C&C Group plc (CCR) Earnings Call Transcript

Welcome to C&C Group's Interim Results Presentation for the 6 months ended 31st of August 2024. In a moment, you will hear a short presentation from Chair and Chief Executive Officer, Ralph Findlay; and Chief Financial and Transformation Officer, Andrew Andrea. After that, Ralph and Andrew will welcome your questions. [Operator Instructions] But first, I'll hand over to Ralph for the presentation.

Thank you, and good morning, everybody, and welcome to this presentation of our interim results, and I'm just going to start here on the introductory slide. The objectives of today is that we will go through the key points and highlights of our performance, a reminder of our strategy and what the market is doing. We'll cover the performance of the business segments. Andrew will update on our financial performance, and we'll take Q&A at the end. So moving on to the next slide. In terms of performance, I think against a challenging market, this was a resilient performance. Our net revenue was slightly down, and that was mainly due to the exit from some noncore activities, including our water dispense business and some low-margin contract business, which we exited. Free cash flow was strong. We had a net inflow of just over EUR 19 million, and that actually represented an increase year-on-year of free cash flow of EUR 19 million. The key brands performed well in their respective segments, with continued strong growth in premium brands, and I will describe that in more detail shortly. Operating profit of EUR 40.3 million was 29% up against the previously published numbers. And Andrew will go into that performance in detail later. We have declared a dividend of EUR 0.02 per share, a 6% increase year-on-year. And we have, so far of the target to return at least EUR 150 million to investors through share buybacks, completed a EUR 15 million tranche, and the second tranche is now underway. And those buybacks represent an effective and value accretive use of our capital at this time. So some key points on the facilitators to enable the business to continue to demonstrate improved performance at the bottom of that slide. First of all, we appointed 2 new nonexec directors, and we have brought in external people into some key executive roles. This is improving our governance oversight, and it is sharpening our capability in key operational areas. Secondly, we are simplifying the business and improving processes, and that's leading to a clear focus on quality, on efficiency, health and safety and consistency in our supply chain business and better customer and market-driven decision-making across the business generally. Thirdly, an important part of that simplification and improvement process is ongoing investment in technology, moving our systems investment on from the ERP investment of 2023 and '24 on to customer relationship management and financial systems to improve our customer management and to improve our financial reporting internally. Finally, we have opportunities in cider and in premium beer to win in these key segments of the market. So turning to the next page on strategy. Our strategy remains consistent. So we are a branded business and a distribution business with opportunity to further leverage synergies between those 2 businesses. In brands where we have leading market shares with very strong brands in Ireland and the U.K., we can leverage those positions to build distribution of premium beers and cider. In distribution, through Matthew Clark and Bibendum, we have an industry-leading distribution platform to target share growth in the on-trade and to use our scale and systems investment to further improve operating margins. From a financial perspective, we have very clear financial targets. Sales of EUR 2 billion, EBIT of EUR 100 million, free cash flow of EUR 75 million with a manageable leverage of around 1x EBITDA, with those targets to be achieved by financial year '27. Meeting our financial targets facilitates a sustainable and progressive dividend and creates the potential for improved shareholder returns or, in a consolidating market, M&A provided that we can achieve high returns. As I've described previously, currently, share buybacks are an effective use of capital. And it's our belief that the achievement of our financial targets and our operational plans will create value for shareholders. Turning to the next page and the market. Although it's been a challenging period, with a poor summer in the U.K. and Ireland and cost of living pressures creating a flight to value, the sector has actually been fairly resilient. As I note on the slide, we faced an additional and unforeseen consequence of the fact that a large number of our core Tennent's