Earnings Call: H1 2021

Aug 3, 2021

Good morning, and thank you for joining us this morning. In a moment, I'm going to hand over to Richard Hutton to present our financial results, which I'll then follow, as usual, with an overview of our operational and strategic progress so far this year. We'll then end, as we do normally, with a comment on current trading and outlook before opening the live question and answer session. As you have seen in our statement release this morning, Greggs has delivered a strong first half recovery, which again showed its resilience in a challenging first half. With the actions that we put in place, we emerged from the lockdown months in a strong position to rebuild sales as social restrictions were progressively relaxed. Total sales for the first half were 9.2% lower than the equivalent period in 2019, sales in the second quarter exceeded our expectations and delivered like-for-like sales growth against the same year. I'm pleased to report that Greggs has restored profits to GBP 55.5 million in this first half, which followed our first ever loss last year. That means we returned to strong cash generation and we're declaring an interim dividend of GBP 0.15. While wrestling with the challenges of daily operations under COVID conditions, we've continued to make good progress with our strategic priorities in our determination to emerge from this crisis both stronger and better. Our shop pipeline is in good shape, we're on target to grow the estate by 100 shops this year. Our successful delivery means that this channel is now established as a core part of our offer. We successfully launched our new Greggs Rewards app. Our product development pipeline has successfully restarted. Our new automated freezer facility up in Newcastle is operational, and we successfully launched our Greggs Pledge back in February. Let me now hand over to Richard to present our financial results in more detail. Yes, thanks, Roger. On slide 5 of the deck, you can see the overview of the income and expenditure for the 1st half of 2021. You will notice that we've given you 2 years' worth of comparisons this time around because obviously last year was heavily affected by the closure of the business in Q2. We've given you the 1st half of 2019 as well, as what we believe is a better comparison. You can see that coincidentally, the sales for the 1st half of 2021 are almost exactly the same as they were in 2019, but the composition of them is quite different, and I'll explain that in more detail on the next slide. Overall, you can see, as Roger said, that we made a profit before tax of GBP 55.5 million, and the best comparison for that two years ago is the before exceptional items PBT of GBP 40.7 in 2019. Overall, some progress since then, you will see in a couple of slides' time that I'll explain why that is the case, and that results in a diluted earnings per share figure for 2021 first half of GBP 0.432. If I move on now to describe the sales position, as I said, there is a different makeup to the overall sales for the first half. This is quite a busy slide, you can see top left, the two-year company managed like-for-like decline that Roger explained was -9.2% for the first half, you can see it was very different between Q1 and Q2. In Q1, when there were significant restrictions across the U.K. still, we were down 21.5% on a 2-year basis versus 2019. Whereas in the second quarter of the year, we were up 2.8%, so back in 2-year growth. If you look to the bottom left, you can see a chart which describes the overall shape of the first half sales. Back in 2019, our first half sales were comprised almost wholly of company managed walk-in sales, plus a little bit of B2B through our franchise partners and also through Iceland Foods. You can see the shape of it beginning to change now as we come into 2021, where as well as the company managed walk-in sales, we also have delivery sales coming out of our company managed shop estate to Just Eat. Of course, we have the larger B2B trade, which reflects the expansion of the franchise estate, as well as stronger business through the Iceland channel as well. The significant figure in terms of the delivery business is that in the first half of 2021, delivery made up 8.5% of company managed shop sales. The chart on the right describes the recovery of our like-for-like sales in company managed shops over the last year. You can see from this time last year when we reopened the estate following the closure in Q2, the level of sales recovering progressively across the charts to where we are now. The dashed line in the middle reflects the overall two-year like-for-like, that's consistently comparing with the same month in 2019. You can see how that progresses across the chart, gradually recovering, but also taking a knockback each time we see 1 of the lockdowns in the U.K. There was a lockdown in November 2020, and then of course in January and February of 2021, and then the surge around April time when non-essential retail shops were allowed to reopen and our business sort of succeeded more on the back of that. You can see that on this chart, we've broken out various categories of shop to try and give you a feel for the relative performance of the estate. Now, the categories at the bottom of the chart reflect busy sort of city center locations and also those shops which are in public transport. You can see that they've been slower to recover. You can also see on the far right that they only represent 15% of the Greggs estate, so relatively low exposure to city centers and to public transport hubs. Where the heartland of the Greggs estate is at the top end of that chart, which is the purple line, which is shops that we have located in towns and suburbs, which have obviously been stronger than the big city centers. Also the increasing number of shops that we have in what we would describe as drive-to locations, which might be literally drive-throughs, or more often, they would be roadside petrol forecourts, supermarket locations, that sort of thing. Across those two categories is more than two-thirds of the Greggs estate. It gives you an idea about the shape of the sales recovery that we've seen so far. We move on to the composition of the profit and loss account on slide 7, you can see the overall ratios set out in the statutory format. As we've said, the walk-in sales number is still recovering, but that's been compensated by new shops, by delivery sales, and by business-to-business sales. At the gross profit level, you do see some dilution because the addition of delivery sales is dilutive at that level. Where you get it back is in terms of leveraging the assets in our shops and the costs in our business further down the P&L. In distribution and selling costs, you'll see that they are lower than normal in the first half of 2021 because