Cranswick plc (CWK) Earnings Call Transcript & Summary

Good morning, everybody, and welcome to our interim results presentation. Delighted once again to welcome you to Butcher's Hall. Alongside myself and Mark presenting, there's also several members -- more of our senior leadership team here that will be available for you to ask any further questions at the end of the formal presentation. If I can just direct your attention, please, to the agenda on Page 1. I'm going to comment on the progress that we've made throughout the course of the first half of the year. Mark, as usual, will run through the financials, and then Jim, to give a more in-depth view of his take on the wider commercial market, which I know you guys will take an awful lot of interest in. But if I can just direct your attention, please, to Page 3 of the deck. We've made substantial progress in delivering on the strategy in the first half of this year. Our revenue increased by more than 10%. This was underpinned by volume growth of 7% in our U.K. food business, and we've delivered revenue growth across all of our product categories. Adjusted operating margin increased to 7.7%, and this reflects a strong contribution from our poultry farming operations, investment in the automation throughout the course of the business and excellent capacity utilization along with tight cost budgetary controls. Investment across the asset base has continued at record levels with almost GBP 90 million spent in the first half. The GBP 100 million investment program at our facility in Hull on our primary processing site continues unabated, and this will take our throughput of pigs from that site from its current level at 35,000 pigs a week to a maximum capacity of 50,000 pigs on that site. In mid-September, we completed the purchase of the Fridaythorpe mill. This is based in East Yorkshire and this was purchased from AB Agri, and this increases greatly our pig self-sufficiency and brings it more in line with our poultry capacity. Integration of the recent Blakemans acquisition as long as JSR Genetics has gone particularly well, and I'll come back on to that in the strategic performance of the business later on. And I'll cover the benefits of all these additions and how the effect that that's having in the wider business. If I can just ask you to turn to Page 4 on the financial metrics. This demonstrates that we've now delivered another record performance in the first half of the year and that we continue to deliver on the ambitious growth plans that we set out before now. I've already highlighted the strong volume-led growth and improvement in operating margins. And indeed, the adjusted EPS was 9.3% ahead of the corresponding period last year. Our cash generation was in line with our medium-term target at 90%. And despite the record capital expenditure and the money spent on acquisitions, our leverage remains extremely low, and we have maintained our return on capital employed at just over 18% as we continue to effectively deploy capital and generate these strong returns. And following on from that, we'll be announcing today the increase of the interim dividend by 8% to 27p per share. And I'll now hand over to Mark, who will cover in more detail, the financials.

Thanks, Adam. Good morning, everyone. As always, I'll just spend the next few minutes running through the half 1 financial highlights. And throughout the presentation, unless I say otherwise, I'll be referring to adjusted numbers, which exclude the impact of IAS 41, which you'll see has had quite a bit of volatility on the statutory measures and amortization of acquired intangibles and impairment of intangible assets. If you want to see the reconciliations between adjusted and statutory measures, they're shown in the appendix at the back of the slide deck. So turning to the financial highlights on Page 6 of the deck. And just continuing what Adam has just talked us through, we've delivered another period of strong growth across all key metrics. Double-digit revenue growth, a 9.7% increase in adjusted PBT and strong EPS and DPS growth as well. Our cash conversion continues to be strong, with free cash flow of GBP 97 million. And net debt excluding leases increased by GBP 126.4 million over the period, reflecting record capital expenditure, the acquisition of Blakemans and the Fridaythorpe Mill, and growth in working capital, particularly our stock build as we build towards our peak Christmas trading period. Turning to Page 7 and looking at the numbers in a little bit more detail. Reported revenue up 10.4%, well ahead of our medium-term target, with like-for-like revenues up just under 8%. Adjusted gross margin was 29 basis points higher at 15.6%. And adjusted operating profit increased by 13.5% to GBP 113 million, with operating margin strengthening to 7.7%, 21 basis points higher than H1 FY '25 and 88 basis points higher than the same period 2 years ago. Adjusted profit before tax at GBP 105.1 million was 9.7% ahead. And adjusted EPS at 144.4p per share, increased by 9.3% compared to 132.1p last year, reflecting the growth in adjusted PBT. And as Adam mentioned, we're proposing to increase the interim dividend by 2p per share or 8% to 27p per share. And again, that's nearly a 20% increase over the past 2 years. And again, as Adam mentioned, and very pleasingly, our return on capital employed remains extremely strong at 18.2%. So moving on to the next page, Page 8. As I've already highlighted, reported revenue growth was 10.4%, underpinned by volume growth