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Edited Transcript of PFD.L earnings conference call or presentation 12-Nov-19 1:30pm GMT

Half Year 2020 Premier Foods PLC Earnings Call

Hertfordshire Dec 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Premier Foods PLC earnings conference call or presentation Tuesday, November 12, 2019 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alexander Whitehouse

Premier Foods plc - CEO & Director

* Duncan Leggett

Premier Foods plc - Group Director of Financial Control and Corporate Development & Acting CFO

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Conference Call Participants

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* Karine Elias

Barclays Bank PLC, Research Division - MD

* Ronan Bernard Clarke

Deutsche Bank AG, Research Division - Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the Premier Foods Half Year Results Call.

(Operator Instructions) I must advise you that this conference is being recorded today, on Tuesday, the 12th of November 2019.

I would now like to turn the conference over to your speaker today, Alex Whitehouse. Please go ahead.

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Alexander Whitehouse, Premier Foods plc - CEO & Director [2]

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Good afternoon, everybody. And so I'm here with Duncan Leggett, our Acting CFO; and Richard Godden. And I'm going to start from the deck that we used in the equity presentation this morning. And just a handful of selected slides. If you've got that, then you can follow along. And I'm going to kick off with the headline numbers.

So we're really pleased with the start we've had for the year and turnover growth of 2.4% for the half and 3.6% in Q2. And that was driven by some really healthy branded growth. So our brand portfolio growing by 4.3% over the half and 5.6% in quarter 2.

Trading profit was rather better than we expected actually at GBP 51 million, and that's after having increased our media investment or advertising investment behind the brands in the first half of the year compared to a year ago. And then with some reduced interest payments, that left profit before tax up 5% at GBP 32 million. And importantly, we now see an accelerating rate of debt reduction, with strong cash flow leading to a GBP 39 million reduction in net debt year-on-year. So a stronger-than-expected first half performance and which gives us increasing confidence in our full year outlook.

And I'll talk a little bit about our operational strategy. So essentially our operational strategy is unchanged, but with a new senior team and some fresh eyes, we're attacking this with a renewed level of vigor and energy. And the key underpinning thing strategically for us is actually sustainable and profitable revenue growth. We are fortunate enough to have a really strong portfolio of market-leading brands, many of which I'm sure you're aware of and have on your cupboards at home. And what's really worked well for us here is actually investing behind those brands in terms of innovation, so new products and sustained advertising and marketing support. And you couple that with the fact that we've fostered strong, collaborative relationships with our key retail partners, which means we get great execution in store. All that adds up to this concept of sustainable growth.

And if we look at our U.K. business, where we've been deploying this strategy over a few years now. We've just delivered our ninth consecutive quarter of growth in the U.K. And then obviously, on top of that, we have our International business which offers the opportunity for -- on top of growth. And it was good to see our International business returned to growth in quarter 2, delivering 6% growth.

Another key pillar of the strategy is cost control and efficiency. We run a pretty tight ship. We have a lean SG&A cost base. And then we invest carefully in capital investment in the factories in order to either facilitate new products being manufactured or to take costs out of our manufacturing operation. And then the third pillar is cash generation. So we're highly cash generative, and we have tight focus on our CapEx and disciplined working capital management. And now I think we're starting to get ourselves into a position where it starts to open up some options for cash deployment and if we look a little further ahead.

And then I just want to mention briefly some changes we've made to our executive leadership team over the last few weeks. So we've made some new senior appointments to the executive leadership team that report directly to me. One is the creation of a Chief Marketing Officer and the other is a Chief Commercial Officer and then elevating our Operations Director to the executive leadership team. And the plan there really is to make the top of the organization sharper both from a consumer point of view, commercial point of view and operationally. And that also will -- increased our -- I think, our agility and pace of decision making; streamlined a number of our internal processes. And actually when you then take into account that we then will no longer need a managing director for our U.K. business or for our International business, the U.K. managing director role being the one I held before, this actually represents a net cost saving actually. It wasn't the intent, but it does actually save us a bit of money as well.

And with that, I think I'll hand over to Duncan to flesh out where we are from a cash and debt point of view.

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Duncan Leggett, Premier Foods plc - Group Director of Financial Control and Corporate Development & Acting CFO [3]

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Thanks, Alex. Good afternoon, everyone.

