Performant Financial H2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
March 4, 2025

There are 9 speakers on the call.

Operator

Right. Well, good morning, everybody. Thank you all very much for coming here to join us this morning. And also thank you to those who are joining us online. I'm Simon Burke.

Operator

I'm the Chairman of Bakavore, and it's my pleasure to introduce this session this morning. Just to give you an overview of what we're going to cover, Mike will start out by giving you the headlines as it were. Lee will then go into the financial detail, and then Mike will give you a strategic overview of where we think we're at. And then there will be as much time as you need for questions at the end. So without further ado, I will hand you over to Mike.

Operator

Thank you.

Speaker 1

Thanks, Simon. So I want to start off with a couple of slides before I hand over to Lee, who'll go through the detail just framing the key messages from today. So only two slides, one looking back and one looking forward. And I guess at the end of the day, the short story is we're in a really, really good place. So if we look back at 2024, a really strong performance, we've absolutely step changed the financial delivery of the business.

Speaker 1

And I think the three metrics I've pulled out on there speak for themselves really. So a 70 basis point improvement in margin taken us to 5%. And you know our aspiration is 6%, so a big step towards that. Debt coming down further and leverage now at 1.1 times. So a 0.4 turn reduction, big movement and a significant step on in return on invested capital taking us up to double digits and just over 10%.

Speaker 1

So it's absolutely clear that the strategy we've got continues to deliver the performance in the business. And that's going to be a theme as we run through the day. So look, we're in good shape as we look back. But obviously, looking forward is more important. And that's what you guys have come for today, more so than the look back, I think.

Speaker 1

But look, we long and short of it is we're hearing a lot of negative narrative out there, obviously, more overnight. But if I park that for a minute, a lot of talk about the budget, a lot of talk about cost price inflation on food, all feels quite downbeat. We actually feel quite the opposite. We feel quite upbeat. We've got momentum and there is a lot that we'll talk to you about that sort of fuels that positivity.

Speaker 1

In essence, we're going to ensure that we step margin on again in 2025 as we move towards that 6%. And we'll do that by driving through the strategy. And we're really clear what the areas of focus are in each of the four pillars in The UK. We've absolutely got to deal with inflation. Lee will talk quite a bit about this, but there's another $50,000,000 coming down or coming down the track, mostly labor.

Speaker 1

We've also now closed our Wigan site. That's exiting low margin business that happened at the that sadly happened at the February. A bit of work to do that will drive some cost in the short term, but as we get into the second half that will help margin because the business will have adjusted for the loss of that poor business at the end of the day. Internationally, we've got more to go out in The U. S.

Speaker 1

The U. S. Numbers are fantastic. I'll talk to those later, but there's more in the tank. And our strategic reshape in China continues.

Speaker 1

When it comes to excellence, we're laser focused on driving a pipeline of efficiency, and the back of our operating system I'll bring to life a little bit later. But that really sits behind all our work in this pillar. And then finally, trust. We remain focused on our people and ESG priorities. And actually, whilst work in this pillar is absolutely imperative because it's the right thing to do, there are financial benefits as well.

Speaker 1

So all of that leads us to say that we're you know, reinforcing the guidance that we've given and you've interpreted. We sit very comfortable with the consensus. I think if I look at the range, we'd probably like to sit tight in a bit and the bottom end come up and the top end come down a bit, but sit very comfortably with where the market expectation sits. So look, just wanted to head off with those two slides. I'm going to hand over to Lee, who'll go into a lot more detail around the numbers.

Speaker 2

So thanks, Mike, and good morning, everyone. Obviously, this is my first results announcement. And the headline on Slide seven, Strong 2024 Financial Performance, makes it a great way to start. So this slide highlights our range of financial measures, and I'm pleased to say that all the three groupings on this page bring to life what a great 2024 how great 2024 has been for us. Firstly, from a growth and profit perspective, Light Flight revenues were up 5.1% with all three regions delivering good volume growth and adjusted operating profit up 20.5% as we leverage the volume and continue to drive efficiencies.

Speaker 2

The balance sheet is stronger than ever with good conversion of EBIT into free cash, which was lower than last year reflects capital spend returning to more normal levels. As a result, we have delivered further improvement on leverage down 0.4 times year on year to 1.1 times and down 0.1 times compared to the half year. This now sits comfortably at the lower end of our target range. Finally, in terms of enhanced returns, ROIC is now in double digits at 10.1%, up two sixty basis points year on year and we have delivered a meaningful step on in EPS. This combined with our confidence that the '25 outlook leads to the Board recommending a 10% increase in the final dividend resulting as a total dividend per share of 8p.

Speaker 2

So let's now talk through a bit more detail starting with revenue on Slide eight. Like for like revenues were up 5.1%. Within this, prices contributed 2.1% and positively, volume has delivered 3%. On a statutory basis, revenues were up 4%. There are two adjustments to bridge like for like to the statutory results.

