Premier Foods plc (PFD) Earnings Call Transcript & Summary

So good morning, everybody, and welcome to Premier Foods prelim results for the year ending the 3rd of April 2021. I am joined, as always, by Duncan Leggett, our CFO. So I will take you through some of the headlines. I'll hand over to Duncan to go through the numbers. And then we'll come back, and I'll give you an update on strategy, and then we can have a look at this year's outlook. So obviously, it's been an exceptionally strong year of trading for us, and that's driven substantial debt reduction. And you can see there 10.3% growth over the full year and 13.6% growth from our brands. And clearly, that's been helped by the fact that more people have been eating at home as out-of-home eating has been constrained. But also, we've continued to drive our brands with our branded growth model, and I'll come back to that a little while later. And for quarter 4, so that's Jan, Feb, March for us, 4% growth and 7% growth from our brands. That was particularly encouraging, of course, because at the back end of the quarter, that's when we start to go up against the comps where -- that's where people were starting to stock up their kitchen cupboards with products ahead of the first lockdown. Trading profit of GBP 148 million, that's up 12%. On adjusted PBT, up 23%, clearly helped by the fact that through the year, we were reducing our floating rate note and so consequently lower interest costs. And net debt reduced by GBP 94 million in the year. That's down to 1.9x EBITDA, which is the lowest-ever leverage that the business has had. And it's off the basis of that lower leverage and a stronger financial position that we're now in that we're going to restart dividend payments, and that's after an absence of 13 years. And I said that we continued to support our brands and continued to deploy our branded growth model, and you can see there on the left-hand side that led to both our Grocery and Sweet Treats brands, in aggregate, outperforming the market, so Grocery increasing its market share by 32 basis points and Sweet Treats by 113 basis points. The online channel, of course, grew very rapidly as people sought to buy their groceries online where they could, and I'm pleased to say that our work there meant that we outstripped even the high growth of that channel. We grew at 104%, and we gained 128 basis points of market share. And also, during the year, we picked up 4.5 million new households buying our brands as well, and I'll come back to the importance of that number a little while later. So if we look at our track record over the last 4 years, you can see consistent growth in trading profit and adjusted PBT, again, that adjusted PBT being helped by lower interest rates in the last year or so, and then our net debt falling to GBP 314 million versus GBP 523 million in years '16, '17, which drives that net debt-to-EBITDA from 3.9x down to 1.9x over the period represented there. And with that, I'll hand over to Duncan. Thank you.