So if I turn your attention to Slide 13 of our deck and move on to cash. I mean I think a particularly pleasing thing from my point of view was sort of acceleration of cash generation in this half versus the previous two with a GBP 39 million reduction in net debt on a like-for-like basis. That compares to GBP 26 million last year and GBP 21 million the year before. So really encouraged by our cash generation in the half. I mean clearly we've got increased EBITDA over the last couple of years; broadly lower interest; and versus last year, fewer one-off items relating to the refinancing of our bonds we did in H1 last year.

At the second half of the slide, we just thought it would be worth a reminder of our strong operating cash flow. So the full year numbers to March '19, the year we've just come out of. And it shows EBITDA of GBP 146 million converting into free cash flow before interest and pensions of GBP 111 million. And that's even after GBP 18 million of restructuring costs, which clearly are higher than we would anticipate going forward. So a pretty good cash flow conversion. And then after the interest and pensions, that takes us to GBP 27 million that we reported at year-end.

Moving on to Slide 14 and how net debt has tracked versus the year-end. I think the headline is we are pretty much flat net debt versus year-end, which given the seasonality of our business is actually a bit better than we've managed to do before. And we're on track to meet our 3x leverage by the end of this year.

In terms of the moving parts: net debt of GBP 470 million from the left-hand side of the chart. We then have EBITDA and then the key outflows of pensions and interest, as you'd expect. CapEx, GBP 8 million, that will be mainly H2 weighted this year. GBP 9 million of working capital that reflects the seasonality of our business. Clearly, we are in our peak trading period now, so the working capital build at the end of September in anticipation of that. The small amount of restructuring takes us to net debt on a like-for-like basis of GBP 471 million. And then after our IFRS 16 liability of GBP 22 million, it takes us to our reported net debt of GBP 493 million.

And I will now pass back to Alex.

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Alexander Whitehouse, Premier Foods plc - CEO & Director [4]

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Thanks, Duncan.

So I'm going to move us on to Page 20, for those that are following along. So this shows our quarterly U.K. revenue growth, and this shows that 9 consecutive quarters of growth that I talked about. So this is really driven by that brand building and brand growth engine, so the fact that we've got strong brands, the innovation rate coupled with great media support and in-store execution. The only -- if you're looking at the graph, the only 1 quarter where you don't see a strong growth performance is actually quarter 3 a year ago. And for those that remember, that's when we went through our warehouse transition, which initially didn't give us full capacity. So we couldn't actually get all the volume out, but we've now obviously fully recovered from that and you can see the growth coming through really strongly.

Moving to Page 23, I'm just going to pull out a couple of good examples of what helped drive the growth in the first half.

You might recall that, 1.5 years ago, we relaunched the Mr Kipling brand with a number of positive changes to the brand across the packaging, innovation and media support. And we delivered 10% turnover growth underpinned by a very healthy 7% volume growth. While I'm really pleased to say that we managed to keep that going. So over the first half of the year, the Kipling brand has grown by 8%. If you look at Kipling versus where it was 2 years ago, the brand is actually now 22% bigger from a turnover point of view than where it used to be. I think notable things this year was the launch of the Mr Kipling Signature range, which is a small range of 3 premium cakes and which are selling extremely well; and then obviously, continued use of the successful TV campaign. We had one burst of that a year ago, and this year, we'll have full burst actually over the full year. So Kipling performing very well for us.

I'm now going to move us on to Page 30 and just talk a little bit about the outlook for the second half.

So in summary, a way of looking at this is that there's plenty of innovation and plenty of media support in terms of gas in the tank for the second half. I'll pull out a few of the innovation examples. By building on the success of Mr Kipling, we've invested in making some significant modifications to one of our production lines in our Stoke bakery. And that's to facilitate initially the production of some mini versions of our well-known Mr Kipling cakes, but actually then beyond that it actually creates some flexibility for a number of the new products that are sitting in our new product development pipeline for the next couple of years. And the first out of the blocks are a box of 9 mini mince pies. Unsurprisingly, they're going out in the store now, so they're there in time for Christmas. And we'll then follow that up pretty quickly in the New Year with a box of 9 mini Bakewell tarts. And we've also just brought to market our plant-based brand. So it's a new brand we've created called Plantastic. It's essentially a vegan plant-based brand. We've started with flapjacks and cakes, and they're currently in market now and rolling out across our retail customers. We'll follow that up in the second half of the year with something we're calling grain pots. So this is a pot with mixed grain in a coconut cream with fruit, and they are suitable either for breakfast or an on-the-go snack or even as a dessert. And they'll be in market, as I say, in our second half of this financial year. And they're the first 2 steps of what will be the creation of a plant-based brand we expect to grow across multiple categories.

