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Edited Transcript of GRG.L earnings conference call or presentation 28-Jul-20 8:30am GMT

Half Year 2020 Greggs PLC Earnings Call

newcastle Upon tyne Jul 28, 2020 (Thomson StreetEvents) -- Edited Transcript of Greggs PLC earnings conference call or presentation Tuesday, July 28, 2020 at 8:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Richard John Hutton

Greggs plc - Finance Director & Executive Director

* Roger Whiteside

Greggs plc - CEO & Director

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Presentation

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Roger Whiteside, Greggs plc - CEO & Director [1]

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Good morning, everybody, and thank you for joining us in this new format, something I'm guessing most of you will be familiar with by now. In a moment, I'll be updating on our operational performance and strategic priorities before I then hand over to Richard, who will present our financial results. And then I'll close with a view and outlook before we open up to the live question-and-answer session, which follows.

Beginning then with the main points to highlight in these can only be described as unprecedented half year results for Greggs. Following successive years of unbroken growth mix, Greggs made a great start in 2020, came to the year with real momentum and clear strategic plans. And the strength of our business model enabled us to secure the liquidity needed to support our business through the current crisis and then to adapt our operation to allow reopening in the new environment.

We're already demonstrating our resilient under-crisis conditions, and we're now adjusting our plans to ensure that Greggs remains a strong business with great potential for further growth. With all of the shops closed for most of the second quarter, sales reached GBP 300 million before stopping. And this, combined with additional costs incurred, resulted in a first-ever pretax loss for Greggs of GBP 65 million. Net debt of GBP 26 million reflects cash outflows during the period, which includes GBP 150 million drawn from the Bank of England to support liquidity. I'm going to leave Richard to present more financial details. I will move on now to update on where we -- how we've adapted to trading under these new conditions.

Back in March, seems a lifetime ago now, we updated shareholders, stating that we've begun the year with strong momentum in sales and surplus cash on the balance sheet, following the company's record financial performance in 2019. At that time, the COVID-19 crisis has only just started to impact, and our initial intention was to continue trading as a food provider, but it quickly became apparent that this would not be possible, and in fact, was inconsistent with the stay-at-home message which was being put out there by government in during the flat phase of lockdown.

On the 23rd of March, therefore, we announced that for the safety of our staff and our customers, we would temporary close -- temporarily our entire shop estate. Most of our supply chain operations were also closed at that point, with the 1 exception being Balliol Park savory manufacturing, which has continued to supply awesome foods with our successful bake-at-home offer.

Our immediate priority was, of course, to ensure that the company had access to sufficient liquidity. Greggs had always been prudently run, maintaining a strong balance sheet with no long-term debt other than the lease liabilities and a positive cash balance. So the strength of our balance sheet coming into that period meant that we had sufficient time to arrange additional liquidity, and the Bank of England's corporate COVID scheme proved to be the quickest method of arranging that. At the same time, we took actions to protect our cash position, including the cancellation of the planned final dividend for 2019, furloughing most of our team, canceling annual pay increases for management, taking voluntary director salary reductions and freeing all non-essential expenditure. The receipt of the valuable government support in the form of business rates relief and the coronavirus job retention scheme allowed us to maintain employment of our fellow colleagues at full pay during the lockdown phase.

In reopening our shops, we followed a 3-phase plan, which we timed to try and coincide with when we estimated the government will be reopening general retail, and we got that timing just about right. In early May, we conducted trials in a small number of shops to test new social distancing measures and operational processes. And following the success of that, we planned for a first wave of large-scale openings of around 800 shops, including franchise shops on the 18th of June to takeaway customers with new procedures and equipment. And then finally, on the second of July, we opened the rest of the estate to takeaway customers, meaning that we're practically fully open as we speak, with the exception of a few shops around [lessor].

Safety of operations, of course, have been paramount and all the team members have been trained in revised operating procedures to protect them and our customers. Shops have been -- we've put in place floor marking, signage to help customers maintain social distance, protected screens have been installed and protective workwear, and of course, revised an extensive cleaning regime, all of that including hand sanitizer for our customers has meant that we've been able to gain confidence in the safe operation of our shops, and that, of course, includes encouraging customers to pay contactless.

In anticipation, then, of course, that sales will be lower than normal, we've limited our initial product range to focus on the best sellers only, and that helps us to deliver good availability without excessive waste, but it's also meant that a number of our manufacturing and operational teams have had to remain on furlough in our supply chain. It's that continued use of the coronavirus job retention scheme which is going to be crucial in supporting jobs in our shops, in our supply chain and in our office while we wait for demand to recover.

