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

Okay. Good morning, everybody, and welcome to the presentation of C&C plc's full year results. I'm Ralph Findlay, the chair, and I'm joined this morning by Patty McMahon, the group CEO. Last week's announcement including the Board changes was obviously not expected, but I am really delighted that Patty has been appointed as the CEO. And before Patty goes into the detail, I'm just going to summarize the FY'23 highlights, progress against strategy and the FY'24 outlook. In terms of FY'23, the significant reduction in leverage to 1.3x and the robust financial performance have enabled a return to dividend payments with a final declared dividend of EUR 3.79 per share. Looking at the progress against strategy, we made clear market share gains in all the key categories of cider and beer, and we achieved significant growth in achieved revenue per customer. Looking forward to FY'24, the underlying business is strong despite the impact of the ERP upgrade. And our immediate priorities are, therefore, very clear to continue to make progress against our strategic objectives to develop brands and to win distribution and to resolve systems issues to return to outstanding levels of customer service. So with that introduction, I'm going to hand over to Patty. Thank you.

Thanks, Ralph. Turning to Slide 4 and given the disruption associated with our ERP system upgrade, I wanted to highlight the business rationale for the investment, which post FY'24 remains firmly intact. The background to the ERP implementation was that our Matthew Clark and Bibendum businesses were operating on different platforms. That's a legacy from their acquisition. The first step of this transformation program is to harmonize our systems and ERP platform to address the weaknesses in our system security, remove old legacy systems, which as well as generating potential security concerns are cumbersome, expensive and complex to maintain. The current implementation we're undertaking will enable us to address these issues together with harmonizing some of our core processes, which in turn will drive greater efficiency for us in time. Once we have stabilized the systems and we will, we can then start to consider how we can exploit the significant efficiencies such platforms offer us. The more recently acquired businesses, in particular, haven't had the level of IT investment required to drive competitive advantage in today's market. But that's the opportunity that we will undoubtedly be able to pursue, providing us with a clear route to sustainable margin enhancement, and we will, of course, update you further in time on these plans. Turning to Slide 6 and taking a step back for a moment looking at the market as we see it. We previously spoke about spirits, outperformance post-lockdown with consumers looking to celebrate the return to on-trade with serves and experiences that they couldn't easily replicate at home, the most obvious one being cocktails. Now we see this trend, I think, reversing and spirit volumes down 7.9% in the market as a whole. Wine too continues to lose volume and value share. The winners have been beer and cider and to some extent, soft drinks also. Looking at consumer types or customer types rather, the trend around independent free trade, which is IFT and lease closure continues. And the GB and Ireland on-trade universe has contracted by a little bit more than 12% with over 15,600 net closures since FY'20. This is primarily in GB. 87% of site closures in GB during FY'23 were the independent free trade and some closures in that lease sector. The independent free trade and leased combined to be over 100% of the net closures during last year as the national and regional groups made up centrally of managed sites have been much more robust, growing their footprint during the year by about 1.5%. The growth in these managed groups is good news for C&C as over 60% of our GB business is in that managed channel where we enjoy strong relationships with stable businesses. We're the #1 supplier to manage operators in GB. Turning now to Slide 7 and our very good cider share results, as Ralph has outlined. Core to our strategy is growing sales of our own brands and I'm pleased to say that our investment is paying off. FY'23 was a good year for our cider brands. In Ireland, Bulmers grew volume by 9% and net revenue by 40% in the year driven by the return of on-trade and somewhat aided by the introduction of minimum unit pricing and our brand positioning ahead of that change. In GB, Magners was 6.6% share of cider sold during the 12 weeks to the end of January. And that's an important period because it encompasses Christmas. And Magners enjoyed its highest off-trade Christmas share in 3 years. Orchard Pig, our premium cider brand also grew with volumes up 92% in that same 12-month period. Overall, the always-on brand activity on C&C cider throughout the year, encourage consumers to reprice our brands, helping to increase penetration and allowing our brands to grow sales, like I said, particularly around that all-important Christmas time. Turning to Slide 9 and our premium beer performance. Another one of our core brand objectives is growing in premium beer, where we have grown market share again in FY'23 overall. In Ireland, we're the #2 provider or supplier of premium lager in the off-trade and have