Premier Foods PLC

LSE:PFD

Earnings Call Transcript 2020-Q3

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the Premier Foods Quarter 3 Trading Update Analyst Conference Call. [Operator Instructions] I must advise you that this conference is being recorded today, Friday, 17th of January 2020.And I would now like to hand the conference over to your first speaker today, Mr. Alex Whitehouse. Thank you. Sir, please go ahead.

[Alexander Whitehouse, CEO & Director]

Thank you, and good morning, everybody. Thank you for joining this, which is our quarter 3 trading update call and that covers the 13 weeks to the 28th of December 2019. So I'll give a brief introduction and take you through our Q3 trading before opening up the call to questions. I am, of course, joined on the call this morning by Mr. Duncan Leggett, our recently appointed CFO.So overall in terms of headlines, there are 3 big takeaways for us today. First of all, we've had a really good Christmas and delivered another strong quarter of trading. And as many of you will know, Q3 is our biggest quarter of the year where we generate nearly 1/3 of our annual sales. The second thing is that our expectations for the full year are unchanged. And thirdly, we remain firmly on track to meet our net debt-to-EBITDA target of 3x by our year-end at the end of March. So if we look at some of the key figures then. Our quarter 3 group sales increased by 2.6% compared to last year, and this is pretty consistent with our year-to-date position, which is now plus 2.5%. In the U.K., and as a bit of a reminder, we generate around 94% of our revenues in the U.K., our sales were significantly ahead, up 3.6% in the quarter. And this is, again, a fairly similar shape to our year-to-date picture, which is up 3.3% in the U.K. I think what's important here, though, is that our U.K. business, this is its 10th consecutive quarter of growth, and we'll come back to that in a little while.So clearly, in the U.K., we can see that we materially outperformed the market. We've gained market share both in the Grocery and the Sweet Treats sections of our business. In particular, we saw good share gains in Ambrosia and Mr Kipling. And in fact, actually, 7 of our 8 biggest brands have gained market share in the financial year-to-date. Our branded sales overall were up 2.3% compared to last year. And as we expected, our Non-branded sales returned to growth in the quarter driven by Sweet Treats and were up 3.9%. So as I said, this is our key trading quarter for the year. And we have a number of seasonally focused brands, which collectively grew by over 5% in the quarter. So I'm talking there about Mr Kipling, Ambrosia, Bisto, Paxo and OXO.So this consistent sales growth, and I'm talking about the 10 back-to-back quarters of growth in the U.K., is continuing to be driven by our branded growth model, which as many of you will already know is about leveraging our great market-leading brands. So bringing exciting new products to market, and that's based on our work on understanding in great depth how our consumers' lives are changing, how they're cooking and how they're eating together at home and turning that into new solutions and new product ideas for them and then supporting our major brands with emotionally engaging television advertising.And then the third element of our model remains delivering excellent in-store execution and that's through our strong strategic partnerships that we have with the key U.K. retailers. And given the importance of television advertising in that branded growth model, it's useful to note that we more than doubled our media investment in the U.K. in quarter 3 compared to last year with Bisto, OXO and Mr Kipling all benefiting from advertising during the quarter.So leading the charge in our branded growth in the U.K. was again Mr Kipling. Sales for Mr Kipling, which as you all know is our biggest brand, were up 10% in the quarter, and that's now 8 consecutive quarters of growth from Mr Kipling. Mr Kipling is also a really great example actually of how our branded growth model is working. So if you look, for the quarter, first of all, we had a great range of new products in quarter 3 and I included the new premium signature cake range that I mentioned at the half year results. We then supported Mr Kipling with the little thief TV campaign that we've been using successfully this year and actually since last year, and we adapted that to turn it into a Christmas version and included mince pies in it. And actually, by way of comparison, we didn't advertise Mr Kipling in quarter 3 last year at all. And then we have strong seasonal execution in store with our retail partners with plenty of eye-catching displays.And of course, key to the success of our cake business at Christmas is mince pies, and we sold a fairly staggering 201 million mince pies in 2019, which is 7% more than in 2018 and equivalent to approximately 3 mince pies for everybody in the U.K. Mr Kipling mince pies notably grew by 10%, and that was supported by the launch of our mini mince pies and also are including those mince pies in the TV advertising as I previously mentioned.If I was to pick out some other brand highlights in the quarter, Paxo, our stuffing brand, had a great run into Christmas. Sales were up 11%. Bisto also had a good quarter, and that benefited from advertising, as I said earlier. But also, we saw consumers continuing to trade up into our Bisto Best range, which have a positive sales mix attribute for us. And also, we saw benefits from our new convenient range of single-serve, ready-made gravy pots.Additionally, the Nissin brand of noodles range continued their impressive momentum. So between Soba Noodles and Cup Noodles grew by nearly 70% compared to a year ago, which really demonstrates the great combination of the authentic noodle quality offerings that Nissin produce for us with the strong relationships we have with U.K. retailers and our