Premier Foods plc (PFD) Earnings Call Transcript & Summary

Good morning, everybody, and welcome to Premier Foods half year results. That's for the 26 weeks that ended on the 30th of September this year. As always, I'm joined by our CFO, Duncan Leggett. And once I've given a bit of an introduction, Duncan will take us through the numbers, and then I'll come back and give us an update on how we're doing against our 5-pillar growth strategy. And so just to kick off with the highlights, and you'll be pleased to say that, that strong momentum we had in quarter 1 flowed through into quarter 2, and we ended the half with revenue up 19.2% of GBP 484 million, as we saw an improving volume trend through quarter 2. Grocery market share, once again, really strong with a further 113 points basis growth versus prior year, and trading profit of GBP 68 million was also up 19%. So in line with revenue growth, leading to a trading profit margin, which was held versus prior year. Adjusted profit before tax of GBP 57 million was up 21.2%, and importantly, net debt was GBP 65 million lower than at the same point a year ago. So a nice set of financials. And if I move on to a quick look at how we're doing against those strategic growth pillars, and there's good progress on all of these as well. If we look at the first one, that's growing our U.K. core, so our U.K. brands grew by 15.5% in the half. We continued to invest in our manufacturing infrastructure. Our new category expansion experiments, they expanded by 21%, so revenue up 21%, so again ahead of that U.K. branded growth rate. And international as well, also up 19%, so faster than our core U.K. business as well. And then in terms of inorganic opportunities, and we'll talk about this in a little bit more detail later, but good performance on The Spice Tailor, but also, obviously, we announced a couple of weeks ago that we bought FUEL10K. That's a quick skip through there. I'll come back in more detail in a little while. And I'll just hand over now to Duncan to take us through the numbers.

Thank you very much, Alex, and good morning, everyone. I want to spend the next few slides talking through the half 1 performance. As Alex has mentioned, it has been another good 6 months for us in terms of how that looks for the total group picture. We got revenue up 19.2%, and that's a good contribution from the branded part of the business, really spearheaded by grocery, that's up 15.8%. Non-branded clearly a lot smaller part of our portfolio, but that's up strongly, nearly 45%, and that is good contribution from both the Grocery and the Sweet Treats business. You can really see the benefit of the strong grocery performance flowing through to divisional contribution. That is the most profitable part of our business. So divisional contribution is up 21.7% to GBP 102 million. Group and corporate costs are higher. As you'd expect, we've got salary inflation in there. We're also investing behind efficiency projects, including those, including systems and also behind our broader strategy. So where does that leave trading profit? So trading profit is up 19% to GBP 68 million. Once again, we've kept our trading profit margins in line year-on-year, something we've been really keen to do, particularly with the recent inflationary cycle. Interest is a touch up. I mean, clearly, interest rates have gone up significantly over the last 12 months. We've managed to mitigate most of that by virtue of our fixed cost of borrowing. A reminder, our fixed note rates are at 3.5%. And we've largely been undrawn on our RCF. So interest is up 8.5%. And that all leaves adjusted profit before tax of GBP 57 million, up 21.2%. Adjusted earnings per share, now that's after a much higher tax charge this year versus last year. The vote of corporation tax, of course, has increased from 19% to 25%. So our adjusted EPS for the half is 5p, which is up 12% year-on-year. So how does this look for our 2 divisions? I'll start with Grocery. And as I mentioned, that's really leading the charge in terms of performance in the half. This does include the international business, which Alex will talk about shortly, but that has had a really strong first half, with revenues up 19%. In terms of the division as a whole, total revenue is up 24.6%. And as I mentioned before, really good branded performance, good strong growth across all of our grocery brands. So branded revenue is GBP 317 million, and that's up 23%. And if I had to pick out a couple of examples. Oxo particularly with Stock Pots, is performing really well. So that's up about 40% in the half. And Nissin continues to go from strength to strength, and that's up 50%. Non-branded revenue, again, a bit of a smaller part of our portfolio, but that's up strongly, up 36%. There is pricing there. There's also increased run rates on some of our contracts, particularly flower. And you can see the benefits of the branded performance supplemented by our strong focus on supply chain efficiencies, and of course, the benefits from our capital investment program, that were flowing through strongly to divisional contribution. So that's GBP 90 million, up 27.5% and that is after investing more in consumer marketing half year on half year, which is, of course, what we're aiming to do with our branded growth model. Now switching to a slightly different picture. We've talked about price elasticity before. And we know overall as a group, we are better off than we expected, and we are less elastic. That's largely because the grocery business is much less elastic than we expected. And Sweet Treats is a little bit more elastic, and we can see that playing through in the first half results. We also talked at year-end results in May about improving performance through the year in terms of Sweet Treats, particularly during H2. That's very much what we're seeing. And we've, in fact, we've started the quarter 3 really strongly. We're seeing market share gains, so that's all playing out in terms of expectations. So in terms of the half year itself, so total revenue was up 5.4%. Within that, Mr. Kipling was in growth, which is fantastic because that's our largest brand. Cadbury's was a bit softer half year on half year. And again, non-branded revenue, a smaller proportion, so smaller numbers, but that's up 66%. That's a combination of contract wins and prices in there as well. We'd expect to see that moderate a bit as we progress through the second half of the year. Divisional contribution, now that is back 9% half year-on-half year. That's partly due to the revenue shape in terms of performance. We've also continued to invest behind Mr. Kipling in the half, and there is more H1 weighting in terms of marketing half year-on-half year. Were that to be flat in terms of marketing investment, we'd have about flat divisional contribution as well. It's been another good performance in terms of net debt and cash generation in the half. So we're GBP 65 million lower than at this point last year, and we're about flat in terms of where we were at year-end. Just as a reminder, we spent the first half of the year building our stock for our peak season, and we generate most, if not all, of our free cash in the second half of the year. In fact, we've got more than GBP 40 million of stock, more on balance sheet at half year versus year-end. We've managed to offset that through strong working capital management elsewhere. CapEx has more than double this time last year. So that's at GBP 14 million. That's consistent with what we're saying about stepping up our investment behind what are, frankly, really attractive opportunities in the business, and this underpins our full year guidance which is around GBP 35 million. Pensions, we're seeing the benefits of the cash reduction we agreed earlier this year following the '22 valuation. They were flowing through in the half and will continue to do so for the full year. And we've got restructuring costs of GBP 10 million. Now this includes some of the cash costs relating to the Knighton closure. We're expecting more in the second half, and our full year guidance for this has gone up slightly to GBP 20 million, but this does also include the M&A cost relating to the FUEL10K acquisition, which Alex will talk about later. Now it wouldn't be a presentation for me without at least 1 slide on pensions. And I thought I'd spend a bit of time just recapping where we are and how we see things playing out from here. So we're about 3.5 years on from the merger that we put in place of the 3 U.K. schemes. And frankly, the trustees have done a fantastic job of both generating returns from the assets but also managing risk at the same time. There's a great evidence of this through the March '22 valuation, the results of which we announced earlier this year, where we're starting to see a surplus on the RHM scheme. The net present value of pensions is now GBP 125 million. That's nearly GBP 200 million lower than it was before we put the merger in place. And it was really good that these all came together to lead a reduction in the cash we pay into the schemes of about GBP 6 million this year. So very much things working according to plan, probably slightly ahead. I think we're 18 months on from the last valuation now. And all else being equal, we'd expect things to be in a bit of a better position than they were then. I mean we just need the time for the assets to return to generate the returns and effectively the surplus in the RHM scheme to build high enough to fund the deficit in the Premier Foods scheme. We see this to occur within 3 years. And clearly, when it does, we're going to have roughly GBP 40 million of cash that we currently pay into the schemes, significantly increase our free cash flow and open up options in how we deploy that cash. That leads me nicely on to broader capital allocation. I mean this is something you've heard from me before. I talked about pensions. We're still paying about GBP 40 million into the schemes. We expect that to reduce in the not-too-distant future. CapEx, we did exactly what we said we're doing. We want to step it up. There's a continued great set of projects that give us great returns in this area. We're guiding to about GBP 35 million for this year, and expecting it to be by GBP 35 million to GBP 40 million over the coming years. M&A, again, Alex will talk about the FUEL10K acquisition shortly. Again, we're doing exactly what we said. We've made a second acquisition in just over a year, targeted strong brands, we believe we can create value with. And again, on dividend, we knew we started from a small base. We progressed it by 20% or so over the last couple of years. We continue to intend to progress this on a full year basis, whilst being mindful of our net debt-to-EBITDA target of 1.5x. Clearly, with M&A, this might bump around a bit in the short-term, but we'll clearly be focused on getting it back to 1.5x. And that's all for me, and I'll now pass back to Alex.