Speaker 2

The first is the movement in currency and the second, the revenues from our China bakery business, which we sold in March 2024. Moving on to like for like revenue performance by region. As you can see, The U. K. Revenues were up 5.2% and volume up 2.8%.

Speaker 2

Positively, within this, all four of our categories have seen volume growth. Price was up 2.4%, reflecting the good level of support we receive from our customers on inflation recovery. In The U. S, revenues were up 2%, all driven by volume. And in line with the guidance at the half year, we saw a return to growth in the second half with revenue up 9.1% supported by new listings of our Fresh and Simple brand and a strong Thanksgiving.

Speaker 2

In China, revenues were up 11.3% driven by a good volume growth in Mainland China offset in part by reduced volumes in Hong Kong. And I'll come on to talk about more about our plans for Hong Kong in shortly. Moving on to slide nine, where we show our economic bridge. This highlights the key movements in adjusted operating profit. But starting with the overall movement, our adjusted operating profit has increased by $19,300,000 which is an increase of 20.5% year on year and margin is up 70 basis points to 5%.

Speaker 2

Volume growth as outlined on the previous slide has made a meaningful contribution to the model delivering $18,000,000 Moving on to inflation, while still a large number of $59,000,000 or a 2.9% increase in costs, it is significantly lower than the $360,000,000 we face cumulatively across the previous two years. In 2024, labor is the largest component with increases in national living wage being the key driver. We have continued to receive good level of support from our customers on recovering these increased costs and this is reflecting the price increases shown on the chart. In 2025, we expect inflation to be circa $50,000,000 and again weighted towards labor. Within this increase within this, the increase in U.

Speaker 2

K. National Insurance is expected to have a circa $15,000,000 annualized impact. We're positively engaged with our customers regarding recovery against this and given our track record would expect a good level of support. Finally, our efficiency improvements of $15,000,000 have underpinned the profit improvement. We made further progress in driving operational performance across all three regions through our back of our operating system and Mike will bring a bit more detail to this in the next section.

Speaker 2

So moving on to slide 10 and our adjusted operating profit by region. So as you can see from the table, in The U. K, profits were up $11,300,000 or 12% year on year and margin of 5.4% was up 30 basis points. This was driven by improved volumes, good price recovery and further efficiency improvements. In The U.

Speaker 2

S, profit steps up $6,500,000 to $9,900,000 and margin up two eighty basis points to 4.3%. Our momentum continued through the year underpinned by our laser focus on driving operational efficiencies. Positively, at an EBITDA level, The U. S. Is now delivering margin ahead of The U.

Speaker 2

K, Nine Point Five Percent compared to 8.2%. Clearly, at an EBIT level, The U. K. Remains ahead, but this is driven by the relatively high depreciation charge in The U. S.

Speaker 2

We remain confident that The U. S. Will become accretive to the group's EBIT margin in the medium term and supports the delivery of our 6% margin target. In China, operating losses halved as volumes continue to improve and our lean manufacturing efficiencies delivered efficient lean manufacturing initiatives delivered efficiencies. The business continues to be self sustaining and cash generative.

Speaker 2

As we continue to look for opportunities to simplify our operations, in December 2024, we agreed the sale of our Hong Kong business, which is expected to complete in April. This follows the disposal of our bakery business in March 2024. Operating profits of $93,400,000 includes a net exceptional charge of $20,200,000 The largest component of this relates to the costs of our Wigan closure of our Wigan site, which we announced in September with $8,500,000 of cash costs and $12,900,000 impairment of assets. We've also recognized a $3,200,000 impairment in relation to the sale of our Hong Kong business. In the year, this is more than offset by the profits on disposal of the bakery.

Speaker 2

So now moving to slide 11 to talk more about cash. Overall, we've continued to deliver strong cash generation, reflecting improved profits and further working capital inflow, partially offset by an increase in capital spend, which returned to more normal levels. This delivered a $36,000,000 reduction in debt with leverage down 0.5x to 1.1x comfortably at the lower end of our range of one to two times. As you can see, we delivered another good working capital improvement in 2024, building on the record delivery in 2023. Capital spend has increased in a controlled manner.

Speaker 2

This follows restricted spend in 2023. We've continued to see returns from our investments and productivity and capacity materialize, supporting the step up in 2024 profits. Our spend in the year included $3,000,000 related to the replacement of our legacy ARP system in The UK. Returns to our shareholders were also funded with the outflow in '24 reflecting the final '23 dividend payment and the '24 interim payment. As outlined at the half year, we refinanced our debt facilities in July 24.

Speaker 2

We have facilities of $350,000,000 comprising $150,000,000 term loan and 200,000,000 RCF with a four year term plus the option of two one year extensions. These facilities included a 25 basis point improvement in margin. And then finally on this slide, I'm pleased to report that the recovery payments on The U. K. Defined benefit scheme will cease as of March 25.

