Premier Foods plc (PFD) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to today's conference. My name is Drew, and I'll be your operator today. At this time, I would like to welcome everyone to the Premier Foods plc Q3 2023-2024 analyst conference call. [Operator Instructions]. I'll now turn the call over to your host, Alex Whitehouse, CEO. Please go ahead.

[indiscernible] everybody and thank you every much for joining us, and this is our quarter 3 trading update call, which covers the 13 weeks ended 30 December 2023. I'm also joined on the call this morning by Duncan Leggett, our Chief Financial Officer. So as usual, I'll give an overview of the third quarter trading, and then we'll open the call up to questions. So as many of you all know, while quarter 3 is our most important quarter, I'm pleased to say we've actually had our biggest ever Christmas with quarter 3 sales and double-digit growth across the business and with significant market share gains. So group sales increased by 14 4% and with Branded sales of 12.7%. The Branded sales are now up 14.6% on a year-to-date basis. And I think this demonstrates the strength and the continued relevance of our brands to our consumers in the current economic environment. And of course, Brand sale and Brand performance continues to be underpinned by our Brand and growth strategy and that's leveraging our great market-leading brands and bring highly relevant new product innovation to market. And that's based on our in-depth understanding of consumer needs and trends. We also support our major brands and engage in meaningful advertising and marketing campaigns that keeps the brands relevant and top of mind for consumers. And then we deliver excellence of execution to our strong retail partnerships. So like this is obviously always important, it's especially tough in quarter 3, which as I said, is our key quarter in terms of sales. And if you do get a chance to look at any stores on the to Christmas. I'm sure you'll have seen many of our product displays around the store. Now this brand building model is actually very similar to that used by the large cap multinational branded food businesses. In fact, we actually see ourselves as a much smaller version of one of those multinationals in the sense that we use the same brand building model. And the main difference, of course, is that we are still in the early stages of our international expansion. And now as I just said, brand investment is key to our branded growth model. And we again invested behind many of our major brands in the quarter, Bisto, Oxo, Mr Kipling, Batchelors and Ambrosia, all benefiting from an overall upweighted level of advertising support in the [indiscernible] to Christmas. In terms of product innovation, we again introduced a number of new products based on our in-depth understanding of consumers. And again, we would help deliver incremental sales. So some examples are; Mr Kipling's ‘Best Ever’ premium minced pies, which have received [indiscernible] reviews from consumers and Bisto Best meat free gravy, and Paxo Chicken and Bacon stuffing and Ambrosia Deluxe Custard, which did particularly well over the Christmas as we saw people trading up and treating themselves. This strong performance was notably ahead of the market and has resulted in strong market share gains. In fact, overall, we gained just over 120 basis points of market share, which really is something that we're very pleased with and illustrates just how well we're competing in our markets. It's worth noting that these share gains are similar in both grocery and sweet treat categories. So a [indiscernible] in a shape to the sales results moving quarter this morning. There is a significant outperformance again reflected the strength of the brands are prudent around the growth model and the strength of our customer relationships. [indiscernible] based across the brands and pricing continued to play a significant role in that growth, of course. Although, of course, what's going to happen is that pricing will start to drop out during quarter 4 as we lap the last major price increase last year. So not at all improvement in retail volumes as we have through the quarter, but the retail volumes up versus a year ago in the key trading week just before Christmas. Looking at our grocery business. The sales increased by 11.9% and by 11.6% for our brands, and many of our brands and products are, of course, particularly popular over the Christmas period and that includes brands like Bisto gravy, Oxo Stock, Paxo stuffing and Ambrosia Custard. And this year was no exception as all of these delivered strong growth -- not only did the established seasonal favorites do well, but we also launched new products to a company Christmas dinner, which included Paxo Chicken and Bacon stuffing that I mentioned before. [indiscernible] grew strong double digits with its great progress continuing towards what is [indiscernible] becoming a GBP 50 million digital sales ground. And in fact, both [indiscernible] and Batchelors have outperformed the category by some distance in the quarter. And as a result, we continue to cement our position as a clear market leader in the Quick Meals, Soups & Snacks category. As you know, one of our strategic pillars is to extend our brands into new categories and the sales here more than doubled. So we're leading away with Ambrosia Porridge pots and during the quarter, for the first time, we advertised these on TV and