Thank you very much, Duncan. So I just wanted to start off by taking us through the 5-pillar growth strategy. Now you might remember that this is based on the fact that we believe that our core skill set is about building brands and making brands grow in a profitable way. Then this really looks at how we can expand that across a broader base. So if we start on the left-hand side, Pillar 1 is about continuing to grow our U.K. brands in their core markets in the U.K. because that obviously gives us the foundations for further growth elsewhere. And at the moment, it's where the majority of the business is. And the second pillar is about investing back into our supply chain with 2 objectives there really. One is buying the equipment needed to manufacture some of the new products that we bring to market because you'll be aware that our model is very heavily dependent on new product development, but it's also about investing in efficiency and making ourselves more productive and consequently improving margins. And the third pillar is about taking our well-known brands and extending them into new categories, where historically, we won't have delivered any revenues. So a great example of that, which we'll come back to, is the extension of Angel Delight and Mr Kipling into ice cream, but it's also Ambrosia going into breakfast porridge pots. The fourth pillar is about applying, again, our same brand building techniques but overseas. So we've got a handful of focused markets and a handful of focused brands where we're looking to build in overseas markets, which, of course, is all white space growth. And then the fifth pillar is inorganic opportunities. And so what we're doing there is we're looking for brands which we believe that when we apply our branded growth model to them, will deliver disproportionate growth and value. And so we believe that by applying this growth strategy over time, we'll be able to make Premier Foods a much bigger business than it is today. And this, of course, is all guided by our purpose, which is enriching life through food, together with our ESG strategy. And so what I'd like to do now is walk through what we've been doing in the first half of the year on each of those 5 pillars. But before I do that, let's just touch on progress against that ESG strategy. And there's 3 key areas to this product, planet and people, you might remember. And obviously, because we're a food manufacturer, we see our responsibility to help people to eat more healthily. So consequently, we've got a big focus within our new product development pipeline on healthier products. And you can see at the top left there that our sales from high nutritional products increased by 23% in the first half of the year. So then again, it's ahead of our core branded growth rate. And we've now got 43% of our portfolio having an additional health benefit of some sorts, that might be high in fiber, one of your 5 a day or low fat, for example. And then down bottom left there, our packaging, our commitment is to get to 100% of all our packaging being recyclable. We're now at 96%, so 4% left to go. Now clearly, that's going to be the most difficult 4%, but a lot of work currently in play to make that happen. On the product pillar, continuing to work on reducing our Scope 1 and Scope 2 emissions. And you can see there we expect our Scope 1s to be approximately 4% lower this year than last. So that's in line with our journey to get to net zero. And we've now kicked off a new supplier engagement program working with our key suppliers to help drive down their emissions, which, of course, are our Scope 3s. And then just briefly to touch on people, and just a reminder of where we've got to on the top right-hand side there with now at a point where 47% of our management colleagues are female. So I'll move on now to talk about the pillars. And what I said before is that what underpins the pillars of our growth strategy is how we go about building our brands. And this is what we call our branded growth model. And you can see that laid out on this chart here. So we start in the top left, and frankly, a very fortunate position where most of the brands that we've got are leaders in their core categories. And we've got high household penetration. If you were to knock on the door of pretty much any U.K. house, you'll probably find that there's several Premier Foods products in the cupboard. But that, on its own, as I've said before, is not going to give you growth. It's a great start point, but then you've got to do something with the brands. And really, that's what the rest of the model explained. So we're very heavily dependent on new product development. We work very hard to understand how our consumers are shopping, how they're eating and how they're cooking at home. And we develop new products which fit with those trends. And that's one of the reasons why our new product development program is so successful, and our new products tend to work very well. Then #3 there is that we continue to invest behind our brands. So as Duncan said, we've put more investment behind our brands again this year. So that's behind marketing and advertising campaigns that build the brands, maintain brand awareness and keep the brands contemporary and relevant for our consumers. And then we also work really hard in creating emotional connections between the brand and the consumer because we know that, that leads to long-term value creation. And then bottom right there, but very importantly, is our relationship with our key retailers. And given that we're in that position where our brands are the leaders in their categories, building strategic partnerships with our retailers that drive mutual growth for both the retailer and for our brands, delivers disproportionate benefit to us because, as I say, we start from that position of being the leader in most categories. And if we look at how that's played out over the last few years, the chart on the left-hand side there is our revenue generated from our U.K. brands over the last 6 -- first half years. And you can see there's just consistent growth year after year after year. There's a peak there in the middle, of course, that's when we were all locked down, and we're all eating at home. And obviously, that meant that people are buying more food, those sorts of products that we make in order to cook those meals at home. And then if you look in the middle there, that 8.6%, that's the 5-year CAGR growth rate of our trading profit in those same half 1 periods. So what we've been able to do effectively there is continually grow the top line, but actually growing our trading profit consistently at the same time. And also over that period, you'll be aware that our market share has also continued to grow over that time as well. And the number we've just shared today is that 113 basis points improvement in this half year in our grocery market share. And that's actually even ahead of what we said at the end of quarter 1. And as I said, part of the model, and a cornerstone of the model is actually the new product development work that we do. When we work on a number of key trends. Health and nutrition on the left-hand side, really important. We brought many health and nutrition based products to market, not just over this half year, but actually over recent years. I've pulled out a few examples here, and it includes things like lower fat Sharwood's curry pastes. And at the top there, you've got a deliciously good version of our Cherry Bakewell. So that's a Cherry Bakewell that's, low in sugar, low in fat, high in fiber and contains real fruit. So it's actually on the government nutritional profiling model has a score of less than 3, and they're consequently not classified as high fat, salt and sugar. On the convenience trend, there's a number of new products we brought to market there. Incidentally, there's Nissin cup noodles at the top there, and Nissin continues to grow very strongly for us and is again this half year being our fastest-growing brand. And then there's the indulgence trend. So slightly counterintuitive. We know people are trying to eat more healthily. But we do see this slight counter-trend on indulgence. And we believe that, that is a case of people. When you're not eating healthy and you are going to be a little bit more indulgent than it's got to be worth it. And so we brought a number of new products again to market that fit into that trend. Now I've said another important part of the model is investing behind our brands, and actually 7 of our major brands benefited from increased levels of TV, digital and outdoor media during the first half of the year. We also had a significant increase in investment in our best restaurant in town campaign. Now you might remember me telling you about the best restaurant in town campaign, and that came about from us listening to our consumers who were saying, well, look, we know the cheapest way for me to eat and feed my family is to actually cook at home for ourselves, but I need some ideas. I need some inspiration. So we created a series of short films, which help people come up with ideas for low-cost nutritional meals that they can cook at home and obviously includes our brands in those little ads. And we've extended that campaign this year across more of our brands with more ideas and actually across a lot more TV and digital media slots. And then the other part of the model, of course, is that working with retailers in gaining great in-store execution. A couple of really nice stats actually relating to the grocery business so far this