Greggs plc (GRG) Earnings Call Transcript & Summary

Good morning, good morning, and thanks for taking the time to join Richard and myself today for the Greggs' prelim results presentation, both for those in the room and for those that we have online. The agenda today will be in the usual format. So I will give you an update on the results we've announced today, and Richard will then take you through the financial performance. I will then provide you with an update on the operational and strategic overview. So it is great to be able to announce another record performance in 2023 driven by strong execution of our strategic plan and as a thank you to all the teams across Greggs who have worked so hard to deliver this. The slide covers all the key information, but just a few points that I will pull out to note, it's fantastic to see almost 20% of total sales growth with almost 14% coming at a like-for-like level. We had strong profit delivery at GBP 167.7 million for underlying pretax profits. We are pleased to announce a final dividend of 46p per share for 2023, bringing the total ordinary dividend per share to 62p. And we're also announcing today a special dividend of 40p. And in a few moments, Richard will explain our capital allocation policy for you. It's important to also mention what's not in the slide that is part of our long tradition of sharing 10% of our profits with all of our colleagues with 6 months service across the business. Today, we announce we are sharing GBP 17.6 million with our colleagues within the business, and they will receive that by the end of March. We've also noted on this slide a number of highlights against our strategic progress. And after Richard has covered the financial performance overview, I'll spend some time providing you with some more detail on these. But for now, I will just pull out the very important metric of our market share visits, which has grown to an all-time high of 8.2%, giving us the confidence that we absolutely have got the right strategic growth drivers. And on that positive note, I will now hand over to Richard.

Roisin, thank you. Good morning, everybody. I'll kick off by just talking you through the high-level income and expenditure, and then we'll dive into some of the detail. So we've already previewed a lot of the sales results, and you'll have seen that in our pre-close trading update in the new year. But what we can confirm this morning is underlying profit before tax was GBP 167.7 million. That's 13% up year-on-year. And we have an exceptional gain, some of which was previewed at the half year. So that relates to insurance claims that were made in respect to incidents in 2020, one of them being the pandemic. So we had a business interruption claim that brought in GBP 16 million to mitigate the interruption effect of the pandemic and another GBP 4 million which related to flooding in South Wales and has taken a few years to fully resolve. So we've pulled those out as exceptional items, both in terms of the magnitude of them, the one-off nature, but also the fact that they obviously relate to events in 2020. So that gives us a full year PBT of GBP 188 million. The income tax charge, the only thing to note really there is obviously the increase in the corporation tax rate. And you can see that coming through in the underlying diluted EPS, which is up 5.4% compared with PBT being up 13%. So that's the increased tax rate, which we will come on to. So let's get into the sales numbers. This is a segmentation that always appears in the accounts, but we don't sort of dwell on it too much in these presentations normally. But as the sort of franchise business is becoming more significant for Greggs, I thought it was worth just pulling it out this time. So I'm showing you here the overall sales growth of 19.6%. Split between that, that's come from our company managed estate, which has come from our business-to-business activity. So it's a combination. It's primarily the franchise business, but it also includes our business with Iceland Foods on a wholesale basis. And what you can see is that there's a slightly faster rate of growth in the business-to-business segment. That's because the actual like-for-like growth on the system sales of our franchise partners is slightly higher than the company-managed estate, which is partly reflective of the locations. Most of those are motorway services or petrol fuel stations. And it's also indicative, I think, of kind of the relative maturity of that estate. So they are typically newer shops that are earlier in their growth phase. And of course, the proportion of shops being grown in that segment is disproportionately high as well, with 62 new openings out of our net 145 being in the franchise estate. So I think just an interesting split. Going into the core of the business then, the company-managed shops like-for-like on Slide 7. You can see the bar chart shows you the progress over the last couple of years. So the yellow bars represent what happened in 2023. And you can see there was a progressive stepping down of price inflation in those numbers. The underlying volume was relatively stable and strong through that period, but we obviously annualized on the big price increases that we've had to take in 2022 to recover cost inflation. Then coming into the first 9 weeks of 2024, we still got 8.2% like-for-like growth. It's a slight nudge down on what we saw in quarter 4, and that's a volume impact. The level of underlying price inflation is relatively consistent in there. So