we also added [indiscernible] variant which is performing very well indeed and always [indiscernible] market share step forward again now reaching 7.5% will be on-the-go porridge market, and up to 14% in our best performing customer. We also achieved new listings from Mr Kipling and Angel Delight Ice-cream in 2 major retailers, and that's given sales significantly higher in the quarter. So we're really very pleased with the progress that we're making in new categories so far this year. And The Spice Tailor, which we've now owned for coming up to 18 months, continues to perform very well and delivering further double-digit growth compared to last year and benefiting from distribution gains in the U.K. and in overseas markets, and I'll come back to that overseas rollout of The Spice Tailor surely. [indiscernible], Sweet Treats sales increased by 21.3% and the Branded side of the business returned a very strong growth, with revenue up 17.1%. And it is great to see Cadbury cake back in significant growth, a strong performance from core Mini Rolls and cake bars. And we lacked some unchecked maintenance on the manufacturing line last year, if you remember. This Christmas, all mince pie is just as popular as ever, we sold 195 million of them, that's forming in more than last year, and that was helped by the launch of Mr Kipling's new and the best ever premium mince pie. Looking at the non-branded business, sales grew by 22.4% and that's excluding [indiscernible] fees, of course. [indiscernible] sales increased by 14.5%, whilst [indiscernible] non-branded grew by 28.7%. Our revenue growth in non-branded compared to the prior year was due to pricing, these are in label contracts, via [indiscernible] was a combination of the new contracts that we won in pies and tarts and pricing as the growth drivers. So this growth in the quarter is below that seen in the first half of the year where the pricing effects have begun to moderate. Our overseas businesses made few of the good progress delivering 11% of sales growth but we continue to expand distribution of our products in our strategic focus markets. And you might remember, we've got 3 key brands which are a strategic focus for [indiscernible]. So they are Mr Kipling, and Sharwood's and now The Spice Tailor is in [indiscernible] with all our brands. In fact, with the Spice Tailor, we going to make some really good progress in rolling it out to new markets. When we acquired the brand, it was mostly present in the U.K. and Australia, but we are now in or at least got confirmed listings in a total of 10 countries. And this includes New Zealand, Canada and our first listing in United States. And in Europe, so far, we could do listings in Belgium, Switzerland and France as well as a step change in distribution in Ireland. So our future international expansion will continue to be focused on these 3 brands. And as in parallel, we're also exploring the potential for Fuel10K overseas. So looking to Australia, both Sharwood's and The Spice Tailor are the major contributors of performance, and that was driven by strong in-store execution. And in North America, Sharwood's grew by 20% as we gained distribution in more stores. And in cake, we've also just landed over 800 new store listings in Canada. So on top of what we've already gained in the U.S., we're now close to 3,000 stores across North America. To put that in context, Mr Kipling will now be in [indiscernible] in North America than it is in Tesco in the U.K. which has got all the Tesco stores in the U.K. And of course, at this stage, this has been a much smaller product range, but that should give you some context in terms of store numbers. Moving on to Ireland, [indiscernible] enjoyed another very good quarter with sales up 27% and particularly strong growth from the Grocery brands. So Oxo and Bisto both have really strong Christmas season sales over 50% and the latter benefiting from advertising in the run on to Christmas. So if we now look ahead to quarter 4. And as you'd expect, we've got strong funding growth, including several new product launches, advertising support for our brands and impactful execution lineup for [ in-store ]. We do, of course, expect the level of top line growth to begin to reduce, but the year-on-year impact of point sales falls away during the quarter. And then as we move into the next financial year, we expect to return to more normal levels of top line growth split between the blend of volume and price mix. And maybe think about the top line growth that we were consistently delivering pre-pandemic. So maybe just to wrap up then, we've had our biggest Christmas ever, with double-digit growth on the sales in Grocery [indiscernible] quarter as underlined by significant market share gains at over 120 basis points. And we've also continued to deliver against the other pillars in our 5 [indiscernible] growth strategy as new category sales of, I think, [ 8% ], led by the Ambrosia Porridge, Mr Kipling and Angel Delight Ice-cream. Our international business grew by 11% and The Spice Tailor and FUEL10K continue to progress very well and the integration of FUEL10K is running to plan. So all in all, I think we're in good shape for the rest of this financial year and well on track to deliver on the previously upgraded expectations. So with that, I'll just thank everyone for your time. I'll stop there, and we'll pass back to the operator, and we'll be very happy to take any questions. Thank you.

