Bakkavor Group H1 2025 Earnings Call Transcript

Quartr
Provided by Quartr
September 3, 2025

Key Takeaways

  • Positive Sentiment: The group delivered a 50 bps margin uplift to 5.7%, bringing the medium-term 6 % target within sight and now accelerated to full-year 2026.
  • Positive Sentiment: Management has upgraded full-year EBIT guidance to the upper end of the £120 m–£126 m range, reflecting confidence in ongoing performance.
  • Positive Sentiment: The U.S. business achieved 7.6 % revenue growth and expanded margins by 260 bps to 5.9 %, making it accretive to the group.
  • Negative Sentiment: Inflationary pressures have risen to ~£65 million (from £50 million), driven by commodities and labour, with only ~70 % cost recovery so far.
  • Positive Sentiment: The China disposal completed post-half-year, generating ~£50 million cash and removing a strategic risk after restoring profitability in the region.
AI Generated. May Contain Errors.
Earnings Conference Call
Bakkavor Group H1 2025
00:00 / 00:00

Transcript Sections

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Simon Burke
Simon Burke
Chairman at Bakkavor Group

Good. In that case, thank you very much, and good morning, everybody. For those of you who don't know, I'm Simon Burke. I'm the Chairman of Bakkavor, and it's my pleasure to welcome you all to our half-year results for 2025. That's all I get to say, so I'll now hand you over to our Chief Executive, Mike Edwards.

Mike Edwards
Mike Edwards
CEO & Director at Bakkavor Group

Thank you, Simon. Good. Right. Welcome to MHP's offices. I think I should start by thanking Katie for bailing us out because there's been a big issue with electricity at Fitzroy Place where we were planning to do this. We had to pivot pretty quickly, and Katie and the team came up trumps, and here we are today. Thank you very much for that. Thank you, you guys as well for coming because I know a lot of you have hightailed it from Hilton session and braved the weather to get across London. I really appreciate you taking the time to do that. I think the agenda for today is me kicking off, handing over to Lee, going to some detail around the numbers, and then me sort of closing out. I think the place to start really is a summary.

Mike Edwards
Mike Edwards
CEO & Director at Bakkavor Group

I think we're here today with another fantastic set of numbers. I know it's a strong performance up there, but genuinely, I think it's a fantastic performance by the business. I think in the context of the big thing that's going on as well in our world, it's absolute credit to the Bakkavor team that they've absolutely stayed focused on the plan and frankly have knocked it out of the park. There's not many, well, there's no numbers on the page not to feel good about. I think it all stems from the improvement in margin, another 50 basis points. This is on continuing business now that we've exited China completely. We're at 5.7%. That's really significant because, as everyone knows, we declared our medium-term ambition to be 6%. When we declared that, I think we were at something like 4.3%.

Mike Edwards
Mike Edwards
CEO & Director at Bakkavor Group

It felt a long way off, but now we're getting really close. That obviously rolls through, and it helps move return on invested capital forward. Had a bit of benefit there as we've reduced our capital base, exiting a couple of factories, and then leverage has nudged down again. The thing to remember in leverage is the cash that we've brought in on the back of the China disposal isn't in the books yet because it came in mid-July. Really strong performance. It does come down to us executing our strategy. I think I'm going too quick. Everything really is underpinned by us just driving the strategy. I think we've got into a real rhythm around what's important for the business. I'll come back to it later, but each pillar has absolutely delivered and underpinned the performance of the business in the first half.

Mike Edwards
Mike Edwards
CEO & Director at Bakkavor Group

I think that leads us to the very nice place that we feel able to upgrade guidance for this year. It's difficult talking about consensus because so few people can follow us at the moment, but our original, or the last guidance we put out there, was £120 million to £126 million, and we're now steering people to the fact that we expect to be towards the upper end of that expectation. I think for me, more significantly, with the step on to the 5.7% at the half-year, we feel able to now communicate what was always our internal plan to the outside world and say that we're planning to pull forward the delivery of the 6% to 2026. As I say, we were always working on this 6 for 26 in-house.

Mike Edwards
Mike Edwards
CEO & Director at Bakkavor Group

We always said we had a really strong pipeline to get there, but we've obviously got the confidence now to share that with you guys. I think we're in a really good place. Lee's going to take the baton now and go into a lot more detail on the numbers. I'll step back up. Thanks, Lee.