And then we're also launching a large size of our successful Super Noodles and Pasta 'n' Sauce pots in the pot snacks category. There is a subsegment of the pot snacks category which is for a big size and that's currently not an area where we play. And so we've taken the success of our relatively recent launches of Super Noodles and Pasta 'n' Sauce pot snacks and then created a large-size version so we can play in that segment. And those are rolling out now.

And then the other one I'm going to pull out is then Ambrosia chilled mini pots. So Ambrosia mini pots are -- is a middle pack of 6 pots of custard, which are used largely by parents to give to very small children. And they sell very well and they sit in the ambient dessert fixture, but what we've done is we've created a new version of this. It's 30% less sugar and it's formulated to be sold in the chiller. And the idea is that, that will sit in the chilled cabinets in the supermarket, next to some of the other alternative mini pots and basically providing a lower-sugar alternative for parents to give to children.

So NPD pipeline looking very healthy. There is a lot more to it, but obviously we don't have time to go it through all now, so I'll just pull out those 4 examples.

And from an advertising investment. In the second half, we've got strong advertising support across the brand portfolio and increased levels of investment versus a year ago: as I mentioned, a Mr Kipling campaign which was very successful last year with a very strong return on investment. We actually didn't have any media support behind that in the second half last year, and we've got 3 media bursts behind it this year, so that's a pretty significant change. We advertised in the first half of this year a new piece of advertising behind our Batchelors super noodle pots. If anyone has seen it, it's the ad with the crazy donkey in it. That works really well, and we will put that back on air again in the second half of this year.

And then with Bisto and OXO, 2 of the group's core brands and where we have 2 well-established campaigns, the Bisto togetherness project and the new OXO family advertisement. And they'll both be on air over the winter season and both with higher levels of investment than in prior years. And then finally, we're in the middle of making some new advertising for Ambrosia. If that is ready in time for use this year, then great. We'll use it. And if not, then that will get aired next year.

Okay. So that was all I was going to talk through, so I think, with that, we'll go to any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question today comes from the line of Ronan Clarke.

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Ronan Bernard Clarke, Deutsche Bank AG, Research Division - Research Analyst [2]

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Firstly, I just want to ask about the IFRS 16 impact inevitably on EBITDA because I saw you guided for GBP 2 million for the full year impact, but how much of that is in the GBP 60.5 million number that you're showing against GBP 59.4 million last year? So I'm guessing that's more flat with the IFRS 16 adjusted today? Or is that fair?

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Duncan Leggett, Premier Foods plc - Group Director of Financial Control and Corporate Development & Acting CFO [3]

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Yes. It's a value you can flip if you consider about half of it.

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Ronan Bernard Clarke, Deutsche Bank AG, Research Division - Research Analyst [4]

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So it's one and one across the year?

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Duncan Leggett, Premier Foods plc - Group Director of Financial Control and Corporate Development & Acting CFO [5]

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Yes.

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Ronan Bernard Clarke, Deutsche Bank AG, Research Division - Research Analyst [6]

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Yes. Okay. Great. And your -- the 3x leverage target. Are you now talking leverage in post-IFRS 16 terms? Or keeping it pre for both...

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Duncan Leggett, Premier Foods plc - Group Director of Financial Control and Corporate Development & Acting CFO [7]

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Well, I think -- yes, I mean, I think, the target is one that we've talked about for 2 or 3 years now. And obviously that was on a pre-IFRS 16 basis, so it is consistent with that on a pre-IFRS 16 basis.

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Ronan Bernard Clarke, Deutsche Bank AG, Research Division - Research Analyst [8]

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Okay. Great. And then switching to the pensions, and I was just wondering because you've -- in the past, you'd given the net present value number of GBP 300 million to GBP 320 million. Is that unchanged? I didn't see it in the deck. I just wanted to check if that's still the number?