Thank you, Alex, and good morning, everyone. So I just wanted to start by -- just by going through some of the progress in the last year across interest, pensions and leverage. So on the left-hand side of the page, we can see the interest charge this year has reduced from GBP 39 million to GBP 33 million. And actually, if you pro forma this for the bond redemptions already made, that's more like GBP 27 million, which is 30% lower than the year before. We've announced this morning that we are issuing a proposed GBP 300 million bond. And because that is replacing a 6.25% coupon, we think the interest cost will reduce further from here. It was just over a year ago now when we announced the landmark pensions agreement. So not only does that give us a more secure future for the members of the Premier Foods pension schemes in particular, but it also has potential over time to significantly reduce the deficit that's currently in the Premier Foods pension scheme and, therefore, reduce the contributions from the company. And this progress across interest and pensions, combined with 1.9x net debt-to-EBITDA ratio, which is the lowest certainly since listing in 2004, we feel the time is right to propose a dividend, and that is for GBP 0.01 per share. So in terms of how our deleveraging has progressed over the last few years, we are continuing to increase the rate of net debt reduction. And since March '17, we reduced the overall net debt number by over GBP 200 million, and nearly half of that has come in the last 12 months. And from a net debt-to-EBITDA ratio, we've reduced by over 2 turns from 3.93 down to 1.9x. So in terms of the moving parts of the deleveraging during the year, and clearly, as you'd expect, all the profit has turned -- profit growth turning into cash, so EBITDA on the left-hand side benefiting our cash flow. On pensions, that's GBP 47 million. Now that does include the benefits coming through as planned of GBP 4 million per year, administration cost savings we announced as part of the merger. And in [indiscernible] I've just mentioned, 33 on a cash basis this year after we reflect the full year impact of the redemptions of the floating rate notes already made. We expect that below to be below GBP 30 million and to improve further following the pricing of the bond later this week. The GBP 30 million on the right-hand side relating to Hovis, and that comprises the gross proceeds of GBP 37 million, net of a GBP 7 million contribution we made to the pension schemes. And I'm delighted to announce the refinancing today. So we have announced a new RCF facility of GBP 175 million with a refreshed banking group that we think are really well placed to support us over the next phase of our strategy. This extends the maturity of our facilities and also, combined with the new bond [indiscernible] and the redemptions of the floating rate notes made already, going to help to significantly reduce our future interest cost. The RCF is for initially a term of 3 years, plus 2 1-year extensions, and the margin structure is broadly unchanged. And the fixed rate note proposing a 5-year bond of GBP 300 million, and that will replace the current 6.25% fixed notes and the remaining GBP 20 million of the floating rate notes. And again, really happy to be here, having reinstated the dividend for the first time in 13 years. We last paid a dividend in 2008. And I think the progress Alex touched on and I've just gone through, progress on the balance sheet, we now think now is the right time to reinstate Premier Foods to the dividend list. Clearly, 1p per share, roughly 1% yield is relatively modest, but I think it's really important that we have returns list. And because we started modestly, we expect the payout ratio to progress from this base. And just to remind that of the dividend matching arrangement we have with our pension schemes. So moving on to the headline results. Now you probably noticed it's a 53-week period this year. We've done our best to make it as comparable as possible with last year. So attract your attention to the middle 2 columns. And as we've touched on and been talking throughout this year, it has been quite a remarkable year. So total sales is up 10%, and branded sales for the year is up nearly 14%. I think particularly pleasing, quarter 4, which don't forget is starting to cycle some of the panic buying this time last year, was up 4% on a total basis and 7% on a branded basis. So trading profit of GBP 148 million. That's GBP 11.9 million higher than last year on a like-for-like basis, and that is after a slightly higher group on corporate costs, which is largely due to the performance measures built into our management incentive scheme that covers 500 or so of our management-grade colleagues. And further down the P&L, adjusted PBT, which obviously includes the reduction and the progress we've made on interest, that's up nearly [ 22% ] to GBP 115 million. So in the Grocery business, I mean that is where we have seen the biggest change in consumer behavior and eating-at-home meal occasions. And that is when that flows through to total sales growth of 13% year-on-year, and branded is nearly 17%, and again, quite a strong end to the year in Q4 as well. So what we've seen is market share growth across all of our grocery categories, and all of our key brands have been in growth this year. I think profitability, so at GBP 173 million, which is 16% higher year-on-year, this is after increasing consumer marketing year-on-year, and it is after additional costs relating to COVID. So they're around hygiene, keeping our employees safe and around absence. And despite those, we are seeing [ additional ] contribution moving forward. Nonbranded sales is a bit lower year-on-year, and that is where our sales to the out-of-home sector are recorded. So not surprising, they are slightly down. And within the Grocery business, these numbers we have international, which really, pleasingly, has grown not only 23% for the full year but double-digit growth across all 4 quarters of this year. I think with that, there are some COVID benefits within that but also some strong positive early signs of the strategy changes coming through. Now Sweet Treats, we haven't really seen the same dynamics as we have in the Grocery business. And actually, the category overall is down 2% for the year. But what we have seen, we have been able to grow our revenue by 2% in the full year and nearly 5% at branded level, and again, a strong exit to the year with total sales up 5% and branded revenue up nearly 8%. So continue to see good, good growth and good performance from Mr Kipling, particularly through NPD, particularly our better-for-you options; and within Cadbury's as well, strong performance from the core Mini Roll range. You will see nonbranded is lower year-on-year. They're due to own label contract exits, mainly low profitability contracts that we've chosen to exit, and we expect to continue to cycle through these contracts through the first half of this year. So additional contribution, that is slightly down 5% year-on-year. That is because we continue to invest consumer marketing higher year-on-year. And also, there are COVID-related costs that I just touched on now. They aren't offset to the same extent as they are within the Grocery business because of higher volumes. So there's been less of enough to offset to those which are flowing down to profit. So strong progress across all of our statutory metrics. So operating profit is up GBP 57 million to GBP 153 million. That's largely because of the trading performance that I've just touched on. That's also around a GBP 30 million one-off gain relating to the sale of our stake in Hovis. Basic EPS is up 7p to 12.5p, and adjusted profit before tax, again, reflecting the benefit on interest is up 24% to GBP 115 million. Just moving on to pensions. So a healthy combined surplus of GBP 514 million. Now that is quite a lot lower than this time last year. I think the way the market's reacted at the time of the onset of the COVID pandemic means that last year's valuation is a bit of an outlier. And I think if you compare it to 2 years ago, the combined surplus is about 50% higher than it was then. I think what we've seen versus last year is a combination of 2 things. One is a lower discount rate, and one is higher inflation. So both combined to increase value of liabilities and, therefore, reduce the combined surplus. Just a reminder that the accounting basis valuation isn't relevant when we look at cash contributions into the scheme. And the way we continue to look at these is the net present value of our future agreed cash contributions, which remains between GBP 300 million and GBP 320 million. So just final thoughts on capital allocation as we look forward. We're planning to maintain our pretty healthy trading profit margins after having increased -- continuing to increase behind consumer marketing. From a CapEx perspective, we've typically been spending about GBP 20 million a year. That's been nearer GBP 25 million this year. And we do continue to have a continued stable of attractive payback projects around the site, particularly taking cost out and increasing efficiency around the sites. We expect that to continue. So we do think capital investment will accelerate. I think I'll probably view it as a gradual increase rather than a one-off step change. M&A, I mean Alex will talk about later, but we are exploring targeted, bolt-on acquisitions should the opportunity arise and give us the opportunity to apply what we think is a pretty proven branded growth model to another business, which might help access to another category or another market. And then we are reiterating our approximate 1.5x net debt-to-EBITDA ratio over the medium term. Thank you all for listening, and I'll pass you back to Alex.

