Premier Foods plc (PFD) Earnings Call Transcript & Summary

Good day. Thank you for standing by, and welcome to the Premier Foods Preliminary Results FY 2022 Bond Investor Conference Call. [Operator Instructions] I must advise that this conference is being recorded today. I would now like to hand the conference over to your speaker today, Alex. Please go ahead.

Thank you very much, and afternoon, everybody. Thanks for everyone -- thanks for dialing in. So Duncan and I'll just run through a couple of the charts. I think everybody's got these charts. So if you haven't got them, they're on the website, just to sort of frame things before we move into Q&A. So I'm starting with Page 3 of this morning's deck. So I think the main message here is that we had a good year. You might remember, we raised our profit guidance in our quarter 3 results. And I'm pleased to say that we actually came in ahead of that already raised guidance. If we look at the numbers, I think again, we're looking a bit on -- compared to 2 years ago as well as compared to 1 year ago. And thankfully, it will be the last time we need to do that. But against that 2-year measure, turnover growth of 6.3%, but very strong on the branded side. Almost 10% growth over the 2 years from our brands. Now, of course, that's down versus the 1-year ago measure because 1 year ago base has clearly got a period of time when we were all eating at home because all the restaurants and things were closed during the lockdowns. Now that strong branded growth is again ahead of market. So we continue to take market share. Market share is up on both the 1 year and the 2 year measure. Trading profit was GBP 148.3 million. That's up almost 12% versus 2 years ago. And I think bizarrely, what we're really proud of is the fact that, that's actually flat versus prior year because, of course, prior year was against that elevated base. And obviously were we've delivered flat trading profit off a lower level of turnover. So an improvement in trading profit margin of 60 basis points. Adjusted profit before tax, a significant double-digit growth there on both 1 year and the 2 year measure. That's the flow-through of the trading profit, of course. But what you're also seeing there is a significant reduction in our interest cost. So it' almost halved our interest costs over the last 2 years, driven by 2 things. Over on the right-hand side of the chart there, obviously, we've got 1/3 less debt than we had 2 years ago. But that debt also being refinanced with a new coupon at a much lower rate than before. So if you remember, we were at 6.25% and then we refinanced at 3.5%. So less debt and the lower coupon cost, significant less interest there flowing through into adjusted PBT. So if I move on to Page 4. We also -- as well as that having strong financial progress, we've made some good progress against our strategic priorities. So 5 key strategic pillars that we have now. The first one being continuing to build our U.K. business. And you'll see there strong 2-year growth of 8.7% and investing back into our infrastructure, and we put 2 new high-speed lines -- production lines into the business this year, which obviously have that positive impact on margins. And then the expansion pillars, so expanding into new categories in the U.K., largely done with our existing strong brands and extending them into new categories, expanding geographically in our focused overseas markets. And you can see there that our international business grew by 25% versus 2 years ago, which is exactly the role we wanted to be playing, growing faster than the core U.K. And then we continue to look for what we're describing as modest sized bolt-on acquisitions, because if we can find a brand that we think would fit well in our portfolio than we've got the opportunity to accelerate growth, and would respond well to our radar growth model and then that would likely be a good fit. Not one of the key pillars, but nevertheless, important news on pensions and really the first steps, I think, of the new pension arrangements that we put in place 2 years ago starting to flow through. So significant deficit reduction on the Premier Foods scheme and that leading ultimately to what is approximately a GBP 60 million reduction in the NPV of our pension payments. And so I think that's -- the last thing I'd add is just on Page 5, actually, if you've got that in front of you, the 4 graphs there. So I think now a really strong track record of sustained delivery over the last 5 years. You can see a big step up in trading profit in the prior year 2021, and that's obviously when everybody was eating at home. I'm really pleased that we're able to sustain that level of profit delivery in this year where clearly we haven't got that benefit. Adjusted PBT, similar progress, but accelerating in the last 2 years, driven by the reduction in those interest costs. And then you can see net debt falling away in the 2 charts at the bottom and now down to 1.63x net debt to EBITDA. That's on a pre-IFRS 16 basis. On a post it is 1.7x. So starting to get close now to our target of 1.5x. So I think that's a quick summary for me, and I'll now hand over to Duncan.

