Nichols (LSE:NICL) — Interim Results

0:01 Good afternoon, and welcome to the NICLLS PLC interim results investor presentation. Throughout this quarter presentation, investors will be in listen only mode. Questions are encouraged and could be submitted at any time by the q and a tab situated in the right corner of your screen. Just simply type in your questions and press send. The company may not be in a position to answer every question received in the meeting itself. Have the company come with you all questions submitted today and publish responses where it's appropriate to do so. Before we begin, I'd like to submit the following poll. And I'd now like to hand you over to Rich Newman, CFO, and Andrew Milne, CEO. Good afternoon to you both.

0:33 Thank you. Good afternoon everybody. A very warm welcome to our half year results presentation and thank you for taking the time to dial in to listen today. We really do appreciate it. Okay. In terms of the flow of the presentation today, I will kick off by giving a strategic and operational overview of how HOPP year one has progressed. I will then hand over to Richard, our CFO, who will take you through all of the numbers and give you the outlook. Then I will come back and just talk to you about what we're planning to do in the second half of the year and then wrap up and then open the floor to questions. Okay. So in terms of the highlights we'd ask you to take away from today's presentation.

1:18 Firstly, we're really pleased that we're able to announce adjusted profit before tax growth of 18% versus the same period has been delivered this year, driven by consistent strong earnings and very strong cash generation again in the business. In line with our strategy that we absolutely wanted to focus on driving growth in our UK package business this year. We're pleased to report that we've driven volume by 4.9 percentage points, internal revenue by 5.3% and that's seen as drive market share gains in both squash and carbonates and also deliver our highest ever retail sales value growth of GBP 109,000,000 for the Vimto brand in that period.

2:09 Over the last couple of years, we've talked to you about the strategic review we've carried out in our out of home business. I'm really pleased to say now that the majority of the actions are now implemented and we have significantly improved the profitability of that route to market for ourselves. In line with our capital allocation policy, we were pleased that we were able to announce a special dividend of GBP 20,000,000 and also an interim dividend of 18.3% versus last year in line with our adjusted PBT growth. On full year 2024, adjusted PBT is now expected to be slightly ahead of market expectations prior to our results being announced yesterday morning.

3:00 Okay. So I will give you now a reminder of our strategy and strategic focus. So if you focus on the right hand part of this slide, the pink boxes. So overall, our key strategic focus is to accelerate growth in our asset light higher margin package business, both in The UK and international and drive bottom line contribution in our out of home business that is now far more simplified and requiring less senior management attention. So we have four growth pillars that we focus on. The first is what we call more from the core. And that's about accelerating organic growth through the core brands in our business, in the categories we operate in, the channels we operate in and our key core geographies of UK, Middle East and Africa.

3:58 In our first for new pillar, we want to drive incremental growth through innovation predominantly in UK packaged and The Middle East, using the money on our balance sheet to try and find the right acquisitions in spaces in The UK packaged market and areas that we think are going to grow in the long term, but places that you cannot stretch our current branded portfolio into. And then the big focus for us geographically, we talked about earlier this year, was try and break it to South Africa and also Malaysia. South Africa is work in progress, but I'm pleased to announce that we will be launching into Malaysia later this year and more of that detail later. In our fuel for growth pillar, we are absolutely going through a business transformation program at the moment that will see us implement a new IT system, a SAP system in Q1 of twenty twenty five.

5:00 We will look from 2026 to drive realized benefits from that. And then we'll then reinvest that back into our business to grow our high margin package business. And we have a number of commitments against our ESG priorities. We call that program our Happier Future program, and we are making again strong progress in delivering against those commitments. And these growth pillars are underpinned by three key enablers. The first is we are a branded business, and we're very proud of the distinctive portfolio of brands that we either own or we distribute on behalf of our partners. We pride ourselves on the long term partnerships we have built up over many years. A great example would be the partnership we have with Asia over in The Middle East that we've had for over ninety years now.

5:53 And we also pride ourselves on the culture we create at NICHOLS that allows our people to do their best work and thrive. So that's our strategy. Before I turn to how that strategy is playing out, I'll just give you a bit of context on how soft drinks are performing in The UK package route to market. So this is the Nielsen data, which is the industry benchmark. It is the six months to the June 15 versus the same period last year. And it collects grocery till roll convenience and wholesale data via sample data, but it doesn't collect all of the discounted data. So any discrepancy in these numbers and our internal numbers are due to those slight differences, but this data is the market benchmark and gives a flavor for where something is going.