So thank you, Duncan. So what I'm going to do now is take us through 4 key areas before we get into the outlook. So firstly, our response to COVID and progress against strategy in the last year, our plans for the year that we've just started and then progress on ESG and, in particular, on healthier choices. Now you may remember our approach to COVID was essentially underpinned by 3 key strategies, and protecting our colleagues' health and well-being being the most important. And in particular, you'll remember we got out very quickly with a series of strict additional protocols, which has, I think, helped us very much as we've been through the year. The second was to ensure continuity of food supply and make sure we've been doing our bit to keep food flowing through the channels. And I'm pleased to say that all our manufacturing and logistics operations have remained fully operational throughout the year. And then thirdly, to protect and indeed prepare the business for the next steps post COVID, which is hopefully where we're moving to now. And as we went through the year, we continued to focus, therefore, on building our brands through our branded growth model, so supporting with advertising and bringing new products to market. And then looking forward now, I think from a site point of view, we're going to continue to employ a cautious approach. That's what's served us in such good stead so far. So we've got no immediate plans to relax any measures yet. We move on to strategy. You'll be familiar with our core 3 strategies, so sustainable and profitable revenue growth and controlling costs and making sure that we're efficient in order that we can maximize cash generation, and that's what we've been using to deleverage the business. But I want to focus on the left-hand side there on the sustainable and profitable revenue growth and, in particular, the branded growth model. And so remember, there are 4 key elements to this. We start with strong market-leading brands with very high household penetrations. But in order to generate growth from them, we develop new products which are linked to our deep understanding of how people's habits are changing both in terms of how they shop and then through to how they cook and eat at home. And then in addition, we continue to sustain marketing investment behind our brands, so marketing and advertising that builds brand equity, maintains awareness and keeps them contemporary and relevant. And we particularly focus on creating that emotional connection, that emotional bond between the brand and the consumer because we know that's what leads to value generation in the medium to long term. And then we continue to focus on our strategic partnerships with our key retailers, so focused on driving mutual growth that expands the category as well and delivers outstanding execution in-store, and that's particularly important, given that we start from such strong market share positions in our categories. And it's that model that's delivered us strong performance quarter in, quarter out now for the best part of 4 years. And you can see that over on the right-hand side there, there's clearly an acceleration that's caused by more people eating at home as out-of-home eating, as we said, had been restricted through the last year. But I think the key point is that the model was working really strongly for us prior to COVID, and as a consequence, we have every reason to believe that if we continue to deploy it, then we'll continue with good performance into the future. And if we look at the new products we launched last year. I've just put a small sample here. It included a series of better-for-you options, and we've put some images of some of the Sharwood's better-for-you options in there. But it was another year in which we increased our revenue generated from new products. And also, we advertised 6 of our brands on TV rather than 4 in the prior year with both Ambrosia and Sharwood's both benefiting from TV advertising for the first time in a number of years, actually. And I think it's the deployment of that model again through the year, plus the robust performance of our supply chain, that allowed us to once again outperform the market. And you can see there our grocery brands grew ahead of market at 13.6% and increased our market share by 32 basis points. And in Sweet Treats, we grew by 2.4% and took 113 basis points of share. And as Duncan pointed out, of course, the Sweet Treats market did actually go backwards slightly. And that's because many of the occasions when we tend to eat cake, it's when we're sharing the moment with family and friends. And of course, there were, unfortunately, a lot of less opportunities to do that during the last 12 months. And so consequently, we saw a slight fallback in the category size. Now I mentioned before that we gained 4.5 million new households buying our brands during the year. And you can see some of the numbers there behind the individual brands. And we think what's happened there is that as we all were cooking all our meals at home, we got a little bit fed up of cooking the same things day in, day out and actually started to experiment a little bit more in the kitchen, try some new recipes, make some new dishes. And in many cases, those new dishes have involved consumers that weren't buying some of our brands to actually start buying them. And this is really important because we believe that if those consumers continue to enjoy those dishes even as out-of-home eating starts to open up, then we would expect to retain a proportion of that expanded user base. I mentioned earlier that online grew particularly quickly as a channel. You can see how that quickly ramped up once we got down into the first lockdown. The total market there on the left-hand side growth is in the pink bars but Premier Foods brands growing ahead of that. And you remember, we've put a lot of energy and focus on our online e-commerce strategy over the last few years. So it's good to see that helped us perform ahead of market. We took 128 basis points of market share, as I said. And we actually, if you look over on the right-hand side, outperformed the channel in all of the categories in which we play. Now importantly, moving on to our international business. So you remember that a year ago, I talked to you about our international business as being a great opportunity but needing an evolution in strategy in order to unlock it. I'm pleased to say we've made really good progress against that new strategy over the last year. In particular, we've implemented a new leadership structure, which, as a reminder, moves first from having functional leadership