Perfect. Thanks, Alex, and good afternoon, everyone. I am just going to fast forward to Slide 12 in our deck and just touch on some moving parts of our deleveraging during the year. I mean, you can see on the left-hand side, good strong EBITDA performance coming through. And I touched on this morning, I mean, interest is the lowest it's ever been, and therefore the skinniest as far as look through it for a little while and pensions remained a big outflow. We would expect to see that to reduce over time. CapEx, a decent amount. I'm trying to step that up year-on-year. Bit of investment in working capital, mainly around stock, making sure we've got enough raw materials and finished goods to ensure continuity of supply amid quite a challenging supply environment, and of course, the dividend payment this year. So Slide 13, pensions, I mean, Alex has touched on it. I think really, really pleased and pretty significant news from our perspective. The left-hand side of the chart shows that things have been pretty static for quite a long time. So really pleasing that this merger. So this valuation, which is only 9 months post the merger has shown such a significant improvement. So about GBP 125 million on a total cash obligation basis. When you discount that back from NPV perspective, which is how we view our sort of pension debt, as you probably know, that reduces it by GBP 60 million or 20% to a midpoint of about GBP 250 million. So really, really good progress. And again, this is Premier Foods scheme progress by itself. We know the benefits of the merger. We'll move around using the surplus as and when it arises in RHM to help plus the whole with Premier. So I think really pleased that we've already reduced NPV by 20% and the benefit of the surplus we expect to come. So confident of how things look going forward. And triannual valuation is all going at the moment, actually, so that would be a good marker as to where the RHM scheme performance has been post-merger. We'll probably find out about that probably early next year. Slide 15, just capital allocation. So we sort of set this out where we are today and where we see things going forward. So the left-hand side, probably fairly familiar, pension quite rightly remains a big obligation for us. We are stepping up amount in CapEx. We've still got a lot of attractive projects to come. And obviously, we started paying dividend last year and have increased the dividend to 1.2p this year. But as you look forward, we talked about pension benefits, expecting further benefits to come, so as and when the pension contribution is reduced, that will clearly free up more for CapEx, a lot more we plan to do and think we're able to do. And clearly, the ESG lens as well will update into that quite nicely. I mean dividends, we know are really low base. I think as and when other demands in our cash flow reduce, so I think that's an opportunity to have a look at that. And then M&A, want to touch on later or questions, but we are looking at the M&A opportunities. And clearly, we'll continue to do that going forward. And then just on Slide 16. So CapEx is probably worth picking up, so GBP 30 million to GBP 35 million, so quite a decent step-up plan for this year, and that's really around continuing to invest behind the growth of the business, but also automation of our case factories, which are generally a bit more manual and therefore were more of the attractive automation opportunities remain. So our dividend, GBP 13 million is the cost -- rough cost of the proposed dividend we proposed today. And tax, not expecting again any tax this year in terms of bought forward losses. But just as a reminder, the legislation on the amount of losses we can use in any 1 year, that's always meant we're going to pay small amount of tax going forward, and that's very much the case now. And then just finally for me, the other thing we mentioned, we're just tweaking the definition of our trading profit. So it's a noncash change. It doesn't impact sort of progress to date and doesn't impact our view going forward, but we will be including software amortization in our measure of trading profit. So that's more just a technical change to make you aware of. But clearly, no real change into performance or prospects and EBITDA isn't impacted. So that's all for me, and I'll pass back to Alex.

