Greggs PLC

LSE:GRG

Earnings Call Transcript 2020-Q4

[Roger Whiteside, CEO & Director]

Good morning, and thank you for joining us. In a moment, I'll update on our operational performance and strategic priorities, before then handing over to Richard, who will present our financial results. I will then close with a review on outlook, which will be followed by a live question-and-answer session.Beginning then with the main headlines from our response to COVID and how we accelerated our strategy. Following successive years of unbroken growth and a record year in 2019, Greggs made a great start to 2020, coming into the year with momentum and clear strategic plan. All of that came to an abrupt stop in March when we decided to close our entire estate in response to the stay-at-home message of the first lockdown.I don't want to take up all of the time in this presentation describing the establishment of our COVID-secure operating model. Needless to say, I think our teams did a great job in what was a massive exercise under enormous pressure to be able to open nationwide in July.Trading under social distancing conditions showed how resilient our business model is due to the effects of our customer appeal and the variety and reach of our shopper state in locations accessible to customers, the majority of whom are not able to work from home. And unlike some specialist operators, we had relatively modest exposure to office workplaces and public transport.I must also be grateful for the fact that we'd invested heavily in recent years in both our supply chain and systems, without which the management of COVID would, frankly, have been unimaginably more difficult. We tried our best to treat our people as fairly as possible as the crisis unfolded, making full use of the government job support scheme whilst we were closed and continue to do so while we established what level of demand to expect under these conditions. Those expectations were clear by November, and we then took action to reduce the size of our workforce and only use the job support scheme, where we could see the job impact was temporary even under social distancing.So at this stage, I'd just like to take the opportunity to thank all of our people. I think we can all be proud of the part we played in our nation's time of need. Thank you.Whilst we cannot escape the short-term impact of COVID on our business, we have been determined to keep our strategic plan on track. Many of the changes we have been observing in customer behavior during this crisis are trends that had previously been identified. And fortunately, for us, we had already begun development of new channels as a part of our Next Generation Greggs program, which we launched pre COVID.As a result, we saw the opportunity to accelerate our strategic development to emerge stronger in the years ahead. We launched our Next Generation Greggs program, as you see on this slide, in January 2020. And it's now clear that the ambition in that strategic plan to increase access to Greggs has become more relevant than ever. We expect the competitive landscape would have weakened significantly as a result of COVID, and we remain excited by our strategy to increase market share in a multichannel world.The most important of those channels remain shops, which provide the most convenient access to customers who need food away from home. Once we were able to open our shops again in the summer, we could see that although footfall and sales were well below normal levels, certain shop locations, particularly those accessed by car, were still profitable. And therefore, we reactivated our shop opening pipeline, demonstrating our confidence in our continued long-term growth opportunity. And we achieved net growth of 28 shops by year-end. I'll return to this in a moment, but we now feel confident in setting out our next target of 3,000 shops in the U.K. that we begin planning for the next phases of supply-chain capacity.Drive-thrus have cemented their position as the most attractive shop format type. And we, like others, are pursuing these wherever we can. Delivery has been the fastest-growing new channel both before and now during COVID. We have rolled out nationwide to over 600 shops with plans to go to at least 800 this year. Again, I'll return to this in a moment, but I'll also -- it's also played a key role in allowing us to compete in the evening daypart.Successful trials of our improved Greggs Rewards loyalty scheme in 2019 meant that we were able to accelerate our plans and launch it nationwide in October. Marketing continues to play a key role in driving brand awareness amongst target customer groups, and we've invested in a stronger team to compete in digital channels and develop our customer relationship management capabilities as new systems are deployed during '21.Our development team also applied the learnings from earlier trials to launch our new click-and-collect service, making it available to all shops in September last year. Click and collect will be brought together with Rewards in our new app, which is now being piloted ahead of launch in the second quarter of this year. This will then become the platform on which we offer better availability and customized food options in the future.While new digital channels present opportunities to compete for market share, our shop network remains key to our growth ambitions, providing both convenient access to passing customers as well as nationwide reach with delivery and collection services. Existing trends towards increased flexible homeworking and online shopping have seen material acceleration during this crisis. Longer term, we expect to see a further shift away from office-dependent catchments and weaker shopping locations. Our experience during this crisis has highlighted that the