Premier Foods plc (PFD) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. And welcome to full year results bond investor call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Alex Whitehouse. Please go ahead.

Thank you very much, Owen. Good afternoon, everybody, and welcome to the Premier Foods bond investor conference call for our full year ending the 52 weeks of the 28th of March 2020. For those of you that don't know me, my name is Alex Whitehouse. I'm joined also by our CFO, Duncan Leggett; and our Director of Investor Relations, Richard Godden. So the plan is we will run through a short selection of the slides that you will have got and that we'll use as this morning's analyst deck, and then we'll move over to some time for Q&A. So I'm just going to kick off with what will then be in your slides, in Slide #3. So I think the important thing from our point of view is that the last financial year for us was one of considerable progress on a number of fronts. The first one being the continued good growth of our U.K. business. And we saw that grow quite consistently throughout the year and that makes it now 11 consecutive quarters of sales growth in the U.K. And actually, with 3 days left to go till the end of the quarter, it will soon be 12. Also, a significant reduction in net debt by GBP 62 million, which brings us to a net debt-to-EBITDA ratio of 2.7x. You may remember that we've set ourselves, it was a long-standing, actually, target of 3x for the end of the last financial year. So we're very pleased to have got below that. And also, in April, we announced the closure of our strategic review with the landmark pension agreement, which you'll be aware of, which is the prospect of a very significant reduction in the NPV of the deficit contributions. So all in all, a year of good progress on a number of very important fronts. If I move on to Slide 5, headline results. You can see that the business grew by 2.8% over the full year and 3.6% in the last quarter. And that being driven really by our U.K. business, which had a very strong year at 4.3% growth and 7.3% up in the last quarter. That bump in the last quarter is due to -- so this is right at the end of March, the last 3 weeks of March, so the last 3 weeks of our financial year, we saw that phase just before lockdown or just as lockdown was starting to happen, and people went out and stocked up their store cupboards. So that was the impact of that flowing through on our full quarter. And trading profit was GBP 133 million. That's up GBP 4 million versus prior year. And then as I said, net debt down GBP 62 million, bringing net debt-to-EBITDA to 2.72x. And then if I just move to Chart 6. And you can see from the graph there that we've now got a pretty consistent track record of trading profit growth and of adjusted PBT growth, and then that fall in net debt and net debt-to-EBITDA. And you particularly noticed the net debt step-down in the latest year, '19/'20, compared to the prior years. And so with that, I think we'll hand over to Duncan, who will go through the numbers in a bit more detail.

