Premier Foods (LSE:PFD) Q2 2027 Earnings Call

0:00 So morning everybody and welcome to Premier Foods half year results for the 26 weeks that ended on the 26th of September this year. As always, I'm joined by Duncan Leggett, our CFO, and together we'll take you through how the business has done in the first half of the year. So some highlights from me, Duncan will run us through the financials, and then I'll come back and talk us through the progress that we've made against our five pillar growth strategy. So to kick off with the highlights then, I'm pleased to say we've had another good first half of the year with further branded revenue growth and market share gains. Trading profit was up 2.4% and adjusted EPS up 4%. and today we're also upgrading our adjusted pvt and adjusted eps expectations and that's due to lower than expected interest costs which Duncan will talk about shortly and today we're also introducing an interim dividend that's the first time that premier foods has had an interim dividend for 19 years If we also just look at how we've done across our strategic pillars, and I will come back to this in more detail shortly, but good progress against all the pillars.

1:05 So growth from our UK core was plus 3%, and that was plus 2.2 in quarter two, and that was because of the impact of the hot weather on our core grocery business, and I will come back and talk about that more. Infrastructure investment was 36 million, that's up 54% versus prior year as we invest behind some significant strategic projects in our manufacturing sites. Category expansion, so our extensions into new categories and the image on the chart there is our extensions with Cape Herbs and Spice into the Herbs and Spice category, they were up 15% and our international business grew by 8% and was actually up 10% in quarter two. and then if we look at our inorganic opportunities, so there's the brands we've bought, the Spice Tailor, Fuel 10k and Merchant Gourmet, they all grew strong double digit in the first half of the year.

1:57 And I think what's really interesting when you look at this is that you start to see that the business is now significantly more resilient than it was historically. and I think because of that resilience we've been able to deliver a good branded revenue growth in the first half of the year despite that warm weather and the impact that we all know that that has on our grocery business because our grocery business tends to have products in it that we all like to eat when the weather's a little bit cooler. and that resilience really comes from a diversity of of both category presence and a diversity of geographical presence and you see that when you look across the strategic pillars so we've got a bigger stronger sweet treats business which has grown very strongly compared to seven ten years ago we've got our category expansion experiments we've got a bigger stronger international business and of course we've now got the three brands which we've acquired all of which are actually not very seasonal and in fact quite temperature agnostic so all in all a more diverse business as I say both in terms of category presence and in terms of geographical presence and which makes the business more resilient and as we go forward and deliver further against those strategic pillars the business will become more resilient still and with that I'll hand over to Duncan who'll walk us through the financial progress.

3:16 Thanks Alex and good morning everyone. So I'm going to talk us through some of the highlights from the financials from the first half and I'll start by sort of three key takeouts from my perspective. Firstly as Alex has just mentioned really pleased to be upgrading both adjusted PBT and adjusted EPS to the top end of expectations. That's driven by an updated right-sized debt structure which I'll talk about shortly Our strong balance sheet continues to give us a strong platform to invest that's both within the manufacturing sites but also in the acquisition of future focused brands that will help step change both the size and also the growth profile of the business and as Alex has just said really pleased to be confirming the introduction of the interim dividend today.

4:02 So looking at the financials at a group level you can see branded revenue is up 3.2% to 467 million That's really good, strong performance from Sweet Treats building on the momentum already gained and grocery performance, you know, pretty strong and resilient, as Alex has just mentioned, despite the impact of the warmer weather. Total revenue is up 2.4% to 514 million. The non branded revenue is down overall, but a bit of a bit of a mixed picture across grocery and sweet treats, which I'll talk to you shortly. Trading profits growing in line with revenue, stacked up 2.4% to 72 million. Margin's very much in line with the prior year. We've dealt with the inflation we've seen in the first half.

4:47 and then looking a little bit further ahead in terms of inflation we'll continue to manage it in exactly the same way as we would typically do so we have hedges, we have forward contracts and we fix contracts with suppliers where we can and looking further ahead we'll obviously be keeping a close eye on things, clearly things are quite volatile and we'll be monitoring during the second half. adjusted ppt is up 3.8% that's going ahead of trading profit and that's because we continue to reduce our interest costs as we continue to build cash on the balance sheet that earns return and reduce leverage Free cash flow has always been a strength of the business. Good performance half year on half year, so that's up nearly 44%. That's really through tight control of working capital.

5:33 As you know, most of our cash is generated in the second half, so we expect to see much more coming through there. a net debt of 131 that is over 70 million lower than this time last year in terms of the build during the half we have the typical stock build that I'll talk to you shortly as well as you know more capex and a high dividend during the first half and then the dividend that we talked about declaring for the first time today in 19 years and in terms of monetary value that is 1.12 pence So looking at the divisions in a bit more detail, so the usual reminder that the grocery business includes international The branded revenue is up 2% to 344 million. And again, we've got good examples of the innovation pipeline coming through and working really well for us. Alex will talk about some examples, particularly around Angel Delight and OXO shortly. Obviously, we have had the impact of the hot weather, which does impact the category in which we operate.

6:33 But looking at the less seasonal, more future focused acquired brands, they're all growing double digit, really fulfilling their role in the portfolio. The number of revenue is down 12% to 28 million. We've got some contract exits you can see there. It's actually a better trajectory across the half. Q2 was an improving trend versus Q1 and we'd expect that trend to keep improving as we go through the second half. So all that leaves total revenue up 0.8% to 372 million. And then divisional contribution. you can see growing ahead of turnover so that's up 3.2% to 96 million and that's really our continued focus on efficiencies both from a capex perspective but also from our supply chain broader efficiency program really good control of costs and some of the benefits of the branded mix coming through.

