Greggs plc (GRG) Earnings Call Transcript & Summary

Okay. So we will make a start. First, just to say good morning. I'd like to think that Richard and I have brought the sunshine to London. So you can tell us if we have or not. And agenda today will be in the usual format. I will outline the results we've announced today and I will then hand over to Richard to take us through the financial performance in more detail. And after that, I will then take you through our strategic progress and finish with the outlook for the year. So it's great to be able to stand here and report that we continue to make good progress. So as you can see on the slide, total sales are up almost 14% and on a like-for-like basis, that is 7.4%, while underlying pretax profits are increasing by just over 16% to GBP 74.1 million. And very pleasingly, we've announced an interim dividend of 19p, which is just shy of 19%. In terms of our strategic progress, we are continuing to grow and improve our shop estate. And so far this year, we have opened 99 new shops. That includes 30 relocations, and we have closed 18 excluding the relocations. So this gives us 51 net new shop openings in the first half, and therefore, we had 2,524 shops trading as at the first of July. And as I'll talk quite a bit later in the presentation, menu innovation is a key driver of our like-for-like progress. And I'll take you through some of the products that are supporting our multichannel strategy. I'm pleasing to say the supply chain investment is on track, supporting the next phase of our growth plans. So pleased to be able to stand here and report continued good progress. And I will now hand it over to Richard to take you through the financial performance.

Yes. Thank you, Roisin. Good morning, everybody. It's nice to be presenting a good strong set of results and good to be beyond that phase, I think, where we've had so much sort of volatility in input cost inflation over recent years. We're into a more steady sort of scenario now, which does have an impact on the numbers and margins, which I'll just try and take you through. So just with the headlines first on Page 5. So we have sales up almost 14% and underlying profit before tax up 16%. So you can see there's a small amount of margin improvement overall, which we will come to in a moment. We had an exceptional gain last year in the first half, which was the settlement of an insurance claim following the COVID pandemic. Nothing in the first half of this year, although there may be something in the second half, which I will come to in a few slides' time, leaving that little teaser with you. And then the income tax charge is slightly up, and that's simply the result, in percentage terms at least, of the annualization of the increase in the tax rate from April 2023. So a slightly higher average tax rate, which means that the underlying earnings per share are up 15% for the first half. So looking first at sales. You can see the 2 key segments in the business are sales from the shops that we manage ourselves, which is the vast majority of the estate. And then the business-to-business sales, and our business-to-business is a combination of the wholesale business that we have with Iceland Foods and also the franchise shops within the estate. So we have 524, I think, franchise shops in the estate now, so just over 1/5 of the estate. And the revenue from both selling materials into franchise partners and the commission that we take on the franchise arrangement goes through that line. You can see on the company managed line, a combination there of 7.4% like-for-like, which includes some nice growth from the extension of our delivery service with Uber Eats. So we now have both Just Eat and Uber Eats as delivery partners. And then the impact of an estate change, so that's the growth in the estate, but also importantly, the reinvestment in relocating shops throughout the estate, which Roisin will talk a little bit more about later, which is an important part of the story in terms of increasing the quality of the Greggs estate. So those 2 factors combining to give us 12.5% on the company managed line. And then you can see the percentage growth on the B2B line is much stronger, and that's because we're coming from a lower base in terms of the size of the franchise estate. And so the relative additions on the franchise shop numbers are proportionately greater on that line. And that will continue to be the case for a few years because we're opening about 1/3 of our net shops on a franchise basis, and it's about 20% of the base in terms of shop numbers. Moving on to margins then on Slide 7, you can see the ratios. Gross margin has obviously moved ahead nicely, and that reflects the fact that we've had much lower food and packaging inflation. In fact, we had a slight deflation on food and packaging costs in the first half, which are a big proportion of the gross margin impact. The opposite was true last year, we had very high input inflation in the first half and a much lower level in the second half, but we had a relatively steady price recovery across the year. So you've got this sort of skewing effect on the P&L where it was a bigger burden and subdued