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Edited Transcript of PFD.L earnings conference call or presentation 14-May-19 12:30pm GMT

Full Year 2019 Premier Foods PLC Earnings Call

Hertfordshire Mar 31, 2020 (Thomson StreetEvents) — Edited Transcript of Premier Foods PLC earnings conference call or presentation Tuesday, May 14, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alastair S. N. Murray

Premier Foods plc – Former Acting CEO, CFO & Executive Director

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Conference Call Participants

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* Helen Rodriguez

BNP Paribas Markets 360 – Former Senior Sector Specialist

* Ronan Bernard Clarke

Deutsche Bank AG, Research Division – Research Analyst

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Presentation

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Alastair S. N. Murray, Premier Foods plc – Former Acting CEO, CFO & Executive Director [1]

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Good afternoon, everybody. I’m Alastair Murray. I am the CFO and also the acting CEO of Premier Foods at the moment, and I’m joined by my colleague, Richard Godden. And we are going to take you through the investor call concerning the results for the year to March 2019. I’m going to make reference to some — the presentation, which we gave to the equity analysts this morning. Hopefully, people have been able to have a look at that. If you’ve not, it is on the Investor Section of the company’s website. You will also be pleased to hear, I’m not going to plow through every page on here, I’m going to pick a few out and then I think the aim will be to get to the Q&A fairly quickly and see what you would like me to expand, but I think certainly, I’m going to cover few highlights.

Slide 4 is a good place to start and you will see from that, first of all that we had a very good Q4 actually 3.1% up, leaving us 0.6% up for the year, with an increase of trading profit of 4.5% to GBP 128.5 million. That’s slightly ahead actually of where the market had us. And in terms of adjusted PBT, we’re up 12% at GBP 88 million. As debt investors, you’ll obviously be very interested in net debt. You know that our plan is to reduce net by — debt by about GBP 25 million a year. We actually achieved nearly GBP 27 million, so that got us to GBP 470 million of net debt and that’s 3.23x EBITDA. And obviously, continuing to reduce that net debt-to-EBITDA ratio is pretty important.

And if you look at the progress over the past couple of years, you can see actually where we’ve done well on all of our key metrics. So firstly, trading profit growing, adjusted PBT growing over 2 years, net debt coming down and therefore the net debt-to-EBITDA ratio; and that 3.23x is the best that we can find certainly the lowest for 12 years. We didn’t actually go back further than that in the archives. That’s kind of as far as we got.

I think, if I turn now to Page 6 and just have a quick look at the headlines in a bit more detail, the headline numbers. As you can see, I’ve already mentioned that strong Q4 branded sales is actually up by 4.2%, which is quite encouraging after a weaker Q3, and we can talk about that a bit later on. You’ll see, as generally speaking, that nonbranded sales were weaker. The reason for that was really driven by our Sweet Treats business. Grocery had very strong non-branded sales, but it was very negative in Sweet Treats, which was caused by couple of things, one was walking away from some low-value private label contracts. And we also lost some private label volume when we had some distribution challenges in our central warehouse, which I’ll come back to later.

So in terms of the key headline results, as you can see, our divisions — the divisional contribution increased by GBP 6 million to GBP 162 million, group and corporate costs pretty much flat. So trading profit up to GBP 128.5 million, rounding up to GBP 129 million here because we’ve gone to the nearest million with a slight increase in margin. So pretty good result for the year in terms of profit and particularly encouraging to see the momentum that we’re coming out of in terms of the Q4 numbers.

So if I go to Page 9 now, just to go down — a bit further down the P&L. You’ll notice that we have a few quite large items going through in the current year that gets us down to GBP 5 million operating profit. Amortization of intangibles is relatively similar to the previous year. You’ll see some other bigger numbers further down. Firstly, GMP equalization. GMP is related to historic defined benefit pension liabilities that are related to the period between 1990 and 1997, and as a result of a high court ruling in the case of Lloyd’s Bank, the — there will be some additional benefits payable by the schemes, not by the company but by the schemes, and — but as a result, the accounting professionals has deemed that is deferred cost of employment and therefore, it should go through the P&L. It’s noncash. We have told people about this before, so it’s not something to worry about, but it’s something that we are required to do to comply with best practices in accounting terms. And this isn’t specific to us. This is true to all other big companies. So for instance, Sainsbury’s and IAG Group, which is British Airways, both recently got new charges of just under GBP 100 million. So it’s something very similar. Further down, cash restructuring costs primarily related to our logistics transformation program, and we’ll come back to that, but we’ve now reached the end of that. And then we have some impairment charges GBP 31 million that relates really to recurring value, 2 of our brands, Sharwood’s and Saxa. Again, what I’d say about these 2 things, one is again, obviously, noncash. It’s not that they had a bad year, actually, Sharwood’s had quite a good year. We’ve just revised the way that we are looking at this from an accounting point of view. So really, it is a technical accounting adjustment not something, which is really giving you useful information about how the brands are performing.

