Premier Foods plc (PFD) Earnings Call Transcript & Summary

Hello and thank you for joining today's conference call titled Premier Foods Q1 analyst conference call with our speakers, Alex Whitehouse and Duncan Leggett. [Operator Instructions] Thank you.

Good morning, everybody. Good morning and thank you for joining this, which is our Q1 trading update call that covers the 13 weeks to the 1st of July this year. I'm joined on the call this morning as always by Duncan Leggett, our CFO, and I'll start by giving a few headlines on our trading in the quarter, and then I'll dive into a few key areas to provide a bit more detail and before as usual passing to you for your questions. Now also, as a reminder, we're today holding our AGM that's 11:00, and that's hosted here at our offices in St. Albans, with an option of attending virtually just like we did last year. So if there are any shareholders who'd like to attend and don't yet have the details, please do contact Richard Godden in Investor Relations for the details of how to attend. So on to the Q1 results done, and overall I'm very pleased to say that we've had a strong start to the year and reported sales growth of 21.1%, and branded growth of 17.5% this morning for our first quarter, and as a result, we're clearly very pleased with. In addition to this, we've also grown our market share in the Grocery business by another 94 basis points, and given the current environment, and these really positive results today are partly due to the strength of our brands, of course, and then relevance in the current and economic environment, but also very importantly down to us continuing to drive our branded growth model and delivering against our 5 pillar growth strategy but more of that shortly. In terms of strategic progress in our new categories, we've more than doubled our sales of Ambrosia Porridge and also actually of Cape Herbs & Spice. And our overseas business has made great progress in particular with Mr. Kipling both in the U.S. and in Australia. So it's very positive starting with strong plans for the rest of the year. We're now saying we expect to deliver trading profit at the top end of market expectations. So we'll go through a brief review of progress in the quarter, but before I do, I just want to remind you of our branded growth model, which is at the core of what we do and is the reason why we've been able to deliver such consistent strong performance over the last 5 years or so. So we start with a portfolio of brands which are leaders in their categories, and they've got very high household penetration and this of course is a -- is a great starting point but on its own doesn't give you growth and so we then listen really carefully and work closely with our consumers, so that we can bring to market insightful new products, and which are based on what we've understood on current consumer needs and trends. And then we support our brands with emotionally engaging and meaningful marketing and TV campaigns. And then finally, but also very importantly, we work closely with our key retail partners, delivering excellent in-store execution and some visibility for our brands. So turning to Grocery. The Grocery business done a very broad based and strong performance all round. And a similar pattern to that actually that we reported in Q4 last year. So total Grocery sales were off by 26.7%, and all our major brands delivered double digit growth, so contributing to the 25.1% branded sales growth in the quarter. And really there aren't any brands which I would really call out as notably stronger than the others or in fact below par within that. There was, of course, a fair amount of price included in that very strong revenue growth. Separately and importantly, I'd point out that our portfolio is generally well positioned and highly relevant during the sorts of challenging economic environment, which we're facing into at the moment and I'll come back to that a little later. One important and very encouraging trend I'm pleased to highlight is that we saw an improving volume shape towards the end of the quarter across all brands, which as I say, we're very encouraged by and we'll be tracking this very closely in the coming weeks. As is always the case, the way we build volumes sustainably over the medium term is through our branded growth model, and especially on new product development program. And the quarter benefited from product ranges such as new improved versions of OXO Stock Pots, a big size version of our very popular Soba Noodle Pots, and a premium take on our Batchelors Pasta 'n' Sauce which we call Chef's Specials, and then from Plantastic expanding into 2 new categories with creamy pasta sauces, and also something we call Protein Pots, all of which had been launched over in the last year actually. I mentioned this briefly earlier, and I'm pleased to say that as we've done over recent years, we've continued to take market share in our Grocery business. And you may recall that we gained share during the last financial year, so 64 basis points over the year. And this increased to over 90 basis points in the fourth quarter. While we've continued this momentum into the first quarter of this year, taking a further 94 basis points of share. And I think this demonstrates our brands continue to be very relevant and important for our consumers, and also demonstrates their strong competitive positioning. Now the topic of inflation has been very much debated over the last 12 months or so. As I've previously outlined, we've obviously not been alone in experiencing significant input cost inflation across a range of commodities, energy and also labor costs. And we monitor our commodity costs very closely. And as I've mentioned before, we've looked to offset this unusually high level of input cost inflation by using a range of measures and these include how we manage our supply contracts to minimize the impact of rising input costs in the first place, along with our hedging strategy, and then a significant focus on cost saving and efficiency programs before finally price increases where we need to. You may recall that when we last spoke in May, that we've recovered all the input cost inflation that we've seen to date, and that very much continues to be the case. And we will of course continue to monitor the situation very closely. But we now believe the significant levels of inflation which we've experienced over the last 12 to 18 months has now passed its peak, and therefore we have no further price increases planned for the remainder of the calendar year. Now, in the current climate, there were clearly some consumers who are unfortunately needing to make tough choices when it comes to their grocery shopping. And one thing we continue to see is that more people are cooking for themselves and their families at home. And this of course makes a lot of sense that we all need to eat. And without doubt the cheapest way to do this is to cook for yourself at home. And as you know, we have a broad portfolio of brands which resonate strongly with consumers and many of our product ranges are therefore well positioned to help consumers to create those tasty and affordable meals in a convenient way. And actually, one thing people tell us is they struggle for ideas for meals that they create at home. So a great example of how we're helping provide families with the inspiration to prepare affordable, nutritious meals at home is through our Best Restaurant in Town campaign with delicious meal ideas demonstrated in short videos. And we started this last year with a digital campaign with YouTube videos, but it proved to be so successful that we've now significantly upgraded the campaign, and with many of our recipe ideas also now being aired on mainstream TV, so building on the successful YouTube campaign that we ran in the last financial year. Moving to Sweet