consumers went to Germany for the Euros. And many of those people, core Tennent's drinkers, and we definitely saw a dip in volumes during that period. The flight to value has probably helped pubs versus restaurants, and beer and cider took a greater share of spend compared to higher-priced and higher-margin wines and spirits, and we saw some of that reflected in our numbers. So overall, market growth in terms of value and wet-led pubs doing better, with beer and cider outperforming wines and spirits. Turning to the next page and looking at more detail at our branded performance. Tennent's increased its market share of the Scottish beer and lager segments, with shares of 42% of the total beer market segment in Scotland and 55% of the lager segment in Scotland, with a really strong market share performance in the on-trade and broadly holding share in the off-trade, the on-trade being up by 5 percentage points in terms of share of lager. As you can see from the bar and the line graph, total net revenue was slightly down year-on-year by around 1%, with revenue per hectoliter continuing to increase. While that illustrates that the market in Scotland has been quite tough, I think part of that, as I've said previously, was to do with the Euros, which had a marginal negative impact on Tennent's volumes. At the same time, we recorded our highest-ever brand health scores for Tennent's, which is a good foundation for future performance. Turning to Bulmers on the next slide. The cider market in Ireland was quite weak, influenced by the relatively poor summer, and net revenues of EUR 35.7 million were down 3.5%, which reflects that. Nevertheless, we were broadly neutral in terms of market share, with modest outperformance in the on-trade and a slight reduction in off-trade share. As with Tennent's, revenue per hectoliter was slightly ahead of last year. So a good performance from Bulmers in its market. Turning to the next slide and looking forward, we are pleased to be planning to bring the Magners brand back under our own management. It's been managed by Budweiser Brewing Group in England and Wales and distributed by them. And as part of a wider renegotiation of that partnership, we will take it back from the beginning of January 2025. We described the renegotiation of the partnership is essentially neutral to us from a profit perspective. But I do see this as an opportunity. However I look at it, I think that no brewer is going to love our brand as much as us, the brand owner. So I do think it has potential. The performance of the brand has been quite weak for several years, and we expect it to respond to brand investment and increased focus by us on the cider category. And I expect innovation in terms of packaging and brand extensions, which we have historically done little of. I also think, as I've already said, that we can exploit our industry-leading Matthew Clark distribution platform to increase channel distribution. Turning to the next page and premium beer and cider. We are continuing to make very good progress, with revenues up 9% in the period and double-digit volume growth for Menabrea, the premium Italian lager, and Orchard Pig, our biggest premium cider. Premium is around 9% of total branded net revenues, and we have set our own near-term target to increase this to around 15%. The portfolio, as described on the left of the chart, will, I think, benefit from increased focus and management of distribution opportunities to help achieve continued growth towards that target. So turning to the next slide and distribution. I am pleased to report that service levels are now consistently ahead of where we were pre-2024 within Matthew Clark, Bibendum. Within that business, we achieved revenue growth of around 2% and volume growth of 5.6%. There was an adverse mix change, which was market driven and reflects the rebalancing away from wines and spirits into beer and cider, as I described earlier. At the same time, customer numbers are now around 10% above where we were a year ago, representing the recovery of lost distribution following the ERP setback and net customer gains. In terms of operating margin, the graph illustrates that net margin has improved significantly versus last year. And with continued focus on automation, this is targeted to grow further to at least 3.5%. One of the strengths of the business, as indicated at the bottom of that slide, is its broad reach across the sector. As you can see, we are the #1 distributor to the on-trade in the U.K. and in Ireland, and we supply many of the leading brands. There are further opportunities for us to build on that to achieve our targets. So that is the operational summary, and I'm now going to hand over to Andrew for the financial performance.