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

Well done, another excellent quarter, and great to see the momentum continuing. Can we just chat a little bit more about Q4 and going into next year with much lower inflation in the system and what you're doing in terms of driving volume. And obviously, new product launches is part of it. But what are you doing on promotional activity?

Thank you. Yes. So you're absolutely right. [indiscernible] through out this last quarter in the year, normal pricing benefit from that last big price increase a year ago, drop out. By the end of the quarter, we'll be fully back to everything that we deliver from our Branded growth model. So I think we'll be confident in that. The model has delivered well for us over a number of years now. If we go all the way back to before COVID, people can remember that far back. The business is delivering really well based on that model and I have every reason to believe that will continue to work for us. So that's the usual thing about the [indiscernible] Model. As you say, it's very reliant on new product development, and I'm pleased to say that we've got a really strong NPD pipeline. Both the things that come to market this year, which will continue to grow forward next year and the products that we'll bring to market as brand new next year. So pretty really confident about that. Our in-store execution is better than it's ever been. Our number of displays and grocery that we had out over the Christmas period, will double digit up versus same period a year ago. So our execution machine is working really well. And then I think the final point that you touched on was pricing. So where we've had the space as some of our commodities have come off their [ piece ]. And that's given us the space to [indiscernible] some of our promotional pricing, and we've chosen to do that on areas where we've got the greatest anticipated price elasticity. So some of those sharper price points continue to come to market over the last quarter of the year. And so far, we've seen really strong performance responses and borrowing responses to today's changes. So you're absolutely right that the pricing will have dropped out again next year, but I think we've got a really strong tool box, and we'll expect store to perform well.

If I can ask one more question. Just on Mr Kipling's rollout in the States, where does it sit in terms of your expectations? It's 3,000 locations, what you're hoping for? Or is it ahead? And also where are we in terms of those distribution points going live?

Yes, we're actually a bit ahead of where we expected to be for this year in terms of total distribution points in the U.S. So that's perhaps quite pleasing. Obviously, we haven't finished the year yet. So we're ahead of -- I think it's suffice to say we're ahead of the target we have for the full year in terms of total store count. And in terms of the live dates, I think I'm right in saying that pretty much all the U.S. stores that we've talked about, the nearly 3,000 stores are lives now or about now and we expect to ship to the new 800 Canadian stores at the back end of buyback by the end of quarter 4.

Our next question today comes from Patrick Folan from Barclays.

Can you quantify maybe on the FUEL10K, how did that do in the quarter going ahead? I imagine that will be a bigger part of the kind of top line algorithm and then I know you kind of touched on it there in the last question, but just more broadly, just on the consumer environment, are consumers still looking at value, I guess, with promotional activity stepping up probably be more intense next year, and that's going to drive hopefully a bit more volume footfall just in the context of pricing fallaway. So just kind of comment on that environment and maybe that promo stepping it up, do you see maybe further drive of market share from promo?

Patrick, I'll let Duncan pick up on the contribution of FUEL10K. But the consumer environment is an interesting one, isn't it? I think, having been through what's common in branded as cost of living prices or [indiscernible] as you will say, we're now in a position where we're seeing wage inflation ahead of our actual inflation. So people -- at least start, I feel a little bit, better off, but obviously coming from [indiscernible] behind over the last couple of years. I think from our point of view, it doesn't really have a massive impact on it because the business tends to be relatively resilient to those economic changes. So what we see when people are feeling the pinch and count on the pennies. What will tend to happen is people will eat out less and therefore, the consequence to buy more of our products because they're cooking more at home. And then the flip side of the coin is when the economy picks up, and we're in the other part of the economic cycle, yes, we lose some volumes to people eating out, but we also pick up volume from people who trade up. So in that math it seems to be relatively neutral fallaway. But as I said, to Charles, we will anyway always look to optimize our promotion mechanics and our promotional price points. We've got a lot of modeling capability and economic modeling capability that looks at price elasticities, the impact that it has on volume, the way that volume translates to factory efficiencies and ultimately profitability. So we're constantly playing things on optimizing those promotional price points to optimize the equation between volume, profitability and cash profit delivery. And that will continue to be the case as we go through next year. Does that answer your question, Patrick?

