Premier Foods plc (PFD) Earnings Call Transcript & Summary

Hello, and welcome, everyone, to the Premier Foods Quarter 1 Trading Update Analyst Conference Call. My name is Becky, and I will be your operator today. [Operator Instructions] I will now hand over to your host, Alex Whitehouse, to begin. Please go ahead.

Thank you very much, and good morning, everyone. Thank you for joining this, which is our quarter 1 trading update call, and that covers the 13 weeks to the 27th of June this year. As usual, I'm joined on the call this morning by Duncan Legg, our CFO. I'll start by giving a few headlines on our trading in the quarter, and then we'll go into a few key areas to provide a bit more detail before, as usual, passing to you for questions. I might want to ask -- and also as a reminder, we're holding our AGM at 11:00 this morning, which, as usual, we're hosting in our offices here in St. Albans. So if any shareholders would like to attend and don't yet have the details, please do contact Richard Gonen in Investor Relations for details of how to attend. So on to the quarter 1 results then. Firstly, I am pleased to say that once again, we've grown our branded sales ahead of the market. That's up 4% and so further increased our market shares. And this was led by a particularly strong performance by our branded Sweet Treats. And with our biggest brand, Mr Kipling, delivering especially strong growth. Now overall, our group sales increased by 2.7% and our U.K. branded sales increased by 3.8%, and that was led by our strong innovation program. So the strong branded growth is partially offset there by further rightsizing of our less profitable non-branded business. I'm pleased to say that we're on track at this early stage in the year and with our trading profit expectations for the year unchanged. I'll take you through some of the progress we've made in the first quarter. But before I do that, I just wanted to remind you of the branded growth model, which is the core of what we do and is the reason why we've been able to deliver such consistent strong performance over an extended period of time now. Now firstly, we're lucky to have a portfolio of really strong brands, which are leaders in their categories and have got very high household penetration. But then we spend a lot of time and effort talking to and listening very carefully to our consumers so that we can create and bring to market insightful new products, which are based on current consumer needs and trends, which includes things like premiumization and better-for-you options. We then support many of our brands with emotionally engaging advertising and impactful marketing campaigns to maintain that strong awareness of our brands and keep them contemporary and relevant. And then we also use digital channels to enhance our connection with younger audiences. And finally, but very importantly, we work closely with our key retail partners to deliver category growth and deliver excellent in-store execution for our brands. And it's this branded growth model that underpins our 5-pillar growth strategy, where we continue to make strong progress in all of the pillars, but I'll come back to that shortly. So if I kick off with Sweet Treats first then, well, we've had another really great quarter here with branded sales up by 6.6%, and that was led by Mr. Kipling, which has grown by another 9% this period. And this trend means that our branded Sweet Treats has now grown on average by 8% for the last 11 quarters, which is clearly a very consistent strong performance. But a significant part of this growth has been driven by the quality of the innovation program, which, as I said, is a major part of our branded growth model and overall strategy. However, I should also point out that the underlying core product ranges also continue to perform very strongly as well. And we talked back in May about those Sweet Treats new product ranges, which we launched relatively recently. And this quarter, we've introduced further new products, including birthday cake slices, which builds on the already successful birthday cake Tarts. And you might remember these birthday cake Tarts were inspired by a trend that we've seen in the U.S. for birthday the flavor. And these are selling really very well indeed. And so we've extended the idea into our cake slices, which is, of course, our best-selling cake format. And we've also launched a new range of Mr Kipling Worlds, including some modern flavors like Cooks and Cream, which will appeal to younger consumers. Now these new ranges add to the product innovation we launched last year, particularly Mr Kipling tubs of Cake Bites, which is perfect for sharing or for those wishing to control portion size and also the Mr Kipling breakfast bakes. Now if we move on to the grocery business then, our Grocery branded sales increased by 3% compared to last year. And similarly to the Sweet Treats business, we launched a series of new products based on current consumer trends. And this includes Ambrosia custard in pouches, which are a convenient option, perfect for lunch boxes that contain just 100 calories a pouch. And we also introduced Lloyd Grossman premium cooking source kits, which is the same format as the Spice to a 3-step kit to bring Italian restaurant quality meals into the home. And we've also brought to market missing hands and meals in a part, and these are a complete nutrition product range, which are nutrient dense -- they contain over 20 grams of protein per pot and 26 essential vitamins and minerals, and they can be particularly helpful for those using GLP-1s. In addition to those launches I've just outlined, we also delivered very good growth from some ranges that we introduced last year. And in particular, I call out OXO Bone Groth and Angel Delight Bubble Jelly, which were significant contributors to both sales and growth and share gains for those brands. Moving to the non-branded part of the business. In Sweet Treats non-branded sales increased by 5.3% due to some strong volumes on pies and tarts and a contract win for cake slices. And we expect our non-branded Sweet Treats to now deliver modest growth across the year. Non-branded grocery sales were GBP 2.5 million lower in the quarter. And I said before, we continue to rightsize this part of the business and so have exited some further contracts, which impacted the