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Ladies and gentlemen, thank you for standing by, and welcome to today's Premier Foods Half Year Results Bond Investor Conference Call. [Operator Instructions] I must advise you that this conference is being recorded today, 13th of November, 2018.And now I would like to hand the conference over to your first speaker today, Mr. Gavin Darby. Please go ahead, sir.
A good afternoon to you all here in Europe or good morning from the U.S. Gavin here. I'm going to rattle through just a few charts from the deck that we used earlier, I'm sure many of you have got it, on the screen.So starting with Page 2, just a general introduction. I think these numbers have been seen so far, certainly by the equity side as very positive. We had good revenue growth. I'll come back to the details of it later. This proportionately good profit growth we had guided reduced profit growth being second half driven in the end. We've been running ahead of our plan during the year. So it came first half strong. We also managed to pay down another GBP 26 million of net debt kind of year-on-year, and the drivers, as I'll come to them in a minute, really standout performances in 2 of our top 3 brands, Mr. Kipling and Batchelors. And that really is the story. I've got a couple of other points in terms of -- I'll come back to logistics, things like that later.So turning really to Page 9, net debt, and you'll see just a really important chart. We started actually, GBP 960 million, the number was on my first day, with -- at GBP 496 million we got to at the end of the last financial year. You'll know based on working capital in the business in the cycle of a very winter-orientated Christmas stock-building market that our net debt is always higher at the half year. However, then it wasat the prelims, we paid down another 26 million relative to the same time a year ago. And that -- we announced, if you recall I think 18 months ago, we would drive to get to below 3x net debt-to-EBITDA by March 2020. This is another good step in that direction.So I'm going to take you all forward to Page 16, group's strategy page. This page really just confirms the strategy seen in this chart since 18 months ago. As I touched on the strategy areas to keep is drive revenue growth, manage the costs, generate the cash, invest the cash in marketing and capital in building the business and people, pay down the debt, and that's the strategy. What we have said consistently over the last 18 months is we've got to find a way to do that faster than we would do it. And we've been looking during that 18-month period and there's been quite a lot of press and company announcements about where we've been, and a lot of speculation about Batchelors a year or so ago, et cetera.So we have looked for, given that we've got good a solid business, as I said, the strong half year running and it could be better. So that takes us to Page 17, really the big announcement of the day, that we have found an asset in Ambrosia which we think may achieve a number of ends. If we turn to the -- or look to the middle of Page 17, what's the strategy? And then I'll come back to why Ambrosia. We think there's an opportunity first and foremost to invest some of the proceeds from a brand sale in driving the business faster and taking resources to put behind the brands as they've got momentum. I mean, examples would be the case with Batchelors, and international would be the same. So my experience, if you invest behind initiatives that have already got momentum, then you really do get a return. You've got the momentum turned into better momentum and it's a better investment.So a dollop of investment is the first leg of this acceleration, and the second one is allowing us to pay down our debt in a bigger step than the GBP 25 million a year that we're currently running to. Again, as I said, we started with GBP 960 million. I think people think at the end of this financial year we're going to finish with GBP 470 million or something, GBP 470 million, keep chipping away at that to 25 million is one option. Drive the GBP 470 million down so we're perhaps more in the 2.5x of net debt-to-EBITDA territory. Well, that's the big change, 6 to 2.5x, and that would be very common and kind of normal.So that's the strategy to transfer it. Why Ambrosia? Well, Ambrosia, I think, is -- candidly is worth more to another company than it is to us at this point. I'm quite sure that in 3 years' time or whatever Premier could really do with Ambrosia what it has done with Batchelors, but it is 3 years' time, we could use that money better in the fashion I have just described. And so I think if I was an international desserts company, if I was a U.K. desserts company in chilled or frozen, Ambrosia would be a fabulous brand. And we know that Ambrosia is as good a proposition in desserts chilled and frozen as it is in ambient. So there's a lot of, I think, attraction to the Ambrosia brand. And the second thing is we know that it's pretty easy to detach industrially. So the carve-out of the one factory is much easier than other assets that we've got in the past. So we'll talk about Ambrosia, I'm sure, more later.So moving to Page 19. Yes, a fifth quarter of consecutive growth. I think probably just as interesting, really 3 halves now of very good both revenue and particularly profit growth and cash. As with all quarters, you've got some things that are tailwinds and some things that are head. And the outcome spent is basically an outcome of the mix. The drivers, we've talked about Kipling and Batchelors. The headwinds were -- it was a beautiful, wonderful, idyllic British summer, not great for a company that sells products that are kind of more winter-centric. And we've had some wobbles with the closing part of our logistics transformation. So over the chart on each of those, Page 20. I think business resilience is the most important one. You can see the way we designed this if we chose the 3 months that have been standout months relative to normal temperatures in the last 4 years. Each time when the weather has been disproportionally hot, the categories have crashed 8%, 9%, 6% that we operate in. In the previous years of '14 and '16, Premier has led to very negative quarters. I think a lot of people feared the same. And because of the resilience of the business, the brands that we've innovated in, the momentum of less seasonal brands like Cake and Kipling, and the fact that Batchelors is no longer just a