Thank you, Duncan. So I'm just going to skip now to Page 18. I'd just give a quick reminder of our strategy. So we have a clear 5-pillar strategy. So working left to right there. And the first pillar is about continuing to grow our U.K. core business, and having a solid and growing U.K. business gives us the foundations on which we can then expand further. And then continuing to invest back into that business, in particular, in operational infrastructure and that really serves 2 purposes. One is giving us the manufacturing capabilities to produce some of the new products that we bring to market, because as you realize, our strategy is very focused on new products and using new products to drive incremental revenue. So that's a really important piece of the jigsaw. But also investing in automation and machinery upgrades, which improves efficiency, and ultimately therefore improve margins, and we use that to invest back into the brands in order to keep driving top line growth. And the third pillar is an expansion pillars, so that's about expanding into new categories in the U.K., largely using our strong brands that we already have, but taking them into new categories, and we've got a handful of first steps currently live in market that we're in the process of nurturing. And the fourth pillar is similar in a sense of -- it's again expanding, but it's about expanding also into a focused number of overseas markets and building sustainable business units overseas, again, using the brand building and brand growth techniques that we use in the U.K. And then the fifth pillar, as Duncan mentioned this in the organic opportunities where, as I say, if we could find a brand which would fit nicely into the portfolio, accelerate growth and would respond well to our branded growth level, then that would probably be a very good move. Moving then on to Chart 22. And I had mentioned the branded growth model. So this is our model that combines the strong brands with innovation focused on changing consumer needs, supporting the brands with marketing and advertising campaigns and then working really closely with our key retailers in retailer partnerships. And if you look at the results of that formula over the last 4 years, pretty consistent growth profile there. It's -- from our U.K. brands, a 4.2% full year CAGR. So pretty strong and consistent. And with that peak in 2021, when again, we were all stuck at home and cooking all our meals ourselves. But it's good to see that in the latest year, post that, essentially picking up where we left off pre-pandemic. I mean, that's a fact, if you look over on to the right-hand side, at the 2 year CAGR to try and iron out what happened over those 2 years, you actually see that there's a slight pickup. So the 2 year CAGR at 4.7% is slightly ahead of the full year CAGR. And we think what's going on there, well, there's an increased momentum clearly. Quite probably some ongoing benefits from changes in consumers' eating habits post-pandemic, essentially keeping hold of some of those changes. And on Page 23, you can again see that, that strong branded growth was ahead of market. So we continue to grow faster than our categories. And so as a consequence, we increased our market shares both in grocery and in Sweet Treats. And also in both volume terms and value terms as well. We also increased our market share online, that's an area where we've been putting quite a lot of focus. We've increased our share there by 111 basis points. Also worth a quick mention on the right-hand side, there is an increase in our average amount of distribution. So this is a measure about how many products we've got out there in how many stores. And obviously, as an environment where retailers are looking to constrain their ranges to improve efficiency, we see it as important that we continue to not only get our fair share of that, but actually increase our share of the shelf. And you can see we've improved our overall distribution points in both grocery and Sweet Treats. I think it is just worth us mentioning the external environment on Page 24, because I think we're all aware that it's quite challenging at the moment and was all the way through last year. So import cost inflation, I said at the beginning of last year that we would see probably high single-digit inflation. That's broadly what we saw and that we would cover that with cost savings and price increases, which clearly we successfully did. There's no dilution in our margin. And in fact, as I said earlier, our margins actually moved forward. But we are continuing to actively monitor that. Cast the hand to see what we believe is going to happen. And clearly, there is more inflation coming this year, and we will use the same techniques that we've used effectively over the last year and previous years to cover that. I think on the labor market point, it's not such an acute issue for us because we don't have a lot of manual roles within our factories. We're fairly automated. So our roles tend to be higher skilled and so that's somewhat less of a challenge for us. And then overall, from the supply chain point of view, through the year, where we managed to keep our customer service levels high. We had to pedal quite hard to make sure that we could source the ingredients we needed. But I think the supply chain teams did a really super job, and we were able to fully supply over our peak trading periods on the run up to Christmas. So I think then just to finish off from me, if you flip to Page 33, where does that leave us? Well, I think we're in a strong place going into this financial year. I mean as you would expect from Premier Foods, we've got a strong pipeline of new products, which we're all ready to go this year and we'll continue to invest behind those 6 major brands, including with digital activation and we're actually increasing our brand investment year-on-year. And we'll continue to nurture those category expansions into new categories that I mentioned and continue to build our distribution and growth in our target markets overseas. As I say, we do expect that inflationary environment to continue, but we'll take the appropriate mitigating actions, which will include cost efficiencies and will include further pricing. And then I think we're 6 weeks into the financial year at this point, we're off to a good start. So it's absolutely spot on actually in line with our going-in expectations. And I think one of the key useful point is that our market shares continue to increase. I mean, if anything, they're increasing faster so far this year than they did last year. So I think that gives us a good indication of the direction of travel. And I think we're in a good place to make further good progress this year. So I think that summarizes things and we'll move on to Q&A.

[Operator Instructions] Your first question comes from the line of Ronan Clarke.

[Technical Difficulty] so far or what more you expect to need? and any comments on specific categories like within food or energy would be very helpful as well.

Sorry, we didn't pick up the first half of that question. Would you mind repeating it?

Sorry. It's about just a general topic of inflation and pricing. So could you share any details on -- in terms of what you've pushed through in terms of pricing so far? And what more you expect to need to get in this year? And then the second part was just on specific categories of cost, like any food items or energy that you're seeing particularly pressure on?

Yes. So I'll do the second part first, if that's all right. So I think it's pretty universal across the board. So we're seeing it across a very wide basket of ingredients and packaging components. And I think one of the reasons for that is you've got energy import costs flowing through to all those as well. So it's pretty universal. Input cost, and it's therefore, pretty universal in terms of pricing that we we've put through across the brand portfolio. As I said, we do try and offset as much as we can with internal cost savings and then we'll push through in pricing the remainder. I said at the beginning that last year, we expected high-single digit input cost inflation and that's broadly what we saw, I'd say. And then we I'd say, offset some of that and passed through rest in pricing, but I'm not going to go into the detail of exactly how much pricing we've push through, because we view that as being commercially sensitive, if you don't mind. And then again, I think this year, we'll be increasing pricing again. Input cost pressure at the moment is looking like low double-digit, so that will give you some sort of indication or ballpark.