6:51 So at headline level, pleased that the soft drinks market in The UK is growing value by 2.7%. Volume is down 0.7%. So you can still based on that, there is still 3.4 percentage points of inflation and price in the market. But the gap between value and volume is definitely closing six months ago. Those gaps were more like eight to nine percentage points. In the subchannels of categories doing very well, energy is now about 20% of all of soft drinks sold in The UK and continues as it has been for many years to drive very strong value and volume growth. Water on the back of the health focus in The UK continues to do well. And pure juice up there strongly, although volume down and a lot of that is the recovery of the big price increases we've seen in orange juice recently.

7:52 And in categories not performing as well, lemonade and mixers continue to underperform. And then sports is down, really trying to cycle the phenomenal growth that Prime delivered last year in the marketplace.

8:10 If we then compare that to how Vimso is performing from a Nielsen perspective, so we're really pleased to say that both our value and volume are in growth. You can see they're on the right hand side, 3.35.2% respectively. And that means we're ahead of the marketplace and taking share.

8:30 We're very pleased still that we are taking market share in squash and we're firmly consolidated as the number two brand in squash after Robinson's. And in carbonates, we've turned that performance round with over 9% growth in value and we're now the second fastest growing carbonates brand in The UK in the first six months. And we fully expect our ready to drink performance to improve in the second half. We have just launched a new kids ready to drink product into The UK grocery market, the top four now listed that product And we'll have a full six months of sales in that in the second half. So good optimism there. So let's now turn to how our strategy has been executed.

9:15 So Bert, Oaxair and more from the call. You can see in UK packaged, the numbers I highlighted earlier, strong value growth of 5.3% being fueled by good volume growth of 4.9%. And we've delivered strong distribution gains on our core business in some of our core grocers. We've also driven volume by doing more promotions than we did this time last year when we were protecting our gross margins. But I'm pleased to say we've been very targeted with where we've done more promotions to grow share we've still improved our gross margin overall year on year. We've hit that 109,000,000 RSV level, the highest ever for the Vimto brand, and that's been underpinned by the strong investment in our Love the Taste or Your Money Back promotion.

10:07 It's our highest ever spend, and it's been a complete promotion both above the line, below the line, in store, digitally, social. And we branded over 2,000 buses across the nation, of which one was on the first picture when we started today. Again, we're very pleased with how Ramadan has been executed in The Middle East. So we've had outstanding execution again in a strong integrated marketing campaign. And we've really taken the opportunity to showcase our Zero Cordial brand that was launched into market about eighteen months ago to reflect the changing consumer habits and needs of The Middle East market. And in our Rest of World business, which for us is North America and Europe, that's now about 25% of our revenues in international.

11:00 It's mainly an ex pat business, products that we sell in Saudi and Africa being sold in various outlets across America and Europe. And I'm pleased to say at the half year, we've driven performance there by 37% year on year as we've driven some improvements in our supply chain, which have resulted in more product in market and some distribution gains. Against our first for new pillar, so this year in UK package, we've got a heavyweight lineup of new products. So our Bimto Discovery sub brand, our two new flavors of 500 ml Bimto energy products our launch into kids with a mango tropical flavor and original Bimto, and a fabulous new tasting squash product, Blood Orange.

11:54 We've got good strong listings across all of our sub channels we operate in, and we executed very well in store with strong marketing programs. On Lehigh, we've delivered 27% growth at the half year. That's been through the launch of a new three thirty ml can,

12:12 two new 500 ml energy products and also returning to the green bottle in our 500 ml Caribbean crush range that's really driven good visibility again at end growth. And a new market for us internationally, so we've launched in Sierra Leone, which is in our stronghold of West Africa. It's about 6,000,000 people population. We are launching with the Coca Cola off of that. So the product, as you can see there, the 300 ml PET carbonates pack will be distributed alongside Coke and Fanta in the region. And we've got a very exciting marketing plan second half to really drive the performance of that brand.

12:57 Are that fuel for growth ambition? So in out of home now, we now have a much simpler business, a very focused and targeted business and making very strong progress delivering an extra GBP 1,600,000 versus the same period last year in profitability. As part of our business transformation program, we will be implementing a brand new IT system, SAP4HANA. We have a comprehensive program currently underway. As we're building the system, we will go into testing the system, training our people and then launching this new system in Q1 twenty twenty five. We've made a significant investment into this system and we will start to realize the benefits from that as we enter 2026.

