Bakkavor Group H2 2024 Earnings Report

Bakkavor Group EPS Results

• Actual EPS: GBX 9.60
• Consensus EPS: N/A
• Beat/Miss: N/A
• One Year Ago EPS: N/A

Bakkavor Group Revenue Results

• Actual Revenue: N/A
• Expected Revenue: N/A
• Beat/Miss: N/A
• YoY Revenue Growth: N/A

Bakkavor Group Announcement Details

• Quarter: H2 2024
• Date: 3/4/2025
• Time: Before Market Opens
• Conference Call Date: Tuesday, March 4, 2025
• Conference Call Time: 4:00AM ET

We are the leading provider of fresh prepared food in the UK, and our presence in the US positions the Group well in this high-growth market. We leverage our consumer insight and scale to provide innovative food that offers quality, choice, convenience, and freshness. Around 14,900 colleagues operate from 31 sites in our two markets supplying a portfolio of c.2,000 products across meals, pizza & bread, salads and desserts to leading grocery retailers in the UK and US.

Bakkavor Group H2 2024 Earnings Call Transcript

Key Takeaways

• 2024 adjusted operating margin rose by 70 bps to 5%, leverage fell 0.4x to 1.1x and ROIC climbed to 10.1%.
• Like-for-like revenues grew 5.1% in 2024 (UK +5.2%, US +2% with H2 up 9.1%, China +11.3%), driven by +3% volume and +2.1% price.
• Inflation added $59 million of costs in 2024 and is expected to contribute ~$50 million in 2025 (mainly labor), though management anticipates price recovery support.
• Operational improvements, including a $15 million efficiency programme and rollout of the “back-of-operating-system” with 500 staff trained in the OpEx Academy, underpinned profit growth.
• For 2025 the company forecasts flat revenue and adjusted operating profit in line with consensus (~$118.6 million) with slightly lower finance costs and a ~26% effective tax rate.

Presentation

[Simon Burke, Chairman at Bakkavor]

Right, good morning, everybody. Thank you all very much for coming here to join us this morning, and also thank you to those who are joining us online. I'm Simon Burke, I'm the Chairman of Bakkavor, and it's my pleasure to introduce this session this morning. Just to give you an overview of what we're going to cover, Mike will start out by giving you the headlines, as it were. Lee will then go into the financial detail, and then Mike will give you a strategic overview of where we think we're at. There will be as much time as you need for questions at the end. Without further ado, I will hand you over to Mike. Thank you.

[Mike Edwards, CEO at Bakkavor]

Thanks, Simon. I want to start off with a couple of slides before I hand over to Lee, who'll go through the detail, just framing the key messages from today. Only two slides, one looking back, and one looking forward. I guess at the end of the day, the short story is we're in a really, really good place. If we look back at 2024, a really strong performance, we've absolutely step-changed the financial delivery of the business. I think the three metrics I've pulled out on there speak for themselves, really. A 70 basis point improvement in margin taking us to 5%. You know our aspiration's 6%, so a big step towards that.

[Mike Edwards, CEO at Bakkavor]

Debt coming down further and leverage now at 1.1x, so a 0.4 turn reduction, big movement, and a significant step on in return on invested capital taking us up to double digits and just over 10%. You know, it's absolutely clear that the strategy we've got continues to deliver the performance in the business, and that's gonna be a theme as we run through the day. Look, we're in good shape as we look back, but obviously, looking forward's more important, and that's what you guys have come for today, more so than the look back, I think. Look, the long and short of it is we're hearing a lot of negative narrative out there, obviously more overnight.

[Mike Edwards, CEO at Bakkavor]

If I park that for a minute, you know, a lot of talk about the budget, a lot of talk about cost-price inflation on food, all feels quite downbeat. We actually feel quite the opposite. We feel quite upbeat. We've got momentum, and there is a lot that we'll talk to you about that sort of fuels that positivity. In essence, you know, we're gonna ensure that we step margin on again in 2025 as we move towards that 6%. We'll do that by driving through the strategy. We're really clear what the areas of focus are in each of the four pillars. In the U.K., we've absolutely got to deal with inflation. Lee will talk quite a bit about this, but there's another GBP 50 million coming down the track, mostly labor. We've also now closed our Wigan site.

[Mike Edwards, CEO at Bakkavor]

That's exiting low-margin business. That happened at the, that sadly happened at the end of February. A bit of work to do that will drive some cost in the short term, but as we get into the second half, that will help margin, because the business will have adjusted for the loss of that, you know, poor business at the end of the day. Internationally, we've got more to go at in the US. The U.S. numbers are fantastic. I'll talk to those later, but there's more in the tank. Our strategic reshape in China continues. When it comes to excellence, we're laser-focused on driving a pipeline of efficiency. The Bakkavor Operating System I'll bring to life a little bit later. That really sits behind all our work in this pillar.

[Mike Edwards, CEO at Bakkavor]

And then finally, trust, you know, we remain focused on our people, and ESG priorities. And actually, you know, whilst, you know, work in this pillar is absolutely imperative 'cause it's the right thing to do, there are financial benefits as well. So all of that leads us to say that we're, you know, reinforcing the guidance that we've given and you've interpreted. We sit very comfortable with the consensus. I think if I look at the range, we'd probably like to see it tighten a bit and the bottom end come up and the top end come down a bit, but sit very comfortably with where the market expectation sits. Just wanted to head off with those two slides. I'm gonna hand over to Lee, who'll go into a lot more detail around the numbers.