kind of soup brand and a carbs brand, the pot -- rice, pot and snacking launches are much less weather-affected. So for all those reasons, our growth is coming from brands that are less affected thankfully by the ups and downs of the season. So we grew, and I think that's one of the reasons why people were very encouraged on the equity side anyway in terms of performance. I think we are fundamentally more resilient. Now the only other thing we had to handle in this fixed period of the half year that September was some difficulties with the final stage of our logistics update, Page 21. You'll recall from previous conversations, this is an 18-month program. You see the picture there of the facility in the middle of England terminals that we have been migrating into. The first phase of grocery was last summer, summer of '17. And we completed the second phase very successfully in the summer of '18, of Grocery and then we moved into the third phase. And we struggled in the first phase and weak stage really of the cake transfer disproportionately because of the initial both labor availability and retention issues, which we have taken bigger steps to resolve in our results. And that sets us a very, very large and significant business with great complexity and great scale after a very difficult start. And in the immediate period, that actually read over to the Grocery business to some degree.So we clearly left some sales on the table in September. I think we said in the meetings earlier that the 1.3% that we grew in the first half would probably be more like 3.3%, a point on each of Grocery and Sweet Treats. I think the good news is Grocery, we have recovered that. That was really just the transfer from quarter 2 to quarter 3. We had a phenomenally strong quarter -- October period for Grocery and that's continued. We've pumped through this facility an awful lot more grocery products than it has ever had before. In October, much more than was budgeted and it handled it and we're very confident that there is no revenue -- negative revenue impact to the Grocery business in the third quarter.Sweet Treats has been a bit harder. It's taken longer to fix. I think we've made some big changes to the said labor rates, retention. We've added some extra capacity outside of this facility to take strain off it. And so both September, which is the quarter we're talking about and October were difficult. I have to say our market shares have held up all the way through. We are very confident -- I think we're very confident at this point that our seasonal business in November and December, the mince pies, et cetera, were [indiscernible] will be delivered in the right fashion. But we've certainly left some demand in the cake business on the table in October. And therefore, we warned that we may have for Sweet Treats some revenue short impacting quarter 3. We do not see that as a problem for quarter 4.So Page 23, the big driver of growth as we touched on earlier has been our biggest brand. Kipling is our biggest brand. We've relaunched it. It's a classical relaunch story. You can see the ingredients on the page, New and Revised Packaging, which tested brilliantly before we launched it and has done just as we expected in the market. Here NPD, great in-store execution and one of the best TV ads that we have run in terms of ROI and in terms of consumer connection. So this is a big part why we did well in H1. And one page really, on Page 27, on international, this is a big driver typically of Premier's quarterly growth. We had a quarter off this quarter after 15 consecutive quarters of double-digit and we ended up minus 9. Two reasons there. One is we, as we described back in May, a situation whereby the Australian retailers who take titles to their products in the U.K. and then managed to go all the way to the individual stores in Australia had more stock than they ever understood, than they were aware of. And so we've been selling from stock to some degree in this half year and that probably affected our shipment into that pipeline. I'm glad to say they have restarted and -- but we have the kind of inventory to cycle through in the meantime. The most important thing on this chart is to show that our market shares for cakes are very strong. This is full year. By H1, I should say, 12.4 vis-a-vis even higher weeks and months in that year. So we've got a great business. There's tremendous momentum. The underlying strength of the business is there. And on the right-hand side -- and so I think as we said, the headline is minus 9 for international, underlying if you take out the stock cycling point I've just made. And if you take out some onetime hit to our export -- our wholesaler export business where we've changed our commercial terms by materially through all sorts of very good reasons, which in the short term has affected sales as per a budget. If you take those 2 out, actually, our underlying growth is plus 9. So moving to the last point I was going to make, the outlook, that's Page 31. I think we feel good about another half year of more than solid, I think, approaching good and solid results. We've exceeded people's expectation certainly on the equity side, but interesting views. We've announced the sharp -- the potential sale of Ambrosia, and you've heard me describe what the strategy is behind that. And the final piece that we announced today is my stepping down at the end of January and really just 60 seconds on that. I think I signed up very clearly for 3 to 5 years. I've done 6. I think the business bears no resemblance to the one we started with. Debt more than half, the total liability is more than half. It's now a consumer-facing business, fantastic innovation, track record, brands that were nostalgic but people didn't necessarily buy are growing. We have a very interesting international business. And we can now attract and have attracted fabulous people. So I do feel that we've achieved a lot. And the final piece of the puzzle really that is the news we announced today. Yes, we have got to conclude that transaction. But it is the final step or big stride really in a massive transformation of Premier Foods. So bottom line is, I think, the time is good. The end of January is exactly 6 years since I started. And so I think the timing is perfect. So with that as background, we will then go to Q&A. If you could just describe who you are and who you represent, and Alastair and I, Richard, will do our best to answer your questions. Carlos, back to you.