13:50 And from an international point of view, for many years, we have produced the Red Cam for Africa in Spain. One of the challenges we have is that import duties and tariffs continue to go up on products being imported into the West African region. As a result of that, lots of our distributors have their cash flows tied up in those tariffs. Our lead times into market sometimes are quite long. And obviously, from a sustainability point of view, shipping product over water is not ideal. So we will start to phase production from Spain into Senegal over time to ensure that our distributors no longer have their cash tied up in tariffs.

14:42 We are producing closer to the point of consumption, which should allow us to put our market put our products into market far more efficiently at a speed and crucially, from a sustainability point of view, do the right thing in terms of we're not shipping lots of cans of the water.

15:04 We are making strong progress in our happy future commitments against everyone matters, products we're proud of and owning our climate impact. Some things to pull out. So in that first column, we've just been awarded the real living wage employer accreditation, which we're very proud of and in terms of how we look after our people. In products we're proud of, we will reach our goal of 51% of our recycled PET in our bottles being achieved. And we've done that in a sustainable way, ensuring that, that plastic is all sourced from The UK. And we continue to make sure all of the innovation we launched in The UK is either no added sugar or zero products, making sure we offer consumer choices.

15:53 Okay. At this point, I will now hand over to Richard, who will step you through the financial performance. Thank you. Okay. Thank you, Andrew. Good afternoon, everybody. So in summary, we're pleased with the progress that's been achieved at the half year. We've improved our profitability. Adjusted operating profits increased by 14%. Adjusted profit before tax increased by 18%, and our profit before tax margin has expanded now to over 17%. We continue to generate strong cash flows. And given the strength of the balance sheet, we'll be paying an interim dividend of 14.9p, which is an increase of 18%, as well as the special dividend, which is an aggregate of £20,000,000 or the equivalent of 54.8p per share.

16:49 In terms of the key drivers of that performance, I'll first of all turn to revenue. So the chart on the left just shows the drivers of our our revenue year on year. So in aggregate, we delivered £84,000,000 of revenue at the half.

17:08 So within that, The UK business, which is approximately 50% of the total turnover, grew by 5.3. As Andrew said, that was outstripping the market and underpinned by volume growth of 4.9%. I think what was particularly encouraging was that growth was achieved across all of our major sales channels, so through the grocers, through the discounters, and through the wholesalers, and it was driven by innovation and distribution gains. In our international business, there are a few different things going on at a headline level. Revenues were down by 6.9%. Within that, in The Middle East, which was down 29%, that decline was entirely driven by the timing of shipments into the region around the key Ramadan season, which moves forward by ten days each year, and that will reverse in half two.

18:08 In Africa, where we were down 10%, that decline reflects strong comparators to last year where we launched significant volumes into the Ivory Coast. And, again, as that unwinds in the second half, Africa will will return to growth in half two. And in the rest of the world, that was up 37%. And as Andrew said, that reflects us improving our supply chain and increasing our distribution in the Europe and USA markets. The decline in the out of home business reflects our our conscious withdrawal from a number of unprofitable accounts during last year. Fundamentally, whilst the the revenues are smaller, we have a more focused and more profitable business.

18:56 Our absolute profits in that business have doubled, and now the operating margins there are over 15%.

19:06 In terms of the profit, so, again, the chart on the left just shows the drivers of our our profit movement. Most encouragingly, the biggest driver of of the profits was the expansion in our gross margins that are now at 44%, and that is more consistent with the levels of gross margins that this business enjoyed pre COVID and pre inflationary spikes. That expansion in margin really reflects the pricing actions that were taken particularly last year to cope with cost inflation, and we're now in a position where we fully recovered those costs. And looking forward, whilst costs remain high, we're now seeing a far more benign inflationary environment.

19:55 The other thing I'd point out, administrative expenses were flat half year on half year, but what's going on underneath there is that we saw significant savings resulting from a reduction of overheads in our out of home business, which we reinvested into marketing to drive the growth of the package business.

20:16 We also enjoyed a higher interest income, which is reflective of our strong cash position and, obviously, the higher interest rate environment. Exceptional items. So exceptional items total £2,700,000. They largely relate to the investment we're making in our IT infrastructure. That investment in a new ERP system that that project has moved from what we're calling the design phase into what is now the build phase. We will then go through an extensive testing period through the autumn, and the system will be ready for go live in quarter one twenty twenty five. The total spend on that project will be around £9,000,000.