shape of the numbers in the quarter. We do actually expect the trend in grocery to improve as we go through the year. Now as I've said before, whilst these nonbranded contracts can be a bit lumpy, our target over the medium term is for these parts of the business to be flat or possibly deliver some modest low single-digit growth. And timing-wise, I'd expect this to take place in Sweet drinks before grocery, which is what we're now starting to see. Now look more widely at the other strategic pillars, we've continued to make some encouraging progress. The next pillar is investment in our infrastructure, and we haven't provided an update on this today as this is just a trading update. However, we do remain on track to invest somewhere between GBP 55 million and GBP 60 million in CapEx this year. And by way of a reminder, this part of our strategy enables us to drive improved efficiency and automation through our supply chain, enhancing our gross margins, which means we can reinvest back into brand investments. Now moving into new categories. I'm pleased to say we've continued the momentum here with sales increasing 16% compared to last year. So further good progress, especially when set against last year's comparative when sales in those new categories grew by 38%. This quarter, I'd call out Cape Herbs and Spice as a particularly strong performer, which as I've mentioned before, has become an established presence in the market. It's great for bringing flavor to live and a wide range of dishes, so poultry, fish, salads and ribs. -- and also across midweek evening meals, but also the barbecue season, which helps us reduce the seasonality and sensitivity of our grocery business. Growth from new categories also included FUL10K yogurt and granola, which we launched last year and is in the chilled app. And this is a pot of protein enriched yogurt with a lid containing some of our market-leading FUEL10K granola, which you sprinkle on top or which you can mix in. We now move on to international. As I said before, our focus markets are Australasia, North America and EMEA. And within these target markets, we're currently focused on Mr Kipling, Sharwoods and Spice Tailor, but now also FUEL10K. And in the first quarter, overseas sales at constant currency grew by 6% and actually 7% on a reported basis. So if you take Europe first then, where we increased sales in double digits in the quarter. It's been very pleasing to see the encouraging start to the launch of Fuel 10K, where we're initially in the Netherlands, Germany and France. The Netherlands is where we've achieved the most significant distribution with both granola and C parts ranges listed in Albert He, and we supported the launch with some social media. And as I say, it's off to an encouraging start. In North America, sales also grew in double digits. Canada saw increased sales of the Spice Tailor. -- while in the U.S., we saw very strong growth compared to last year due to the new distribution for Mr Kipling Slices and Pies, which took place in the second half last year as well as some more recent listings. In Australia, sales of the Spice Tailor grew over 20% as it benefited from a multichannel marketing campaign, which actually included TV advertising in addition to an immersive retail experience in one of Australia's largest shopping centers. And we do this because we know that once people try the Spice Tailor, they do really like it and they tend to come back and make it a regular purchase. So our focus is on increasing consumer awareness. And then in cake, in Australia, we saw sales stabilize as retailer stock holding levels begin to normalize. And then just as a reminder, our final strategic growth pillar is to look for inorganic opportunities where we can deliver further growth by leveraging the strength of our branded growth model. And as you know, we're looking at acquiring future-focused brands, which have significant further future potential to scale up and deliver high growth for many years ahead. And following that premise, all 3 of the brands we've acquired since we set out on this strategy, that's the Spice Tailor, Fuel10K and Merchant Gourmet, they've all again grown sales in double digits this quarter, which we're really very pleased with. And Merchant Gourmet enjoyed widespread growth across all its range, especially from some of its new launches, including the new gourmet baked beans. And Fuel10K also continued to progress very strongly as well. We've mentioned before that we have the #1 granola product in the U.K. market with our flagship chocolate granola. We that continues to be the case. And in fact, we've strengthened that further and taken more market share in the granola category. So another very strong performance from the brand. And then in terms of the Spice Tailor, the core Indian kids range performed particularly strongly and the brand also then growing sales in the teens percentages in quarter 1. As we said before, we'll continue to explore further inorganic opportunities and where we believe we can add value by applying our branded growth model. And we're looking for high-growth future-focused brands. Of course, we do now have some greater flexibility in terms of the size of opportunities we can consider given the strength of our balance sheet. However, and also, as we've said before, we are quite picky, and we'll update you when we've got anything more we can share on that. So look, in summary, we're on track and our trading profit expectations for the financial year are unchanged. And it's particularly pleasing to see the good progress across the pillars of the growth strategy and in particular, the role that our recently acquired brands are playing in accelerating overall group growth. As we look forward to the rest of the year, we'll continue to drive performance across all of those 5 pillars of our strategy and to leverage the strength of our branded growth model. And as usual, of course, we'll be continuing to support our brands as well as bringing a number of new products to market in the U.K. and also building our brands overseas. And over the medium term, we expect to continue to build the business by making strong progress against that 5-pillar strategic growth strategy. So look, thank you very much again for your time today. I'll now pass back to the operator, and we'd be very happy to take any questions.

