Premier Foods plc

Ladies and gentlemen, thank you for standing by and welcome to the Premier Foods Quarter 3 Trading Update and List Conference Call. At this time, all participants are in the listen-only mode. After the speaker presentation, there will be a question-and-answer session. And to ask a question during this session, you will need to press star and warning or telephone and wait for your name to be announced. 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 our first speaker today, Mr. Alex Whitehouse. Thank you, sir. Please go ahead.

Thank you. Good morning, everybody. Thank you for joining this, which is our quarter three training update call, and that covers the 13 weeks. to the 20th of December 2019. So I'll give a brief introduction and take you through our Q3 trading before opening up the call for 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 three 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, cheaper is our biggest quarter of the year where we generate nearly a third of our annual sales. The second thing is our expectations for the full year are unchanged, and thirdly, we remain firmly on track to meet our net debt EBITDA target of three times by our year end at the end of March. So if we look at some of the key figures then, our quarter three 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 UK, and as a bit of a reminder, we generate around 94% of our revenues in the UK. Our sales are 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 UK. I think what's important here, though, is that our UK business is at its 10th consecutive quarter of growth, and we'll come back to that in a little while. So clearly in the UK, we can see that we've materially outperformed the market. We've gained market share both in the grocery and the sweet treat sections of our business. In particular, we saw good share gains in Ambrosia and Mr. Kipling, and in fact, actually, seven of our eight 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, Fisto, Paxo, and Oxo. So this consistent sales growth, and I'm talking now about the 10 back-to-back quarters of growth in the UK, is continuing to be driven by our branded growth model, which 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 that model remains delivering excellent internal execution, and that's through our strong strategic partnerships that we have with the key UK 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 UK in quarter three 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 UK was again Mr Kipling. sales from Mr. Kipling, which, as you'll know, is our biggest brand. We're up 10% in the quarter, and that's now eight consecutive quarters of growth from Mr. Kipling. And Mr. Kipling is also a really great example, actually, of how our branded growth model is working. So if you look at the quarter, first of all, we had a great range of new products in quarter three, 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 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 three last year at all. And then we had strong season 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 three mince pies for everybody in the UK. Mr. Kipling mince pies notably grew by 10% and that was supported by the launch of our mini mince pies and also by including the 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 Nissen Brandl noodles range continues their impressive momentum. So between them, 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 that our friends at Nissen produce for us with the strong relationships we have with UK retailers and our execution capabilities. So together, Sober Noodles and Cock Noodles are the two missing brands. They're worth nearly £10 million of retail sales value and they're really starting to become meaningful players in the category in the UK and continue to improve their 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 treat sales as we transitioned to our centralised 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 treat sales recovered, and actually they grew by 8.8% in quarter three. So international performance in the quarter, which you'll recall is about 6% of our group sales, is 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 here. 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 UK business. So if you look at how we've built that consistent growth and consistent performance of our UK 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. 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 heart here, we've also got a small business in the US 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 four, 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 brand of growth model working. In Sweet Sweets, 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 had over Christmas. As we look forward to Easter, we've just brought to market Cadbury cream egg chop cakes, and that really builds on the popularity of the Cadbury cream 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 UK. So this is obviously using cream 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. But Quartzful also sees the expansion of our new plant-based brand, Plantastic. Obviously there's a very strong vegan trend in the UK and plant-based eating becoming more popular. And we've said before that Plantastic is ultimately going to extend to be a multi-category brand. And as we go into Q4, we've actually just launched the new product range of Brain Pots. So it's 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 cellar cabinets in new cellars right now. Moving on to cost savings in November, you may recall I introduced the new cost savings program. This is planned to deliver around £5 million of cost savings over the next two 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 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 fruit business. Some of you may remember that we brought back Knighton 100% into the group just over three years ago. And since then, we've operated Knighton as a standalone subsidiary. So we've now made the decision to fully reintegrate Knighton back into the UK 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 to have one entity to deal with rather than two. 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 if you look to the full year, profit expectations remain unchanged. And I think importantly, we're also well on target to achieve our net debt EBITDA ratio. We're below three times by the time we get to the end of March. So in summary, I'd say we're making really good progress. Our UK 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. Kittlinger's brand, doubles in the quarter, and our expectations for the full year remain unchanged. So thank you very much for your time. I'll now pass it back to the operator, and we'll be happy to take any questions.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. As a reminder, if you wish to ask a question, you can press star and one in your telephone and wait for your name to be announced. And if you wish to cancel your request, you can press the hash key. Again, it's star and one if you wish to ask a question, please. And first question comes from the line of Martin Devoe. Thank you. Your line is now open. Please ask your question.

Gentlemen, good morning. I'm in a noisy environment, so I apologise if there's noise in the background. I can't do anything about it, I'm afraid. I've got three 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 Key3? And just remind me, because I can't remember, was the declining Q3 worse than Q2 and H1? I just can't remember. But the key question is, what was the driver of the decline? Secondly, on commodities, I suspect they're not much of an issue for FY20. If you go into FY21, we're seeing bullish noises from ADF on sugar prices. There's a lot of dairy inflation, which I think they'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 volume split at Q3, but maybe a question I could ask you, did you see any volume growth at Q3?

Okay, thanks, Martin. We'll take those one at a time. I think on international, the biggest drive of decline, actually, in the quarter was a three-year intake. This, again, was a movement in shipment and stock and didn't reflect what we see coming out of EPOS and Milton 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 two key customers, really. And it's a very concentrated market. So if one of those customers decides to try and operate the business off the level of stock level, then we feel it quite quickly. So I think that's probably a temporary effect, given that we haven't seen any deterioration in e-commerce sales. The second question was on commodities. 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 tapping that onto our retail targets. Overall in terms of volume Obviously, really good volume growth in Mr. Tickling, obviously, and that's really sitting behind that growth. But a lot of the growth overall on aggregate is driven by price mix, especially on Bisto, because you remember I mentioned that we saw a lot of trade-off in Bisto from the base Bisto into the premium tiered Bisto back.

Okay, thank you for that. Very useful. Thank you.

Thank you. Again, ladies and gentlemen, if you wish to ask a question, you can press star and one in your telephone. Thank you. Again, ladies and gentlemen, if you wish to ask a question, you can press star and one. Thank you. And that's follow-up questions from Mark and Ivo. Your line is now open.

Yeah, me again, gentlemen, and again, sorry for any background noise. 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 a distraction? I mean, as I understand it, you know, it's a high growth 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 know, you're painting an optimistic picture, but the fact remains the headline numbers aren't. Is it worth it for the long term, would be the blunt question?

Well, look, I think from my perspective, Martin, it's a question of potential. So what we've seen, I think, is that we have some unique traction with our cake business when we take it overseas. And that's the one big fruit 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 money to take. And when we enter the new markets, 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 build the consistent performance in the UK, just making sure we're taking decisions and actions that build for the medium to long term. So yes, definitely worth it. And by the way, actually, the international business does make the profit.

On the trading line, Alex?

Yes, yes, yes, on the trading line, and then obviously, you know, and of course it's pushing volume through the UK factories, which, you know, helps them over all factories.

Okay, thank you very much. I didn't think that was the case. Okay. All right, thank you for that.

All right, thank you. And again, ladies and gentlemen, if you wish to ask a question, please press bar and 1. Thank you.

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.

Thank you, and that is to conclude our conference for today. Thank you for participating. We all disconnect.