year is that we've managed to get more products into more stores. So 2.6% more products in more stores actually done at the same period a year ago. So our overall level of distribution is increasing. And we've also increased the number of products that we've got on off-shelf displays has actually increased by a pretty staggering 56%. And then a couple of examples in some of the images there. So the Batchelors team sort of teamed up with the Batman movie franchise. And if you bought Batchelors, you could win Batman merchandise, cinema tickets and things like that. And that we were able to get these pretty big dramatic displays in store. And similarly there, on the right-hand side, you can see a similar arrangement where Mr Kipling teamed up with the Minions franchise, and consumers could win movie tickets and Minions merchandise and in-store, we have these fantastic big displays. So that's a -- some just great examples of the model in action actually. And of course, I've got to mention inflation, and it's great news that we saw in yesterday's O&S stats, the inflation is falling, including food inflation. And of course, we still got inflation, but at least it's on the way down. Now what we've noticed in our input costs is that over the last few months, we've started to see some of those costs starting to fall off their peak. And that's really good news because what we've been able to do there is we've been able to sharpen some of our promotional price points in the market, which ultimately will lead to greater volume delivery. So a couple of our biggest brands, if we take Batchelors, Batchelors super noodles. In 2021, you would probably find those on promotion for around 70p. By the time we're in January this year, that was more like GBP 1. And but what you should start seeing now is pricing, promotional pricing around 80p to 90p. And of course, it depends on the retailer because pricing is obviously at the discretion of the retailer. But it depends on the week and it depends on the retailer. But broadly, that's what you should see. Similarly, Mr Kipling, a 6-pack of slices in 2021 would have been about GBP 1.25. In January this year, that would have gone up to GBP 1.75, and we've now been able to help lower those down to about GBP 1.50. Incidentally, actually, the Mr Kipling example on the page there is the first one we did. So we've been in market for a month or so with that. And we're actually able to read some of the results. And I can tell you that it's led to some pretty significant increases in volumes as a result. And you'll see more of that as we go through the second half of the year across a number of our key brands. I'm going to move on to the second pillar, which is infrastructure investment. And on the left-hand side there, you can see this lovely virtuous circle we get whereby we generate cash. We invest some of that cash back into making our manufacturing sites more efficient. That obviously improves our gross margins. That allows us to invest more back into our brands, which delivers more growth and generates more cash. So a lovely little virtuous circle. And we've got plenty of projects with payback periods in that 3- to 4-year sort of zone. And therefore, to Duncan's point, we're putting a significant increase back into capital this year behind those 3- to 4-year payback projects. A good example of that is the one we've got immediately on the right there, which is efficiency and energy reduction. And the beauty here is, of course, that when we invest in reducing energy consumption, we're saving money, and we're also reducing our Scope 1 and Scope 2 emissions. And the example I've got here is actually some work we've done replacing our air compressors, and probably not the most exciting topic, but we do use a lot of compressed air across some of our sites. And by moving to newer technology and better and more efficient compressors, we've been able to make a reasonably significant decrease in our Scope 2 emissions and save electricity, which is giving us a payback that's actually less than that 3- to 4-year window period that we've got on the left there. Now let heard me talk in the past about further automation in our cake business. And in this particular case, automatic case packers on auto-palletizers. So these are basically robotic arms that are either picking up boxes of cakes and stacking them into the cases or it's picking up the cases and stacking them on a pallet to a computer-generated configuration ready for those pallets to be picked up and shipped off to a warehouse. We implemented 4 of those over the last few months, and we've got 4 more of an order for the second half of the year. And as a reminder, these things are generally costing a few hundred thousand pounds each, and they pay back in pretty much spot on 3 years actually. And then finally on the right-hand side there, you've got the closure of our Knighton site. Now you might remember that this is a site that was producing non-branded low-value powders, and actually was a loss-making site. So the closure now of the Knighton site has the following effects. It will increase the group's branded sales mix. Because it was loss-making, it obviously, therefore, increases our absolute and percentage margins. And it was actually quite an energy intense site. So it has a reasonably significant impact on our overall greenhouse gas Scope 1 and Scope 2 emissions. What we're in the process of doing right now is we're transferring some of those remaining production lines into our Ashford and Carlton sites, and they were to production lines that made some of our branded products, which obviously we want to retain, and we'll just make those in different sites. So I'm now going to move on to Pillar 3. So Pillar 3, if you remember, is expanding into new categories, using our brand building techniques and extending our brands into new territories. On the left-hand side there, this is -- probably the 1 that I would argue is no longer an experiment. This is actually full rollout, and this is the extension of Ambrosia into Porridge Pots. So we've now got a 6.2% share of breakfast pots, and that's actually a highly growing subcategory in the first place. So consequently, the revenue growth that comes from that is pretty significant. In the first customer that we launched in, we've already got to a 14.7% market share. So you can imagine now where that blue line is going to continue to over on the right-hand side. And we've got more flavors coming within the range in the second half of the year, and we're also launching into Ireland in the second half of the year as well. In the middle there, you've got ice cream. And you may recall that we did a test in Iceland stores with this a year or so ago. That worked really very well indeed. And so we've now decided to roll this out. And I think very, very recent, but I think you can now buy these products in both Morrisons and in Asda. And we're working hard now with those retailers to make sure we're generating trial and getting people to pick those up and take them home. Cape Herbs and Spice over on the top right. This is 1 that's just continued to but in fact, actually revenue from Cape Herb & Spice more than doubled in the first half of the year as we gained more distribution and expanded the range. And this is one where the product is just such a fantastic high quality that once consumers find it, they'll tend to stick with it and not go back to what they were buying before. And as that sort of generates more volume, we've seen the distribution expand out into additional retailers, and I fully expect we'll pick up another retailer on that in the second half of the year. And then finally, on the bottom right-hand side, the Oxo Rubs and Oxo Marinades. And we really like this because if you think about Oxo, it tends to skew towards the winter season. So Oxo will tend to use it, not exclusively, but it tends to skew towards the sorts of dishes you make when the weather is a bit chilly. And the thing we like about these is they're obviously focused on the summer season and they're focused on barbecues. So what that does is it helps to deseasonalize the profile of the brand a little bit. So moving on to the fourth pillar. Our international expansion continues to gather pace. And if we look at the left-hand side there, this is our increase in distribution of Mr Kipling cakes in the United States. And you might remember that we had a test in 200 Target stores last year, that was really successful. In fact, all of our flavors sold in the top 50% if you were to rank all the cakes sold in Target at that time. And so armed with that success, we've now been rolling the brand out into more and more stores. And you can see those bars represent the store count over the last -- over the last few months to the point now where we're almost in 2,000 stores. So we'll expect to add further stores as we go through the rest of the year. And we're supporting the brand with social media and also in-store activation in order to drive consumer trial. And actually, that increase in distribution has helped drive our overall U.S. growth to 53%. Now obviously, from a fairly small base at this point, but nevertheless, really encouraging. And when we move over to Australia. Australia, we obviously have a much more developed business. We're already the leader in cake, and we're the leader in Indian cooking sources as well. So essentially becoming a fully-fledged business unit in Australia. So cake retail sales growth was 22% in the first half, yet another record market share at 16% and 19% household