Premier Foods plc (PFD) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Premier Foods Financial year 2021/2022 Half Year Results Bond Investor Call. [Operator Instructions] I must advise you that this conference is being recorded today, Tuesday, the 16th of November 2021. I would now like to hand the conference over to your speaker today, Alex Whitehouse, CEO. Please go ahead, Alex.

Thank you, and good afternoon, everybody. Thanks for joining the call. I'm here together, of course, with Duncan Leggett, our CFO; and Richard Godden, Director of IR. So I'm sure many of you have seen the presentation this morning, so I won't go through all of that again. But all we're going to do is just go through a handful of slides and then we can pick up on anything else in Q&A. Of course, the full deck is on the website anyway. So if that's all right, I'll kick off. If you're following along with the deck, this is Slide 3, which just gives us a headline view of our half year results. And as I said earlier this morning, I think we're very happy we've had a very strong quarter 2. So -- and remember, we're measuring ourselves against 2 years ago as well as just last year. And against that 2-year measure, 8.5% growth in the quarter. And I think where we're particularly pleased, I have to say, is with the branded growth. So brands growing at 13.3% versus 2 years ago. So obviously, what we're doing now is you're ironing out the ups and downs that COVID played on the numbers by comparing against a number 2 years ago. So 13% growth on the brands versus 2 years ago, feels like really good progress to us. If you want to compare against 1 year ago in the quarter, we're actually also up even versus 1 year ago as well. And that brings us given that we also had a good quarter 1. You'll remember that brings us to 7.5% growth versus 2 years ago for the half. And again, that really strong branded growth of 11.4%. And then that all flows through to trading profit, at 13.1%. And again, I think that's a really good indication of how we're managing input cost inflation, which I'll come back to later because there's no profit dilution there. And then adjusted PBT of plus 46%. And clearly, that's a factor of 2 things, really. One is the strong trading performance flowing through. But also, of course, now we have a lot less debt. And as you'll all be acutely aware, the remaining debt was refinanced at a much lower coupon. And the combination of those 2 have a significant impact on our interest costs, which obviously then flows through very positively to adjusted PBT. Moving on to 1 page ahead, on Page 4. So just looking at our key strategic focus areas the first of which is making sure that we have a strong, healthy, growing U.K. branded business because the U.K. branded business is the heart of the business, and it's essentially -- it's from that strong base that we can then build further. And as you can see, really great progress there. So a good, strong set of foundations. We continue to invest in infrastructure. And in fact, we've got a couple of new high-speed lines due to come on stream now later this year and 1 in Ashford and 1 down in Lifton. And we've continued to expand into new categories, and we're making good progress on the international front, which I'll come back to in a little while. And then over on the right-hand side there, that's the just acknowledgment that we completed that refinancing exercise, as I said, you'll be very well aware of during the first half of the year. And this is all now guided by our new purpose, which we've called [indiscernible]. And I think that's a good point to hand over to Duncan.

Thanks, Alex. Good afternoon, everyone. So turning on to Page 6, I mean, Alex has mentioned and clearly, based on the call, will be aware. But the key component of the refi was the bond refi or facing or 6.5% bonds with new ones at 3.5%. We also did do a sort of brand new RCFs different banking group. We think we're well placed to support the group going forward. And on the right-hand side, on a pro forma basis, interest costs are down by more than half versus 2 years ago. So pretty pleased with the strong progress and obviously freeing up some of the cash -- group cash in that perspective. Slide 7. So again, comparing against 2 years ago, which we're typically doing to provide a more meaningful comparison. Total revenue is up 7.5% versus 2 years ago and the branded growth model really delivering with group branded revenue up 11%. And we've seen good progress across the grocery business, Sweet Street and in fact, international against that time, fairly consistent growth across all 3. And again, branded growth generally growing ahead of nonbranded in all of those areas. Non-brand is down in that lower business-to-business volumes. And also as reminded the out-of-home channel, we do sell to and that hasn't yet recovered to levels that it was before the pandemic, although it is on an improving trend. And I think generally through the half, we did see a stronger second quarter than the first quarter relatively. And actually, second quarter was growing revenue versus last year at the total level and growing quite nicely as well within [indiscernible]. The profit is 13% up versus 3 years ago. And again, just the benefit of the branded mix and the increase there was slowing down market to profit. again, versus last year, we are down, which is what we expected and have always said, lapping particularly quarter 1 panic buying in the base for down 6.5% revenue and 12% of profit as you say, very much where we to new we'd be. But again, as I said, a good end to the second quarter with sales growth at a total level has to be up versus a year. So flipping for a few pages on to Page 12, which I'll finish with, just components of net debt. I mean clearly, a couple of costs or outflows in the half that we wouldn't normally see on is a dividend, which we haven't been for a very long time. We're delighted to see over GBP 11 million, obviously, the first dividend for 13 years. So really delighted we've been in a position to pay that. And the cost associated with the refinancing, of course, lots of benefit seen benefit first half, lots of benefit more to come in the second and looking further ahead. But obviously, there are some one-off costs relate around the redemption of the old bonds as well as fees in there. And then obviously, we are in the peak working capital part of our year with particular stock levels to the working capital outflow of GBP 15 million is pretty much related to Stockford and levels of stock at September versus the end of March at year-end as we build up stock for our key Christmas period. So that's all from me and I'll pass it back to Alex for a few more slides.