the first half result last year. It was more beneficial in the second half. We've got a much more even rate of recovery this year, which is one of the factors when thinking about the full year as well. So -- but there was still some net benefit from that in the first half. There are a few moving parts behind there as well. So the development of, obviously, the delivery business comes at a slightly lower gross margin once you've taken commission costs into account. So that's kind of working against the ratio, but overall, a positive move forward on gross margin. Distribution and selling relatively stable, a small increase, and that really results from the fact that wage inflation obviously running higher than the average cost inflation overall. And then in admin costs, we've had a bit of a step-up as we've reinvested in some of our technology infrastructure, which had become fully depreciated. So we had a little bit of a gap over the last couple of years, and we've reinvested in new technology there in the background. So overall, a small increase of 20 basis points in the underlying operating profit and PBT. Slide 8 shows you the cost inflation in the normal manner. The biggest elements being people and food and packaging costs. On food and packaging costs, we've had some marginal deflation in the first half of the year. And we don't expect any material inflation over the year as a whole. We could be back into a degree of inflation in Q4. So that's one sort of word of caution in terms of just the balance of inflation on food and packaging over the year as a whole, but it's a relatively benign picture. And we've got a pretty good forward cover. We're about 4 months covered. So we do have some exposure in Q4 as we stand here today, but not overly exposed. And on the energy complex, which is about 5% of the overall cost base, we are expecting some reasonable deflation across the year, and we're very well covered there. So we're covered right through 2/3 of next year and the whole of this year. People costs, we've obviously talked about, pushed up significantly by the increase in national living wage and when you add that together with some enhancement of pension benefits, which is something we felt is the right thing to do to be competitive in the employment market, then overall wage inflation in the first half was 9.5%. And shop occupancy costs continue to be a positive for Greggs as we leverage the covenant of the business to get better terms and better premises. So overall, I think our guidance of 4% to 5% continues to be right for the year as a whole. We saw 4% overall in the first half, and we may see slightly more than that in the second half. In terms of capital expenditure on Slide 9, this is quite a big year for CapEx for Greggs. We've got -- we're expanding the shopper estate at a fair rate. And you can see that in the first half, we moved ahead strongly with that opening 74 gross new shops, which includes the shops that we've relocated up from 61 last year. So more spent on new shops and relocations, a relatively stable amount on shop refurbishment where we aim to slightly increase the number for the full year year-on-year. And the big number is obviously going through supply chain, where we've been completing the work on our 2 distribution center extensions, Amesbury and Birmingham. They're ready to go in Q4 this year and starting work on the first of the 2 big new sites in the Midlands that will create the capacity that we need for the future growth potential of Greggs. So the site in Derby is being built by our landlord. And the box at the bottom of this slide describes what impact that has because what happens is the landlord builds the shell of the building, they then lease it to us, and we should take ownership of that in -- well, October, Q4. At that point, we capitalize the shell of the building on our balance sheet sort of right-of-use asset of about GBP 60 million. We don't then start to depreciate it until we finish sort of fitting it out ourselves, which will be late 2026. So we take it on, we then fit out the rest of it. It then comes into use at the end of 2026. So it puts more on the balance sheet, but it doesn't necessarily affect the P&L until it comes into use. And we do start to depreciate that lease, but it gets rolled up into the new asset, which will go live, as I said, at the end of 2026. So lots going on there. We're still in line with the guidance that we gave you. I said we expect to spend about GBP 280 million this year. That also assumes that we complete the acquisition of the land at Kettering. So we've been talking about Kettering as a second site. We can now confirm that it's a site called Symmetry Park in Kettering. That land purchase is about GBP 30 million. We've paid the deposit, and we expect that we will complete the rest of it in the fourth quarter, and that should go through this year. If it doesn't, then we'll be closer to GBP 250 million CapEx, but it will just be a timing issue. Moving on then to cash flow. You can see there's a very strong cash flow from operating activities. It's been -- and our cash balance is higher than we predicted as well. There's an issue I should just sort of pull