Premier Foods plc (PFD) Earnings Call Transcript & Summary

Hello, and welcome to the Premier Foods' half year results conference call. My name is Alex, I'll be coordinating the call today. [Operator Instructions] I'll now hand over to your host, Alex Whitehouse, Chief Executive Officer. Please go ahead.

Good afternoon, everybody. So the plan here is we're going to go through a handful of slides from the deck, which I believe is available on the website, Richard. So if you want to follow along, I'm going to start on Page 3. I'll let you know which slide we're moving on to each time. So look, I think the main message from us today is that we've had a good first half. Quarter 2 was just as good, if not slightly better actually, than Quarter 1. And we finished the quarter -- sorry, we finished the half, up 6.2% versus a year ago in terms of revenue growth. And then branded growth at 3.9% with trading profit, that's 6.2% growth. So trading profit growth in line with revenue growth. So obviously, therefore, we've recovered input cost inflation and held our margins versus a year ago. And we've done that through a combination of cost savings and price increases. Adjusted PBT is up 11.9% and that's the result of the trading profit growth, obviously, but also the fact that we've got a lot lower interest payments than we had in the year ago base since the refinancing last year. And then finally, net debt to EBITDA ratio fell by 0.1x versus prior year. And bear in mind that after the consideration for the acquisition of The Spice Tailor. So another way to think about that is that we basically paid for Spice Tailor in 1 year's free cash generation. But I think overall, these numbers tell us that the consumer proposition of our brands is highly relevant in the current environment, and we can talk about that a little more later. Another thing that then flows from these numbers and also from the fact that obviously, we're sitting here halfway through our quarter 3. So 6 weeks of data further on the numbers that are published today. So I can tell you we're also having a good Q3. And so with that strong half 1 under the belt and Q3 going well, we're feeling comfortable that we're on track for full year expectations. So I'm going to move us on to Page 4, so just one page ahead. And this really just shows our 5 strategic growth pillars. I'm really excited that we've continued to make progress against all 5 of those pillars. So the first pillar is growing our core U.K. business. And as you can see there, we've now delivered an average annual growth of 5% a year over the last 3 years from our U.K. brands. The second pillar is investing in infrastructure, so back into our manufacturing operations and what that's doing is improving our efficiency, increasing automation and therefore, improving profitability. And the third pillar is about category expansion. So this is really taking our really well-known strong brands and actually extending them into new categories where historically, we've not derived any revenue. So the image that's on the chart there is actually Ambrosia porridge parts. So Ambrosia, known for custard and rice pudding and a few other deserts, taking it into a completely different daypart, breakfast, where the entire group has not played in breakfast. So it's entirely white space from a revenues point of view. And yet the principles of Ambrosia, what the consumer understands from Ambrosia, which is creaminess from Devon is entirely relevant when you're making porridge. So the brand equity transfers into that category. And we've got 4 or 5 different experiments we're playing around with in category expansion like that, and we've admittedly from a small base, but we've more than doubled the revenue from those experiments this year compared to last year. International business continues to perform well. So another double-digit growth performance from the international businesses. And you remember where we've got 5 focus countries and what was 2 focus brands, with Sharwood's and Mr Kipling, it's now 3 focused brands since the acquisition of Spice Tailor. But it all continues to perform really well. And then in terms of inorganic opportunities, that fifth pillar, which we've talked about before, conceptually, we've obviously, we've now made our first acquisition or at least our first acquisition in 15 years with the acquisition of The Spice Tailor, which I think is almost a perfect example of the types of bolt-on acquisitions we were trying to indicate before. So a high-growth brand with its bang on trend, with lots of growth potential, particularly when we apply our branded growth model. So I'm now going to -- so now I'm going to hand over to Duncan, firstly.