[Operator Instructions] Okay, sir. Your first question comes from the line of Ms. Helen Rodriguez.
I wonder if I can ask, Ambrosia, would we be right leaning that EBITDA is around 18 million for Ambrosia?
So it's Alastair here. I mean, we haven't disclosed that. I think all I can do is point you towards the guidance we've given that it's just under 10% of group sales. You know that, that is part of our Grocery division and you can see from the most accounts what the margins are on Grocery. So I'm afraid I'm going to have to let you go with your own conclusions.
Okay. Can I just ask a slightly new kind of question? In terms of the reference that you've cut back on the divisional contribution increase this last half, was that -- how significant was that in terms of where it ended up? The revenues are down. Where did it lead to a 5% improvement or 10% improvement or...
Sorry, how significant was what in the context of that?
So you were saying that in Ambrosia, you changed your strategy in terms of promotions. So how big of an impact did that have in...
I think the answer is it had more of an impact on sales than it did on profits. And it was -- I think in profit terms it had much less effect. So we sold fewer cases, but we made more of a case, I guess.
Okay, all right. And then my other question is, in terms of your pensions deficit, is Ambrosia on the Premier side whether it's pension deficit or is it -- does it not have pension deficit associated with that?
So I mean, the business is not attached to particular schemes other than historically based on where people used to work. So people that worked at Lifton before we bought it obviously would've been in the Unilever pension scheme and following that they'd have been on the Premier Foods side.
Where there was a deficit.
Where there's a deficit. But I think the important thing to say in that context is that we will not be transferring any pension assets or liabilities as part of this transaction. That will all remain with Premier.
Okay, good, perfect. In terms of sort of the [indiscernible] today, retailer pushback is sort of slightly at odds with the comments that you were making about food and purchasing power being slightly better. Is there any update on how the supermarkets are feeling from your perspective?
I think there's definitely -- in the context of consumers overall lacking confidence, which we see, down here we see there's clear evidence that consumers are lacking confidence. But I think the food industry overall in terms of food for consumption at home is in good shape. We can see from the chart that I put in here and I didn't go through, but you can see where it was, that there is good volume growth in industry. So Page 18, you can see there's volume growth of about 2% in business over time. And revenue a bit more for a bit of inflation. So I think the food industry is in good shape. Volume in this industry did not have volume growth a couple of years ago. It had negative volumes. So in this regard, Helen, the external environment is stronger for both supermarkets and food companies. The bigger challenge is, as you know, casual dining and people eating out and things like that.
Okay, and both in -- and so the supermarkets in terms of addition, there's no meaningful change in the sort of contracts you're striking?
No, I think they -- volume is really important to all of us. As I say, we were in collectivism and very indicative. I mean, there will always be a good degree of commercial tension in the U.K. industry. Supermarket industry is very concentrated already before anything else happens. And so there will always be some tension, but Premier has had that for all the time I've been here. And we've been through all sorts of challenges. You remember the Brexit -- or the referendum devaluations. Each time people have asked Alastair and I, "Can you recover these input costs? Do you have pricing power?" And you only have to look at our gross margin in this half year and our trading profit, they all look healthy. So we -- it will always be a tough, intense engagement because customers are strong and powerful, but Premier has got good brands. We have very sophisticated salespeople and cash flow management. We're investing in innovation and that's why it works for us. It might not work for everybody else, but it certainly works for us at Premier Foods.