Treats. Mr. Kipling returns a growth in the quarter with sales up by 3.6% and this was really down to us continuing to work our branded growth model, and Mr. Kipling benefited from the impact of new product development and examples of this include our indulgent signature Brownie Bites, which I have to say are particularly delicious and the non-HFSS, so non high fat, salt and sugar, deliciously good range of cake slices and fruit pies. And additionally, the King's Coronation in early May was celebrated on the packs of some of our most popular Mr. Kipling products with associated impactful displays in store and that boosted sales in the quarter. Just for completeness, Cadbury sales were a little lower following the slightly earlier timing of Easter this year compared to last year. And of course, another important element of the branded growth model is investing behind our brands, of including in marketing and advertising campaigns. And in the first quarter, we again advertised Mr. Kipling, our largest brand on TV with the popular piano adverts as we call it, which captures a nostalgic moment between the father and daughter. And this is important, because I think it's a great example of the kind of emotionally engaging approach that we're employing to build long term emotional connections between our brands and our consumers. And this year, again we plan to advertise 6 of our major brands using a variety of media, including digital posters and TV, and we will again increase our overall brand investment compared to last year. On non-branded sales, we're also well up on previous years in Grocery sales, and sales were up by 38% to GBP 22 million, which was largely down to higher pricing compared to the same quarter last year. Sweet Treats non-branded sales were also much higher in Q1 this year, and this was down to some further contract wins in pies and tarts. And then of course, as you would expect with some pricing benefit in there as well. Again, as we've mentioned previously, over the last few quarters, we're not seeing a huge effect of consumers trading down from our branded product ranges to private label, and I think one way you can see the evidence of that is in the continued increases in market share. So if we move on to our other strategic growth pillars, I'm sure you'll recall that one of these pillars is to deliver growth in overseas markets. And as I've said before, this will be in the key target markets of Ireland, Australia, New Zealand, North America and Europe. And within these target markets we're focused on Mr. Kipling, on Sharwood's and of course, now also on The Spice Tailor. And that's other than Ireland, which is a more established business that carries a broader portfolio of brands. Our international business has performed very well again for us over the first quarter, sales increasing by 14% on a constant currency basis, including The Spice Tailor. And as I just mentioned, Mr. Kipling is one of our brands which we see as having some true global potential, and as we said back in May, we've completed a successful trial in the U.S. in 220 stores of the retailer target and we achieved some really encouraging results there with strong rates of sale, and so off the back of this we started to roll out to further customers, and so far we have agreed distribution in 1,400 stores across a number of retailers in the U.S., including in Albertsons Safeway, which is of course, a major player in the states. Additionally, we're expanding the product range. So this includes strawberries and cream slices for the summer. And they're in target right now, and then some seasonal lines planned for Halloween and the autumn. In Australia, another one of our key target markets, our in-market performance of cake has continued the positive momentum that we achieved last year with market share now at 17.6%. So that's another market share record. We've also reached 20% household penetration, which is 2 percentage points higher, same period a year ago. The scale of Mr. Kipling in Australia is now of sufficient size to support mainstream advertising, including TV as we start to focus now on building brand equity just as we do in the U.K. and Ireland and together with new product launches such as the same Mr. Kipling signature Brownie Bites, the rollout of our proven branded growth model from the U.K. is now in full swing in Australia. And in Europe, another one of our target markets we've expanded distribution of Sharwood's in both Germany and the Netherlands in the quarter, which has helped drive total European sales up by over 30%, and that's all part of the European expansion plan that we've got for Sharwood's. Another of our strategic growth pillars is taking the brand building capabilities that we've demonstrated in our core categories, where we've got strong leadership positions and expanding into new categories in the U.K. And one of the early successes is Ambrosia Porridge Pots, which as a reminder is a convenient and ready to eat range of breakfast porridge. And these are, as I say, ready to eat, so they're not a dried product. They're made with creamy West Country Milk, which of course you'd expect from Ambrosia. We're very pleased indeed with the progress we're making with this range as it builds critical mass now in breakfast with Q1 sales more than doubling versus last year, and our market share continuing to build. Additionally, Cape Herbs & Spice, the southern style spices range also increased sales by over 100% in the quarter, benefiting from increased ranging and distribution and also a strong barbecue season in June given the hot weather. And then just as a reminder, our final strategic growth pillar is to look for inorganic opportunities which we can bring into Premier, and then deliver further growth by leveraging the strength of our branded growth model. And that was one of the key principles we applied when we assessed the fit of The Spice Tailor, and I'm pleased to say The Spice Tailor is on track and is actually expected to be slightly ahead of our original acquisition model this year. We're securing expanded distribution both in the U.K. and overseas and also working on a number of major new product initiatives which will start to come to market over the next couple of years. Now we continue to explore further inorganic opportunities. However, you know, we are quite picky, and we'll update you when we have anything more that we can share on that. So for now, look ahead to the rest of the year. A couple of things to note. So firstly, we expect to see our Grocery revenue growth moderate as we progress through the next quarter of the year. And that's the effect of year-on-year price increases as they reduce. And then for Sweet Treats, this will have a slightly different dynamic because we expect to see a strengthening trend in the second half of the year, something that's how to think broadly about the revenue trends for the remainder of the year. So really, to summarize where we are, we've had a really good start to the year, strong first quarter continuing that very positive momentum from the end of last year, and we continue to drive our proven branded growth model, and our portfolio continues to demonstrate its relevance in this challenging environment. And as a result, of course, we continue to take market share. As we look forward to the rest of the year, we will of course bring further new products to market. We'll be increasing our brand investment as well as expanding our U.K. presence in new categories and continuing to build our overseas businesses. And so with this strong first quarter behind us, and some great plans for our brands, for the rest of the year, we now expect to deliver trading profit at the top end of market expectations. So thank you for your time. I'll now pass back to the operator and we'll be very happy to take any questions. Thank you.