Thanks, Alex. Good afternoon, everyone. So I'm going to fast forward us to Slide 9 of the deck, and just 3 slides for me. I think first on net debt, I think the important message is that we're lower than we were last year, even having bought Spice Tailor. So we've effectively absorbed the acquisition in a year's worth of free cash flow. I mean, typically, as you see this time of the year, it's our working capital peak, so we've got high levels of stock compared to the year-end, and that's driving the working capital outflow. That generally -- expect that to unwind as we get through the year from a stock perspective. CapEx of GBP 6 million, spent a bit during the year. We expect it to be more H2-weighted for the full year. We're guiding to about GBP 30 million for that. And of the dividend perspective, we paid our second dividend in a row, 20% higher than it was this time last year, and it's on a final dividend basis, and we'll continue to beat up for the time being. So flipping over the page to Slide 10. Again, just a helpful reminder of where we are from a capital structure and sort of overall risk and resilience point of view. We've been working towards the medium-term leverage target for a little while. We've made good progress getting it down to 1.7x. At March, clearly, it popped up again being half year and also because of the acquisition of The Spice Tailor, but it's still only 2x after the acquisition, and we continue to make good levels -- generate good levels of cash to help get that down towards our target. So that's what we're heading in the right direction. You'll be well aware of our refinancing we did last year. clearly pleased to have done what we did at the time. So clearly, we've got a fixed rate of interest and a good window before we need to refinance again, particularly from a bond perspective, but also from an RCF perspective. We've got a 1-year extension to -- that will be triggered early next year. And then currently, just to remind them more than anything, we don't really have any exposure to the U.S. dollar. We've got modest net euro purchases that we manage with forward contracts, et cetera, et cetera. And we don't really have any other material currency exposure. The final slide for me just on pension. So made good progress over the last couple of years since our pension scheme merger. I think where the Premier Foods pension scheme is always hovering about GBP 500 million, GBP 550 million in terms of deficit despite the company paying quite a lot of cash into it. It's starting to make good progress. And I think that's a lot of that's due to it being run by the new team or the team that inherited the Premier Foods game. So we've had such success running the RHM scheme. So we had GBP 125 million reduction from the evaluation last year. We've got a valuation at March '22 ongoing. We'll obviously share the results of those when we were able to, probably early next year, and things generally moving in the right direction. We've got Premier Foods scheme performing well by itself, the deficit is reducing. We've got the RHM scheme performing well by itself. We think it's probably a sort of buyout level there or thereabouts. So very soon, we'll be building a surplus, and that's exactly what we envisaged when we did the merger that the RHM scheme would get to this position, start building their services, and clearly, the bigger the services, the bigger dent it makes in the Premier Foods scheme. So I think they're very much moving in the right direction. And also pleased to share, obviously, has been a bit longer though that [ hasn't aired ] but from the recent volatility, there's been no real impact on the schemes. That's what we managed well. There have been capture calls as it would have been with pretty much every scheme, I think, but there were assets that we can liquidate without a haircut and a relevant notice to make sure that we weren't called short. And actually, that was really managed very smoothly and actually probably better now is part of the merger scheme. So that's another benefit coming through. And where do we end up? We end up now -- we get to higher than they were a few months ago and I guess, all else being equal, that tends to be positive for all our schemes, particularly the Premier Foods scheme. So plenty to be positive about there. I will now pass back to Alex.

Thanks. So I'm going to flip it on to Page 20, and really just talk about those external industry-wide challenges and how we're navigating them. So on the left-hand side, you can see there talking about mitigating input cost inflation. So, so far, we've managed to cover that input cost inflation through that combination of cost savings and price increases that we've already implemented. And obviously, you can see that in the fact that our margin is in line with prior year. We are seeing further inflation in half 2, and we'll continue to address that using a combination of measures, including forward contracts for commodities and also for energy where those markets exist through cost efficiencies and also through increased pricing there where we have to do. And then just as a reminder, we don't sell anything to or buy anything from either Russia or Ukraine. On the right-hand side, probably appropriate to talk about consumer behavior at the moment. And clearly, what we're seeing is the consumer budgets are becoming more and more stretched. But I think when we look at that through the eyes of our portfolio, what we realize is that actually our brands are quite affordable. When you look at it in the context of all the things that you buy in store, we're on the more affordable end of the spectrum. And we tend to have products which help consumers pull a meal together as an affordable way for the family. So I think that puts us in a position where we're well placed to perform well despite the environment. And the other factor that's playing into this is consumers have been telling us for a while now that they're intending to eat out less and have less takeaways in order to save money, which of course makes perfect sense because the cheapest way to eat is to cook for yourself at home. What we've seen we think over the last 6 to 8 weeks that this really started to emerge as a trend for the last 6 to 8 weeks, we've seen a steady improvement in volume trends, but it looks like there's a switch from eating out of home to eating in home. So when you take those things into account, I think that's one of the really key drivers as to why our brands are continuing to increase their market share despite the current environment. I thought then if we just flip on to Page 23. It's probably just worth us touching on the international business for a moment because it's becoming a bigger part of the portfolio over time. So international sales, again, double-digit growth, up 11% with progress across the market, standout performance for me was Australia. So that was plus 22%. And we actually hit our best ever share for cake in Australia, so extending our leadership position. So also worthy of note is that with the acquisition of The Spice Tailor, we're now the biggest player in the cooking sauces or Indian cooking sauces, I should say, in Australia. Ireland bridged strongly in the major retailers and Soba was the standout performer there. And that's been our launch into the Quick Meals and Snacks category in Ireland, given that we don't own the Batchelors brand in Ireland. And then in Europe, it's all about extending the Sharwood's brand. So this is all about getting more distribution in more stores across Europe because we know it works when it's listed. So it's actually a distribution expansion strategy right now. And we did gain some significant new listings. So it's Jumbo in the Netherlands. That's the #2 supermarket chain in the Netherlands and also in Carrefour in Spain, which is always an important retail. So very pleased with that. In the U.S., good strong growth in the U.S., were up 37%, but that was largely driven by Sharwood's, where we had sales growth of over 50% as we continue to extend the brand into more stores. But also, we've launched the healthier range. So this is the range we launched a couple of years ago in the U.K., which is a reduced fat range and that's performed -- that's rather surprisingly well, actually, in the states, doing very well. The Mr Kipling test remains ongoing in approximately 200 Target stores. We're quite pleased with the way that's performing, but we've still got some time to go yet until we finished looking at that and deciding when we're ready to extend it. Canada, on the other hand, we did do a Mr Kipling test a year or so ago when we made some tweaks to the model as a result of that. And I think a combination of those tweaks plus starting to pick up more distribution has meant that Mr. Kipling grew by 30% in Canada in the first half. And also in Canada, we picked up some new distribution in Walmart. It's obviously a major retailer. So we've got 30 new SKUs of Sharwood's and Spice Tailor going into Walmart Canada at the moment. So that's a quick snapshot of international. And so really, that leaves us just to wrap up actually on Page 27. So the overall picture from our side is that the combination of our brand proposition, our consumer proposition of our brands and the strategy. We've got are delivering really well for us. So strong half 1 performance, both revenue and profit level in clearly what is a fairly tough environment. We've also made good progress on all 5 of our strategic growth pillars and so far successfully navigated the inflationary environment. And then just a reminder, on financial resilience, of course, we continue to work towards that 1.5x leverage target and that we are financed now by largely fixed rate notes of 3.5%, which are not due until October 2026, which gives us some protection from the interest rate environment. So I think that that's a strong half 1 under our belts. And the fact that we know that Q3 is shaping up really nicely as well. We are quite happy to say that we're remaining on track for the full year. So that's the summary. I think we should be happy to do questions there.