Your next question comes from the line of [ Dale Lafarte ] from Insight Investment.
The first question for me is, I was hoping you'd comment on commodity inflation, both what you've seen recently and also what you're seeing for the second half of the year.
Shall I take that one? So we continue to be in a kind of upward cycle in terms of stock commodity inflation. So this is really the third year that we are sort of tackling that and obviously as we start going to sort of annual discussions with retailers, that's very much on our minds. I think without sort of going to specifically numbers, the biggest hit we had was 2 years ago, and that was particularly driven by the impact of the Brexit vote, and therefore, what happened to sterling at that point in time. We had a substantial number that we needed to recover in pricing, which we did successfully. Last year, we had a smaller number, and I would say this year, we're more in that sort of lower end of the spectrum more than back to where we were 2 years ago. But we are considerate. We are continuing to see some inflation coming through. It's not consistent across the board; some things are going up, some things are going down. But if you look at our specific mix, which is obviously the way we look at it, then the way that nets out is continued inflationary pressure.
Okay. And when you talk about the mix, can you mention areas in particular where you're seeing the highest inflation?
I think it kind of varies. I mean, the big one that we had been seeing had been sort of dairy fats, but that's actually coming back down. Again, that's probably been the most volatile element that we've been handling recently.
Sorry, was that...
Dairy fats, say butter, for instance.
Okay. And in terms of wheat prices, has that been a big headwind for you?
Yes, that has been an impact. Again, we've been seeing how that -- we've been sort of seeing how that flow through the business. Give me a second. I might be able to quickly give you a bit more color on that. Yes, so in the stuff that we are seeing at the moment, we're tending to see fats and oils sort of starting to come back a bit. Spicy ingredient is tending to go up. And then I'd say probably the biggest ones would be wheat and flour and starches, which again, is directly related to grain pricing.
Okay. And is there a certain lag in terms of when you see the commodity prices increase and when it actually hits your financials because it's, say, hedging or...
Yes. I mean, look, there's a lot of stuff that we buy that you can't hedge. And, of course, there's a huge number of individual stock keeping units. But what we try to do is to buy forward or to sort of hedge your derivatives. But typically, actually just simply buying forward on those big commodities. And our cover periods will vary. But it wouldn't be unusual on some of these kind of things to be 6 months covered, for instance. Now what that buys is it doesn't ultimately protect you from the cycle. It just buys you some time, but that gives you the time in which you can negotiate increases in trading prices if that's what you need to do.
Okay. And just one final question from me. I think there's a lot of debate on the bond side in terms of the proceeds from the sale, I mean, how much would go in terms of reinvesting back into the business, how much would go into the pension fund and how much will be used for debt reduction? I realize you can't go into specifics, but is there any signal you want to send the bond market in terms of your intentions to pay down debt?
Well, I think there's a couple of points. I mean, I think the first thing to say is if it does happen, it will be a significant deleveraging event. And I think that should be a credit positive for bond investors. So I think that's an important thing to say. I think if you look at the, in a way, the hierarchy of how we're going to be looking at this, obviously, where we would most want to put proceeds is the accelerating investment plan. And that will be both sort of capital and consumer marketing and really driving the rest of the business going forward. I think obviously, we have to engage in conversations with our pension trustees. There's a debate to be had there. I really don't want to sort of prejudge that. We haven't had any substantive discussions with them yet other than obviously to make them aware of what's happening. But we will be talking to them about the fact that this is actually good for Premier Foods and, I think, it makes a stronger business. And then there will be a significant amount, I think, left that is going to go towards deleveraging. And we are already signaling and continuing to signal that even absent this, we're on track to get down to 3x net debt-to-EBITDA by March '20. If we do a deal on Ambrosia, obviously that is going to make a big step change down further what it ensues, and I think that, as I say that, I think, puts us into a somewhat different category in terms of looking at our leverage levels.
[Operator Instructions]
Okay. I think looking at the screen here, we see no more questions. Yes, we have somewhat 15 seconds to say the one or register an interest. Otherwise, you know the company very well and you really do well, and hopefully it's all very self-explanatory. So I think on that note, thank you very much, and have a good rest of the day. Bye.
Okay, that does conclude our conference for today. Thank you for participating, and you may all disconnect.