Premier Foods PLC

LSE:PFD

Earnings Call Transcript 2018-Q3

[Operator]

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to today's Premier Foods Q3 Trading Update with Gavin Darby, CEO; and Alastair Murray, CFO. [Operator Instructions] I must advise you that this conference is being recorded today, Tuesday, the 16th of January 2018. I would now like to hand the conference over to your first speaker today, Gavin Darby, CEO. Thank you, and please go ahead, sir.

[Gavin John Darby, CEO & Executive Director]

Hey, good morning. Thank you. Welcome to you all. I'm joined here, as you've just heard, by Alastair. We're talking about a trading statement for the Christmas quarter to 30th of December. [ And the headline ] is that we're pleased with our third quarter trading. We grew by 4%. I think that is probably ahead of people's expectations and compares well with the number of the other industry announcements in the last few days. Our Grocery business was up 4.8%, Sweet Treats up 2.2%, and that leads us year-to-date after 3 quarters plus 2.6%. And clearly, the drivers, International, we've talked about before, is a very important strategy, where Premier grew 26% on a current -- constant currency basis. I'll come back to that later. And secondly, really, a second big driver continuing to be Nissin and Mondelez, with strategic partnerships with both. In quarter 2, we said that they both accounted for about 44% of our growth in that quarter, and for this quarter, the same impact, maybe slightly stronger even. So big impact on our growth from partnerships with those 2 companies. If I step back and I think about what is driving the business, first of all, yes, the Nissin and Mondelez relationships going well. Secondly, I think innovation, innovation agenda particularly within our U.K. business, we talked about innovation, which is very much on trend, and that's our focus. And I would highlight particularly going in the direction of new products in the area of health and wellness being important. I'll come back to that later. And finally, I'll comment really on the consumer and the food industry in particular. It's quite clear that there's a big divergence of trend when it comes to consumer behavior. Our consumer food, as per BRC data, continues to show, is in growth. At a chart, if you remember, at the interims, it demonstrated that the food -- consumer food industry in growth, whereas nonconsumer or nonfood consumer is now in decline. So there's a big divergence there in the food business. And there's evidence in the past, in history that when our consumer is under pressure, then food is, at worst, quite a defensive place to be. Consumers will spend on things that are essential to their lives, and food is part of that. So the food industry is in good shape at this point in time. In terms of market share, we grew market share on most of our major brands [Audio Gap] reflect conscious decisions to sacrifice the market share as we recover our import costs and the like. But all that is entirely in line with the strategy, which [Audio Gap] several times, a balance of growing revenue, reducing costs and, most importantly, generating cash.Another highlight and the reason we did [ interest ] with Premier about mince pies in Christmas, we set another record, 220 million mince pies. That is a lot of mince pies, more than 3 mince pies for every man, woman and child in the U.K. And that drove both our Branded but particularly our Non-branded business. We'll come back to that Sweet Treats over Christmas. Going to Grocery. I guess I'll highlight that strongest performer and the lead performer in Grocery again was Batchelors. This brand, as you know, has been in decline for some years. We've now had 4 consecutive quarters of growth, disproportionately driven by the work with Nissin and Super Noodle, Batchelors Super Noodle pots. We are absolutely on trend in terms of snacking and light meals. Nissin, as you know, produced in Hungary for us, so it's working both at the kind of product and the manufacturing and supply chain level. We've also launched -- and we've now accrued [ positive ] sales for that initiative so far this year. We also launched Soba Noodles, as you know. And that's now over GBP 2 million of sales. Elsewhere in Grocery, Bisto and Oxo, which are also very critical to Premier Foods, as we know, enjoyed good Christmas with both volume and revenue higher. We supported them with big advertising campaigns on TV and media, 9 and 11 weeks’ worth. Bisto is our second-biggest brand and is nudging now being a GBP 100 million revenue brand for the group, so it's in good shape. We, thinking about health and well-being, launched a gluten-free range as well in September, and that is -- that is performing well.I continue to be pleased to report that Angel Delight is on a strong growth trajectory, up another 30% in this quarter. Once again, working on the trend towards snacking, and this is now ready-to-eat