Premier Foods plc (PFD) Earnings Call Transcript & Summary

Hello, and welcome to the Premier Foods Q1 Trading Update Call. My name is Lauren, and I will be coordinating your call today. There will be an opportunity for questions at the end of the presentation. [Operator Instructions] I will now hand you over to your host, Alex Whitehouse, Chief Executive Officer, to begin. Alex, please go ahead.

Thank you. Good morning, everybody. Thanks for joining us, which is our quarter 1 trading update call, and that covers the 13 weeks to the second of July this year. I'm also joined on the call this morning as usual by Duncan Leggett, our CFO. I'll start by giving a few headlines of our trading in the quarter, and then we'll dive into a few of the key details, which would provide a bit more color and as usual, before we pass on to questions. And also, while everybody is on, as a reminder, we've got today our AGM, which at 11:00 this morning, which we're hosting at our offices here in St. Albans and also with an option of attending virtually. So if any shareholders would like to attend that and don't have the details then by all means please contact which you've gone in IR for details of how to attend that. So with the quarter 1 results then. So overall, I'm very pleased to say that we've had a strong start to the year. And we reported sales growth today of plus 6% which in this environment, we consider to be a very good result. And that strong start means that we are firmly on track to deliver on our full year expectations. Looking at some of the other headlines. We've also continued to gain market share by building on the share gains that we made last year. And our international business has grown double digit for another quarter. So if we go through a brief review of progress in the quarter then, importantly, our branded growth model continues to deliver really well for us. And you can see this playing out by the fact that our branded sales grew by 4.2% in the quarter and with the grocery brands up by 4.5% and Sweet Treats up by 3.3%. So again, very good results. And as a reminder, our branded growth strategy, I make no apology for reiterating this. For those of you who heard it many times before because it is the backbone of our model and our strong performance over the last few years. And that is we start with a portfolio of brands, which obviously leaders in their categories, they've got very high household penetration and obviously very well-known brands to our consumers. And then we listen very carefully. We listen very carefully to our consumers to make sure we've got a depth understanding of how they're cooking and how they're eating and how that's changing so that we can bring to market insightful new products, which are based on those current and changing consumer needs and trends. And then we support the brands that are mostly engaging and meaningful marketing and TV campaigns. And then finally, and really importantly, actually, we work closely with our key retail partners and to make sure that we're delivering excellent in-store execution for the brands. So if we look at some great account pools of this splendid growth model and the activity in the quarter, some in April, we launched a category first, and that was a Mr Kipling Deliciously Good Cakes. And this healthy arrangement, which was a good 3 years in the making actually is quite a technical breakthrough is an entirely designated as non HFSS, so that's not high fat, salt and sugar. It's got 30% base sugar that our core range is considerably less fat. It's got 10x the amount of fiber and it's made with real fruit and [ product ] tastes really great and so far, they've been received well by our consumers. And we've always delivered over GBP 1 billion of sales since we launched those. Other exciting key launches over the last few months have included a range of authentic Sharwood's East Asian cooking sources and they include flavors such as Thai Red Curry, Japanese Teriyaki and Thai Jungle Curry. And these really help consumers to enjoy an authentic delicious bit of home with the convenience of having to source many base of them and obviously a fraction of the cost of eating out. And you might also remember, we recently introduced Ambrosia Porridge Pots. A convenient, ready-to-eat range of breakfast porridge in 3 flavors. And these are to say they're ready to week, they're not to drive product. They're made with creamy West Country Milk, which is what you'd expect from Ambrosia, of course. And this is because when we were working with consumers, we -- this develop what we discovered ready-to-eat product of this nature delivered a much better tasting product that consumers much preferred to the drive options that were already available in the market. So porridge is performing really well. It's now available in a number of leading retailers. And I think -- to me, this is a really good example of us leveraging those strong brand equities and to generate incremental revenues by expanding into white space categories. And of course, breakfast for us is a new meal occasion as well. If you look at all the rest of our brands, they're really targeted another times of the day. Another important element of the branded growth model is investing behind our brands, including advertising and in the first quarter, we advertised Mr Kipling and that's our largest brand, of course, on TV with a new advert which we call Piano, and this captures a nostalgic moment between a father and daughter as they're moving house. To me, this is a really good example of what I mean by mostly engaged, and most engaged approach that we employ to build this emotional connection between our brands and our consumers. And again, this year, we plan to advertise 6 of our major brands on TV and also supported digitally to increase our overall brand investment compared to last year. Key benchmark for us is how we're performing against others in our markets, of course. I'm pleased to say that we've -- as we've done in recent years, we've continued to increase our market share, and this is the case both in stores and also online. And then, of course, a topic of much debate has been the widespread inflationary environment. And as we indicated back in May, we're seeing another wave of input cost inflation coming through the system. Now as always, we've looked to offset this inflation by using a range of measures, and that includes our hedging strategy, includes cost efficiency programs. And then it also includes pricing. I'm really pleased to say that we've made good progress here, and we've recovered at this point, all the inflation that we've seen to date. So