Page 11, I just want to come back a little bit more with the detail around net debt, which I said at the outset is an important part of the journey. And you can see here the waterfall chart that gets us at the start of the financial year from GBP 496 million of debt and 3.56x net-to-EBITDA to GBP 470 million that we delivered at the end of the year. And most of the numbers on this Page shouldn’t surprise you in line with guidance, I think if I pick a few out, CapEx a bit less than guidance but will go up next year. Interest is unusually low, because we — when we did our bond refinancing, the coupon date fell the other side of the year end. That helps slightly because that won’t repeat. So in future years, GBP 5 million to GBP 9 million more than this. Restructuring costs, I’ve already mentioned, although of course those won’t repeat. Financing fees from the refi that we did at the start of the financial year, as I said, 12 months ago. And then on the other side a bit of good news, which you won’t have been expecting, which is some money coming up from our 49% associate company Hovis Holdings, who repaid us GBP 7.6 million in the year as a result of their stronger financial position. And indeed there is a possibility, but no more than a possibility at this stage of that repeating next year — or if not [next year], I mean in the current year.

Moving on to Page 12 just to talk about pensions briefly. What you will see here is that the combined surplus improved by GBP 56 million, but of course this is a composite number based on adding together the 2 pension schemes. So you need to treat that calculation fairly cautiously, because we can’t take money out of RHM and put it into Premier. And in fact, you will see that the Premier scheme actually increased its liabilities a bit. Now the main factor in increasing liabilities is a reducing discount rate. So 2.7% to 2.45% and also 10 basis points of those movements in the inflation assumptions.

I think the number at the bottom of the page, you will see that the highlighted is the NPV of future pension deficit payments, and I really think this is really the most important number because what that’s telling you is how much cash Premier Foods is expecting to hand over to its pension schemes in the next years and that number actually hasn’t changed since the previous time we looked to this. So that’s really a quick view on pensions.

And I just want to talk a bit more about how the brands are actually doing and if you quickly turn to Page 19. You will see, first — you’ll see a couple of things, first of all, is the trend information on the U.K. business. This is the U.K. business only, which of course is over 90% of our operation. Couple of things to say here, firstly, a really good accelerating trend. So 0.9% Q1, 2%, 2.8% and then 4.9% in Q4. So you can really see that momentum with which are coming out of the year. But also more importantly, the majority of our key U.K. brands are in growth. I’ve called out in particular, Mr. Kipling, our biggest brand, which is up by 10%; Batchelors is up 7%; Sharwood’s is up 7%; Angel Delight is up 15%; OXO and Ambrosia is also growing. And the only real negatives here are Bisto. Bisto is down particularly in Q2 because of the very hot summer in the U.K. but once we got through that, that’s going to returned to growth in H2; and then Loyd Grossman in a very competitive cooking sauce category, so it’s a tough category at the moment, but we have some exciting plans to put that back into a good place in the future. So brands, generally speaking, are performing pretty well and the reason for that is because we are bringing innovation into the market and we get — we are increasingly getting behind it with consumer marketing.

If we just flip over the page quickly, I think chart 20 is worth a look at. International has been a big sales growth driver for the last 3 years. And candidly, it’s disappointing that this was a much tougher year with sales 12% down. Now there are 2 specific reasons why this happened. One is a customer in Australia ordered much too much stock in the previous financial year and then ordered almost nothing in ’18, ’19, while they worked through that stock overhang. So that gave us a gap in our order pattern and that obviously negatively impact sales. And then secondly, we put price rises through to U.K. based export wholesalers who in theory at least export to markets in which we don’t want to operate. We needed to rationalize our pricing and actually we lost a lot of volume into that channel. Some of that volume is actually coming back into the U.K. or was never leaving the country on the gray market. So although it’s a negative in reported International, the reality is we probably picked up those [tails] in our mainstream U.K. business.

