Premier Foods plc (PFD) Earnings Call Transcript & Summary

Thank you all for joining. I would like to welcome you all to the Premier Foods Q3 Trading Update. My name is Brika, and I will be your event specialist operating today's call. [Operator Instructions] I would now like to hand the call over to our host for today, Alex Whitehouse and Duncan Leggett. Sir, you may begin your conference.

Thank you very much, and good morning, everyone. Thanks for joining this quarter 3 trading update call. And of course, covers 13 weeks for the 31st of December 2022. I'm also joined on the call this morning by Duncan Leggett, our Chief Finance Officer. So I'll just give an overview of the third quarter trading and before handing over to Duncan to provide an update on our manufacturing footprint, and then we'll open the call, as usual, for questions. And so the headline today is that we've had a really strong quarter 3 in what is, of course, our most important trading quarter. And so that's building on the trading momentum that we've delivered already so far this year. And the performance is particularly evident in our grocery business and with all of our major brands delivering excellent sales growth compared to last year. And so with this strong quarter now behind us, and we're well on track to deliver on expectations for the full year. If we now move on to look at some of the key figures that make up this morning's statement. Also, Q3 group sales increased by 12% compared to last year. And so year-to-date, now group sales are ahead by 8.6%. So Q3 was, therefore, obviously stronger than the performance that we reported on in the first half of the year. Now just to note that these figures exclude the impact of The Spice Tailor, and I will come back to The Spice Tailor shortly. But if you include The Spice Tailor, the group sales growth was 30.3%. And then of course, building and growing brands is core to our business model. And so importantly, our brands grew by 8.8% in the quarter compared to last year, which means that they're now up 5.9% year-to-date. And I think this demonstrates the strength and continued relevance of our brands to consumers in the current economic environment. And of course, that great brand performance continues to be underpinned by our branded growth strategy, so leveraging our great market-leading brands and bringing highly relevant new product innovation to market that's based on our in-depth understanding of consumer needs and consumer trends. And then, of course, we also support our major brands with engaging the meaningful advertising and marketing campaigns, and that keeps the brands relevant and top of mind for our consumers. And then we deliver excellent in-store execution for our strong retail partnerships. And whilst that's always important, it's especially the case in quarter 3, which, as I said, our key quarter in terms of sales. And if you were out and about, you've got a chance to look at any stores on the run up to Christmas, you'll have seen that many of our products are being displayed around the store. Yes, again, we've invested behind many of our brands in the quarter with Bisto, Oxo, Mr. Kipling, Batchelors and Ambrosia, all benefiting from TV advertising in the run-up to Christmas. And during the quarter, we brought to market several new products, a number of which were geared towards people have joined Christmas lunch. And this included ranges such as Bisto Pigs in Blankets Flavour Gravy, Oxo Turkey stock cubes, Paxo Turkey & Bacon Stuffing, Bisto Roast Potato Seasoning. And we also introduced a new low-salt version of Paxo stuffing. Additionally, we've recently launched further new products focused on healthier and also plant-based eating, and that includes Plantastic Millionaire Flapjacks, Plantastic Protein Boost, Proxmox and Batchelors meat-free pots, Sharwood's reduced salt Poppadoms and Paxo meat-free mixes. And I should point out that this marks a change in our approach to Plantastic and that's based on all our learnings from consumers and so far with the brand. And this new generation of Plantastic products are designed to be delicious, first and foremost, and then they happen to be plant based. So there's no taste compromised for the consumer by eating our plant-based products. In fact, personally, I think the new millionaire flapjacks are one of the best cakes we make [full salt] plant-based or not. In terms of market share, our grocery brands continued to take a healthy amount of incremental share at an overall level, so up 66 basis points over the 12 weeks at the 31st of December. And as I've said before, we see this as a significant outperformance that reflects the strength of our brands, our proven brand growth model and the strength and depth of our customer relationships. But in this tough environment where consumers are continually seeking value, this sheer performance is a strong indicator of our brands' resilience and how well they're positioned for future growth. If we now look into the detail of some of the brands that have driven what was such a good quarter for us. The first thing to mention is this and this is particularly the case in the grocery business, but the growth we've seen is broad-based across the barns. And obviously, pricing has played a