7:26 Sweet Treats, top line-wise, another really great growth coming through. We've got branded revenue up 6.7% to 123 million. Within that, we've got Mr Kipling growing at over 10%, so really, really good momentum continuing in the business. Non-branded revenue is up for the fourth successive quarter, so that's up 7.8% to 19 million. We've got a bit of a tailwind of contract wins you can see there. That leaves total revenue up 6.9% to 142 million. From a profit perspective, you'd normally expect to see the benefits of the branded mix and the volume flowing through to profit. That hasn't happened to the same extent this half as we'd expect, and that's really for a couple of reasons. one is we spent a bit more marketing in the first half versus last year that's purely phasing and that will right itself over the full year but what we have seen is during the prolonged hot weather we've had manufacturing of inefficiencies particularly at our Cadbury site so if you think trying to set chocolate on a mini roll in sustained sort of 30 degree heat that's actually quite difficult so we had to stop production for a period of time which led to some inefficiencies and then also some of our innovation is performing so well we've had to put additional labour onto the manufacturing lines to service what's frankly been pretty exceptional demand. We've got a plan in place for that, we've got some capex that we're going to lay down but the benefits of that will probably be back into the back end of this year or start of next year so we expect to see some of that continuing during H2.

8:58 So all that leaves division of contribution down 16% to 12 million. So in terms of debts, I've talked about the half year net debt being over 70 million lower than this time last year. In terms of the components of the outflows compared to year end, very much in line with our capital allocation framework with the addition of the typical seasonal stock build that we see in advance of our peak season that we're in now. So taken from some of the key movers, we've got CapEx at 36 million. We're guiding to 60 million for the full year. And again, you see much more spent in the first half that would be typically. And as I've always said, that's a really good thing for us. The more we spend, the more we can put down, the quicker we can get the benefits. So that's very much in line with our plan.

9:46 Interest at 7 million continues to be modest. You can see we're now guiding to 18 million, reflecting the updated financing. and then we've got dividends payment to the financial of the final dividend and deferred consideration we paid one amount in the first half we've got another amount that we're planning to pay in the second half then in terms of other we've got some restructuring costs and some refinancing fees and all that takes us to net debt of 131 million for the half and leverage of 0.6 times Just a reminder this is a 53 week year so what that means in terms of working capital is one of the month end payment runs that would typically fall into FY28 comes into this year so that means we've got a working capital outflow we're expecting during the year.

10:31 So in terms of that refinancing I've referenced a couple of times you'll be aware that we had a bond maturing mid-October and what we've done is taken the opportunity to actually repay the bond through cash and addition of a term loan. At one point we thought we might be refinancing it would be at a significantly higher interest rate so really good you can see we've got over 200 million pounds of cash on the balance sheet at the end of September we've used about 150 million of that together with 175 million pound term loan that we've agreed with our banking group to repay the bonds and really what that does is it right sizes our debt structure at a sensible cost of interest trying to minimize it where we can whilst maintaining flexibility to execute our strategy going forward then on the right hand side of the slide you can see the trajectory in terms of interest over the last six or so years so much more than halved from 39 down to 18 million which is the expectation for this year.

11:33 So pensions, we talked in May about the triennial valuation results showing a bit of a surplus on a buy-in basis. That was really positive news because it's the first time that we'd seen it. We also took the opportunity, reflecting the pension scheme strength, to remove the company's requirement to pay administration fees into the scheme. And that really was the last cash payment that we were paying that has now been removed. now there's no real formal update in terms of any formal valuations but what I would say is six months on we're continuing to see the progression of the pension scheme and how things are moving you know we've got a good degree in an increasing amount of confidence about the realization of that surplus in due course and from a capital allocation perspective things playing out very much in line with our principles this half so capex is up at 60 million we're guiding to for the full year that's 15% higher year on year and I think this really is the sort of rough go forward position we'd expect on a BAU basis going forward and Alex will talk about shortly but very much not just investing in our strong payback projects which continue to be the case but also more strategically in terms of insourcing some production from outside and increasing capacity in certain areas of the business.

12:53 From an A perspective, clearly no acquisitions during the half, but clearly the acquired brands we do have all growing really strong double digits and really fulfilling their role in the portfolio as growth accelerators. And then for the dividend, obviously we've announced the introduction of the interim dividend today, but also worth remembering that over the last five years since we came to the dividend list, we've returned about £100 million to shareholders. and then from a leverage perspective looking forward just a reminder we continue to expect within a range to operate within a range of about one to two times over the medium term obviously the timing of any M&A activity will depend where in that range we land. M&A, I mean we haven't announced any deals in the first half but what we can see is the three acquired brands that we have bought so far really performing their sort of growth accelerating part and their role in the portfolio with all three of them growing in double digits.