this puts us in a good position in terms of thinking about the rest of the year. We will, of course, continue to monitor the situation very closely. And if we need to take further action, of course, we'll do so. So the recovery of these increased costs through pricing is largely only taking effect now. So these impacts to our top line are likely to come through in subsequent quarters. But to be clear that we do have price benefit in the numbers we reported today, but that's the effect of the price increases we put through in the latter part of 2021. So in summary, there's some pricing benefit to these numbers perhaps from the price increase in the back end of last year and the latest price increase only really just now starting to flow through at the end of the quarter. Now stripping out price and volume this quarter is a rather complicated picture with quite a few moving parts. Yes, overall, pricing is playing a big role in the overall sales growth of 6%, which we reported this morning. And of course, we always expect to see some softer volumes in the course of in years as we're lapping a tough comparative from last year's Q1 and if you remember, eating out-of-home was still restricted and so we were benefiting -- benefiting in this period last year. So that's played out pretty much as we've expected. And going in the opposite direction, we've got the branded growth model, which [ drives solid ] growth. But then the third key factor here is that we inevitably will have got an element of volume elasticity impacting the numbers in there as well. So as I say, it's a complicated picture with lots of moving parts and one which we're tracking very closely. In terms of emerging trends, our consumers are telling us that they're increasingly looking to cook affordable meals at home in order to save money rather than getting a takeaway or eating out. And as you know, we've got a broad portfolio of leading brands, which resonate strongly with consumers. And many of our product ranges are well-positioned to help consumers create those tasty affordable meals in a convenient way. In terms of what we've actually observed in the quarter both Batchelors and Nissin Noodles are facing particularly strong growth. And we believe that this is an indication of what consumers are telling us, which is then looking to make those tasty, affordable, convenient meals, at home. And as we look forward over the next 6 months, the consistent message we're getting from all our consumer research is suggesting that well over half of consumers in the U.K. are now planning to save money by reducing the number of takeaways that they're going to buy and how frequently they eat out. And of course look, we all need to eat [ daily ] and cooking at home is always going to be the cheapest option and depending on how you choose to pay your meals could also well be healthier as well. So therefore, with a greater proportion of meals likely to be too at home, we'd expect to be a beneficiary of that trend, obviously. Now yes, there may well be a trend with some consumers purchasing more on label products but we expect that with more meals being eaten a home, but that will be a significant offsetting effect. Moving on to our non-branded sales. So you noted in the note, our non-branded sales were up 19% in the quarter, and this is driven by 3 very specific effects. So firstly, we remember that our non-branded sales include sales to out-of-home outlets. And obviously, those sales are now recovering strongly from the pandemic restrictions along with the wider recovery of the out-of-home sector. And secondly, we've won some new private label contracts in Sweet Treats. And then, of course, as you would expect some pricing benefit in here as well. And so to be clear, what we're not seeing is any widespread effect of consumers trading down for our branded product ranges into private label. And I think anyway, you can see the evidence of that in our continued increase in market share. In Sweet Treats, both Cadbury and Mr Kipling grew their sales in the quarter with a combination of price and volume driving the growth and demonstrating again the strength of those brands. As I mentioned earlier, Mr Kipling benefited from the new Piano TV advertising and also the new Deliciously Good, our non HFSS range, which I said has been well received by consumers. And the company core range actually continues to perform very well as well. And we'll also be aware that one of our key strategic growth pillars is to deliver growth overseas. And as I've said before, this will be in the key target market of Ireland, Australia, North America and Europe. And within these target markets, we're focused, of course, on Mr Kipling and Sharwood's, other than Ireland which is the more established business and carries a broader portfolio of brands. So our international business has performed very well for us again over the first quarter. Sales were up by 12% on a constant currency basis. And the key driver of that was actually in Australia, obviously one of our key target markets where we delivered particularly good performance from Mr Kipling and Cadbury. And in fact, Mr Kipling achieved its highest ever market share of over 11% and extended its position as the #1 brand in the category in Australia. Now together with an increase in Cadbury, cake market share as well, to over 6%. We've now got a 17% share of the cake market in Australia. We've got the #1 and the #2 brand and as we continue to build towards the strong position that we occupy in the category of the U.K. And this performance is really due to continued strong performance of our core range and getting that core range execution in-store that absolutely spot on, and that's very much in line with applying our branded growth model in our target markets, just as we do in the U.K. In Ireland, Nissin Noodles continue to perform very well as they've done in the U.K. as well and in Canada and Spain and we've had success in expanding the distribution of Sharwood's, which we expect to deliver benefits as we go through the year. Another of our strategic growth pillars is taking the brand-building capabilities that we've demonstrated in our core brands and expanding them into new categories in the U.K. And as I mentioned, we've got a number of live initiatives in market here that take them out of our traditional categories into logical adjacent categories. I'm in the early stage of this structure, the member, about the porridge that I mentioned earlier is a good example of that. And so with that as a brief review of the first quarter trading, I'll pass over to Duncan to provide a brief update on credit ratings.