Thanks, Ralph, and good morning, everybody. If I can take you to the headline financial slide, by way of introduction before we get into the meat of the financials, as we highlighted in June, as a consequence of the prior year adjustment work, the interim results for HY 2024 have been restated. To be clear, this does not impact the full year numbers. The numbers we reported back in June are the numbers we will report against in May of next year. But it's important that we look through the lens of the underlying business before those adjustments to understand the performance in the first half year. With regards to revenues, as we reported back in September, they're slightly behind last year. I'll come back to the detail in the next slide, but we saw growth in margins in both our branded and distribution business, and the impact of that has been to drive earnings right through the lines on every earnings measure, most notably, operating profits up EUR 9 million to EUR 40.3 million overall. From a cash perspective, we've seen significant cash improvement, up EUR 19 million year-on-year, and I'll come back to that a little bit later. But the combination of earnings growth and cash flow improvement means that leverage has fallen to 1.1x, in line with our underlying target of maintaining leverage of around 1x overall. So a resilient first half performance. Turning to the next slide on revenues. As I just mentioned, revenue is slightly behind last year. The 3 key detractors were the disposal of our Irish soft drinks business, lower contract brewing volumes and softer GB cider sales reflecting the poorer weather. Offsetting that is some slight growth in premium brands but, importantly, growth in our Matthew Clark distribution, reflecting the recovery of the IFT account base that Ralph has just described. Turning to the next slide and operating profit. So if we pull out the prior year adjustments, the underlying performance of branded and distribution sees a slight increase in branded earnings despite the turnover shortfall, and I'll come back to the margin building blocks in a moment. But as expected, the majority of the earnings recovery in the period is from our distribution business, up EUR 9 million reflecting the IFT recovery and the introduction of further efficiency in our distribution network. And we would expect to see a similar shape of recovery coming through in the second half year as we recover the lost distribution earnings from FY 2024. Turning to the next slide and moving on to margins. As I mentioned, both branded and distribution margins have grown in the period. On branded, we've seen a growth of 1 percentage point in margins, reflecting the lower mix of low-margin soft drinks and contract brewing, combined with the margin accretion of premium volumes. Our medium-term target remains the same as we set out in June to get margins above 18%, driven by 3 factors. The first of those is an appropriate level of direct brand marketing, including in our premium brands; secondly, maintaining a brand portfolio that has brand strength and the ability to take moderate price increases to mitigate cost inflation going forward; and thirdly, increasing our mix of premium products, which, as I've just mentioned, is margin accretive overall. On distribution, the recovery in the period reflects the recruitment of IFT accounts and the fact that we've consolidated some of our distribution network driving further efficiency. Our medium-term target, again, is, as we set out in June, at least 3.5% margin by FY '27, driven by 3 factors: the continued gain of share from the independent free trade; we see further efficiency opportunities within our distribution and production network; and finally, investment in systems to replace inefficient legacy processes. So overall, an encouraging rebuild of margins, our medium-term targets remain unchanged, and we have clear actions in place to achieve those over time. Moving to the next slide and on to cash flow. As I mentioned earlier, our underlying free cash flow is up EUR 19 million year-on-year, reflecting principally the combination of earnings growth and improved working capital in the period. A couple of other comments. Our CapEx for the year, we expect to be around the EUR 20 million, very similar to last year. And our finance costs are slightly higher, reflecting the cost of additional leases entered into in the period. The combination of earnings growth and cash flow, as I've mentioned earlier, means that our leverage has come out at 1.1x earning in the period. Moving to the next slide and looking at our net debt. Compared to this point last year, our borrowings are around EUR 30 million lower. To remind you, we have long-dated bank facilities extending out to 2029 with extension options, and we have long-dated private placement finance in place. We have no short-term refinancing requirements. With regards to lease liabilities, they are up year-on-year, reflecting the commencement of the lease for the Orbital West depot in Southwest London and the renewal of a couple of other leases in our distribution network. Moving to the next slide and finally from me on capital allocation. Ralph mentioned earlier, we are aspiring to grow our cash flow, generating free cash flow of at least EUR 75 million per annum by FY '27. That will be achieved principally through growing our earnings. The GBP 100 million -- EUR 100 million underlying operating profit target remains intact. But we see further opportunity. We see opportunities to reduce working capital, particularly on inventory. We're establishing and reviewing the extent to which we can reduce our maintenance capital without compromising service or standards. And finally, because of that long-term bank finance, we have predictable finance costs and predictable tax cash flows. And by achieving that free cash flow target, the company has cash optionality and optionality to allocate capital as we see fit. Our current commitment is to return EUR 150 million to shareholders over the 3-year period to FY '27. That will be achieved through a combination of a progressive base dividend. We've announced a EUR 0.02 per dividend for the interim, up 6% versus last year. And that, in addition, will be supplemented by either share buybacks or special dividends. As things currently stand, all of that allocation sits in the former. We completed the first of the 2 EUR 15 million tranches this year in the first half year. We recommenced the second tranche on the 1st of September. We're around EUR 5 million through that, and we'll complete that by January. And we will continue to keep that under review, but that is our priority. As Ralph also alluded to, though, cash optionality means we have the ability to look at allocating capital to strategic growth CapEx or indeed M&A. It's not a priority. But clearly, if the right returning opportunity were to present itself, we have the balance sheet that enables us to do that. And underpinning all of this is a discipline to maintain underlying leverage of around 1x earnings overall. So we have a very clear plan for capital allocation. We have a very disciplined approach to how we allocate that capital, and we're well set to return cash to shareholders or invest accordingly in the business going forward. And that's everything from me. I'll now hand back to Ralph.