Lee Miley
Lee Miley
CFO & Director at Bakkavor Group

Thanks, Mike. Yeah, I'll go into some more detail, hopefully not too much. Starting with slide seven, these are the headlines that I'll walk you through as we go through the rest of my slides. I think the starting point is these are a really strong set of results. As Mike says, we're upgrading our guidance both for the full year and accelerating our 6 for 26, which gets a big thing off my mind because that's our internal target. I kept thinking I was going to trip myself up saying 6 for 26 when we did this last time. 6 for 26. I think starting with how we're presenting the numbers, clearly, we've executed the sale of China. As a consequence of that, we're showing our numbers as being discontinued from a China perspective and then continuing operations for the UK and the US.

Lee Miley
Lee Miley
CFO & Director at Bakkavor Group

Just dealing with China, as Mike says, the cash of circa £50 million isn't in these numbers yet. It actually came in just post our half-year. I'll talk a little bit more about that later. The other thing I would absolutely point to within this is that in the half-year, we did get China into a profitable state, which, you know, we always said we were trying to do, and regardless of the sale, that was our objective. Moving on to continued operations, headlines here: our growth is on plan. We talked about the Wigan exit, and I'll talk a little bit more detail about that later. Our adjusted operating profit is up £5.5 million, a circa 10% increase. Most importantly, up 50 basis points to 5.7%. As a knock-on, our ROIC is up to 11.2%.

Lee Miley
Lee Miley
CFO & Director at Bakkavor Group

The balance sheet remains strong, so debt's down and our leverage is at 1.1 times. Again, I'll say it a few times, it doesn't include the China proceeds. If that's the headlines, then maybe dive in a bit more into the revenue. On the left-hand side here is our sort of traditional bridge. Overarching, our like-for-like growth is 1.2% with price being 2.2% and then volume down 1%. I'll talk about that more in a second. Once you take into the FX impact, we have a statutory reported growth of 0.9%. If you then move on to the right-hand side, this is where we're looking at our regional elements. As you can see, the UK is marginally in growth at 0.4%. This is where we're showing that the price is driving that, with being offset in the main by the volume decline.

Lee Miley
Lee Miley
CFO & Director at Bakkavor Group

That's in line with our plan and is principally around the exit of the Wigan site and the sales that moved with that. From a U.S. perspective, growth is 7.6%, all volume. Encouragingly, this is the continuation of the second half growth last year, driven by both organic and pipeline, principally in the two key areas of meals and burritos. Finally, China on this page is just shy of 26% growth in the period, obviously discontinued. Moving then into the profit, this is clearly the standout numbers here. As I said earlier, cash increase of £5.5 million, circa 10% increase, but a 50 basis point movement up to 5.7% margin. If you're then looking at the bridge and how that's built up, the volume decline pulls through from the previous page.

Lee Miley
Lee Miley
CFO & Director at Bakkavor Group

Dealing with that middle block of inflation and price increases, which are clearly linked, inflation in the first half is around 3.5%, of that, circa 60% is labor. Importantly in the labor space, we have concluded all of our wage necks. From a recovery perspective, recovery of just below 70% of that inflation. A combination here of negotiated recovery principally around labor and the NI, and then a mechanical price increases as we pass through on that front for commodities. Thinking about this for the full year, when we talked earlier in the year, we were guiding towards circa £50 million of inflation. That has actually increased as we've gone through the first half, and we're now expecting it to be circa £65 million. That delta is all about commodities, and in particular, it is about dairy, egg, and protein.

Lee Miley
Lee Miley
CFO & Director at Bakkavor Group

The good news from a profit perspective on this is that they are areas that we are highly covered from a mechanical perspective, and therefore they are passing through relatively mechanically. As a consequence of that, we would expect to see our recovery as a percentage of the inflation slightly higher in the second half. This is all built into our guidance perspective as well. Yeah, I guess finally on the bridge, and for us most pleasingly is the efficiency improvements. If you remember, this is a combination of our efficiency pillar, in particular, the Bakkavor Operating System driving factory efficiencies, but also the benefit of the closure of the two sites being Wigan in the UK and Jessup in the U.S. To contextualize this, approaching £18 million in the first half. For those that remember, for full year 2024, this was £15 million.