Thank you, Alex. Good morning, everyone. So I just wanted to, I guess, update on credit rating. So following a strong strategic and financial progress we've made in the last couple of years. Really we've got 2 further upgrades recently from S&P and Moody's. They're really recognizing some of the progress we've made, and we obviously appreciate the constructive dialogue we've had with them over the years. So where does that leave us? So S&P now rates us as BB, and that's an upgrade of BB minus and moving between our BA3 up from B1 both of these have to stable output. So listings as [indiscernible] upgrades across S&P and Moody's over the last 2 years.

Thanks, Duncan. So to wrap up then, we've made a very good start to the year. The brands are proving resilient in this environment. And as we look forward to the rest of the year, we will, of course, bring further new products to market. We'll continue to increase our investment behind the brands and also to build our overseas businesses and then expand our presence in new categories. So I think a strong quarter 1 behind us, and we've got on input cost pressures mitigated. We're firmly on track now to deliver on our full year profit expectations. And thanks very much for your time. I'll now pass back to the operator, and we'd be very happy to take your questions.

[Operator Instructions] Our first question comes from Charles Hall from Peel Hunt.

A couple of questions, please. Firstly, could you just expand on the consumer behavior you're seeing? And you mentioned that you're not seeing consumers down-trading from your brand to private label. But overall, are you seeing private label growing in your categories? And is there any difference between the different categories that you're represented in?

Yes. Thanks, Charles. So yes, I mean, the overall picture as I say is that we're clearly not losing share to private label. But if you dig into the detail in some of the categories that lots of moving parts, some brands have done better than others. In some cases, private label done better or worse, but it's a fairly mixed picture across the categories. But I think the thing that's keeping us strong is, and I think this is quite an important point is whilst navigating the short-term challenges that everybody is facing, we're not taking our foot off the gas on the branded growth model, and that have our 5-pillar strategy. I think it's really important that we continue to drive the strategy and the things that have made the business successful over the last few years whilst dealing with the short-term challenges and not just get too wrapped up in the short-term.

That's great. And then secondly, on the international side, could you just update a bit more on what you're seeing in North America in terms of the Mr Kipling launches. And obviously, Sharwood's sounds as that's going well in North America. Maybe just give a feel for the scope of the potential for Sharwood's in the international markets?

Yes, of course. So Sharwood's in North America, we picked up quite a bit of new distribution and that will filter through more as we go through the year because obviously, you get agreements with customers and then you wait until they get to the date when that [ shading ] gets changed down. So as we go through the year, we'll see more of that flow through. When we might remember a couple of years ago, when we did a big rethink of our international strategy and move to a much more focused approach with a great emphasis on getting the in-market execution right. So essentially move from an export model to a brand building business building model. You'll remember that. All the research we did across multiple markets so that Mr Kipling and Sharwood's would be the first 2 brands to focus on. So rather than trying to build 5 brands overseas to focus on those 2. And there's good reasons for each of those, which we could go through. So yes, so Sharwood's, we feel pretty excited about. It's is a developing cuisine in many markets, it's obviously very well developed in the U.K., but it's a developing cuisine in many markets, and we're sort of in there at the beginning as it's growing quickly. So it's a nice position for us to be in. On Mr Kipling, in Canada, we've obviously, we've made the changes post the test and we're expanding into more stores. So that's growing nicely. And in the U.S., we're live in market in the test stores with Target. We've got some early data on that, and it's bang in line with what we would expect off the back of the Canadian test. But I'd caution that that's one data point right at the beginning, and it's very early days. But as we get more information, we'll see how that goes.