significant role in that growth. And 1 thing that we did see this year was a particularly strong run-up in the week before Christmas, as we said that many shoppers left their food shopping to that week before. And all of our major grocery brands increased their sales, either high single digit or in double digits for the quarter. Many of our product ranges are very popular as part of preparing Christmas lunches. So Bisto Gravy, Oxo Stock, Paxo Stuffing and Ambrosia Custard. And this year was no exception as all of they delivered strong growth for us. Not only did they establish seasonal favorites do well, but we also launched new products to our company, Christmas dinners, such as Bisto Pigs in Blankets Flavour Gravy Granules which I mentioned earlier and which proved popular with consumers. So not only did those bands and product ranges perform well for us, but Sharwood's Loyd Grossman Cooking Sauces & Accompaniments also had an excellent quarter and supported by our 'Best Restaurant in Town' media campaign, which provides tasty and affordable meal ideas for consumers. And this campaign has proven to be very successful and so much so we'll be extending the reach of this campaign in quarter 4 by moving it from a digital-only campaign and on to mainstream TV. Yet again, Nissin's Soba and Cup Noodles continued their remarkable growth trend and as we've said before, these products delivered incredibly well on authentic product quality in its best, which drives strong repeat purchase rates that's translated into the exceptional sales growth. So sales grew by almost 50% in the quarter, and the brand continues to increase its market share in the category and extend its leadership in the authentic noodles market. And despite the sale of this performing well, so exactly as we expected, in fact, and the sales grew double digits compared to last year and also the integration is well on track. Now turning to our Sweet Treats business, which I'll remember has grown consistently well over recent years and the sales were actually 0.9% lower in the quarter, with non-branded up 22.7% and branded down 10.8%. And there's a very specific one-off reason for that, which I'll come back to in a moment. Mr. Kipling impact increased its sales in the quarter as the established core slices range, both in its flat pack formats and also in the snap pack format, both delivered good growth. And the launch of our non-HFSS version of Mince Pies that we call Deliciously Good Festive Pies and helps deliver market share gains in the Mince Pie category in the quarter. And public sales, however, were heavily impacted by some unscheduled maintenance on 1 of our Mini Rolls manufacturing lines which resulted in a few weeks of lost production. Now I'm glad to say that work is now being completed and production did restart just before Christmas, a normal service to customers has now resumed. So as I say, a specific one-off issue. In non-branded, the strong trends that we've seen in the first 2 quarters of the year continued into quarter 3. So grocery non-branded sales increased by 29.3% while Sweet Treat non-branded grew by 22.7%. Revenue in grocery non-branded has continued to see the benefits of a recovery and out-of-home hospitality volumes in the third quarter compared to prior year and also pricing benefit from retailer and labor contracts. On a combination of new contracts in pies and tarts and price benefits delivered strong revenue growth in non-branded Sweet Treats as well. So therefore, on a year-to-date basis, Grocery and Sweet Treats Non-branded have grown by 23% and 24%, respectively. Now if we move on to talk a little bit about our overseas business. I'm pleased to say that we continue to make good progress on what is, as a reminder, 1 of our 5 strategic growth pillars. So sales in quarter 3 increased by 10% at constant currency. And on a year-to-date basis, we're also at the same level. So consistent strong progress this year and great to see from our international team. And we've said that we've got 3 key brands now, which are a strategic focus for us overseas, and they're Mr Kipling, Sharwood's and now, of course, The Spice Tailor and our future international expansion will continue to be focused on these 3 brands. Sharwood’s delivered very strong growth in Canada, thanks to increased distribution of cooking sauces in Walmart. And then in Europe, growth was led by Germany, Cyprus and Malta. In Australia, Mr. Kipling continued to deliver great progress with further strong increases in sales, growing market share, which incidentally came at the expense of own label and household penetration gains. And Lemon Bakewells which we launched there just a few months ago, are doing particularly well and they contributed a fairly significant amount to that growth. Now in the U.S.A., as you know, we've been testing our cake proposition. It's performing very well with all the flavors that we've launched, performing in the top 2 quartiles, when you bank all the cake sales that are sold in target. And so now we're looking to expand our distribution to additional new customers. I'm now going to hand you over to our CFO, Duncan, he's going to provide a brief summary on the proposed closure of our Knighton manufacturing site and also briefly on pensions.

