Nichols plc (NRV.F) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and welcome to the Nichols plc Interim Results Investor Presentation. [Operator Instructions] The company may not be in a position to answer every question it receives during the meeting itself. However the company can review all questions submitted today and will publish responses where it's appropriate to do so on the Investor Meet Company platform. Before we begin, we would like to submit the following poll. And if you could give that your kind attention, I'm sure the company would be most grateful. And I would now like to hand you over to the executive management team from Nichols plc. Andrew, good afternoon, sir.

Thanks, Jake. Good afternoon, everybody. Welcome to our half year results presentation, and thank you very much for taking time out today to dial in to listen to us. Okay. In terms of the flow we're going to follow today, I will kick off and look at half year 1 from a strategic and operational perspective. I will then hand over to David, who's our Interim Finance Director, who will give you a deep dive into the numbers. Then I will come back and give you a forward outlook, and then we are happy to open the floor to Q&A. So in terms of today's presentation, the real highlights we'd like you to take away from today is that we're really pleased that we've been able to continue delivering against the key strategic initiatives that we outlined back at the Capital Markets Day in November 2024. Firstly, we're really pleased with one of those key initiatives, which was growth in Africa. And in half year 1 this year, we have delivered 17% revenue growth versus Half 1 last year on the back of the move to the concentrate model in West Africa. After 2 years of hard work and planning, we very successfully went live with our new ERP system, [ SAP S4 HANA ]. And this was really the launch of our business transformation program that we'll look to drive benefits from over the next 5 to 6 years. And adjusted operating profit growth was 4% at the half year, and this was absolutely in line with the plan we had when we set out this year. And we're really pleased that our strong, well-diversified business model across U.K. Packaged, International Packaged and Out of Home have again all contributed strongly to our performance, supported by a very healthy cash position. And we're very pleased to report that we fully expect our adjusted PBT expectations to be in line with forecast, which lie at GBP 33.1 million. And if I just spend a couple of minutes now reminding you of our key strategy. So this is what we outlined at the Capital Markets Day. From a headline perspective, first and foremost, we are looking to accelerate the growth in our higher-margin packaged business, both in the U.K. and internationally and drive bottom line value from our much more simplified Out of Home division. We have 4 key strategic drivers. The first is more from the core. Now it's absolutely crucial that we don't take our eye off our core business, and we invest and drive distribution in our core brands across the core categories we operate in and in the channels and major geographies of the U.K., Middle East and Africa. The second pillar for us is what we call [ First For You ]. The first pillar there is around innovation, and that will predominantly be focused in the U.K. Packaged area and the Middle East area, where we're looking to innovate off the Vimto brand, where it already has strong equity and look to move into new areas and new channels. Geographic expansion will always form a part of our growth in new spaces and not more so than our recent launch into Malaysia. And then as part of our capital allocation strategy, acquisition plays a role for us in U.K. Packaged, where we are looking to buy brands that can complement our Vimto portfolio and take us into predicted fast-growing subcategories over the medium term. The third pillar for us is fuel for growth. And this is about how we can leverage our asset-light model to drive efficiencies that we can then reinvest back into our business. And a couple of examples here over the last few years would be the strategic review we did in Out of Home and the additional bottom line contribution that business is making now, how we reinvest that back in our Packaged business and also initiatives like our strategic business transformation where, again, we will look to drive efficiencies, we can reinvest into the main business. And then our Happier Future program, which is a range of commitments we have from a sustainability perspective that we will look to deliver by 2030, all underpinned by 3 key foundations of we only focus on brands as a business, and that helps us to drive the healthy profit margins. Partnerships are crucial to our model, both in the U.K. and also internationally and none more so than the example of where we work with the Aujan Coca-Cola Bottling Company in the Middle East, and we have done now for over 100 years. And then the third foundation is our people. So we pride ourselves on the culture we create at Nichols that allow our people to deliver superior results day in day out. So if we just turn to the U.K. Packaged soft drinks market and perhaps provide you a little bit of context in terms of what's happening in the market. Now this is the Nielsen data, and it runs to the middle of June. So there might be some slight discrepancies as our half year runs to the