Speaker 2

As the scheme was in surplus at December 24 and January 25. This was previously an annual cost of $2,500,000 In light of this, we feel positive about the next trial of valuation which is this year. So looking ahead to our 2025 guidance, which you'll find on slide 12. Starting with reported revenue growth, our guidance for the full year is that we expect to be broadly in line with 2024. The impact of the WIG enclosure being largely offset by underlying volume growth in all three regions and some contribution to price linked to inflation recovery.

Speaker 2

Although still early in the year, trading in '25 has started well with volume growth continuing in all three regions. From an adjusted operating profit perspective, we expect to be in line with market expectations with consensus sitting at $118,600,000 and the range being $114,000,000 to $123,000,000 We expect finance costs to reduce slightly as we maintain lower debt levels and forecast U. K. Base rates to decrease marginally. We continue to have a good level of cover with $130,000,000 of interest rate swaps in place at 3.7%.

Speaker 2

To finish off this slide, we expect the effective tax rate to return to marginally above The UK corporation tax rate at 26% with certain items that benefited our ETR in 2024 not expected to recur. So finally, I'll conclude our guidance with capital allocation on Slide 13. We expect to return to more and more levels of capital of circa $70,000,000 whilst maintaining the strong controls we have introduced in the last couple of years. Capital includes seven circa $7,000,000 of spend in relation to the ERP replacement. In addition to the capital cost, there is a further circa $8,000,000 that will be expensed in 2025 and treated as exceptional cost.

Speaker 2

The total project spend is expected to be circa $40,000,000 and concluded in 2027 and will be broadly split equally between capital and exceptional cost. We remain focused on our strategic growth opportunities and we expect to build on the improvement in returns we have seen in 2024. Our strengthened balance sheet means we have the flexibility to assess acquisition opportunities where we see the right strategic fit and the potential to enhance group's margin and returns. So whilst at the low end, we believe our leverage target remains appropriate, albeit we do expect to continue to deliver some improvements in debt with ongoing working capital focus and profit improvement. And finally, we remain committed to our progressive dividend policy and expect the level of increase to be more closely aligned to historic levels of circa 5%.

Speaker 2

So to conclude, in 2024, we've delivered a strong financial performance, the call outs being profit and margin progressive in all three regions, debt and leverage both at record lows despite increasing capital spend and ROIC back into double digits. We remain confident in delivering progress in 2025 as we continue our trajectory towards 6% target in 2027. Now I'll hand back over to Mike.

Speaker 1

Brilliant. Thanks, Lee. Very clear. So I want to say a little bit about the strategy. I want to start being a bit more holistic in terms of what it is, but I'm not going to go through it all in detail because you know.

Speaker 1

And I'll start with a slide that I used at the half year. Then I want to talk a little bit about our strategy and action through 2024 to give you a sense of why we feel positive about the performance moving forward. So this chart is no nothing new, and I'm really not going to go through it. But I think what I would say, our strategy and our plan give us absolute clarity and purpose as a business. And there's no doubt in my mind that that clarity and purpose underpins our delivery, be that financial or otherwise.

Speaker 1

And we absolutely want to reaffirm today that our target of 6% margin in 2027 is absolutely going to be delivered. And as I said earlier, we took a big step along the path with the 70 basis point improvement in 2024. So I now want to focus on 2024 and talk a little bit about each of those pillars and what we've been working on. And in The UK, I want to really focus on the market and our performance in the market. And I think the big call out on this chart is that The UK fresh prepared food market is back in growth.

Speaker 1

So the middle pillar on the chart there really, really key for us. We've had a couple of years of decline, which is always a challenge when it comes through the model. Not only is it in growth, but we're back ahead of grocery. So it tells us we're operating in good space, which is really positive. To the far side of the chart, you've got the relative performance of categories.

Speaker 1

So you can see that meals and salads are outperforming the market and desserts and pizza are underperforming the market. And we'd always expect to blend to get back to that market number. I'll say a couple of words about the ones that are behind. I mean, I think, in terms of desserts, desserts remains more of a discretionary purchase than any other category we've got. So we have still seen some volume headwinds as we've gone through 2024.

Speaker 1

But at the end of the day, people still like a treat. And I think this is really important. We had a really strong Christmas and people bought into dessert strongly and volumes were up, so really encouraging. Pizza and bread is really about normalizing because through cost of living, consumers really focused on price rather than value and there was a lot of trading down. And we started to see this to right itself as people are now trading up.

Speaker 1

And we're seeing, therefore, a decline in volume, but strong performance in value. So an interesting dynamic there. All of this really comes back to the consumer and the consumer behavior. And I think what we're seeing is a normalization. I I think what people are telling us is they're coming to terms with and learning how to cope with the new world we live in because this inflation has stuck.