[Operator Instructions] We will now take our first question from Charles Hall from Peel Hunt.

Well done on a excellent quarter. Could you just talk a little bit about the impact of the weather during the quarter, because obviously it was pretty hot during a period. What did you see in terms of trends in volumes? And you mentioned that they were picking up towards the end of the quarter. Is that just because the weather started to normalize, or is that because with pricing now embedded, there's more promotional activity, or consumers are just used to on the pricing levels?

Charles, thank you. Yes, so you're absolutely right, we had a blisteringly hot start to the summer, didn't we? And you'll be aware, most people will be aware that a fair chunk of our Grocery portfolio is quite weather sensitive. So I think that did pin us back in the middle of the quarter. And if it hadn't been for that, we'd have probably delivered, you know, even stronger results than we have actually. In terms of volume trends, so what we were really referring to, wasn't really linked to the weather. It was more a case of as we got towards the back end of the quarter, we started to see the trends that we saw after it -- remember, we increased our prices in the summer last year. And obviously, you get the price elasticity impact of that, and then gradually we saw volumes coming back to get you know, almost back to flat. And I think what we're seeing is the same, the same trend based on the price increases that we put through at the beginning of the year. We're now getting to that point where that's -- where the volumes are started to get back to fairly flattish. So pleased with that trend.

Okay, understood. And then secondly, on the international side in the U.S., obviously really good progress in terms of distribution of Mr. Kipling. Can you just give a feel for the timing of product going into a store and any feel about the number of products per store, the number of SKUs, and you also talked about some seasonal product going in, what's the timing of shipment of those, is that sort of looking towards the Christmas period or any other seasonal products that you've got going in?

