Premier Foods plc

Ladies and gentlemen, thank you for standing by, and welcome to Premier Foods' Quarter One Trading Update Call. At this time, all participants are in the listen-only mode. There will be a presentation followed by a question-and-answer session, at which time, if you wish to ask a question, you will need to press star and 1 on your telephone. I'm satisfied that this conference is being recorded today, 17th of July, 2019. I'll now hand the conference over to our first speaker for today, Mr. Alastair Murray. Thank you. Please go ahead, sir.

So, good morning, everybody. Alastair Murray speaking. As I think you probably all know, I'm Acting CEO here at Premier and also CFO. So, thank you for joining this update call for the first quarter, which is the first 13 weeks of this financial year. So, I'll give a quick introduction before I move on to questions. My colleague Richard Gordon is with me, who many of you know. So, in terms of headlines, I'm pleased to say we've had an encouraging start to the year. We've increased our group sales by 1.1%. When you actually look at the detail in here, you'll see that branded sales actually grew ahead of this, up by 2.9%. And I'm particularly pleased that in the UK, which is by a long way our most important geography, Our branded sales were actually up by 4.9%, so that's very encouraging. If you look at the business as a whole, there wasn't much to choose between the two reported segments. Grocery was up by 1.3% in the quarter. Street truth was a little bit less at 0.6%. We'll dive into both of those in a moment. If you look across the last couple of years, we've actually now reported branded revenue growth in seven of the last eight quarters, and the other quarter was flat. And that averages over the period at about 2.5% revenue growth. And I think that really demonstrates that our strategy is working, and we're seeing very consistent progress driven by investment in the brand and in innovation and in marketing. Another statistic that may be of interest is what happens if you look at the first half of the calendar year. So taking the fourth quarter from the previous financial year and then this first quarter, over that period our group sales have grown by 2.2% and group branded sales by 3.6%. I think that's interesting because that statistic obviously removes the effect of Easter timing and again highlights a very good performance and progress. We're also encouraged by how we are delivering in terms of market share. Not only have we delivered share gains in both the grocery and street food businesses as a whole, but actually seven of our eight top brands have all gained share in the quarter, with Ambrosia, Bisto, Sharwood and Cadbury Cake being particular highlights here. Non-branded revenues were down by 8% in the quarter, which was mainly street treats. I'm going to come back to that number in a moment. So if we just now spend a couple of minutes on some of the brand and category performances from the first quarter. Yes, again, our largest brand, Mr. Kipling, was a star performer with sales growth of 10% at group level. So very, very pleasing to see that in terms of Kipling performance. In the UK, we were back on air with TV advertising and that built on the success of the brand relaunch last year. Within Mr Kipling, we had good Easter ranges with elderflower and lemonade slices and triple chocolate slices, which sold well. And internationally, we also saw good progress in Australia with the latest new product range that we have been marketing down there. Also within our sweet treats, The Cadbury cake sales were well ahead of last year in the UK. Obviously, that benefited from the later timing of Easter this year. But we not only had that timing benefit, but also better range and execution in store with customers. For example, this year we had Cadbury cream egg cupcakes for Easter. That was the first time we've had that product in the market, and that was well received both by customers and by consumers. We also saw a much better shape of things in cooking sources in the third quarter of the year. As you know, this is a perennially competitive category. But in the UK, Sharwood and Lloyds Grosvenor Sources both gained market share in the quarter and saw sales increases in double-digit terms as a result of better promotional execution and some improved levels of distribution in a couple of major customers. and also the expansion of curry paste products. So overall, we're very happy with the progress that's being made here. In quick meal and quick meals, snacks and soups category ranges from mission, so soba noodles and cup noodles are going at a very impressive rate. These products doubled their sales in volumes compared to the same period a year ago and now worth £5 million in sales for the group as a whole. This is an incredible trajectory for brands which had negligible distribution just two years ago. Bachelor sales and sales were slightly down in the UK. That followed two years of very good growth and in particular, we were anniversarying some strong promotional activity in a market that continues to be very competitive. Now, this time last year, as both of you based in the UK will recall, we've been experiencing some very hot and consistent summer weather here. And as you will all know, there are a couple of categories whose growth profile is impacted by that. So in looking on year-on-year performance, you obviously have to remember the fact that it was particularly hot. warm last year and therefore we get a weather benefit as we've moved into a more average summer. The flavourings and seasons category which is where Bisto, Oxo and Paxosid saw growth of 11% in the first quarter and were actually 18% up in June as they saw as we anniversary of that very hot weather 12 months ago. So you won't be surprised to know that Bisto and Paxo in particular saw really good Q1 on Q1 sales in the quarter. And if we look at Ambrosia, which sits in the ambient desert category, both the brand and the category also benefited from relatively cooler weather this year. The custard market grew in Q1 and in June this year, coincidentally actually by the same magnitude as the slaving seasons category. 