Okay. And so far, in terms of price discussions, is there any difference between branded and private label in terms of the food retailers' receptiveness to increase it?

Well, private label contracts tend to run on a cyclical basis. So they come up for usually annual renewal and you bid on them. So that's usually taking place in the bid process. But we very clearly see ourselves as a builder of brands, our focus is on our brands, our energy goes into building the brands. And you can see we've got very strong branded performance. So if those margins on some of those private label contracts become wafer thin then we -- over recent years, we've tended to walk away from them rather than try and eke out a wafer thin margin. And I think that will be the case. Having said that, I'd expect our private label business to be broadly flat this year compared to where it's been over the last sort of 12, 24 months. Sorry, actually, just I missed a bit of your question there, but I mean remember to answer it. So on the branded side, though, of course, you've got to bear in mind when it comes to price increases, we tend to be the leader in all the categories that we -- in all our core categories at least that we operate in, and that clearly really helps when it comes to talking prices. So having powerful brands with TV advertising, strong innovation pipelines really helps your negotiation hand, if you want to look at it like that.

[Operator Instructions] We have a question from the line of [ Ella Kurt ].

I have several questions actually. Just firstly I wanted to clarify, when you mentioned last year and upcoming years' inflation expectation of low double digits for next year, for instance, is that across the cost of sales, so including the raw materials and the manufacturing. If that's the case, can you sort of give us a directional split between the 2 in terms of the inflation, please? The second one is on the cost savings. Obviously, last year, you partly did cost savings and partly pricing. Can you talk through the areas where you saved costs? And is it fair to say that broadly speaking, a couple of -- tens of millions of savings within the manufacturing, I guess, side. And whether you'll be looking to save costs in the sort of same areas for next year as well. The next question is going to be volumes. Obviously, you had volume growth last year. And you've mentioned in this morning's call as well that you tend to do well in that kind of environment. I was wondering whether you can recall any period in the past where volumes did soften as a result of price increases. Maybe I'll start with these 3 and then I'll continue later on.

Sure. Let me -- so you have to remind me on some of those. I was taking notes, but I might not got it all. So in terms of price increase, I actually said for this coming year, low double-digit and the high-single digit was what we anticipated going into last year. And that is -- when I'm saying that, that's across our input costs for the manufactured products, so it essentially covers all of our ingredients, all of our packaging materials, et cetera that goes into making the product. So that's essentially encompass everything, but we don't give a breakdown of what's taking place within that. In terms of volumes, yes, you're absolutely right. So last year, our growth was broadly balanced between volume and value growth. And of course, that's -- some of that volume growth is driven by underlying growth model. So our branded growth model, clearly looks to sort of drive value, but it's doing it through volume growth, because you're bringing new products to consumers that are new eating habits or replace an existing habit. So which takes us, I suppose, neatly into thinking about this year where you've got a couple of dynamics going on. I think the cost price inflation as that flows through into product pricing on shelves, there's clearly going to be some volume elasticity associated with that. We've got quite sophisticated econometric models, which help predict what that might be. But then also going on in the background, we're still driving our growth model. So we're still bringing new products to get to market. We're supporting the brands with advertising and marketing campaigns, and then we're working with retailers to execute well in store. So you've got 2 different dynamics there. And I think at this stage, it's rather early for me to predict exactly how that's going to play out because I will inevitably be wrong. Did that answer that?

Yes. Partly, just so from your clarification, I understand that the low double-digit next year is only on the ingredient input sort of cost. Are you able to provide any expectations around in general manufacturing cost inflation as well, please? And just in terms of the cost savings as well last year, where did you achieve your cost savings? And are they going to be the same this year as well? If you can give us a bit of an idea around the cost saving potential for next year so to speak?

Yes, sure. So I think just to be absolutely clear, when I'm saying high -- sorry, low double-digit input cost inflation, I'm talking about all our costs associated with manufacturing of products. So if you think about it in terms of our cost of goods might be the best way to think about it, yes?

Sure.

That makes sense? In terms of cost savings, I mean there are several areas that we made good progress on, reducing waste and improving efficiency in manufacturing. And also, we've obviously invested in new equipment which automates parts of the business and improves efficiency there. We've not given any magnitude as to what that was. And unfortunately, I'm not planning to do so, I'm afraid. And as we look into this year, I would say similar areas, we've got some -- quite a lot of opportunity remaining with our Sweet Treats sites, particularly on automation, because we've still got some areas there that are fairly manual, which we can significantly improve.