Our next question comes from Martin Deboo from Jefferies.

Two questions from me. One is just a very short one for clarification and one is a bit deeper. Alex, you're talking about tough volume comps in the prior year. Can I just double check that statement? Because my read the prior Q1 was actually very soft. It wasn't the real problem if it was Q1 '21 that was the tough comp and that you're essentially still lapping that and obviously, underlying 3-year growth is still positive. I just want to make sure I understood that comment about tough prior year volume comp correctly. Second question is moving to the commodities there because it's going to be so important through this year. Can I just sort of the best understanding I can of how you're managing it? How much of your commodity basket is sort of hedgeable in the broader sense of the world? And how does that resolve into actual technical hedging where you're actually buying hedging instruments? How much of it is just forward cover? And how much of it is just sort of holding inventory? And can you give any indication of what your total covered position is either for the first half or for the year? So those are the questions.

Yes, sure. Let me take the second question first, if I may. So we don't give the split if I'm honest, Martin. But you're right, that we use all of those methods. So historically, we would anyway use a combination of forward contracts and also hedging instruments in order to stabilize pricing. And some of those are forward contracts, which at the moment have become really important in terms of securing volume as well. So that's one thing that's been there for a while. The other point you mentioned is also true. So we are holding more inventory of some more materials in order to make sure that we've got really continuity of supply, although of course, it does have a stabilizing effect on pricing as well. And sometimes that's where we're holding that inventory and sometimes where the manufacturer of the ingredient is holding it forward. So there's a basket of things I think there, but we consider it commercially sensitive as to what the mix of those are, if you don't mind. If I move on to the volumes point. So I think the point here is that a year ago -- so 2 years ago, of course, there was an enormous pandemic effect, and that clearly had a big positive impact on the business. If we then go to a year ago, whilst it's a negative effect versus that prior year, but it's still elevated versus today because there were still some restrictions that we were just coming out of in quarter 1 a year ago. So the year-on-year comparison to a year ago is still pandemic related in the base, which takes you to looking at things over 3 years, but we've made a conscious decision to stop trying to compare to pre-pandemic and to just now move on.

No, that's very clear on that one. And just on the hedging one. Forgotten the question, Alex. I'll come back at the end if I remember it. Sorry, carry on.

Next question comes from Doriana Russo from HSBC.

Yes. Sorry, I was on mute. My first question is on the retailers' attitude towards pricing. Are you seeing that the prices you've taken in your -- across your categories are being passed on the consumer? Or are you seeing retailers reluctancies to pass it on and perhaps play in a different way? That would be my first question. Then I have a question on the U.K. growth versus international. Can you give us a number for how much the U.K. sales have increased and what would be your expectation for the year? And finally, on inflation, can you give us a sense of what are the area of major inflation? I mean, obviously, everybody is talking about energy, but what other areas are you feeling a pinch on? And coming back to what was just discussed, do you see good availability and good access to all the raw material that you need to basically keep your supply chain secure?

Four questions in there [indiscernible], but let's -- let's go through them in order. So retailer pricing. Well, the first thing to say here is that is entirely the discussion with the retailer. We don't have any control over that. We'll pass on what we need to pass on to them. And it's really up to them as to when and to what extent they pass that through. And I can't give you a blanket answer because it's very dependent on brand by retailer. But what I would say, by and large, we are seeing our prices increasing in market. That's probably the way to think about that. The second one in terms of U.K. growth, I'd say for the guidance there, we were in the high 5%, if that's helpful to you from a point of view. And then in terms of inflation, my answer to this is going to be pretty similar to what I've said in the past is it's pretty broad across everything. I mean energy obviously got a lot of the headlines and that's very true. But then you've also got to bear in mind that energy is a component of input cost inflation to the market suppliers of our ingredients as well. So that actually then just manifests itself as increases across other ingredients. Clearly, the war in the Ukraine has had an impact on -- and we don't buy anything from the Ukraine or Russia. I should clarify, but obviously, that's had an impact on global commodity markets on a number of ingredients. So it's pretty widespread. And given the number of ingredients we buy across all our different brands, it tends to then mean we've got pretty consistent inflationary pressures across the brand portfolio. In terms of availability of ingredients and raw materials and packaging, it's certainly better than it was. It's also still challenging. So far, we've managed all through, frankly, since the beginning of the pandemic all the way through to now, we've managed to keep up and we've managed to continue manufacturing everything we need. But it's -- I would say our procurement team is a particularly good job in securing the volumes forward, and that includes, as a said in answer to Martin's question, that includes securing forward contracts because that gives us more security of volume, and it also includes us buying forward ingredients that we need just to make sure we've got our arms around them. Did I answer the question, Doriana?