And if you look at the actual retail sales, don’t forget what we ship into warehouses is what consumers are taking off shelves. If you look from the bottom left hand side, you can see there are market share of the Australian cake and biscuit market. It was moved from 3.4% to 7.5% in 2 years. So if we just step away for a minute from stock movements and supply chains, this says to me that we still have a very sound business. And while I’m not going to go through the detail, Page 21, which is the next page gives you some further information about the opportunities as we see it.

And I just want to pause on the turnaround in Mr. Kipling, which you’ll find on Page 26. As I say, this is our biggest brand, double-digit growth in the year and really the only blip was a bit of a challenge around distribution in Q3. But from ’17, ’18 when it was in both revenue and volume declined, we’ve done a number of things: redesigning the packaging; bringing in new products for instance, Unicorns Slices, we’ve sold 17 million or 18 million of those since we launched it just over a year ago. New TV campaign, which has been on air and very successful in building most attachment to the brand and some fantastic in-store execution. And this particular photo you can see is from our Roald Dahl summer promotion, which we’re running — We’ve run that on previous occasions and it was very successful again. So the results of that is from that mild decline in ’17. We went to a 10% revenue growth and a 7% volume growth. So I think that’s a good example of what you can do, if you get these things right.

I should just quickly touch on one thing that didn’t go so well in the year, which is logistics on Page 34. You will be aware I suspect, that we have a program in place to consolidate physical distribution into single U.K. location in the center of the country in West Midlands. This is the third and final phase of that consolidation in late 2Q and early Q3. Candidly, it didn’t go that well. We had significant initial issues around warehouse efficiency and labor availability and that particularly effected Sweet Treats.

Where are we today? So the good news of the program is now complete. There are no further phases to put in place, so we dealt with labor availability. Customer service levels are not only back to normal but have been for several months. So we’re very confident now that we have a stable solution. And the key period of Easter, which is particularly important to Cadbury Cake was delivered successfully. So we’re very happy we’ve nailed that. And we’re now able to focus on driving out further cost efficiencies, and we have a new logistics director in place since January and he is going to be very focused on that.

So turning now to Page 37 and then I’m going stop for questions. In summary, a second good year of positive movements in all of our key metrics, revenue, trading profit, adjusted EPS, net debt and gearing. Notwithstanding challenges in logistics and International and driven with a core innovation strategy, which is working and you can see that for instance from Kipling and growth from Batchelors and from others. So we think we’re very much on the right track. We are indicating expectations to further progress in ’19, ’20, albeit biased towards the second half. We will continue to pay net debt down at a similar rate to that, which we have seen historically. And we will do that at the same time as upping capital investment into the business and upping our investment into consumer marketing.

So I hope that was a useful quick run-through. And also I have the material here, if you want to go there. But at point I’m going to stop and hand over to [Godden] for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Ronan Clarke.

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Ronan Bernard Clarke, Deutsche Bank AG, Research Division – Research Analyst [2]

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Alastair, a couple of questions from me, please. Firstly on the Hovis loan note. Could you tell us what’s the remaining outstanding balance on that please? And also to just try and understand, what’s the sort of the decision and equation for Gores? And I guess, with a voting majority, why would they opt this year for another loan repayment versus a dividend? Is it due with a maturity date or the cost of that loan please? If you can help us understand that.

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Alastair S. N. Murray, Premier Foods plc – Former Acting CEO, CFO & Executive Director [3]

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So the answer to the question is that the loan notes have previously been fully written off. In fact, four of our investments in Hovis is fully written-off. So it’s pure upside from that prospective. It is effectively a return of capital to shareholders. Mechanically, it was better to do it by repayment of a loan note than through a dividend, but I mean, to be honest, I don’t think mechanics matters much. It’s getting the check which counts. And I think, what the Hovis board will be doing is looking at its financial position. You can certainly (inaudible) world that it will be able to share more money with its shareholders, probably at some point in the autumn. But I think prudently the Hovis board wants just to wait and see how trading goes and so forth before it makes that — any decisions on that topic.

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Ronan Bernard Clarke, Deutsche Bank AG, Research Division – Research Analyst [4]

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Okay. So the size of future — any potential future distribution, it has nothing to do with the loan, it’s just the mechanism.

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Alastair S. N. Murray, Premier Foods plc – Former Acting CEO, CFO & Executive Director [5]

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It’s more to do with affordability than the nominal values alone, yes, that’s correct.