in U.K. food of 7%, reflecting new business wins and strong demand for our premium products as the U.K. consumer continues to appreciate the quality, the value and the versatility of our core pork and poultry categories. Performance is strong across the board with growth in all our product categories. Jim will talk you through this in a lot more detail in a moment or two, but just a couple of key call-outs. Poultry revenue up 18.5%, with the onboarding of new premium retail added value business driving an improved sales mix and increased volumes, and also higher pricing in fresh poultry, reflecting the rapid and successful upscaling of our poultry farming estate to effectively transition to the new lower stocking density standard. And poultry now represents 20.9% of group revenue. Gourmet revenue up 15.9%, reflecting the acquisition of Blakemans and strong demand for our premium added value gourmet product ranges. And pet revenue, while small in the context of the group, was up 13.6%, reflecting further expansion of the Pets at Home relationship. Now moving on to margins. On Page 9, through consistent targeted investment and focused delivery of our strategy, we've again delivered strong progression across all key margin metrics. Compared to H1 FY '25, gross margin increased by 29 basis points to 15.6%; EBITDA margin was up by 28 basis points to 11%; and our operating margin was 21 basis points higher at 7.7%, comfortably above our medium-term target of 7.5%. This margin progression reflects a strong and growing contribution from our integrated poultry supply chain, investment in process automation, excellent capacity utilization and our relentless focus on cost control. Now moving on to cash flow and then on to the balance sheet on Page 10. Net debt increased by GBP 99.9 million to GBP 272.3 million, which includes GBP 145 million of lease liabilities. You can see a strong EBITDA inflow of GBP 161.4 million, and that was offset by a GBP 46 million investment in working capital and biological assets, reflecting investment in new long-term strategic partnerships and a very strong Christmas stock build. Tax paid in the period of GBP 20.9 million was just GBP 0.3 million higher than a year ago. And as we've already mentioned a couple of times, record capital expenditure and spend on acquisitions of GBP 121 million, which compares to GBP 51.1 million in the same period last year, and I'll come on to that in a little bit more detail shortly. Dividends paid in the year were GBP 40.6 million, GBP 4.5 million up on last year, reflecting the 12.9% increase in the FY '25 final dividend. And as we continue to broaden out our poultry farming estate, a GBP 12.3 million increase in lease liabilities, particularly, as I mentioned, in relation to that move to lower stocking densities, where effectively, you need 20% more space now to grow the same number of birds. Notwithstanding this period of record investment, we've maintained our investment-grade balance sheet with very modest levels of bank debt and gearing, including IFRS 16 lease liabilities remains below 1x leverage. Looking at cash generation over the longer term on Page 11. Our cash generation over the last 7.5 years, and indeed, going back much further, has been consistently strong. We generated over GBP 1.2 billion of free cash flow over this period. How do we use that? Well, GBP 738 million has been reinvested to strengthen, expand and diversify our asset base, and we spent GBP 225 million over that period on accretive acquisitions. We've also returned almost GBP 276 million to our shareholders through our progressive cash dividend policy. And over the 5 years to March 2025, we've increased our dividend by 67% and we delivered our 35th year of unbroken dividend growth and remain on track to deliver our 36th. Following a highly competitive refinancing process which successfully completed during the period, we secured a new GBP 360 million revolving credit facility which extends through to July' '29, with the option to extend for a further 2 years. We also have the option to access a further GBP 90 million on the same terms, which lifts our total facility now to GBP 450 million from GBP 300 million previously, and provides generous headroom to support the next stage of our ambitious growth plans. Turning now and looking at CapEx in a little bit more detail. As I said, during the first half, we invested a record GBP 89 million across our asset base, with GBP 25 million of this spent on farming and feed milling and the balance of GBP 64 million spread across our industry-leading asset base. Total expenditure in the period was just over 55% of EBITDA, which is slightly ahead of our medium-term guidance ratio of 50%. But I expect that rate of CapEx to continue through this year now, so we'll spend an equivalent amount in H2 to the amount we spent in H1. As you can see, we've made significant progress across our pipeline of major capital projects. As Adam mentioned again, the transformational GBP 100 million multiphase expansion project at our [ Hull pork ] primary processing facility is progressing to plan. The GBP 25 million fit out of the hummus and dips facility in Worsley, Manchester is nearing completion. And the GBP 30 million expansion of the 2 added value poultry sites in Hull is now complete, with new premium retail business onboarded. The GBP 30 million throughput expansion project at the Eye site is ongoing. And last but by no means least, we've committed a further GBP 14 million at our Lincoln pet food facility