sitting in the U.K. to market heads sitting out in the countries, which have been recruited from those markets. And they've now put small teams in place, again, recruited from the markets. And what that's allowing us to do is to take the principles of that branded growth model, which has worked so well for us in the U.K., and start to apply them in those markets but adapting them with that local experience to the local market conditions. And in addition, we've made a number of improvements to our route to market across our distributor base across the countries, and in particular, it's given us access to more stores than we've had before. And you'll note there that we picked up 3,000 incremental distribution points for Sharwood's in the United States, and that's allowed us to more than double our sales of Sharwood's in the U.S. last year. And recently, we announced that we're now working with Western Foods as our distributor in the U.S. to bring Mr Kipling cakes to the U.S. market. The result of all that was double-digit growth in every quarter. We finished the year plus 23%. And whilst there's clearly some benefit sitting in those numbers from, again, people eating more at home in some markets, but we're really pleased with the strategic progress and the way that, that's also playing into the numbers. A couple of quick examples of this taking place and the application of that branded growth model into overseas markets. The first one is Ireland where, for the first time in many years, we've advertised Mr Kipling, and we've advertised Bisto. And in addition, we've brought a number of new products to market. Probably the best example I can give there is on Mr Kipling, where the deployment of the advertising and some of the innovation from the U.K., along with some tweaks to the execution model, has actually driven 17% growth from Mr Kipling in Ireland over the year. And remember, of course, that the cake category is not a beneficiary from people eating at home in the same way that it was to grocery categories. And we've advertised for the first time in Australia, putting Mr Kipling on air in the back end of the year. And we've brought a number of new products to market, including there, you can see, the Sharwood's healthier, low-fat sources. And as we look forward now into the current financial year, the one that we've just started, we've got a number of new products coming to market over the next weeks, which you can see some examples of on the left-hand side. I won't go through all of them, but I will point out there's more better-for-you options. And you can see there a vegan range within Sharwood's and some lower-sugar options from Loyd Grossman and Homepride. But you can also see here some expansion into new territories and to new segments of the market. So Bisto, obviously, is known from being a gravy, but we've been steadily expanding Bisto into the sauce mix category, and you can see there the example is pepper sauce. But also, we've got Cape Herb and Spice, which we brought to market the back end of last year. We're the U.K. distributor for it. It's a fantastic brand. And that will be rolling out across the main supermarkets as we speak. And I think the interesting thing there is that gives us a presence in a category, herbs and spices, which we didn't play in before. And then over on the right-hand side, that's just to say, really, that we will continue to support those 6 brands with above-the-line advertising, and we'll be making new advertising for Mr Kipling and for Bisto as we go through the year. Now I talk a lot about new products, and it's important because it's at the heart of our brand-building and our brand growth model. But I'm always talking about it from -- through the lens of the U.K. And so what we're going to start looking at more now is how we're bringing new products to market in some of our overseas businesses. And you can see on the left-hand side, we've talked about the U.S. launch of Mr Kipling. But also, we've just been through a program of a market test in Canada, and we've learned a lot from that. We're going to be making a couple of tweaks to the model. And then following that, later this year, we'll be rolling out Mr Kipling across the stores in Canada. And I will not go through all the rest of the things on the chart there, but just to say that there's a whole series of new products being rolled out across a number of markets -- across our focus markets. And of course, healthier for you choices are core to our innovation agenda, and we've been working on this very hard for a number of years now. As a reminder, there are 3 key planks to that healthier choices strategy. And the first one is what I call the stealth strategy, so that's taking our existing portfolio of products and gradually sneaking down the levels of salt, the level of sugar and the fat and the calories. And so far, we've made great progress. We've moved 1,100 tonnes of sugar across our cake and desserts categories. That's ahead of our 1,000-tonne target. And actually, we did a similar exercise a few years ago on salt as well. In addition, we've made a commitment that by 2025, all of our core ranges will have at least 1 better-for-you option. I'm pleased to say we're now at 84% by the end of last year and so well on our way to that target. And then hopefully, you recognize the label down in the bottom right-hand corner because we're committed to giving consumers the information they need at the point of purchase to be able to make an informed decision on the -- based on the nutritional profile of the product. And of course, that healthier choices forms one of the 5 key pillars of our ESG strategy, and I'll take you through some of our progress there in a moment. But first, just to add that we've just created a new role that heads up ESG for the business. That's part of the executive leadership team reporting to myself. And the reason we've done that is because it sends, firstly, a very strong signal to our business on the importance we place on the ESG agenda. But what it also does is it puts sustainability considerations right into the heart of the strategic decision-making of the business. So in terms of progress, we've already talked about healthier choices, but actually, I will point out that, that 17 new better-for-you ranges we brought to market during the year, and that's how we've made that progress to 84% that I mentioned. In terms of realizing people's potential, we're delighted yet again for the fourth year running to be a top 100 apprenticeship employer. We've continued to put a lot of effort and energy behind our inclusion and diversity agenda, and we've taken 550 leaders