Thanks, Alex. Good afternoon, everyone. And thanks for joining. So I just wanted to pick up on a few slides out of the deck, so starting with Slide 8. And that highlights our net debt progression since March '19. So obviously starting from GBP 523 million of net debt at the end of March '17. And the chart just highlights a good free cash flow over the last 3 years and illustrates the fact that we are -- that we did have a better year last year in terms of free cash flow. I mean clearly, higher EBITDA over the 3 years, trading profit moving from GBP 117 million to nearly GBP 133 million over that time. But also the reduction in interest, it was up GBP 40 million at the start of sort of '16/'17, and that's gone down to below GBP 36 million last year. So there you'll see interest coming down. As we'd expect, as net goes down -- net debt goes down, and clearly, we'd expect that to reduce further with the part redemption of the floating rate note that you guys will be well aware of, that we completed last week. And other pieces, I mean, last year, the year to March '19, had some one-off charges relating to a redemption of bonds and financing fees that they obviously didn't repeat, which helps us step it forward, from where we get to GBP 408 million, that's GBP 62 million reduction year-on-year and net debt-to-EBITDA of 2.72x, as Alex said, and comes to be below the 3x target that we had set ourselves. So moving on to Slide 9 in terms of the more detailed movements in net debt during the year. Starting at GBP 470 million, you can see the strong trading performance that we talked about, branded growth model really, really working well. And Alex will touch a bit on that later. And then we get to the big outflows, both the pension and interest will be no surprise. Clearly, both pretty hefty. But as I said earlier, interest has been coming down from sort of GBP 40 million 3 years ago, and we expect that to reduce. And pensions obviously, with the pensions agreement, that we're pleased to say has now been signed. We'll get a reduction in that big cost straight away, and we expect the deficit recovery payment to reduce over time as well. Working capital was a strong performance with a fairly large inflow there. There was some timing in there. Obviously, we exited the year with lower stocks because of the strong end to the year. So some of that will unwind during the year as we rebuild the stocks. And then that leaves us with GBP 408 million on a like-for-like basis, which excludes the IFRS 16 lease adjustment. When you add that back in, we get to reported net debt of GBP 430 million. And Slide 10 highlights just a strong free cash credential of Premier Foods. And we can see the EBITDA of GBP 153 million converts to an operating free cash flow proxy of GBP 142 million, that's a 94% conversion. And even after pension and interest, that is still 41%, which is pretty much double where we've been for the last couple of years. Looking a bit further ahead, as I said, interest, we expect to come down further with the redemption of the partial part of the floating rate note and pensions with administration costs that will come down a bit this year. And obviously, we're expecting a significant reduction over the next few years as the benefits of our pension agreement start to flow through. That leads me quite nicely on to pensions on Slide 11. So we've got the accounting valuation on the left-hand side of the chart and actuarial on the right. Just taking the accounting, I mean, it starts to get pretty eye-watering actually. You've got the RHM surplus at GBP 1.5 billion on an accounting basis. And Premier Foods has improved to GBP 275 million deficit. Some of that's being driven by financial assumptions. So we've got slightly higher discount rate and lower inflation. And clearly, the RHM asset performance that has underpinned its success to date has continued to deliver. And that is part of the higher returning, less liquid assets, but also the effect of the hedging that yields start to reduce over the last few months of the year. We've got some strong performance from some of those assets. So on the right-hand side, pleased to say that we have signed the 2019 valuations, so they're at March or April '19, depending on the scheme. And in terms of where they landed, we've got Premier Foods pretty much bang on where it was 3 years ago. And RHM stood at GBP 338 million versus compared with GBP 135 million in 2016. So just a bit more detail on that. So because the RHM scheme is moving towards buyout, they used a more prudent discount rate for the valuation this time around. So actually, they're not like-for-like versus 2016 because they used a Gilts of plus 0.5% discount rate. I think if we stick to the Gilts of plus 1% that they used in 2016, the 2019 valuation is more like something north of GBP 600 million. So that's probably a more accurate like-for-like basis. But I think using -- even using the official valuation result, you can see deficit combined in 2013 of over GBP 1 billion. We are now down to sort of GBP 200 million on the actuarial basis. So the final slide for me is Slide 12. I guess that sets the theme quite nicely, just to remind you of the pension agreement that we announced in April. I mean clearly, the RHM scheme is going from strength to strength, and the whole premise of the deal is that we will leverage that strength for the benefit of the Premier Foods schemes by moving the sections under one trust. And clearly, that would be the way it was if we let it play through as it previously was because the RHM scheme would have bought out, at the earliest possibility, as any scheme would and the Premier Foods scheme would still be where it is. So for the RHM trustees and now sort of the combined scheme, one might conclude that it will be in their interest to come on a bit past buyout so we build a surplus, and that surplus will then move over to the Premier Foods scheme. No tax impact. If any, surplus came back to us now, it would be net of 35% withholding tax. So the surplus will go over within the same trust, the benefit of the Premier Foods scheme. And that will obviously create a much better certainty for our pension scheme members, which is really important. And clearly, to the extent to which the pension Premier Foods' deficit reduces, we'd expect a consequential reduction in deficit contributions as well. So that's it for me. Look forward to questions later, and I'll pass back to Alex.

