Premier Foods PLC

LSE:PFD

Earnings Call Transcript 2018-Q2

[Operator]

Good morning, ladies and gentlemen, and welcome to today's Premier Foods Quarter 1 Trading Update Call. [Operator Instructions] And I would now like to hand the conference over to your first speaker today, Gavin Darby. Please go ahead.

[Gavin John Darby, CEO & Executive Director]

Hi. Good morning to you all. Thank you for joining this -- our quarter 1 trading update call covering the 13 weeks -- the first 13 weeks of the financial year, and it ran until, of course financially it runs until 30th of March. This ran up until the 30th of June 2018. Obviously joined by Alastair. At the group level, I'm pleased with the progress we've made. Obviously, this is the least important quarter in terms of sales in the year, but we grew 1.7% in the quarter compared to a year ago. Looking at the split between branded and Non-branded sales, both areas displayed progress with brands up 1.1% and Non-branded growing 4.8%. Now the Grocery business was in slight growth, plus 0.2%. But as I'll describe in a bit more detail, Sweet Treats was really the strong performance. It grew revenue 5.5%.Now you may recall that last year, the last fiscal year, 52 weeks, we grew 3.6%. And we finished with a particularly strong fourth quarter of plus 7%. And we mentioned many times that we would not continue at 7% because it was being flatted by a couple of factors in quarter 4, which indeed to some degree would reverse in quarter 1. In particular, quarter 4 last year had benefited from a strong international performance and I'll come back to that. But most importantly, Easter moved often, as we all know, from the quarter 4 to quarter 1. And vice versa, it strengthened our quarter 4. And this quarter was obviously the flip side. So I'll come back to that in a minute. If one takes the first half of the calendar year, why is that sensible? Because that actually averages out particularly in Easter. So if we take the first 6 months of calendar -- the calendar year, then our sales grew a very healthy 4.5%, as I say. I quote that because it averages out the move for Easter. And let's go for some of the detail. Clearly leading the charge in quarter 1 with Mr. Kipling. This is incredibly important. Mr. Kipling is our biggest brand. And some of you have worried that its sales were soft in the first half of last year. Actually it had a good quarter 4, and it continued very strongly with a plus 14%. So Mr. Kipling sales grew plus 14% in the U.K. in this first quarter. Why? We took -- undertook an important brand relaunch in March. We revamped the logo. We updated and modified the packaging to make sure it's modern. And the significant number of individual selling lines, such as Angel Delight and [ Homepride ] et cetera, all were clear and distinct on shelf.And most importantly, we also ran a new TV advertising in both March last year and in April this financial year. On top of that, we've launched some new Mr. Kipling products, Fruit Slices, we've discussed before, come in at an average of just 92 calories per slice. And we launched a range of Unicorn slices, which since their launch in February this year, we have sold more than 10 million -- 10 million Unicorn slices. On the other side of course, with the Easter move, Cadbury sales as expected was lower. And this, indeed, just the Cadbury impact and Easter impact, if you calculated -- effectively took 130 basis points of group sales in this quarter, as I said earlier, were in at quarter 4. Batchelors is our #3 brand, it had another strong quarter. I think this is the sixth consecutive quarter for us, why's that important? It means that, by definition, we're cycling big things we did with Batchelors 5 to 6 quarters ago. So we're cycling our own growth, which is very encouraging when it comes to the sustainability. Super Noodles -- Super Noodles pot products and Pasta ‘n’ Sauce pot alone contributed nearly GBP 3 million of sales in the quarter and grew by a massive 50% versus the prior year. And Nissin brands that we distribute, Soba and Cup Noodle, delivered nearly GBP 0.75 million of sales in the quarter. And given that that's from our year ago, pretty well a standing start, they have now 1.3% market share of the quick meal snacks and soup market.Elsewhere, and those of you who joined us in our Capital Markets Day, our analyst visit a couple of weeks ago, would have heard how we have revitalized Angel Delight, the brand benefited from the launch of, as you know, some of you -- ready to eat pots. These have proved very popular and the momentum has continued. Again, once again, important because [indiscernible] we did a year ago for Angel Delight with sales plus 17%. On the other side, Bisto sales were definitely lower in the quarter as we saw, perhaps not surprisingly, less people buying gravy in the recent hotter weather. Loyd Grossman sauces were lower because of promotional phasing changes compared to the prior year. On the positive side, both Sharwood's and Homepride saw sales increased versus prior year. Now moving to International. The progress continued. Sales were up 4%. You may recall that follows a plus 34% in the last quarter. And we mentioned at the time that, that 34% reflected, to an extent, my higher customer orders, particularly in Australia. Australian customers have ordered and built stock in their pipeline, and that is working through their system. So while quarter 1 sales weren't as strong as that plus 34%, if you averaged these 2 quarters, which gives you a much better reflection of International progress, then for the first calendar half, International grew 20%. Clearly, we're very pleased with International. It's a critical strategy. We've nearly doubled the business in the last 3 years. And while this quarter, and perhaps the early part of next quarter, have been affected by this pipeline headwind, we have great confidence in the plans for the rest of the year. And Non-branded business again delivered a solid performance in the quarter, which is pleasing. As you will recall, about half the Non-branded business actually comes from our 2 B2B companies, Knighton Foods and Charnwood Foods. As you know, these businesses don't compete with our core supermarket business elsewhere. And we did see some contract wins in stuffing and in our food service business. Most importantly, our supply chain, you'll be aware that we're in the midst of a [indiscernible] branch very significant change to our supply chain. We have now completed the second of the 3 phases, which means that all of our Grocery business has moved from previous distribution centers into our new logistics center in Tamworth. And that was completed in this quarter. The final phase, the third phase, which is the Sweet Treats cake phase is due to go live in August. The plan is to get that all done before we ramp up for -- obviously the very busy run into Christmas. So on the financing front, as we previously announced, we were pleased to complete the issuance of the new fixed rate bond of GBP 300 million in the quarter, at a coupon of 6.25%. That's 25 basis points lower than the retired notes. At the same time, we also reduced the quantum end extended the tenor of our [ 10-year ] -- of our revolving credit facility with our [ supported ] bank group until the end of 2022. So in summary, the year's started broadly in line with our expectations. We're particularly pleased with the big momentum, quarter 4, and again accelerating in quarter 1 for Mr. Kipling. And Batchelors, our #3 brand, continues to go well into its sixth quarter. So our expectations for progress in the year are unchanged. As we said in May, this progress, as it was last year, will be weighted to the second half of the year. Thank you for your attention. And now let's go back to the operator. And Alastair and I will be delighted to take your questions. Thank you.