13:55 and then dividends we've obviously talked about introducing of the interim dividend but good to see that since we came on the dividend list just over five years ago we've returned about 100 million of cash to shareholders and then just a reminder we'd expect generally going forward to operate within a leverage range of between one and two times. So where does that leave us? I think really pleased you managed to right-size our debt structures. We've got a decent amount of liquidity to deploy capital going forward and invest in the business whilst minimising the cost of that debt. we know the business remains very cash generative so good performance in the first half last year we generated over 100 million of free cash flow and it's really that combined with our low leverage that enables us to invest in the business to drive shareholder return and a good evidence of this is the introduction of the interim dividend this morning that's all for me and I'll pass back to Alex thank you very much Duncan

14:57 So what I'd like to do now is just walk us through the progress we've made against our five pillar growth strategy. And if you remember, this is really a blueprint of how we intend to scale up and grow the business based on the principles, of course, that we believe our core skill set is in building brands and growing brands in a sustainable and profitable way. And so just to remind us of what those five pillars are. And the first pillar is about growing our core UK business and our brands in the UK. and that's important because that's where the majority of our revenues and profits are generated at the moment and so keeping that working and ticking over on a day-to-day basis is really important. The second pillar is supply chain investment so remember this is about investing back into our supply chain in order to make ourselves more efficient which frees up investment in order to go into supporting our brands for further growth.

15:52 The third pillar is expanding into new categories, so a great example of that of course will be when we took the Ambrosia brand into porridge, so into breakfast, a totally new part of the day for us and therefore all completely incremental revenue. And the fourth pillar is building our international businesses to a point of critical mass and remember our three focus geographies Australia, New Zealand, Europe and North America and clearly all the generation of revenue in those markets is entirely incremental to what we deliver in the UK and finally the fifth pillar is buying new brands and bringing those into the business where we believe we can apply our branded growth model in order to generate more growth or more value and so on and so forth.

16:58 In the UK, we start with a very fortunate position, which is we've got leading brands in our core categories that are well known by consumers with very high household penetration. But then we have to make them grow. And the way we do that is through the other pillars. So firstly, in the top right, insight driven new products. So we work very hard understanding our consumers, how they're shopping, how they're cooking. Thank you very much. Bottom left is sustained marketing investment. So it's great that we've got really well-known and well-loved brands, but to keep them that way, we continue to invest in marketing and advertising programs.

17:49 It builds the brands, maintains awareness, and keeps the brands contemporary and relevant. And what we're doing now particularly is using digital channels to connect with younger audiences and bring younger consumers into the brands. and then bottom right really importantly is is how we build relationships with our retailers because what we look to do for our key retailers is build strategic partnerships where we're working together to generate category growth which benefits both of us and we find that we disproportionately benefit from that because of our strong brands and our leadership positions in many categories and this is really a case of where the output is greater than the sum of the parts and when we get all of these right at the same time that's when we can deliver some really great growth for our brands So how do we do against those pillars in the first half of the year?

18:37 Well, as you've seen, we continue to build our branded revenue growth in the UK. So 3% overall branded revenue growth in the UK and 6.7% driven by that really strong sweet treats performance. And that was really a volume driven growth and really underpinned by several new product developments which have worked really well for us. And I'll talk those through in a few moments. and that's now 12 successive quarters of strong branded revenue growth for our sweet reach business and as we mentioned earlier Mr Kipling up 10% in the first half and now on an annualised basis a £200 million turnover brand. Our UK grocery business grew by 1.6% despite that long hot summer and what we've seen there is we've seen some really strong pockets of growth where we've had great new products under some of those grocery brands and again we'll talk about those shortly. Along the right hand side you can see that we continued to increase our market share in fact we increased market share both with our grocery brands and also with our street treat brands and that builds on the market share gains of previous years.

19:45 and then moving on to those new products that we've got in market so there's a series of really really strong new products I mentioned actually earlier in the year that we've got a particularly strong lineup this year and I think here are some of the examples of things that are working particularly well so in grocery we all know pasta and sauce from bachelors and that's something you cook up in a saucepan takes a few minutes what we've got here is a microwavable version of a ready-to-eat pasta and sauce so you pop it in the microwave and it's ready in 90 seconds and that's really generating some really nice incremental value and we've got Lloyd Grossman which is extended into premium Italian and Mediterranean sauces and that's a similar format to the Spice Tailor but obviously directed to a more Italian and as I say Mediterranean set of flavours down at the bottom left we're having great success with Oxo Bone Broth and I think it's really interesting that clearly OXO is one of those brands which we would expect to suffer from the hot weather over the summer and what's actually happened is OXO grew and OXO grew because the declines on the core were offset by the great growth that we're getting from the innovation with bone broth Angel Delight grew really strongly driven by the launch of bubble jelly which goes from strength to strength and is building further distribution and then on sweet treats we've got a series of new things under the Mr Kipling brand so the tubs of small cake bites that I've mentioned before that you see top left there they continue to perform really well and we continue to expand distribution as well as introducing a series of

21:16 new flavours as well and the Mr Kipling worlds that you can see top right and I think this is one of those areas that Duncan mentioned where it's been so successful that we're now looking at how we automate and put more capacity in and what we've got is a series of new more contemporary flavors but also we're selling these in a pack of four now rather than a pack of six which makes the price point more accessible to more consumers. I think those two things together have really helped drive some really quite incremental large volumes. and bottom left the Mr Kipling breakfast bakes continues to grow and continues to be really successful for us and this is really interesting because it's eaten at a different time of day from the rest of the Mr Kipling range and so the revenue that it's generating is entirely incremental.