Thank you, Andrew. So to conclude on the summary and outlook slide, I do think that was a resilient first half year performance and that we have got good momentum in the business. So as a reminder, our core brands performed well. We saw an increase in market share for the Tennent's brand, with a particularly big increase in the on-trade. Bulmers maintained share overall. We saw good growth in our premium brands, and the underlying growth in the branded profit was achieved as well. In distribution, we saw volume and account gains. We increased our margin, and profit was significantly ahead of the prior year. On financial targets, we retain our 2027 financial targets, and we believe that achieving those and improving our operations will help to create value for shareholders. In terms of Christmas and New Year trading, we're, I think, in a significantly better shape than we were a year ago, and we're gearing up for that key trading period. For the full year, we are currently on track to meet expectations. And finally, we have a clear plan for capital allocation, which is all about creating shareholder value. So that concludes the presentation this morning, and I would now like to hand the meeting over to the questions.

[Operator Instructions] And the first question comes from Patrick Higgins.

First question I had is just around H2 and, I guess, the profit build, like when you look at the branded part of the business, should we anticipate that part of the business kind of delivering a similar level of growth versus the previously published figures that we saw in H1 and then the delta to get to the EUR 80 million figure is just further improvement in distribution? Just the balance between those 2 will be helpful for H2. And then on my figures, that implies the distribution business gets close to 3.5% margin target in H2 specifically. Is that correct? And then the second question I had is just around the 2027 net revenue targets. The EUR 2 billion figure, I appreciate we're only 6 months in, but that target is not -- is just over 2 years away now. How should we think about the building blocks to achieve that number? Should we expect, for example, distribution revenues to jump to 10% growth from here? Is that the way to think about it? Any color would be helpful there as well.

Okay. Patrick, thank you. On the profit build, I'm going to ask Andrew to comment on that.

Yes. So I think, as I mentioned in the slide earlier, that shape of growth will predominantly be distribution recovery. As we continue to grow that IFT base, we'll see that feed through. So I'd expect the majority of the, I guess, the EUR 10 million growth delta for H2 to be distribution, perhaps not as pronounced as H1, as Ralph alluded to. I think branded has some big detractors. So if you were going to look at this sort of EUR 0.5 million, EUR 9.5 million, it might be EUR 1 million to EUR 1.5 million versus EUR 8.5 million to EUR 9 million in shape. But this year is all about, principally, the recovery of distribution. On the margins, I don't want to get drawn into, but I'd be surprised if we hit 3.5% in the second half year. I think it's a build to 3.5% over time, but we should see continued improvement in that -- in the second half year to a number slightly north of where we are currently.

And I think on the builds to EUR 2 billion of sales, there are opportunities within our branded business for further revenue growth. And that would include growth in premium brands, and we believe there is a growth opportunity with Magners being managed effectively within our business. But the majority of our growth, I would expect to come from the distribution business. And that, first of all, we are the #1 supplier into the on-trade in the U.K. and in Ireland. But in the U.K., specifically, there are certain segments of that market that we have a relatively low market share in. And with better organization, structure and planning, I think we can target those segments of the market and aim to achieve that growth. That would be the most significant opportunity we have.

Our next question comes from Damian McNeela.

I guess this is a follow-up to Patrick's. Can you just highlight where you -- which segments of distribution you see the particular opportunities to grow your business there? And I guess the sort of my questions on distribution were more sort of you indicated sort of customer numbers were up 10% in August. Can you give us an indication of how much of the -- or if you can, give us a sense of how much of the lost customers you've recovered to date and, I guess, the sort of where the market share -- your current market share is in aggregate and, I guess, where you think that, that might can get to? I guess there's quite a lot in there in that distribution. I'll let you answer that, and then I've got another one on marketing.

Okay. In terms of segments of the market where we think there is good opportunity for us given our platform that we have, I think there are a couple of key areas. One is that if I look at our existing distribution footprint, we supply, as I indicated on that slide, a significant number of the leading brands in the U.K. hospitality sector, from pubs to restaurants to hotels. And I think there is opportunity for us to increase our own branded representation within the products that we -- and the brands that we sell to those customers. So more of the -- more of our own brands within the mix rather than other people's brands on which we would expect to achieve higher margins. I think the second area is that the performance of the business in recent years has tended to be more aimed at those bigger national account customers as we would describe them, the pub companies, the hotel chains and so on. But the independent free trade is still a huge market. And I think historically, we have not been structured in a way which allowed us to be very successful in attacking that market. And that is something that we've been looking at in recent months and is a key part of our plans for the future.

I think supplementing that, I mean, to Ralph's point on structure, we appointed a new Director of Sales for England and Wales with a lot of free trade experience. And we have a relatively low share of what we call the viable IFT. So these are accounts of appropriate quality to go at. We're still sub-5% of that market. So there is certainly a share opportunity to gain from that. With regards to the builds, we touched on the fact that we've lost around GBP 10 million of earnings relating to customers in FY '24 and that we would recover that over a 2-year period. So we're on track to recover the first GBP 5 million at least this year, and I'd anticipate a further GBP 5 million of recovery next year. So that's all on track, but it was certainly a 50-50 recovery over a 2-year period, but we're making good progress to date.

Okay. Very clear on that front. And then just on marketing, can you indicate, if you can, how much marketing has gone up by in the period and how we should think about marketing, not only for this current year but also how we should think about the evolution of that, particularly, when you talk about Magners and what you're doing on the premium brands in general, please?

In terms of the amount -- yes, thanks.