Speaker 1

We are still seeing inflation at much lower levels now, but it is still there. But consumers are getting more confident and are managing their spend in a different way. And actually, the big three macro drivers of fresh prepared foods are living large again. People are returning more and more to the way life used to be. They go into the office, getting out and about, and convenience is really important to people that are time pressured.

Speaker 1

And as people go back to the office, that time pressure starts to build. From a quality perspective, there's no doubt that eating out is incredibly expensive, and we offer fantastic quality of product, a good alternative to that heating out experience, that in home experience with the family. And then finally, it's all about value. And I think here value has reclaimed the top spot, if you like, from price. There is a definitive difference between the two.

Speaker 1

What we make is really strong value for money. Generally, meals at the moment will trade three for 9 or £10. That is phenomenal value for great quality product at the end of the day. So it's those consumer behaviors that are driving growth back into the market. And really, when we look at the consumer KPIs, it's all about frequency.

Speaker 1

People are getting out shopping more, and we know we are more of an impulse per purchase. Food for now, food for later. This frequency growth is really important for us. So good news around the market, but fantastic news around back of our performance as well because what this is saying is that we're outperforming. So the market was 2.6% up, we were 2.8% up, so beating the market.

Speaker 1

Winning in pizza, bread, and desserts, slightly lower in salads. And the reason we continue to win are the reasons that we've talked about before. Strong customer service, making sure we get good quality products on the shelf day in day out for our customers. Leading innovation, there is no doubt, as consumers have normalized their behavior, we're having to normalize our behavior a bit when it comes to innovation. And then we've got net business gains.

Speaker 1

We're winning more than we're losing. And desserts is a great example of a lot of this, because we are winning in desserts. And you know, that winning performance is really down to two things. Number one, it's down to innovation. So a lot of new lines have launched.

Speaker 1

I would say a big chunk of that is just standard MPD where we're winning out on briefs. But we also onboarded a major customer with a big cream cake win, which really supported our performance in this category. The other thing is exceptional delivery at peak. And desserts is interesting because we all get very fixated with Christmas. But actually, we get a peak at Valentine's Day, Easter.

Speaker 1

You know, all these events drive opportunities to sell more desserts and you know, people buy and shop the category strongly at those times. And it's our track record of delivering through peaks when customers really need us to deliver and consumers need us to deliver that makes us stand out. So great news in The UK. Our matrix is working really strongly, so our customer teams are laser focused on what consumers want, developing propositions, and delivering outperformance for our customers. And our operational teams back that up with fantastic delivery of service and quality.

Speaker 1

So UK in good shape. If I come to international, Lee called this out. I mean, the picture speak a thousand words. The two graphs on the page there really show the direction of travel internationally. It's really started to turn around with profitability improving on the whole.

Speaker 1

I think in terms of The U. S, you can see the marked improvement as we've gone into half two. We should remember that Thanksgiving is in there and we do get a seasonal spike for that. And some of the business we onboarded was specifically Thanksgiving product, but nevertheless a great performance. And as Lee said, from an EBITDA perspective, ahead of The UK.

Speaker 1

And I think the key story here is there is more to come. The back of our operating system is in place in its basic form. As we roll that out, we will deliver more efficiencies and that will continue to power performance. And we are still whilst we want growth, this is all about profitable growth and making sure that The U. S.

Speaker 1

Drives incremental benefit to the total group margin. If I come to China, China is never going to do that for us. We've been pretty clear on that, and we would reaffirm our excitement about The U. S. And our slight disappointment around China.

Speaker 1

We have a wonderful business that's incredibly well run, but it's never really going to deliver for the group and hence our strategic review. That said, the team have done an amazing job. We've halved the losses. And just to be clear, you know, we have about $5,500,000 6 million dollars of depreciation. So we are generating cash here and we're certainly not spending ever so much capital.

Speaker 1

So this is now not a drain on the group, which is really important to remember. We've streamlined because Hong Kong is now leaving us, which is good news given it's a drain on the business and it just leaves Mainland China, which is the most invested asset with the best customer base within the stable. And, yes, the majority of losses last year would have come through that Hong Kong business. So we're going to have a natural opportunity to step on again. So good news on the international front.

Speaker 1

In terms of the back of our operating system, we could talk about this for hours and I'll really try not to. But the system, so the diagram that's on the chart there, you know, talks about data insight and action. And I think the key here is our red zone system that we'll have talked to you about, you know, creates a data point. So we get a lot of data from that. And at the start, you get bogged down in data, but then you start finding the insight.

Speaker 1

And then the most important thing is finding the actions. And at the end of the day, we've now got a nice balance to this in The UK where the three segments are kind of incremental and it's a self fulfilling circle. In The US, we're probably more skewed to data at the moment as we start to implement Red Zone. But the key principles behind this are very simple. First and foremost, we want to do it the same in every one of our factories.