[Lee Miley, CFO at Bakkavor]

Thanks, Mike, and good morning, everyone. Obviously, this is my first results announcement. The headline on slide seven, strong 2024 financial performance, makes it a great way to start. This slide highlights our range of financial measures, and I'm pleased to say that all of the three groupings on this page bring to life what a great 2024, how great 2024 has been for us. Firstly, from a growth and profit perspective, like-for-like revenues were up 5.1%, with all three regions delivering good volume growth and adjusted operating profit up 20.5% as we leverage the volume and continue to drive efficiencies. The balance sheet is stronger than ever, with good conversion of EBIT into free cash, which, while lower than last year, reflects capital spend returning to more normal levels.

[Lee Miley, CFO at Bakkavor]

As a result, we have delivered further improvement on leverage down 0.5x year-on-year to 1.1x and down 0.1x compared to the half year. This now sits comfortably at the lower end of our target range. Finally, in terms of enhanced returns, ROIC is now in double digits at 10.1%, up 260 basis points year-on-year, and we have delivered a meaningful step on in EPS. This, combined with our confidence of the 2025 outlook, leads to the board recommending a 10% increase in the final dividend, resulting in a total dividend per share of GBP 0.08. Let's now talk through a bit more detail, starting with revenue on slide eight. Like-for-like revenues were up 5.1%. Within this, price has contributed 2.1%, and positively, volume has delivered 3%. On a statutory basis, revenues were up 4%.

[Lee Miley, CFO at Bakkavor]

There are two adjustments to bridge like-for-like to the statutory result. The first is the movement in currency, and the second, the revenues from our China bakery business, which we sold in March 2024. Moving on to like-for-like revenue performance by region, as you can see, the U.K. revenues were up 5.2% and volume up 2.8%. Positively, within this, all four of our categories have seen volume growth. Price was up 2.4%, reflecting the good level of support we receive from our customers on inflation recovery. In the U.S., revenues were up 2%, all driven by volume. In line with the guidance at the half year, we saw a return to growth in the second half, with revenue up 9.1%, supported by new listings of our Fresh & Simple brand and a strong Thanksgiving.

[Lee Miley, CFO at Bakkavor]

In China, revenues were up 11.3%, driven by a good volume growth in mainland China, offset in part by reduced volumes in Hong Kong. I will come on to talk more about our plans for Hong Kong shortly. Moving on to slide nine, where we show our economic bridge. This highlights the key movements in adjusted operating profit. Starting with the overall movement, our adjusted operating profit has increased by GBP 19.3 million, which is an increase of 20.5% year-on-year, and margin is up 70 basis points to 5%. Volume growth, as outlined on the previous slide, has made a meaningful contribution to the model, delivering GBP 18 million. Moving on to inflation, while still a large number at GBP 59 million, or a 2.9% increase in costs, it is significantly lower than the GBP 360 million we faced cumulatively across the previous two years.

[Lee Miley, CFO at Bakkavor]

In 2024, labor is the largest component, with increases in National Living Wage being the key driver. We have continued to receive good level of support from our customers on recovering these increased costs, and this is reflecting the price increases shown on the chart. In 2025, we expect inflation to be circa GBP 50 million, and again, we're weighted towards labor. Within this, the increase in U.K. National Insurance is expected to have a circa GBP 15 million annualized impact. We're positively engaged with our customers regarding recovery against this, and given our track record, we'd expect a good level of support. Finally, our efficiency improvements of GBP 15 million have underpinned the profit improvement. We made further progress in driving operational performance across all three regions through our Bakkavor Operating System, and Mike will bring a bit more detail to this in the next section.

[Lee Miley, CFO at Bakkavor]

Moving on to slide 10 and our adjusted operating profit by region. As you can see from the table, in the U.K., profits were up GBP 11.3 million, or 12% year-on-year, and margin of 5.4% was up 30 basis points. This was driven by improved volumes, good price recovery, and further efficiency improvements. In the U.S., profit steps up GBP 6.5 million to GBP 9.9 million, and margin up 280 basis points to 4.3%. Our momentum continued through the year, underpinned by our laser focus on driving operational efficiencies. Positively, at an EBITDA level, the U.S. is now delivering margin ahead of the U.K., 9.5% compared to 8.2%. Clearly, at an EBIT level, the U.K. remains ahead, but this is driven by the relatively high depreciation charge in the U.S.

[Lee Miley, CFO at Bakkavor]

We remain confident that the U.S. will become accretive to the group's EBIT margin in the medium term and support the delivery of our 6% margin target. In China, operating loss is halved as volumes continue to improve, and our lean manufacturing initiatives delivered efficiencies. The business continues to be self-sustaining and cash generative. As we continue to look for opportunities to simplify our operations, in December 2024, we agreed the sale of our Hong Kong business, which is expected to complete in April. This follows a disposal of our bakery business in March 2024. Operating profit of GBP 93.4 million includes a net exceptional charge of GBP 20.2 million. The largest component of this relates to the costs of our Wigan site closure, which we announced in September, with GBP 8.5 million of cash costs and GBP 12.9 million impairment of assets.

[Lee Miley, CFO at Bakkavor]

We've also recognized a GBP 3.2 million impairment in relation to the sale of our Hong Kong business. In the year, this is more than offset by the profits on disposal of the bakery. Now moving to slide 11 to talk more about cash. Overall, we've continued to deliver strong cash generation, reflecting improved profits and further working capital inflow, partially offset by an increase in capital spend, which returned to more normal levels. This delivered a GBP 36 million reduction in debt, with leverage down 0.5x to 1.1x, comfortably at the lower end of our range of 1x-2x. As you can see, we delivered another good working capital improvement in 2024, building on the record delivery in 2023. Capital spend has increased in a controlled manner. This follows restricted spend in 2023.