and managers through our R&D program over the last year. And we continue to hold a best-in-class safety record. Our accident rates, incredibly low, much better than industry average, and it actually improved slightly in the last year. Driving ethical sourcing is really important to us. I think the big piece of progress there that I'll point out this year because I said last time that we wanted to move our direct purchase soya up from 89% of it being sustainable up to 100%. I'm pleased to say that we've achieved that objective now. And then we'll move on to supporting our communities, which, of course, was particularly important this last year as we were fighting our way through COVID. And we donated over 0.5 million meals, actually, to those in need through Fareshare as well as donating a number of products to the fantastic NHS workers in the hospitals close to our sites. We've raised GBP 70,000 for our corporate charity, Together for Short Lives, and I think credit to our charity champions there who've managed to do that despite not being able to get people together for the usual types of events that they would use. And for the third year running, we're a gold level supporter for our industry charity, Grocery Aid. On environmental footprint, I'm pleased that we've further reduced our CO2 emissions, so a further 5.8% this year, and that's on top of more than 5% last year as well. And that gets us down to 43% since our 2008 baseline. And I'm particularly pleased with this last year because that's obviously against the background of a significant increase in production volume as well. And we've continued to reduce our food waste compared to prior year. And then packaging, as a reminder, only 12% of our packaging is plastic, and that's down a little bit actually from last year. But we've taken over 400 tonnes of nonrecyclable plastic out, which has meant that we've now got 70% of our plastics are recyclable, and that's up from 63%. And then just as a reminder, across our total packaging, 94%, by the way, is already now recyclable. So clearly, the business is now in a materially stronger position and certainly a stronger position probably than any time in the last 10 years. And it's been a challenging year in many respects but also an exceptionally strong one for the business and resulted ultimately -- that position of financial strength has allowed us to reinstate the dividend, as Duncan Leggett mentioned, and obviously, now we go forward to launch a new fixed rate bond today. So now with our leverage down below 2x, it allows us to shift our emphasis on to, what I call, Phase 2 of our business strategy, which is about applying the same principles, that brand-building strategy that delivers sustainable and profitable revenue growth for us but now applying that to expand the business. So we're going to be looking to expand into new categories in the U.K., and you've seen a couple of examples of that in the NPD pipeline that I showed, and also using those same principles to expand our businesses overseas and scale those up to reach critical mass. What we'll also start to do now is we'll also start to look for appropriate bolt-on acquisitions. Those are acquisitions that can either help us expand our U.K. category base from the 5 categories where we operate now, all of which will help us accelerate towards critical mass in one or more of our overseas markets. And as we go into the current year, we go into the year, I think, well positioned and in a strong position. You'll remember that we go in with an increased user base in terms of number of households. And also, our consumers are telling us that they've enjoyed cooking more at home with their families and that they want to keep holding those good habits going forward. So that's obviously something which stands us in good stead. And in any case, we will continue to deploy our branded growth model. So you've seen, we'll have plenty of new products. And also, we'll be supporting 6 of our major brands on TV. As far as quarter 1, the first quarter is concerned, obviously, that quarter started with out-of-home restrictions on eating still in place, and that will gradually unwind, as we know. There's certainly an impact on that in quarter 1. And then obviously, we expect to continue to make strong progress in our international business based on the revised strategy that I talked about a little earlier. And then the other thing to think about is that our COVID costs, so we have significant costs associated with COVID over the last year, and we expect those to now significantly reduce as the overall level of COVID infection also reduces. So what does that mean in terms of outlook? Well, I think, look, the first thing we're very aware is that we're up against some strong prior year comps. And one of the things we're going to be doing is measuring our growth against 2 years ago because that's the last solid baseline. And we've got -- and what does that mean for quarter 1, given we're 6 weeks in, and then I'd say we've made a good start. It's in line with what we expected. And I think 2 years progress would look for us somewhere between 5% and 6% growth versus 2 years ago, which is pretty much where we're tracking to now. So I think that reinforces our confidence in our profit expectations for the year. And bearing in mind, of course, the adjusted PBT, we're expecting to benefit from lower financing costs now. And I think we also got to bear in mind that our interest costs this year are going to be substantially lower than 2 years ago because we've also got the benefit from the repayments of the floating rate note that we made over the last year. And then of course, we're reiterating our target for net debt of 1.5x in the medium term. But just to be clear, that will not prevent us from making the right decision should an appropriate acquisition -- bolt-on acquisition come along, and then we'll get back to that 1.5x target again in the medium term. As Duncan said, we're announcing that progressive dividend policy. And then, of course, now from that lower debt position, we're going to start focusing on expanding the business by using our skills in brand building and branded growth to expand within the U.K. into new categories, to expand our overseas-focused businesses and then, of course, looking for those appropriate bolt-on acquisitions. And so before we get into Q&A, I'd just like to say, look, I think we're in a really strong position and in a stronger financial position, as I've said, than any time over the last 10 years. And we're all very, very optimistic and excited about the growth opportunities we've got for the future. So thank you.

