C&C Group plc (CCR) Earnings Call Transcript

Good morning, everybody, and welcome to this presentation of C&C's interim results. Hosting the call, you've got me, Ralph Findlay, Chairman; and Patty McMahon, Chief Executive. So turning to the slide on Page 3, the key takeaways. I think the first thing to point out is that we have reported EBIT in the first half of EUR 30.5 million and that is net of an estimated EUR 22 million of ERP impact that we've described previously. I'm pleased to report that the service levels in the GB Distribution business have been restored and the key metric that we target in that area is the OTIF score. And we're now back to an indeed slightly above pre-ERP implementation levels. So that has been good progress. We have had an excellent performance from our strong brands, Bulmers in Ireland, and Tennent's in Scotland, with across the 2 brands of Bulmers and Tennent's net revenue growth of 9%. Just coming back briefly to the ERP system implementation. The operations within the Distribution business are now consolidated onto one systems platform, and that really does give a scope for targeting further efficiencies, and also further improvements in service. Turning to dividend and capital returns. We have today announced our intention to distribute EUR 150 million to shareholders over the next 3 fiscal years staying within targeted leverage range of 1.5x to 2x EBITDA. So just a bit more on that dividend and capital return objective. The first point I'd make is that we will seek to continue to maintain balance sheet strength. So as I pointed out, we will target leverage of between 1.5 and 2x. We'll continue to strengthen and improve the quality of the balance sheet to optimize cost of capital. And importantly, we will continue to retain the flexibility to manage disciplined investment in the business where there are opportunities to do so. At the same time, that includes -- that dividend and capital return plan includes a progressive base dividend growth, and in these interim results, we have declared a dividend of [ EUR 0.0189 ], and in future we will target progressive and sustainable base dividend growth. So just to summarize on that Distribution objective, the overall objective is for dividend and capital returns of EUR 150 million over the next 3 fiscal years. So with those highlights in mind, I'm going to hand over to Patty to discuss the progress on our operating objectives.