[Lee Miley, CFO at Bakkavor]

We've continued to see returns from our investments in productivity and capacity materialize, supporting the step up in 2024 profits. Our spending the year included GBP 3 million related to the replacement of our legacy ERP system in the U.K. Returns to our shareholders were also funded, with the outflow in 2024 reflecting the final 2023 dividend payment and the 2024 interim payment. As outlined at the half year, we refinanced our debt facilities in July 2024. We have facilities of GBP 350 million, comprising a GBP 150 million term loan and GBP 200 million RCF, with a four-year term plus the option of two one-year extensions. These facilities included a 25 basis point improvement in margin. Finally, on this slide, I'm pleased to report that the recovery payments on the U.K. defined benefit scheme will cease as of March 2025.

[Lee Miley, CFO at Bakkavor]

As the scheme was in surplus at December 2024 and January 2025, this was previously an annual cost of GBP 2.5 million. In light of this, we feel positive about the next round of valuation, which is this year. Looking ahead to our 2025 guidance, which you'll find on slide 12, starting with reported revenue growth, our guidance for the full year is that we expect to be broadly in line with 2024. The impact of the Wigan closure being largely offset by underlying volume growth in all three regions and some contribution to price linked to inflation recovery. Although still early in the year, trading in 2025 has started well, with volume growth continuing in all three regions. From an adjusted operating profit perspective, we expect to be in line with market expectations, with consensus sitting at GBP 118.6 million and the range being GBP 114 million-GBP 123 million.

[Lee Miley, CFO at Bakkavor]

We expect finance costs to reduce slightly as we maintain lower debt levels and forecast U.K. base rates to decrease marginally. We continue to have a good level of cover, with GBP 130 million of interest rate swaps in place at 3.7%. To finish off this slide, we expect the effective tax rate to return to marginally above the U.K. corporation tax rate at 26%, with certain items that benefited our ETR in 2024 not expected to recur. Finally, I'll conclude our guidance with capital allocation on slide 13. We expect to return to more normal levels of capital of circa GBP 70 million, whilst maintaining the strong controls we have introduced in the last couple of years. Capital includes circa GBP 7 million of spend in relation to the ERP replacement.

[Lee Miley, CFO at Bakkavor]

In addition to the capital cost, there is a further circa GBP 8 million that will be expensed in 2025 and treated as exceptional cost. The total project spend is expected to be circa GBP 40 million and concluded in 2027, and will be broadly split equally between capital and exceptional cost. We remain focused on our strategic growth opportunities, and we expect to build on the improvement in returns we have seen in 2024. Our strengthened balance sheet means we have the flexibility to assess acquisition opportunities where we see the right strategic fit and the potential to enhance the group's margin and returns. Whilst at the lower end, we believe our leverage target remains appropriate, albeit we do expect to continue to deliver some improvement in debt with ongoing working capital focus and profit improvement.

[Lee Miley, CFO at Bakkavor]

Finally, we remain committed to our progressive dividend policy and expect the level of increase to be more closely aligned to historic levels at circa 5%. To conclude, in 2024, we've delivered a strong financial performance, the callouts being profit and margin progressive in all three regions, debt and leverage both at record lows despite increasing capital spend, and ROIC back into double digits. We remain confident in delivering progress in 2025 as we continue our trajectory towards 6% target in 2027. Now I'll hand back over to Mike.

[Mike Edwards, CEO at Bakkavor]

Brilliant. Thanks, Lee. Very clear. I want to say a little bit about the strategy.

[Mike Edwards, CEO at Bakkavor]

I want to start being a bit more holistic in terms of, you know, what it is, but I'm not going to go through it all in detail because you know, and I'll start with a slide that I used at the half year. I want to talk a little bit about our strategy and action through 2024 to give you a sense of why we feel positive about the performance, moving forward. This chart is nothing new, and I'm really not going to go through it, but I think what I would say, our strategy and our plan give us absolute clarity and purpose as a business, and there's no doubt in my mind that that clarity and purpose underpins our delivery, you know, be that financial or otherwise.

[Mike Edwards, CEO at Bakkavor]

We absolutely want to reaffirm today that our target of 6% margin in 2027 is absolutely going to be delivered. As I said earlier, we took a big step along the path with the 70 basis point improvement in 2024. I now want to focus on 2024 and talk a little bit about each of those pillars, you know, and what we've been working on. In the U.K., I want to really focus on the market and our performance in the market. I think the big callout on this chart is that the U.K. fresh prepared food market is back in growth. The middle pillar on the chart there is really, really key for us. We've had a couple of years of decline, which is always a challenge when it comes through the model.

[Mike Edwards, CEO at Bakkavor]

Not only is it in growth, but we're back ahead of grocery, so it tells us we're operating in good space, which is really positive. To the far side of the chart, you've got the relative performance of categories. You can see that meals and salads are outperforming the market, and desserts and pizza are underperforming the market. We'd always expect a blend to get back to that market number. I'll say a couple of words about the ones that are behind. I mean, I think, in terms of desserts, desserts remains more of a discretionary purchase than any other category we've got. We have still seen some volume headwinds as we've gone through 2024. At the end of the day, people still like a treat, and I think this is really important.

[Mike Edwards, CEO at Bakkavor]

You know, we had a really strong Christmas, and people bought into desserts strongly, and volumes were up, so really encouraging. Pizza and bread is really about normalizing because, through cost of living, consumers really focused on price rather than value, and there was a lot of trading down. We've started to see this write itself as people are now trading up, and we're seeing therefore a decline in volume, but strong performance in value. An interesting dynamic there. All of this really comes back to the consumer and the consumer behavior. I think what we're seeing is a normalization. I think what people are telling us is they're coming to terms with and learning how to cope with the new world we live in because this inflation is stuck.