penetration. So that's almost 20% of Australian households now by Mr Kipling Gold cupcakes. And also now we've reached that level of critical mass in Australia, we're starting to apply the full branded growth model that we know from the U.K. And so that means we've been able to start investing behind building the Mr Kipling brand. So this is no longer just a case of selling really great quality cakes, it's also about building brand equity and building the brand. So we've been investing in TV media using the U.K. little thief copy, although, obviously, with an Australian accent. And we've also been sponsoring the Great Australian Bake Off. And if you look down the bottom there, we've also got new products coming into Australia. So we're running a full new product development stream with new cakes going into Australia, just like we would do in the U.K. And then the fifth pillar, the final pillar. Remember, this is finding brands that we can bring into the business through acquisition, which we believe we can apply our branded growth model and deliver disproportionate performance. So obviously, The Spice Tailor just over a year ago now, and we always said the first phase of growth from The Spice Tailor would come from increasing distribution and in-store execution. And that's exactly what's played out. In fact, if anything, it's played out better than we expected because -- the simple fact was that The Spice Tailor's performance was better than its distribution that it had got, or in other words, it deserved better distribution than it had actually got. So what we've been able to do over the last 12 months is more than double our weighted distribution in Asda and Morrisons. And we've also been able to get more and more impactful displays, like the one you can see in the image there. Now the next phase of growth starts to come as the NPD pipeline kicks in. And you can see that we've got a couple of the first examples, which are flavor extensions of the Indian range, and they're coming to market around now. But what you will see over the next 12 months is some pretty significant new product development that will come to market. And I'm going to sit on that one until we're a little bit closer for competitive reasons. And then over on the right, you've got overseas expansion. So we've been able to more than double our distribution in Ireland actually by getting distribution in Dunnes stores and Musgraves. So that's essentially doubled the size of our Spice Tailor business in Ireland. And whilst the brand was strong in Australia, it wasn't present in New Zealand, and we've now rolled out into 540 countdown stores with 4 SKUs in New Zealand. So all in all, in really good shape, and we're well on track actually to deliver returns, which are quite notably ahead of our internal acquisition plan for this year. So very much on track, if not ahead of expectations for us there. And then 2 weeks ago, of course, we announced that we bought FUEL10K. What is FUEL10K? Well, it's a vibrant breakfast oriented brand with granola and oats and drinks, and with a differentiated protein-boosted brand proposition and a modern and young consumer demographic. Now why did we like this so much? Well, first and foremost, because it provides us with a much larger platform in breakfast. If you think about our entire portfolio, we've got over GBP 1 billion worth of sales, and almost all of it is coming from lunch time onwards with almost no presence at all in the morning until, of course, we launched Ambrosia Porridge Pots. So what FUEL10K gives us is it gives us a much bigger presence and a bigger platform with which we can build breakfast. And the thing we really liked about FUEL10K was it had a differentiated positioning because there's lots of great granolas out there, but the thing about FUEL10K is it has this protein-boosted proposition, which makes it different from a lot of the other brands. Just like The Spice Tailor, it's got a track record of high growth. And again, we very strongly believe that when we apply our branded growth model, will deliver significant incremental value. So if we just look for a moment how we think that will play out. On the left-hand side there, just like with The Spice Tailor, we believe this brand is performing better than its current distribution would suggest. So again, it deserves more distribution than it's got. And of course, what we'll have access to now what the brand will have access to is a much bigger sales organization with a lot of deeper analytical capabilities as well. We also think there's a great opportunity in terms of new product development. There's a lot of that. I can tell you already well underway and with access to much greater resources than the brand had before. And also, just like The Spice Tailor, as the brand grows, we'll be able to upweight brand investment and start investing significantly in brand equity development, which I think you probably realize is core to our model. Now not within our acquisition model, but would be, if you like, icing on top, would be expansion into overseas geographies. So we will be looking at where we can expand FUEL10K overseas, because as I say, that's not in our model. And so anything that comes there would be on top. And similarly, and whilst we bought the brand because of its strong position in breakfast, we can see some opportunities actually for the brand beyond breakfast. And that's something else we're going to be pursuing. And then finally, you've got supply chain opportunities. So the obvious thing will be that FUEL10K will get delivered on the same trucks as part of the same order to customers as all the rest of Premier Foods products. But at the moment, all of the products are made by third parties, external manufacturing. But obviously, as certain parts of the brand grow, then we'll obviously be able to ask the question on whether or not we actually buy the kit and manufacture some of the products ourselves in-house. So I think a great plan there of how we'll apply our growth model and drive the brand. So that's really a quick-wit through all the 5 pillars. If we look forward, though, what can we expect to see in the second half of this year. So as you'd expect from us, a lot of new products coming to market, and there's just a few examples there. The ones I'm going to pick out are Ambrosia plant-based custard. This has been many years in the works, but we have actually now cracked industrial scale, a plant-based Ambrosia custard which tastes really delicious. And then the other one in the middle was my personal favorite is Mr Kipling's best-ever Mince pie, and it really is its best ever and definitely worth the taste over Christmas, I think that one. The second one is our infrastructure investment. We've touched on that. We expect to spend around GBP 35 million in capital over the year. And the example I've pulled out here, I like a lot because it's an example of Premier Foods being innovative, but this time not in product development but in process development because the team have developed a new process for making icing that goes on our iced-topped cakes. It's a process we don't believe anybody else is using. It significantly improves our efficiency. It uses a lot less energy. It's quicker. And because of that reduction in energy, of course, it saves us quite a lot of money, and it reduces our Scope 1 and Scope 2 emissions. I think when we do the math and apply it to our Stoke factory, for example, when we implement this, we expect around a 14% reduction in our Scope 1 and 2 emissions from that side. And so looking at the new categories, as I've said, we'll continue to put more flavors behind the Ambrosia Porridge range. We've got 2 new flavors coming in the second half. And also be working on driving trial behind the new expanded distribution of the ice creams. I'm looking at the international businesses. We'll continue to build additional distribution of Mr Kipling in the U.S., building on almost 2,000 stores that we're at now. And we've also put some increased sales resource behind going out and selling that. In terms of The Spice Tailor, we'll be launching The Spice Tailor into Northern Europe, and I'm pleased to say we've already landed our first couple of customers on that. And we're starting to kick off a dialogue with customers in the U.S. about bringing The Spice Tailor into United States. And then finally, on Ireland. Ireland running a very similar model to the U.K. So we'll be investing behind the brands as we go through the key winter season. So look, in summary, for me, I think we've had a strong first half of the year. And actually, we're standing here aren't we halfway through quarter 3. That's our key quarter. And whilst there's still an awful lot to play for as we go towards Christmas, I'm pleased to say we've made a really good start to quarter 3 as well. The second half will benefit from all that comprehensive program of MPD. We just talked about further brand investment and further of that great in-store execution. And as you probably realized, FUEL10K integration is well underway and down the track. So bearing all that in mind, that's why today, we're now saying that we expect full year trading profit to be in the region of 10% higher than the prior year. And then just a reminder of what Duncan said earlier, we're also saying that our pensions, we expect full resolution of that now within 3 years, and obviously, that will unlock significant future value for the business. So look, thank you very much for listening. And Duncan and I now will be very happy to take any questions.