out here, which is that we have an invoicing issue from one of our suppliers who has migrated to a new billing system and been unable to bill us properly, and we're sitting on about GBP 30 million that they need to bill us and we need to pay them. So the half year number for operating cash inflow and cash balance is overstated by GBP 30 million that will reverse in the second half as that all gets addressed. But I think if you take GBP 30 million out of the inflow and the cash balance, the numbers start to look much more like what we would have been expecting, but still strong numbers. Then the teaser earlier for would there be another exceptional. It looks like we're at long last, going to complete the sale of our legacy bakery site in Twickenham, which those of you who followed us for a number of years, will probably catch your mind back to -- I think it was 2017 when we actually had pulled out of the Twickenham site. We sold it to a developer subject to planning and that planning has taken an awfully long time to achieve. There's been a sort of a few twists and turns along the way. But it looks like that will go through. And I know it's been a few years since we've actually talked about it. But the last time we talked, we said the value of that to us would be about a GBP 15 million cash inflow, which would result in about a GBP 14 million book gain when it comes through. So we think that will happen in the second half. If it does, we'll book it as an exceptional gain, obviously, because it really relates to the restructuring work that we did back at that time. And the only other thing I think on cash is we have renewed our RCF in the first half. It's not something we're drawing on at all, but it's good to have it in reserve. So we've got an extra GBP 100 million of liquidity, which is something we've sort of put in place since the pandemic to make sure that we've got greater facilities to draw on should we need to. Not much to say about tax. I've already flagged that the overall tax rate is just tracking up as we reflect the increase in the corporation tax rate last year. Looking forward, we expect about a 26% effective rate, which is tracking about 1% above the headline rate. And we're pleased to announce an interim dividend of 19p, which is broadly tracking slightly ahead of earnings increase, but it's just rounding on the number of pence we're paying. So very much in line with our normal progressive policy on the dividend. So I think that's it for me. Happy to come back with questions later. But for now, I will pass you on to Roisin.

Thanks, Richard. So I will just spend a few minutes updating you on the progress we're making with our ambitious plans to address the many growth opportunities available as we progress to become a multichannel food-on-the-go brand. So this slide really is just to put into context how we are continuing the growth journey and summarizes how we think about the opportunity for Greggs. In simple terms, it's about being more convenient for our customers and serving more of their food and drink needs while they are on the go. So serving them, whatever, whenever and however they want. So, the first box on the slide talks about us being more convenient for customers more often. So in terms of doing that, we're expanding into new locations with better shops and relocating a proportion of our legacy estate to meet the demand for Greggs as a multichannel operator. So this often means for us trading longer hours and ensuring that we can provide services such as delivery and click and collect. And the second box that you will see us highlighting our desire to serve more of our customers' food and drink needs. So we remain a focus on being the value leader in the market and evolving our menu to respond to the market trends and reach all dayparts. We also use our loyalty program to engage customers and understand how we can serve even more of their needs. And this is supported by being a vertically integrated business. So as we've said and as Richard just alluded to, we're investing further in our supply chain capacity to ensure that we can deliver on those future ambitious growth plans. We're doing the same with technology, which is crucial to our continued success, and underpinning it all is our approach to being a responsible business, which for us is a Greggs Pledge, which is our approach to ESG. So that's a quick summary and a reminder. Let me just talk you through some of the detail. So if I talk about access to more locations, we continue to drive the opening program at pace and find opportunities for exciting new shop openings in those underrepresented catchments plus finding bigger and better units, as Richard said, to relocate some of our current constrained shops into. So far this year, we have opened 99 new shops, which included 30 relocations, and we are on track for our opening program of between 140 to 160 net new shops with a very similar phasing to last year. Our confidence is underpinned by the continued success in the catchments where Greggs is underrepresented, so that's the areas like the retail parks, the supermarkets, the roadside, the railway stations, and they provide us with a clear opportunity