product, as you know. And the reason we highlight it is it's a great example, if you bring innovation, which is on trend, to established brands that some people call traditional brands, then you can get a big uptick in sales. So Angel Delight is a beautiful example of that. While one of our smaller brands is a great example of what we're doing across the portfolio.Turning to Sweet Treats. We've touched on 220 million mince pies, but we also saw growth in other areas in terms of seasonal products, Yule Logs, et cetera. So we continue to get good growth in some of our Non-branded portfolio.You have seen, as a result, what within the results -- I should say within the results, that sales in -- of Kipling and Cadbury were lower during this third quarter. I mean, first of all, I would comment that Cadbury cake sales are growing at the group level when you add in International. And of course, we've been, as you know, on a very strong run with Cadbury cake in the U.K. in the last few years. Two reasons really behind this. I mean, one, we chose not to participate in some deep discounting promotional activity in this quarter, activity that we might have participated in a year ago. So we reduced the depth of some of our discounting and frequency of it, which is entirely consistent with our strategy of making sure that our growth is growth that really generates incremental cash. And secondly, in the short term, we encountered, because of the strength of growth in, particularly International, some short-term capacity constraints. So Cadbury cake sales were lower in the U.K. as a consequence.Within the range, we -- with Cadbury range, we did launch into a new -- with a new product under the Cadbury Heroes trademark. This is a range of cupcakes. They are noteworthy because it gives you another example with the new Mondelez contract whereby we can use and extend the use of other Cadbury brands, in this case, the Cadbury Heroes brand. And that will be important going forward. Equally, with Mr. Kipling, again thinking about the health trend, we launched a new range of slices, which have got 30% lower sugaring and typically only 92 calories per slice. So Kipling working as we need to in the area of health and well-being and less sugar as well.Coming back to International. Another great quarter, 26% up on a constant currency. That is 8 of the last 10 quarters for International now growing in double digits. So we're cycling on cycling, and we've clearly got real momentum. We've been investing in International, as you know, for the last 2 or 3 years, and we have a lot of important growth. And I think we can talk about the contribution to growth [ it plays ] if you have any questions in that regard. Closer to home, we've also been successful with Sharwood's and increasing listings in both Europe and in the U.S.A. Now while this is predominantly a trading update, one comment on logistics. As you know, we're in the first phase of our 3 phases of logistics transformation. As we said in November, we did have some implementation challenges in the third quarter. However, we are well on track now to complete the second and third phases of the project during the course of financial year '18/'19. And at the same time, we had some short-term manufacturing variances in the quarter.So before I sum up, it would be appropriate that I refer to the media speculation we saw on the weekend regarding Batchelors. As you will have seen, we made a statement yesterday, a short statement. I'm not going to add anything beyond what is in that statement. However, I would just reiterate, as the statement says, that of course, the board regularly reviews its strategic options. That's what all good professional boards do. And they do it on a regular basis, and they do it on a structured basis, perhaps on an annual -- that's an annual pace as well. And we look at options, as all boards do, that might add value to shareholders or other stakeholders. The second point we made in that context, there is no current situation where discussions have gone beyond an exploratory stage. So by way of summing up, as we look forward to rest of the year, we will -- we believe that we will continue to deliver progress. Exactly what we've been saying since last May, we said that the second quarter would be stronger than the first quarter, and the second half would reflect the momentum. And that's exactly the way it played out in quarter 3. We're delighted therefore about quarter 3. It's the crucial quarter, our Christmas quarter, as we all know. And sales are good, if not a little better perhaps even than we had planned.Turning to net debt. It will be down this year as the market is expecting. And we remain on track for this net debt pay down to step up over the next couple of years as the market expects. So thank you for your attention, and let's turn back to the operator. Rose, if you could throw the meeting open to questions. Thank you very much.