Thank you, Ralph. Turning now to Slide 5, and a quick look at the market in GB as we see it, and we see continued share losses for spirits. We noted that earlier in the year and spoke previously about spirits and performance immediately after the post-lockdown restrictions. Wine share has appeared to -- appears to have stabilized somewhat, which are -- with the share winners continuing to be beer and cider. In absolute terms, volumes for all categories declined by 2.6%, with value better than that at minus [ 1.5% ]. That's very much been achieved through pricing and premiumization. We spoke the last time about outlet closure trends in GB in Ireland and the relative weighting of those to the IFT, the Independent Free Trade and leased operators. And whilst that continues, we see the rate of decline slowing over the more recent period. A reminder that the growth of managed groups is good news for C&C as over 60% of our GB Distribution business is in that managed channel. So we've got strong relationships, stable businesses there. We're the #1 supplier to that managed operators sector in GB and we're growing. Turning now to Slide 7, and what was our big priority for Q2 and the restoration of service levels, and we've made solid progress. I can confirm that our OTIF, which is our On Time In Full measure, is higher now than it was before our ERP implementation. Of course, we have more work to do in improving these scores further and rebuilding our history of consistency and reliable service to all of our customers. September OTIF was 95% in GB. OTIF in Ireland remains very steady at about 98%, and as you know, that was unaffected by our ERP issues. Looking at Slide 8, and a specific look at Scotland, again, largely unaffected by ERP issues during the year. Scotland brands represents about 60% of our total GB branded revenue, and within that, 85% of that relates to our wonderful Tennent's brand. Overall, both volumes and revenue grew for us in Scotland in the half. Price/mix drove the performance on revenue, as we can see here, with Branded even higher than our Distribution business. This volume and revenue growth translated into a relatively significant market share growth for the Tennent's brand in the on-trade, up 400 basis points, growth that has been supported by upweight marketing activity and investment over the last period. Tennent's brand volumes were flat year-on-year with revenues up 11%. But it's not just about Tennent's though. We've grown market share for our premium beers too in the form of Heverlee, Menabrea and Innis & Gunn, and the latter we've got an 8% shareholding in. Turning now to Slide 9, and a specific look at Ireland, again, a region only impacted for us by the ERP issues earlier this year. Like Scotland, we have revenue growth here being delivered through price and mix management. Bulmers continues to gain share of cider, up 35 basis points. However, we should note that cider as a category lost about 70 basis point share to leave it with about 11% of overall LAD in the period. We continue to invest in the medium and long term, and Bulmers has reacted well to increase marketing investment and activity this year. Bulmers brand volumes were down 8%, but revenue was up 7% year-on-year. Turning to Slide 11, and a summary of the H1 FY '24 financial results. So net revenue of EUR 873 million was down 1% year-on-year, and that's despite the performance being materially impacted by our ERP-related recovery in the period. Branded revenue, as I've outlined, driven by price/mix was plus 7% overall, Distribution revenues down 3%. Operating profit of EUR 30.5 million reflects the one-off nonstructural disruption caused by the ERP issues with about 22% -- EUR 22 million being our estimate for the impact in H1. Pleasingly -- very pleasingly, branded profit grew by 5% in the period. That reflects the resilience in the main of our 2 core brands and their place as category leaders. Operating profit margins of 3.5% overall comprised Branded margins of 14.5% and Distribution margins of 0.8%. Effectively, Matthew Clark, Bibendum didn't generate profit in H1. As previously highlighted, our net debt was EUR 190 million post IFRS 16. That's up EUR 10 million from this time last year and equates to 2.1x net debt/EBITDA. On a pre-IFRS basis, leverage was 1.6x. Turning to Slide 12 and an overview of our net revenue progression across our Branded and Distribution businesses. And like-for-like, minus 1% year-on-year, and we're pleased to report that within that, our Branded net revenues across the group were in growth of 7% with price/mix growth of 11% more than offsetting the volume declines of minus 4%. The pricing resilience of our core brands continues to insulate our P&L somewhat from trading headwinds, and we leverage that selectively as required. Magners' performance in the period was not as strong as Tennent's and Bulmers with volumes down 12% and revenues down 6%. Our Distribution net revenues in Ireland were up 7%, representing 11% price/mix increase, offsetting volume declines of minus 3%. Despite the disruption emanating from our ERP implementation, our GB Distribution net revenue declined by only 4% as challenges with order fulfillment gradually eased over the period, providing the stability required to implement our delayed price increase and further enhancing our revenue yield. Turning to Slide 13 now, and a summary of our operating profit performance across the group in the period. As previously declared, operating profit for the period was EUR 30.5 million, which incorporates an estimate of EUR 22 million for one-off operating profit impacts attributable to our ERP disruption. In Ireland, our Branded and Distribution businesses recorded operating profit growth of 5% and 6%, respectively, which is clearly pleasing given the relatively muted volume opportunity. In GB, before accounting for one-off costs relating to the disruption, our Branded business enjoyed operating growth of 4% over the 6 months. However, our Distribution business's operating profit did decline by 9%, which is reflective of, I think, primarily 2 factors. One, a strong reopening outcome in the prior year post lockdown reopening and then less profitable customer and product category mix this year. The EUR 22 million estimate for ERP disruption costs are one-off in nature and span the investments made to accelerate and stabilize the business as quickly as possible. We remain of the view that EUR 25 million will be the full year operating impact of this disruption. Turning to Slide 14, and an insight into our anticipated input cost inflation for this year and next in our manufacturing sites. And of our total cost of sales, about 10% relates to manufacturing input costs, with the remainder attributable broadly to third-party goods for resale, labor, et cetera. As is widely documented, inflationary pressures across the commodity complex have been a structural headwind across most manufacturing industries, and we certainly haven't been immune from that. We've managed to insulate ourselves to an extent. However, owing to our hedge positions, which we quantify is delivering about a EUR 3 million benefit in the year. That's compared to the current spot rates that we have. In total, however, we estimate that the full year impact of input cost inflation this year to be about EUR 20 million, which roughly equates to about a 20% increase year-on-year. And nearly 2/3 of that increase is derived from materials -- materially increase -- rather, materially increase across sugar, cereals and glass, where global supply chains have struggled to meet growing demand. Next fiscal, so in FY '25, however, we project a modest softening in commodity pricing, and that's provided no further geopolitical destabilization, of course. But we do believe, along with further pricing actions that, that will be key for us targeting branded margin expansion from FY '25 onwards. As previously mentioned, cost pressures are the primary reason Branded margins have reduced over the past number of years. Turning now to Slide 15 on our net debt of -- just shy of EUR 190 million equates to a net debt/EBITDA of 2.1, as we've said, which is marginally above our targeted range due to the one-off ERP challenges. Free cash flow was negative EUR 3.5 million in the period as our operating cash flow absorbed sizable working capital outflows as we invested materially in stock across our depots to improve our customer service levels. We experienced higher outstanding debtor balances as well due to service levels and the associated invoicing delays. CapEx in the period comprises investment behind our ESG initiatives as well as general site management and investment across our depots and manufacturing sites. We're pleased to reinstate our dividend in the period, which marked the return of our progressive dividend policy and resulted in a cash outflow of EUR 14.9 million in the period. Incremental lease liabilities of EUR 18.8 million is reflective of the timing of lease renewals across primarily our distribution network. As we've now stabilized the business, we anticipate our cash flows to be positive in the year and deliver a leverage position within our stated guidance range by year-end. Turning to the next slide and concluding on Slide 17 with a reflection on our inherent business strengths, which provide the backdrop for our step change announcement on capital returns and distributions, hopefully provide shareholders with the certainty of value that they deserve. We believe it currently represent the most effective use of our capital over the medium term. And the last few years clearly been very challenging. We recognize the frustrations felt, I think, across all of our stakeholders. However, we emerge from these challenges to more stable, more secure business with clear opportunities in front of us to deliver enhanced shareholder value. And we remain excited about the future prospects of the business, the capabilities we have and executing against some significant value opportunities that we see. Our strategy remains underscored by an inherently strong business model, cash generation and a disciplined approach to capital allocation and a focus on efficiency. It's from this position of [indiscernible] confidence that we announced our intention to distribute EUR 150 million to shareholders over the next 3 fiscal years, as Ralph has already outlined. That's a testament to our belief in the durability of our system strength underpinned by our Branded and Distribution platforms. We are the leading distributor to the U.K. and Ireland -- Irish on-trade. And we have capacity for further growth across these geographies, which we're selectively targeting now that our GB business has stabilized service levels, growth opportunities to gain profitable market share that don't necessarily require significant cash outlays. Again, a reminder, in particular, our Distribution business is asset-light and in normal times has a high return on capital employed. On a steady state, we continue to target our operating margin, 4% for our Distribution business, a level that we recognize as appropriate, reflective of our market position. This margin level we anticipate a return on capital employed beyond 25%, which is significantly ahead of our average cost of capital and would improve our overall group return on capital employed to provide sustainable value creation. We believe that distributing dividends and other capital returns to shareholders represents the most effective use of our capital currently with our own share price, an important benchmark for all capital allocation decisions. Thank you very much. And Ralph?