continued to grow volume sales throughout the year. In the on-trade in Ireland, our partnership with the Licensed Fitness Association has also helped us grow distribution for our key partner brands, such as San Miguel, which distribution is up almost 300%. Meanwhile in GB, both Heverlee and Menabrea continue to grow ahead of total beer across on- and off-trade. Our increased brand footprint in the on-trade has grown volume of both brands Heverlee plus 23% and Menabrea plus 24% year-on-year. Turning to Slide 10 and we can't really talk about beer without mentioning Tennent and Tennent's total volume share of beer in Scotland is 29.3%. And that's well ahead of its nearest competitor, amongst mainstream beer brands, Tennent's represents over 2 and every 3 pints pour in the on-trade. Across all beer, it represents 1 in every 2 pints poured in the on-trade. Despite its scale, it's still growing market share up 1.9 percentage points in the year. During FY'23 in Scotland, we've grown our own Heverlee brand in the on-trade as well to be bigger than Amstel, Budweiser and Madri as measured by CGA. At the same time, we've supported Innis & Gunn strategic partner of ours and of course, an equity investment to a greater on-trade market share than Corona. Turning to Slide 11 and are all important OTIF, which is on time in full measures that serve as an indicator for us are a proxy for customer service. These stats are for MCB only with the remainder of the business operating and an OTIF range of mid-to-high 90s. Points to call out here are pre-COVID, Matthew Clark averaged about 96% OTIF, a level that we consider good, but with some room for improvement. The cybersecurity incident in February '21 reduced OTIF to 43% and that's clearly a level that doesn't meet our expectations or indeed the expectations of our customers. So post that cybersecurity incident in February '21, we were on a trajectory of improvement, building OTIF back to 92.2% in January and that was immediately prior to our new system implementation. As we disclosed last week, our OTIFs at the moment aren't we want them to be. We are supporting their gradual improvement with additional investment of people in our depot primarily. We have a track record of resilience and building back after adversity and pleasingly, the last week continues to show an improving trend in OTIF. We're up to about 87%. Of course, it will take time to rebuild trust, within back customers. But with some of our depots Bedford, they're already in excess of 90% in the last week. So we're clearly seeing improvement and we've done this before. We've built back in 2018 and we've built back post cyber. Okay. Turning to Slide 13 and a summary of the FY'23 results. So moving on to the financials now. We reported a strong performance for the year, though Q4 was impacted by a number of factors, principally nonrecurring a number of rail strikes impacted particularly around the Christmas period most noticeably and we experienced some system implementation disruption that only came in February. But FY'23 was ultimately a year of further recovery, as Ralph has mentioned. Net revenue of EUR 1.7 billion was up 18% year-on-year as we lap the last of the COVID restrictions in last year's comps. Operating profit of EUR 84 million continues to reflect our pricing actions, offset by higher input costs and overheads as well as increased brand investment of EUR 11 million in the year. Obviously, as mentioned a moment ago, it is also reflective of one-off nonstructural disruption. Operating profit margins of 5% represents significant year-on-year improvements and it's worth noting that EUR 11 million increased brand investment is contained within that 5% margin and that equates to about 60 basis points of overall margin. Free cash flow of almost EUR 75 million represents conversion of 65%, which is within our medium-term range. Our net debt was EUR 153 million post IFRS and that's down from EUR 271 million last year, equating to 1.3x net debt-to-EBITDA ratio. Turning to Slide 14 now, maybe a quick closer look at that plus 18% year-on-year growth on the net revenue line, Ireland's net revenue was plus 24%, so that's an outperformance versus GB at 17%. Wherever, I would point out that the trend in GB was better, clearly prior to those rail strikes, particularly around the Christmas period. We see positive price mix driving the growth year-on-year, more so than volume, which is plus 3% higher than last year. So it has been mostly a price mix story. We lost some co-pack business during the year, which is the nature of that kind of business, the vast majority of it related to BBG brands, namely Stella. Turning to Slide 15. Now looking at operating profit. Operating profits, as we said EUR 84 million. The year's outcome represents a 76% increase year-on-year with GB distribution providing most of -- the most significant element of that year-on-year improvement. As mentioned, we benefited from minimum unit pricing being implemented in Ireland earlier last year and we continue to invest in our brands for the long term. As indicated earlier, some one-off disruption adversely impacted profitability for the year, most noticeably, again, those rail strikes. Turning to Slide 16 and net debt. Net debt of EUR 153 million equates to net debt-to-EBITDA of 1.3x, which is below our target range, meaning we're in a very strong