Lee Miley
Lee Miley
CFO & Director at Bakkavor Group

This is a really pleasing number from our perspective. Thinking about that then in terms of the regions and then dealing with exceptional items, clearly a lot of detail on this page, and I'm certainly not intending to talk through it all. In reality, the stories flow through from the previous page. I guess the things to call out here is that both the UK and the U.S. are still showing momentum from a profit perspective with the UK up 20 basis points. Clearly the U.S. stands out with a 260 basis points improvement in margin. Importantly for us because it was one of our sort of strategic objectives, at 5.9%, the U.S. is actually accretive to the group. That's a clear sort of gate from our perspective. Again, just calling that China is profitable within these numbers as well.

Lee Miley
Lee Miley
CFO & Director at Bakkavor Group

From an exceptional perspective, we have booked £24 million in the first half. This breaks down into three elements. There's an element here, circa £11 million of Greencore related transaction costs. There's then the cost of the closure of Jessup and then the ongoing cost of our ERP projects in the UK. In terms of closing off the half-year, from a cash perspective, we continue to be a strong cash-generative business. From a free cash flow perspective, £47 million of free cash delivery, which is circa 76% free cash conversion. After you take in the dividends and the exceptional cash costs that we've incurred in the half, our debt is broadly in line with where we were at the year-end. The leverage at 1.1x is in line with the year-end, obviously 0.1x better than prior year, and towards the bottom end of our guidance.

Lee Miley
Lee Miley
CFO & Director at Bakkavor Group

Again, without sounding like a broken record on this, this doesn't include the circa £50 million of cash that we've subsequently received in terms of the sale of the China business. In terms of guidance then, as we've already talked, the strong set of half-on results, and therefore the business is in good shape, and that is leading us to an upgrade in our guidance. If I just deal with the individual pillars as we go through that, from a revenue growth perspective, actually no change in our guidance in this space. If you remember when we were guiding the full year, we were saying that we would be broadly flat, with price being offset by volume. That hasn't changed. Maybe the shape slightly, but in terms of the overall guidance, it's the same.

Lee Miley
Lee Miley
CFO & Director at Bakkavor Group

From an EBIT perspective, this is where we are now guiding towards the upper end of our range. The range at that time was £120 million to £126 million, to give you the context. From a capital perspective, we expect capital to be slightly lower than our previous guidance. We guided to £70 million. We're now saying £65 million. Two key factors within this, clearly that we're not spending any money on China, which was in the original plan, and I think in sort of normal course of business, there's a rephasing of the spend in the UK. Lastly, in terms of debt, in this space, given the China proceeds, we would expect to be below our target of one times or our range of one to two times, and expect that to be sort of 0.8-ish, I guess, once you take into account that China proceeds.

Lee Miley
Lee Miley
CFO & Director at Bakkavor Group

Clearly, given the transaction, there is some guidance around how the interim dividend is paid as we go through the second half because it's only payable if the transaction hasn't happened by the end of January. All that is dealt with in the transaction documentation. That is leading us to a summary in this space. Clearly we're in really good shape. Our growth is in line with our plan. Our profit is strong, 50 basis points up at 5.7%. The balance sheet remains strong with the China proceeds to come through, and ultimately that's leading to the changing guidance and the upgrade to the full year being towards the upper end of our original guidance. And then as Mike said, most importantly, accelerating our 6% target to be delivered in full year 2026. I will hand back over to Mike. Thank you very much. Brilliant. Thanks, Lee. Great, great numbers.

Lee Miley
Lee Miley
CFO & Director at Bakkavor Group

I want to come on now to talk about how we're putting our strategy into action. I make absolutely no apology for putting this chart up. You'll have seen it pretty much every time we've stood up and presented to you. It's about the four clear key pillars. Not going to read them out. It's about the plan that we put in place when we needed to make some big changes in the business, and it just became embedded. It's about that margin target that you know we've brought forward. This is what the teams default to and focus on. I think it brings real clarity to the business, especially at a time when there's a hell of a lot going on. It's muscle memory always coming back to what's the strategy, what's the plan, what are we actually doing, and how does it fit with that?