[Operator Instructions] This question comes from the line of Charles Hall from Peel Hunt.

Hello, Charles, we can't hear you this end. I don't know if you're on mute.

As there is no answer from Charles line, I will move on to the next question, which comes from the line of Ashton Olds from Redburn Atlantic. Please go ahead.

So we're not hearing this either operator. I don't know.

Ashton Olds from Redburn Atlantic. Your line is unmuted. Please go ahead. As there is no answer from the line. I will move on to the next question, which is from the line of Clive Black from Shore Capital Markets.

Can you hear me?

Yes, we can hear you loud and clear, Clive.

Communications deliver full better than London. And 2 questions, if I may. First of all, thank you for the presentation and obviously well done, actually. But -- could you give a feel on the back of your discussion of the manufacturing base, what sort of capacity levels you're running at? And whether you will be thinking of needing new capacity in the next 3 years? And then secondly, pleasing to see what you've reported around The Spice Tailor. Maybe you could give a little bit more color as to where you are with that investment against your original expectations?

Clive, thanks for that. So yes, manufacturing capacity levels, I mean, broadly speaking, across the business, we've got capacity for the next few years' growth. There are pockets where we may need to invest in more capacity. So a good example of that is actually the Ambrosia Porridge Pots, they've done so much better than we originally thought that we've recently signed off investment to increase capacity, which will allow us to develop that more in the U.K., but also to start selling it overseas as well. So you do get 1 or 2 pockets like that, but the majority of the capital investment is more about automation and efficiency improvement. On [indiscernible] good question. We're really pleased with where we've got to on this. It's playing out as we expected in the investment case. And so as I mentioned in the presentation, we're getting that extra distribution that we always felt the brand deserved, the overseas expansions working well. And then what's going to be the exciting next phase, I think, is when some of the new products start to filter through over the next 12 months. I think in terms of the our own internal investment case, we're quite a long way ahead of where we expected to be in terms of returns at this point. I don't know if Duncan, do you want to add anything to that?