Thanks, Duncan. So I'm just going to move us on now to Chart 20 and just talk for a couple of minutes on the obvious question of the impact of COVID-19 on the business. I think the important thing to know is that we, right from the beginning in March, we put in place 3 key priorities in order to guide the organization over the forthcoming months, particularly bearing in mind at the time, of course, none of us really knew how this was going to play out. Those 3 priorities were: looking after the health, safety and well-being of our colleagues; doing our bit to keep the supermarket shelves full and feed the nation; and then thirdly, protecting the business from a cash and liquidity point of view. So starting with the first one. Obviously, we run food factories. Food factories need very high hygiene standards. We're very, very pleased with the high standards that we have in our factories. It's very difficult to get access to our factories. And then once you're in, there are very high standards in place in terms of handwashing and PPE and stuff. So we nevertheless thought that it would be beneficial to put a number of additional measures in place. We did those very quickly at the beginning of March. And I think the implementation of those measures has really helped us have relatively low levels of absence. And to our knowledge, we still have no known cases of transmission taking place within the workplace. And then in addition, we also, therefore, have no restriction in our manufacturing or logistics output as a result of the absence levels that we've seen. If I move on to the second priority, which was, let's say, doing our bit to keep the shelves full. And we took that responsibility very seriously. And I think as one of the leading U.K. food producers, there are times when you need to step up to the plate, and that's what we wanted to do. As I say, all our sites remained operational. We also put extra shifts on and still have actually extra shifts running across a number of the grocery factories in order to keep up with demand. But the supply chains held up very well. Great support, as I say, from the procurement team because obviously, all the extra products we're having to manufacture, we need to procure more ingredients with which to make them, but we've managed to do that. And I think a truly impressive performance from our operations colleagues. I'm actually very proud of everything that they've done. And we also put in place a small thank you by way of a bonus and a Hamper and a couple of days of holiday for all our operations colleagues. And I just want to put into context what a great job these guys have done that the incredibly high demand that we've seen over the first quarter of this financial year as well as the last 3 weeks that came at the back end of last year. We've actually significantly increased our market share during that period across the categories. And that's, I think, good because we've managed to keep up with the demand maybe better than some other players in our categories. And then the last priority was, importantly, protecting the business. As it happened, we were sitting at the year-end on over GBP 90 million of cash generated from operations. So we decided to sit on that for a while. And we also thought it prudent to draw down some of the revolving credit facility in March. And as it turned out, we didn't need to, but we didn't know that at the time. So I think that was a good precaution that we took for where the world was at that particular time. If we move on just quickly to talk about the impact on business performance, and I'm on Chart 21 now, from a volume and revenue point of view. So if we think about last year, I think the important thing to understand there is we were on track for a really strong year anyway. All -- the only real impact of COVID-19 on our business at the end of last year was those last 3 weeks, where our grocery volumes went up quite significantly, but only in the last 3 weeks, again, as I say, people stocking up their store cupboards. What's interesting as we move into quarter 1, so the quarter we're just finishing now, that has continued with volumes a lot higher than normal. And then on our outlook statement, we're saying that we're probably going to close the quarter with about 20% growth in turnover. And that's clearly because all the out-of-home eating outlets are closed. So actually, also a lot of workplaces are closed so clearly all the meals that would have otherwise been eaten out of home are now being eaten at home, and all that volume gets pulled through grocery stores, which is of course what we supply. So I think you can see how that plays out. And as I say, I think we've done a particularly good job from a manufacturing and distribution point of view. And that's obviously helped us improve our market shares and capture more of the available volume. I think what's probably going to happen as we move through quarter 2, so the quarter starting for us in July, is we'll start to see some sort of normalization. As we've announced yesterday, we're going to see outlets start to open, but I'll come back to that in the outlook statement. From a Sweet Treats point of view, so our cake business, the volumes were initially lower than prior year. And I'm talking now back in the March, early April and actually through most of April, to be honest. And that was really because both stores, so the retailers as well as consumers were, at that time, prioritizing the essentials they needed in order to feed their families basically. But what we've seen since then, as people have started to get, I guess, more into balance is we've seen that sales growth return to our cake business in both May and June. So cake business is going quite nicely over those 2 months actually. We do have a small foodservice business and