Our first question comes from Charles Hall from Peel Hunt.

Can I just ask on Ireland? What was the impact in the quarter from that change in -- from a distributor to direct retail? Was it just in that quarter? Presumably, it doesn't affect ongoing sales. And just give a bit more color around that, that would be great, please.

Sure. Thanks, Charles. Yes, so what we've done is we've had a historic relationship with one of the retailers in Ireland, a significant one as well, where we've gone through a distributor, which isn't particularly efficient. So we've now moved that to direct delivery relationship, which obviously is more efficient, saves us some money and gives a bit more control. So there is a one-off impact as we run down the stocks that were in the distributor's warehouse, if you think about it that way because they have -- they own that stock. But you're absolutely right, it is a one-off. It only affects the first quarter of this year. And I think from an impact point of view, think about it as a couple of million or so of sales. And that would be grocery brand to be fair.

Got it. Perfect. And then one other. Can you just give an update on input costs and pricing? I think when you last talked about it a little bit higher, but not looking to change pricing. Has that changed at all?

Similar picture, although obviously, we're very aware of what's happening when we thought we've got that seems to have dissipated on us. So we'll keep very close to that. If we need to take some action, then we'll do so. But at the moment, it doesn't look like we need to.

Our next question comes from Andrew Wade from Jefferies.

A couple of questions from me. First one on innovation and new product development. I just sort of interested as to the cadence of it seems to have stepped up or intensified. I don't know whether that's just a perception thing or you sort of explaining it in more detail, but it really seems like there's been some quite big wins there on the product development and innovation side. Is that putting a bit more into it? Or is that sort of -- it's the way it's always been? And if it step change, can we sort of see that continue at the same level? That's the first one.

Yes, good question actually and quite observant as well because, yes, there is a subtle change here that's something we've been working on for a few years. It takes a little while for these things to filter through. So whilst we might not have more NPD in absolute terms, in fact, it might even be a little bit less. What we've been focusing on is coming up with ideas which have got overall greater scale-up possibility. So when you think of things like OXO Bonebosth, that's something that we expect to be able to scale and be worth several million pounds of turnover as opposed to doing lots of little things. And similarly, with the innovation that we've talked about on Sweet Treats, like the breakfast bakes, which targets a different time of the day. They're very specifically intended to be entirely incremental to the rest of the Mr Kipling business, which is generally even lunchtime onwards. So there is a subtle change there, and it's really about scale.

Interesting. And then the second one I was going to ask, on the non-branded grocery side of things, that was obviously a bit light of certainly I expected and I think perhaps others as well. Obviously, not too much of a concern given it's sort of not a strategic priority and it is relatively low margin. But I'm sort of interested as to -- you're obviously still very happy with consensus trading profit expectations. Is it just that sort of that revenue is such a low margin, it doesn't have much impact? Or are you sort of slightly out trading elsewhere? Just interested in the dynamics around that.