end of June, but this is the most relevant data. So if you firstly go down to the bottom left-hand corner, you will see, again, a very resilient soft drinks in the U.K., delivering 7.5% value growth of 5.1% volume growth. So as you can see that, probably 2.4 percentage points of inflation being taken through price in the market. We're really pleased with our progress. So value up at 4.9% and volume at 4.1%. And in the 4 main subcategories we play in, in squash, we are the second biggest squash brand in the U.K. And we are pleased to have delivered value growth of 2.8% and volume of 4.3% as we have promoted a bit more heavily in half year 1 to support our innovation launches. In the ready-to-drink still juice section of our business, as you can see there, we're really pleased to report over 20% value and volume growth on the back of our launch into kids products. In flavored carbs, which is a much more promotionally driven and therefore, lower margin section for us as we're up against some really strong competitors, across the Coca-Cola portfolio, the Carlsberg Britvic portfolio and A.G. Barr portfolio. We're not quite where we want to be at this stage, but we do have a heavyweight marketing campaign kicking in, in the second half and further changes to come next year. And on energy, which has been our latest launch, we are pleased that our value and volume growth are over 30% at the half year. So in terms of some of the key initiatives we've had in place in the first half. So if we start in U.K. Packaged and more from the core, so we've recently done a big piece of category strategy work called Fresh Thinking For Drinking that was driven through consumer insight. And we then go out and talk to all our customers about how we see soft drinks growing over the next 5 years and how we can work together with our customers to grow our business and their business. And here, there's an example of a great piece of customer collaboration where we've put branded bays into squash aisles in one of our retailers. This has meant we've doubled the amount of space to our product, and it's meant that we've driven better availability, better visibility and on the back of it, very strong growth in the first half, and our customer has also seen strong growth at the same time. So a real win-win for both customer and supplier. On the [ First For You ] within U.K. packaged. So again, we have launched a range of innovation. So our new functional squash Wonderfuel in 3 flavors has been launched in the first half, and this is targeting new consumption occasions throughout the day with a particular focus on the breakfast occasion. Secondly, combining both sustainability and commercial opportunity, we have launched our double concentrate double strength portfolio in 2 flavors across a range of retailers, driving both visibility and sustainability benefits. Within our energy portfolio, we have rolled out our GBP 1 price-marked pack that means via our wholesale partners, we are able to access more of the independent retail trade in the U.K. and continue our strong growth. And then in our Beyond the Bottle concept, we are working in partnership with Applied Nutrition [indiscernible] Group. And it means we are taking Vimto into health and wellness spaces through our brand licensing model across tablets, gels and creatine powders. Further afield in our International division, again, in our more from the core strategic focus, we have again had a very successful Ramadan, celebrating being at the heart of over 100 Ramadans in the Middle East. You see the world-class execution there of our iconic bottle. We've had a multimedia advertising campaign, including going back on TV after 4 or 5 years off TV and really leveraging the emotional connection that Vimto plays in the households of people throughout the Middle East. Across Africa in our more from the core pillar, we have continued our rollout of our concentrate model. Due to rising tariffs in West Africa, last year, we decided to move our production from Spain into the markets of both Senegal and next year, Ivory Coast with a key partner there who is building factories called The Millennium Group. They have their own product 3x Energy, and we will be producing Vimto within their factories and then rolling out to the 11 key West African markets you can see there on the map. We have currently in the first half, rolled out to Senegal, Guinea and Mali. In the second half of this year, we will roll out to Guinea-Bissau, Gambia and Mauritania. And then next year, when the factory is complete in Ivory Coast, we will roll out to Niger, Burkina Faso, Ivory Coast, Liberia and Sierra Leone over '26 and early '27. We have also put some people into marketing roles within Senegal who are working with our partners to drive marketing activity. And going forward, this reduces supply chain risk for us as we are producing in country and also drive sustainability benefits as we will be importing finished goods from Spain. In our [ First to New ] model internationally, we again are focused during our Ramadan campaign and throughout the rest of the year on driving more Zero products into our Middle East portfolio on the back of rising diabetes in the region. And this is driving penetration into the category and bringing new users in who can't consume sugar but want the great and well-known taste of Vimto. We have also now launched into Malaysia with our 1-liter squash