also some B2B volume. As you would expect, they are now a lot lower than normal. But there is still some volume playing through there because we do serve hospitals and prisons, and we actually also supply food to some outlets that do takeaway food. So we are still seeing volume through there, but it is notably lower than normal, but it is a small part of the business, to be fair. And then on cost and margin, as you would also expect, there is some incremental cost in delivering the extra hygiene measures that we put in place and the social distancing measures that we put in place. We also recruited over 100 people, actually, for our manufacturing operations, and that's to cover additional shifts that we've put on in order to step up demand, but it's also covering the gaps where we've got absence. So we've had absence, obviously, because of people who are self-isolating. And we've also got a group of people who are in the government-shielded group, and they're obviously at home and not able to come to work. And so obviously, we continue to pay them. I think it's probably worth mentioning as well that those shielded individuals, we would be eligible to claim furlough payments for. We have chosen not to do that. We think that, that scheme really is there for businesses that are struggling, and that's clearly not where we are. And so consequently, we think the right thing to do for us would not to be claimant. So we've self-funded the people we've got shielded and at home. And overall, I think it's fair to say that the additional costs are more than outweighed by the impact of that incremental volume given how strong it is. So I'm now just going to move us forward to Page 24. So Page 24 is the bar chart on -- that shows our growth in the U.K. over the last 11 quarters. So that's the 11 quarters of growth that I talk about quite a lot. But I think there, I'd really like to focus on the 4 quarters of '19/'20 that we're announcing today. And you can see really consistent strong growth from the U.K. business through all the quarters of the year, helped at the end there, in quarter 4, by those really strong last 3 weeks during the COVID stock-up phase, as we call it. But great performance through the year and underpinned by this model we now have for building our brands with innovation and with TV advertising and by partnering really strongly with our key retailers. So as we fast forward that into the current quarter, quarter 1, as I say, 3 days left to go, 2.5 now actually, and we expect to be up around 20%. And as I say, that's the impact of all those meals that were being eaten out of the home, now being eaten at home. And then move on just one chart now to Page 25. And the other thing that we take a lot out of is the graph on the left-hand side, and that shows our market share gains across the categories that we play in. And I think the important take out here is that we outperformed in every single category that we played in. So strong performance across the quarters, but also outperformance in all the categories that we play, which I think just gives some indication of the strength of the growth model that we now have running in the U.K. And underpinning that growth model is the innovation rate, which is shown in the graph on the right-hand side of the page. And our growth model is driven by really understanding consumers, how they shop, how they cook and how they eat and developing new products that better serve their needs. And you can see there that our innovation rate, and we measure this, by the way, as the percentage of sales that we get from new products launched in the last 3 years. And back to '14/'15, 2.5% of sales from new products moving up to 6.5% in '19/'20, which is a 70 basis point improvement on prior year. And you can correlate pretty strongly the changing fortunes and the growth of the company or growth of the U.K. business at least against that innovation rate. And actually, if I break it down and I break it down by brand, the brands with the higher innovation rates are growing the fastest and the brands with the lower innovation rates are growing the least fast, and it correlates very strongly indeed, actually. I'm going to move us on just one chart again to Chart 26. And I think this is a great little case study of the model in action. And so we relaunched Mr Kipling 2 years ago in a sort of series of new product launches and TV advertising support and also some great in-store execution as well, I have to say. The brand is now 17% bigger than it was 2 years ago, grew both over the last 2 years since the relaunch. And that's underpinned by a number of innovations and TV support. So you can see that just last year, we launched Mr Kipling Minis. And so over Christmas, we have Mr Kipling Mini Mince Pies. And then now we've got, I think, Mr. Kipling Cherry Bakewells and Mr Kipling Mini Fruit Pies and things. But we also have the Mr Kipling Signature range, which was a new premium range we launched based on the trend we see for indulgence. And we significantly outweighted our TV support in the year. So this is our biggest brand, and the last year had its highest sales that it's ever experienced actually. So a great example of the model in action in building the brands. I'm now going to fast forward us in the interest of time on to Page 32 and talk about our International business. And I think this is important because as I said, when we did our quarter 3 trading update, we were a bit disappointed with how our International business was performing. So when I took on the role, we said we would take a really good deep look of what was happening and where we thought the opportunities were. And I'm happy to say that as we sort of sit here this afternoon, we have completed that work. There is a new plan in place, and we are in implementation mode. I think