diversity of our estate means we're not overly dependent on any one location type, and downturns in some areas are balanced by improvements in others.Shops accessed by car have been the strongest performers during the COVID crisis. And these location types already formed most of our new shop pipeline. This gave us the confidence to restart our new shop opening program in the second half. And we're targeting a rapid return to previously planned growth levels of circa 100 net new shops for the years ahead.In addition, new opportunities now exist in previously underrepresented locations, such as Central London and mass transport hubs, where availability and rental levels will now make those locations more accessible. Similarly, relocation opportunities to expand into bigger, better shop space are expected in existing locations, and that will support our continued drive to improve the quality of the estate and develop new opportunities with additional seating.The shop estate is itself in good condition and refurbishment costs will remain low while we establish spacing equipment requirements for new services in our full range of formats. In 2020, we opened 84 new shops, including 35 franchise units, and we closed 56, growing the estate to 2,078 shops, 328 of which are franchise shops operated by our partners.We know what to expect when it comes to shops, but we've been on a steep learning curve when it comes to delivery. We believe under normal circumstances that the delivery customer is not considering going to find a shop to get through as an alternative to delivery. So in that way, it's additional business. Of course, under COVID, going to a shop was not an option for many, and therefore, demand for delivery increased as the restrictions increased, and in the current lockdown, account for as much as 10% of sales.Customers are typically buying for more than one person. And we've seen disproportionately high sales in hot food and sweet. We're particularly interested in the demand for new pizza box offer, which we see as having a greater appeal in the evening. Our current plans are to roll out to a further 200 shops, but this remains under review and could go further as we learn more about the channel.When it comes to our menu development, having started 2020 with the launch of a new award-winning vegan steak bake, alongside our first vegan donut, our product development plans came to an abrupt stop as we focused on providing a service in our key best sellers during the crisis. COVID restrictions saw increased demand in supermarkets, including our long-term partners, Iceland, and sales of our Greggs products for home baking leapt to record levels. That introduced new customers to our brand for home consumption and provides a platform for further development, including the introduction of vegan products to the brand.Our ambition to be the nation's favorite brand for food-on-the-go requires us to offer a varied menu suited to all times of the day, breakfast, lunch and dinner. Our strategy remains to add to our existing credentials for freshly prepared, great value, great tasting bakery food by building our reputation for product categories with growing demand in the market. The addition of new digital channels strengthens our ability to test new product areas and avoid some of the maturity costs in gaining customer support, products not already associated with our brand. The growing trend for dietary choice shows no signs of slowing. And this year, we'll return to introducing additional vegan-friendly versions of our best-selling lines. Interest in healthier food choices is also driving our sector-leading standards as provision of information to customers to enable them to make informed choices.We've now completed successful trials in preparation for the requirement to move to full labeling of sandwiches, which is due later this year. Product improvements will see us make further progress with salt, fat, sugar and calorie targets alongside continued progress in our animal welfare standards. The options for customers will be further increased when we trial custom ordering for sandwiches through digital channels later in the year.Work restarted in the final quarter of last year to plan for new product introductions once customer restrictions are lifted and demand conditions improve. Strategic areas of opportunity include our coffee menu, which will be extended this year alongside the rapid rollout of our fully tested new coffee machine, improving speed, quality and range options.Hot food also remains a key area of focus, both for self-selection in our shopfronts and increasingly from behind the counter for delivery. The combination of these 2 opens the opportunity for development of our offer to compete in later day trading which we tested in trial shops last year and will see further expansion.Even before COVID arrived, our supply chain teams began 2020 in crisis mode, having to cope in February with our first-ever flood, leading to the closure of our bakery and logistics site in Wales. We could not have expected then that we would remain in crisis for the rest of the year and into 2021.Our teams have been outstanding in managing throughout this period, coping with constantly changing shop closures, alongside managing the infection risk seen in food-manufacturing sites around the U.K.Our ability to manage the impact of temporary site closures benefited greatly from our major investment program over recent years, in which we both centralized and automated manufacturing. It allowed us to build and distribute from stock around the country. In response to the requirement to minimize social contact, we also radically changed our distribution operation, resulting in improved delivery efficiency, which will now benefit the business longer