Lee Miley
Lee Miley
CFO & Director at Bakkavor Group

If I go through each of the pillars, I want to start with the UK. A couple of slides here. Firstly, talking about the UK market. I think the big message here on the far side of the chart for you guys is, the FPF market is in great growth, 4.4% against grocery being 0.4%. We really are winning the battle of the stomach. A lot of this comes back to people eating out less, and having those in-home occasions. I think that then takes you to the left-hand side of the chart where we're talking about consumer behaviors and the things that have always been important to consumers with regard to fresh prepared foods: convenience, quality, value, and value is very different to price.

Lee Miley
Lee Miley
CFO & Director at Bakkavor Group

Remember, these things are really, really resonating now, as people have come to get into a new routine on the back of some of the cost of living pressures they've faced into. Consumer dynamics are really good for us. The point to pull out in the middle pillar really is all about frequency. I've said many times before, when we're seeing an improvement in frequency, people shopping our category more, we see the growth coming through. It is the most important of the KPIs when we look at shopper behavior. You can see there that we've got a progressive number for last year, but a much stronger number for this. That's translating in the actual growth number we're seeing. We are absolutely operating in the right space. That has to be really reassuring for us and everyone associated with the business.

Lee Miley
Lee Miley
CFO & Director at Bakkavor Group

I think the next chart really then speaks to our performance. I think everyone will default to this bit here because the market's grown at 4.4%. We're actually 2% down in terms of volume. The big message here for me, first and foremost, is it's exactly in line with what we plan to do, you know, and I've got to bring everybody back to that. There is always a bit of a trade-off. You know, when the North Star's margin, there's always a bit of a trade-off in terms of volume. It's easy to go sell. The more difficult bit is to actually convert it. The first thing to say is it's about the plan that we've got in place. About two-thirds of the delta will relate to actions we've taken, including the closure of Wigan and exiting some other low-margin business that were absolutely embedded.

Lee Miley
Lee Miley
CFO & Director at Bakkavor Group

As Lee said, we're not changing our guidance on growth. This was all factored in. The kind of dynamic that's probably been a bit stronger than we expected is desserts performance. Out of the categories we've got, salads would be performing ahead of the 4.4% in the market. Meals is pretty much bang on. Pizza and bread a little bit behind. Desserts is actually in decline as a market. It comes back to the relationship between inflation, because this category has seen a lot more inflation than others through cream, dairy, egg, and then the cost of living pressures, alongside this being a discretionary purchase. We've been on the wrong end of that from a mixed perspective, but as ever, this is where our breadth comes in to play. We're still absolutely in line with where we expect to be in terms of UK sales.

Lee Miley
Lee Miley
CFO & Director at Bakkavor Group

I know it's going to be probably the question on everybody's lips, so I'm laboring it now to try and answer that ahead of time. The great news in the middle here is the margin movement. This is still the big engine room of the business. We've had three years now where we've shifted margin forward 80 basis points, which in an environment that is absolutely dominated by an inflationary agenda is no mean feat. I think the most important thing is we've always talked about when it comes to, you know, winning share, the fundamentals are absolutely in place within our business. You know, we've got great technical standards and we deliver great quality for our customers. Our service through the supply chain is second to none. We continue to drive unrivaled innovation.

Lee Miley
Lee Miley
CFO & Director at Bakkavor Group

They're the important things when it comes to winning the battles as customers are looking to, you know, work out who to give business to. If I then move on to international, in all honesty, it's probably the chart in this presentation that we're the most proud of because it just epitomizes the way we operate. You know, we set out to do something, and we absolutely go after it and nail it. The things really couldn't have gone any better for us internationally. You know, the imperatives that we laid down weren't easy because the imperatives were a China exit, and U.S. becoming accretive to margin. We've delivered both.

Lee Miley
Lee Miley
CFO & Director at Bakkavor Group

From a China perspective, we've brought big cash back into the business with a profit, but more important from my perspective, we've removed a massive risk that we were, you know, always exposed to operating in that part of the world. I think that is a massive step forward for the group. Look, what's not to like about the chart that shows the U.S. margin now accretive to the group? It's what we set out to achieve, but it's been a steady, sustainable improvement. We've got a great settled team over there. We changed the team, as you know, back in 2023. Cam, who leads the business there, has built a great group of people who are really driving this business well. It's well controlled. You know, we've established a new culture, and there's frankly more to come from the U.S. business.