22:03 and then finally bottom right and now you may remember me talking a year or so ago and getting quite excited about the birthday cake flavour tarts and if you remember that was a flavour trend we bought from the States so birthday cake as a flavour applied to different products. well those birthday cake tarts were really successful and they're still in market and they're still doing really well but what we've done now is taken that flavour trend into our slicers range so what we've got there is birthday cake flavoured slicers and slicers are actually our biggest product range within the Mr Kipling brand so that's actually off to a really good start so we continue to develop more new products and that's using the same consumer trends that you can see on the right which we've spoken about before and I'll not go through again now and also as part of that branded growth model we continue to support our brands with marketing investment and during the first half of the year we supported both Ambrosia and Bachelors with TV advertising and Bachelors with a new campaign and we do that because it gives us mass market coverage very quickly so reach as well as being a great vehicle for building long-term brand equity.

23:13 We also used out of home and we typically use this to highlight new products but also to support some of our smaller brands and typically you find this on bus stops and in the approach to supermarket entrances and we used it in the first half of the year with Lloyd Grossman new pasta sauce kits as well as Bachelors microwavable pasta and sauce pouches. and then digital and social media we've got widespread use across the brands and we increasingly use this and to highlight some of the new products as well so we use that to highlight bubble jelly from Angel Delight and also that bottom right picture there is a new campaign we've got for Ambrosia called a match made in Devon and this is a de-seasonisation campaign so what we're doing there is encouraging consumers Thank you for watching.

24:18 and then that fourth cornerstone of our brand and growth growth model is about our in-store execution and our retail partnerships and that continued a strength in the first half of the year and I'm pleased to say that we further increased our share of distribution so this is our share of products in store in our categories so a 19 basis points improvement in grocery which we're really pleased with but is obviously dwarfed by that fantastic 121 basis points improvement in sweet treats and in both cases this was driven by the new products that we've launched going into store and taking up space on the shelves. And the other thing worth bearing in mind of course as well is that this increase in share of distribution comes on top of the previous years of increased distribution that we've had as well.

25:05 Over on the right hand side you can see some of the great displays that we've been getting in store. The one in the middle there, that blue display is a big significant proportion of our bachelor's range all on the same big display as we partnered up with the Spider-Man movie that launched earlier in the year. and then on the right that's a display where we've combined both Mr Kipling and Cadbury products on the same display at the same time so we're getting some great in-store theatre and these things drive significant incremental volume for the business. And then really just a reminder of what I said in May on what we're seeing from GLP-1 and we're still seeing this being more of an opportunity for us than a risk so definitely an upside for us. Why is that? On our grocery portfolio it's driven by two things.

25:54 One of the things we see is that if a member of the family is on a weight loss drug they will tend to want to cook at home more, eat out less and have less takeaways. And one thing we do know is that when the family eats at home rather than eats out, given the breadth of our product range there's a decent chance that one or more of our products might get used in that meal that's cooked at home. So we see that as an opportunity. The other opportunity is particularly around some of the brands we've acquired, because we know that GLP-1 users are looking for protein and fibre to supplement their diets. And of course, Fuel 10K, the protein-based brand, and Merchant Gourmet delivers both protein and fibre. So we see, again, opportunity in those areas as well. and then over on the right sweet treats now that's the one area where you might think we might see some risk well certainly current performance suggests that we're not seeing any negative effects 10% growth from Mr Kipling in the first half of the year and then if you look over the last 12 quarters our sweet treat business has delivered a consistent strong branded growth when you look into the consumer usage occasions and the consumer usage habits you get some clues as to why that's the case and we believe what's happening is our cakes are not bought for individual on-the-go consumption, they're bought as part of the family shop, they're taken home, they're put on the countertop in the kitchen and it might well be that one person in the family is on a weight loss drug and therefore

27:24 doesn't eat as many of them but actually they'll get eaten by other members of the family and we think that's why we're not feeling any impact on sweet treats. If I move on to the second pillar in the growth strategy then, so that's about investing into our supply chain. And there are three significant capital projects that I draw our attention to. And so on the left hand side, we've got the installation of a new UHT plant down in our Ambrosia dairy. This does two things. It will expand capacity for our Ambrosia porridge pots. as they continue to grow and also give us the possibility of making a number of the new products that I can see are coming down the pipeline and it also will improve efficiency If I look in the middle that's the replacement of our pie, one of our pie cake lines in Carlton and this is a really great project because it does two fantastic things.

28:20 It delivers improved efficiency which is really important but what it also will do is it will make a significantly better quality product more consistently for the consumer. So it's a real win-win because the consumer gets a better quality pie and we've been able to produce it more efficiently at a lower cost. and then on the right there you've got a picture of a half finished extension in workshop and this is to house our new cooking sources facility and what that will do is that will allow us to manufacture the wood grossing cooking sources ourselves rather than being made by a third party with the obvious improvement in profitability that you would anticipate from that and then over on the right you can see how our capex has grown over the last four or five years up to about 5% of sales now which feels like it's at the right level in order to be able to fund these more significant line replacements and infrastructure projects.

29:19 So really good progress.

29:23 And then I mentioned the Ambrosia Porridge part. So this is our third strategic pillar and this is extending into new categories which generate incremental revenue to what we get out of our core business. So Ambrosia Porridge continued to grow in the first half, it continued to take share and this has really become a well-established business now and actually got quite reasonable size. It's in all the major retailers, we've expanded the range to five different variants and we support this as part of the Ambrosia brand media strategy. Cape Herbs and Spice also continued to grow in the first half in fact grew really strong double digits and continued to take market share and that was for two reasons it benefited from further distribution gains in the first half but also we believe that it benefited actually from the hot weather so we think people were using this on barbecues that's on meat before it goes on the barbecue and also into into summer salads as well and then down the bottom our latest launch in new categories which is into the yogurt category so this is unusual for us because it's in the chiller in the store and it's a Fuel 10k protein yogurt with our best-selling chocolate granola on the top that you can then mix in. There's been one customer at the moment it's doing really really well and we're going to be looking to put that into more customers as you go through the second half and into next year.