Yes. Thank you, Patty. That concludes our presentation. I think that in -- talking through that, Patty has provided reassurance on the ERP implementation issues that we reported earlier. I think he's demonstrated the strength of our key brands in Tennent's and Bulmers and also provided clarity on capital allocation. And I think we'd now like to turn the meeting over to questions.

[Operator Instructions] The first question comes from Laurence Whyatt of Barclays.

A couple for me, if that's okay. Just firstly on your guidance, but it's where the consensus expectations are. We're currently looking for around -- just under EUR 60 million profit for this year. But just sort of breaking out how historically your first half and second half have worked out. And of course, the first half this year has had the ERP implementation impact taking EUR 22 million first half and EUR 25 million [ of ] the year. You would normally expect the second half then to be quite substantially a bit ahead of where current consensus levels are. Just wondering if you are comfortable with the current level of consensus? And I suppose, putting it another way, where do you see the key risks in the second half of the year that means that, that second half of the year is going to be slightly below where historically those numbers have been? And then my second question is around the downtrading that you're potentially seeing. Just wondering how you would characterize the current U.K. consumer? We can see clearly from Slide 5 that you're seeing cider and beer continue to take share from spirits. Do you think that is to do with downtrading? And certainly, within the beer categories or within the spirits categories, are you seeing people selecting lower-value products as a preference at the moment? Has that changed in recent months?