still good volume coming into this year, but I think reflective of the overall kind of wet weather and the retail environment, and it's very consistent with what you'll have read in terms of overall market statistics, but obviously, Greggs is still taking volume share. So that's the up-to-date sales picture. If we turn then to the growth initiatives that are driving that on Slide 8. This is a chart we've used consistently over the last 18 months or so to try and bring out how the various growth drivers are contributing to sales growth. It's imperfect, I know, I'll explain why in just a moment. But broadly, the height of the bar shows the level of participation in overall sales that we're getting from either delivery or evening daypart. And the green overlap between the two is the combination of delivery in the evening, if you follow me. So progressively, through the last couple of years, those have become a bigger proportion of our overall sales. And that's measured on the left-hand axis. The dotted line then is the level of participation of customers in our company-managed estate in terms of what proportion are scanning the app as they go. Now that benefits all dayparts and all channels. So you can see that that's been rising at a fairly aggressive rate. And we finished last year, in fact, in Q4 last year, 15% of transactions were being scanned as customers came through. Now these two work against each other a bit because the more customers increase their frequency by joining our loyalty scheme, the more our daytime walk-in business grows and that squeezes the other channels in terms of the evening and delivery. So I don't think it's a perfect way of showing it. It's been a useful way of just illustrating how we've got momentum in the new growth initiatives. But we'll have to think about whether there's a better way of describing this to you in the future. But I think the message is good progress in terms of the new business. I think what particularly stands out is the Greggs app and the impact that, that is having in terms of driving frequency. Now those new channels have an impact then on our P&L account, so let's have a look at that on Slide 9. So you can see here the profitability of the business expressed in terms of margin ratios. So if I just walk you down the P&L, at gross margin level, you can see a few things going on there. There's quite a lot under the bonnet there. So food cost inflation exceeded price recovery in the 2023 year, so you've seen some level of dilution there, but also the increased participation in the app where we give every tenth item free and also in the delivery channel where we broke the exclusivity with Just Eat last year and have now got Uber Eats and Just Eat. So we took a commission increase on that channel, which will drive additional volume in the year ahead. So those factors are weighing on gross margin in 2023. You see some mitigation coming through in distribution and selling costs where you've got operating leverage as that additional volume has been driven through our fixed cost base. But also cost inflation was less than price inflation in that area because, although there is wage inflation in there, there's also rents on shops, which were pretty benign. We were also investing to drive the new channels. So there's a little bit of extra shop labor in the distribution and selling costs to keep those shops open in the evening and a little bit extra marketing cost as we kind of reached a new level in terms of our marketing investment. You also see operational gearing coming through in administrative costs where the level of growth there is less than the sales level. And we had a beneficial impact from finance income in that we held a lot of cash in the business, which we'll describe in a moment is going into the investment program and benefited from the relatively high interest rates on that. So you do see an element of PBT margin dilution year-on-year, but what you also see is that super strong volume coming through and working the asset base harder, and that's reflected in return on capital employed, which is a key metric for all of us. So return on capital employed, above the historic average. I mean, broadly speaking, if you take a view on Greggs over time, Greggs has averaged a return on capital employed of around 20%. If you go back to 2019, which was a very strong year in its own right, ROCE in that year was about 20%. We obviously shorter came through the pandemic. As it settled, coming out the other side, we're actually sort of working relatively hot because we're near capacity in our supply chain. And you're seeing that in the numbers that we've seen over the last couple of years. So it's a strong performance. And looking forward, I would expect, as we get into the investment program over the next couple of years, you'll start to see that come off marginally and then it should recover back towards that historic norm, again, as we start to fully utilize the new capacity with additional shops. So plenty going on in the P&L. If we move forward to cost, which has obviously been the big story over the last couple of years. On Page 10, you can see the overall cost base and the two big segments, which are people costs and food and packaging, the blue section and the green section. The overall headline at the bottom of the chart is that we're expecting in the year ahead 4% to 5% cost inflation, and that will be driven primarily by people cost. If we focus first on food and packaging, the level of inflation is reducing