30:47 And if I just move on to our fourth pillar, so this is our international business, where we made further good progress, 8% growth of the half, 10% growth in quarter two. In Australia and New Zealand, you'll recall, we've been working with some volatility in the shipment of our cakes down from the UK to Australia. well we've made really good progress in stabilizing those now where we've actually got our own logistics person sitting in our team in Australia and he's been working really closely with the two big retailers in Australia to actually get to an understanding of what the optimum amount of stock that the retailers need in market at any one time now obviously we can't directly control that there is up to the retailer but we've made really good progress in starting to stabilize that it'll never be completely flat there'll always be some volatility in it simply because of the logistics of long-term shipping but certainly it's a lot smoother now than it was before we just need to remember that obviously the year ago base year is still quite volatile so as we go over the top of that we might see some odd percentages and notably in quarter three, which we're in now, where there was actually a spike in stockholding and shipments.

32:02 And the spice filler grew really well actually in Australia in the first half of the year and that was helped by the new larger family size packs. So the normal Spicetailer pack essentially serves two people and so we've done a larger size pack now which is really so that you can cook for the whole family with one pack and what's really interesting is that the sales of those have come almost entirely incrementally to the same flavours that we got in the normal size so clearly being bought by different consumers. and then down the bottom there you might remember a year ago I was talking about Bisto Best Gravy going into Australia but called Paxo Best Gravy for trademark reasons and that went into Coles and did really well over the last year so much so that it's now gone into Woolworths as well as we start to build a position in the gravy category down there and what you can see happening here is obviously we're the leader in cake, we're the leader in Indian sauces So now we're extending the business outwards into different categories. So we've gone into Asian sources with the spice tailor.

33:07 We've now gone into gravy. And there's another category I'm going to talk about shortly when we look forward into the second half of the year. and we can move on to Europe very quickly. Europe, it's now all about the drive of establishing Fuel 10k granola. We've been really encouraged by what we've seen so far when we started to put it into the Netherlands where we went into a key retailer in the Netherlands and supported with social media and we've got more listings there coming on stream in quarter three. We've also now launched in several customers in Germany and we're also getting into France as well. so really encouraged by the early start on that and we'll be continuing to drive that really hard. In North America we've seen some very strong sales of Mr Kipling, we're encouraged by the performance of the lemon slicers that you can see there in the picture in Walmart and also we've seen and expansion of the range in Kroger as well.

34:05 And then two further retailers coming on stream in the first half of the year. So really good growth from our Mr Kipling range in North America. And then the last pillar, the fifth pillar, of course, is M&A, where we continue to look for what we call future focused brands. So these are brands where we think are well positioned for where the consumer is moving to. So long term trends in how people cook and eat. and I think that's exactly where the Spice, Taylor, Fuel 10k and Merchant Gourmet sit and then of course we're looking for brands where we can then apply our branded growth model in order to deliver more growth and more value but remember we're very particular we are very fussy when we're looking at these things we sought for a lot of brands that we choose not to pursue and I think it's that that particularness, that fussiness that's got us into a position where all three of the brands that we've purchased so far have worked so well for us.

35:03 So we continue to look for more, we'll continue to have that fussiness and we'll continue to apply strong financial discipline particularly looking at return on invested capital. and then talking briefly about the brands that we've bought so far as I said before they've all grown double digit in the first half of the year and we look at what's driving them it's very clearly the application of the branded growth model so what do we do we get more distribution we execute promotionally better in store and then we innovate and bring new products to market whether it's the spice tailor moving into noodle kits whether it's fuel 10k moving into into yogurts or the extensions of the merchant gourmet range and then finally we apply incremental media in order to generate more awareness because the great thing about these brands is when people try them they really like them and they come back and buy them again it's what we call a really high repeat rate so investing in generating awareness and generating trial will give us a great return over time so really good progress continues on all three of those and I thought it was just worth pointing out just what's actually happening here with our M&A strategy and how that impacts the dynamics of our brand portfolio so I think what we all understand very well is that we generate fantastic cash from our core UK business and Duncan touched on that earlier and we invest some of that back

36:35 into our supply chain but we're also using that to buy more brands now the obvious thing there is that scales the business up and there's a compounding benefit in that but the other thing is if you think about the kinds of brands we're buying those future focused high growth brands when we apply our branded growth model the more revenue we have from these new brands what that's doing is it's moving the average growth rate of the group forward so if you think about how that plays out over time as we buy more brands and we grow the brands that we've already purchased What we're doing is we're evolving our brand portfolio and shifting ourselves towards higher levels of growth. And that's one of the reasons why I've been able to say in the past that we believe over the medium term that Premier Foods will deliver relatively consistent mid-single digit growth. Now, we're not quite there yet, of course, and we've bought three brands.