Thanks, Duncan. I think it's important we just touched on new ESG strategy. So you can see that on Page 16. I think we made quite a lot of good progress against the old or the previous ESG strategy, but we had achieved a lot of the objectives there already or we were a long way along the line. So it felt like time to sort of refocus it and to set ourselves some more stretching and more ambitious targets. And that's what you see in the new strategy, what we've called the emitting live plan. And we put that under 3 pillars: products, planet and people. So on the product side of things, what we're doing there is looking to provide tasty but nutritious sustainable food for our consumers, so focusing more and more on Health & Nutrition, and expanding our plant-based eating offering and then moving to more and more sustainable packaging. And we set ourselves some goals there, and we put a couple of them on the chart. So 1 is more than doubling the sales of high nutritional standard foods. That's 1 with the score of less than 4 on the Department of Health nutrient profiling model and also increasing our sales of plant-based products to a total of GBP 250 million by 2030. And then moving on to the planet pillar, obviously, all about contributing to a healthier planet and really us taking action on climate change to delve it to keep global warming to that 1.5 degrees. That's been talked about have a great deal recently or also protecting our natural resources and then reducing waste across our entire value chain. So some of the goals there are to reduce our Scope 1 and 2 emissions by a further 42% by 2030. That's obviously on top of the progress that we've already made and achieve ultimately net 0 for direct emissions by 2040. And I think what's important to understand here is we've already reduced by 43% since our baseline year of 2008. So then we'll come down by 42% across Scope 1 and 2 by 2030. That in total is about 2/3 of where we were in 2008, leaving about 1/3 of it left to do by 2040. That's a fairly linear approach that I personally think is really important that you're not just kicking the can down the road and finish up with a big hockey stick at the end. And so we're taking a fairly linear approach to it. And actually to that end, we'll be setting science-based targets and aligning ourselves to the business ambition for 1.5. And then on the food waste point then the plan is to reduce our food waste further and impact half it by the time we get to 2030. And then on the people front, we want to continue to build a diverse, healthy and inclusive culture within the business. and then to become a leading developer of people for the food industry. And then in the communities in which we operate, a caring community partner. And some of the commitments there are to reach gender balance within our senior management population. That's our broader senior management population by 2030 and donate 1 million meals a year to those in food poverty by 2030. And if you want to see the progress that we've made against the previous goals, that's obviously all in the presentation on the website. So I'll move now on to Page 18. Just a reminder of our strategy. The strategy is not new, but the chart is a new layout in terms in terms of navigating around it. So the first 1 I said before, we're continuing to grow the core U.K. business. So that's solid and growing U.K. business provides the foundation for broader expansion. Investing in operational infrastructure, so investing in our manufacturing capabilities. And this is important for 2 reasons. I think, one, because we are a very new product development-focused business. So 1 of the ways 1 of the very important ways in which we deliver our top line growth is through introducing new products that satisfy changing consumer needs. And so obviously, 1 needs to invest in the capability to produce those products. But secondly, it's also about making what we do more efficient and improving productivity because what that ultimately does is it expands our margins, and we use that word to invest back in the brands to fuel growth. So there's a bit of a virtuous circle going on there, cash generation invest back into infrastructure, improve profitability, invest it back into brands, generate growth, generates cash. So you sort of get this virtuous circle that goes on there. And then pillar 3 is expanding into new categories within the U.K. So we've got some really great performance, I think, from our brands in the 5 core categories that we operate in historically. But what's become very clear is that there's opportunity to expand into new categories, which are essentially white space farers in terms of incremental revenue opportunities. But using the brands that we've got that are well known and well loved by U.K. consumers and importantly, using the same brand growth model that we know we worked really well for us and he's really well proven. And there are several examples that we've got, where we've extended into new categories already to the point where I think we'll probably generate close to GBP 10 million of turnover from those new