[Mike Edwards, CEO at Bakkavor]

You know, we are still seeing inflation, much lower levels now, but it is still there. Consumers are getting more confident, and are managing their spend in a different way. Actually, the big three macro drivers of fresh prepared foods are living large again. People are returning more and more to the way life used to be, going to the office, getting out and about, and convenience is really important to people that are time pressured. As people go back to the office, that time pressure starts to build. From a quality perspective, there's no doubt that eating out is incredibly expensive. We offer fantastic quality of product, you know, a good alternative to that eating out experience, that in-home experience with the family. Finally, it's all about value.

[Mike Edwards, CEO at Bakkavor]

I think here value has reclaimed the top spot, if you like, from price, that there is a definitive difference between the two. What we make is really strong value for money. You know, generally, meals at the moment will trade 3 for GBP 9 or GBP 10. That is phenomenal value for great quality product at the end of the day. It's those consumer behaviors that are driving growth back into the market. Really, when we look at the consumer KPIs, it's all about frequency. People are getting out, shopping more, and we know we are more of an impulse purchase. Food for now, food for later. You know, this frequency growth is really important for us. Good news around the market, but fantastic news around Bakkavor performance as well, because what this is saying is that we're outperforming.

[Mike Edwards, CEO at Bakkavor]

The market was 2.6% up, we were 2.8% up. Beating the market, winning in pizza, bread, and desserts, slightly lower in salads. The reason we continue to win are the reasons that we've talked about before: strong customer service, making sure we get good quality products on the shelf day in, day out for our customers. Leading innovation, you know, there is no doubt, as you know, consumers have normalized their behavior, we're having to normalize our behavior a bit when it comes to innovation. Then we've got net business gains. You know, we're winning more than we're losing. Desserts is a great example of a lot of this, because we are winning in desserts. That winning performance is really down to two things. Number one, it's down to innovation. A lot of new lines have launched.

[Mike Edwards, CEO at Bakkavor]

I would say, a big chunk of that is just standard NPD where we're, you know, winning out on briefs, but we also onboarded a major customer with a big cream cake win, which really supported our performance in this category. The other thing is exceptional delivery at peak. Desserts is interesting because we all get very fixated with Christmas, but actually we get a peak at Valentine's Day, Easter. You know, all these events drive opportunities to sell more desserts and, you know, people buy and shop the category strongly at those times. It is our track record of delivering through peaks when customers really need us to deliver and consumers need us to deliver that makes us stand out. Great news in the U.K. Our matrix is working really strongly.

[Mike Edwards, CEO at Bakkavor]

Our customer teams are laser focused on what consumers want, developing propositions, and delivering output performance for our customers. Our operational teams back that up with fantastic delivery of service and quality. U.K., in good shape. If I come to international, Lee called this out. I mean, the picture speaks a thousand words. The two graphs on the page there really show the direction of travel internationally. It has really started to turn around, with profitability improving on the whole. I think in terms of the U.S., you can see the marked improvement as we have gone into half two. We should remember that Thanksgiving is in there and we do get a seasonal spike for that. Some of the business we onboarded was specifically Thanksgiving product. Nevertheless, a great performance.

[Mike Edwards, CEO at Bakkavor]

As Lee said, you know, from an EBITDA perspective ahead of the U.K. I think the key story here is there is more to come. The Bakkavor Operating System is in place in its basic form. As we roll that out, we will deliver more efficiencies and that will continue to power performance. We are still, whilst we want growth, this is all about profitable growth and making sure that the U.S. drives incremental benefit to the total group margin. If I come to China, China is never going to do that for us. We've been pretty clear on that. We would reaffirm our, you know, excitement about the U.S. and our slight disappointment around China. We have a wonderful business that's incredibly well run, but it's never really going to deliver for the group and hence our strategic review.

[Mike Edwards, CEO at Bakkavor]

That said, the team have done an amazing job. We've halved the losses. And just to be clear, you know, we have about 5.5 million, six million of depreciation. So we are generating cash here, and we're certainly not spending ever so much capital. This is now not a drain on the group, which is really important to remember. We've streamlined because Hong Kong is now leaving us, which is good news given it's a drain on the business. It just leaves mainland China, which is the, you know, most invested asset with the best customer base within the stable. You know, the majority of losses last year would have come through that Hong Kong business. We're going to have a natural opportunity to step on again. Good news on the international front.

[Mike Edwards, CEO at Bakkavor]

In terms of the Bakkavor Operating System, we could talk about this for hours and I'll really try not to. The system, so the diagram that's on the chart there, you know, talks about data insight and action. I think the key here is our Redzone system that we'll have talked to you about, you know, creates a data point. We get a lot of data from that. At the start, you get bogged down in data, but then you start finding the insight. The most important thing is finding the actions. At the end of the day, we've now got a nice balance to this, in the U.K. where, you know, the three segments, you know, are kind of incremental and it's a self-fulfilling self-fulfilling circle.

[Mike Edwards, CEO at Bakkavor]

In the U.S., we're probably more skewed to data at the moment, as we start to implement Redzone. The key principles behind this are very simple. First and foremost, we want to do it the same in every one of our factories. There has to be a best way. We will find that and we will do it everywhere. That will fuel efficiency. Secondly, it's about people. You know, as with most of our structures, this is a matrix. We have experts at the center, and then we upskill our local teams because they are responsible and accountable for delivering. We've put 500 people through the OpEx Academy, which, you know, is a phenomenal number and we will continue to do that. You know, people are key as they are in every part of our business. Then it's about optimization.