proposition. We now have listings nationally in over 3,000 stores. And our big marketing campaign is kicking off alongside TV advertising that will hopefully drive rate of sale throughout the year and into next year as we grow our business in this key strategic region. On our Fuel for Growth focus, firstly, we start in Out of Home. We have a much more simplified model. And part of that was to only sell ICEE into cinema chains in the U.K. And I'm pleased to announce that we have taken on another cinema chain, Reel Cinema to complement the business we have with Cineworld and Showcase. That has been rolling out across their 16 cinemas in Q2 and will drive incremental growth for us over the next few years. We also are having a phased exit from our Starslush still product. We have a partnership with [indiscernible], who will be distributing our product for us. And then in years 2 and years 3, manufacturing our product as they take ownership of this brand as we continue to simplify our business model. And then we continue to focus on driving consumption out of very profitable individual outlets then we can measure as we deliver direct to market. Our business transformation program that have been in place now as we've been planning for it for a couple of years, saw the launch of our brand-new [ SAP S4 HANA ] system during Q1. We had a very successful launch and have been able to trade successfully throughout the period. And as we move into half year 2 and next year, we will look about how we realize benefits from this program to reinvest back into the business over a 5-year payback period. From a sustainability point of view, we have 3 pillars to our strategy. They are namely everyone matters, products we're proud of and owning our climate impact. And I think the success of these programs are very much where we combine commercial and sustainability programs. A couple of great examples will be where we've launched double concentrate and functional squash products that both drive sustainability through reduced plastic and nutrition through the vitamins we've added to our Wonderfuel products. And on the right-hand side there, the moves we've made in West Africa reduces our impact on the environment as we no longer ship finished product all the way from Valencia into Senegal. Okay. I will now hand you over to David, who will step you through a detailed analysis of our numbers. Thank you.

Thank you, Andrew. Looking at financial highlights, a really good performance in the first half of the year. The business has delivered well and very much in line with our plan. I think our internal targets have always been weighted towards the second half year, and we are confident in meeting them. Just picking out the main points. Group revenue, GBP 85.5 million, plus 1.8%, and I'll go through more details later. The like-for-like progress on that is plus 3.7%. Operating profit, GBP 13.6 million, plus 4.1%. That's GBP 0.5 million up, and that's really good progress given the phasing, particularly the phasing of the Middle East business in the first half. Operating profit margin, plus 0.3%, 15.9%, good traction there. And PBT up GBP 0.1 million, slightly lower than the increase in operating profit, and that's because of lower interest rate -- lower interest receipts as interest rates fell and we had slightly less average cash. PBT margin, 17.1%, a little bit lower, but that's down to the interest reduction and it's not problematic, and we're still effectively making progress towards our medium-term target of 20%. Cash, GBP 16.6 million -- sorry, GBP 61.6 million, lower than this time last year because of the payment of the GBP 20 million special dividend in the second half last year, but higher than expected. Good free cash flow at GBP 14.2 million against GBP 9 million last year, and that's really down to an inflow on working capital. I think that's really more of a timing issue and will moderate in the second half. We still expect to have a bit more cash. Normally, we grow cash principally in the second half, but we think it's come a little bit early. Return on capital, very strong, 30.4%, up GBP 3.3 million following payment of the special dividend last year, we've now got a more efficient balance sheet with slightly less cash on there. And dividend, a small rise to 15p. We expect bigger growth in the second half, but I'll pick that up again later. Okay. Having a bit more of a detailed look at revenue. Throughout this slide, I'll give some like-for-like numbers, which have an adjustment in them for the effect of moving to the concentrate model in West Africa. This has a calming effect on revenue growth without affecting the absolute profit we earn on that sale. Group, up 1.8% like-for-like plus 3.7%. U.K. Packaged plus 3.7% within that volume up 5%. We haven't put through an inflationary price rise this year. We've had a little bit more promotional spend within the revenue line, maybe a little bit lower marketing below the revenue line. International, minus 2.5%. Like-for-like on that is up 5.7%. The principal reason for the fall is the earlier timing of Ramadan during the year. Some of the shipments in the comparative period, we actually made in Q4 2024. Those of you who heard the presentation then will remember that we got good growth in the Middle East. We probably just shipped at least an extra container in terms of the timing in '24 rather than early '25. But really that offset by the shift