Yes, sure. I mean I think we talked about return on invested capital of around 3 years at The Spice Tailor. Clive, I think will be when we're saying returns ahead, we'll be ahead of that, and that's obviously the basis once we valued the business so really pleased of the progress we've made.

Okay. That's very encouraging. If I can just go back to the capacity question, Alex, would you expect over the next, say, 3 years, given the growth agenda that you outlined in your summary there for their need to be material physical factory expansion? Or do you think efficiency and better plant utilization will be the focus of CapEx?

I think the focus will be on efficiency, automation and probably some situations where we choose to put new kit into manufacture new products that are part of the NPD stream tried. So I think that's probably where the focus will be. But as I say, there are 1 or 2 areas, like I said, with porridge pots, where additional capacity will be necessary as individual product ranges grow disproportionately. And that to be honest, that's also a great opportunity because what we'll tend to do with those as we put in more modern, more efficient equipment. So it also helps from a margin point of view.

Yes. So the point I'm just trying to bring out is you can probably therefore fuel your next medium term from your existing asset base?

Yes. Broadly speaking, that's correct, yes.

Next question now comes from the line of Matthew Webb from Investec.

I've got three questions, please. The first is on the expansion of distribution, this 2.6% figure that you've quoted in terms of increased sort of point of distribution. That sounds quite significant to me. And I was just wondering sort of mechanically what has driven that? Is that more space through existing products? Is it your new products? Is it developing new or underdeveloped customers? That's the first question. The second is just on the level of price elasticity of demand that you've seen across grocery versus Sweet Treats and you said that Sweet Treats has maybe been a bit worse than expected and grocery is better. I just wonder what you've what you've learned from that, what your conclusions are in terms of why that surprised you? Is it just the nature of the categories with Sweet Treats being more discretionary? Is it -- is there a bit of a trend away from Sweet Treats do you think underlying that perhaps, is it something about the brand strength and any comments on that? And then the final question just on international. You've posted a figure of 19% revenue growth for overseas, but I see that's been affected by destocking in Australia. And if you look around the various growth figures for the other markets, they're all well ahead of that. And I think the Australia retail sales figures ahead of that. So I just wondered what that 19% figure might be if you excluded the destocking in Australia, if you've got a rough figure on that, that would be helpful.

Sure. Matthew, thank you for those. So I'll take those in order. So in terms of distribution, yes, we think that 2.6% is quite significant, actually. It really comes about for a couple of reasons. So this is measuring a distribution point for these [ 8 products ] that exists in a store. So if you get more stores or we get more products into the same stores, then obviously, that number increases. So getting more shelf space actually isn't included in this that although we believe that's also happening as well. So why does it happen? It happens for a couple of reasons. So performance tends to attract more distribution. So as we've got products that have performed particularly well in market, they tend to get taken into more stores. So either more stores through the network of existing retailers that stop them or getting stocked by retailers that haven't stocked them in the past. So it's a classic case of success breeding more success, I think. And then the other thing, of course, is new products. And our model -- our branded growth model is heavily reliant on a pretty aggressive NPD stream. And so as those new products gain distribution, then obviously, that adds into that statistic. So yes, we're really pleased actually the range reviews that have happened in the -- over the last quarter, really, we've seen ourselves gaining quite significantly across those. So that's what plays into that stat. Price elasticity, yes, you're absolutely right. I think the interesting thing when we went into this inflationary cycle is that none of us have ever experienced this level of inflation before. And frankly, therefore, neither had a as statistical models that we use for mapping these things out. So we were sort of an unknown territory. So the way it played out was that versus our models and our estimates, our grocery business turned out to be quite a lot less price sensitive than we thought on aggregate, and Sweet Treats a little bit more price sensitive. And I think when you look into it, there's probably some consumer behavior things going on there. Well, I think grocery benefits from the fact that as I've said so many times before, family purse strings are a little tight, then the most cost-effective way to feed your family is to eat at home, to cook and eat at home. So grocery benefits from people making meals for themselves home rather than maybe getting a takeaway or going out to dinner. So it's sort of the nature of the portfolio, I think, in that respect, whereas obviously, Sweet Treats doesn't benefit from that. And as you mentioned, is somewhat more discretionary. We don't think, in any way, shape or form, there's a longer-term here from a Sweet Treats category point of view. I've always said that we expect the second half of the year to be a lot stronger for Sweet Treats and I'm sitting here with October and part of November already visible to me, even though it's not to you, and we're quite encouraged by what we've seen in terms of the pickup of Sweet Treats in the second half of the year so far. Moving on to the international question, you're absolutely right. So yes, 19% overall, but with some chunky performances from some of the business units. And obviously, that destocking effects that contain a lead time down to Australia affecting the Australian cake business. But as you correctly point out, the Australian cake business, if I look at retail sales, so [indiscernible] of sales grew by over 20%. And if you were to model that back in, back of an envelope, so it's a little bit rough, but you'd probably be seeing an international growth more like 30% rather than the 19% that we've posted.

Next question that comes from the line of Andrew Wade from Jefferies.

A couple from me. First one, just in terms of volumes, how you sort of talked a little bit to an improving trend in the statement and some encouraging signs on the Sweet Treats side of things in H2. But just in general, just interested on your thoughts on the outlook from a volume perspective. That's the first one. The second thing, just looking at building on Matt's question about the range reviews, obviously impressed by that number as well. How sort of permanent are these -- are the range reviews? And I guess it sounds like you've got momentum to build more rather than sort of scope for any concern that they'd come back, but just interested in sort of shape on that. And then the final one on the inorganic side of things. It sounds like The Spice Tailor, well, you've explicitly said Spice Tailor well ahead of where you'd expected it to be. Does that perhaps mean you could get your sites a little bit lower -- be a little bit less selective in terms of acquisitions going forward? Yes, that would be the third one.