[Mike Edwards, CEO at Bakkavor]

It's short term and long term, winning the day, and having a pipeline of future activity that's going to continue this procession of performance and efficiency through the business. The points raised on the far side of the chart really talk to that pipeline. The first two examples there are things that are now up and running and delivering, but will give us a spring, you know, through the rest of this year and into next as we get some kind of annualization. Obviously, Redzone at the bottom rolling out in the U.S. is an example of something that's on the pipeline that we're investing in now that will help in future years. The pipeline is really, really strong. I want to finish off on trust, and start really with our ESG targets.

[Mike Edwards, CEO at Bakkavor]

Unfortunately, there's a bit of a blot on the landscape here because our net carbon emissions went up. We talked about this at the half year. I don't want to be complacent about that or sweep it under the carpet, but it was related to an incident at one particular factory in the US. We're happy that it's not going to be a repeatable performance. What I would say on that one is we are absolutely on track to deliver our commitment here, which is a 42% reduction in emissions by 2030. Despite that disappointing year, we're on track. As we are with food waste, we've got to halve our food waste by 2030. We saw another really strong step on in year, and it brings the reduction to 320 basis points since we started this journey.

[Mike Edwards, CEO at Bakkavor]

Actually, you know, good performance continuing in this space. As I said at the start, you know, we spend a lot of time talking about ESG in the business. Actually, we do because it's absolutely right that we are focused on this. We're doing things and using our scale for good. The FareShare partnership, you know, that we've got, along with the King's Coronation project, where we're giving 500,000 meals to help tackle food insecurity, is a great example of that. There are financial benefits here. The new bread line that we put into our Crewe site not only reduces labor, but it actually reduces energy costs because we've changed the type of refrigerant. This is the great thing that we're coming to understand in this space.

[Mike Edwards, CEO at Bakkavor]

You know, we want to do things that future proof the business. Sometimes you have to spend a little bit more, but you can get heat recovery built in. You can spend a little bit more and get more efficient systems. Look, ESG, very much on track. I mean, the yardstick for us are the measures in the middle. It's about turnover and it's about engagement. You can see there we've seen some significant improvement in both measures. I think the U.S. improvement does speak to the performance we've been driving in the business because it's a massive drop. Actually talks a little bit about the scale of the problem we had. Certainly the team have been very focused as we've come out of recovery, spending more time doing the right things when it comes to engagement.

[Mike Edwards, CEO at Bakkavor]

You know, fantastic scores there. The score on the engagement survey is as well, you know, 320 basis point improvement. I think we see this as the two bits on the side of the chart really driving the metrics in the middle, because it is about rewarding colleagues and paying them fairly. Through this whole, you know, cost of living crisis and significant period of inflation, we've actually increased hourly rates of pay in our factories, you know, in the U.K., ahead of the compound of the inflation. That's a massive thing to be able to stand up here and say. I'm not sure there's ever so many businesses that could actually say that and stand behind that.

[Mike Edwards, CEO at Bakkavor]

The other thing that I'm pleased to update you on today, and we don't talk about this a lot because whilst it was very unpleasant, unfortunate and disappointing noise, it wasn't really materially affecting the business. I'm pleased to say that as of yesterday, the dispute at Spalding with Unite has ceased. Unite came to us a week or so ago and said they were minded to recommend the acceptance of our final offer in October. They proceeded to a ballot and I'm pleased to say that, you know, colleagues at Spalding will be returning to work and, you know, we can kind of get on with, you know, the more, yeah, the more positive things now on that site because it's been difficult for everybody.

[Mike Edwards, CEO at Bakkavor]

Aside from pay, it's also about benefits and we've worked really hard to use our scale to deliver for colleagues. Two best examples for me to call out would be investment in facilities. That horrible picture is me opening a new staff facility in Highbridge a week or so ago. You know, that has gone down immensely well. Walking around the factory and meeting colleagues, you know, and doing that, it's brilliant. It's the restroom, you know, it's got quiet areas, it's got workspace, it's got the shop facility. You know, it is a proper reason for people to come and work at Highbridge. That links nicely to the staff shop push that we've had. You know, we make food.

[Mike Edwards, CEO at Bakkavor]

You know, the one thing we can do to help our colleagues is to provide them with cheap food. We now make food specifically to put in our staff shops. When we were just relying on overmakes or rejects, you know, we just could not get stock around the system. We now have set up, you know, a network to be able to supply certain Bakkavor products to every site on a weekly basis. This has gone down incredibly well. At the moment, the run rate is about 1 million meals per year, which, you know, when you do the maths on it, is pretty impressive. This has been a big push and we will continue to do this and we get great feedback around it.

[Mike Edwards, CEO at Bakkavor]

I think, you know, I've hopefully shown that, you know, every pillar of our strategy is delivering and underpinning performance and it will continue to do so. I've just got two slides to wrap up, which will then leave us sort of 20 minutes or longer if necessary for questions. The first one is just a repeat. You know, we feel that we are in a really good place. We have momentum. We're confident about moving margin on again in 2025, and we're reiterating the market expectation, and our confidence in delivery and homing in on that consensus number and maybe reducing the range ever so slightly. The final chart just summarizes everything really. Brilliant 2024, 2025 started well. You know, the strategy and plan we've got gives us this clarity and purpose.