Thanks, Charles. Good question. So a number of those -- I don't know the exact number, but a number of those 1400 stores are already have got products, you know live on sale and of course, that includes the targets, I mean, it'll target stores, and some of them are going to come on stream as we go through the rest of the summer. At most, we've got a range of 3 flavors of the core -- sort of core range, and most customers seem to be taking the range of 3, and which I think is a good, a good start point, a good core range to have it. But as you probably will be aware, you know, in the states the impact of seasonal events is huge. And so having a seasonal offering is going to be a really important part going forward. So we're starting to gear up for that starting with, you know, this fall and having the right sort of autumnal and Halloween type products available. And then as we go through into next calendar year, we'll have available an entire seasonal sort of calendar, whereby we transition from spring SKUs into summer SKUs into autumn SKUs that are important to gain the extra future space and support in the states.

And just lastly, can you just update where you've got to in Canada in terms of Mr. Kipling just to give us sort of a feel for how North America might progress?

Yes. So I mean, obviously, it's a much smaller market. We arrive at a very similar place with the test we did, that we've been replicated in this states. And since then, we've been gradually increasing store count. So it's sort of similar situation to the U.S. really, except I think what's happening is the focus we're putting on the U.S. is delivering a faster rollout, and that's quite intentional given the opportunity side.

Our next question comes from Matthew Webb from Investec.

Three questions, please. First, you talked about the relevance of your products in the current environment. I mean do you think that consumers are becoming more and more cost conscious as the cost of living crisis rolls on? Or are there any signs of that changing at all as some prices come down and others stabilize? That's the first question. Second question, you said you're not planning any further price increases this year. Do you think you'll be able to hang on to the price increases that you've taken? And then the third question, you flagged that you're still on the lookout for inorganic opportunities. I mean is there much out there where the price expectations, are they realistic? Anything more you could add on that would be very helpful.

Thanks, Matthew. So taking those in order. So yes, I think one of the things we've definitely seen is that how's some consumers have had to make some sort of choices on how they're spending the available cash. We are benefiting from people eating at home, and that's quite clear in our data. And I think having leading brands is very helpful in that sense. And probably also the fact that we've got such a vibrant new product development program. So we've always got sort of related flavors in the latest format, which is very helpful. It's interesting, I've not seen any -- as you put it, any increased level of consumer price sensitivity. If anything, I think what happens is that over time, volumes come back, which seems to suggest people get used to new levels of pricing, but at the same time, we need to overlay on top of that, but we're working very hard to make sure we've got great activation in store. We've got great promotional activity and that we're continue to driving -- continue to drive our branded growth model very hard. So it's rather difficult to tease out the different elements of that, because obviously, we've got our full front to the floor on driving our growth model, and then that offsets a fair amount of the price elasticity. And then moving on to your next question. So yes, no further price increases based on what we can see in terms of what's happening to commodity pricing. As I said, I think the input cost inflation is past its peak, but let's not confuse that with price deflation. So yes, 1 or 2 ingredients have started to go down, but some are still on the way up. And I think if we extrapolate forward what we can see, I think most commentators in the same place, but I think we'll still be seeing food inflation as we get to the back end of the year, just not as acute as it has been. So I'm not anticipating that is going to lead to decrease pricing on all kinds of products. If we did and we did get the opportunity, of course, we'd want to be competitive. And therefore, we would look at our promotional pricing, but I'm not necessarily sure that's going to be the way that things play out. And then sorry, Matt, just remind me of your third question.

Just any color on the inorganic.

Yes. I mean I think it's specialty, there's not a lot out there. You'd probably be well aware of that. And the things that we all look at -- looking at, I've said before, we are incredibly picky. We took a while to find The Spice Tailor. We were looking for something that we were absolutely convinced that would benefit dramatically from us applying our branded growth model that we could bring something new to the party, which would dramatically accelerate the brand. And that very much remains the case in terms of what we're looking for. So we're not going to buy the first thing we come across. We're very choosy. So it will take a little time.

Our next question comes from Andrew Wade from Jefferies.

A couple of questions from me. The first one, we're sort of in the midst of annualizing the price increase, summer price increase sort of at the moment. My understanding was it was towards the back end of June and into July. I guess that does tie in with your comment on the volume trends. Just wondered if you could give us any color on whether it's sort of performed in line with how you'd have expected to -- as you've annualized those price increases? So that was the first one. And then the second one, you talked about the Easter impact on Cadbury. Just wondering if you could -- in Sweet Treats. Just wondering if we could get an idea of the scale of that impact? And more broadly, I suppose, why the branded Sweet Treats is running and continuing to run sort of below branded Grocery now. Obviously, it's partly because branded Grocery is doing so well. But just any color on that you can give would be helpful.