I'll try to take both of them, and Ralph might chime in with a view on the U.K. consumer. Look, I think we're clearly aware of where consensus is, Laurence, and as much as we don't have guidance out there, I think -- yes, we're aware of where consensus is. I think it is difficult to look at the norms of our historic sort of H1, H2 split. Clearly, we've got to EUR 22 million impacting H1. We've got EUR 3 million probably to impact H2 as well. So I think that, that's one thing that's different to the historic norms. Clearly, we're in rebuilding mode as well around IFT. And even though our net revenues in Distribution in GB were only down 4%, we still see that we have a way to go in regaining some of those IFT customers. That doesn't happen at the flick of a switch from the 1st of September. So I think that, that's a build into the year. I think probably the most significant change though in H2 versus an historic sort of run rate trend is probably the uncertainty around rail strikes and the impact that, that would have on an all-important Christmas trading period for us. You'll be aware of just how important November, December is to the trade. And I think that the last couple of years have provided some anomalous outcomes that maybe don't speak to the historic H1, H2 split. So I think we're aware of all of those things. I think they're largely assumed in analyst consensus, and we probably think that, that's the right place to be. I think on the second point around downtrading and maybe U.K. consumer, yes, I think, look, there clearly is evidence of downtrading. We see it probably an outlet typology. We see that, that maybe -- well, the Rugby World Cup was better for pubs than it was for restaurants. And I think we have seen over the last few years, probably people trading down from high-end restaurants into maybe gastropubs, from gastropubs into wet-led pubs. So I do recognize the downtrading piece that you speak to. And it's very clear, I think when you look at spirits and cocktails performance, wine up until recently had been declining as well, and I would attribute that to consumers seeking maybe better value. One point to call out is around premiumization because we continue to see within categories, and within beer in particular and cider, we're continuing to see premiumization. And pleasingly, our volumes for our premium brands were up 23%. I think you compare that to maybe some of the other big brewers that had results out this week. That definitely looks like our performance. So I think we're still seeing premium growth within categories. But yes, I do recognize that the downtrading is a feature.

Yes, I think that's right. The fact is the U.K. consumer is clearly -- there's still fragility around that. And Patty is correct, there's been trading into -- the pub sector has generally been performing pretty well in the mainstream part of the market. In terms of brands, that shift has been into premium and into recognized brands. And that, I think, has benefited us because that's really where we sit. Tennent's seems to be able to span premium and mainstream, which is quite an unusual thing for a brand to be able to do, but it is an extraordinary brand. And Bulmers clearly a well-recognized brand in the Irish market, and those 2 brands have done relatively well. I think there are other consequences of market share changes, which also benefited us. Changes in sort of ranges of wines and spirits means that we've been able to consolidate brands and reduce SKUs, which has been helpful to our overall efficiency. So those are some other points I'd add to that.

Next question comes from Patrick Higgins of Goodbody.

I just want to kind of focus on the Irish business. And I guess, firstly, Bulmers' volumes down almost 8%. How much do you put that down to elasticity demand versus poor weather or maybe just changing consumer preferences towards Stout beer? And then the second question on Ireland is just around the Branded volumes, down just 4.4%, despite Bulmers down at 8%. Could you just speak about the balancing items within that Branded performance? Clearly, some good offsetting performance in some of the premium brands, so interested to hear more detail on that, please?

Yes. Well, look, yes -- I'll answer the second one first. And I think you're dead right. I think we've done a really solid job with building out the portfolio around Bulmers. I mean Bulmers is very much the anchor brand that we've got in Ireland. About 50% of our gross profit in Ireland still gets generated by Bulmers. But creating a portfolio around it is something that's been a big, big focus for the Irish team. I think they've done a really good job there. We know -- speaking to your first point, I think we know that cider in particular does tend to trade with weather. So it's more impacted the weather by -- than most of the categories. And I think that's probably a little bit of a feature in what we're seeing in the volumes here, Patrick. And that's not to say that weather was universally terrible this year. I don't think it was. But the big, big months of July and August clearly were disappointing weather-wise, and I think that, that does provide a little bit of the headwind that we see on volumes. I think we've taken some price action as well as we've needed to, to protect margin, to remain competitive, and that undoubtedly has had an impact on volume to some extent also. I think we're not alone there. And I think the longer-term trend away from weather and away from pricing is pressure on volumes. And I think you're going to continue to see that. Where growth will come is in price and mix management, in particular. So revenue growth, maybe not so much volume growth. But look, as we know, when it's good weather in Ireland, Bulmers reacts very, very positively to that. So I think that's undoubtedly a feature. Yes.

Our next question is from Cathal Kenny of Davy Research.