categories this year. So still fairly early stages, but starts to be something that matters and there's more plans on that as well. And then continue to build ourselves towards critical mass in our focused overseas market. And that's, again, using the same principles of our brand building model, our branded growth model but adapting it to local market conditions. And then the final strategic pillar is inorganic opportunities. So we've said that with a much lower level of net debt now that 1 of the things we'll be looking for are modestly sized bolt-on acquisitions, which would either help us expand the breadth of our portfolio in the U.K. and our category exposure or might give us an accelerated route to protocol making 1 of our focused overseas market. So if we move on to Page 20. You can see there on the left-hand side, this is our growth in our core U.K. business. on a quarter-by-quarter basis. And you can see since we implemented the branded growth model. And that started to deliver results for us back in 2017, and we've had pretty consistent strong growth from our U.K. business. Particularly, you can see that in '19/'20, the year before COVID and that's always worth pointing out because with no COVID assistance, we were actually performing really strongly beforehand. And then, of course, it gets lifted by more fleeting at home during our financial year 2021 with a very big peak in quarter 1, when, of course, we have people stocking up their covenants in anticipation of that first very hard lockdown. And if we then look at this financial year, we've already announced, of course, quarter 1 before that was the minus 14, that's minus 14 on top of the plus 22.9. And then today, the number we're reporting the plus 1.5, which comes on top of the plus 7.8 in the base year. And 1 way we like to look at that internally to try and unravel the ups and downs of COVID traded is to look at a 2-year CAGR, which I think gives a more consistent picture of where we are. And we're very pleased with that progress because you get 2.8% growth for Q1 and 4.6% in Q2. And again, really importantly, the branded growth being much stronger than that. So the brand leading the way with 4.3% and 7.1% 2-year CAGR in Q2, which is, frankly, I think, a very strong performance indeed. And I won't go through it now, but as I said this morning, share gains versus 2 years ago in grocery, in speed tree both volume and value and also taking market share online as well. Moving to Page 22. I think it's important we just touched on the macro environment. It is challenging, and it's been very well talked about industry-wide challenges. But I think as you can see from the numbers today, our teams are doing a really fantastic job of navigating our way through it. So from an HGV driver point of view, our customer service has every strong all the way through the first part of the year, so much so that we are picking up incremental in-store display space and activity as other manufacturers have not been able to fill the space that they got booked, and we've been able to fill at short notice. So we're gaining. And I think it's more and more our supply chain being a competitive advantage for us actually. And I think the other thing to just bear in mind is that as we look at our peak, winter season, our peak Christmas deliveries, they're actually happening right now. So this is based on history, this week will probably be our biggest week of the year this of the entire financial year. And obviously, I can see very clearly the amount of drivers we've gotten the capacity we've got, and we're very relaxed about that. We've got what we need. Tight labor markets clearly being written about a lot. It is just worth bearing in mind that a lot of our line -- our production lines, particularly in the grocery side of the business are highly automated and therefore operated by a relatively small number of highly skilled individuals who've been with us a long time. So our exposure to the bottom end of the labor market is not as great as some other people. So less of an issue for us. And then finally, on input cost inflation, and I'll point us back to what I said at the end of Q1, which hasn't really changed, which is that we came into the year anticipating significant inflation and with measures already put in place at the end of last year, which included hedging, which included offsetting efficiency savings, of course. And then lastly, of course, there's always price increases. And that's played out as we expected. And as you can see in the numbers today, there's no dilution in our profitability. Now obviously, looking forward into the next cycle, we can see more inflation we've taken exactly the same approach as we took at the back end of last year, and we'll be implementing a similar set of measures before we get to the end of the year, which will offset what we're now seeing looking forward. And so overall, in summary, it is a difficult environment. That much is absolutely true, but I think the teams are doing a really good job of navigating our way through it. And I think the evidence is in the numbers so