While we were closed, our marketing teams did a good job, I think, of maintaining brand engagement using social media. And we began operating shop -- opening shops again at scale at the end of June, as I've said. I have to say, the early sales trends are really quite encouraging when you reflect on the fact that so much of the economy is yet to open up, which is reflected in the widely reported lower footfall numbers that we're all aware of. Whilst these are early days, Greggs is already showing that the variety and geographical reach of our shop estate, combined with the broad appeal of the brand, makes us more resilient than many in these extreme conditions. Although we expect sales to remain constrained under social distancing, they have already reached over 70% of last year's levels and are showing a steadily improving trend, which is encouraging.

To provide more insight into the shape of our business, this slide shows how we are not overexposed to the hardest-hit locations during this crisis. The weakest area of demand of those near -- those shops near mass transport hubs. For us, they represent just 2% of the estate, but they are down over 65%, showing that very few people are using public transport yet. The next weakest area are those shops located in office-based work locations and city centers that sales are reliant on public transport access. But these represent just 12% of our estate and they are down 45%. The majority of Greggs shops are located in local towns and suburbs and shops that are accessed primarily by car-borne shoppers. It's that latter group that's benefiting from customers using cars in preference to public transport, and in our estate, are down just 14%. Now of course, we don't report sales for shops run by franchise partners, but all of these are located to serve car-borne customers.

In addition to the variety of shop locations, Greggs also benefits from appealing to a broad base of customers. And this next slide looks at our customers from the perspective of their occupation and how well they're suited to working from home. What it shows is that the vast majority of Greggs' customers are not able to work from home, and so many of those in employment are likely to have been either working or on furlough during this crisis. Many, of course, are not in employment at all, such as students and the retired. And while we all believe that increased flexible home-working office workers is likely to remain with us even over the longer term, Greggs is not dependent on that segment of the market, and in fact, we may well benefit in the longer run from reduced capacity in that specialized sector.

Clearly, we can be encouraged by the resilience of our brand, and we must expect that social distancing will constrain sales. But we aren't able to predict how long social distancing will be required, and so we need to continue under the current constraints and we've shown that we can adapt to that. But looking further ahead, we remain very confident of our potential for growth once that constraint is removed. Now when you look back on the strategy that we've talked about in the past, it really has 3 components. It's based on shop expansion, the rollout of new digital channels and on daypart development. Those are the 3 big growth drivers in the business plan. And all of those drivers remain relevant in a post-COVID world. We've just had to adapt them in light of the social distancing constraints that we're currently facing.

Digital channels in the form of click-and-collect and delivery, which allow customers to order and pay in advance, can help us to serve additional customers in a safe and effective manner during social distancing. So that's what we've done is advance and accelerate our plans there, and we're planning to roll out both click-and-collect and delivery nationwide by this autumn.

Where we reopened shops earlier this month, those -- some shops we chose to open as digital-only in order to get going, but they -- those shops are going to be transitioned as part of this plan to combine walk-in with digital services as we begin that rollout across the country. And we believe we're able to do that and still comply with our social distancing procedures.

We've also continued to make good progress with the development of our Rewards Digital Lab. Again, as I remind you, our plan there is that we're going to combine all of the multichannel access with our loyalty program into one place. So we've kept our teams on in -- our development teams on whilst the lockdown has been underway. They've not been furloughed. They've been working on advancing that so that we can make progress with that early next year.

While customer footfall remains subdued and below normal, we've also adapted our plans when it comes to wanting to trade later into the evening. There's no point in opening shops later as the footfall numbers are subdued. So we've adapted our plans and instead of opening later for walk-in customers, we will now plan to trial food for the evening available through delivery and click-and-collect, and you'd expect to see something later on this year as we experiment in that area.

And then finally, the most important part in our plan is obviously new shops and with -- we've still got a very strong pipeline that we've obviously established before this crisis hit us. And we continue to see the potential for Greggs to grow its estate. But of course, given current conditions, we've temporarily slowed our new shop opening program while we assess what is -- the impact of social distancing will have on each individual shop location.

We've also brought forward a number of planned closures of shops that have become unviable more quickly as a result of current conditions. So in the first half of 2020, we opened 20 new shops, which included 7 franchise units, but we also closed 45 shops, which gives the total estate, as we stand, at 2,025, of which 307 are franchised. However, the year as a whole now, we're expecting to open circa 60 shops and close circa 50, so we'll grow by net 10.