37:31 They make up about 8% of our turnover so far. But if we think about how that casts forward, you can see how we get to that mid single digit growth position. Now, if we change gear and just look forward to the second half of the year. Lots happening. On the top left, new product launches. We've got several new products coming to market. We've highlighted just a few of them here. Given the success of the Oxo bone broth, we've got some new flavours. We're going into an Asian chicken flavour. Another successful range for us has been our Ambrosia Deluxe range. There's a premium tier to the Ambrosia range. as we've got new flavour there as well and then we've got several versions of Mr Kipling's seasonal cakes which obviously come to market this time of year over the seasonal period and then on the right there Merchant Gourmet which has launched into a gourmet version of baked beans which is relatively recently in market In terms of infrastructure investment we'll continue to work on those major projects so that work on the workshop cooking sources extension will continue and we'll finish off the installation of the Lifton UHT plant.

38:44 And as we touched on earlier what we're now working on is an automation of our world's line that'll do three things for us it will give us more capacity which we need given how successful this range has become it'll allow us to manufacture them more efficiently and it will also deliver a more consistent high quality product for the consumer so again very similar to what we've achieved with the new pie line if you look down to the bottom left and we've got some new products coming in the new categories area so we've got an extension into marronades with charwoods and this is something that we've learned talking to consumers particularly in the summer what they're looking for is yes a nice spicy Indian flavour but a light coating for meat that they can then put on the barbecue so we've got a new range of marinades coming there and we've got fuel 10k going into overnight oats which I'm sure we're all aware is is quite a trend at the moment In terms of international business, we'll continue to drive those key things we talked about. So in North America, continuing to drive the Mr Kipling range, including the launch of Mr Kipling lemon pies. It's really all about driving that fuel 10k granola rollout.

39:54 and then I mentioned in Australasia what we're doing is we're expanding the range beyond where we've already become market leader in a couple of categories and we talked about gravy where we've also just launched Angel Delight for the first time and we've led with the new bubble jelly product so that's really across the pillars and of course what we'll do is we'll continue to look for more inorganic opportunities so more brands that we can buy that are future focused and where we can apply our branded growth model to give good growth So then in summary for me, I think we've had a good first half, good brand of revenue growth led by Sweet Trees and that's been despite the warm weather and therefore demonstrates I think the resilience that we've now built into Premier Foods through pursuing that five pillar growth strategy.

40:42 A capital investment plan is well on track, we've got strong growth from new categories, further good progress in international and all our acquired brands grew revenue in double digits and then of course we're announcing today the introduction of that interim dividend. In terms of outlook we're upgrading our expectations for EPS as Duncan mentioned and driven by the lower than planned interest costs we are monitoring the macro economic environment really closely but I think we're well positioned for a strong second half of the year particularly when you see what I've just showed you in terms of the activity that we've got coming in the second half and then we touched on having a strong balance sheet and the fact that that provides the platform to enhance the growth profile through further future focus brands so not just scale but also the growth profile and that's why we're confident Thank you very much for joining and Duncan and I would be very happy now to take your questions.

41:59 I will pause for a brief moment. Thank you. We will now take our first question from Charles Hall of Steelhorns. Your line is open. Please go ahead.

42:18 Morning, Alex. Morning, Duncan. Can I just ask a couple of questions? Firstly, on the sweet treats margins, Duncan, you talked contemporary headwinds there. Can you just give a bit of colour on what the outlook for the second half is and what the long-term trends are with that volume growth? and then secondly, maybe more generally, on input cost inflation. Could you just talk a little bit about your level of cover on things like energy costs and what your thoughts are on pricing going into next year?

42:54 Perfect. Well, why don't I take the first one, certainly, and Alex and I can probably tag team the second.

42:59 Yeah, I think three treats.

43:01 I think what we've seen is really fantastic top-line growth, really volume-led growth. volume-led innovation really driving it and as I said just now you'd expect to see that normally flowing through to profit what we've seen this year is a couple of bits other pulled out one is purely the hot weather and the ability of our ability to set chocolate on a cabbage mineral is a little bit makes a little bit harder so we did have to stop production that was very much behind us and then the other bit which is you know in some ways it's a good problem to have because our MPD is performing so so well that we're having to put some additional labour onto the line now that's that's something we've got fixed going forward in terms of capex plans that will continue in the second half but again it's really because you know the innovation is performing so strongly so I think you know feeling feeling okay about that and that's typically the way we approach it with a with a low-cost approach and if it's working really well then we start to deploy capital so very much got a plan there and I think if you think about you know the the medium term picture Charles you know we saw last year an exceptional profit so for sweet treats and we've talked about over the medium term starting to close a bit of that gap of the DC margins between grocery and sweet treats that very much remains the game plan.

44:17 We know in any one year there'll be a bit of volatility for various reasons and particularly within half a year you'd expect to see that but very much continue to expect to improve sweet treats division contribution going forward.

44:33 Move on to input costs.

44:35 Yeah, to input costs why don't I start. I suppose that we would we'll plan to manage this current environment in exactly the same way as we have done before Charles so you know as you'd expect we've got forward cover we've got hedges we fix our pricing with our suppliers where we can and clearly that buys us time. Things like energy we've got a bit longer cover on than some of the other bits and then always as we go through the back half of the year we always look at inflation ahead, we look at what we can offset through costs, we look at what we might need to do with our prices and that will very much happen towards the end of the year to make sure that we go into next year with the right position.

45:17 I'm not much glad really when we're keeping a very close eye on it of course but at the moment we're not expecting that we necessarily need to take any action ahead of that annual pricing review that comes at the end of the year as Duncan mentioned.

45:33 That's great, thanks. Thank you, we'll now take our next question from Damian McNeill of Deutsche Bank. Your line is open, please go ahead.