significantly. Our current outlook is that it will be broadly neutral in the year ahead. Most food categories are slightly deflationary, but we are still seeing inflation in pork input costs and that's just creating a balance. So we do expect it to be in usual position. And we've got about 4 months forward cover, so we've got reasonable visibility but not the full year yet. On energy costs, which is the purple segment, we do think that will be slightly deflationary in the year ahead given the positions we've got, and we've got very good forward cover there. We've got 80% of this year covered now, and we've got half of next year covered as well. In fact, we've got a tiny bit for 2026. So it's been a market where we've been happy to extend cover on energy. People costs, we expect about 9.5% wage and salary inflation in that blue segment this year. And that's a combination of the average awards, which are being driven by national living wage increases primarily, plus some enhancement of pensions and other benefits to make sure that we are market-competitive. So that's where most of the inflation is coming from in the year ahead. And as I've already said, shop occupancy costs continue to be an area where we see efficiency. So 4% to 5% cost inflation is our best guess in terms of the outlook for 2024. Moving on to Slide 11. This shows you the trends and plans for capital expenditure. Last year was a big year for capital expenditure. You can see that in the retail side, we were ticking up as we basically opened more company-managed shops than we had the year before and actually refurbished more shops as well. And you can see the number of jobs as it were down at the bottom of the slide there. So more going through the retail side, but the big step-up was on supply chain where we were completing the work on adding a fourth production line to our Balliol Park savory site where we make all the iconic sausage rolls and bakes. That's now available and should be sort of gone through commissioning and should be available to us in the weeks ahead. And then casting a view forward, so I'll show you the phasing in just a moment, but this will be a particularly big year when we expect to be spending about GBP 250 million to GBP 280 million as we step up the investment in future capacity to allow for growth. So I said a couple of slides ago that we've been running relatively hot in supply chain. I'll show you in just a second what we're doing to create the capacity that we need to get through the next couple of years and then to provide for the significant growth that we see ahead. So you've got a fair bit of data on Slide 11 that gives you the overview of the CapEx. On Slide 12 then, we're throwing out the phasing of the CapEx program. This is broadly a rephasing of what you've seen before. There's a little bit of inflation into the numbers, and we've cast it forward an additional year, which wasn't on the previous guidance. But if you sort of follow the chart left to right, you've got green is the retail investment, yellow is sort of background IT and, obviously, the more volatile bit is the blue segment, which is investment in our supply chain. So that's a combination of manufacturing capacity and logistics capacity. What you can see is that in the GBP 200 million that we invested in 2023, we put down that extra production line at Balliol Park. And we started the work, which will complete this year, on redeveloping 2 of our regional distribution centers, 1 in Birmingham and 1 in Amesbury, Wiltshire. By refurbishing and extending those 2 DCs, we'll add capacity for about 300 more shops to the network. And that will be available to us by the end of this year. So we'll be pretty much at capacity in the existing supply chain by the end of this year. We'll have another 300 shops added, which will see us through 2025 and 2026, if we carry on expanding at the rate we are. So that means by 2027, we need more. And the way we'll do that is by investing in 2 sites in the Midlands, which we think will be operational in late '26 and early '27. One of them is a manufacturing site, which will be in Derby, and we're already on site there starting that construction. And the second one will be a national logistics distribution center, which will be in the Corby/Kettering area. So as I referenced earlier, that's going to be the point at which we should see some modest ROCE dilution as we sort of put those sites up. And then I think from sort of '27 onwards, we start to eat into that capacity, and we should see some of that ROCE start to recover. We've tried to give you a guide as to where this comes out beyond the investment phase. You can see by 2027, we're back to a more normal situation in terms of the balance of supply chain and retail expenditure. And as a broad steer, we would expect, if you look at the historic trends in Greggs, that our maintenance level of CapEx would be about 5% of turnover. And if you look historically, it's typically been about 6% because of the additional being investment in growth. So that's the rephasing of the guidance, and you can see the assumptions in terms of shop number growth and refits below there as well. We don't know whether we'll carry on at circa 150. But in terms of guidance, we think it's prudent to plan for that given that we continue to see opportunity for 150 net new shops as we sit here today. Slide 13 pulls out the tax and EPS impact. So the tax rate, as I say, has increased, obviously, from the 1st of April last year. So we haven't quite annualized, but