far. I'm going to flip all the way forward to Page 28 now just to touch on our international business briefly. So 7% growth versus 2 years ago in the half, which we're very pleased with the progress on. And actually, that's despite some challenges sourcing shipping containers. So particularly in September, we had a number of shipments to Australia and to the U.S. delayed. The good news is that we then shipped those in October. But of course, you can't see those in these numbers because these numbers stop at the end of September. So there's certainly a flip there between September and October, down a little versus prior year, of course, and that's the pandemic impact. And I'll touch briefly on the specific markets. So Ireland -- in Ireland, we've been implementing the successful U.K. branded growth model. It really is as simple as that. So all that successful NPD from the last few years in the U.K., we're now launching in Ireland. Our innovation rate in Ireland is now catching up with what it is in the U.K. We're starting to support the brands with advertising, and we are extremely happy with how that is playing out actually. So branded growth of 39% on a 2-year basis. But just bear in mind that, that is positively impacted by the base year 2 years ago, which was the unwind of a Brexit stock build, if you can get your head around what was happening 2 years ago. And we'll continue that in the second half, of course, there'll be more new product launches and further investment behind the brand. Quickly touching on North America. You might remember that we did a test launch in a few hundred stores in Canada of Mr. Kipling slices. That works really well, but we also made some tweaks to the commercial model based on that test, and the revised product offering is already in Canada and winging its water stores, so we expect that to be on shelf in a week or 2. And from that, we will now be moving to rolling out in Canada. So expanding distribution and moving to a full rollout of the brand in Canada. And then North America, U.S. is following on the heels of Canada. So we're taking the same approach, and we're working with a couple of customers now to bring that to market at the -- probably on shelf, I would imagine early January. And we will take the same approach, make sure the model works, make any tweaks that we need to the commercial model before then pushing out further distribution in the U.S. And then just as a quick reminder on Sharwood's. Sharwood's works very well for us in the U.S. where we -- wherever we're in store, we seem to sell very well. And so it's all about pushing out the number of stores that we're listed in. And in the first half, we picked up 2,400 new distribution points. That's a new product in a store. And so because they're not insignificant in terms of distribution improvement. Similarly in Australia, we've been focusing a lot on getting the core range right and making sure we've got the best-selling products in every store. But the graph blue bar graph down at the bottom in the middle on Page 29 shows the expansion of stores and distribution increase in the independent grocery trade. That's about 8% of the Australian grocery market and now getting from almost nothing in the first half up to 1,000 stores. That gives us about an 80% weighted distribution of that 8% of the market. So actually not an insignificant increase in our total distribution in Australia. And then Europe is really all about Sharwood's, again, a little bit like the U.S. works very well everywhere we put it. This is all about getting into more stores and also getting into more countries. So sales up 32% versus 2 years ago, admittedly still from a fairly small base. And we just launched for the first time into Sweden in the first half. So I think then we'll go straight to summary. So Page 32. And so look, my overview of the first half was that it was a really good start. I mean that branded revenue growth is 2 years ago, is very strong and frankly, a bit better than we expected. The branded growth model really delivering for us. I think the team are doing a great job, as I said, of navigating us through those industry-wide challenges. And also, we've made some pretty good progress on both our additional expansion projects to new categories and overseas. And as Duncan took us through interest costs, of course, almost halved versus where we were 2 years ago. So where does that take us to in terms of outlook on Page 33. Well, obviously, we're going into the second half of the year with a lot of strong momentum. -- doing a good job of navigating around those challenges and with the additional progress on the strategic priorities, I think that puts us firmly on track to deliver against our full year profit expectations. And then really, just as a reminder, net debt to EBITDA, that 1.5 target remains in the medium term. And having paid our first dividend as Duncan said in 13 years in the first half of the year, it's our expectation to continue to do that on a full year basis. as we get to the end of the year. So that's a summary from me, and I think that we'll go to questions.