[Mike Edwards, CEO at Bakkavor]

That makes us very, very confident in delivering the 6% target we have laid down. Actually, as Lee said, our balance sheet strength underpins our ability to look for further, further margin enhancing returns. Obviously, we can do that by looking internally and externally. This whole leverage piece, and I maybe preempt a question, this is not worrying us. You know, Lee had a chart up there that said the cost of finance for this year is going to be GBP 24 million. It is not a bad time to be reducing leverage and therefore debt. If we were to fall below that target, we would sit quite comfortably with that. You know, we probably would not change the target because we want to keep that flexibility. I just thought I would put that out there.

[Mike Edwards, CEO at Bakkavor]

Of course, if we do want to seize opportunities, they need to be absolutely right. Right means, equitative to the group margin, and to enhance that 6% that we've got as a target of normal spend metrics. Look, I think that's the formal bit done. Obviously, I think you guys get more excited about the questions and listening to us talk about our business. We obviously won't answer them all as specifically as you'll want, but we'll try and give you some good color in terms of how we see things going forward.

[Simon Burke, Chairman at Bakkavor]

We do have a microphone. A good way to be handed it because it'll just make it easier for people online to hear what you're saying. Charles.

[Charles Hall, Head of Research at Peel Hunt]

Charles Hall from Peel Hunt. Mike, it sounds as though you've got greater confidence on hitting or exceeding that 6% target. Obviously good improvement last year, but what's giving you the confidence to be able to say that you're going to deliver an extra 100 basis points and what are the key drivers of doing so?

[Mike Edwards, CEO at Bakkavor]

Yeah, look, we are confident. You know, we've got real line of sight of all the pipelines that are in play. Those pipelines are in play through the four pillars of the strategy. As I've said many times, we're not going to sort of build it out and say what comes from each pillar, but it will be those four pillars that underpin that 100 basis points. You know, we were very confident when we were sat at 4.3% that we were going to get to 6%, but we wanted to put a marker down and we've done that with the 70 basis points improvement.

[Mike Edwards, CEO at Bakkavor]

Yeah, there will be a steady climb to the 6%. There won't be another step on like we've just seen. Actually, you know, what we need to make sure we do in 2025 is underpin that stellar year. So there's a bit of consolidation. You know, so I think that's, you know, that's the color. I mean, the confidence absolutely comes from, you know, what we're looking at in the business. And, you know, we've just got clear plans.

[Charles Hall, Head of Research at Peel Hunt]

And then on the U.S., the employee turnover was extremely high. Yeah, going back to 2023, big reduction 24. What drove that big reduction and what's that doing for all of your metrics in terms of productivity and capacity and customer service?

[Mike Edwards, CEO at Bakkavor]

Yeah, look, I mean, it's difficult to link it directly to performance and customer service, but it just has to be linked. You know, if you've got over 50% turnover in a business, you know, delivering efficiency and customer service is always going to be more of a challenge. I think what's shifted the paradigm, you know, I think it comes back to the pay and the benefits. Unfortunately, when we were losing money, we stopped giving pay rises. There was a little bit of a vicious circle going on this. It was important that as soon as we got into making money, we started to reward colleagues and reintroduce pay awards. That has definitely played a part.

[Mike Edwards, CEO at Bakkavor]

We have definitely, you know, as we have come out of crisis, because we were in crisis, and moved from recovery to stability, our ability to, you know, run the business in a normal way and focus more on, you know, engagement and doing the right thing for our colleagues has definitely made a huge difference. It just, when I walk around the factories over there, they just feel so different to what they used to. We have just gotten ourselves into such a bad place and now we are in a really good place, but there is still loads of opportunity.

[Charles Hall, Head of Research at Peel Hunt]

That volume growth you saw in H2, is that carrying through so far this year?

[Mike Edwards, CEO at Bakkavor]

Yeah, volume is still pretty strong. I mean, let's be clear, you know, that was really overstated.

[Mike Edwards, CEO at Bakkavor]

Not overstated, but there was a flattered, that's the word, thanks Lee, flattered by Thanksgiving because some of the new business that we onboarded was specifically Thanksgiving product. But yeah, we are still seeing growth. There's going to be an annualization impact. You know, we're not going to grow anything like 9% this year. We don't necessarily want to. We want to see profits continue to improve and margin improve, but there will be growth.

[Charles Hall, Head of Research at Peel Hunt]

Perfect, thanks.

[Damian McNeela, Director and Equity Research Analyst at Deutsche Numis]

Thank you. Damian McNeela from Deutsche Numis. I think one for you, Lee, firstly on CapEx. Can you talk to us about how much of that GBP 70 million that you've got in for this year is strategic? And outside of the ERP investment, can you tell us, or identify some of the projects that that's been spent on?

[Damian McNeela, Director and Equity Research Analyst at Deutsche Numis]

Perhaps for you, Mike, just an update on the FPF market in the U.K. It sort of, you indicated that it's in a good place. Have you got any sort of feel for what level of growth we should expect? In particular, what you're hearing from your customers, because I think most of your customers are performing pretty well.

[Mike Edwards, CEO at Bakkavor]

Yeah, let me take that one first and then pass over to Lee on the CapEx one. Look, I think firstly we saw the market grow 2.6% last year. I'm not sure it's going to go quite as much this year. We're expecting one point something would be, you know, where our heads are with this. We're not expecting, you know, massive growth to underpin the model is the first point.

[Mike Edwards, CEO at Bakkavor]

You're absolutely right to call it out, and I should have called it out. Our customer mix is really, really strong at the moment. You know, you've got Tesco, M&S, Sainsbury's, three biggest customers, you know, in rude health and performing really, really strongly and actually doubling down on food, and doubling down on all the things that speak to those three key drivers of fresh prepared food. I think that's what will ensure the market stays ahead of grocery. I think that gives you a bit of color on the growth as well as, you know, on our customer mix.