Lee Miley
Lee Miley
CFO & Director at Bakkavor Group

If I come on to our excellence pillar, this is the pillar that just keeps giving to the other pillars because really by driving excellence in the business process, you know, we execute our plans and find ways to leverage new value, whether that's in the UK, whether it's internationally, or whether it's actually in our trust pillar, particularly around, you know, driving ESG matrix. It's all about the Bakkavor Operating System. It's become a way of working, a way of life in the business now. It is all about driving the key principles, and the principles are standardization—doing things the same way in each of our sites, measuring the same things, having the same business process. It's really investing in people, having centralized experts, but also OpEx teams embedded in each of the manufacturing sites. Then it's about optimization, and the real message here is about winning the day.

Lee Miley
Lee Miley
CFO & Director at Bakkavor Group

We used to look at data very much in the past. We're now looking at data on the day, looking to push performance forward on the day and identify the opportunities to fuel the pipeline for future efficiency gains. A really, really important part of the strategy. We then come on to the final pillar, which is trust. A lot here is about our people agenda. The best thing about Bakkavor Group plc is the people. We have a great team, great people that have worked in the business for a long time, and we work really hard to continue investing in them, whether that's through pay and benefits, whether it's through training, whether it's through listening. A lot of time goes into that. This improvement in turnover, 360 basis points, that doesn't happen by luck.

Lee Miley
Lee Miley
CFO & Director at Bakkavor Group

That's come on the back of a lot of work from the team over a good number of years now. Turnover in the business is at its lowest level. It's 18.4% for the half, and that is phenomenally good in an environment such as ours—fast-moving, fresh manufacturing. Really pleased about the progress we're making there. As I mentioned, ESG KPIs show a fantastic trend. We've decided to show it back to the baselines that were established in 2017 for food waste and 2021 on net emissions. You can see the glide path there, the progress that we're making. We have to be ahead of the glide path because you start these things and there is some low-hanging fruit, but you can see that we're in really good shape. The most pleasing thing here for me is the net emissions because we had a tricky year last year.

Lee Miley
Lee Miley
CFO & Director at Bakkavor Group

You saw, you can see on the chart we were aggressive on the back of a number of refrigeration leaks. We've really learned some lessons from that, invested behind it, and we're seeing the benefits now. Really good shape when it comes to our non-financial targets as well. I think the wrap-up for me, I suppose we have to talk about the big thing that's going on, the acquisition of Bakkavor Group plc by Greencore Group plc. There's not a lot I'm going to say about it really because, number one, I can't. Number two, what can be said is pretty much in the public domain. I think the first thing for me is this is a fantastic thing that should happen. It's going to work really well for colleagues. It's going to work well for customers, and it's going to obviously work well for shareholders as well.

Lee Miley
Lee Miley
CFO & Director at Bakkavor Group

I think the reason this is going to work well is the combined business is going to use scale for good. In the environment that we're in, which is incredibly tough, I think consolidation is an inevitability. I think it's really important if we want to continue to drive a growth agenda in the UK. This is a compelling opportunity for the industry. It feels a bit weird from a personal perspective because when you've worked for Bakkavor Group plc for such a long time, the concept of the Bakkavor name disappearing troubles the heart. When the head kicks in, it's so obviously a good development all round. You'll have seen the announcement from the UK Competition and Markets Authority (CMA) this week about the clock starting. This is great because it means the formal process is off and running.

Lee Miley
Lee Miley
CFO & Director at Bakkavor Group

It means the CMA believe that they've done enough learning to be able to make a decision on this within the 40 working days that's clearly set out. It's really playing out exactly as we expected it to. It's not really new news. I think what it does do is establish a really clear date, the 27th of October, when we will know the outcome of that phase one review, which is good because it brings some clarity to a slightly uncertain situation. It's slightly uncertain because this transaction completing is out of our hands, really. It's in the hands of the CMA. Everything that we could have done, we have done, as you well know. That's where we are in terms of the Greencore Group plc acquisition. Just by way of a summary, really, we're really pleased where we are.