of the business rates relief that our sector has had in the first half, which is now finished. That was a GBP 30 million year-on-year cost reduction, along with about GBP 2 million that we released from the impairment provisions that we made at the end of 2020. Just to emphasize, there is no furlough support in these numbers at all. In administrative costs, again, these administrative expenses were lower than they were in 2019. That was due to GBP 4 million less in terms of incentive charges, particularly in 2019, where we were providing for a special thank you payment to staff, which related to the record-breaking year that we had then. Also about GBP 1 million from the structural changes that we made to the business last year, which GBP 1 million of that is showing up in admin expenses. Overall, a stronger margin than 2019, but I think you can see in there is a little bit of one-off help to the number. We dig into our more conventional sort of cost position on slide 8, just to remind you can see the overall structure of the cost base as usual, which is about 40% people costs and almost 30% relating to food and packaging. We just dive into those two bigger areas first, so food and packaging, we've seen the costs for food packaging and indeed energy were not particularly inflationary in the first half of 2021, so only a marginal level of inflation in those areas. You'll be very well aware, the demand globally and the level of disruption in supply chains is now starting to have an impact on that. We do expect to see inflation in the second half, and our best estimate is that inflation across food and energy sources will be about 2.5% in the second half of 2021. We can be reasonably sure about that because we have that covered forward, about 5 months forward at the moment. People costs are more predictable, less driven by commodities, obviously, and there's been less pressure in the first half of this year from the national living wage. We can say with reasonable confidence that we expect people cost inflation to be about 2.3% in the year as a whole for 2021. You can see the splits there with the first half being 2.6% and the second 2%. Then the next most significant area of the cost base is the red segment there, which relates to our shop occupancy costs. Obviously, we've got this temporary relief from business rates in the first half of the year, which will stop at the end of June or has stopped on shop premises. The other significant element within shop occupancy costs relates to the rents that we pay on our shops, and we've been negotiating better rents in return for our strong covenant. Although the accounting picture is obviously sort of determined by lease accounting, if you look at the right-of-use asset charge on our company managed shops now in the first half of 2021, you would find that they are 10% lower than they were in the equivalent first half of 2019. Turning now to capital expenditure. The middle column of this chart describes the CapEx that we had in the first half of 2021, which is GBP 23.5 million. You can see that the largest elements of that were on opening new shops, equipping those shops, and also adding additional equipment such as upgraded coffee machines to our estate. Also completion of works in our supply chain, the biggest element of which was the completion of the new automated frozen cold store at Balliol Park. Looking forward to the full year, we expect now that the CapEx for the full year will be about GBP 66 million, which is about GBP 4 million lower than we previously guided. There's no structural change to that. It's purely related to the phasing of CapEx, particularly on a new pizza line that we're installing in our Enfield bakery and also to some vehicle purchases. Finally, on slide 10, I've outlined the position on liquidity, tax, and dividends. We're in a very strong cash position, having seen strong cash flow in the first half as a result of the trading performance, but also the working capital recovery that we see as the shops increase their sales levels. What that's resulted in at the half year is GBP 118 million cash position, and behind us, in case of need, we do have GBP 100 million revolving credit facility, which, just to confirm, is undrawn at the moment. Good liquidity. In terms of tax rates and guidance, we expect for the full year 2021 that the effective corporation tax rate for Greggs will be about 20%. Looking forward beyond this year, we can now give you guidance on the next three years or so, and this builds in all of the impacts from the budget back in March, when the new enhanced super-deductions were announced. That will benefit the tax charge for 2022, and we expect the effective rate to drop to 18. It will then start to increase significantly as the new higher rates of corporation tax kick in. 25% expected in 2023, and then settling out at 26.5% in 2024, which at a 25% headline rate, we would expect is the going effective rate for Greggs. Finally, the dividend. The board's declaring today an interim dividend of GBP 0.15 per share and would intend to target a full year ordinary dividend, which would be around 2 times covered by earnings. We're very conscious that that will result in us carrying a higher than normal cash balance in the short term, but we do think that that's a prudent thing to do and are absolutely committed to returning any surplus cash to shareholders in due course, and that would be in line with our historic approach to distributions. With that, I will hand you back to Roger. Thank you, Richard. I'm now going to provide a brief overview on our operational and strategic progress in this first half. We've also used the period to take stock of our position. The outcome of that is that we've refreshed our five-year plan, and in doing so, we've reinforced our confidence in Greggs prospects and in our ability to deliver sustainable, profitable growth into the longer term. We're currently planning to be in a position to provide a more detailed update on those plans later in the year, but for now, I'm going to provide an update on the key opportunities that we've developed so far. Starting then with shops. As we said earlier, Greggs has the opportunity, we think, to expand its U.K. estate to at least 3,000 shops, and that, of course, presents many years of growth opportunity ahead of us. The crisis has shown that our strong, proven covenant is attractive to landlords, and it's shown that there are opportunities are now greater in number than they were before the pandemic. As well as growing the overall size of the estate, we continue to relocate existing shops to enable them to better deal with the increased demands of each shop is facing in terms of multi-channel demand. Our latest shop design, which we're going to be using for all new shops and relocations, will support the collection of digital orders and incorporate kitchen modifications to allow us to do things like product customization and menu development. 