Yes, perfect.

And then just on FUEL10K. I mean, I'm really, really excited to know we've got around down there. And I think we're probably more excited now as we get to know better and understand opportunities for further growth that we actually announced around transaction. I think that's really positive. It's a great brand and what it's going to do is to try to be a great accelerator for us. So no, I think in terms of contribution, we imported partly through the quarter. It's about -- we disclosed is about [ GBP 20 million ] brand in terms of sales last year. We're clearly going to be expecting to be growing on that, but it don't make a couple of months to it, so that what gives you a feel for it, [indiscernible] growing nicely year-on-year nonetheless.

Our next question comes from Matthew Webb from Investec.

A couple of questions on International growth of 11%, so obviously a very good figure, but well down on the H1 growth, particularly if you adjust that for Australian [ destock ]. So I just wondered why you've seen that slowdown, particularly when it sounds like the distribution gains have continued to be very strong. Second question still on International. As you've growing distribution of Kipling in the U.S., I was just wondering whether there had been any change to its performance relative to other brands in that category, you've obviously been very pleased with this relative performance. I was just wondering if that's continued. And then also just in terms of your total distribution in the U.S. having got to that 2,000 figure that you've been aiming at. I mean do we pause here to see how the brand performs or does that keep rolling out as we go into next year. And then, sorry, just one final quick question on the U.K. on Sweet Treats. You obviously got some very good market share gains there and good revenue growth, but it looks like that is very much led by Cadbury, which was up against a weak comp, I just wondered whether you had any comments on the Kipling range, either in terms of revenue growth or its market share trends?

So yes, a few bits in there. So yes, we're really pleased with International growth of 11%. It's a business that seems to deliver consistent double-digit rev for us quarter in, quarter out. If I look at total performance, I think it's probably 2 things to think about really [indiscernible] there was still a bit of that destocking in the front end of the quarter. We thought we got through all that, but it turned out that we haven't. We're pretty confident that that's all I can picture by now though. And it also tends to be a bit lumpy in terms of shipments because in some markets, we're still very small. So we might ship already containers in 1 month and then not for another couple of months. And just because of the efficiency of transportation, but bear in mind that all our products are the long shelf life on the Grocery side or on the Sweet Treats side that [indiscernible] essentially, again, it becomes long shelf life. So you do get fluctuations from quarter-to-quarter. But as I said, overall, we're really happy with it. The focus, though, I think it's fair to say, is actually on building distribution. So I'm much more interested in the KPI is not necessarily short-term revenue delivery. It's actually a number of extra stores we get for Sharwood's, it's the number of extra store we get for Kipling, et cetera, et cetera. And the progress there is been quite good. And so all that leads to growth further down the line. Moving on to the second part of your question. So if we look at exactly that was the distribution list of Kipling in North America, so performance and as you remember when we first tested this in a couple of hundred stores, and the performance was really very good, and we were very pleased with it. As we've started to roll out into other customers, that performance seems to have held up. Different stores have got different footfall. So it becomes a little bit complicated. But overall, I'd say we're really pleased with how it's performing in those additional stores. I'm not thinking that we pause at all at this point. And then we'll continue to push out stores with an increasing focus on what we call seasonal ranges. So having the right policy [indiscernible], having the right product in and how we [indiscernible] those sorts of things. Those depends in the states are really important, but it's a great way to get new distribution in new stores. I think we'll see more of that coming as we go through the next financial year. So taking our foot off the gas there in any way, shape or form. Coming to the case with Sweet Treats, there's a lot happening behind the Sweet Treats great numbers. So you're absolutely right, we've got the weak comps on Kipling because of that [indiscernible] we had, say, a year ago. But at the same time, there's a lot of things that happened. So this is also the quarter where we've anniversaried our lapse, the promotional restrictions that came in with [indiscernible] restrictions, so where you can do promotions in stores. So for the first time in quarter 3, we were in a position where we've got more displays in store than in the prior year. And that's not something that's happened for a year on Sweet Treats, I think to [indiscernible] is more where we are and it's certainly where we are in Grocery, but it's not been the case in Sweet Treats for a year because of those instructions. So good to be in a positive position there. As I've mentioned before, Sweet Treats is one of our most, not the most [indiscernible] active part of the portfolio when we increased pricing to cover commodity costs. And we therefore be [indiscernible] was the first place that we started to adjust promotional pricing as commodity prices came off that peak. So there were some benefits there across [indiscernible] Cadbury and Mr Kipling in the quarter and then couple that with some really good new products, including that Mr Kipling new minced pies and increased levels of advertising and promotional support. There's a lot happening behind that number. I've no doubt that the biggest piece of it is probably the category comp, but there's an awful lot of other stuff on the positive side happening. It's just at this stage, we're not able to deconstruct exactly which element delivered which part of the growth, but I'm sure we'll get greater clarity on that as we go through the next few months.