to create capacity to manufacture new high meat content products for newly secured business with Pets at Home. And I think it's just worth referencing because I did have a few questions about this when we -- a couple of weeks ago. The GBP 40 million of investment in our pig farming business, which we called out following the recent publication of the independent review of our pig farming operations, is not new incremental CapEx. This investment was already in the pipeline, but will now be fast tracked and completed over the next 3 years. Turning to Page 13. And looking at ROCE, we have a proven track record of delivering attractive return on capital whilst deploying capital with discipline and at pace. This has been a fundamental element of our successful growth strategy. ROCE has remained in the high teens despite a threefold increase in capital employed over the past 10 years and remains above 18%, even with the record pipeline of CapEx. Turning to Page 14. This slide provides a reminder of our value creation model and our medium-term targets, and we continue to successfully deliver against this model and we've again outperformed our medium-term targets. On Page 15, we presented this slide for the first time in our Capital Markets Day a few months ago. It explains how our business model and strategy have been created and developed to deliver strong compound growth. Our H1 FY '26 results provide further compelling evidence of this capability. Over the last 5 years, we've overlaid operating margin expansion of 104 basis points on to 9.5% compound revenue growth. We've consistently generated strong cash flows, which allow us to invest at pace across our asset base and in targeted M&A. And the Blakemans acquisition and the Fridaythorpe Mill purchase, which both completed during the period, are the latest in a long line of successful bolt-on earnings-enhancing deals. We have driven and maintained a return on capital employed in the high teens, well ahead of our WACC, and our business model and our strategy are built on solid foundations, underpinned by an unparalleled quality asset base, depth of management and balance sheet robustness. Moving on to the capital allocation framework. We have a well-established framework and we will continue to invest in the business to support our growth strategy. We'll maintain an investment-grade balance sheet and we'll maintain a progressive dividend policy with cover of at least 2.5x EPS to DPS. And we'll continue to explore complementary targeted bolt-on M&A. So briefly to recap from me, we've grown revenue by 10.4%, underpinned by 7% volume growth in U.K. food, increased PBT by 9.7%, and lifted adjusted earnings per share by 9.3%. We've invested at record levels across our asset base to further strengthen the foundations of the business and build the capability to deliver long-term sustainable growth. Our cash generation is strong and our balance sheet remains in excellent shape. We're increasing our interim dividend by 8%, and we have a sustainable and compelling business model, which will drive strong returns and compound growth over the long term as we continue to deploy capital at scale and at pace. I'll now hand over to Jim, who will update you on our commercial progress.

Good morning, everyone, and thank you, Mark. So yes, I'll just take the next few minutes just to walk you through market context for our key categories, highlighting this year's commercial achievements, and then share our priorities and opportunities as we look further ahead. So if I turn your attention firstly to Page 18. As we all know, the U.K. consumer environment remains challenging. It's cost of living pressures, political uncertainty continue to weigh on consumer confidence, and value therefore is still a primary driver of many purchase decisions. Whilst disposable incomes, on the other hand, have actually improved in real terms, food prices still remain a major concern for many customers. We've seen a clear shift away from out-of-home dining, which has created a number of opportunities for retail innovation and premiumization, which I'll come on to later, and also health and protein-rich diets are increasingly important to consumers, and actually return to scratch cooking is now evident as customers seek affordable ways of feeding themselves in a healthy way in the home. So actually, the U.K. retail sector continues to grow, both in volume and also driven by inflation, driving the top line higher. Market share gains in absolute terms, as I'm sure you're aware, are very much driven by Tesco and Sainsbury's, well, actually, Ocado, M&S and Waitrose are starting to see some growth from a percentage point of view, really highlighting that premium opportunity and that affordable treat. The discounters, of course, though most notably Lidl, of late, maintain momentum with a compelling value proposition. It's fair to note that Lidl's trading intensity is well below that of Aldi. So I think there's still potential for further growth from the Lidl camp going forward. The food service market is incredibly challenging. With raw material inflation, a lot of food service operators are very exposed to beef prices, which I'll come on to later. Of course, rising labor costs, all that impacting volumes and their price mix, it's becoming increasingly more expensive for shoppers to eat out of the home, therefore impacting on volume. The value-led operators in the food service sector, such as McDonald's and Greggs, however, are proving more resilient, and a lot