balance sheet position. Cash generation was again good at 65% conversion. Contained within that, there's a working capital inflow of EUR 2 million and that's reflective of an EUR 18 million tax deferral payment, which was an outflow higher stock levels, owing to increased safety stock of EUR 12 million and that's associated with the timing of our ERP implementation where we decided to hold higher levels of buffer stock. That's offset partly by the increased use of our debtor securitization facility, which contributed EUR 14 million in the year. As at the end of February, that data securitization facility was drawn to a value of EUR 94 million and that compares with EUR 110 million at half year and EUR 84 million this time last year. Debt collection was good throughout the year, but of course, we remain vigilant of credit risk and extending credit to customers at the moment. CapEx was within our EUR 15 million to EUR 20 million guidance range in the year. Admiral disposal proceeds feed in here as well and you'll note the increase in lease liabilities, which is largely the timing of lease renewals. Finally, on this slide, we refinanced our senior bank debt in recent weeks, extending maturity out to 2028. At the moment, more than 80% of our senior debt is fixed. Turning now to Slide 18 and I'll conclude on this slide. Ralph has started his remarks with the outlook, the expected impact of the ERP implementation in FY'24 and I fully understand how disappointing and frustrating last week's announcements regarding those ERP disruptions will have been for both our own people and, of course, investors. However, as I stated earlier, we're confident that we will fix the issue and having done so, we'll be in a much more stable and secure position to grow the business. So let me finish the presentation by giving you my view on the inherent strengths and characteristics and opportunities that this business possesses, which clearly particularly excite me as the incoming CEO. Our business is underpinned by genuinely strong brands with excellent market positions, generating consistent cash flows over many, many years. The brands are principally: Tennents, Bulmers, Magners, not only are they #1 or #2 in their respective markets or categories that they serve, but they act as an anchor for us to extend our fast-growing premium portfolio of brands. And you saw earlier that our premium beer volume was up 44% last year. We know that brands are strong when they command pricing power and that's something we've certainly seen over the last 12 months. Price mix has been the key driver of our 21% growth in branded revenue. That hasn't come from volume, as I said earlier, that's come from price mix and that's a sign of strength. Within the brands, we have two very significant and world-class, well-invested and well-maintained production sites that serve directly the markets that we operate in. These core brands is well established are benefiting from greater marketing investment and returning both volume and market share growth in the main. Our balance sheet strength and cash flow characteristics mean that despite the one-off impact of ERP, we can and will continue to invest in our brands and our business. The other part of our business is distribution and we operate the largest independent distribution platform to the on-trade in the U.K. and Ireland. We have a steady-state margin target of 4% for this part of the business, which we achieved, obviously, in H1 of the year just ended FY'23. It's challenged clearly by various disruption in the second half of the year and indeed, industry trends away from IFT towards managed operators, all play its part in H2 being a lower number in terms of the margin derived from that distribution business. However, we remain of the view -- firmly of the view that with technology efficiencies delivered that 4% margin is sustainable and it's attractive to us. We see return on capital employed for the distribution part of our business in excess of 25% and that's largely because that business is asset-light. So clearly, the more we can grow that part of the business, the more beneficial it is to the overall group return on capital employed over a period of time. What all this delivers is a business with fantastic sustainable free cash flow conversion, which in turn enables us to return to a strong and progressive dividend, the first step of which we've already announced today. And of course, in time, we will consider further returns of capital to shareholders whilst always maintaining that prudent leverage ratio of 1.5x to 2x EBITDA. There's no doubt that the next few months are going to be very, very challenging. And finally, embedding and fixing our ERP implementation. As I've said, we're very confident that we will achieve that as well as the strengths of the business that I've already outlined, what really excites me is the commitment and talent of our people within C&C. That's never been more evident to us than during the last few recent weeks where people have worked tirelessly to support our business and our customers. That talent and commitment will be a true strength for us as we seek to exploit the exciting opportunities this business has over the coming years. And I feel truly privileged to be supported by such a fantastic committed and talented team. So thank you for your time. I'll hand back to Ralph.