21:03 2,000,000 of that, was incurred last year. We expect to spend £6,000,000 in the current financial year and then another million pounds in full year '25. And then from a cash perspective, as I said, we we generated in the $0.59000000 pounds of free cash flows, so essentially the cash before any dividend payments, and the net cash position improved to £70,000,000. Working capital was was well controlled. Capital capital expenditure is relatively low, and that reflects the asset light model of the business and also reduced demands from the out of home business.

21:52 And then finally, on our capital allocation policy. So at the half year, our adjusted earnings per share were 29.9p, in line with our our dividend policy of maintaining two times cover that led to an interim dividend of 14.9p. As I said, on top of that, we'll be paying the the one off special dividend of £20,000,000, so 54.8p. We'll continue to keep this this policy under review. We want to ensure that we maintain sufficient resources to fund the organic growth of the business, and, also, we want to make sure that we maintain sufficient resources if any sensible and suitable acquisition opportunities present themselves.

22:42 Thank you very much. I'll hand you back to Andrew. Thank you, Richard. So I'm just going to now do a couple of slides focusing on our big priorities for the second half. So four key areas. So as we talked about, we will now start to transition and phase production from our products in Spain and into Africa. This is going be a great opportunity for us to increase our market share in that region. And we have also set up our first office outside of The UK, NICL Senegal, where we have two people on the ground really focused on driving performance in market. And we've got a couple more people in the market towards the end of the year.

23:31 One area we've had our focus now for a number of years is trying to launch into Malaysia. So Malaysia is a country with a population of 30,000,000 people. It's a strong Muslim population. It has a very well established squash and cordial market. And as a result of that, we have now signed a contract with a co packer over there. We've got a distribution sales force signed up, and we're going to be launching product into the marketplace later in the year. And this will now be a long term play for us to try and establish ourselves in the Malaysian market. So we're very pleased and very excited about this opportunity. And from a first for new perspective, we have a continued focus on trying to make the right and appropriate acquisitions in our UK package market.

24:25 We are working with a number of partners in this space to try and find the right acquisition that will really help us accelerate growth in our UK package route to market, complementing our Pinchot brand. And last but certainly not least, we talked a bit about this already, but during the second half and then Q1 next year, we are absolutely prioritizing the implementation of our new transformation program to ensure that that goes very smoothly when we go live at the end of Q1 twenty twenty five. Okay. So in summary, Seth, we leave you with the thoughts that, again, we're very pleased that the category we operate in of soft drinks is resilient and still in growth. Hopefully, you can see we've got a very clear and focused strategy that we're delivering against in accelerating the growth in both our package business in The UK and internationally where we will perform well in the second half.

25:25 Our continued focus on driving bottom line value from out of home, and we will continue to focus on driving efficiencies through our business transformation program that allows us to reinvest that money into our business to drive growth faster. We will be hosting a Capital Markets Day on November 6 in London, and there'll be more information about that that people would like to attend. And with all that in mind, we are very confident in delivering long term shareholder value. Okay. That concludes our presentation. Thank you. Perfect. Andrew, Richard, thank you very much for your presentation. What I'll do at this point is I'll just bring your camera back up. Ladies and gentlemen, please do continue to submit your questions just by using the Q and A tab, which is situated on the top right hand corner of your screen. But just while the company take a few moments to read the questions that have been submitted today, I'd like to remind you that recording of this presentation along with a copy of the slides and the published q and a can be accessed via your investor dashboard.

26:22 As you can see, we have received a number of questions throughout today's presentation. And Andrew Rich, if I could just hand back to you both just to read out those questions and provide responses where it's appropriate to do so. I'll pick up from you both at the end. Okay. Thank you. So If I take the first couple of questions, I'll I'll I'll read them out. So the first one is, how do you expect to grow the Vinyl brand or growth be in other products? So no, I think predominantly the growth will come from our Vimto portfolio, which is still the bulk of our sales. And I think as we've said in UK package, it will be through innovation, it will be through organic growth and maybe acquisition if we can be successful.

27:12 Internationally, it will be organic growth and innovation in The Middle East and then geographical expansion such as Malaysia that we've highlighted today or Sierra Leone. And then our out of home business growth will be about driving bottom line contribution. So we will do that very carefully to maintain our profitability. There's a question linked to this about the Feelgood brand. So a couple of years ago, drew the Feel Good brand from the marketplace. We've launched a brand. We're about to relaunch it during COVID that made it quite challenging. And we decided to focus back on driving the Vinto portfolio and our Levi portfolio in The UK.