Andy, thanks for those. So on the volume trend, yes. So when we -- if we look at what happened during quarter 2 in particular, we saw improving trends on both grocery and Sweet Treats. And I think whilst grocery, grocery was a little lumpy because it's difficult to read -- depending on -- obviously, we had a cool summer didn't we, and then a really warm autumn in that given the temperature sensitivity ratio and that makes it rather difficult to read. But if we try and iron out and look at what's happening underneath, and look at what we've seen so far in Q3, our grocery business is now trending towards, in fact, getting pretty close to flat volumes year-on-year. So we're pleased with that. I say, Sweet Treats improving trend, and we'd expect that to continue to improve through Q3 and into Q4. If we look at the range reviews, how permanent? Well, range reviews come around, depending on the retail and depending on the category every year or every couple of years, and as good as your performance in market must say if you're performing well, you'll tend to attract more shelf space and get more products in. And obviously, vice versa is also true. And obviously, we will always have a pretty healthy new product stream every year anyway. If you look at this, we've used this a couple of times in these meetings, and we tend to gain distribution overall rather than lose it. It's probably the way to think about that. Yes. And then inorganic growth, yes, we're really pleased with how The Spice Tailor played out to Clive's question earlier, it's doing what we expected and we're seeing the benefits we expected to get, and it's playing out better than we thought. So that's great news. Obviously, we've now got FUEL10K as well, giving us that bigger sort of presence in breakfast, which we've not really had before. So that's quite exciting. What does it mean in terms of future acquisitions? I don't think we'll be less selective. I think one of the things that we've been true to all the way through here is being really choosy on the brands were chosen to bring into the business and really choosing things which we believe when we apply our branded growth model, will deliver great performance. And in the case of FUEL10K as well fills in a portfolio gap. I think going forward, we might start to look at things which are not quite so modestly sized, that might be one way to think about it, but I think we'll be just -- expect in our criteria.

Your next question comes from the line of Darren Shirley from Shore Capital.

Yes. Can you hear me?

Yes.

And all a few for me, if you don't mind. Just going back to sort of the manufacturing investments. I mean what sort of proportion or percentage of your capacity do you think could benefit from investments and give sort of an attractive payback on to sort of on 3 to 4 years? I mean, how big is the prize there? Are we looking at tens and tens of millions that will be interesting. The second one will be on you've talked about investing in your central costs. I think you talked about sort of 4 custom tools and data management, if you could give us a bit more color around what that is and what that brings to the business over the medium term. And then finally, on the U.S. And we've seen an impressive expansion in terms of stores there, [indiscernible] now 1,900 in Q3. Can you just give us a bit of color of how that expansion has happened, is that with new partnerships? Is that expansion with existing customers. Just a bit more color around the new deal there that would be helpful.

Yes, sure. So I think on the manufacturing piece, there's plenty left to go for. So if we look at the grocery business, we know the grocery business is pretty automated, Darren. But on the other hand, some of that could be upgraded with newer, more modern and more efficient piece of equipment. Sweet Treats, on the other hand, is less automated, and we've talked about things like automatic case packers haven't we, and the sort of manual handling here and there. So there's definitely opportunities across the business. Not I don't think we're running out of ideas anytime soon. I don't know, Duncan, if you want to add anything to that.

No, I think -- that's I mean, we've always been -- we've always had a good statement of cost-out projects, as you know, Darren. And we're still very much in the 3 to 4 years in terms of payback for those. And I think with the increasing ambition to spend more capital, we've guided to GBP 35 million this year. We're probably looking at GBP 35 million to GBP 40 million in the medium term, and that's pretty exciting for us to be able to have the cash to spend and be able to invest it back in the business on some of that projects.

Okay. And I'll probably add to that as well, of course, the cost of energy has meant that anything we do to invest in energy efficiency has this wonderful double benefit where we take cost out of the organization, but what we also do is we reduce our Scope 1 and Scope 2 emissions. So there's a lot of effort going into that as well. In terms of those central costs, on the forecasting tools in particular. So what we've been doing is we've been putting a new process and system in place for forecasting, planning and scheduling product production. And the reason we've been doing this is because obviously, the business is growing pretty quickly. We're bringing new brands into the business. We've got great ambitions to make this business a lot bigger than it is today. And it's the case that this is a facilitating step. So this is something which will unlock the ability for us to grow the business further. . And then on the U.S., yes, we're pleased with the number of incremental stores we've picked up because -- it wasn't that long ago, we were only in those 200 stores with Target. How's that happening? This is the case that we've got a small team on the ground in the States, and they're working with what we call in the States brokers, are sort of in between, between manufacturing companies and retailers. So working together with them, knocking on doors, showing what a great performance that the products delivered in Target, letting them taste the products and just gradually opening more doors. So there's some -- there's everything in there from small regional chains to actually now starting to get into some more nationwide distribution. So yes, pleased with the 1,900 stores, but we have to remember, it's a big country and there's lots of stores there to play for.

Sorry John, I was just going to build on the central cost point. I mean I think on the planning system as that extent, it's absolutely a facilitating step to support our growth. We are also looking at it as a pretty attractive payback project, if you like, much as you do in the factory. So it is investment in the P&L, but it's not going to pay back in potential cost in, but it will pay back across different lines of the P&L and be part of our sort of gross margin expansion and help invest in the brands going forward?

So I mean was that something you do in central stuff, something you do it manually then, which is being automated? Or is it just more automation?

We did have some systems in place, but they were -- I think they were quite old, Darren, and we'd outgrown them requiring therefore, a lot of manual offline spreadsheets and things. And you can only do that for so long with the business growing as it is and as we want it to. And as I say, with new brands and also geographical expansion overseas, it's important we now get this set up for success for the future. But as Duncan said, there's also a payback on this as we get down the line.

Your next question comes from the line of Damian McNeela from Numis.

And apologies, I missed Charles Hall's first question. So apologies if this is a repetition. But firstly, on the corporate cost side, I think historically, first half costs have been lower than the second half. I was just wondering what the shape of corporate costs this year are likely to be given the performance that we see all in the first half, whether that should continue? Just on inflation and your expectations for sort of the rest of this half and into the next year, whether you could give us any sort of indication of what level of inflation you're expecting and whether there's a greater impact in either grocery or Sweet Treats? And then the last question, please, would be on -- I think, Alex, you mentioned that sort of you don't have very much exposure to the breakfast category. I was just wondering whether FUEL10K fills the entire gap in the portfolio or whether you still see further M&A opportunities in that breakfast occasion, please?

So I'll say the first one, Alex, and you take the second. Yes, I think on group and corporate costs, you are right, David, I think typically, they've tended to be H2 weighted. I think I'd probably look at this year as being a bit flatter between the 2 halves, if that helps.