Patty, thank you very much for that. We'd now like to turn the meeting over to questions, please.

[Operator Instructions] We will now take our first question from Patrick Higgins at Goodbody.

A couple of questions on my side, if you don't mind. Can I see just on Matthew Clark Bibendum and I suppose GB distribution. Could you just give us a bit of a bridge on the weakness in the margins in H2. So obviously, it's down from 4% to 1.5%. You mentioned the rail strikes weakness in the independent free trade, et cetera. And obviously, the ERP system, just a bridge would be great on that side. And then secondly, just on the ERP system challenges, what system are you guys putting in place? What exactly are the challenges occurring in some of the depots? What are the fixes that you're putting in place to resolve the challenges?

Maybe I'll take both of them, actually. The first one, I suppose, margin in H2. There's probably 4 aspects to it. And I will rank them in order, starting with the most significant, which is clearly the rail strikes. They happened at exactly the wrong time for us, canceled a lot of Christmas parties clearly in the run up to December, which is our most lucrative time or one of our most lucrative times. So to put a number on the rail strike disruption, it's always hard to quantify what you would have got, but we think it's somewhere between EUR 5 million and EUR 8 million of net profit that we lost as a direct consequence of those rail strikes. And that's the most significant element. I think there was ERP disruption clearly as well. In February, we went live with our ERP in the month of February and that probably cost us a couple of million of profit in the month. It led to us coming in at the lower end of range. So that's the next most significant impact. Again, both of those you'd like to think nonrecurring. Hopefully, rail strikes don't happen to the same extent again. Beyond that, we talked about product mix and spirits declining. And that does have a margin impact and that did have a margin impact because spirit's margins are quite attractive for us and we benefited from that in H1. There's an element of seasonality in there as well that we can't quite quantify because we haven't had a normal 12-month period really with Matthew Clark post-COVID to compare against, but it feels like there's going to be an element of seasonality that favors H1 in time anyway. And then maybe the last point to make, Patty, is around the customer mix, as you call out -- as we called out in the presentation, managed operators are winning at the expense of the independent free trade and without going into the various economics associated with those customer groups, I think it's fair to say that our value extraction from managed groups is a little bit lower than independent free trade. So I think all of those things combined to put some downward pressure on H2. I think the latter 2 points and product mix and customer mix are probably likely to continue in the short term, whereas the other ones are nonrecurring. Second question, the ERP system, a little bit more of the detail. We're upgrading the core ERP system in Matthew Clark Bibendum to JD Edwards, 9.2, which is the same system that we operate successfully across the rest of the business in Ireland, Scotland, we all use 9.2. So again, there's a high level of confidence that we can clearly work through this and harmonize. I think the big difference with Matthew Clark is its sheer scale. I think it's been probably a couple of decades since it went through significant technological investment and that brings its own complexities. The fix is, there's many of them. There's no silver bullet fix. And it's not all technology. And technology certainly plays a part in it, but what we're seeing is there's a process, there's people just getting used to a new system, having not used a new process for so long. We see that learning curve element is pretty evident to us as we look across the 8 new -- the 8 depots that we've got in England and Wales and some depots already have OTIFs and customer service levels north of 90% and some other larger, more complicated depots that are lagging behind that. An interesting observation in some of those depots that are lagging have higher staff turnover. And I think that that's part of it as well. So Patty, there are a lot of aspects to what we need to do to repair and sustainably repair our customer service levels on the ERP system, no silver bullet, but we're working on a number of work streams right now and happy to report that OTIFs are improving week-on-week gradually, as I say, with some depots already north of 90% gives us an awful lot of confidence that we will get there.