28:00 We still have the Vinto at the Feel Good trademark, which we may do something within later years. But for now, we'd stay very much focused on the brands I've highlighted in The UK. Maybe one down here for Richard. So I'll read it out. So great to see the increase in cash and special dividend. Are you not seeing opportunities to expand or acquire to generate a greater return on cash as opposed to the special dividend? Yeah. So, the decision to pay the special dividend. So obviously, the business has built quite a large cash position, which is built over a number of years. And we had a look at that as a board.

28:47 We looked at what were the sort of internal cash requirements of the business to to fund our normal sort of flexes in working capital, to fund our investment in our our new, IT system. Our underlying capital expenditure requirements are relatively limited. And then we wanted to maintain, you know, quite a decent war chest such that if if the right acquisition opportunities come along, then we're in a position to execute against that. And having looked at all of those needs, we felt there was still surplus cash in the business, and we felt it appropriate to return that amount to shareholders. So that's something we'll keep under review, but it was there was a lot of thought that went into that.

29:33 And Richard, there's another question similar. I think what you just said answers that question. There's one here about pension. So Richard, could take this one. So is the defined benefit pension scheme seeking to complete a full buyouts to remove all risk and ongoing running costs from the company? If not, why not? Good. Good question. And the answer is that we are looking at buying that out or executing a buyout transaction. The funding position of the scheme has improved over the last three years, and it's now in a position where that that makes some sense. It's not a quick process.

30:18 It does take quite a long time to actually execute it, but that decision in principle has been made and we've started on that journey. Okay. Thanks, Richard. So the question here about out of home. So now that out of home restructuring is largely completed and the out of home P and L has been broken out. Do you see any opportunities to grow this business unit or is it likely to be considered a mature business? So I think as the question states, we're very pleased with where the business is. We've improved the profitability and improved our margin contribution at the bottom, circa 15%. But we do see perhaps another couple of margin points we can gain maybe up to about 16% or 17%.

31:08 But I think that our growth here will be very targeted. We will think long and hard about where we deploy capital to make sure we get strong return on investments. So we will still continue to grow this business, but it will be careful growth, profitable growth. And our accelerated growth will come from our high margin asset light package business. So there's another one here. Are there any UK market M and A potentials within the next twelve months? Or will focus be on organic progress of your current UK brands? We get lots of opportunities coming across our desk.

31:56 We look long and hard at them. So there may very well be one in the next twelve months. But either way, our focus will still be on organic growth both in The UK package business, but also the international package business as well. So the acquisitions coming across will not slow us down, but we remain open minded to looking at them. Have you considered switching Vimto and Levi Energy Drinks to smaller cans? Wouldn't this be more responsible as energy drinks have their detractors? So I think we do lots of consumer research and the target market for us and the best chance to be successful here, we believe is in the 500 ml format.

32:46 I will say a couple of things. So first of all, our energy drinks are the caffeine source is natural, so it's from coffee. We have added vitamins in the products, and they're very both variants are very low calorie, below the sugar levy. We also, through the British Soft Drinks Association, sign up to the voluntary code of conduct. So we don't market or promote any of our energy brands to children 16 and under. And we also have a clause on the back of our packs to say not suitable for children or pregnant ladies. I think that brings us to the end of the questions.

33:35 Yeah, I think that probably means we unless any more are going to come in, probably means that we go back to follow-up the session. Thank you. Perfect. Andrew Rich, thank you very much for answering those questions you can for investors. Of course, the company can review all the questions submitted today. We'll publish those responses on the Investor Meet company platform. But just before redirecting investors to provide you with their feedback, which is important to the company, Andrew, could I just ask you for a few closing comments? Yes, thank you. So firstly, again, you very much for dialing in today. We're very pleased with the numbers we've announced today, particularly it's against the strategy that we've now been talking about for a period. That strategy is now starting to play out. And I think where we are now is we have a lot of confidence that going forward in the environment where inflation is stabilizing and with the initiatives starting to work that we can continue to drive strong growth in the business over the next three to five years and deliver value back to our shareholders.

34:37 Thank you very much. Perfect. And thank you once again for updating investors today. Could I please ask investors not to close the session as you now be automatically redirected to provide your feedback and all the management team can better understand your views and expectations. This will only take a few moments to complete, but I'm sure it'll be greatly valued by the company. On behalf of the management team of NICHOLS PLC, we'd like to thank you for attending today's presentation, and good afternoon to you all.