term. As a consequence, we have created additional distribution capacity and are now able to postpone investments in our Birmingham site, which had been scheduled to commence this year, and it will be delayed now for a number of years.In addition to the tireless work involved in maintaining supplies, our teams continued to make progress on our key strategic projects, which will be completed in the year ahead. These include the rollout of the new SAP systems to all remaining sites and commissioning of our new automated frozen distribution facility at our Balliol distribution center in Newcastle.New shop openings, alongside an anticipated return to strong sales growth, will require investments in additional manufacturing capacity, beginning with our savory manufacturing plant at Balliol, where a GBP 9 million program of automation is already underway and is planned for completion later this year. Planning will also commence to address our capacity needs looking forward to our next target of 3,000 shops in the years ahead.As with our supply chain, our investment in recent years to modernize our core business processes and IT systems greatly assisted us in supporting the business as we adapted to working from home, often with skeleton teams, when numbers on furlough were at their peak. Rapid deployment of modern office working tools alongside business intelligence reporting has made us through efficient remote working. Office working remains at the minimum, and we're planning for increased flexible working to remain for the long term once restrictions are lifted.Alongside this work, we're also able to maintain progress on SAP deployment in our supply chain at sites in Enfield and Manchester despite the COVID constraints, and this leaves us well positioned to complete the rollout of that program in the year ahead.Accelerated investment in our digital capabilities has been a key focus during 2020, and our IT development teams have been fully engaged in our Next Generation Greggs program, which saw rapid rollout of digital customer channels and the new Greggs Rewards loyalty scheme in the second half of the year. Progress made last year will see us launch a new Greggs App in 2021, followed by new systems to help our shop teams satisfy demands in these new channels, improve the customer experience and offer new service features.Finally, in our determination to come back from this crisis both stronger and better as a business, we work to launch our new Greggs' Pledge, committing to 10 sustainability objectives to develop the business in a responsible manner. The Greggs' Pledge commits us to 10 things that we're doing to help make the world a better place by 2025 and beyond. We arrived at these pledges by talking with our own people and our external stakeholders, and by considering the issues that are most relevant to our business. Our pledge is aligned with the ambitions of the UN Sustainable Development Goals, and we've chosen to concentrate our efforts on the challenges where we think we can make the most difference. We want to help build stronger, healthier communities. We want to make our planet safer, and we want to be a better business.Our first-ever separate sustainability report provides a full description of our activities alongside measurable targets we set ourselves across all these areas, and I encourage everyone to engage with us in this increasingly important element in our strategy.That concludes this section of our presentation, and I'll now hand over to Richard to update on our financial results in more detail.

[Richard John Hutton, Finance Director & Executive Director]

Thanks, Roger. Yes, I'll give you a run-through of what was obviously an extraordinary year, last year. We, obviously, reported our loss for the first half at the interim period, but I'm glad to say that we've made some decent progress in recovery through the second half. And on Slide 15, the income and expenditure overview, we can see that. And we'll talk about sales in just a moment. But overall and we should acknowledge including quite a lot of support, the operating loss last year was GBP 7 million, to which we have to add almost GBP 7 million of funds expense, which is mainly the interest charge on finance leases to give a loss before tax of GBP 13.7 million. And then after a GBP 0.7 million income tax credit this year, then the loss after tax is GBP 13 million. And the earnings per share is an actual loss of 12.9p per share.So if we move on to the sales pattern. The chart on Page 16 reflects the level of like-for-like sales each month through the year compared with the level in 2019. So it's a like-for-like number, in that sense of the word. Now if you follow the track through the year, you'll see, obviously, that we started January and February trading ahead of last year's level with a very strong start. And then you can see in March where sales came to the cliff as we shut the business in late March. We were closed in April and basically through May and most of June. You'll see we did start to open a few trial shops in May. And then on the 18th of June, we opened 800 of our company-managed shops to business, with the rest of the estate opening in early July.What you then see is a very steady recovery month by month through the second half of the year with the one exception being November when there were lockdown restrictions again. And those restrictions have been quite as severe as the restrictions we've seen in the last couple of months, which, obviously, Roger will come and describe at the end of this.One of the patterns you'll also see is the increased contribution from delivery. So our partnership with Just Eat has rolled out rapidly through the second half as the red element of the buyers is the contribution from delivery to company-managed