11% and 18% respectively. It just happens to be the same numbers for those two different categories. If we move on to international, overall sales were down by 18% compared to the prior year. This was expected and I think we talked about this quite a bit when we gave our prelim results in May. We'd expected it to be low in the first quarter and that proved to be the case. A couple of factors that we would call out there. Firstly, some unwind of Brexit build-up stocks in customers in Ireland. Obviously, customers in the Republic had been particularly concerned about the possible impact of a hard Brexit or a no-deal Brexit at the end of March, so they'd all built up stock onshore for them. We saw some unwind effect of that. We pretty much got through that, but it certainly affected the first quarter. We also saw what we expected in the last quarter, sighting the effect of the price changes that we put through to UK wholesalers. And again, we talked about that previously, and we mentioned there was still a bit more of that cycling in Q1. If we look a bit more widely, it's worth pointing out that Mr Kipling in Australia is continuing to perform strongly with a good pickup in market share in the quarter. So Kipling is mirroring in Australia the very encouraging trends that we're seeing in the UK. And some of the innovation and new products in Australia include velvety chocolate whole slices and Halloween buy-in. Obviously, it takes a while to get down there for vampire fancies and mummy slices. Looking forward we do expect confidently that international trajectory will be a return to growth as we go through the remainder of the year. Now I mentioned a bit earlier Non-branded sweet treats in Q1, again as expected and as clearly signalled in May. We expected to see declines. The figure in fact was 37%. There's a couple of factors in here. The first of these is some issues which arose from the challenges we had in logistics in the autumn running out to the Christmas peak trading system. where we had a number of customers who had a dual supply model switch to other providers and haven't yet switched back. Obviously, we're still working on that. And then secondly, we consciously chose, probably around this time last year, to step away from lower margin contracts where it was not economically beneficial for us to continue supplying. And obviously, we're still fighting that. As we go through the year and especially into the second half, we will start to cycle that and we'll see those trends improving and flattening out. I think it's worth remembering, although that's quite a big negative number, that the non-branded sweet treats business represents just 9% of sweet treat sales. It's only 2.7% of group sales. So it's not something that we should get ourselves overly concerned about. If we look on the grocery side of non-branded, we were up. We were 2.2% up. The good news in there was contract gains in stuffing and cooking sources, which we've talked about before. We're still getting the benefits of that. Although Knight and Foods had a somewhat tougher first quarter, although we do expect to see Knight make good commercial and operational progress during the year as a whole. There's a tougher first quarter. Looking forward, We've got some promising new products coming to market in line with our investment in innovation strategy. Just thought I'd pick a few examples out that might interest people. Bisco Gravy Pot, which are perfect for time-strapped consumers. It's a minute in the microwave and there's your Bisco with all the great taste and stuff that people expect to see. We've just launched into market Cadbury Dairy Milk Slices. We've got three flavor variants, Cadbury Dairy Milk, the caramel slices and the raspberry cake slices and the initial rate of sale is very encouraging, early days but so far we're feeling good about those products. We have a Mr Kipling signature range, for instance we've got products like after dinner mint fancies and chocolate caramel and pecan slices and for those of you who follow us you'll know that we have a new plant-based range with the cakes due in store with a major retailer from October, that's the fantastic range that we announced when we did prelims in May. We will be continuing to substantially increase consumer marketing investment this year. Both Mr Kipling and Bachelors have been on air so far this quarter and during the remaining of the year we will also see Bisto, Oxxo and Ambrosia with TV advertising. If that's not too much excitement, I'll just very quickly touch on the topic of IFRS 16, which is the lease accounting. I'm not going to sort of plough through this in detail, but just to remind those of you who are looking to update models that post these changes, and we did highlight this in May, so this is not new news, but it's probably just worth reminding those of you building models. that the base numbers, had we been on IFRS 16 in May, net debt and EBITDA would have been approximately 20 million and 3 million higher respectively. So when we report our intrims in November, just bear in mind that that is the impact of IFRS 16. So we've mentioned a couple of other items in our statement this morning. You will have seen that Keith Hamill Our chairman is retiring from the board at the end of today's AGM. I would like to thank Keith for his leadership of the board over the last couple of years, and of course we all wish him very well for the future. What's happening now is that our senior independent director, Richard Hodgson, is leading the search for a new chairman, and this is well underway. He's also leading the search for another independent non-executive director and a permanent CEO, and we'll provide an appointment on these when we have some more news to share with you. And then lastly, before I summarise, you know that we announced a fresh strategic review back in the spring. This work remains ongoing. We don't have anything particularly new further that we are able to share with you today, but as soon as we do, then we'll make the appropriate announcement. So, summing up, the year started on a very encouraging note for us, as we expected it to. We are pleased with the continually good trajectory of many of our brands. The business, I think, is being well run. And I've got a great bunch of colleagues supporting me on the executive leadership team. And our expectations for progress in the full year are unchanged. And as we said in May, this progress will be weighted towards the second half of the year. So no change there. So thank you for that. I hope those two comments were useful, and I will now pass back to the operator, and we'll be happy to take your questions.