it will do this year. So a 24.3% corporation tax rate, and looking forward, we would expect 26% to be roughly the rate given the 25% corporation tax rate, there's about 1% extra which comes from disallowables. So broadly, we tend to run about 1% above the headline rate in terms of the effective rate for Greggs. We've talked about the EPS being up just over 5%. The ordinary dividend twice covered brings us up to 62p for the full year. And as Roisin has already said, we've declared a special dividend of 40p based on the cash that we hold in the business currently. So let's just take a look at that cash position, which is on Slide 14. It was a super strong year for cash generated. So we had a cash inflow after paying our rents of GBP 257 million, which was up from GBP 199 million last year. That included the exceptional gains that we saw from the insurance receipts and it also included the rephasing of cash tax payments because of the change to full expensing of capital expenditure in the budget last year. With such a big CapEx program, the more we're investing, the more we're deferring tax. So that tax comes later, but it's creating a window where there's a lot of tax being deferred. And that's reflected in the strong cash generation. So that resulted in GBP 195 million on the balance sheet at the end of the year, which was not the plan at the start of the year. So we've got strong cash position, strong overall liquidity given that we have an RCF as well, so what do we do with the cash? Well, broadly, at the bottom of Slide 14, you can see our capital allocation priorities. So we continue maintaining the business, investing in it to keep those shops looking good, and to make sure that our supply chain can cope with what it needs to. Our year-end cash target is to have about GBP 50 million to GBP 60 million worth of net cash on the balance sheet. And what that means is we've then got sufficient liquidity to see us through the low point in the year, which is typically in June, after we've paid out corporation tax dividends and other things. We aim to maintain that attractive ordinary dividend, which is 2x covered, as we have for the 2023 year. And then where there are opportunities to invest for growth, we'll take them because we make a very good return on capital. And that's obviously the plan at the moment and why we're carrying a lot of cash into this year. But we've assessed how much we need, and we still think there is more than we need. So wherever we've got that position, we said we'll return cash to shareholders. And currently, our preference for that is special dividends, thus the 40p special dividend, which is about a GBP 40 million distribution of cash that we see being surplus to our current requirements. So on that positive note, I'll hand you back to Roisin who can talk you through the operational and strategic development.

Thanks, Richard. So hopefully a good set of results, but let's talk about how we're actually delivering those and the belief and confidence that we've got in the strategic growth drivers. You've got a quick reminder on the slide of the strategic growth drivers that drive the plan, and we as a team remain very focused on executing and delivering against these. But let me just spend a few minutes taking each one in turn. So I mentioned earlier that our market share is at an all-time high at 8.2% of visits, which is up from 7.7% when we reported at the same time last year, which is our highest ever market share. Really pleasingly, our breakfast market share has continued to increase, and we are now #1 in the market for share of visits at 19.6%. We continue to work hard to reach consumers in all dayparts to ensure people are aware of the offering we provide. It's not on the slide, but we have 95% awareness of the Greggs brand. So we're very confident in our progress to serve our customers wherever, whenever and however they choose to shop with us. And very importantly, we continue to be ranked #1 in the YouGov's brand overall index. And again, not on the slide, but when value remains so important, and I think it remains equally important this year, we retain our long-held #1 position for value on the YouGov Index as well. Growing and developing the Greggs estate remains a core focus of our growth, and our track record just continues to get stronger. So when we talk about the record number of shop openings last year, just to put it in context, that was, on average, 4 shops we opened every single week of the year in 2023. And we continue to have good momentum as we look forward into the property pipeline for this year. We ended the year with 2,473 shops, and we continue to be confident in our opportunity to have significantly more than 3,000 shops in the U.K. In the next few weeks, we will announce we've reached the 2,500th milestone, which again is a great milestone for the business. As I said, it was a record year of openings at 220 new shops. That resulted in 145 net new shops. So within that, we had 42 relocations and we had 33 closures. And we're seeing that for this year, we believe our net new openings is somewhere between 140 and 160 openings for the year. We continue to extend our partnerships across a number of retailers, so that includes Primark, Tesco and Sainsbury's, while also continuing to grow our presence in Central London. And we passed the milestone last year when we got to our 500th franchise shop. And our franchise partnerships continue to extend our reach, particularly in forecourt retailing. Now we've previously