[Operator]

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

[Arthur John Reeves, Equity Analyst]

Can you just touch on how you're doing on price recovery or what the input pricing situation is like at the moment and whether the retailers are open to price recovery?

[Gavin John Darby, CEO & Executive Director]

Well, important question particularly at the beginning of the year. I would say we are absolutely on track with our -- of the plans, as we've communicated, to recover all our input costs. We've done it perhaps slightly differently to some. As some of you have heard me say before, we've done it very much in collaboration with our retailers, which I think [ ultimately ], in the middle to long term, puts your retail relationships in a much better shape. So now we're confident, and as we said before that while they were substantial, we've recovered them in collaboration with our customers.

[Arthur John Reeves, Equity Analyst]

And are you under -- is there much upward cost pressure at the moment, sugar prices are low, dairy prices coming off?

[Gavin John Darby, CEO & Executive Director]

Well, I think it's fair to say that a big proportion or a good proportion of the input costs were linked to what I would describe as the Brexit devaluation, which was a kind of onetime event. And some other proportion was cyclical, as you know. You talk about sugar and dairy, [ and butter ] would be good examples of things that would have happened anyway. You put the 2 together, that meant that was a very big issue. I think there are input costs coming our way. Looking forward, Arthur, they tend to be -- that's still material but not as -- absolutely not as material as we -- as the whole industry was facing, I would say, a year ago.

[Operator]

Your next question comes from the line of Martin Deboo of Jefferies.

[Martin John Deboo, Equity Analyst]

Just wanted to go over the comment on capacity on Cadbury and use it as a springboard for a wider question. Could you just comment on what the capacity constraint is on Cadbury? I'm assuming it's not a floor-plate constraint. Feels like it might be a line-level constraint to me, but would be interested to hear more. And I guess the wider question is, how are you feeling about your available capacity in cakes most obviously but also in Grocery? Is there a need to -- would there be a need for step-change CapEx anywhere to expand capacity? Or are you generally happy you can work your way through it?

[Gavin John Darby, CEO & Executive Director]

Well, let me do the general question, the second one and Alastair perhaps the one on Cadbury. We, Martin, do not see any material capacity constraints in -- by the vast -- [ big 6 ] factories covering the vast majority of our products. There's always a few pinch points at certain times of year on certain SKUs. But -- and so the -- your question is obviously coming back to capital. So in that regard and even with regard to Moreton and Cadbury, which I was just about to come to, we do not see is -- as something that we cannot handle within the envelope -- the capacity envelope or the capital envelope that we have communicated to you. So specifically, Alastair, do you want to talk to Cadbury and Moreton?

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

Yes. I mean, I think, I mean, obviously, there are lots of things that you can try and do with existing equipment. And I suppose you look at the hours that you run, you look at getting operating efficiencies up, would be 2 of the obvious places you go to. We certainly think that there are things that we can do across the Sweet Treats manufacturing network next year. I mean, just more specifically around Moreton where the Cadbury products are made, it will absolutely help drive some additional capacity, particularly in that Cadbury's area without having to make capital investments that, as Gavin said, is outside the envelope of the normal guidance we have given, which is sort of in the low 20s of millions. And I think looking forward, that's also our view. I think overall, if you look at capacity in the Sweet Treats factories, if you stepped back and looked at it at a global level, you would conclude that there was quite a bit of spare capacity. I think the 2 things that you would -- you have to remember is, firstly, this is quite a seasonal business, so of course, you have to be capable of dealing with peaks as well as averages. And secondly, of course, the equipment is relatively specific to particular types of cakes. So you can't make a Mini Roll on a Battenberg line and so on and so forth. So when you really start getting into the detail of all this, you do find yourself very much looking at it on a kind of line-level basis.

[Operator]

And your next question comes from the line of Karine Elias of Barclays.

[Karine Elias, Managing Director]

Hi. Apologies, my question was actually answered. It was on the capacity for Cadbury. Thank you.

[Operator]

Your next question comes from the line of Roland French of Davy.

[Roland French, Food Analyst]

Just a couple of questions from my side. Just firstly, clarification on the guidance for net debt. And just looking at the interim stage, there seems to be kind of dropping of the language around the 3- to 4-year time frame. So just wondering if there's anything nuanced in that messaging. Secondly, just noting there's market share gains 6 out of 8, but just if you could give us a little bit more color on the volume growth in absolute terms across the portfolio.