The significant program of investment in our supply chain has proved particularly valuable in recent weeks. Our manufacturing sites have been much better able to flex production to demand. And we intend to complete the transformation of our manufacturing operations this year, but we will slow down the remaining activity designed to increase logistics capacity naturally because that reflects the temporary slowdown of our shop opening plan. In addition to that, we've continued with the investment in our new robotic frozen logistics facility in the northeast, which will significantly improve logistics efficiency and will reduce third-party costs when it comes into operation in the second quarter of next year.

That now concludes this section of the presentation. I'm going to hand over to Richard for updates on our first year -- first half financial results in more detail. Richard?

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Richard John Hutton, Greggs plc - Finance Director & Executive Director [2]

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Thanks, Roger. Well, I'll start with the shape of the P&L, which is obviously not pretty, and Roger has already given you the headlines here. So sales in the first half of GBP 300 million were 45% down on the year before as a result of the closure in the second quarter. And that resulted in a profit before tax loss of GBP 65 million at that level.

So just to break that out a bit more, the next chart gives you the bridge analysis. So the bridge analysis here shows the story of the half, really, starting with the profit we made last year of GBP 37 million. You can see we made a really strong start in quarter 1 with year-on-year profit growth, and that was something we talked about when we met last in March when we showed that we made a very strong start to the year with good like-for-like growth. And then, of course, in quarter 2, we've got the impact of the closure and you can see the significance of that.

If you take the red bar, which is the lost contribution during that closure period, less the support we've had for jobs through the job retention scheme and the relief we've had for rates, the net of that is about GBP 100 million in terms of the net impact. And the way to think about that is that about GBP 10 million of that is one-off costs, such as stock write-offs and sort of screens that we've put up in shops. And the rest of it relates to the cash burn of GBP 4.5 million a week during that quarter, plus the lost contribution that we would normally have had in a normal year, which would have been about GBP 2.5 million a week. So that GBP 7 million a week difference multiplies up across the 13 weeks to give you the majority of that movement.

Other things just to pull out. The impairment charges on there of about GBP 10 million relates to the 45 shops which we chose not to reopen at the end of the closure period, plus a few more who, by their nature, were impaired by the lost contribution during that period. And then a few adjustments in terms of exceptionals gets you to the GBP 65 million loss for the first half.

Thinking forward then, there are obviously a few unusual items here to think about in the second half. We have already claimed GBP 69 million in terms of job support from the job retention scheme. And we would expect something in the range of GBP 20 million to GBP 25 million in the second half. Now that depends on the rate at which sales come back and how much we're able to return people to work, but the GBP 25 million would be the top end of it. It will be a declining sort of figure where we'll be running at about GBP 7 million claim in July, reducing to about GBP 5 million by October on that basis.

Business rates relief will continue until at least March next year. Our annual rate bill for shops is about GBP 25 million, so we would expect the second half to benefit by about GBP 12 million. Rent reductions, we're actively discussing with the shop landlords and reaching agreements, where mutually agreeable, to bring forward rent renegotiations, and so we're making good progress in that area. Protective workwear, and particularly additional cleaning as we raise hygiene standards at this time, we would expect that to result in additional costs of about GBP 5 million in the second half of the year. And as Roger said, we're keeping costs very tight, as you'd expect, essential expenditure only.

Finally, a new cost for us, which is -- is financing and the CCFF finance cost for the second half, likely to be about GBP 0.5 million and that reflects an interest rate of 70 basis points. Those are more normal costs. The pie chart gives you our cost base. Just to highlight a few things. Generally, the cost inflation outlook is improving. We had quite an inflationary outlook earlier in the year. And clearly, the economic impact out there has taken some of that away.

Food and packaging and energy inflation is trending lower through the second half, and we expect to be about 4% in H2, particularly fuel and energy, which is becoming deflationary, and also pork, which we've talked about in the past because it's a major ingredient for us and one that's been sort of double digits in terms of inflation. That is starting to annualize on the biggest increases, and we expect that by the end of the year, that inflation will be back in single-digit territory. And normally, we aim in this area for about 4 to 6 months forward cover to help us plan forward. And we've been pushing our cover out so we're at the top end of that range at the moment.

People costs, you would normally expect to be fixed at the start of the year, but they are also running slightly lower because, as Roger said, we canceled the management pay award and directors are taking voluntary reductions. So we now expect about 3.5% wage and salary inflation, and that broadly relates to the national living wage increases as being the biggest factor.