Thanks, Alex, and good morning, everyone. So those of you who follow up closely will know that we're focused on growing the leading brands we have in our portfolio. Just a reminder, over 85% of our annual sales come from our branded portfolio and is really growing our brands through our established and proven branded growth model, which is how we deliver the progress and generate value. So on Knighton the site manufactures predominantly non-branded products, which attract much lower margins than the rest of the business. The site is underutilized and is marginally unprofitable at trading profit. So you can think this really doesn't have a strong fit with our growth strategy. After careful consideration and subject to colleague and employee consultation, we're proposing to close the Knighton site. We know this will, of course, result in much uncertainty for qualities at Knighton and will support them as much as we can through this process. In terms of strategic rationale, so we're increasingly focused on driving our branded business and investing behind and growing these brands. That's why, for example, we got site failure last year. This is a perfect example of the growing brand with further growth potential that aligns very strongly with our 5 pillar growth strategy. In terms of the existing business, which is manufactured at Knighton, the branded products will be transferred to other sites in the group, and most of the non-branded products will be carefully managed through exit and discussing with respective customer partners. Changes aren't expected to take place until the middle of this calendar year. Do you want to just mean from a financial perspective? Well, subject to the outcome of the consultation, there will be some restructuring and redundancy cash costs of approximately GBP 10 million, which will be incurred next year in FY '23-24. Ongoing, there will be more benefit to trading profit. Now this is really from sort of FY '25 because of the phasing of the closure next year. But this is margin accretive to the group, and although we'll, of course, use this where we think appropriate to continue to invest back into the business to grow our brands. In terms of the quantum of the sales, we expect to exit, this is about GBP 27 million. And because of the exit of the non-branded sales, this will have a positive benefit on our branded mix which we estimate to be an increase of about 270 basis points to just under 89%. And just for clarity, all the sales, we're talking about are currently reported on our grocery non-branded in our sales segment disclosures. And then finally for me, just to confirm that the 2022 pension valuation remains high, and we'll update in due course. So that brief overview of Knighton and pensions. I'll hand you back to Alex.

Thank you, Duncan. So I just want to recap on our 5-pillar growth strategy, which is what we're focusing on to build the business over the medium term. So firstly, continuing to drive growth in the core U.K. business using non-branded growth model, which we know works so well for us. So as you'd expect, we've got a full pipeline of new products for next year which we're already working through the plans to launch over the coming months. Secondly, investing in our supply chain infrastructure to increase productivity and efficiency. And as you might recall, we've got plenty of capital projects in the pipeline, which have attractive payback periods. The first pillar is then expanding into new categories in the U.K. and again, deploying our proven branded growth model, but over a broader range of categories. And there are several examples of initiatives we're experimenting with here and they include things like the Cape Herb & Spice range, ice cream, and the Ambrosia and Mr. Kipling brands. And Ambrosia ready-to-eat porridge pots, which by the way have now reached GBP 1 million of sales so far this year. So lots of activity going on in that area. And then the fourth pillar is building our international business, of course, towards critical mass and as you've seen today, the overseas business continues to progress well, and we're very happy with that progress. And then the fifth lever strategy is looking for further modest bolt-on acquisitions to broaden our portfolio, and that's following on from last year's acquisition of The Spice Tailor, which was the first for 15 years. So just as a wrap up for me then. So look, we've had a strong quarter 3 and then I call out, in particular, our grocery brands, which performed particularly well. And we've grown faster than our grocery categories. So that's increasing our market share by 66 basis points. Our brands are demonstrating strength and resilience against the backdrop of a tough consumer environment, and that's underpinned, of course, by our branded growth model. We're still seeing input cost inflation and as previously commented, we'll continue to deploy a range of measures to deal with that. But in summary, and we're well on track to deliver on expectations for this financial year. So all in all, I think we're in good shape for the rest of this year, but also now as we look forward into next year as well. And with that, I'd like to thank everybody for your time, and I'll stop there. We'll pass back to the operator, and we'll be very happy to take any questions.

[Operator Instructions] We have the first question on the phone lines from Andrew Ford of Peel Hunt.