shop sales. So in the fourth quarter of the year, they represented 5.5% of the company in shop sales. So overall, in traditional like-for-like terms, this was a decline of 36.2%, but I think you can see from the pattern that most of that damage was done in the second quarter.That second quarter will be difficult when we start to report in the year ahead because, of course, we'll have no comps. So what we'll do when we next report to you in May is we will use a 2-year like-for-like to get around that and give you some sort of consistency or visibility of the sales recovery over the months ahead.So turning to the cost side of things then. On Slide 17, you can see we pulled out some of the material additional costs. And then it's in the P&L. We haven't classified these as exceptional, but clearly, they are material. So the job support scheme, the CJRS, for furloughed employees was a significant element of support. At the half year, we reported that we've used about GBP 69 million in the second quarter. And into the second half, we used another GBP 18 million worth of employment support. So the total claim for 2020 was GBP 87 million.In addition to that, we continued to get relief from business rates under the retail, hospitality and leisure scheme. And that benefit was a total of GBP 19 million for 9 months in 2020. The current government guidance is that, that benefit will continue until the end of June 2021 for us. We've already reported that the closure of the business in March last year resulted in a GBP 9 million charge in respect of stock write-offs and other provisions.And we reported at the half year that the closure at that point of 45 of our shops resulted in asset impairment charges and onerous operating costs of almost GBP 8 million [indiscernible]. We've since then reassessed the rest of the estate and increased that impairment charge to reflect those shops where the recovery in trading conditions was unlikely to be quicker to allow them to recover their main asset portfolios over the remaining life of the shop. So that has resulted in an overall charge of GBP 16.5 million for asset impairment and onerous costs in 2021 -- sorry, 2020.We've been running with additional costs in the past year and still are in respect of some of the safety measures we've had to take to operate in a COVID safe way. Those include signage in shops. They include additional cleaning procedures, hand gels for customers, protective equipment for staff, and in our supply chain, a proactive virus testing program. So a total in 2020 of GBP 9.3 million, and that program is ongoing. So we believe, at the moment, that the current cost per month is about GBP 1 million from maintaining that safe environment.And then finally, in terms of material costs in 2020, Roger has referred to the fact that we had to go through a collective consultation with respect to redundancies at the tail end of 2020. That cost a total of GBP 10.2 million and will result in an annual cost reduction, going forward, of GBP 14.4 million.So turning now to the more conventional cost picture. On Slide 18, you've got the usual pie chart, which shows our underlying cost base in terms of normal business. And the biggest areas of that really are as usual, firstly, the food and energy costs, where we've seen energy, food and packaging cost easing through the second half of 2020 as a result of sort of weakness in demand in those commodity areas generally. We've also seen some reduction in the pork price, which if you remember, is one of the utmost inflationary element over the last 2 years, but I think it's fair to say there's quite a lot of uncertainty still in that market, but we have at least seen the first signs of some optimism.Overall, if we look forward, we expect that food and energy inflation in the year ahead is likely to be relatively low, in the range of 1% to 2%. And as a result, we've taken quite a bit of forward cover. So we've currently bought forward for about 6 months to take advantage of those lower costs.Then if we look at people costs, which is 40% of our cost base. While we have 3.5% overall wage and salary inflation last year, that's despite having canceled the management pay award for the year and despite directors taking the voluntary pay reductions for a number of months. So the biggest driver behind all of that, of course, was the national living wage increases, which were already in place. Those will be much less significant in 2021. And so as a result, we expect that the overall wage and salary inflation for 2021 will be about -- around 2.3%, so lower than we had for many, many years.Then finally, shop occupancy costs. We've already talked about the business rates relief and that will benefit us for the first half of 2021. But we've also been attacking the question of rent renegotiations with landlords and continuing to seek better terms in return for the very strong covenant that landlords enjoy from the relationship with Greggs.Looking now at capital expenditure. Well, we had to slow down the capital expenditure dramatically in March last year. But once we got reopened again in July and saw the sales trends, we were fairly quick to reignite the pipeline of new shops in particular. Because we could see the opportunity, and we could see that the pipeline shape, as Roger has already described, really reflected where our strongest performance was. So we did lose some ground and only opened 50 company-managed shops in 2020 compared with the 100 that we hoped to open. We did manage to protect some of those strategic projects in the supply chain. But overall, we spent GBP 58.7 million in CapEx in 2020.Looking forward, we expect CapEx in 2021 to be about GBP 70 million, and that will reflect 100 new shop openings. Still relatively little on shop fitting as we expand