Then finally in shops. We've already talked about this already but we've got the business rates relief in place until March. We've been succeeding in negotiating lower rents. And we should reiterate that we have paid all our rents so far through this crisis and are now continuing to do so monthly in advance from July onwards.

Moving on then to capital expenditure. We had a certain momentum, obviously, in this program, particularly in the supply chain where we have some major projects still running. So you can see in the first half of 2020, we've actually spent GBP 33 million on capital expenditure. The areas we've slowed down have been in shop fitting and new shop development, although there are a few new shops which we'll be opening in the second half, which reflect either commitments to good locations or strategic developments that we really want to push on with.

But the biggest commitment ongoing in capital expenditure will be in the supply chain, where we have some major projects, including the big frozen cold store project in the northeast, which will earn us great paybacks when they come live and it makes no sense to try and stop them halfway. So we're pushing ahead with those. And you can see that as a result of that and some of the investment we're making in the technology area, we expect to invest about GBP 55 million in total this year on capital expenditure, and the shop numbers that support that are at the bottom of the slide.

To cash and the balance sheet. Well, it's been a big period for cash. As I've already said, we expected the weekly cash outflow during the closure period to be GBP 4.5 million. It was very close to that, GBP 4.4 million after the support that we got on the mitigating actions that we took. On top of that, though, when you're in a position where you're having to settle your working capital for a business like ours, we had to deal with an outflow of about GBP 75 million to settle existing liabilities during that period as well, a situation which will obviously reverse now that we're starting to trade again because we will have a lag between receiving cash from customers and paying it back to suppliers.

So overall, in the first half, there was a net outflow of GBP 118 million before we introduced additional financing, which, of course, we did through the CCFF and that resulted in a cash position at the end of June of GBP 123 million positive cash balance in cash and short-term deposits and effectively a net debt position on the balance sheet of GBP 26 million. So a strong position. We actually accessed, through the CCFF, GBP 150 million back in April. And the rationale for that at the time was to guard against the possibility that we couldn't get trading again this year. Now obviously, we're in a much stronger position than that. But at that time, without that knowledge, that was the prudent thing to do.

So that facility is available for us until March next year, at which point, we could issue more commercial paper under it and we could do that with a maximum duration of 12 months. So effectively, the CCFF, if we manage it right, is available to us until March 2022. But that's not the plan. Our plan is to repay the government money as soon as we can and replace that with commercial arrangements. So we've been having discussions with banking partners, and we'll progress those through the second half, with the aim of putting in place a medium-term revolving credit facility, which will give the business the support to draw on, should it face disruptions of this time or any other in the future.

So where does all that lead us in terms of the dividend? Well, we've said our priority is to repay the CCFF and restore the balance sheet to a position of strength. But we understand that shareholders would love to see dividends. Again, Greggs has a fantastic track record over the years in paying dividends. In fact, the Greggs dividend never failed for 35 years following the IPO in 1984 until today. So we acknowledge that and we'll manage this prudently as ever, but we do have an objective to try and get the dividend going again as soon as is possible.

With that, I'll hand you back to Roger to conclude.

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Roger Whiteside, Greggs plc - CEO & Director [3]

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Right. Just to finish then, we've been encouraged and we're quite encouraged by our ability to operate successfully under social distancing guidelines. In these past 2 weeks, we've seen the average sales across the estate rise to about 70% of the same period last year and climbing in the right direction. So that really is encouraging.

There's obviously variation by location type, which we expected, and we've shown in an earlier slide, know how that is mapped out across the business. And the relative resilience of our brand is really reflected in the fact that we have a broad appeal in customer type and we have a very widely distributed shop estate. Those recent sales have allowed us to bring back approximately 75% of our colleagues out of furlough, and it means that we're trading broadly at around operating cash breakeven. So our expectation is that as sales levels continue to pick up, we'll be able to bring more of our colleagues back from furlough. But in the interim, obviously, we continue to be reliant on the furlough scheme to protect and support those roles.

If you look forward, we expect the business should break even in profit before tax terms when it achieves sales of around 80% of 2019 levels. Obviously, it remains very difficult to predict the outlook and likely performance of the business, and we recognize the possibility of further lockdowns regionally or even nationally. However, Greggs is now well prepared to deal with the challenges of social distancing and to operate through whatever conditions we can imagine being faced with.

We remain a much loved brand. We're convinced that our long-term growth opportunities remain, and the business is better placed than it's ever been to adapt to new conditions and we're confident of being able to do so.