Alex and Duncan, well done. Really good performance. Just on the growth this year. So you have branded up pretty strongly, but more interesting -- interestingly taking market share. What do you think the main driver for your performance versus the competition was this year sort of better promotions, sort of holding price better? Or was it sort of out-performance of those new products you mentioned? And then just 1 more on the U.S., you mentioned a successful test in Target, how successful are we talking? And what can we expect from that relationship going forward? That's really interesting.

Andrew, thanks for that. So yes, drivers of growth. I mean, there's nothing particularly new or different here. I think what we've done is executed our model very well. So it's a combination of the fact that we've been launching a series of new products through the year. We supported our brands very strongly with media campaigns during the quarter on the run up to Christmas. We did have a new range of products that were specifically targeted at the kind of meals that people cook at Christmas as well, and that helped. And then as I said, if you were out in store, the number of displays and the execution we had in store this year, I think, was particularly strong. So there's no magic here rather than just, I think, really great execution of our branded growth level, which we've talked about a lot. In terms of Target, so how successful are we talking about? Well, I think probably the way to think about this is what we do is we look very closely at how well the products sell in an average store. So we look at something we call units to store per week, which is the average number of units sold by an average store in a week. And we ranked that compared to all the other cakes that Target is selling in their same stores. And what we're looking for is to be in the top half of that ranking. And where we got to is a point where all 4 of the flavors we were selling were in the top 50% of Target's cake rankings. And as a fact, in the more recent weeks, 2 of the flavors have actually crept into the top quartile. So that's pretty -- we're pretty pleased with that. That's pretty successful. And I think whilst there's some learnings and some tweaks that we will make to the proposition, we're certainly at the point now where we can start to look at rolling that out across other customers. I think the thing to bear in mind with Target is those 200 stores, all that stores with grocery, a decent sized grocery unit within it. The 2,000-ish stores that Target have are largely general merchandise of course. So I don't necessarily think it means that we'll extend to 2,000 Target stores. But what it does mean is that we'll start talking to other customers now with a view to a rollout. I think speed of that rollout will be quite different from what you see in the U.K. Obviously, in the U.K., we've got quite a concentrated trade when you're talking about a handful of customers make up a large proportion of the distribution in the U.S. for those are familiar with it, it's much more fragmented with many, many, many chains of stores. So it will be a process, let's say, to get around and talk to all those and convince them to list, but we'll embark on that journey in the next weeks.

Thank you. We now have the next question from Martin Deboo of Jefferies.

Can you hear me, I'm on a headset? I just want to make sure you can hear me.

Yes, we can hear you fine, Martin.

Just want to sort of build on Andrew's question. I want to sort of try and reconcile in my mind the sort of strong Q3 with the guidance statement, which while clearly more confident isn't actually an upgrade to expectations and just sort of understand what's creating the relative caution there. To come to it from the way I'm looking at it, branded grocery in Q3, 15.5% is a very strong number, and it compares to read across from around from Tesco and Sainsbury's updates and Kantar. The suggestion seems to be that U.K. grocery as a whole grew 5% to 6% in calendar Q4. You're taking 66 bps of share, which sort of feels to me like you're outperforming the market by 1% to 2%. So I can sort of get to sort of 7% to 8% growth in Q3, but not to 15%. So I think questions on my mind, has there been any bring forward of sales as of Q4 into Q3? Is that something we need to think about? Are you worried about pretty new pricing into the market in your Q4 calendar Q1 and potentially some under recovery that you want to build a sort of safety margin into? Or are you thinking that rather than return to sort of bump Q3 into trading profit, you want to reinvest that in marketing, which I would completely understand. So you sort of sense what's in my head. How do I bridge the very strong Q3 with the sort of maintained on paper guidance for the full year?

Yes, sure. Thanks, Martin. So look, there's no bring forward of any sales here into Q4 that we're aware of. We look at retailer stock levels and we monitor that pretty closely and our exit stock levels at the end of the quarter were pretty much where we'd expect them to be. So not seeing an issue there. I think -- we're certainly very pleased with what has been obviously a very strong quarter. I think does that increase our confidence for the full year? Yes, it absolutely does. Why are we not giving an upgrade today? Well, I think there's still a few months, left a month. But also, you will remember that Quarter 4 is when we do an annual price increase. So that's in progress now. And I think once we've got that behind us, things will be a bit clearer.

Our next question comes from Clive Black of Shore Capital Markets.