of the concentrate model in West Africa. So Middle East as a whole, up 53%. We were down 3 containers against the comparative, but we expect the second half to be level at 17 containers in both periods. Africa, really standout performance, plus 16.9%. If you do a like-for-like on that adjusting for the move to the concentrate model where the sales value is around about 1/3 of that of the finished product equivalent, it would have been 29% up. So really strong performance progress both on concentrate and on Red Can. Rest of the World, down 13.6%, restrained really in both Europe and U.S.A. We expect to make progress in the second half of the year to recover that. In Europe, our distributor had 1 or 2 supply chain issues within their logistics and U.S.A., a bit of an effect from -- we think we're a little bit out of high on price and obviously some effect from tariffs. Overall, Packaged up 1.8%, that's 3.7% in like-for-like terms. Out of Home, plus 1.9%, good performance from what's now a much more simplified business. Again, we expect to make a bit more progress in the second half. We did plan for revenue to be -- revenue growth to be lower because essentially, we slowed -- particularly slowed the Out of Home business down while we went through the ERP SAP transition. Okay. Moving on to business profitability, operating profit by business. As we see, overall, up GBP 0.5 million to GBP 13.6 million, 4.1%. Operating margin, 15.9%, up 0.3%. A really good performance building on the near 15% growth last year. So we're really quite pleased with the progress over the 18-month period. Packaged profit, plus GBP 0.5 million. I think importantly, in terms of our targets, return on sales up 0.4% to 29.1%. So that's a really good return on sales from the business and very much in line with strategy. Within that, U.K. performance was good. We've seen extra sales, maintained gross profit percentage has led to extra margin. As I said earlier, some additional promotional spend during the year in sales line rather than marketing spend. So just a little bit of a switch between the two, but overall good performance in U.K. And I think in International, benefits really of developing a spread of markets. We've obviously got the lower Saudi business in the first half, but that's really being balanced by the standout performance from Africa. So overall, gross margin percentage has been maintained. Out of Home, profit plus GBP 0.1 million, a good steady performance. Sales a little ahead, profit a little ahead, good cost control within that business. And again, importantly, the return on sales ahead by 0.6%. Our objective really for Out of Home is to improve profit rather than grow the business quickly. Central overheads in net terms, up 2.3%. Within that, higher spend on operations. We have got a full period of the recruitment that went on through last year, and that's really investing in our procurement and supply chain teams and a little bit of extra spend in IT. The SAP system, the license fee on the SAP system is bigger than the license fee on the legacy systems that we were working before. So increase in spend in IT. We've also had the increase in cost of living and extra [ NIC ] coming through in the first half. So overall, those investments and additional national insurance has been offset with savings elsewhere. Overall, really fairly well controlled. Profitability up 4.1%. We expect to make more progress in the second half. Adjusted PBT, really same numbers, but in a statutory format. As you can see, the group margin overall maintained at 44.1%. We expect the second half to be higher with a substantially increased number of shipments to the Middle East. So we do see that moving forward. Distribution costs higher, a bit more volume there. We saw volume growth in the U.K., 5%. Admin spend generally well controlled and more balanced. So good progress at the operating profit line. As I've talked to earlier, finance income lower. We had generally lower cash on average during the period given the payment of last year's special dividend and obviously, interest rates were lower. We expect progress in the second half. Exceptional items, 2025, entirely the SAP implementation and business change program during the go-live period in March had extensive support from our implementation partners, which was the SAP implementation partner and also the business design and transformation partner that we used. Second half, we've -- while the system is in and working, transactionally went very well. I think -- I don't think there was any interruption either to our purchasing processes or dispatch and invoicing, which you get with some SAP installations. So transactionally went very well. We're now bedding down the systems. There's a little bit of further spend to come in the second half on completion of some of the integrated business and financial planning systems. We expect a further spend of around about GBP 0.75 million on that. And then the project will be complete, and we could look forward to capturing the benefits that we expect to come from that, which will be largely in better procurement and in better supply chain management. Net cash, obviously, a really good performance, support of the forward strategy. We always plan to be pretty strong on cash. And obviously, that's still the case at the half year. I think it is a little ahead of where we would normally expect to be. Traditionally, we get