We'll now move on to our next question from Laurence Whyatt at Barclays.

A couple for me, if that's okay. Firstly, on the EUR 25 million that you've sort of indicated will be required for the ERP system. Just could you give us some ideas of why you're so confident that is the right number? Why in 12 months' time to be not find out, it's a lower number perhaps or it could even be a higher number? Why is 25 -- why are you so sure that 25 is the right number? And then secondly, in terms of one of the attractions of C&C to its customers, one of them was the fact that you offer decent balance sheet support. Given that we're now in a slightly higher interest rate environment, has that become more of a challenge for you to be able to do efficiently?

Yes, the EUR 25 million is our best estimate. We could have gone with the range. I think the EUR 25 million would have been at the higher end of that range, Laurence. So it's our best estimate. I think we went through it last week and maybe it's worth me refreshing the component parts of that EUR 25 million right now. Some of it's already happened. So we have a high level of confidence that it's nonrecurring, but it basically breaks down into 3 elements. The first one is about EUR 4 million, which relates to a delayed price increase. That meant for a period of time earlier this year. We were under recovering cost that we experienced from our third-party brand suppliers. So we just weren't able to pass on that price increase to customers in a timely manner. Now the good news there is that we have subsequently taken the price action in mid-April. So that under recovery is hopefully one-off historic and we move on. So that's EUR 4 million. The second element, there's about EUR 8 million to EUR 10 million of additional running costs that we're currently experiencing in our depots. And that's running at about a little bit more than EUR 1 million a month. So we're expecting that to continue probably tapering off in Q3. But again, that's very firmly based on what we're experiencing right now. As I say, it's encouraging that OTIF are coming back in some depots already above 90% and we're giving ourselves, like I said, until August, September time to carry that cost before it tapers off a little bit. So that's the second element of that EUR 25 million. And then the last element is another EUR 8 million to EUR 10 million of impact, and that's associated with lost business as a consequence of this disruption. And again, we're particularly seeing that in the independent free trade, which typically are the more promiscuous type customers, they're not contracted and our estimates are informed by our current run rates and attrition in that sector. Again, what we're targeting is a H2 recovery on customers. One service levels are back that we will have every right to win business. And I think it's important to bear in mind when we bought Matthew Clark in 2018, we had a not dissimilar outlook where Matthew Clark was losing customers, but we successfully attracted them back as we did post the cyber incident because of our range, because of our normal customer service levels and because we're competitive on price. So I think there's every reason to believe that we will win those customers back in the second half of the year because it won't be the first time. The second part of your question...

Patrick, sorry, just before we jump in on part 2, just if I look back at the numbers you've given, the -- if you were to give a range, then that would come up with something like EUR 20 million to EUR 24 million, if I take the bottom and the top end of those 3 sets of numbers that you gave, is it fair to say that the risk is probably to the upside on that EUR 25 million?

We went with EUR 25 million and let's hope there's risk to the upside, but the number we've put out is EUR 25 million. But yes, you can clearly see what comprises that? Okay. Then look, your second one about extending credit to customers. And look, yes, we've redoubled efforts, I think we implemented additional procedures more than 12 months ago, frankly, around credit control I think we've got a lot of pedigree and a lot of experience in the way we diligence customers. We get very, very close to customers. Often, they share management information with us so that we can get comfortable. So we remain with heightened vigilance around who we extend credit to. But happy to say we haven't had any material bad debts. We stay very close to customers. So I think the balance sheet strength -- balance sheet strength is only strength if we use it. And I think we're going to continue to use it in a sensible way going forward. It also helps our low leverage helps with credit insurance and it helps with the credit terms that we enjoy from suppliers as well. So I think it's an important aspect of our business, particularly as we look to recover and grow in distribution.

We will now move on to our next question from Damian McNeela at Numis.