[Operator]

[Operator Instructions] Your first question comes from the line of Arthur Reeves.

[Arthur John Reeves, Equity Analyst]

Good morning, everyone. Thanks for the update. I've actually got 4 questions. Maybe that's taking too many, but let me start with the first couple. What would growth in the quarter have been without Batchelors, please, is my first question. And my second question is, consensus, I think, for sales is for a 2% growth in sales for the full year. Are you happy with that consensus?

[Gavin John Darby, CEO & Executive Director]

If I do the second one, while you can absolutely guarantee that neither of us have the answer to the first question. And you'd be surprised if we did. Yes, I'm happy with the consensus of 2% on sales. Let's come back, Arthur, in a minute. We'll look and see if we can find the numbers to your first question. Why don't you have a crack with numbers 3 and 4?

[Arthur John Reeves, Equity Analyst]

On -- number 3 is about your cost-saving initiatives. You told us that you would save GBP 20 million. Is that still the number you're looking for, from those 2 initiatives? And number 4 is, can you give us any update on the 2 contracts you -- the 2 private label contracts you lost in Sweet Treats, please?

[Gavin John Darby, CEO & Executive Director]

Well on number 2 -- sorry, number 3, cost savings, yes we talked about GBP 10 million, if I recall, of SG&A saving, remember that. So they're in the bank and delivered. And we had a second GBP 10 million, to your recollection -- accurate recollection which comes from the logistics and manufacturing side. And I talked just a minute ago about the fact that we'd done the first 2/3 of our logistics rationalization, so obviously, we're getting the cost benefits in there. But we've got a lot more to do, we've the cake rationalization which falls largely -- the benefit into H2. Important -- another important reason why we're a little bit backloaded in terms of our H1, H2 financial profile. So no, bottom line, it's very confident with the GBP 20 million. The 2 contracts, well, as you well know, having been in industry for a long time, Arthur, you know private label contracts are annual contracts, they come and go. We've said many times that we have a very strict financial criteria. We're not going to take contracts that don't make money. We obviously look at the benefit that we get from overhead recovery, but we also look at more than that. And we win -- we've won a whole stream over the last couple of years. And it would be surprising if every now and again we didn't lose a couple. I think that's as far as I would go. Alastair, anything -- first question?