[Damian McNeela, Director and Equity Research Analyst at Deutsche Numis]

Thank you.

[Lee Miley, CFO at Bakkavor]

Do I need the mic or? Yeah, yeah, okay. Yeah, look, going back to the CapEx question. Yeah, look, GBP 70 million planned for this year.

[Lee Miley, CFO at Bakkavor]

I mean, broadly, we talk about a third of that being sort of strategic in nature, driving capacity, productivity, in terms of bringing some color to the types of projects. We've got a couple of really, really great ones. You know, building on our bread experience and craft breads, we're now laying down that same technology on a second line. In the pizza space, you know, some automation, which with it brings, you know, a pretty decent capacity step in terms of stuffed crust pizzas. You know, those two things would be great examples as well as several other areas. Was that the, yeah, that was a tough question. Thanks.

[Vincent Ryan, Consumer Equity Research Analyst at Goodbody]

Good morning, Vincent Ryan here from Goodbody. Two questions for me, please.

[Vincent Ryan, Consumer Equity Research Analyst at Goodbody]

Firstly, just with regards to your China business, following the sale of Hong Kong, how should we think of that business going forward in terms of top line and like sort of a sustainable room rate margin or profit generation? Secondly, one of you, like you think you've mentioned strong balance sheet and would consider M&A. One of your peers has also talked about looking at M&A sort of further afield, particularly in continental Europe. Is that part of your thinking or would M&A be very much U.K. or within the existing footprint?

[Mike Edwards, CEO at Bakkavor]

Yeah, let's start with that one. You know, we've said many times in the past, China's closed off. U.S. would like to, but there's not really anything in our space. That brings us back to the U.K. if we were to do anything.

[Mike Edwards, CEO at Bakkavor]

There is a big if around that. I think the thing I would say to back that up is we're not looking to, you know, open up on another front. We have been to Europe, we have tried that. It did not work for us in our space. You know, we are certainly not going to be going back there, Vincent. I think, you know, whilst we talk about M&A, we are so focused on making sure anything that we would consider would be, you know, accretive from a margin perspective. It just has to be at the right price and no one wants to sell anything for the right price. It has to be, you know, laden with synergy. You know, we set a high bar on this. I would not get, you know, massively excited, you know, around M&A.

[Mike Edwards, CEO at Bakkavor]

In terms of China, look, we've tidied the business up. The bit we will have left is the, you know, the blue ribbon bit. And it is a great asset. It's generating a bit of cash. We are, as we've said on many times, reviewing strategic options. I feel if we could find someone to work with over there, that would get more out of the business. If we can't, you know, we will continue as is because, you know, it's not a nail in our heads anymore. In terms of what to expect, I would expect a step on in profitability this year. Sale is getting harder, given the challenges that some of the American brands are having over there, the likes of Starbucks, Yum.

[Mike Edwards, CEO at Bakkavor]

Therefore, I think, you know, probably the growth that we've seen over the last year might slow up somewhat. Profitability, you know, we're confident that our, you know, lean programs over there that link into the Bakkavor Operating System again will, you know, protect us from some of those commercial pressures. Break-even at EBIT is probably as good as it gets, and that's not very exciting.

[Andrew Ford, Equity Research Analyst at Peel Hunt]

It's Andrew Ford from Peel Hunt. Just a couple from me. You mentioned the sort of a bit of a reversion in consumer sort of behaviors and priorities.

[Andrew Ford, Equity Research Analyst at Peel Hunt]

I just wondered if you're seeing any priorities change with your customers, you know, whether they're still looking for, you know, the same, you know, the same things they were last year or if it's sort of a bit more of a pre-COVID, sort of look on things like ESG, etc. and then secondly on the margin target, I know Charles has already sort of asked on that and that there is a lot of confidence around that number. If assuming you sort of get to the 6%, is it then about margin progression from there or would you look a little bit more about, you know, is it more back to sort of volume performance at that point? Sort of where do you, you know, how do you think about it if if and when we get there?

[Mike Edwards, CEO at Bakkavor]

I work backwards. I mean, look, there's a link between volume and, you know, bottom line delivery if you get the balance right. So, you know, we're always going to be focused on that. But, you know, I don't think we should be thinking about 6% as a ceiling. You know, we've said that we're going to deliver that through our normal business operations. So our normal GBP 70 million of capital, you know, through our existing regions. But, you know, we could use our balance sheet to, you know, do more is what I'm trying to say. So I think that was the second part of the question. The first part was around, you know, retailers changing. I don't think they are ever so much. I think they're quite consistent in their approaches. There's some nuance because we're seeing promotions, you know, come back into play.

[Mike Edwards, CEO at Bakkavor]

A lot more promotions in our space now than there would have been over the last, if I go back, say, two years. I think they're very excited about this shift to own label. I think I read something, that one of the teams sent me actually, about the scale of own label now in grocery being as high as it's ever been. I think that's a really interesting dynamic. I think some of that is, you know, back to consumers learning to cope, because we are a coping nation at the end of the day, learning to cope with some of the challenges that the cost of living crisis has brought as they've had clarity about what's going to happen to their earnings.

[Andrew Ford, Equity Research Analyst at Peel Hunt]

That's very clear. Thank you.