execution capabilities. So together, Soba Noodles and Cup Noodles are the 2 Nissin brands that are worth nearly GBP 10 million of retail sales value, and that's really starting to become meaningful players in the category in the U.K. and continue to improve our market share every quarter.Moving on to Non-branded sales. Non-branded sales grew by 3.9% in the quarter, which was very much as we expected. You may recall that we experienced a slowdown in Non-branded Sweet Treats sales as we transitioned to our centralized logistics facility last year. So that effect has now worked its way through the system. And so it's pleasing to see that the Non-branded Sweet Treats sales recovered, and actually they grew by 8.8% in quarter 3.So international performance in the quarter, which you'll recall is about 6% of our group sales, was admittedly disappointing. Sales on a constant currency basis were down nearly 17% year-on-year, but I think it's important to note a couple of things there.I think, firstly, I'd say that we continue to see international sales as an interesting opportunity for the group, and I'm going to draw a parallel here with our U.K. business. So if you look at how we've built that consistent growth and consistent performance of our U.K. business over the last few years, we've really focused on the principles of consistency and the ability to deliver sustainable growth. And so what we're going to do is apply that same set of principles to how we build our international business.As I mentioned in the statement this morning, I've put new senior leadership in place in our international business, and our plans are moving to concentrate our efforts on building bigger businesses focused on a select few markets. And we've already got a pretty good business in Ireland, which we will continue to build, and we've also built a nice business in Australia, particularly in cake, which we will look to expand further. And as I mentioned at the half year, we've also got a small business in the U.S. where we're looking at how we can replicate some of the success of our cake business in Australia. So that remains in progress, and we'll see how that goes. So as we transition to this revised strategy, I think further progress probably isn't expected until 2021.If we look further ahead into quarter 4, we've got more consumer marketing to come and also a number of new product launches. So this is all really focused on keeping that branded growth model working. In Sweet Treats, for example, we're launching the range of Mr Kipling mini cakes, so small Cherry Bakewells and small Fruit Pies, and that obviously follows on from the mini mince pies that we have [ for ] Christmas.As we look forward to Easter, we've just brought to market Cadbury Crème Egg choc cakes, and that really builds on the popularity of Cadbury Crème Eggs that are around at Easter. But I think more interestingly, it actually points to how we're starting to use the sub-brands, the Cadbury sub-brands, to expand our Cadbury range in the U.K. So this is obviously using Crème Eggs, but we've also recently launched caramel -- Cadbury Caramel-branded products as well. So that's sort of part of our Cadbury expansion strategy.Of course, we'll also see the expansion of our new plant-based brand, Plantastic. Obviously, it's a very strong leading trend in the U.K. with plant-based eating becoming more popular. And we've said before that Plantastic is ultimately going to expand to be a multi-category brand. As we go into Q4, we've actually just launched the new product range of grain pots, so very much the next step in the expansion of that brand. This is a single-serve pot, and it's great for breakfast or as an on-the-go snack or even a dessert. And of course, they only contain plant-based ingredients, and they're already starting to appear in chiller cabinets in retailers right now.Moving on to cost savings. In November, you may recall, I introduced a new cost-savings program. This is planned to deliver around GBP 5 million of cost savings over the next 2 years. And I'm pleased to say we're already making really good progress on that. It's completely on track. And the primary use of these savings will be to reinvest them back into our major brands just time to further fuel into our branded growth model, and we'll update further on that in due course.We also provided a brief update today on our Knighton Foods business. Some of you may remember that we bought back Knighton 100% into the group just over 3 years ago. And since then, we've operated Knighton as a stand-alone subsidiary. And so we've now made the decision to fully reintegrate Knighton back into the U.K. core business. And by doing so, we expect to really simplify how the business operates and also generate some commercial opportunities and some operational synergies. It will also be easier for our retail partners as well as we'll have more entity to deal with rather than 2. And I think this is a good example and illustrates how the new senior team are looking at things with a fresh pair of eyes and acting with pace and energy.And then lastly, on our strategic review, I'd really like to be able to provide an update on this for you today, but we're not quite there yet, so you'll just have to bear with us a little longer on that one. So as we look to the full year, profit expectations remain unchanged. And I think importantly, we're also well on target to achieve our net debt-to-EBITDA ratio of below 3x by the time we get to the end of March.So in summary, I'd say we're making really good progress. Our U.K. business continues to go very well. Our branded growth engine is firing on all cylinders, and we're consistently outperforming the market. Our biggest brand, Mr Kipling, has grown double digit in the quarter, and our expectations for the full year remain unchanged.So thank you very much for your time. I'll now pass back to the operator, and we'll be happy to take any questions.