the formats, and we would expect that to accelerate in the years ahead. There will be a step-up in shop equipment to reflect the rollout of new improved coffee machines. And also the work that we need to do to support in shop labeling of sandwiches, which has capital requirements as well. So overall, GBP 70 million in the year ahead.And if I flip on to Slide 20, you can see the sort of 3-year view of that. The red line on this chart, the dotted red line, reflects the pre-COVID CapEx plan that we've previously communicated. And obviously, we spent well short of that in 2020, and we'll do in 2021 as well as I've just described. Going forward, we've rephased. We'll see the increased number of shop openings coming back in from this year onwards. And as I just said, the retail refurbishment do increase in the years ahead as the next-generation of shop formats are deployed. The bulk of our supply chain transformation is complete, but as Roger has already said, there will be investments in the savory manufacturing capacity, some of that comes this year. And some of it will come in 2023 when we have to invest to meet increased demand that we expect from the multichannel growth and to support the continued expansion of distribution capacity to meet the opportunity of more shops.And finally, we'll be looking at our plans to see whether there are any opportunities to use the corporation tax super-deductions that were announced in the recent budget over the next 2 years. So that may result in some rephasing of the plan if we are able to.Continuing the tax theme, on Slide 21. You can see that our effective rate of tax on a lot of tax credit in 2020 was very low at 5.2%, and that reflects the impact of disallowable expenses relative to a relatively small loss for the year. And also the revaluation of deferred tax benefits last year.The introduction of those super-deduction capital allowances will affect the effective rate over the next 2 years, as will the revaluation of deferred tax again to reflect the announcement in the budget of the move to a 25% vote from April 2023. So to give you a guide of what we expect, we think the tax rate -- effective tax rate in the year ahead will be about 19%. And then looking into 2022, we anticipate essentially around 17%. After that, you can follow the headline corporation tax rate, but our expected rate, [indiscernible] will be about 1.5% above that, reflecting the impact of those disallowables.Looking at the dividend. Well, the dividend is currently suspended, as you know, but we would expect to recommence the distribution as soon as trading conditions and profitability improve. And we anticipate beyond that, that we would return to a progressive dividend policy as we improve the [indiscernible] once the business performance had stabilized.If we just finish on liquidity then. Despite all of the things that happened in the year and with the support of a lot of aid, we finished with a very small net cash inflow of GBP 1.5 million from our operating activities. And after CapEx, we saw a net cash balance at the end of the year of around GBP 37 million. We closed the year with a very strong cash position, which was a great place to be, given all of the challenges we had.In addition to that net cash balance, we have our new revolving credit facility, which means that total liquidity at the end of December was GBP 107 million. That facility is GBP 100 million committed facility, but it does require us to retain minimum liquidity of GBP 13 million, so effectively a net of GBP 70 million.And to put that in some context, if there was another nationwide closure scenario, then we would anticipate the working capital outflow of GBP 35 million, and then a weekly burn of around GBP 4 million assuming the same level of government support is available again. So it gives you some idea about capacity you have them to withstand the prolonged closure period.As a result of putting the new liquidity facilities in place, we were confident to repay the Bank of England CCFF facility at the end of December. And then the other point just to note on balance sheet is that our pension scheme deficit under IAS 19 is now around GBP 12 million. So we will be working with scheme's trustee to make sure that there's a funding scheme in place for us over the medium term.So I'm pleased that we've ended the year with a net cash position and those facilities behind us. So I think that allows us to look beyond the short-term disruption we can see into trading and confidently invest in the opportunities that are clearly there for property growth in the years ahead.That's it for me. I'll hand you back to Roger to conclude.

[Roger Whiteside, CEO & Director]

Thank you, Richard. Having made good progress through the second half of 2020, we've made a better-than-expected start to 2021, given the extent of lockdown restrictions, and the particular challenges in Scotland where our shops are being closed to walk-in customers. We've seen an improving trend each week, with like-for-like sales in shops outside of Scotland, rising to minus 14% in the most recent 2 weeks. Overall, including Scotland, company-managed shop like-for-like sales were down 29% year-on-year for the first 10 weeks of this year. As you would expect, delivery sales have been particularly strong in these conditions at 10% of total company-managed shop sales in the year-to-date.Greggs is well placed to participate in the recovery from the pandemic and has demonstrated its resilience and capability to operate under such challenging conditions. With good liquidity and growing digital capabilities, Greggs is an attractive proposition that can grow further in new locations, new channels and at all times of day. These opportunities will benefit all of our stakeholders in the years to come.