Yes, thank you very much. But can I also ask, if I'm not wrong, you do have some production facilities based in Europe. Now in case of this gas reduction going on, would you be sort of exposed in any way to potential disruption from a reduction in gas supplies in the country?

All our manufacturing facilities are in the U.K., Doriana.

[Operator Instructions] Our next question comes from [ Ella Carol ] from Wellington.

I have 3, please. The first one is on the input cost inflation. You had guided for low double digits for this fiscal year. I was wondering if there are any changes to that? The second one is on the price increases. You mentioned you're launching now. I was wondering if it's sort of in line with the sort of high single-digit-ish inflation we are seeing in the grocery market. And the last one is the private label. You mentioned you aren't losing share to private label. I was wondering if that's generally true for the categories or is it just you?

Okay. Thanks. So input cost inflation, we said it was going to be low double digit. I think that's pretty much what we're seeing play out. So no change in the previous comments we've made there. In terms of how that manifests itself in price increases, though we -- that's not something that we commercially disclose. What we've always said is that we look to reduce the impact on price through cost saving measures and other efficiencies that we can make within the business, and then we'll only pass on what we need to. But that's not a number that we disclose. On the private label point, yes, you're absolutely right. We're continuing to increase our market share. So there's no wholesale loss of market share to private label from our brands. But as I said in response to one of the earlier questions, if you drill into a category by category, there are winners and losers in each categories across the different brands and private label, but it's sort of a mixed picture.

[Operator Instructions] Our next question comes from [ Pratik Tax ] from BlackRock.

And based on the discussion during the call, I was just trying to confirm if we look at the 6% growth in the quarter, is it fair to assume that despite price increases, it was partly offset by some volume impact and also the fact that not all inflation is getting passed on to the [indiscernible] of consumers?

I'm really sorry. We can't hear the question. Could you speak more loudly, please? Or closer to the microphone.

Yes. Sorry, is it now any better?

That sounds better. Yes, that's better.

I'm just trying to understand the 6% revenue growth in the quarter in the context of...

We've lost you all together now.

It appears that [ Pratik ] line has disconnected from the call, which brings me to the next question, which is from Clive Black from Shore Capital.

Good morning, gentlemen. I also lost the connection to the call. So apologies. Two questions if they haven't been asked already. Firstly, could you give us some color on the promotional environment at the moment? I am reiterating the inflationary backdrop. And secondly, Alex, you mentioned the HFSS content of your Mr Kipling or non HFSS [indiscernible]. How does the adjustment of the rules in the U.K. influence your thinking about its impact on your range?

Yes, sure. So promotional environment, actually not massively different, if I'm honest with you. I mean promotional prices are changing. So a product that might have promoted at one price now might promote to a slightly higher price. It's pretty -- it's pretty widespread across the market, obviously, because a lot of in the U.K., a lot of volume is sold at the promotional price, as you know, and so seeing inflation flow through to promotional pricing, if you want, what's happening in the market. But other than that, I wouldn't say it's any more or less intense than it's been in recent years, to be quite honest, really. In terms of HFSS regulations, I mean, to be honest, the majority of our portfolio is not classified as HFSS or does not fall within the defined categories that the government is talking about. So the impact on us on the majority of the range is really pretty negligible. The difference being cake, of course. And I think where we are there really is the only measure that we made is the location or promotional location. So you won't be able to have a bundle or end of take some biscuits and things. But obviously, with our new non-HFSS range, we will still be able to promote that Mr Kipling range in the way that we used to with on the same on [indiscernible].

[Operator Instructions] It seems we have no further questions registered. So I'll now hand you back over to Alex Whitehouse for closing remarks.

Well, thanks, everyone, for joining the call this morning. As you can see, to wrap up, we've had a really good start to the year. We recovered the cost inflation that we're seeing so far this year. And on that basis, we're looking towards the rest of the year pretty optimistically and saying that we're currently on track. Thank you very much.

This concludes today's call. Thank you for joining. You may now disconnect your lines.