a small increase in cash in the first half, but a bigger increase in the second half. We think this will -- therefore, the outperformance in H1 will moderate in H2. Nothing substantially has changed within the numbers. I think it's just a bit of timing, but obviously, a better place to be. Principal change in cash has been lower working capital demand of GBP 6.4 million, probably a better performance on debtors than at the 2024 year-end. We received some delayed payments from Africa and the Middle East. Credit is a little bit higher, but that's generally timing and things like higher VAT charge -- VAT. Lower cash interest, normal tax charge and cash out. And obviously, we've paid 2024's final dividend. We're really quite happy that we've got over GBP 60 million in the bank at present. So pleased with that. Finally, from me, a reminder of our capital allocation policy and a bit of information on the interim dividend. Obviously, as a business with a long-term perspective, the first call on our cash is always to support the business with investment in innovation, marketing and widening our distribution, and that's obviously carried on through the first half. And then supporting the business with CapEx and working capital. So that's always the first course on -- from the business point of view. We then obviously want to pay a progressive dividend. I'll come on to the dividend later, but a small increase. And then after that, really, it's supporting the current business with, I suppose, what I term quality M&A. It's the right target in the categories that we can't access easily with the Vimto brand. And finally, returning surplus cash. Last year, we obviously paid out a GBP 20 million special dividend. I think the Board has reviewed whether we should have declared one at the half year. We think it's a little bit early, but it will be considered again at the -- with the full year results. So in terms of dividend, we operate a fairly rigid 2x cover dividend policy. What that translates into with the earnings per share figure is a small increase to 15p from 14.9p. But obviously, given the full year expectation of an improved profit, we'd expect to pay -- to generate more dividend growth in the final dividend paid next year. Thank you.

Thanks, David. Okay. So just looking ahead, some of the key focuses for us in half year 2. So on the back of our launch of Wonderfuel, which obviously targets kind of children in that breakfast occasion. We've got good distribution now across some of our key customers and the major marketing campaign kicks off in back-to-school in September, where we'll be making a significant investment into TV, digital, sampling and shopper marketing across the piece. So very excited about this launch. On the back of the success of our big Love the Taste brand campaign, we will be going out with a bigger and bolder program in year 2. That program is just starting in market now. We are increasing the number of packs you will see it on to over 35 million. And the key here is that is then supported across our retail partners where we bring to life in store superb activation, drives interruption for consumers and additional rate of sale. From an international perspective, we will be looking to move our production out to -- back into the market of the U.S.A. So we currently have a business there mainly focused on expats from the Middle East and Africa. During COVID, we took our production out of the U.S.A. with challenges with our partner there and back into Spain. But on the back of rising tariffs that obviously we've all seen in the press, we'll be looking to move our production of products into -- back into the U.S.A., and we'll be doing that at the end of Q4 this year. We continue with a focus on innovation abroad. So in the Middle East, we are launching a new flavor in our kids range of black currant. We are launching a new can format. So you see the purple can there. That's a 330 mL pack, both in original Vimto and blue raspberry, which is going to be a value offer to consumers. And then in West Africa, we are moving to a 250 mL an format across our Gambia country. And then last but certainly not least is the continued rollout, as I mentioned earlier, to our supply of Red Can into 3 additional markets in the second half. So just to summarize from me, we are really pleased with where we are and absolutely on plan to hit the targets we outlined back in our Capital Markets Day in November last year, and they are to take turnover to about GBP 225 million, a PBT margin of 20% and PBT of GBP 45 million. And as David [indiscernible], we're absolutely on plan at the half year, and we accelerate in the second half on the back of the Middle East phasing and the ERP rollout. We are part of a very growing and resilient soft drinks category, which is really, really positive. We have a clear and focused strategy to remind you to accelerate growth in our higher-margin package business in the U.K. and internationally to drive bottom line contribution from our simplified Out of Home business and continue to drive efficiencies through operational change and business transformation to reinvest back into our business. And we are confident that we will deliver in line with market expectations on adjusted PBT at GBP 33.1 million to continue to deliver further value for all of our shareholders. Okay. Jake, that wraps up the presentation. We're now happy to open up to questions.

