. And with that, again, I say thank you. Wish you a good day. And talk to you all in our too distant future. Thank you.

This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.