[Operator Instructions] And our first question comes from the line of Nicola Mallard from Investec.

Sorry. Right. Just a quick question. Bolt-on acquisitions. I just wonder whether you can give us an idea of scale. What would you be comfortable going up to? I mean, clearly, you've done a fantastic job on the balance sheet, and I don't think anyone wants to see it go back to where it was. But what would you classify as a bolt-on in terms of scale for an acquisition

No. It's a good question, and I'll pass the Duncan to comment in a minute. I think we're using the term bolt-ons very deliberately. We are aware of the -- of some of the long-standing history of the business. But really, what we're trying to say here is that if we can literally just bolt on another brand that would maybe give us presence in a new category or possibly something of a modest size in an overseas market but would just accelerate our route to critical mass in that market, that would be helpful, but we don't see any specific parameters. But I certainly would guide you towards modest in size. Duncan, do you want to add anything to that?

No. Not really. I think Alex has set it out, then it will -- we're not contemplating anything immediately. I think Alex said, it's modest, small in size, and clearly, we're conscious of where the group's come from, and we'll have that in mind. So clearly, if we do find something modest, then leverage will go up a bit before it comes down. But again, as we reiterated earlier, then happy with the 1.5x medium-term target as novel direction.

Is there a level where you wouldn't want to see it go back to? I mean, obviously, one assumes if you go over 3, you can't pay a dividend again. But is 2.5 sort of a cap?

I mean, again, I think you have on what comes up, and I don't know when, Nicola, but I mean those sort of areas, I mean, clearly, 3 has been primitive for us before. And we aren't talking about going up to those ranges at the moment.

The next question comes from the line of Charles Hall from Peel Hunt.

Well done on [indiscernible] set of results. A couple of questions from me. Firstly, Alex, you talked about revenue generated from new products increasing last year. And given a very tough market for launching new products, could you just give a bit more color on how the new products fared, whether you managed to keep the number you expected on shelf and how that might progress this year? And secondly, obviously, great progress in international in turning around the revenues, and it feels though that's on a much firmer footing. Can you give some thoughts on longer-term prospects? And what would good look like in your mind? And also, similar to the U.K. where you talked about significant number of new households trying the products, have you got any color on international markets?