[Operator Instructions] Our first question for today comes from Neill Keaney from JPMorgan.

Congrats on a good set of results. Could you give us a little bit of breakdown on pricing versus volume contributions to those top line numbers in both Grocery and Sweet Treats, please?

I mean, to be honest, that's not a break down we usually give. What I can tell you is that we did say that the price increase we were -- or at least the input cost inflation we were seeing in the middle of the year was low double digit. Now obviously, we've done some work to offset as much of that as we could. But some of that's come through as pricing. I think the other thing you can expect is that when you increase pricing, there's always some volume give back and the bigger the price increases, the bigger the volume giveback is, but then what you do is you work really hard to build that volume back through your executional plans, which fortunately for us, it just happens to coincide with what our growth model is anyway. So it's the new products we bring to market, the continued support for the brands with advertising and marketing campaigns. And then working closely with our retailers on in-store execution, so the big displays and the promotional events that you see. So in fact, what we've seen over -- particularly in the grocery side of the business, over the last 6 to 8 weeks is we've seen a consistent week-after-week improving volume trend as the weeks have gone by. And so hopefully that gives you some idea of the direction of travel, even though we're not being specific about the numbers.

No, that's really helpful. And maybe if I could just ask another couple of questions on The Spice Tailor acquisition. Firstly, can we assume that the cash outflow in the first half is -- that's the total upfront consideration. There's no near-term earn-outs or anything like that, that we should be modeling in for the second half of the year? And then maybe as a follow-up to that, given anticipated the working capital cycle and generally the more cash-generative nature in the second half of the year. Can we anticipate that you'd ideally like to pay down the RCF just given the, I guess, the cost of it relative to your fixed rate notes with organic cash flow in the second half?

Those both sound like questions for the CFO.

Sure. Well, thank you, again. So yes, in terms of price daily, yes, that is that's the initial consideration. I mean you'll probably be aware, there is an earn-out structure, but it's not going to crystallize any cash in the second half for sure. So I hope that helps with the full year piece. I think in terms of -- yes, in terms of working capital and overall cash and debt, yes, I mean, we're slightly joined on the RCF at half year, we did always have a bit of cash on the balance sheet as well. And it depends on our working capital cycle. I think if you look at typically where we've been at half year versus year-end, you would expect net debt to be a fair bit lower at year-end than it is here. So therefore, you might well assume that there isn't much [ drawn out yet ]. And clearly, that will be the piece that would get paid back first.

[Operator Instructions] At this point, we have no further questions. So I will hand back to Alex Whitehouse for any further remarks.

Thanks very much, and thanks, everyone, for dialing in. I hope you kind of got the feeling that we've got that we're in a good place despite a difficult environment. And I think that comes down to the strength of the brands and the strength of our business model. Plus the fact, of course, that at the end of the day, everybody needs to eat. But the cheapest way to eat, as I say, is to cook at home, which is exactly what our brands help you to do. So I think that puts us in a good position. But again, thanks very much for your time, and we'll talk again next time.

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