Our next question today comes from Clive Black from Shore Capital.

Well done on an excellent quarter. A couple of questions, if I may. First of all, you talk about increasing capacity at Ambrosia. Just wondered what that entails in magnitude. And indeed, just across the network, how are you in terms of capacity utilization at the moment? Are you in a good position to cope with growing sales over the next year or two? And then secondly, just in terms of the cost environment, maybe give us a feel for some of the cost movements. The U.K. National Living Wage comes in, in April. What do you think about energy and commodities? To the extent, are you anticipating disinflation rather than maybe deflation in the next year, if that's a fair question.

Yes, you're absolutely right. We have commissioned increased capacity [indiscernible] in order to be able to make more of [indiscernible] parts. The reason behind that is we've obviously done very, very well with them, probably better than we ever imagined when we first started off. So we started making them on some existing manufacturing kit that we converted to be able to make porridge. And it's now reached the point where it's quite clear to us that we don't put some more capacity. We won't be able to [indiscernible] Particularly, wouldn't be able to continue to -- wouldn't be able to start overseas expansion, which we do think is a possibility of this product. So that's been commissioned. Now obviously, these things take a bit of time, but will quite dramatically increase our overall capacity for porridge pots, which is really encouraging. More broadly, across the sites, Clive, there's nowhere really where I'm looking at and thinking we've got any immediate pinch points. We've got capacity for what we need to do over the next year or two that might be a significant piece for us. Now having said that, as you know, we have got -- one of our strategic pillars, of course, is investing in manufacturing efficiency. So there are definitely opportunities where we could upgrade some of our existing manufacturing kit with newer, more modern production line lower. And therefore, you have a number of benefits that you'd be much more efficient. Your cost [indiscernible], your product quality would probably improve and so there's a whole bunch of opportunities that are attached to that across the sites as we go forward. But that's not predicated by market capacity that's more predicated by opportunity and cost out to make sense. Our cost environment. So what's happening? So you're absolutely right on National Living Wage. But to be fair, that was pretty close to what we had anticipated and we've already built into our costing models for next year. So that doesn't really change anything from our point of view. Energy, as you're probably aware, we have tendency to sort of hedge them by a long way out. So we're pretty secure on that for next year. So that's unlikely to be a significant variable for us. And we're modestly -- we've seen a bit of softening of commodities as they come off their peak. We expect that to continue. I don't expect that overall value gain to a net deflation in any way, shape or form. But certainly for -- while we're sitting from a pricing point of view, we're still in the [ Cadbury ], we don't see that we will need to increase our pricing next year, and that's something that we haven't anticipated, happens.

Okay. And then just a final follow-on from the previous questions. What's the size of the Mr Kipling assortment in the States? Is there any particular product that's proving to be taken off?

So we started with 4 flavors of the cake slices, Clive, and that's what we regionally tested in those first 200 stores. Why that format? Because it's pretty easy to understand, pretty widely accepted format. And so that is essentially the rollout portfolio. These flavors have done particularly well if that's of any interest. And then what we've done in some of the stores where we've been in a little longer, we've now started to introduce some additional products. So I think Cherry Bakewells started to go into some stores as well and we'll be looking to expand that as we go forward. And then in particular, as we come up to different seasons, we'll have seasonal flavors and things. But yes, and [indiscernible] you access to in-store events. So if they do a big display of Halloween products and for Halloween, we've got some pumpkin flavored or pumpkin colored cakes, then we'll get those on to the display events in a way that you wouldn't be able to do in the core range. So and then if you look back, actually, if you look back to how we built the Kipling business to be the #1 cake brand in Australia, a lot of that initial work has actually gone through seasonal events and then the range got flushed out into more [indiscernible] products.