70% of our shop openings in the first half were in car access locations that Richard described. Things like roadsides, petrol stations, retail parks, supermarkets. We've also been able to gain access on improved terms to sites in Central London and transport interchanges, which we see as being good strategic sites in the medium term. Our pipeline of new shop opportunities remains strong. We expect, as you've heard, to open around 100 net new openings in the year as a whole, about half of which are anticipated to be with franchise partners. As well as new shops, which obviously we need to serve more of our walk-in customers conveniently, that Greggs has invested to meet customer needs for food via new channels and at additional times of the day. The most developed of these is our delivery partnership with Just Eat, which continues to grow and is now available across the U.K. from 837 of our shops as we speak. In the first half of 2021, delivery sales represented 8.5% of company managed shop sales. Customers are becoming more used to pre-ordering food, either for delivery or to guarantee availability when they Click + Collect. Pre-ordering presents us with the opportunity to improve availability, both of our standard menu, as well as offering personalized choices where customers can, for example, adapt the ingredients in their sandwich or the topping on their pizza. Pre-ordering is a market trend that we believe will support, in particular, our ambition to grow sales into the evening. Delivery is also going to be important and play a key role there, giving customers convenient access to Greggs's products wherever they are throughout the day. This crisis has also shown how important it is to have strong digital capabilities, and we've invested significantly in recent years in this area to strengthen our customer proposition. Our new Greggs Rewards app and the new customer website that go with it have recently been launched to make the customer journey as convenient as possible. Our new app offers customer rewards across the full range of their purchases with us and is integrated with our Click + Collect service. There are also improved features such as an upgraded shop finder and access to nutritional information, all of which work to make the customer journey with us even easier. Greggs Rewards will also provide the platform which allows us to strengthen our relationship with our customers, better understanding their needs, and providing us with improved communication tools to encourage increased visit frequency and wider participation in our menu. When it comes to menu, our focus during the COVID pandemic has been to maintain a full service on our best-selling lines, and we've seen strong growth in traditional areas such as our bakery range, which has been supported by our recent investments in centralized production platforms. Following a temporary suspension in 2020, our new product development pipeline has been restarted. Recent launches have included new options in our vegan-friendly range, such as vegan ham and cheese baguettes, and our vegan-friendly breakfast sausage. The latest line in the vegan range is the vegan sausage bean and cheese melt, which is due in our shops later this week. We continue to develop our menu, adapting to offer greater choice in categories that we see as providing growth, such as coffee and hot food, and reflecting consumer demand for dietary variety. We continue to develop the health credentials of our food and drink, so we're reducing fat, salt and sugar wherever we can, and offering more choices in low calorie and vegan-friendly ranges. We're also increasing our in-store capabilities with the rollout of more sophisticated coffee machines that can offer things like decaffeinated and dairy-free options. We're developing new offers in the delivery channel, which includes sharing box combinations and additional pizza toppings. This exciting growth opportunity which lies ahead of us is going to need more development in our supply chain to meet the demands for our in-house specialties and to create the logistics capacity we're going to need to reach many more shops. Our centralized manufacturing platforms have proved to be an efficient, high-quality basis on which to supply the bakery favorites that we're famous for, and they're going to be the template for the capacity expansion we're going to need in the years ahead. In the short term, we've planned to increase pizza capacity, as you've heard, with the new line at Enfield. We've already begun operating from the automated frozen distribution facility that you've heard about at Balliol Park in Newcastle. We're going to be providing more details of our plans for investment in supply chain capacity later in the year. As well as supply, systems capability is key to meeting our growth ambitions. The successful deployment of our SAP platform, which has been going now for several years, will complete in the second half. We've moved forward rapidly with new Microsoft Office capabilities, cloud database, new reporting systems, and a leading customer relationship management solution. Our support teams have successfully adapted to remote working. We're increasingly seeing opportunity to bring technology solutions to our shop environment, which makes tasks easier and enables more choice for customers. We've already begun deployment of our new shop sandwich production and labeling systems, which will meet legislative requirements due by October 1st. We see these as also being key for our made-to-order ambitions. Carrying out our plans in a responsible manner has always been an essential element of our approach, and in February this year, we launched the Greggs Pledge, which was our commitment to further improve our ESG credentials in 10 key areas. That pledge has been well received by colleagues, customers, and investors alike, and it's going to challenge us, obviously, to be an even better business for the longer term. Turning finally then to current trading and the outlook. As we reported in our most recent trading update, the level of sustained sales recovery in recent months have been stronger than we anticipated. In the most recent four weeks to July 31st, like-for-like sales in company-managed shops measured on that same two-year basis that we've been using, were 0.4% above the equivalent period in 2019. Despite the general uncertainties in the market, Greggs's has traded well in recent months, and we've demonstrated the resilience of our business model, as well as its potential for longer-term growth as a multi-channel food-on-the-go brand. As a result of all that, we now expect full-year profits to be slightly ahead of our previous expectation. Thank you.