Yes, Andrew, sure. Yes, if we think about pricing, the -- and then the impact year-on-year, obviously, we've got those 2 big steps where we put our pricing up in the year ago both. So it's just mathematical. Obviously, as we anniversary those and go over them, we'll see a decreasing element of pricing in the growth rate. So that's just a mathematical consequence. So we've not hit that point yet. So I'd expect that to just play out as you would expect from the math really rather than anything else. What I think is possibly more interesting is when you start to think about price elasticity. And I think this sort of starts playing into your third question around why is branded Sweet Treats behind branded Grocery. And you're right, it's because branded Grocery is doing so well. But then the interesting question is why branded Grocery doing so well. And I think what happened overall is we went into this environment and our price increases. We've armed with a whole lot of analytical econometric modeling that we dial around price elasticities across all our brand ranges. And things have played out a little different than we expected. In fact, they played out quite a bit better than we expected. So we have seen less price elasticity on our Grocery business than we anticipated. And I think that's one of the reasons why you see such strong performance from our Grocery, since that we've held on to more of the volume than we thought we would. Now part of that, I have to say is because of the things we've done to make sure that, that's the case, and that's about driving the branded growth model and particularly about really strong in-store execution. But the overall lower level of price elasticity is biased towards Grocery. And actually, Sweet Treats has turned out to be slightly more price elastic than we expected. So you've got this situation where overall, our performance is better than we thought it would be because of this impact. But it's manifested itself is quite a lot better on Grocery and a bit worse on Sweet Treats. So if that helps with that, Andrew.

Our next question comes from Clive Black from Shore Capital.

Alex, well done to you and the team. Two from me. Firstly, just interested as to whether there is strategic significance to what you said about applying branded growth model to Australia. And secondly, in years gone by Premier, you used to talk about putting the full oomph of marketing around 5 or 6 brands. I just wonder how you would characterize the brand portfolio now in receiving that full branded growth model segment?

Clive, yes, thanks for that. So yes, I do think that strategic significance around applying the branded growth model in Australia. So obviously, when we take our brands into new markets, so Mr. Kipling into Australia is a great example, nobody's heard of the brand, have they? So they're buying it because they come across it in the store, we're promoting it and trying to get people to try for the first time. Hopefully, they like it and they repeat purchase and you start to build some volume. But then reaching that tipping point where you can then say, I've got a core range that's big enough, growing fast enough, it being bought by enough people that I can start to put on top of that, the NPD pipeline from the U.K., I can start to support that with media, so I'm turning from selling good products into building brand equity and building a strong brand. It's a really important tipping point mentally for me. And the reason why it says strategically significant is this is about us building businesses in other markets. Our aspiration here is to build a replica of our U.K. business in a number of markets over time. And I think this is just a -- it's an early stage, but it's a really important indicator for me. So I think you're right on the strategic significance of it, Clive.

Just by way of follow through, clearly, it's going to take some time for Mr. Kipling to fully appreciate the resources behind Premier. But over what period of time would you expect more brands and more geographies to be experienced in that going from a selling model to a branded growth model?

Yes. I think Australia, we're at that point, clearly on cake, and we're in a really strong position on Indian cooking sources as well, where we're the leader there now when you look at shops and The Spice Tailor. I think then when you look to North America, we're a much earlier stage, as you know, with the building distribution phase. I don't have a specific date on when we'd expect them to be able to turn on mainstream media support, but we're certainly looking at how we support digitally, because we can do that in a more targeted and cost-effective way. And then we're already starting to plan what regional support would look like if we get ourselves into a position where we've got a sufficient critical mass in geographical pockets like within the state, because obviously, it's an enormous market. So the thought process is going on, but there's a bit of room to go down first, I think. And then your second question, Clive, I think in the past year, if I remember, we did talk about having focused brands, I'd probably cover all the call, but before I talk [ about ] power brands, yes. I've never been a big believer in this, and my experience has always been that if you go down the road of saying I'm going to have some special brands that get all the focus, what the organization here is don't do anything on the other brands. And so specially, my view that if you want to have a successful business, you need to actually move everything forward. Now obviously, they don't get the same allocation of resources. So mainstream TV support is something that goes to the bigger brands with the bigger P&Ls and with a bigger upside opportunity. But if I look at things like the NPD program, we expect that there are -- there's an NPD pipeline on all the brands. So it's like an example, usually for trial basis, there is an NPD program on Angel Delight and it's been incredibly successful made of 50% or so bigger than it was a few years ago. So we move everything forward, but the resource allocation, obviously epitopes towards the bigger brand.