of the new entrants in this market are targeting the growth in fried chicken. So just quickly moving on to Page 19, and this is just really showing the volume change within the various pig, poultry, beef and lamb categories, particularly. And what you can see here is strong growth at the pig and poultry and where affordability is key, but also that versatility in the health context as well. Beef prices have risen by something like 23% in recent months, impacting volumes by nearly 12%. So these are quite profound numbers. Similar numbers on lamb volumes actually [ off ] by 21%. So a real change in the kind of mix of how consumers are managing their budget in this in this space. And one thing to call out is pork minced volumes have actually increased by about 1/3 year-on-year as consumers are switching out of beef. So some pretty profound numbers here. So moving over the page -- on to Page 20 and just looking at our major categories. We've delivered positive growth at top line everywhere. And in most cases, very much driven by volume. So pork volumes up by 7.7%. Value was slightly behind that, really reflecting the reduction in pig price that we've seen over the period. Convenience division growing sales by 7.1%, with volume growth of 2%; poultry growing at top line by 18.5%, reflecting a couple of things there, basically -- mainly the increase in the value-added sales, but also the cost inflation associated with that move to the 30-kilo stocking density as well. We actually also temporarily reduced the kill in the poultry sector as we transition to the agricultural footprint being lower stocking. However, that's now where we reestablished and we'll be moving forward with that again. Pet products growing by 13.6%, reflecting those better quality sales from particularly Pets at Home and reducing our lower value portfolio. And we've also seen a bounce in export sales following the reapproval of China this time last year. So moving over to the page -- on to Page 21. Obviously, as I often call out innovation being the lifeblood of this business. And we often talk about keeping our products relevant to the consumer premium affordable, convenient and healthy products. In many cases, actually, we combine a number of these attributes. Value, as I've been talking about today, is clearly a key part of the strategy. And during the year, we've launched several value-oriented products, often there's Aldi price match SKUs at the entry tier in some of the major supermarkets. But also looking at automating things like the marinade products you see there to make that affordable and convenient midweek meal. It's also a key theme now that many baskets are actually containing a blend of both the value and the premium things. So where consumers see value in the trade up, they're very happy to do that. However, when there's base commodities that they don't see a perceived difference in the product, they're very happy to buy into the value ranges as well. Premium, of course, has always been a major focus area, and the current market conditions are allowing for even more premium products. And we've actually developed a number of super premium ranges here, such as the Tesco Finest Chef's Collection range you can see there, and some super premium ranges in sausages, also a collaboration with Tom Kerridge with M&S as well. So customers are really willing to pay a lot more, and that's often reflecting that trade down from the out-of-home space I mentioned. A lot of expansion in the convenience snacking solutions there. You can see some of our mini cooked sausages there and some of the platinum selection packs from Continental as well. And then finally, reinforcing health as well where we've been taking some of the ultra-process type ingredients out of our products and looking to much cleaner deck, more home cook style products there, which is working extremely well for us. So moving on to Page 22. And looking ahead, I think we're very well positioned for the group's largest ever Christmas. Record volumes of pigs in blankets with 120 million units planned this year. We've got more premium gammons than ever. We're offering more sous-vide turkeys to more customers. In the last quarter of next -- sorry, in the last quarter of the financial year and the first calendar year, we're actually onboarding the additional volume from that Sainsbury's 10-year deal as we move towards a self supply pig meat scenario there. We've also actually been awarded sole supply of all Pets at Home owned brands of dry dog food, and that's adding the -- particularly their AVA brand and their grocery label products. They are transitioning into our factory between now and the end of January. Looking ahead, priorities remain very clear under quality, value, innovation and that great customer service through our people. And this year, we were very proud to receive the Advantage Survey -- Own-Label Supplier of the Year Award, a recognition of those strong partnerships that are really key to our strategy going forward. We know there's always room to improve, and it also gives us good metrics there and where we can do an even better job working towards being our customers' most trusted supplier. So really, just to summarize on this, we expect growth to continue through these expanded partnerships, premiumization, continued efficiency gains, supported by these long-term agreements with key customers in those retail and pet categories. So I will now hand you back to Adam to cover the operating and strategic review. Thank you.