Thank you. We will now begin the question and answer session. If you wish to ask a question, please press star and 1 on your telephone and wait for your name to be announced. Once again, if you have any questions, please press star and 1. Our first question comes from the line of Martin Debu from Jefferies. Now, your line is now open. You can now ask your question.

Morning, Alison and Richard. It's Martin here at Jefferies. Two questions for me. Alison, I just want to sort of try and understand a bit more the moving parts of branded grocery, just to sort of give you the background for my question. I mean, I think these Performance in Q1, as you say, is good. But I think, you know, it would be nice to sort of see branded groceries sort of trending at more like, you know, if you ask me to give a number, something like a 2% rate. And I sort of want to understand what the difference was in Q1. Just to make sure I've understood it, international is all within branded grocery, isn't it? So the 18% down in international with a headwind on branded grocery sales. The other part of it looks to be bachelors. Would that be the other main headwind in the quarter? That's the first question. Do you want to say that one first, Alison? I'll come to the second one in a minute.

Yeah, sure. I mean, I think in bachelors, there were a couple of things. If you look at bachelors as a whole, we were cycling a very heavy sell into Australia of what we call super, which is effectively cover soup. We trade that particular product under a different name in Australia. So we were cycling that. We also had some promotional changes and then Last year we had particularly high sales of bachelors into ASDA because we won their sort of internal dragon's den and we had particularly strong sales. And then I think the other thing that I'd probably highlight is that there's quite a lot of competitive activity going on from competitors in the category. So you're right, that meant that bachelors had a somewhat tougher first quarter. Now convert within the categories we mentioned earlier. the Nissin products are selling really strongly, so the Soba and the Cup Noodle products.

Okay, thanks for that. Second question is just any comment on the input cost environment? It's not a really loaded question, Alistair, but just what are you seeing out there? What's down? What's the overall basket doing?

Yeah, I mean, I think no major changes from where we were before. So we've had some input cost inflation, but what is coming through is pretty much what we were expecting at the start of the year. Obviously, we're seeing, you know, sterling is a bit weak, but as you know, we tend to take quite long forward cover on forex. So we will be largely covered here in terms of the FX exposure. So there's no really new news on that.

Okay. Thank you. Thanks.

Thank you. Once again, if you wish to ask a question, please press start in one. and wait for a name to be announced. Once again, for any questions, please press star and 1. I don't think we have further questions at this time, sir. You can proceed.

Okay, so thank you for your actual questions, or your question. Hopefully that reflects the fact that we tried to answer most potential questions in the information we put out and what we said earlier. Thank you very much for your time, and I wish a very good day to all of you. Thank you very much.

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