for significantly more with 3,000 shops across the U.K. Franchise opportunities continue to expand the reach of the brand, and we know that's really important for our petrol forecourt business, and we now work with 16 corporate partners helping us reach those catchments that we can't access ourselves directly. And then we've put on the bottom of the slide the pie chart that just shows you how the estate has evolved from 2014 to 2024. And really, how we've been able to reshape it and move into those new catchment areas, making sure that we're well positioned to be convenient for our customers on the go. When you look at where we're opening new shops, what that does in 2014, 82% of the estate was in cities, towns and suburbs. When you then move that through to 2024, that's now 52%, making sure that we are across all of those key catchments. But as Richard said, it's not just about opening new shops, a relocation strategy is absolutely critical to our success, and it has many benefits, enables constrained shops that we've got, the historical ones, to significantly increase the sales volume and to have capacity for further growth. But we also have an experienced team within that shop. So they just move to the new shops. So they hit the ground running. They serve those customers with that friendly, efficient service from day 1. We stay in the catchment for our customers, but we provide them with an extended menu. So we'll provide our hot favorites such as our chicken goujons, our cheese bites, our wedges and we provide more space in the shop to ensure that we can provide the channels that we service in other shops, such as delivery and click and collect. And the shop refurbishment program also provides many of these benefits by enabling us to modernize the shop and deliver further like-for-like growth. So on the slide, you've got a couple of examples just to try and bring it to life. And hopefully, you can see, so we've got Arnold, in Nottingham, we've got Exeter, but they just show you how we lift and we reinvigorate the brand and the existing catchment and really bring something new to those customers. But at the heart of Greggs, as we've previously said, is our menu and making sure that we continue to evolve the range to provide the new exciting products, which I know a number of you have tried this morning in our over-ice drinks, but it also extends our reach into the different dayparts, and that's really important for us. I think it's worth saying, I think I've said this a few times where food is at the heart of what we do as a business. And the menu development is what continues to excite all of us. The new over-ice drinks that I've mentioned are proving super popular, and they are now available in 500 of our shops. And by the end of the year, they will be available in another 200 shops. Pizza continues to be a winner and as well as our 6 slice pizza box just last Thursday, we also launched our 4 slice pizza box. And that's really to cope for the sort of smaller groups of friends and families that get together. And our healthier choice range continues to be extended. So we've now got more salads, we've got more flat breads and we've got an additional fruit pot in the shops. And very excitingly, we continue to develop the made-to-order food trials. So we've now extended that and we are now trialing, fish finger wraps and fish finger sandwiches as well as the chicken options. I have to say, I think the fish finger is the winner. And so the constant evolution of the menu is really important because it's really to excite our customers, it's to make sure that we stay relevant and it's to make sure that we provide those choices across all of the dayparts and all of the channels in which we operate. So in terms of the channels and the growing dayparts, we continue to make good progress across the channels and the dayparts. Evening daypart continues to grow ahead of the average like-for-like rate continuing to increase its share of mix by daypart. And we know this remains a significant long-term opportunity. The evening Food to Go market is dominated by grab-n-go and delivery occasions. Therefore, we are well placed to serve those customers, both through walk-in and delivery and continue to grow the evening business. Delivery also remains important. So I think as I've said before, we offer the service both through Just Eat and Uber Eats, and that is now representing 6.7% of company-managed shop sales, up from just over 5% at the same time last year. And then we continue to talk about loyalty, digital and CRM. So we now have more than 18% of our shop visits being scanned by customers using the Greggs app, up from just over 10% at the same time last year. This is really important as we know that frequency of app increases the customer visits to our shops, but also allows us to get to our customers better and make sure that the promotion and the communication with them is relevant and timely and meets their needs. It continues to be a key area of focus for us to ensure that we can further build loyalty. And I think at times when customers are looking for value, the customer in the market continues to look for value, knowing that for every 9th