Lee Miley
Lee Miley
CFO & Director at Bakkavor Group

The business is in a really great position, and it does come back to us being really clear on what the important things are in the business. The important thing in the business for us is just continuing to drive the strategy. It's so simple. It's so clear. Everybody gets it. It just drives our daily, weekly, monthly agenda as well as setting out direction for the future. We are absolutely running this business as we would if this big thing wasn't going on, because that's just the right thing to do. We will likely transition into Greencore, and we'll be absolutely on the front foot, flying and playing our part in that combined business. If, I hope in the unlikely event this doesn't happen, we won't have lost any momentum at all. We've got a very clear plan strategy that we'll keep driving.

Lee Miley
Lee Miley
CFO & Director at Bakkavor Group

I think that brings us to the end of the formal part of the day, obviously. Opportunity for questions both in the room, and I assume we've got some people online maybe as well.

Mike Edwards
Mike Edwards
CEO & Director at Bakkavor Group

We're very happy to take any questions. Can I just ask you to wait for the mic because that means you can be heard by the people who've joined us online. Who'd like to go first? Charles.

Charles Hall
Head - Research at Peel Hunt

Thanks. Charles Hall from Peel Hunt. Can I just start on desserts, which obviously this was the weaker market in the first half? Is the price increases from the raw material, the dairy prices now all embedded in the customer prices? We've sort of gone through the peak downside in it. With dairy prices starting to come off, can we now be slightly more positive about that, or is that being too ambitious?

Mike Edwards
Mike Edwards
CEO & Director at Bakkavor Group

Yeah, I'm not sure I can concur with dairy prices coming off at the moment. I mean, they're still in our world. They're ridiculously high. They shouldn't be that high. At some point, they just have to come off that. In answer to your question, yeah, we've absolutely passed price through. The most mechanized sort of categories we have are the ones that are heavily linked into big commodities. Desserts is all about cream, chocolate, egg, and they're embedded. That just naturally passes through, and retailers will deal with that as appropriate. We have seen a lot more retail inflation, so much more inflation for consumers in this category on the back of it just having to move through the system. I think the bit for me on this, the couple of positives for me.

Mike Edwards
Mike Edwards
CEO & Director at Bakkavor Group

Number one, I do think we're at peak, and therefore we will annualize and things will hopefully get easier. The second thing from a consumer perspective, we know consumers still want a treat. Yes, we get a lot of questions about the health agenda and how that's evolving. We know from conversations we're having with customers actually around this that there are other sweet treating areas that are absolutely flying. This isn't about people coming away from this sweet treat category. It's not terminal. There's just a bit of reset that's happened. That's, as I keep saying, that's the beauty of breadth in Bakkavor already.

Charles Hall
Head - Research at Peel Hunt

You have been very clear that it's business as usual in the company regardless of the transaction, and you can see that from all the stats. What are you seeing though in terms of customer relationships? Particularly thinking in the build-up to Christmas, is there any change in how you're seeing them respond to Bakkavor innovation or new product development opportunity to get product on shelf?

Mike Edwards
Mike Edwards
CEO & Director at Bakkavor Group

Our customers are really professional outfits. Our biggest three are big listed businesses in the UK. They kind of get this. Consolidation is good for the industry and probably they need some consolidation in their space in all honesty. There is a pragmatism here. Of course, we are absolutely clear with them that it's business as usual, and our plans for Christmas are absolutely nailed on. They've got confidence in Bakkavor. Everyone's being very sensible about it.

Charles Hall
Head - Research at Peel Hunt

Just turning to the U.S., really good numbers both in terms of volumes and margins. Is that business now where you want it to be in terms of the operations, the efficiencies, the customers, or is there still more work to be done?

Mike Edwards
Mike Edwards
CEO & Director at Bakkavor Group

Look, I think we've always talked about if we had our 6 for 26, which is good, we can trip it off the tongue as Lee said. You know, the objective for the U.S. was always 7%. 7 for 26 doesn't have the same ring. 7 for 27 might be the number, but look, we definitely see more margin opportunity in the U.S. Fundamentally, we've got spare capacity. We've got the opportunity to drive growth and dilute overhead. There's more to come. We just want to make sure we keep doing it in a very responsible way. It has to be sustainable. We've moved very quickly from actually a run rate where we were losing money to a position where we've got a very healthy business. We've done that by putting very clear building blocks in place to underpin improvement.