Yes. So yes, 3 questions there, I think. So the first one on NPD. Obviously, we continue to drive our model. We brought to market. You've got to bear in mind that the time frame to go from consumer insight through product development and testing to products out the door is something that takes place over a couple of years or so. And so the things we brought to market over the last year were things we've been working on for a little while. And so consequently, we were really pleased to continue to grow our revenues from NPD during the year. That's, in some ways, due to the products we brought to market during the year but also, to some extent, the strong performance of the products we brought to market in the prior year. But I think what we also are very well aware of that there was a period of time, of course, where it was all hands on deck for the retailers and for ourselves on just keeping food supply to the shelf and keeping things fully in stock. And so clearly, there was -- during that period of time, there were less range reviews, if you like, and opportunities for us to get these new products in. So I think it's in that context, we're particularly pleased to have still made progress. And then we expect this year, range reviews will be back, and it will be business as usual from that respect. And again, we've got another great set of new things to bring to market. So yes, so good shape there, I think. Overseas, look, we took a good look at this a year ago, you may remember. And we very much, as a management team, came to the conclusion that there was a lot of opportunity for us in those overseas markets. And I hope you can see we've made some significant progress over the last 12 months in implementing that strategy that we think unlocks that. And I think that the performance over the last 12 months is a good indicator of that starting to work. We've now got our international business, what, 5% to 6% of overall turnover. But without putting a specific target in place, we can see it being, let's just say, considerably bigger than that. And then I think your last question, Charles. Could you just clarify the last question?

Yes. So in terms -- you've talked about the sort of 1 million additional people for each of the sort of key brands in the U.K. Have you got any stats for overseas markets in terms of additional people trying your brands? Because obviously, your much -- your brands have a much lower profile overseas. So it'd be really interesting to know if your penetration is increasing.

Off the top of my head, I don't. What I can say is that some of the input KPIs have improved significantly. So if I look at distribution and number of stores that we're in, and I gave an example in the charts of a significant step change in our distribution of Sharwood's in the states, but we also unlocked more stores in Australia with a new distribution agreement that actually gives us access to the independents channel. And I think there's more still to go for there. And similarly, across Europe, we've put new distribution agreements in place, which are unlocking more and more stores across Europe. So that's where the key focus is -- at the moment is getting the distribution and getting the in-store metrics right.

The next question comes from the line of Martin Deboo from Jefferies.

I think I've got 4, but they're pretty focused, so if you don't mind. First of all, Alex, the sales guidance. I just want to make sure I heard you correctly. You said in your verbal comments, you said it's very clear that you're comping against FY '20, not FY '21, which seems sensible. But you said in your verbal comments, you expected something like 5% to 6% growth versus 2 years ago. Did I hear that number correctly? Because that's quite a useful number if that's [indiscernible]. I think within that, it'd be useful to know directionally, I sympathize it's almost impossible to forecast your volume position in FY '22, given all the uncertainties. But does that guidance assume there is incremental pricing going through in FY '22 relative to FY '21? And the related question to that is can you give me some color and texture on your input costs outlook for FY '22. We all know there's inflation coming back into the market. Just remind us what your key exposures are. Just what are you seeing there? And then 2 quick ones, if I may. On the pricing of the bond issue, clearly, I think that's later this week. But maybe a question I could reasonably ask you is, is the yield to maturity of the traded debt, is sort of 5%, 5.3%, a reasonable indication of what the issue might be priced at? Or is my amateur debt analysis a bit flawed? And the last one is, I'm just curious, how do you know what your online market share is. You source it to major [ retailers ], but just sort of intrigued how you know what you share in Tesco.com is versus Tesco bricks and mortar. Sorry for the slate of questions, but I'm feeling feisty this morning. So there you go.

Thanks, Martin. So let me pick up the first, and then I'll definitely hand you over to Duncan for bond pricing. I think that's out of my area of expertise. If we start with the sales guidance then. Yes, so we said 5% to 6% versus 2 years ago. So you did hear that right, and we think that represents what would have been 2 years of good progress versus where we were 2 years ago. In terms of volume versus value, there will be a bit of pricing in there, certainly, because we did put pricing through earlier in the year, and that will bring me on to the input cost question in a moment. But I would expect that to be a mix of value and volume. In terms of input costs, yes, obviously, we're very aware of that, and we've seen the comments that other people have made on it. What I'd say is that certainly, at the moment, everything that we're seeing and everything that we're projecting is within our models and within what we'd expected and planned for, so with the [ excitement ] built into pricing we've already taken to market or within our cost-saving initiatives and cost-saving lists for the year. I think that takes us to the bond question where, clearly, Mr. Leggett is the more qualified member of the team to answer it.

Thank you very much, Alex. So I think we're aiming to price the bond at the end of this week, and clearly, we'll announce where we get to. So I think we probably need to just let the process run through. I think in terms of your analysis, Martin, I guess, directionally, I'd like to think that we would do better than that, actually. And you may or may not have seen, but S&P has issued an upgrade to our rating to BB- this morning. So that's the second upgrade we've got from them in the last sort of 7 or 8 months. So feeling pretty positive about that. But I think we'll just need to let the process run over the next couple of days, and we'll let everyone know where we get to.

On online market share [indiscernible] you know what that is.

Yes. So you're absolutely right because, obviously, when we ship product to our major retail partners, we don't know where that's going to go to because clearly, it goes into stores. Some stores pick, of course, their online sales from the stores, but we get data back from the retailers from which we can then reverse into and calculate our market shares, and that's how we do it.