Speaker 1

There has to be a best way. We will find that and we will do it everywhere. That will fuel efficiency. Secondly, it's about people. You know, as with most of our structures, this is a matrix.

Speaker 1

We have experts at the center, and then we up skill our local teams because they are responsible and accountable for delivering. And we've put 500 people through the, OpEx Academy, which is a phenomenal number, and we will continue to do that. So, yes, people are key as they are in every part of our business. And then it's about optimization. It's short term and long term winning the day, and having a pipeline of future activity that's going to continue this procession of performance and efficiency through the business.

Speaker 1

And the points raised on the far side of the chart really talks to that pipeline. The first two examples there are things that are now up and running and delivering, but will give us a spring through the rest of this year and into next as we get some kind of annualization. And obviously, red zone at the bottom rolling out in The U. S. As an example of something that's on the pipeline that we're investing in now that will help in future years.

Speaker 1

And the pipeline is really, really strong. So I want to finish off on trust and start really with our ESG targets. Unfortunately, there's a bit of a blot on the landscape here because our net carbon emissions went up. We talked about this at the half year. Don't want to be complacent about that or sweep it under the carpet, but it was related absolutely on track to deliver our commitment here, which is a 42% reduction in emissions by 02/1930.

Speaker 1

So despite that disappointing year, we're on track. As we are with food waste, we've got to halve our food waste by 02/1930. And we saw another really strong step on in year and brings the reduction to three twenty basis points since we started this journey. So actually, good performance continuing in this space. And as I said at the start, we spend a lot of time talking about ESG in the business.

Speaker 1

And actually, we do because it's absolutely right that we are focused on this. We're doing things and using our scale for good. And the FareShare partnership that we've got along with the King's Coronation project where we're giving 500,000 meals to help tackle food insecurity is a great example of that. But there are financial benefits here. So the new breadline that we put into our crew site not only reduces labor, but it actually reduces energy costs because we've changed the type of refrigerant.

Speaker 1

And this is the great thing that we're coming to understand in this space. You know, we want to do things that future proof the business. Sometimes you have to spend a little bit more, but you can get heat recovery built in. You can spend a little bit more and get more efficient systems. So look, ESG, very much on track.

Speaker 1

And then people, I mean, the yardstick for us are the measures in the middle. It's about turnover and it's about engagement. And you can see there, we've seen some significant improvement in both measures. I think The U. S.

Speaker 1

Improvement does speak to the performance we've been driving in the business because it's a massive drop. Actually talks a little bit about the scale of the problem we had. And certainly, the team have been very focused as we've come out of recovery, spending more time doing the right things when it comes to engagement. So, yes, fantastic scores there as the score on the engagement survey is as well three twenty basis point improvement. And I think we see this as the two bits on the side of the chart really driving the metrics in the middle because it is about rewarding colleagues and paying them fairly.

Speaker 1

And through this whole cost of living crisis and significant period of inflation, we've actually increased hourly rates of pay in our factories in The UK ahead of the compound of the inflation. And that's a massive thing to be able to stand up here and say. I'm not sure there's ever so many businesses that could actually say that and stand behind that. The other thing that I'm pleased to update you on today, and we don't talk about this a lot because whilst it was very unpleasant, unfortunate and disappointing noise, it wasn't really materially affecting the business. But I'm pleased to say that as of yesterday, the dispute of Sporting with Unite has ceased.

Speaker 1

Unite came to us a week or so ago and said they were minded to recommend the acceptance of our final offer in October. They they proceeded to a ballot, and I'm pleased to say that, your colleagues at Spalding will be returning to work, and, you know, we can kind of get on with, you know, the more, yeah, the more positive things now on that side because it's been difficult for everybody. Aside from pay, it's also about benefits, and we've worked really hard to to to use our scale to deliver for colleagues. Two best examples for me to call out would be investment in facilities. That horrible picture is me opening a new staff facility in Highbridge A Week or so ago.

Speaker 1

And that has gone down immensely well, walking around the factory and meeting colleagues, you know, and doing that. It's brilliant. It's the restroom. You know, it's got quiet areas. It's got workspace.

Speaker 1

It's got the shop facility. You know, it is a proper reason for people to come and work at Highbridge. And that links nicely to the staff shop push that we've had. We make food. The one thing we can do to help our colleagues is to provide them with cheap food.

Speaker 1

And we now make food specifically to put in our staff shops. When we were just relying on over makes or rejects, we just couldn't get stock around the system. We now have set up a network to be able to supply certain Bakkavore products to every site on a weekly basis. And this has gone down incredibly well. At the moment, the run rate is about 1,000,000 meals per year, which when you do the math on it is pretty impressive.