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Ronan Bernard Clarke, Deutsche Bank AG, Research Division – Research Analyst [6]

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Got it. Okay. And then on your comments about sort of the shape of this year, you said more second half weighted, which I guess you were referring to top line momentum. But is that also the case — I know trading profit is anyway very much weighted towards H2, but it would be even more so this year?

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Alastair S. N. Murray, Premier Foods plc – Former Acting CEO, CFO & Executive Director [7]

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Yes, I think that’s possible, yes.

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Operator [8]

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Our next question comes from the line of Helen Rodriguez.

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Helen Rodriguez, BNP Paribas Markets 360 – Former Senior Sector Specialist [9]

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Can you please give us the breakdown of EBITDA adjustments between cash and noncash items please?

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Alastair S. N. Murray, Premier Foods plc – Former Acting CEO, CFO & Executive Director [10]

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Yes, and probably the best place to do that is just to go back to the operating profit slide that we were looking at earlier, which is Page 9. So the GBP 42 million of GMP equalization is non-cash. The GBP 17 million of restructuring costs are cash and the…

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Helen Rodriguez, BNP Paribas Markets 360 – Former Senior Sector Specialist [11]

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They’re all cash? They’re actual costs, not provisions?

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Alastair S. N. Murray, Premier Foods plc – Former Acting CEO, CFO & Executive Director [12]

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So this is the P&L charge. It’s not that different to the actual cash that has gone through the period. The actual cash is GBP 18 million, so it’s pretty much similar. There’s a tiny bit more cash to go through, probably about GBP 3 million or GBP 4 million in the current financial year, that’s already been through P&L. And then the impairment charges are noncash.

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Helen Rodriguez, BNP Paribas Markets 360 – Former Senior Sector Specialist [13]

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And then the GBP 2 million of other — is that little share thing that’s mentioned somewhere else, the share increases, the GBP 2 million …

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Alastair S. N. Murray, Premier Foods plc – Former Acting CEO, CFO & Executive Director [14]

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Yes, it’s a small pension credit, which is noncash.

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Helen Rodriguez, BNP Paribas Markets 360 – Former Senior Sector Specialist [15]

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Okay. And then I suppose my other question is on the brands — the various brands, I see this stuff in the press about what may happen is there anything that would stop from an organizational point of view on the shared factories and that sort of thing sort of hiding off one particular brand or another particular brand. Are there any in the same sort of logistical systems or factories that would stop you carving out anything?

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Alastair S. N. Murray, Premier Foods plc – Former Acting CEO, CFO & Executive Director [16]

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I think it varies depending on which brand did you look — I mean, everything shares something with something else. I mean if nothing else, everything goes through Tamworth now, which is our new central warehouse. So at some point all of the supply chains cross over. Some parts of the business are more integrated than others and it varies frankly across the portfolio.

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Helen Rodriguez, BNP Paribas Markets 360 – Former Senior Sector Specialist [17]

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And then just so I’m — in terms of revenues, Mr. Kipling is your biggest brand. How much bigger is it than Batchelors now in terms of revenues?

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Unidentified Company Representative, [18]

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It’s in the region of GBP 30 million to GBP 40 million higher than Batchelors, something in that order.

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Helen Rodriguez, BNP Paribas Markets 360 – Former Senior Sector Specialist [19]

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And would you give us the breakdown of actual revenue roughly at Mr. Kipling and Batchelors?

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Alastair S. N. Murray, Premier Foods plc – Former Acting CEO, CFO & Executive Director [20]

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We don’t typically give them. I mean, Mr. Kipling is our biggest brand, it’s well over GBP 100 million. Our next biggest brands would be typically somewhere in the 90s just to give you an idea.

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Helen Rodriguez, BNP Paribas Markets 360 – Former Senior Sector Specialist [21]

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Great. And in terms of margins, what’s the margin differential between say Mr. Kipling, which is sort of turnaround, and Batchelors, which is going really well, roughly?

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Alastair S. N. Murray, Premier Foods plc – Former Acting CEO, CFO & Executive Director [22]

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Yes, I mean, all we typically do is talk about this at sort of divisional level.

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Helen Rodriguez, BNP Paribas Markets 360 – Former Senior Sector Specialist [23]

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Yes, that’s what I mean. That’s what I mean, divisional level.

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Alastair S. N. Murray, Premier Foods plc – Former Acting CEO, CFO & Executive Director [24]

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Yes, so I mean the big picture is, if you look at the divisional contribution percentages in our Grocery business, it’s 23%. In our Sweet Treats business, it’s 10%. So the big picture is the Grocery brands are typically higher margin than Sweet Treats.