if we look in detail, what we saw was some good, strong evidence that our products and our brands can be very successful in overseas markets. But unlocking it requires a different approach from what's happened in the past. And in particular, it requires a great deal of focus on getting the executional metrics right in the individual markets because obviously, we've got very fine-tuned success models for our brands in the U.K., as you would expect. But when you then take them overseas, then a little bit of translation is required and a little bit of fine-tuning, and it does require some detailed tinkering to get it right. I mean we've called it execution obsession on Page 32, and I think that captures it quite nicely. So in order to do that, we've changed the structure of the team. So you might remember that we've already put a new Head of our International business in place. And then the structure underneath has now moved from being one which is -- which was historically functional, so a Head of Sales, a Head of Marketing, a Head of HR, et cetera, et cetera. And now we've made that by market. So we already had a head of our Irish business, but we've now just appointed a Head of Australia and New Zealand, a Head of North America, and we already had a Head of Europe. So the purpose there is that we shift focus, which is point 2 on market focus, we're shifting focus from the U.K. into in-market. So we've got market heads based in the market that they're responsible for and actually recruited from within that market, and then they will build small local execution teams around them in order to get that execution right. And it just requires that, that presence in the market with your sleeves rolled up in order to make it work, and then again to deliver that executional obsession. So getting -- making sure we've got the right products in the right stores with the right price and the right promotional plan. And I know that doesn't sound like rocket science, and it isn't but it is very, very important to get it right. But if you don't get it right, it won't work. So clearly, that's where our focus is going to be. And then finally, the last piece of the jigsaw is getting our route to market right. And so choosing carefully the right local partners that can help us kind of get the product into store. And with that, I'm going to flip all the way forward now to the outlook chart, which is Page 39. So as you would expect, we will continue to deliver our innovation plans. So we've got a number of interesting new products across all the brands for this current financial year. We're also increasing our advertising investment behind the brand. We had 4 brands on TV last year. We're working on having 6 on this year, and it's a very important part of the model. And that's supported, of course, by the cost-saving program that we announced at the half year, where we said we'd deliver GBP 5 million of cost savings over the next 2 years, which is now, I think, that's on track to over-deliver actually, and we will use those savings to reinvest in that growth model. So we would have expected going into this year anyway, even without COVID-19, to be continuing to make progress similar to what we've seen in previous years. But I think the thing that's changed is that, that incremental demand from everybody eating at home, has meant that we've just got off to an incredibly strong first quarter. So quarter 1, you look at the little model over on the right-hand side, and quarter 1, we, as I said, expect to be up around 20%. So it's still a few days left to go, but that's pretty clear, that's where we're heading. Quarter 2, we now know that lockdown will start to get unwound from a restaurants and pubs point of view in July. So I think what will happen is we will see a gradual opening of out-of-home food outlets, and we will see a gradual return as people venture out. I think, though, what's going to happen is it's going to be a bit of a gradual process. We know that it's quite likely that the full capacity of those food and drink outlets won't be back straight away, so they're going to be working on partial capacity. And I think there's going to be a certain amount of initial reluctance for people to go out until they're sure it's safe. So I suspect quarter 2 will be somewhat transitionary in that respect. And then by the time we get to quarter 3, we're making the assumption at the moment when things are reasonably back to normal, at least insofar as the amount of eating in home versus out of home that sort of takes place. And then in Q4, we're obviously up against some pretty huge comps in the back end of March, obviously, because that was the period when everybody stocked up their cupboards. So where does that leave us for the full year? I think I mean, clearly, it's a very early stage of the financial year. We're not even -- we haven't even completed period 3 yet. But I think what is clear even though we don't know how quickly people are going to return to out-of-home eating just by this year, strength of quarter 1, we're now expecting to be ahead of both revenue and trading profit on where we would have otherwise expected to be for the year. And that's -- and that's taking account of those additional operating costs in the supply chain that I talked about a little bit earlier on. And then obviously, we expect to reduce net debt further as we go through the year. And as we've talked about before, that just continues to open up options forward on cash deployment and capital allocation. And also, I think we're pretty clear from a bank covenant point of view, we would at least now be permitted to pay a dividend if that's what the Board chooses to do. But I would say the priority remains on that debt reduction first. So I think that just about covers it, and probably a good time to go to Q&A.