Just in terms of -- I know you don't want to give a quantum for last year, but do you still have the same sort of absolute level of savings that's achievable this year as well or is it you've done most of it? It's going to be still some cost savings when it's going to be less than last year?

Cost savings in -- yes, you mean into the magnitude of cost savings?

Yes, exactly.

I'd say it wouldn't be dissimilar. Yes, I would say it will be fairly similar.

And maybe one final question on the M&A. Obviously, growth for M&A is on the agenda. I was wondering if you have any pipeline right now if you're considering any acquisitions already or are you now more focused on the execution and looking to M&A later on? And if you can remind us what's the maximum leverage you want to go up to that will be helpful.

Yes. I think -- unfortunately, the answer to that question is if I did have a pipeline that I probably shouldn't tell you. So I'm afraid I'm going to stay quiet on that one. Maybe Duncan, if you want to talk about potential leverage?

Yes. So if we are putting in terms of guidelines, clearly I can't go into the details of what we might be looking at and what stage we're at. But I guess, just to give some flavor of how we're viewing, I guess, going back to sort of capital allocation. I mean we've always talked about bolt-on acquisition. And this is very much what we're thinking about. So we have 1.7x leverage now. I could see us going to maybe between 2x, 2.5x max in terms of leverage, but we're going to intend to sort of to come down towards 1.5x target that we've got. So I hope that gives you a feel we're not talking about anything massive or transformational, but something -- if we come across something that we think we can do. We can do something with an add value too, that's a decent brand, then relatively in modest amounts.

[Operator Instructions] We have a question from the line of [ Duncan Lane ].

Just a quick one. Do you guys have any kind of hedging on at all, not so much on ingredients, but anything like on the electricity, packaging, et cetera, or that -- just all cost that you pass on -- you hope to pass on?

Yes. Thanks for question. I mean we do hedge where markets existed fairly standard, I guess, by the time gives us better certainty and we do take a growing levels of color depending on what it is and what our view is of the particular commodity. So that extends across your fairly standard commodities, indeed -- always as well as currency. And that includes energy as well. I mean that is one of the areas that forward cover markets exist and we would take cover across all of those depending on the circumstances and our view of where we thought markets were going.

We have another question from [ Prateek Pathak ].

I just wanted to broadly take some color from you on how you see things evolving on the demand side given the impact of inflation and increasing cost of living. And how do you see that impacting the business in these current financial year, please?

Yes, sure. Thanks, that's really good question actually. I think if you look at our portfolio of products, we tend to make things which were actually relatively low cost. And so I think that combined with the fact that the types of products we make are often things that consumers can use to pull a relatively low-cost meal together. So I'm thinking of things like pasta sauces, so you can make a fairly low-cost nutrition to meal out of some pasta, left over vegetables in the fridge and transform it with one of our pasta sauces. What we tend to see is that when times are tough, our brands tend to still perform pretty well. And I think that's probably also helped by the fact, of course, naturally, what do people do, they will reduce discretionary expenditure and food is the last thing really on the list, isn't it? So what we'll see is people will tend to choose to eat out less. So they'll eat in the pub less often, and order less takeaways, and they'll make a meal from scratch because that's the most cost-effective thing to do. So we tend to get this sort of compensating benefit of more meal occasions in home or more of the sorts of meals where our products are situated. And I think that's historic evidence for this, if we look back into our archives, we can see that when we've had recession in the past, for example, we've seen household penetration on some of our brands increase. And whilst it's really early days, right now, I said we're off to a good start so far this year. If I look at our market shares, we've continued to increase market share over the last few weeks. And if anything, it's strengthening. So I think that might be an early indication, but then it could also be, of course, the branded growth model, because we're continuing to launch new products and support with advertising and all these other good things I mentioned. But broadly speaking, our portfolio is fairly resilient in tough economic times for the consumer.

And just wondering if you expect consumer down trading and any impact coming on the branded side?

Yes. I think you've got to look at these things on a net basis. So will there be some people who have to down trade and buy a cheaper, non-branded version? I suspect there is. But at the same time, we get those people who were going to go out of dinner who now stay at home and they're down traded to buy our products. And I'll come back to the fact that we're increasing our market shares. And if I look at what's happening to private label, the stores own brands in our categories, there's no widespread increase in the share of private labels. There is widespread increase in our market share. So that gives us, I think, a positive indication.

[Operator Instructions] There are no further questions. You may continue.

We're finished.

Okay, look just no more questions, then thank you, everybody for dialing in, and we hope you find that useful. Thank you very much.

And that concludes the conference call. You may now disconnect.