45:45 Yeah, hey, morning, thank you for taking the calls. First question is, I think some of your competitors have talked about seeing an uptick from consumer demand from the government's Be Ready campaign. Just wondering if you can sort of see whether you've seen similar and perhaps provide some context for where you see the consumer as it currently is, is the first question. Second question is a sort of follow-up to Charles's question on input costs. I heard what you said Duncan but are you able to sort of quantify for us what you see inflation running at at the minute into next year as well please and then one final question if I may is there any action that you can take on Cadbury's cakes to prevent a similar issue occurring next year if we have another hot summer thank you

46:42 So I'll take the first one and the third one, and I'll let Duncan take the second one on input costs. So obviously, because of the Be Ready campaign, I think it's too early to tell. And the reason for that is, as you would expect, as we go into our quarter three we see significant increases in volumes versus the run rate during the summer because obviously we know we've got more winter focused brands and as we run up into Christmas it's our kind of key peak season so that is happening as we would expect it to I don't know whether any of that is due to be ready or just due to the fact that we're going into our key season so I think it's one of those things we'll be able to look back on and maybe figure out but at the moment I couldn't tell you on the Cadbury cage, yes it's a really good point and it's something we're looking at so historically if we had a really hot peak in the weather what we might do is stop production for a day and use that day for maintenance and cleaning and things which is an entirely normal part of I think what changed this year it was it was multiple days that we couldn't manufacture for so that probably changes the economics on putting additional cooling in on that part of the line so that's something we're going to be taking a look at if this is you know something that we'll see again going forward then the payback on that capital might make sense so yeah something to be to be evaluated and I know the team are looking at the moment

48:17 Perfect. And then in terms of input cost, I think when we came into this year, you know, we were working on a sort of low single digit inflation number. Clearly things have moved on a bit, haven't they? And I think we are, you know, as Alex said, we are monitoring closely, I think. I think in terms of putting an exact number on what we're looking forward to next year, probably a bit early, I think a lot of it will depend on where the oil price sort of settles down to, but clearly it will be higher than the low single digits that we're seeing coming into this year.

48:50 Thanks, Duncan. But in terms of for this year then, are you close to a mid-single digit on inflation or are you still in the low single digit realm?

49:01 We've not adjusted our pricing since... the pricing we came into the year with so you know we tend to work on an annual pricing cycle as Duncan mentioned and the pricing we have in market at the moment is the pricing we came into the year with and as Duncan also said you know we're somewhat protected by those long-term contracts and the hedges we've got in place so we've not found it necessary to change anything and my expectation is we won't until we get to again that where the annual cycle kicks in at the back end of the year. Does that answer that Damon?

49:33 Okay very clear

49:34 Yeah, yeah, very clear. Thank you. Thank you. Once again, as a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. Thank you. And we'll now take our next question from Andrew Wade of Traffery. See you later. Please go right.

49:57 Hello there, chaps. A couple from me. First one on sort of branded grocery revenue growth rate. A few people sort of stripping out merchant gourmet and contribution from the double digit growth in the other acquired businesses as well. And, you know, clearly the call was slower than that. And I guess the question we're being sort of asked is really, What gives you confidence that that is going to return towards the mid-single-digit growth rate that you're targeting for the medium term? Clearly, there's been a weather headwind through the first half, which we're aware of. But I guess it's what gives you that confidence that you're going to return to that sort of growth rate you're targeting in that division?

50:44 That's the first one. Shall I do the second one or hold fire?

50:48 Hold fire. Let me do that one, Andrew, please. look I think you know we've been very clear haven't we that acquisitions are absolutely mission critical to the strategy it's the fifth pillar it's really important within that overall plan to scale up the business but as I said in the presentation it's not just scaling up the business it's also about how it over time acquiring these future focused higher growth brands will move up the average growth rate of the business and we've been really open and transparent about that. I think that is exactly the plan. Has that helped us in the first half of the year? Absolutely it has and it's made the business more resilient in the face of that long hot summer. So you will see more of that.

51:33 We will buy more brands similar to the ones we've brought so far that are future focused from a consumer trend point of view that are going to grow faster and that's what over the medium term will move us towards a consistent mid single digit top line delivery and as I said we're not there yet because we have about what 8% of our revenues coming from those acquired brands but as we acquire more of them and as we scale up the ones we've got that percentage and that proportion of our revenue coming from those high growth brands will increase and that's what moves you towards that mid-single-digit consistent delivery. But as I say, we're not there today, are we?

52:19 And I guess in terms of the core part, i.e. excluding the acquired businesses, we should expect to see a step forward in Q3 given, well, assuming a more normalised weather pattern, I suppose.

52:33 We would obviously expect to still deliver growth from the core range. and even despite the weather we did see some of the brands actually deliver quite decent growth in the first half and again that's a function of the branded growth model and a function of the new products that we launched so yeah absolutely the core part of our growth business is something we'd expect to grow it's just that international growth and growth from acquired brands will always deliver higher percentages and therefore complement the total and give you an overall group growth which is higher.

53:11 Yeah, makes perfect sense. Okay, thanks. And then the other one, you obviously touched on acquisitions a few times, but you used the phrase significant firepower in this set of results. I don't remember that exact phrase being used before. Is that sort of a change in tone or is that sort of just development of the language being used and nothing we should particularly read into that?