Our next question comes from the line of Doriana Russo from HSBC.

Yes. I've got a few -- more than one, if I may. First of all, I'd like to go back to the bolt-on M&A ambition. I appreciate some of the questions -- discussion has already been addressed. But I was just curious to understand what sort of companies would you be looking at. Are we looking at buying preferably brands or maybe assets? And are you looking at turnaround situations or from brands shedded by larger groups? Just wondering to know if what we're talking about is also the opportunity to launch internally new brands or to, I don't know, finance new and up-and-coming brands. If you can give me a little bit more color to understand what sort of assets are you looking to add. And in terms of financial returns expected, how do you calculate that? What sort of return over how many years would you be expecting to get? Although I appreciate it might be early days. And secondly, coming back to the -- I think I missed something -- your comment on current trading. I appreciate you looking over 2 years, but did you give out any numbers in terms of what sort of 2 years growth are you -- are you seeing in the beginning of Q1? If you can help me out here, it would be very helpful. And my final question is on dividend. Congratulations restating the dividend. I was wondering if you have got a dividend payout policy that you can share with us today.

Okay. Thank you. So let me pick up the first couple of questions, and then I'll pass on to Duncan for dividends. So look, we're not -- we don't have any specific targets in mind at this stage from a bolt-on acquisition point of view. But what I've said is that we see our core strength in building brands and deriving growth from brands. So clearly, it will make sense for any acquisition that we look at to be able to pass the test of a brand where -- so certainly, a brand or branded business because that's where our core focus is and our core skill set and one where we think we can add value. But other than that, I think it's too early to say. We're currently in the early stages of exploration, I think, is probably the best way to describe that. In terms of common trading, so yes, I'll just refer you to the answer I just gave to Martin. So he said that for the first quarter, we're tracking to growth of around 5% to 6% versus 2 years ago. And then Duncan, do you want to pick up on dividends?

Yes. Sure. So I think on the dividend, I think the key and really, really exciting and important part is that we have returned to the list. We said we plan for it to be aggressive, which is absolutely the case. And clearly, we have started relatively modestly. So I think that gives us scope to progress from here. Exactly how that looks like, we're not planning to share any more at this stage. But I think I'd -- our condition, it is likely to be a sort of annual final dividend rather than a sort of interim final construct.

Okay. And what sort of returns would you expect to make on a potential acquisition? Is that something that you have already defined internally?

Well, again, I think that probably falls into the -- probably a bit too early. I mean, clearly, we will assess the potential opportunities with a wide range of metrics. It will be -- financially, it will be commercial and exactly what we think that we can add the value to that Alex has mentioned. So probably a bit early to talk about that.

[Operator Instructions] And the next question comes from the line of Clive Black from Shore Capital.

Again, well done. Two quick questions, if I may. Could you perhaps talk about how you see promotions within your commercial strategy in 2022? And then additionally, maybe just some color around the focus of the capital expenditure this year as well.

Yes. I'll pick up the first one, and I'll hand off to Duncan on capital expenditure. Look, promotions, I mean they play an important role for us, don't they? And they -- there are technique we use to get consumers to try our products. But I don't see any significant change in our promotional strategy for the coming year versus where we've been in the last sort of last couple of years or so. I mean we have a series of very well-analyzed models. We use econometric modeling, in fact, in order to optimize our pricing and promotional plans. And we'll continue to do that and tweak as appropriate to optimize all the key metrics, but I'm not seeing anything out of the ordinary other than what we might ordinarily derive from our modeling. Duncan, do you want to pick up on the second point?

Sure. So I mean CapEx, yes, I mean we touched on earlier. We have spent a bit more this year, and we continue to see good opportunity to gradually increase over the years ahead. And it's sort of more of the same, Clive, I guess, in terms of continuing to invest behind automation and efficiency across our sites and to help support growth. So I guess a couple of examples for help where we're looking to expand capacity for our Batchelors pots snacks and then also the initiatives around smart energy. So we're aiming to invest more around efficiency from an energy perspective, things like combined heat and power plants, all those sorts of things, which are quite an exciting, emerging area that we think is quite interesting.

We have no further questions coming through. So I will now hand back to Alex for any closing remarks.

Thank you very much. Thanks, everybody, for dialing today. I think hopefully, you get the message that we're in a much stronger financial position as a business than we've been at any time in recent history. I think it's not really a 1-year thing as it is the result of a number of years now, 2 or 3 years of strong performance. So I think we go forward now with optimism and lots of opportunity for further business expansion. So thank you very much once again for dialing in, and have a great day.