Speaker 1

But this has been a big push and we'll continue to do this and we get great feedback around it. So look, I think I've hopefully shown that every pillar of our strategy is delivering an underpinning performance and it will continue to do so. So I've just got two slides to wrap up, which will then leave us sort of twenty minutes or longer if necessary for questions. The first one is just to repeat. We feel that we are in a really good place.

Speaker 1

We have momentum. We're confident about moving margin on again in 2025. We're reiterating the market expectation and our confidence in delivery and homing in on that consensus number and maybe reducing the range ever so slightly. And then the final start chart just summarizes everything really. Brilliant 2425 started well.

Speaker 1

The strategy and plan we've got gives us this clarity and purpose. That makes us very, very confident in delivering the 6% target we've laid down. And actually, as Lee said, our balance sheet strength underpins our ability to look for further margin enhancing returns. And obviously, we can do that by looking internally and externally. But this whole leverage piece, and I'll maybe preempt a question, this isn't worrying us.

Speaker 1

You know, Lee had a chart up there that said the cost of finance for this year is going to be 24,000,000. There's no it's it's not a bad time to be reducing leverage and and and therefore debt. So if we were to fall below that target, we'd sit quite comfortably with that. You know, we probably wouldn't change the target because we want to keep that flexibility. So I just thought I'd put that out there.

Speaker 1

And of course, if we do want to seize opportunities, they need to be absolutely right. And right means accretive to the group margin and to enhance that 6% that we've got as a target of normal spend metrics. So look, I think that's the formal bit done. Obviously, I think you guys get more excited about the questions and listening to us talk about our business. We obviously won't answer them all as specifically as you want, but we'll try and give you some good color in terms of how we see things going forward.

Operator

Thanks very much, Mike. We do have a microphone and if we could wait to be handed it because it'll just make it easier for people online to hear what you're saying. Charles?

Speaker 3

Charles Hall from Peel Hunt. Mike, it sounds as though you've got greater confidence on hitting or exceeding that 6% target. Obviously, good improvement last year, but what's giving you the confidence to be able to say say that you're going to deliver an extra 100 basis points? And what are the key drivers of doing so?

Speaker 1

Yeah. Look, we are confident. We've got real line of sight of all the pipelines that are in play. And those pipelines are in play through the four pillars of the strategy. So as I've said many times, we're not going to sort of build out and say what comes from each pillar, but it will be those four pillars that underpin that 100 basis points.

Speaker 1

We were very confident when we were sat at 4.3% that we were going to get to 6%, but we wanted to put a marker down. And we've done that with the 70 basis points improvement. Yeah, there will be a steady climb to the 6%. There won't be another step on like we've just seen. And actually, what we need to make sure we do in 2025 is underpin that stellar year.

Speaker 1

So there's a better consolidation. So I think that's the color. I mean, the confidence absolutely comes from what we're looking at in the business. And we've just got clear plans.

Speaker 3

And then on The U. S, the employee turnover was extremely high.

Speaker 1

Yes.

Speaker 3

Going back to 2023, big reduction 2024. What drove that big reduction? And what's that doing for all of your metrics in terms of productivity and capacity and customer service?

Speaker 1

Yeah. Look, I mean, it's difficult to link it directly to performance and customer service, but it just has to be linked. If you've got over 50% turnover in a business, you know, delivering efficiency and customer service is always going to be more of a challenge. I think what's shifted the paradigm, you know, I think it comes back to the pay and the benefits. Unfortunately, when we were losing money, we stopped giving pay rises.

Speaker 1

So there was a little bit of a vicious circle going on on this. And it was important that as soon as we got into making money, we started to reward colleagues and reintroduce the pay awards. So that has definitely played a part. But we've definitely, you know, as we've come out of crisis, because we were in crisis, and moved from recovery to stability, our ability to, you know, run the business in a normal way and focus more on your engagement and doing the right thing for our colleagues has definitely made a huge difference. It just when I walk around the factories over there, they just feel so different to what they used to.

Speaker 1

We've just gotten ourselves into such a bad place, and now we're in a really good place, but there's still loads of opportunity.

Speaker 3

And that volume growth you saw in H2, is that carrying through so far this year?

Speaker 1

Yes. Volume is still pretty strong. I mean, let's be clear, that was really overstated, not overstated, but there was a flattered, that's the word. Thanks, Lee. Flattered by Thanksgiving because some of the new business that we onboarded was specifically Thanksgiving product.

Speaker 1

But, yes, we are still seeing growth. There's going to be an annualization impact. We're not going to grow anything like 9% this year. And we don't necessarily want to. We want to see profits continue to improve and margin improve.

Speaker 1

But there will be growth.

Speaker 3

Perfect. Thanks.

Speaker 4

Thank you. Damien MacNeil from Deutsche Numis. I think one for you Lee, firstly on CapEx. Can you talk to us about how much of that 70,000,000 that you've got in for this year is strategic? And outside of the ERP investment, can you tell us or identify some of the projects that that's been spent on?