[Operator Instructions] We have one question from the line of Ronan Clarke.

I have a few, if that's okay. So firstly, I just wanted to check, can you tell us what debt, if any, is on the Hovis balance sheet? I guess I'm just trying to figure out what we could back out as potential cash proceeds if we saw an EV number. If you could just divide it in half or is there something else we need to do?

Duncan, do you want to take that? Do you want to give all the questions and then we'll do them one by one?

Yes.

Yes. Sure. Okay. The second one was on the leverage target. I guess that year-end target is 3x. It sounds like you're weighing things like dividends and CapEx, but is there -- are we going to see a new leverage target number? And should we be thinking about a push on from here and go lower? Or is 3 now sort of imply you have some headroom to go back up and stay? I think it hasn't been updated. And then on the pension agreement, I just wanted to focus on the net present value of the contribution, the GBP 175 million to GBP 185 million, that's come down. Is that just a function of the lower calculation of the liability? Or I assume that, that doesn't assume a buyout at a particular date. Or what are the mechanics of that particular number, please?

Okay. So I'll just pick up the leverage target, Duncan, and then I'll hand over to you for the Hovis question and the pension, yes? So look, I think on leverage target, we haven't set a new target, no. I think 3x was never intended to be the end goal. It's more a staging post. And I think that's still how we see it. And whilst we haven't set a new goal, then the intention is to continue to push down, let's say, towards 2. So into the low 2s. So I think still some road left to go on that one. And then I think, Duncan, probably you're best on the other 2 questions.

Yes, sure. I mean on the Hovis, I mean, I think there's clearly been some news out there. I guess without trying to state the obvious, we are a minority shareholder. We aren't running the business, and we aren't driving any decisions around strategy other than obviously, Alex and my seat on the Board. So I think what I can say is that in terms of our balance sheet, we have nothing on it relating to Hovis. So we've fully written down the investments some years ago because it was having some tough times. So I guess there's nothing on our balance sheet. So anything that we did get would be upside. But I think it's probably not appropriate for us to comment on speculation relating to Hovis. And then just on the question on NPV, I mean, I think we deliberately didn't repeat some of the materials that we set out in April off the back of the pensions agreement, but there is a presentation on our website that may be useful reference material. I think in terms of the NPV, I mean, clearly, we made some forecasts around the speed at which a surplus may build in the RHM scheme. And effectively, how much that might be on any buyout and therefore, how much would move to the Premier Foods scheme. And because there's a lot of our names in there and there's a lot that's not within our control, we put out a range of forecasts as to how that might play out over the next few years. So we had a low, medium and a high case. I think the high reduction to the NPV reduction of up to 45% reflected our high case. So our bull case, if you like, and that did have some of our forecast around exactly how that might play out. If I look at the NPV on the low case, that was a reduction of sort of 17%. So I think the range is 17% to 45% based on our projections. But I think, again, it will depend on the valuation at the particular date, and there's a lot of different variables in there.

Yes. And just to be clear, so let's say you made the contributions of GBP 38 million for the next 2 years and then a buyout occurs, that would be the end of your funding?

Well, no. I mean it wouldn't end the funding. I mean so how it would work is that the -- yes, we would expect there to be a surplus on buyout and that's moved to Premier Foods. I think the size of the surplus is a very good question. I mean I think given the deficit of about GBP 0.5 billion on the Premier Foods schemes, I think they would -- it will be difficult and take a long time to build a surplus of that amount. But clearly, what we're expecting to happen would there be a meaningful surplus, that would move over to maybe not reduce the deficit to 0, but make a significant chunk into it and therefore, reduce the amount that we will need to pay.

We don't have any other questions.

Okay. Well, look, if there's no more questions, then I think we'll call it a day there. And thank you, everybody, for dialing in.

Thanks, everyone.

Thank you. Bye.

This concludes the conference for today. Thank you for participating. You may all disconnect.