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Alexander Whitehouse, Premier Foods plc - CEO & Director [9]

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Yes, that is still a number.

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Ronan Bernard Clarke, Deutsche Bank AG, Research Division - Research Analyst [10]

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Right. And on just more generally on pensions, where are you with the triennial? Is that likely to conclude in 2020? Or what's the position? And I guess, on that point, is it realistic that you could reduce the kind of cash contributions whilst also doing FRN buybacks or perhaps a dividend? Is it possible to do all 3 in the mix potentially? Or do you have to prioritize?

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Duncan Leggett, Premier Foods plc - Group Director of Financial Control and Corporate Development & Acting CFO [11]

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Well, I mean the valuation dates are March and April 2019. So yes, the valuation discussions are ongoing. And I think it probably wouldn't be appropriate to speculate on where we may or may not get to on that. I mean clearly we are not yet. And we'll -- as and when we reach agreement, I think, yes, you're right in that it will be likely to be at the end of this calendar year, probably realistically early next calendar year before we're in a position to announce anything.

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Ronan Bernard Clarke, Deutsche Bank AG, Research Division - Research Analyst [12]

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So early 2020, yes.

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Duncan Leggett, Premier Foods plc - Group Director of Financial Control and Corporate Development & Acting CFO [13]

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Yes...

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Alexander Whitehouse, Premier Foods plc - CEO & Director [14]

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Yes, [exactly].

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Ronan Bernard Clarke, Deutsche Bank AG, Research Division - Research Analyst [15]

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Okay. And I think you talked about maybe doing, thinking about FRN buybacks earlier on today on the other call, but is that something that could happen before then? Or is it all subject to getting the triennial completed first?

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Duncan Leggett, Premier Foods plc - Group Director of Financial Control and Corporate Development & Acting CFO [16]

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Yes. I mean I think what we're trying to get across today were some of the options that become available once we start building cash and which clearly is a nice position to be in. So clearly, FRN buyback is one of those, as is increased investing in [costs for the] marketing that you might have heard we mentioned earlier. So I think these are some of the options. I think, in terms of timing, I think we probably need to wait and see.

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Operator [17]

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(Operator Instructions) Your next question today comes from the line of Karine Elias from Barclays.

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Karine Elias, Barclays Bank PLC, Research Division - MD [18]

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Just going back to your guidance and looking at the -- what you've got in that slide deck. Your working capital is expected to be broadly neutral, but I thought that the -- your original expectation was that was going to be a slight negative. Can you elaborate a little bit better on that? And in terms of summarizing thinking that the free cash flow obviously would have been better than your original expectations, is that because you're stocking up less than what you initially expected around Brexit?

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Duncan Leggett, Premier Foods plc - Group Director of Financial Control and Corporate Development & Acting CFO [19]

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Karine, no problem. I mean I think, the slight improvement on working capital guidance, I mean, that broadly reflects what we've seen during the first half of the year. And we're expecting that to continue. I think we've seen -- we have seen lower levels of stock versus this time last year. I mean -- and they're not Brexit related. I think it's just us bringing our stock levels basically down.

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Karine Elias, Barclays Bank PLC, Research Division - MD [20]

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Great. And just in terms of International, where are you with regards to your original expectations? Is that progressing along in terms of your expectations as given in the last quarter?

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Alexander Whitehouse, Premier Foods plc - CEO & Director [21]

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I mean, certainly, our International business remains really important to us. We see it as a key strategic growth pillar looking forwards. And obviously we were delighted to see it getting back into growth in quarter 2, and we expect it to grow as we go through the second half as well. And we're particularly pleased actually that the -- a lot of the growth is being driven by -- and we're getting a lot of success with our cakes business in Australia, which actually grew by 20% in quarter 2 actually. And what we're experimenting with now is whether we can transplant the success of that cake business in Australia into North America. So we've got a test running in 1,000 stores in the U.S. at the moment to see if we can say -- see if we can replicate what we've done in Australia.

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Operator [22]

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(Operator Instructions) It appears there are no further questions at this time.

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Alexander Whitehouse, Premier Foods plc - CEO & Director [23]

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Okay. If there's no further questions, thank you very much, everybody. Have a great afternoon.

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Operator [24]

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That does conclude our conference for today. Thank you all for participating. You may now disconnect.