explained the opportunity that we have available to us and the catchments where we have low representation. But what we put on this slide for you is a couple of pie charts just to try and bring that to life. So the first chart shows the current estate mix that we have and our diverse portfolio shops and the second shows how we continue to reach into those under-represented catchments. And very pleasingly, it shows the opportunity to continue to take in roadside, in travel locations and in retail parks and supermarkets, which are new markets to us. Looking forward, this mix of new property opportunities continues and enables us to remain confident in our longer-term ambition of significantly more than 3,000 shops in the U.K. But it's not all just about the new shops. So it's also ensuring that we can take the opportunities to relocate our shops to bigger and better locations and also refurbish shops that are in great locations to ensure we can provide our multichannel food-to-go offering. Last year, as I said, we relocated 42 shops. So a really good example shown on this slide is our Runcorn shop where, as you can see, we simply moved next door. However, by moving next door to a larger unit, we were able to provide seating for our customers. We were able to provide the hot food cabinets, which allowed us to give the full range of hot food. And it gave us an immediate sales uplift of 30%. But the shop also have more capacity for future growth. So these relocations are a key part of our estate strategy. And this year, we've identified 50 shops that we believe we can relocate. And refurbishments of our existing shops are also really important as that enables us to provide successful shops that our customers already know and love with the additional facilities needed to realize those future ambitions, particularly to serve our digital channels efficiently and increase our food preparation capability. We completed 122 of those last year, and we are planning for 195 this year. Now we've popped a photo in the bottom of the slide, and that's really just to show the full range of options available to us as we refurbish our shops. So we can put in the hot cabinet, we can put on the impactful digital displays and we can put in the welcoming seating. And it's all dependent on the shop that we go to in terms of the refurb we're able to do. But very importantly, it's new, it's relocations and it's refurbishment. And then on to evening. And the evening opportunity continues to be a really exciting one for us. We're making great progress. We've got a really talented cross-functional team that continue to work together on this. And it represents our fastest-growing daypart and presents a really compelling opportunity for us as we know that more than 35% of the food-on-the-go missions are after 4:00 p.m. So to respond to the opportunity, we now have over 1,200 of our shops who are open to either 7:00 p.m. or later. Evening sales, as you can see in the slide, grew to be 8.7% of our company-managed shop sales in the second half of last year. And our share of visits in that sizable market has now increased to 1.6%. Really pleasingly, it's the hot food items that our customers so love such as the chicken goujons, the pizza slices and the hot sweet treats that we offer in the shops. But as we've said previously, evening for us is not just about walk-in, it's also about delivery, and really making sure that we go after that ambition. We now offer delivery in 600 of our late-opening shops. And to play to that market, we now have our 6-slice family pizza box that can be customized to suit different tastes at a great value price, to feed all of the family, delivered to your home. So very convenient. And then as you are out and about in the high street or if you are on social media, having a play, then you'll see that our marketing support is very much weighted to we are openly messaging to ensure we take every opportunity to increase customer awareness. And our digital channel continues to move forward at pace. Delivery offers our customers another channel to be able to access our offer in the way that's most convenient for them. So it's great that we announced last October we now have 2 delivery partners with a total of 1,440 shops offering delivery through either Just Eat or Uber Eats. And you can see the breakdown of the numbers on this slide. We know the delivery markets settled back post the pandemic as behaviors have been developed and lockdowns started to normalize, but it's great to see that it is now growing again. And last year for us, delivery increased by 23.6% as we met our ambition to extend our geographical reach. So the great news is we now offer home delivery across the U.K. And then on to our loyalty apps. Our Greggs app continues to grow very strongly, with over 12% of transactions being scanned across the year on average in 2023. And that increased from just over 6% the previous year. But as Richard said, very pleasingly, by the time we got to quarter 4, that is actually over 15% of scanned transactions. And that is really important to us because we know that customers who engage in the Greggs loyalty app shop with us more frequently. By being in our loyalty club -- and you don't have to pay for our loyalty club, it is free to join -- our CRM system then allows us to personalize the communication and the offers that we can send you as a customer. So as well as for every ninth product, you get the tenth one free, you also get relevant and timely communication and offers