[Operator Instructions] And we do have one question [indiscernible].

I'm sorry if I missed this because there was some disturbance in my line, but can you please elaborate on your -- any labor cost or labor shortages that you're facing or any inflationary pressures and how planning to deal with them?

Yes. So if we just pop back then to Page 22, what I said was that clearly, there are very well talked about industry macro challenges that exactly as you just articulated, but we're doing a good job of navigating our way through those. I won't go through the details because we've already put a base and benefit of everybody else on the call, we've already gone through that. But we're feeling pretty comfortable with it. It is hard work, but I think you can see in our first half results, the fact that sales are ahead of expectations, there's no profit dilution suggest that we've got all those factors under control, and we're feeling pretty confident about our peak season, which is actually happening now.

Your next question today comes of the line of Pratik Pota of BlackRock.

I had similar question, so that answers my question. 0

[Operator Instructions] Your next question comes from the line of Julien Martin of Aberdeen.

I just wondered in terms of market expectations for the remainder of the year. Clearly, first half was facing a strong comp from last year. And so EBITDA suffering a little bit, but I think the second half last year was not as sales normalized. So I mean, presumably, the second half profit is not as difficult to comp than last year. So just trying to understand how you're thinking of the second half profitability trend.

Yes. Thanks for the question, Julian. I mean we -- yes, I mean, it probably picked up, we're not suggesting any change to analyst expectations today. I mean I think you're right that the disproportionate difficult comps were in H1, but it's probably slightly relative because obviously taken as a whole that last year was exceptionally strong, and most of that was in the first half, but it wasn't all that Clearly, there were other lockdowns during the third quarter and the fourth quarter as we experienced during last year. So I think probably the headline is that we haven't suggested and unchanged our expectations, we're saying that we're firmly on track. So they're feeling pretty good about where we see things. And I guess, current consensus, we're reading about GBP 141 million of trading profit.

Okay. So EUR 141 million trading profit is current market consensus what you're saying, yes?

Yes.

Yes. Okay. So adding about GBP 20 million of D&A to that to get to the adjusted EBITDA for the full year?

Yes, that's about right.

So about 16 million -- total compared to 167 last year [indiscernible]?

Yes.

Great. And then I wondered whether there were any updates on the on the pension scheme or a demerger or any buyout discussions that you've had or any progress there?

Sure. I mean I'm not sure if you missed in to this morning's call, but I said positive news, I think, on Slide 13 of the deck. There's a lot going on behind the scenes in terms of benefit out of the new combined merged truck, if you like, 1 of which that we called out was around the investment strategy of the Premier Foods section. So we're encouraging the trustees have had a look at it. It's been quite a bit of their magic on to it and are targeting high returns to the Premier Food assets versus premerger. So I think that's really positive and take the opportunity to do what's called a winding up lump, some exercise. So that offers sort of people who have a pretty small pension entitlement, the opportunity to take out as a lump sum, but it's only possible to happen when you're widening up the scheme. So as you wound up the legacy from your food schemes and moved them into the trust, that was offered to members and that ended up reducing member numbers by 15%, and that's just greatly contribute to a bit simpler running of the scheme and associated costs. So I think pending going on behind the scenes, which is as we'd expect and clearly as we'd like. I think in terms of overall benefits, I mean, as the valuation of the Premier Foods sections going on at the moment, that's a technical requirement that's needed to be done within a year of merger. But next year is the triannual valuation, which will include the RHM section. So I think that will be -- that be quite a good benchmark and a marker as to the progress the progress on the schemes and therefore, how cash contributions might look going forward?

Okay. And then final question for me is on the on the M&A front? And maybe you talked about bolt-ons in the past. It doesn't look like anything has been being done there? I mean, anything you're working on? Is that still the part of the strategy to kind of expand through small bolt-ons?

Yes, still part of the step very much so, and we now have a Corporate Development Director who can look at this sort of stuff full time rather than Duncan and I doing it in the evenings in the weekend. So we've got a little more focus on that now. But I'm afraid, as with all these things, I can't really talk about it until there's something to talk about.

[Operator Instructions] There are no further questions at this time. Alex, Duncan, back to you.

Okay. Thanks, everybody, for dialing in, and thank you for the questions. I hope you can see we're in a pretty good shape. As I say, ahead of where we expected to be at this point and with a lot of momentum going into half 2. Thank you very much.

That does conclude our conference for today. Thank you all for participating.