[Operator Instructions] I would just like to remind you that recording of this presentation along with a copy of the slides and the published Q&A can be accessed via your investor dashboards. Guys, you can see that we have received a number of questions throughout your presentation this afternoon, and thank you to all of those on the call for taking the time to submit their questions. But Andrew, David, at this point, if I could just ask you to read out those questions and give your responses where it's appropriate to do so. And if I pick up from you at the end, that would be great.

Okay. Thanks, Jake. So I'll read the questions and then indicate whether I'll take that or David will pick that one up. So I think the first one is a question here around beyond Senegal, are the other markets where local manufacturing could enhance flexibility, margin or competitiveness? So yes, I think first is just to remind everybody that Senegal will serve 6 markets. So that will be the ones I've highlighted around Mali, Guinea, Senegal, Guinea-Bissau, Mauritania and I can't remember the sixth one. And then we will move to Ivory Coast next year and the market serviced out of there will be Ivory Coast, Niger, Sierra Leone, Burkina Faso. So that is in the presentation. So those 11 key markets. And then as mentioned in the second part, we will be moving to local production back in the U.S.A. on the back of the rising tariffs but that will -- not having that 15% tariff in place will make us more competitive with sustainability benefits as well. The next question perhaps for David is how do you manage currencies in the West African countries we operate in?

The policy we've had for some time is we trade with West Africa largely in euros. And obviously, there is a local currency, the West African franc, which would give -- if we trade in that would give us some issues. The euro is generally well understood and accepted there. So essentially, we would manage our currency exposure with a hedging policy where we'll hedge 6 to 12 months out on our net euro exposure. We also have some euro costs coming in. So it's been managed on that basis for some time. I think one of the byproducts of the move to concentrate is should be -- give us some improvements. We have historically had some problems, not major ones, in terms of receiving payment from some of our customers in West Africa simply because they've found it quite hard to access hard currency like the euro when there is a lack of euros in their banking system. Because the concentrate model is generally -- while we don't lose any profit, the sales value is about 1/3 of the model it replaces. It means they have to access less euros, hard currency. And so it should be easier for them to pay us. So there's a good benefit there.

Thanks, David. So we've got a question here asking us how do we think we can improve growth as several commentators have reported it to be pedestrian. So twofold. I think it's really important here to -- if we start with profit growth, and I'll talk about revenue growth. So I think from a profit growth perspective, 4% at the half year was exactly where we planned to be. And that is on the back of 2 things: the phasing of containers to the Middle East. So if you remember what David said, 90% of our containers this year will be in the second half versus only 10% in the first half. So we always knew growth was going to be stronger in the second half. And also from a profit point of view, we knew in the first half, the launch of ERP, we planned some activity not to be done, and we moved that into the second half, things like new customers in Out of Home will be loaded for second half growth. So I think it's really important to stress that we are absolutely where we said we were going to be at the half year. I think from a revenue perspective, what's really important to remember is the change in model in Africa means that as we are sending concentrate and not finished goods, our revenue line is always going to look lower. And David, I think, covered quite nicely in his slides around you have to look at it on the like-for-like growth, which adjusts for that change. So probably really important to understand that part of our business to understand that growth isn't pedestrian. It's just weighted to the second half and the change in the model in Africa means revenue lower, but overall profit should improve through the model we've talked about.