[Operator]

[Operator Instructions] And the first question comes from the line of Martin Deboo.

[Martin John Deboo, Equity Analyst]

Martin Deboo, Jefferies. I've got 3 brief questions: international, commodities and volume. Alex, international, you sort of were clear on the sort of way forward there. But can I just make sure I understand what drove the decline in Q3? And just remind me, because I can't remember, was the decline in Q3 worse than Q2 and H1? I just can't remember. The key question is what was the driver of the decline?Secondly, on commodities, I suspect they're not much of an issue for FY '20. [ As we go ] into FY '21, we're seeing [ bullish noises ] some idea on sugar prices. There's a lot of dairy inflation, which I think you're not very exposed to, but cocoa is going up as well. Just how are you feeling about the commodity environment? And thirdly, you're not going to tell me the price volumes versus Q3. But maybe a question I could ask, did you see any volume growth for Q3?

[Alexander Whitehouse, CEO & Director]

Okay. Thanks, Martin. So we'll take those one at a time. I think on international, the biggest driver of decline actually in the quarter was Australian cake. This, again, was a movement in shipments and stock and didn't reflect what we see coming out of [ EPOS and Nielsen ] in Australia. So we continue to see growth and progress from an [ EPOS ] point of view, but what we did see is a reduction in orders and stock. And I think -- I mean, you'll know in Australia, there are only 2 key customers really, and it's a very concentrated market. So if one of those customers decides to try and operate the business off a lot of stock levels, then we feel it quite quickly. So I think that's probably a temporary effect given that we haven't seen any deterioration in [ EPOS ] sales.Your second question was on commodities. We're taking everything on balance. We see a relatively benign environment looking forward. It's not anything that we're particularly concerned about. And as you also know, we work quite hard to offset as much of the commodity inflation as we possibly can before we take the step of passing that on to our retail partners.Overall, in terms of volume, obviously really good volume growth for Mr Kipling, obviously, and that's really sitting behind that growth. But a lot of the growth overall on aggregate is driven by price mix, especially in Bisto because remember, I mentioned that we saw a lot of trade up in Bisto from the base Bisto into the premium-tiered Bisto Best.

[Operator]

[Operator Instructions] And a follow-up question from Martin Deboo.

[Martin John Deboo, Equity Analyst]

Yes, me again, gentlemen. Given that we've got a bit of time, can I push you a bit harder on international, Alex? I mean let me be blunt. Is this business worth the distraction? I mean as I understand it, it's a high gross margin business, but you're probably not breaking even on the operating line on the business. So it's, at the moment, a sort of drag on trading profit, or I would presume so. You're painting an optimistic picture, but the fact remains the headline numbers aren't good at the moment. Is it -- given, I would imagine, it would cost quite a lot of your time [ in overseeing it ], I mean, is it worth it for the long term, would be the blunt question?

[Alexander Whitehouse, CEO & Director]

Well, look, I think from my perspective, Martin, this is a question of potential. So we -- what we've seen, I think, is that we have some unique traction with our cake business when we take it overseas. And the one big proof point that we've got, I think Australia is a really great example of that. The test in America is certainly interesting, and I think there's definitely some potential there. It seems as though we've got a unique capability in producing high-quality, medium shelf life, good value for many case. And when we enter a new market, it seems to gain traction really quickly.So I definitely think there's an opportunity there. Definitely. That's not really a question for me. The interesting thing is how one goes about unlocking it. And what I want to bring to this is a more focused and concentrated approach and to deploy our resources in a more concentrated manner. And again, just going back to those principles of how we built the consistent performance in the U.K. is making sure we're taking decisions and actions that build for the medium to long term. So yes, definitely worth it. By the way, actually, the international business does make a profit.

[Martin John Deboo, Equity Analyst]

On the trading line, Alex, or just...

[Alexander Whitehouse, CEO & Director]

Yes, on the trading line, and obviously -- and of course, it's pushing volume through the U.K. factories, which helps in the overall [indiscernible].

[Martin John Deboo, Equity Analyst]

Yes. Okay. I stand corrected on that. I didn't think that was the case. Okay. All right.

[Operator]

[Operator Instructions]

[Alexander Whitehouse, CEO & Director]

Okay. Well, thank you. If there's no more questions, I think we'll call it a day there. Thank you, everybody, for dialing in, and thank you for your time and have a great day.

[Operator]

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