[Matthew Webb, Consumer Analyst at Investec]

Thanks. Morning, Matthew Webb from Investec. Two questions, please. Firstly, just going back to the employee turnover, obviously that U.S. number was exceptional, but the U.K. number was very, very impressive as well. You talked about what you did to help achieve that. I wonder whether there was also a, you know, broader labor market issue there. Are there fewer opportunities for people elsewhere? Also, again, on that point, I mean, do you think that you can maintain the employee turnover at that low level or even drive it lower? That is the first question. The second question, just on Wigan, you mentioned, I think, if I understood it correctly, some costs associated with closing that down in the first half of the year, but benefits starting to come through in the second. I wonder if you could just clarify that and, if possible, quantify. Thank you.

[Mike Edwards, CEO at Bakkavor]

Yeah, look, I'm not sure we'd quantify it at this stage. I mean, when you shut a factory, it's quite disruptive. You then need to mothball it or prepare it for its next state. I mean, this is probably a site that we would look to. We own it, so we'd probably look to dispose of it. There will be some cost associated with that. Really the message here is the second half, we will start seeing some benefits come through and obviously that will then, you know, give us a spring into next year. Benefits second half this year, into first half next. In terms of the, God, you had so many parts to the first question. I've forgotten.

[Matthew Webb, Consumer Analyst at Investec]

It's all about turnover. Sorry, sorry, I don't blame you.

[Mike Edwards, CEO at Bakkavor]

Yeah, it did go on. I got it. I remembered. The second part of your first question was, you know, is it all down to you or have you had help? In truth, we've had help. There is no doubt that the environment has eased here. I would still say we struggle more around sort of skills, but we're working hard to bring people into the business and skill them up. You know, we've definitely come away from having a labor crisis. I think cost of living has helped that. A lot of people that, you know, took themselves out of work through COVID, you know, felt they probably had to go back when things got a bit tougher. So definitely had some help environmentally.

[Mike Edwards, CEO at Bakkavor]

I would not want to take anything away from the effort that has been put in by the broad team in the U.K., you know, operationally, because we can come up with plans, you know, led by, you know, Donna-Maria behind, but, you know, execution is actually in the field. The effort that has gone into engaging with our people and, you know, making Bakkavor a better place to work, you know, has been phenomenal. It is a bit like an oil tanker. In all honesty, Matthew, we were really disappointed with the, you know, with the improvements we were seeing. They just felt too incremental. You know, this came through in a rush last year.

[Mike Edwards, CEO at Bakkavor]

I think it was a lot to do with all that effort that had been put in upfront, as well as, you know, the environment continuing to ease.

[Matthew Webb, Consumer Analyst at Investec]

Do you think you can drive that employee turnover down even further?

[Mike Edwards, CEO at Bakkavor]

I think it's a, you know, well, it's the lowest it's been, I think, Donna-Maria. You know, I think you want a level of turnover, but at that level that we're at now, it's certainly not on our worry wall in terms of, you know, being, you know, being an impact anymore on performance. You know, we work hard to absolutely make sure it doesn't go up because we're seeing benefits, you know, from where we got it to. It's not, it's not, it's pretty stable at the moment, in all honesty.

[Matthew Webb, Consumer Analyst at Investec]

Yeah, thanks, Mike.

[Simon Burke, Chairman at Bakkavor]

Asking for any questions online.

[Mike Edwards, CEO at Bakkavor]

Do we have anything? Cool.

[Mike Edwards, CEO at Bakkavor]

Yeah, thank you. We should have some people joining online. If the operator would like to go live, we can open the lines. Thank you.

[Operator]

Thank you. Ladies and gentlemen, if you would like to ask a question, please press star one on your telephone keypad. We'll pause for just a moment while waiting for them to queue for questions. Thank you. Once again, as a reminder, please press star one to ask a question via the audio. Thank you.

[Simon Burke, Chairman at Bakkavor]

Okay, doesn't sound like it. Okay. Anything else in the room?

[Mike Edwards, CEO at Bakkavor]

Yeah. Take another hit.

[Clayton Bush, Co-Head of Consumer, Retail and Leisure at Berenberg]

Morning, Clayton Bush] from Berenberg. Great category performance, across pizza and bread and desserts and meals. Just touch on salads because I noticed that it's in growth as a category, but less so for you.

[Mike Edwards, CEO at Bakkavor]

Yeah, look, we were annualizing some losses when we shut a factory in 2023. There's a bit of an effect coming through there. Also, we're exposed a bit here to mix. You know, our salad business is very broad, and whilst we operate in food to go, food to go isn't that concentrated. Food to go has driven quite a bit of the growth here. That's given us a bit of a lag. That's where having this breadth, Clayton, is always really important to us. You know, it's just served us well through the years, in all honesty.

[Simon Burke, Chairman at Bakkavor]

Any more? If something is on your mind and you go out the door without asking it, you'll regret it later.

[Clayton Bush, Co-Head of Consumer, Retail and Leisure at Berenberg]

It's too lost. Part of all the meat they've got with them.

[Simon Burke, Chairman at Bakkavor]

There is that. Okay. No, in that case, it just remains for me to thank you all very much for your time this morning. Thank you for joining us. I know most of you will have catch-ups with the team later as well. Thank you for your continuing support.

Participants

Analysts

• Andrew Ford, Equity Research Analyst at Peel Hunt
• Charles Hall, Head of Research at Peel Hunt
• Clayton Bush, Co-Head of Consumer, Retail and Leisure at Berenberg
• Damian McNeela, Director and Equity Research Analyst at Deutsche Numis
• Lee Miley, CFO at Bakkavor
• Matthew Webb, Consumer Analyst at Investec
• Mike Edwards, CEO at Bakkavor
• Simon Burke, Chairman at Bakkavor
• Vincent Ryan, Consumer Equity Research Analyst at Goodbody