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

So if I talk about that first question on net debt, so there's no new guidance really built within this. The -- in terms of sort of where consensus is, which I can help you with, I think, our -- sort of the average forecast for the end of the current year is about GBP 512 million, if you take an arithmetic mean. We are comfortable with that consensus. The rate of net debt pay down we think should accelerate as we go into next year. Remember, this year, we have to absorb the cost of the refinancing and the new bond issue that we did at the beginning of the year. [ Those aren't trivial] amounts of money. For what it's worth in these market consensus forecasts and in our own forecasts, but the market has [ us in for ] about GBP 480 million at the end of next year. And I think, as you are aware, we are very focused on this target of moving towards that 3x net debt to EBITDA level. We have to do that through 2 things. We have to -- again, it's pretty simple math, you got to get your trading profit up, your net debt down. And we're going to be pushing in both of those directions.

[Gavin John Darby, CEO & Executive Director]

And specifically, well, in regards to volume, which was your second question, I think if you set aside one brand that we -- which is Ambrosia, where we've been recovering very significant dairy input costs and have chosen to do that in a number of ways, which effectively meant that consumer prices are a lot higher. Then with the rest -- and that's a strategy which I mentioned earlier, to recover all our costs and maximize the cash of the business. That's a smart strategy, accepting that brand, then we definitely get volume growth. And then on top of that, to Arthur's question earlier, we have got some price recovery. So the combination of those 2 gets us to the 4% that we described earlier.

[Operator]

And your next question comes from the line of Faham Baig of Crédit Suisse.

[Mirza Faham Ali Baig, Research Analyst]

Two questions from me, please. Firstly, could I ask around the growth in private label and -- which was very strong in the quarter? And what impact -- and if you can go by division, that would be helpful, does this have on your mix and in terms of your profits? And secondly, on the partnerships. Do you -- is there a pipeline after you start lapping the benefits for -- in the noodles that you're looking to launch within soups and the other categories with Nissin? And secondly, I think there was a comment there on New Zealand and launching Cadbury's there. How have you gone around those? Is it direct? Have you gone direct? Have you gone via distributor? Could you comment on that?

[Gavin John Darby, CEO & Executive Director]

Well, I think the best way is, Alastair, if you do the first one in terms of mix and I'll do the second one on partnership.

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

Yes. I mean, there's a couple of comments in here on Non-branded sales. If we start with Sweet Treats, since then, we had a good season in terms of mince pies, so we sold this record 220 million. A substantial portion of that is actually private label, so that is very helpful for us. We had some other contract wins in seasonal lines, so Yule Logs and stuff like that. And we picked up some private-label business from the discount sector. So that's all pretty positive. In terms of margin, obviously, traditionally, people expect to see a gap between the margin on branded and private label. I think the point that we always make to people is that, that is more true for our Grocery business than it is for our Sweet Treats business, where that mix effect is much less pronounced when you look at Sweet Treats. I think if you come across and have a look at Grocery, you've got a couple of things going on here. You've got some increased sales on existing contracts, where we've done well and we picked up more business, and we've actually picked up some particular new business wins, particularly in [ stuffing, ] which may seem like a rather esoteric [ whole ] of our business, but actually, we've got some worthwhile private-label business there that we picked up during the quarter.

[Gavin John Darby, CEO & Executive Director]

And with regards to your question on partnerships, I'll comment on them separately. Noodles and Nissin, we've really just started with noodles and Nissin in the U.K. We are selling well ahead of expectations. So again, to some degree, we've been capacity constrained, there are many customers that we've yet to launch Super Noodles in a pot into, many customers that we've yet to go into, so there's good growth there. And so that business has got a lot more growth in it in this year even when we begin to cycle the first year of launch. With regard to Cadbury and your question, taking Cadbury cake into new geographies, well, you looked -- I think you referenced New Zealand. And our model is increasingly to invest in putting people on the ground and people that work with our big customers on the countries on the ground and substitute wholesalers. So that's our strategy. We did that first in Ireland, and we've done it in Australia. We're doing it in the U.S. And as we roll around the world and get a foothold for our Cadbury cakes in new geographies, that's the model we will continue to deploy.

[Operator]

[Operator Instructions] There are no further questions from the telephone lines, sir. Please continue.

[Gavin John Darby, CEO & Executive Director]

Excellent. Well, thank you all for your time. I know it's a busy day. Obviously, we feel good about this quarter results and big trading quarter for Premier, as everybody knows. And have a good day. Bye for now.

[Operator]

Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you all for participating. You may now disconnect.