[Alastair S. N. Murray, CFO & Executive Director]

Yes, I think just to chip in on those private label contracts, it's just worth understanding that in terms of quantum, and you can see, actually, on the -- sort of the back of the RNS, what we sell in -- in quarter, in Non-branded Sweet Treats, which is up GBP 7.5 million-worth of sales. So the -- although this looks like quite a high percentage, it actually equates to 400k of lost turnover. And clearly, of our total turnover that would be much at the lower range of the margin. So in terms of, what does that mean for profit? That's not something that we regard as really very significant. But that's, of course, the numbers. In terms of your first question, it's not something we publish, but I think it would be fair to say that the 1.7%, absent the growth in Batchelors, would probably have been closer to the 1 than the 1.7 that we reported, just to give you a sort of general sense of what that would look like.

[Operator]

Your next question comes from the line of Martin Deboo.

[Martin John Deboo, Equity Analyst]

Martin Deboo at Jefferies. It was just a small one. You've put this commitment in the outlook statement to reduce net debt by GBP 25 million per annum. I'm just intrigued why you've done that. And does that -- I mean, it's pretty much what consensus already has for this year but -- so in that sense it's undramatic. But just what has given you the confidence to sort of pin down to a number on debt reduction?

[Alastair S. N. Murray, CFO & Executive Director]

I'll take that one, Martin. I think the first thing to say is that this isn't -- I don't think this is really new news. We've talked about that target fairly often, very frequently in the context of how we then kind of reverse engineer from that into what we can afford to put into the pension scheme, so it's not new news. And we were -- we just felt it was helpful to refer to it in this RNS statement for anyone that wasn't aware of that, it's just good practice to make sure it was there. But it's not a new target and I would have thought the vast majority of people on the call would be aware that our internal targeting has been based around that GBP 25 million figure.

[Gavin John Darby, CEO & Executive Director]

You described it, Martin, as a small point, but it is still -- it's a very important point. And I agree with Alastair, we've talked about this, we tend to talk about it though multiple times. I'm not sure we've actually ever written it down in that fashion. So we thought this is well understood as [indiscernible] be rather surprised and overshot consensus last year on the net debt front. So we thought it was just in terms of transparency, and clarity, and that's clearly the premise that most people have invested in, in the company. And that's the background. That's the investment thesis, which is a deleveraging strategy. So let's be transparent and be 100% clear in black and white, and in line with things that we've said. So that's why we went that extra -- and it's not far off, consensus is pretty close to that anyway.

[Operator]

Your next question comes from the line of Faham Baig.

[Mirza Faham Ali Baig, Research Analyst]

A couple of questions from me. Clearly Mr. Kipling has seen a very successful brand relaunch in the first quarter, but I also note that there are further exciting innovations across the portfolio in the remainder of the year. Could you help us identify some of those launches, where are we likely to see them, whether it's Batchelors, Bisto or anything else? And secondly on International, growth has clearly slowed, but that actually said at the start of the call is expected given a strong Q4. Are we still safe to target the high single-digit -- I'm sorry, high teens growth rate that we were suggesting at the start of the year? Or could that be slightly impeded, just given the strength of the growth last year?

[Gavin John Darby, CEO & Executive Director]

I'll take them both. Well, as we shared with many people at the Capital Markets Day, we have tripled the rate of our innovation, so there's a lot more to come. And Batchelors would be a big focus, we've launched just recently, in the rolling out, the Super Rice & Sauce. We've got a whole stream of sort of pot products coming from Batchelors. So much more in Batchelors. We'll be seeing Sharwood's go into pots for the first time. We have got a range of Loyd Grossman products, disproportionately focusing on reduced sugar. And Risotto Kits coming in the future, Homepride new products, Bisto new products. OXO launching Premium OXO cube -- I mean I can go through many of the different brands and they all -- the key thing is they all have a strain of new products. That's why we've tended to focus -- to demonstrate that point. On the small ones, like Angel Delight and [indiscernible]. So there's 2 products to come and we will see the rate of our launch of innovation and new products from the proportion of products and sales that come from innovation continue to grow. And I think on the second question, which you asked, International, I think we would expect to see International continue to grow in the mid to high teens, and I think that -- it will vary by quarter. It will always be much the most lumpy business we have because long supply chains, we've got a really interesting business, as you know, in Australia, it takes between 3 and 4 months to get to a store. We've just opened up a business in New Zealand, as you know. We're making good progress our -- in South Africa. And we'll have plans during the year in the U.S., so with the length of the supply chain as we introduce new products, sometimes as we fill shelves for the first time or the pipeline with new SKUs, then certainly the combination of those 2 means it's a bit more lumpy than the rest of our business. But I think we're happy with the mid to high teens.