Mike Edwards
Mike Edwards
CEO & Director at Bakkavor Group

You know, it starts with a team, but then it goes into business process, culture, values, all of that kind of stuff. There's more to come.

Charles Hall
Head - Research at Peel Hunt

That's great. Thanks, Mike.

Andrew Ford
Equity Research Analyst at Peel Hunt

Hi, it's Andrew Ford from Peel Hunt. Lee, can I just ask on the recovery of the inflation cost? You said it was 70% recovered. What do you expect normally for that? Is that a normal level to be 70%, and how much is maybe coming through or on a lag effect? Just trying to understand the dynamic.

Lee Miley
Lee Miley
CFO & Director at Bakkavor Group

Yeah, look, I think now that's a pretty normalized level. I mean, clearly when this accelerated back in 2022, there was a lag and we saw that driving through. This is now that sort of normal 70 to 75% where I'd say is where it's at. It clearly depends a little bit on what the mix of inflation is, and particularly around commodities because with pass-through mechanisms, it changes the percentages, but pretty normalized.

Andrew Ford
Equity Research Analyst at Peel Hunt

Great. Thanks. That's really clear. Next, on CapEx, you've explained the reason for that sort of coming down. I just wondered, are you seeing any inflation in the UK around the cost of delivering CapEx projects? Has some of that rephasing, I guess, has the number of projects changed or are there kind of other reasons for doing that?

Lee Miley
Lee Miley
CFO & Director at Bakkavor Group

Yeah, I think inevitably there's inflation. You know, we build that into our thinking when we were given the original guidance. I think in terms of rephasing, we're always assessing the business needs and our capital process is as rigorous as it's ever been, which means naturally projects sort of move in and out in terms of timings. In the UK, that's all the movement that it really is. Clearly from a China perspective, it's just stripping out of spend. It's a normal course of business I would describe.

Andrew Ford
Equity Research Analyst at Peel Hunt

Thank you. Last one for Mike, just on the I think it's probably more of a question for the market dynamic at the fresh prepared food market. What, I guess, are there any interesting underlying trends within that? You know, before, I know you spoke about meal deals and how much of a driver that was. What inflation, what sort of growth are you seeing in that category? Are there any other elements that are particularly driving that growth for the market?

Mike Edwards
Mike Edwards
CEO & Director at Bakkavor Group

Yeah, look, I think meal deal does perform strongly. I mean, it is a replacement for the going out occasion. I think the biggest thing I'd point to is the sort of top tier growth and performance of that part of the market. I think that comes back to people still want to treat themselves, have that, you know, family night, but have that family night in instead of going out. You know, as I say, the four things that have always been really important in fresh prepared foods are really resonating with consumers now, so that's great news. I can't see that changing given the dynamics of the environment we're operating in.

Andrew Ford
Equity Research Analyst at Peel Hunt

All right. Thank you.

Analyst

Hi there. Can you just talk about the efficiency improvements that you're working through, and if you see a similar run rate in the second half as H1?

Mike Edwards
Mike Edwards
CEO & Director at Bakkavor Group

Yeah, look, we continue to drive a pipeline of efficiency. As Lee said, we're having a great year, but you don't always shut two factories and that's playing a part in this by taking some overhead out. Yeah, we will continue to see that excellence pillar supporting delivery through the other pillars of the strategy. We're signing off capital in exactly the same way as we have done. We're prioritizing the things that are the easiest to execute and have the best returns. The great thing is the Red Zone live system that we've put in gives us the science to allow us to prioritize, and then it goes into the Bakkavor Operating System to be driven and delivered. This pipeline will just continue. U.S. are a little bit behind on the journey because we've still got two sites to implement.

Mike Edwards
Mike Edwards
CEO & Director at Bakkavor Group

I think we're maybe piloting up one of those, but they're behind the curve a little bit. That's great because we've got loads more to go at. I think when we walk around our factories, we can still see inefficiency. It sounds weird for a CEO to stand up and say that, but it's, I kind of think it's a beautiful thing because there's so much latent value we can still get after. It's a very fast-moving business, and we have to do this at a pace that allows us to stay on top of the day job, give great service to our customers, but also find ways to improve our efficiency, the self-help measures because otherwise it's 70, 75% recovery of inflation, and that's not going anywhere. The business model doesn't work. The great thing is we can see a real pipeline of stuff ahead of us.