53:35 I wouldn't read anything into that in terms of a change in the M&A strategy Andrew if that's what you're thinking about because the M&A strategy is the same we're looking for those future focused higher growth brands where we can apply the branded growth model and deliver significant growth from them what we're saying really I think is that cash generation and resources is not a constraint in doing this the main thing is and I've said this many times is we remain very fussy and I'm absolutely convinced the reason why we're not having a conversation about the performance of the acquired brands because they're all performing brilliantly is because we were so fussy up front and we've been very careful in what we selected and we will continue to be very careful in what we select.

54:26 Okay, thank you very much, very clear. Thanks, Edwin. Thank you, Lilna. Okay, to our next question from Darren Shirley of Shaw Capital. Lionel, please go ahead.

54:38 Yeah, morning, gents. A couple for me, if you don't mind. First of all, both Tesco and Sainsbury's, over the last month, have talked about a tougher UK grocery market and FMCG getting quite a bit more promotional. I mean, is that something you guys would recognise? And how are you looking to trade into that sort of... more promotional market and then also on sort of the UK grocery market a lot of the growth if not all of the growth now seems to be coming from sort of immediacy and sort of on demand online how do you think your portfolio fits with that sort of consumer activity?

55:21 Yeah thanks, two good questions I think look you know we recognize what both Tesco and Sainsbury's have said I think it is a tougher marketplace out there and the UK consumer is under a bit of pressure from what we can see however we are as I've said before somewhat protected from that in the sense that you know we know that when the UK consumer is a bit under pressure one of the things they'll do to save money is to eat out less and have less takeaways and cook at home and once you decide to cook at home given the breadth of our portfolio and the number of products we've got that sort of lock into some of those meals that you'll make you know whether it's pasta and pasta sauce or whether you're having something you're going to put gravy on it it just brings our browns more into play so we tend to get this compensating factor of more meals being eaten at home which gives us a bit of protection and I think that's probably what's playing out now in terms of a more promotional environment I'm not really seeing that on our products I don't think that's something we're seeing so much on branded goods I think it's probably more you know sort of fresh and non-branded but you know we keep very close to that as you know we are very analytical in our approach to how we promote our brands the frequency the price points all that sort of stuff is analyzed within an inch of its life and we take decisions based off the analytics and that continues to be the case and we'll continue to track and monitor and make tweaks where we need

56:55 to. And then the immediacy and online thing. I think online has been outstripping bricks and mortar sales for some time now. and we do have resources in the business that focuses on making sure that our products appear how we would want them to in that online environment which is largely through our key retailers websites of course and I think we would argue that our shape of relative growth in bricks and mortar versus online is probably in line with what you're seeing in the major retailers so yeah I think our brands fit very well into that.

57:40 Thanks, and then just going over to sort of acquisitions and inorganic activity, is there any sense that you've been spoiled somewhat by the performance of the three acquisitions you've made so far in terms of, I mean, sustained double fidget growth year after year? Does that leave you more fussy in terms of what you'd look for? Does it change sort of the hurdle rate you're looking for in deals? It would be helpful if you could just give us a sort of structure in terms of what exactly are you looking for? Are you sticking by ambience? Would you be happy to move outside of that category? Would you be happy to move outside the UK? Could you give us some guidelines on that, please?

58:28 yeah sure no problem Darren so look I you know do we think we've been spoiled by what we've done so far I don't think so no because these brands have performed you know as well if not actually slightly better than we anticipated they would I think what it's done is it's just confirmed that our acquisition strategy and the approach we take is the right one so has it changed the hurdle rate and made it higher no it hasn't I think it's just confirmed that you know the hurdle rates we've got in place and what we're looking for in brands we acquire is the right thing to do so hence it's really a case of more of the same. Have we got the firepower to do things that are a bit bigger? Yes, yes we have but that doesn't necessarily mean that we're just looking for things that are bigger we're looking for things which as I say are where the consumer is moving to and where we can apply our branded growth model to deliver great growth so As I say, we'll just continue to acquire more things in that vein, I think, Darren.

59:32 What are we looking for? Is it just ambient? No, not necessarily. I think we're pretty open to different temperature regimes within the store but it really depends what's available that we think fits with the model. And is it just UK? No, it's not. So we're looking in the UK but we're also looking overseas as well. but that would be within our target geographies so as we said it's Australia, New Zealand, it's Europe, it's North America those are our focus overseas geographies and that's where we'll look as well as the UK of course so yeah pretty open the criteria are really about brand, consumer, consumer trend and how we think things will play out when we apply the brand and growth model to them.

1:00:20 Does that answer that Dan?

1:00:21 Very clear, thanks Alex. Thank you. As a final reminder, if you would like to ask a question, please press star 1 on your telephone keypad and we will pause for a further moment. Thank you. With no further questions on the line, I will now hand it back to Alex for closing remarks.

1:00:50 well thanks everyone for joining again this morning so it's been another good first half for us with some good branded revenue growth and that's despite that long hot summer so I think as I said earlier it really demonstrates the resilience we've built into the business now as we've built the sweet treats business built our new categories built a bigger business overseas and obviously we've got those acquisitions which are you know somewhat temperature agnostic compared to the core UK grocery business and I think if you think about how that plays out going forward as we have more growth from new categories, build the overseas businesses even bigger and acquire more brands, you're basically just dialing in more resilience over time as well as obviously with those acquired brands moving us more and more towards a point where consistent mid-single digit turnover growth will be possible.

1:01:45 and then of course we're introducing the interim dividend today so that was the new announcement today as well as that upgrading PBT and EPS off the back of the lower financing costs than we'd originally anticipated so we're quite happy with where we are today thanks everyone for joining the call today