Speaker 4

And then, perhaps for you, Mike, just an update on the FPF market in The UK. It sort of indicated that it's in a good place. Have you got any sort of feel for what level of growth we should expect? And in particular, what you're hearing from your customers? Because I think most of your customers are performing pretty well.

Speaker 1

Yeah. Well, let me take that one first and then pass over to Lee on the on the CapEx one. So look, I think firstly, we saw the market grow 2.6% last year. I'm not sure it's going to go quite as much this year. So we'd be expecting one point something would be where our heads are with this.

Speaker 1

So we're not expecting massive growth to underpin the model is the first point. You're absolutely right to call it out and I should have called it out. Our customer mix is really, really strong at the moment. You've got Tesco, M and S, Sainsbury's, our three biggest customers in performing really, really strongly and actually doubling down on food and doubling down on all the things that speak to those three key drivers of fresh prepared food. And I think that's what will ensure the market stays ahead of grocery.

Speaker 1

So I think that gives you a bit of color on the growth as well as our customer mix.

Speaker 4

Okay. Do

Speaker 2

I need the mic or

Operator

Yes, please.

Speaker 2

Yes. Okay. So yes, going back to the CapEx question. So yes, look, million planned for this year. I mean, broadly, we talk about a third of that being sort of strategic in nature, driving capacity productivity.

Speaker 2

In terms of bringing some color to the types of projects, we got a couple of really, really great ones. Yes, building on our bread experience and craft breads, we're now laying down that same technology on the second line. And then in the pizza space, some automation, which with it brings a pretty decent capacity step in terms of stuffed crust pizzas. So those two things would be great examples as well as several other areas. Was that the yes, that was a tough question.

Speaker 2

Thanks.

Speaker 5

Good morning. Vincent Ryan here from GoodBuddy. Two questions for me, please. Firstly, just with regards to your China business following the sale of the Hong Kong, how should we think of that business going forward in terms of top line and sort of a sustainable run rate margin or profit generation? And then secondly, one of your like you think you've mentioned strong balance sheet and would consider M and A.

Speaker 5

One of your peers has also talked about looking at M and A sort of further field, particularly in Continental Europe. Is that part of your thinking? Or would it M and A be very much UK or within the existing footprint?

Speaker 1

Yes. Let's start with that one. We've said many times in the past, China's closed off. U. S.

Speaker 1

Would like to, but there's not really anything in our space. So that brings us back to The UK if we were to do anything. And there is a big if around that. I think the thing I would say to back that up is we're not looking to open up on another front. So we've been to Europe, we've tried that.

Speaker 1

It didn't work for us in our space and we're certainly not going to be going back there. And I think whilst we talk about M and A, we are so focused on making sure anything that we would consider would be accretive from a margin perspective. It just has to be at the right price and no one wants to sell anything for the right price. And it has to be laden with synergy. So we set a high bar on this, so I wouldn't get massively excited around M and A.

Speaker 1

In terms of China, look, we've tied the business up. The bit we will have left is the blue ribbon bit, and it is a great asset. It's generating a bit of cash. We are, as we've said on many times, reviewing strategic options. I feel if we could find someone to work with over there, that would get more out of the business.

Speaker 1

But if we can't, we will continue as is because it's not a nail in our heads anymore. In terms of what to expect, I would expect a step on profitability this year. Sale is getting harder given the challenges that some of the American brands are having over there, the likes of Starbucks, Yum! And therefore, I think probably the growth that we've seen over the last year might slow up somewhat. But profitability, we're confident that our lean programs over there that link into back and forth operating system again will protect us from some of those commercial pressures.

Speaker 1

But breakeven at EBIT is probably as good as it gets and that's not very exciting.

Speaker 6

It's Andrew Ford from Peel Hunt. Just a couple from me. You mentioned the sort of a bit of a reversion in consumer sort of behaviors and priorities. I just wondered if you're seeing any, any priorities change with your customers, whether they're still looking for the same things they were last year or if it's sort of a bit more of a pre COVID sort of look on things like ESG, etcetera. And then secondly, on the margin target, I know Charles has already sort of asked on that and that there is a lot of confidence around that number.

Speaker 6

If assuming you sort of get to the 6%, is it then about margin progression from there? Or would you look a little bit more about, you know, is it more back to sort of volume performance at that point? Sort of where do you, you know, how do you think about it if and when we get there?

Speaker 1

Well, I'll work backwards. I mean, look, there's a link between volume and, you know, bottom line delivery if you get the balance right. So, yeah, we're always going to be focused on that. But, you know, I don't think we should be thinking about 6% as a ceiling. You know, we've said that we're going to deliver that through our normal business operations.

Speaker 1

So our normal 70,000,000 of capital through our existing regions. But we could use our balance sheet to do more is what I'm trying to say. So I think that was the second part of the question. The first part was around retailers changing. I don't think they are ever so much.