Analyst

Thank you. Just on the Greencore, on the exceptional costs, the Greencore transaction costs, are those mostly through now, or is there more to come in the second half?

Mike Edwards
Mike Edwards
CEO & Director at Bakkavor Group

There will be more. Yeah, I mean, there's £11 million booked within the half. Clearly, the final number I think was £24 million. It's set out in the original transaction. We're still heading towards that, and that will be booked as and when this deal completes.

Executive

Great. All right. We'll now go to our conference call for a handover to the operator.

Operator

Thank you. As a reminder, to ask a question over the call, please signal by pressing *1. We have a question from Karel Zosi from Kepler Cheuvreux. Please go ahead. Your line is open.

Karel Zoete
Head - Netherlands Equity Research at Kepler Cheuvreux

Yes, good morning all. Thanks for taking the questions. I have one on the U.S. and one on the UK and the excellence project. Regarding the U.S., the head of momentum is not quite strong and that's converting into profits. What's the trajectory going forward in terms of balancing further contract wins or remaining quite focused on conversion? How do you see that play out over the next 6 to 12 months? That's the first question. The other one is a little bit a follow-up on the past one on exceptional cost. The costs for the IT systems upgrade in the UK are marked as exceptional, but I think the benefits are quite visible already. What will be the exceptional cost from the ERP upgrade in the coming years? Yeah, why actually regard these costs as exceptional?

Mike Edwards
Mike Edwards
CEO & Director at Bakkavor Group

Maybe if I speak to the U.S. first, Carol, look, we won't grow as strongly in the second half as the first half. A little bit like us dealing with Wigan in the UK. There is some stuff that needs to be dealt with in the U.S. around legacy business where we're perhaps not making the right margin. Now we've got the business in stable states, we'll face into that and that will affect the top line growth in volume that you'll see. We'll be able to talk to you about underlying growth in meals and burritos, which is really what the business is about there. We will continue to see growth, but we will see it tempering based on us wanting to move our margin forward. I think that's the U.S. one.

Mike Edwards
Mike Edwards
CEO & Director at Bakkavor Group

In terms of the exceptional piece around the ERP, I'll flick over to Lee in a minute, but just the macro thing is, there's a split between capital investment and exceptional. I think we've talked about this before. Lee will give more color, but I'm not seeing any benefits at the moment from vision. We're very excited about what it will deliver in the future, but that's down the track. We're very focused on implementation, managing any risk associated with that, and we're really pleased with progress. Lee, you build. Yeah, look, so taking the points around the costs. If you remember, the overall project cost of this was circa £14 million, and just in the way that we account for it, very broadly, half of that will end up being capital spend and half of that will end up being exceptional spend.

Lee Miley
Lee Miley
CFO & Director at Bakkavor Group

That's just aligned with the accounting rules and aligned with our auditors. In the year we're in, the overarching cost is £15 million, and that's broadly going to be £8 million of exceptional and £7 million of CapEx. In half one, the exceptional element is just short of £4 million, so it's broadly half. That's how it will play out. Obviously, it's a multi-year project. I'm aligned with Mike that in terms of financial benefits, these aren't coming through in any of our numbers. Clearly, the benefits we are seeing are more around sort of control environment and change management, muscle memory than anything else. The project is going to plan.

Karel Zoete
Head - Netherlands Equity Research at Kepler Cheuvreux

All right. Super. Thank you.

Operator

Thank you. If there are currently no further conference call questions, I'd like to hand the call back over to the management team for any additional or closing remarks.

Mike Edwards
Mike Edwards
CEO & Director at Bakkavor Group

Okay. As I said at the start, massive thank you to Katie for providing the room today because we would have been a little bit snookered without that. Thank you guys for coming. Hopefully, you'll go away with the overarching feeling that the business is in great shape and has a great future ahead of it. A final thank you to the Bakkavor team, really, because, as I said at the start, the numbers that we're putting out there, given what's going on in a broader sense, are truly fantastic. With that, thank you very much.

Executives
    • Simon Burke
      Simon Burke
      Chairman
    • Mike Edwards
      Mike Edwards
      CEO & Director
    • Lee Miley
      Lee Miley
      CFO & Director
Analysts
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