Yes. Thank you. Thanks, Jim. I'll now just briefly update you on the strategy as well as cover some of the more salient points over these last few months before moving on to the Q&A. So if we could just turn your attention, please, to Page 25. The growth strategy continues to build on the key strengths of this business and has remained very consistent, as you will know, over many years. We continue to grow the cash-generative nature of the core range through our focus on high-quality, affordable, healthy proteins and added value proteins and products that resonate with our consumers. We continue to invest in the supply chain and across the asset base to drive both growth as well as efficiency, and we will further deliver expansion through our focus on the white space opportunities, as Jim has touched upon, and unlocking those adjacent categories. We will look to extend our operational leadership and increased capacity through the significant pipeline of ROCE-enhancing investment projects. With increased capacity, we intend to gain further market share. And we continue to diversify and strengthen this business through the focus on innovation and the complementary acquisitions that we've made to date across both the supply chain and across the adjacent categories and the markets, and we'll drive and expand these categories as we diversify further into them. Over the last 10 years, we've delivered compound annual growth in excess of 10%. Adjusted PBT, EPS and dividend per share are all comfortably in excess of this 10% over the same period. And with a continued focus on the strategy of consolidate, expand and diversify, I'm confident that we'll continue to deliver strong and sustainable compound growth for the long term. I just want to cover briefly in more detail on the 3 recent acquisitions that have undertaken throughout the course of this year and demonstrate the successful delivery of these growth plans. JSR Genetics is a business that we've known for a lot of the years, it's probably the best part of 30 years in my instance anyway. And we are now the only U.K. processor with our own dedicated pig genetics production capability. Integration into the group is now both well progressed. And with available genetics production capacity is now fully utilized from internal demand and performance is ahead of expectations by quite some pace. As a result, we're now extending further and investing further to expand the production capacity at this genetics production sites. To give you an idea, we've got about 45% and about 40% of the dam line and sire line addressable market in the U.K. So it's a very substantial business this when it comes to the genetic makeup of it. Seamless feedback from the downstream breeding, rearing and processing operations and enhanced genetic selection is driving benefits across the farm productivity, animal welfare and product quality. The vertical integration drives the core, at the same time, enables innovation in the products, strengthening the customer proposition and relationships that we are able to promote with a competitive advantage. Blakemans is another business that we've known for the best part of 2.5 decades, and we acquired this business back in May. It's a well-invested manufacturer of raw and cooked sausage. The business specializes in producing for the food service sector, and it has a strong demand in its marketplace, reflecting great value for money vis-a-vis other proteins currently served in the food service outlets. This acquisition is, therefore, highly complementary to our existing retail-focused gourmet product business, and it enables us to more effectively serve identified white space in the food service sector. By bringing Blakemans into the group, we've also been able to unlock significant procurement advantages and synergies for the business. And through this vertical integration, we've also strengthened our relationship with customers in the food service sector, such as Greggs, that was already a supplier via ourselves into that marketplace. Fridaythorpe Mill was acquired back in September but just finished, and this again represents a step change in our feed milling operations. And alongside ongoing capacity into our existing estate, Fridaythorpe has the potential to increase our self-sufficiency on pig feed dramatically. Through bringing this production capacity in-house and matching it with our demand, we can rationalize diets, we can maximize the operating efficiency, whilst also capturing margin in the supply chain. Just turning on to Page 27. The independent veteran review that we committed to back in May has now concluded. And on the 11th of November, we published the summary findings and recommendations on our website. We welcome those recommendations highlighted by the report, and we will improve our practices relating to the health and welfare of the pigs that we produce. The 6-point plan, along with the GBP 40 million of capital expenditure Mark alluded to before, will enable us to lead wider industry and continue to strengthen our animal welfare standards across our farming operations. And finally, on the final page, turning to Page 28. Trading through the first half of this year has been strong. We've delivered volume-led revenue and earnings growth driven by new business wins, with a positive contribution from recent acquisitions and strengthened alignment to our key long-standing retail partners. We have a substantial capital investment pipeline, with major growth projects underway across both pork as well as poultry, mediterranean foods and our pet food businesses. We continue to deploy capital at pace across these businesses, laying strong foundations for the future growth of the business. Our Christmas order book looks extremely strong and demand for our products remain high as the U.K. consumer continues to appreciate the quality, the value proposition and versatility of our core pork and poultry ranges. And the outlook for the financial year remains in line with the Board's expectations. And finally, before moving on to Q&A, I want to thank our colleagues for the ongoing support and commitment. The successful performance of this business is entirely down to them. When we have a problem, we deal with it. They absolutely step up to the plate every single time. So I want to put my thanks to that on the record. The culture that we fostered centers around a clear ambition to deliver strong, sustainable growth, and will allow Cranswick to continue to prosper both in the current financial year and over the long term. Thank you for attending today.