And then picking up on inflation expectations in the second half. I mean, look where we are now, our overall inflation exposure has started to fall, which is obviously great, and that's why we've been able to shop in some of those promotional prices and that will drive significant extra volume, which we're already starting to see actually on the Mr Kipling Slices. So we're really pleased with that. I think as we go through the second half, I'd like to see what happens. I suspect we're still going to be looking at mid- to high single-digit inflation, but that's factored into our current pricing models. So we wouldn't -- certainly wouldn't be expecting to move prices upwards in the second half of the year, if that helps. Exposure to breakfast. Well, look, I think the focus is clearly going to be on growing what we've got. So we've got never and rapidly expanding Ambrosia Porridge Pot business. And now we've got FUEL10K, which gives us granolas and drinks and oats bars and all sorts of things that we can drive. So that's obviously where the immediate focus is. In terms of M&A, we'll keep looking for brands which as I say, where we think we can apply our model and drive great growth. I wouldn't say we're particularly looking for another breakfast brand at the moment, having just bought one. But if we found a great one, I wouldn't really -- I wouldn't really doubt either.

Your next question that comes from the line of Ashton Olds from Redburn Atlantic.

First one, I just want to expand on sort of the discounting environment in the U.K. at the moment, given that you are seeing a little bit of slow inflation, appears doing it too. Are you seeing these volumes as purely incremental? Or does it weigh on full price sales? Is this something that retailers are pushing for maybe instead of price decreases? That's my first question. My second question is just on HFSS products. Are these outperforming non-HFSS products since legislation came out? And should we expect that legacy products start to trend more towards being HFSS friendly? And then final question, just on Australia. Clearly, it's been pretty good over the past few years as you sort of said, it's no longer a project. At what point do you start thinking about changing the supply chain and how you get products down to Australia? What would you need to see to commit some capital down there? And that's all for me for now.

All right. Thanks, Ashton. So the discounting environment in the U.K., I think probably the first thing to say is that the changes we're making to our pricing is not really coming from any external stimulus of what we think competitors do or retailers do. This is really driven by us wanting to make sure that we've got the optimum pricing in order to drive volume and profitability. So as I say, we are pretty pinned down from an analytical modeling point of view. And it's our view that by sharpening promotional prices off the back of this slight fall in the overall commodity basket that we've got is ultimately going to drive more volume and a better overall outcome for the business. So -- and also I would argue right thing to do for the consumer as well. So -- but that's really the driver. We haven't necessarily seen -- I don't think competitors are doing the same. In fact, some of them, I think, haven't quite finished on the way up, but we'll have to see what that plays out like. But otherwise, it's very much an internally driven sort of approach. In terms of HFSS, are they -- are the non-HFSS products performing more strongly? I think it's a really difficult one to answer because if I look at, for example, our non-HFSS cake range, the deliciously good range. So that was a new product launch for us. So it's an entirely new range. So you look at it on a year-on-year performance, of course. And it looks great, but that's because it's relatively new. In terms of the second part of your question, though, I think it's quite interesting. So trending legacy ranges towards HFSS -- non-HFSS, the answer to that is absolutely yes. But that, from our point of view, that's not being driven by government legislation. This is a long-running strategy we've had in place for a number of years, where we believe there's both a model obligation and the commercial advantage in trying to make our product range healthier for consumers. It's a really nice meeting point actually of whether it's the right thing to do, but also because there is a consumer trend towards healthier eating by making our product ranges more healthy, we're also tapping into a commercial opportunity. That's something we've been working on for several years now, and we'll continue to do so. And then finally, on Australia, yes, you're right. So I think we're building a business with some critical mass in Australia now, which is really exciting. We're a leader in the 2 categories that we currently play in, and we'll be thinking about where we go next in terms of what category 3 might look like. I think in absolute volume terms, however, certainly for our cake business, but the economics of that, well, it will probably still make sense to manufacture that in the U.K. And the Spice Tailor as you're probably aware, is actually also made in India anyway for all the markets we have around the world. What we will probably start to do is actually have more warehousing capability in Australia so that we've got product on hand that we can ship retailers to service promotional peaks and troughs rather than shipping direct to retailer from the U.K. So that's something we're looking at and I think is a necessary -- or likely a necessary sort of stacks simply just due to the scale of the business down there, we're building.

[Operator Instructions] And we now have a written question submitted by Charles Hall from Peel Hunt, who asks, are you seeing an expansion in SKUs in North America? And how is sell-through developing?

Could you just repeat the second bit from I got the are you seeing expansion in SKUs in North America, but what was the bit after that?

And a bit after that was and how is sell-through developing?

Okay. Super. Thanks, Charles. So are we seeing expansion of SKUs in North America? Absolutely, yes, we are. So the original product range on the cake, I presume we're talking about here. So originally, on cake, we started, I think, 4 flavors of our slices. Those are the ones that went into test in Target. And as you know, worked really well and all sold them in the top 50% of Target's cakes. So those are obviously the ones we're rolling out. But actually, on top of that, what we're now starting to introduce some new formats. So I think we're just about to take Cherry Bakewell into the U.S. as well and possibly our apple pies. The other thing we're working on with a number of U.S. retailers is seasonal range. So one of the things you'll probably be aware of when our cake business in the U.K. is that there's obviously cakes that appeal to different seasons. You've got Easter cakes, you've got sort of Halloween and autumn type cakes and you've got Christmas type cake. So that seasonality and having those seasonal ranges starts to become a really important part. So we're working with a number of retailers on getting into their seasonal programs. And I suspect that will start to play out in the next calendar year. And then in terms of sell-through, it's early days, and it's difficult to read. But so far, from what we can see, we're pretty pleased. It seems to be broadly in line with what we saw in Target. But as you're probably aware, Charles, in the U.S., it's not quite as simple as just going and buying one source of [indiscernible] and it's telling you down to everything is a much more fragmented market, that's a little more tricky to get hold of. But from what we can see, consistent with what we expected and are all on track.

Thank you. We have no further questions in the queue. So I will turn the call back over to your host for closing remarks.

Well, well, thanks, everybody, for joining the call this morning. And hopefully, as you can see, the business had a really strong half 1. We're feeling pretty good about half 2 as well. I said earlier that we're part way through our key quarter Q3 and feeling pretty good about where that's landing as well. So lots of activity to come, progress against all the 5 strategic pillars. And so hence, the increase in outlook for profit delivery for the year. Thanks very much, and have a great day, everybody.