product, you get the 10th one free, continues to be important. But we need to continue to invest. And so if I take IT first, investment in technology continues as well as implementing a new CRM platform recently, which allows us to get to know these customers even better. We are also currently rolling out some new till software. And that will help our colleagues at shops will make their jobs easier and better, but it also provides a more flexible platform for us to have future deals and promotions available. And we have also started the migration to the next version of SAP. That will be a multiyear program and our first modules will go live in 2025. And then as Richard talked about, you know we've been investing for additional capacity. So it's great that Birmingham and Amesbury distribution centers are on track, and that will give us a further 300 shop logistics capacity by quarter 4 this year. And as Richard said, we've made good progress with the 2 new Midland sites, so the one in Derby and it's revealed but it's no longer called [ Kettering ], it's Kettering and these will open through the end of 2026 and into 2027, and they will provide logistics capacity for a further 700 additional shops. And that enables us to have the future capacity to support around 3,500 shops. So some pictures for you. So to bring it to life with some images. So Derby is on this side. It's massive, that's a phenomenal site. The leases in place, construction is progressing on a mighty speed in terms of the build, which is fantastic. And this site will be very similar to the Northern frozen manufacturing logistics site that we have in Newcastle, but it will have the addition of automated picking to shop label. It will provide us with a consolidation point for our Southern frozen food network and increase the capacity of our regional distribution centers by supporting them with automated upstream picking. And it does also provide us the ability to expand our manufacturing capacity. We will start with one line, but we'll have the space to develop other lines, and we will do that in line with future demand. And then Kettering, we've recently exchanged contracts for 25 acres of land at Symmetry Park. It's still subject to planning, as Richard said, but we would expect the site to go open the first half of 2027. This will enable us to relocate and expand our current NDC in Kettering, and it will be a focal point for storage, picking a distribution of chilled and ambient goods. It supports the objective of enabling our existing distribution centers to service around 700 more shops as a result of the upstream picking. Automation and scale should deliver productivity improvement, and we future proof the space with space for further distribution or manufacturing capacity if it's required. But we continue to pride ourselves on the Greggs Pledge. That's doing the right thing with significant focus and progress in our commitments. We continue to focus on reducing food waste, supporting local communities. And it's really pleasing to see that we now provide breakfast to school children in 950 schools across the U.K., every single school day. And that was a target that we set ourselves for the end of this year, but we've already delivered. A key part of our Greggs Pledge is also sustainability and to be carbon net zero by 2040. And as part of progressing on that journey, we have moved 60% of our natural gas to a renewable alternative, and we've now recently moved our Enfield distribution center fleet from diesel to HVO. So again, a real step forward. So looking forward, we have made good progress in the first half of the year, and we have successfully innovated across our menu while continuing to grow our estate. The many opportunities are still available to us make us confident that we can continue to realize our ambitious growth targets. Our focus remains on executing our ambitious strategic plan and ensuring we build the capacity required for our future growth. And while uncertainties remain, the Board's expectations for the full year outcome are unchanged. So normally, I would finish there, but we have got a final slide because it was back in 1984 that Greggs floated on the stock market. And today, later on, at the London Stock Exchange, we will celebrate being 40 years as a PLC. The business has grown and prospered since that time as have our shareholders. And you can see there that actually, our share price has increased over 200x since flotation. Over the past 4 decades, we've grown from a regional bakery with 261 shops to a leader in the U.K.'s food-on-the-go sector. We like to think of it as delivering 4 decades full of flavor to the U.K. consumer. So as you know, we've now got more than 2,500 shops. We proudly serve millions of customers every week. However, our continued success would not be possible without our amazing 32,000 colleagues who tirelessly work across our business, making it all possible and doing it all in the unique way that makes Greggs, Greggs. So it is a very proud moment for all of us, but we also have very exciting growth opportunities that lie ahead. So hopefully, we have brought the sunshine to you, and Rich and I will now take your questions.