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Operator [25]

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Our next question comes from the line of [Brian Giffney].

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Unidentified Analyst, [26]

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Just a couple quick questions. You mentioned Q4 had a small benefit from prebuying ahead of Brexit. I think it was GBP 1 million, GBP 1.5 million in revenues. Obviously, Easter’s been pushed back into Q1. Can you just let us know what the net impact would be in Q1?

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Alastair S. N. Murray, Premier Foods plc – Former Acting CEO, CFO & Executive Director [27]

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So as I said, we think Brexit will be GBP 1 million to GBP 1.5 million. The Easter benefit would probably be more than that actually, that we’d get somewhere of a similar order to a bit more.

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Unidentified Analyst, [28]

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Okay. And then in terms of market…

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Alastair S. N. Murray, Premier Foods plc – Former Acting CEO, CFO & Executive Director [29]

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The problem is that the Brexit stock building customers is some of it we can identify, and with some of the major markets, but in other cases you can’t really put it out. So we’ll find out as we go through Q1.

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Unidentified Analyst, [30]

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Obviously, as Brexit hasn’t happened, how does that work in Q1 in terms of the retailer behavior?

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Alastair S. N. Murray, Premier Foods plc – Former Acting CEO, CFO & Executive Director [31]

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I think typically what we’re seeing is people taking Brexit stocks down again.

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Unidentified Analyst, [32]

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Okay. And just in terms of your marketing slightly lower in FY ’19, you’re guiding for it to be higher in FY ’20. Just on the phasing, is that going to be similar to 2019 where it’s lower in first half, higher in the second?

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Alastair S. N. Murray, Premier Foods plc – Former Acting CEO, CFO & Executive Director [33]

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So typically we spend more in the second half than the first half because that’s the most efficient time to advertise. And having said which, we will be increasing consumer marketing in both H1 and H2 in the current year. But if you flush everything through the guidance we’re giving in terms of overall progress is that it can be more weighted for the second than the first half.

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Unidentified Analyst, [34]

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Right. And just sort of last question with the point you made that in terms of H1 ’20 you’re expecting a slow start from back-ended growth. I’m just struggling to understand that in the context of the strong performance you had in Q4 in terms of sales, you got that momentum, there’s no real phasing of marketing, and you got easter benefits. So why is there slow start on first half?

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Alastair S. N. Murray, Premier Foods plc – Former Acting CEO, CFO & Executive Director [35]

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Yes, there’s a couple of things that are playing out. One of which of course is, to the extent, there is a Brexit stop over and customer reverse it. The other thing is the — the point I think I made earlier about sales to U.K. based export wholesalers, which we did have, since sales going through in Q1 last year, which won’t repeat this year. So we’ve got a negative drag coming from that.

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Unidentified Analyst, [36]

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Okay. So when you’re talking about slower start that is both sales and EBITDA. Because I can see your EBITDA comp is tough, but I mean the H1 revenue number was up, it was 1.3%, so that’s why it’s actually a tougher comp.

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Alastair S. N. Murray, Premier Foods plc – Former Acting CEO, CFO & Executive Director [37]

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We don’t publish the quarterly EBITDA numbers.

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Unidentified Analyst, [38]

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No, I mean the H1.

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Alastair S. N. Murray, Premier Foods plc – Former Acting CEO, CFO & Executive Director [39]

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Yes, so H1 so I think you will see more second half weighting — we talked about overall progress, it means it doesn’t have to be — we don’t formally give profit forecast as you know. But I think you’ll see a great disparity if you like between performance in H1 and H2 in the direction we’ve indicated.

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Unidentified Analyst, [40]

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Right. But again is that sales or EBITDA? You’re talking about sales when you talk about the slow start?

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Alastair S. N. Murray, Premier Foods plc – Former Acting CEO, CFO & Executive Director [41]

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In terms of the slow start of the quarter, yes. In terms of the slow start to the half, yes, I’m talking about sales.

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Operator [42]

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(Operator Instructions). There are no further questions at this time, sir. You can now proceed.

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Alastair S. N. Murray, Premier Foods plc – Former Acting CEO, CFO & Executive Director [43]

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Okay, well, thank you, everybody, for joining the call. And I hope that was useful. If you have any questions that occur to you afterwards, please contact Richard or myself, and we will be very pleased to help you out. Thank you very much.

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