Speaker 1

I think they're quite consistent in their approaches. There's some nuance because we're seeing promotions, yeah, come back into play, and lot a lot more promotions in our space now than there would have been over the last, if I go back, say, two years. I think they're very excited about this shift to own label. I think I read something that one of the teams sent me actually about the scale of own label now in grocery being as high as it's ever been. And I think that's a really interesting dynamic.

Speaker 1

And I think some of that is back to consumers learning to cope because we are a coping nation at the end of the day, learning to cope with some of the challenges that the cost of living crisis has brought as they've had clarity about what's going to happen to their earnings.

Speaker 7

Matthew Webb from Investec. Two questions, please. Firstly, just going back to the employee turnover, obviously, that U. S. Number was exceptional, but The UK number was very, very impressive as well.

Speaker 7

And you talked about what you did to help achieve that. I wonder whether there was also a broader labor market issue there. Market issue there. Are there fewer opportunities for people elsewhere? And then also, again, on that point, I mean, do you think that you can maintain the employee turnover at that low level or even drive it lower?

Speaker 7

That's the first question. And then the second question just on Wigan. You mentioned, I think, if I understood it correctly, some costs associated with closing that down in the first half of the year, but benefits starting to come through in the second. I wonder if you could just clarify that and if possible quantify. Thank you.

Speaker 1

Yes. I'm not sure we quantify at this stage. I mean, when you shut a factory, it's quite disruptive. You then need to mothball it or prepare it for its next state. I mean, this is probably a site that we would look to.

Speaker 1

We own it, so we'd probably look to dispose of it. So there'd be some costs associated with that. So, really, the message here is the second half, we will start seeing some benefits come through and obviously that will then give us a spring into next year. So benefits from second half this year into first half next. In terms of the but you had so many parts to the first question.

Speaker 1

I forgot it's all about turnover.

Speaker 7

Sorry, sorry. I don't blame you. Yeah.

Speaker 6

It did go on the first question.

Speaker 1

I've got it. I remember. So the second part of your first question was, you know, is it all down to you or have you had help? And in truth, we've had help. There is no doubt that the environment has eased here.

Speaker 1

I would still say we struggle more around sort of skills, but we're working hard to bring people into the business and skill them up. But, yeah, we've definitely come away from having a labor crisis, and I think cost of living has helped that. A lot of people that, you know, took themselves out of the out of work through COVID, you know, felt they probably had to go back when when things got a bit tougher. So definitely had some some some help environmentally, but I wouldn't want to take anything away from the effort that has been put in by the the the broad team in The UK, you know, operationally, because we can come up with plans, you know, led by, Don Maria behind, but, you know, execution is actually in the field, and the effort that's gone into engaging with our people and, you know, making back of our better place to work, you know, it's been phenomenal. And it's a bit like an oil tanker.

Speaker 1

In all honesty, Matthew, we were really disappointed with the, you know, with the the the improvements we were seeing. They just felt too incremental. This came through in a rush last year, and I think it was a lot to do with all that effort that had been put in upfront, as well as the environment continuing to ease.

Speaker 7

And do you think you can drive that employee turnover down even further?

Speaker 1

I think it's, you know, well, it's the lowest it's been, I think, Donner Murray. So, you know, I think you want a level of turnover, but at that level that we're at now is certainly not on our worry wall in terms of, you know, being, you know, being a, an impact anymore on on performance. Yeah. We work hard to absolutely make sure it doesn't go up because we've are seeing benefits from where we got it to. But it's not it's not it's pretty stable at the moment in all

Speaker 6

honesty. Thanks,

Operator

Do we have anything? So, yeah, thank you. We should have some people joining online. So if the operator would like to go live, and we can open the lines. Thank you.

Speaker 1

Thank you.

Speaker 8

Claesen Busch from Berenberg. Great category performance across pizza and bread and desserts and meals. Just touch on salads because I noticed that it's in growth as a category but less so for you.

Speaker 1

Yes. Look, we are annualizing some losses when we shut a factory in 2023. So there's a bit of an effect coming through there. Also, we're exposed a bit here to mix. Our salad business is very broad.

Speaker 1

And whilst we operate in Food2Go, Food2Go isn't that concentrated. Food2Go has driven quite a bit of the growth here. So that's given us a bit of a lag. But that's where having this breadth, Clayton, is always really important to us. It's, yes, it's just served us well through the years in all honesty.

Operator

Any more? There's something on your mind and you go out the door without asking it, you'll regret it later. Two loss. Well, there is that. Okay.

Operator

No. Well, in that case, it just remains for me to thank you all very much for your time this morning. Thank you for joining us. And I know most of you will have catch ups with the team later as well. But thank you for your continuing support.

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Performant Financial H2 2024
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