[Alastair S. N. Murray, CFO & Executive Director]

I think it's fair to say there that the comment about progress weighted towards the second half would be very [ crude ] for the International business.

[Gavin John Darby, CEO & Executive Director]

Yes, for the reasons that I've just described.

[Operator]

Your next question comes from the line of Roland French.

[Roland French, Food Analyst]

I have 2 questions, please. Just firstly in relation to your raw material costs, could you give some color around input cost inflation and recovery in context of both food and nonfoods, just noting kind of PBT on aluminum inflation in the market. That's a first question. And then I guess secondly, I note in the outlook statement there's reference to looking at strategic opportunities to create value for shareholder. And clearly, you've referenced this as a the part of any board's job, but I guess, more specifically, if you could maybe give some color as to how we should think about that scenario playing out in context of an asset realization and a cash proceeds waterfall, is there a legal documented [ roof ] with mentioned trustees or is this very much a negotiation if such scenario happened?

[Gavin John Darby, CEO & Executive Director]

Well I'll do the latter one and Alastair can do the raw materials. I don't think there's any more color to add candidly, well I mean, we've been clear that -- we've been happy to look at things like asset sales, I think we made a reference to that in June last year in an RNS. We made a reference to it again in January in an RNS. And clearly, there's been multiple references to that in the last weeks, as you will have noted. So I think that the board has been crystal clear. I think the phrase that we used is, opportunities in addition to the kind of base plan to accelerate the -- basically the turnaround. So there's really nothing to add. Actually, crystal clear, if there's any doubt, the board is happy to look and will continue to look at any opportunities and consider any incoming opportunities in that regard.

[Roland French, Food Analyst]

Sure and I guess just -- that is consistent with the preamble, but the question specifically was, how to think about if a scenario prevailed, how the cash proceeds, in terms of that waterfall, might play out. Is it documented or is that an asset point of negotiation with...

[Gavin John Darby, CEO & Executive Director]

I think you have to look at it subject by subject and issue by issue. And I think that's something -- there are many factors like those that you've described, that the board would need to take into account, stranded costs, pension funds, all these usual things. A number of you have had a crack at analyzing asset sales in the past. And there are many, many different variables. In fact, they differ with every single idea, so there's no kind of pro forma or model.

[Alastair S. N. Murray, CFO & Executive Director]

So if I pick up on raw material cost inflation. I mean the situation hasn't really changed from when we were talking on this topic in May. So in the previous financial year, '17, '18, we had a reasonable slug of input cost inflation. As we have come into the present financial year, we are continuing to see input costs going up but to a significantly lesser extent. And it's -- the amount that we are [ needing ] to recovery is probably more of the order of 1/3 of what we had to recover in the previous financial year. And of course, I would remind you that the first thing that we tried to do is to see how we can mitigate those, the need to pass that on to customers through other actions and economies that we can put in place. Going to customers is really the last place we want to go in terms of price increases, but it was necessary at the end of the last financial year, it was also necessary at the beginning of this financial year. Those negotiations are all completed in a satisfactory manner, and we are set in terms of where we're headed for this financial year.

[Operator]

[Operator Instructions] Your next question comes from the line of Nicola Mallard.

[Nicola Victoria Mallard, Consumer Analyst]

Gavin, you mentioned a possible sort of second half weighting, I think it was in reference to the savings for your logistics work. Is there anything else we need to consider, I know we're only at the end of Q1, but anything else we need to consider in terms of first half, second half weighting that's worth flagging at this point, whether there's a particular revenue [ SKU ] from the launches that you've mentioned or marketing costs or anything else that it's worth bringing out...

[Gavin John Darby, CEO & Executive Director]

Alastair?

[Alastair S. N. Murray, CFO & Executive Director]

So I think the other one that I kind of touched on earlier, Nicola, was phasing of sales in the International business. I think that's the other one I'd point to. [ Whether it was always the ] imponderable, so I don't really want to -- really want to sort of go there. So I think those would be the main things that you've already picked up on.

[Operator]

[Operator Instructions] No further questions at this time.

[Gavin John Darby, CEO & Executive Director]

Well, thank you very much, operator. Thank you very much, everybody, for dialing in. And those of you who are coming to the AGM, we'll see you later, otherwise have a great day.

[Operator]

Thank you. That does conclude our conference for today. Thank you for participating. You may all disconnect.