delivered to you. And then very importantly, as Richard just talked about, is our investment plans. So we wouldn't be able to deliver on our growth plans on a vertically integrated business without growing the capacity of our supply chain and our systems. Our manufacturing investment has enabled us, as Richard said, to create an extra 35% of capacity for iconic bakes and sausage rolls, and our new pizza line in Enfield has doubled the pizza capacity of our existing line, very important, given all the focus we've got on pizza and our customers' love for that. And then we've made further investment in our items such as double-deck trailers. Really important, another 34 of those are now in the fleet, which results in lower distribution costs and, very importantly, in terms of our Greggs pledge and drive to reduce carbon emissions. And as we previously outlined, we continue to invest in technology and are constantly improving our digital capabilities, particularly our shop systems where simplicity is key for our teams. And we tested a new till suite last year. The shop teams gave us a feedback on that. They've made improvements. They've made changes. We will now roll that out across the estate in 2024. And then just to spend another minute or 2 on the supply chain capacity, which Richard has talked about. You'll see the supply chain priorities for the year on this slide. And as I said, this is all about supporting our ambitious growth plans. As Richard mentioned, we've got the short-term capacity improvement. So that's Birmingham. That's Amesbury. And by the end of this year, that will add another 300 shops of logistics capacity into the business. But as Richard has also outlined, we've got 2 new facilities in the Midlands that we'll expect to come online in 2026 and 2027. So our confirmed Derby site will allow us to add additional manufacturing capacity, and we will do that, as we previously said, on a phased basis. But it also provides efficient automated storage and packing operations for our frozen stock, and it will come onstream towards the end of 2026. Some of you have visited our Balliol site up in the Northeast where we produce our bakes and sausage rolls. Our site in Darby will be very similar to that, with the manufacturing capability and the automated cold-store operation that we currently operate. The additional improvement at Darby will be the automated packing operation that we'll put in place. And then Richard has mentioned, the Kettering and Corby national distribution center, and that will enable storage, packing and distribution of the ambient and chilled products, and we expect that to come online in the first half of '27. Now this solution of two significantly larger manufacturing and distribution facilities rather than several smaller radio site, which have been our previous route to actually increasing the capacity of the business, facilitate of different benefits for us. So it's increased automation on those sites. It takes advantage of technology solutions. It provides efficiency benefits and also introduces an upstream packing solution. What that lends for us is it enables us to extend the capacity in each of our radio distribution sites across the U.K., and all of that is critical to make sure that we can provide the increased capacity needed for our future growth. As we've previously outlined, and as I've said again, these plants will be implemented on a phased basis in terms of manufacturing. And Richard has outlined our capital investment to support our growth plans. And we'll continue to maintain our focus on strong returns on capital, which remains a key management remuneration target. And then the Greggs pledge, and very important for the business as the business has always prided itself in doing the right thing, we are delighted with the focus and progress that we continue to make across the 10 commitments that we've made and a key thank you to the whole team for the focus that they give to this area. I'm not going to go through all 10 commitments, but we have just pulled together some of the highlights for you. So some of those are we now feed every single school day 62,000 schoolchildren. We opened our 35th outlet shot last year, really important to both reducing food waste but also supporting those local communities. And we continue to take the learning from our Eco-Shop and rolled out those new initiatives across the chain. We won the healthy eating award for our sweet potato bhaji and rice salad bowl. Hopefully, some of you have tried that in the past. If not, you can try it in the future. And then our 2040 net zero carbon target is fully embedded into our business processes. Scope 1 and 2 reduction forms part of our long-term incentive plan for all of our senior managers, and we take this really seriously in terms of driving it forward. So just to end before we take some questions, looking forward, strong trading has continued into 2024. As Richard said, the inflationary pressures are reducing. And importantly, we've got improved visibility of the cost across this year. We remain confident that we can deliver another year of good progress as we continue to execute our strategic growth plans and realize the opportunity to become a significantly larger multichannel business. And as a team, we are well positioned for the significant opportunities that lie ahead as we invest for further sustainable growth. So just to wrap up, the plan is working. It's driving the results. We're confident in it and we remain focused on delivering it.