Morrison Supermarkets PLC's (MRWSF) CEO David Potts on 2016 Christmas Trading Statement - (Transcript)

| About: WM Morrison (MRWSF)
This article is now exclusive for PRO subscribers.

WM Morrison Supermarkets Plc (OTCPK:MRWSF) Christmas Trading Statement Conference Call January 10, 2017 3:30 AM ET

Executives

David Potts - Chief Executive Officer

Trevor Strain - Chief Financial Officer

Analysts

François Halconruy - Morgan Stanley

James Tracey - Redburn Partners LP

Bruno Monteyne - Sanford C. Bernstein & Co. LLC

Xavier Le Mene - Bank of America Merrill Lynch

Andrew Gwynn - Exane BNP Paribas

Niamh McSherry - Deutsche Bank

Nick Coulter - Citi Investment Research

Rob Joyce - Goldman Sachs

Operator

Good day and welcome to the Morrison’s Christmas Trading Statement Analyst Call. Today’s conference is being recorded. At this time, I’d like to turn the conference over to David Potts. Please go ahead.

David Potts

Good morning everyone and Happy New Year to you all. You would have seen this morning’s announcements. I have Trevor with me and we’ll be ready to answer your questions after a few opening remarks from myself.

We are of course pleased that for the fifth consecutive period like-for-like sales were positive, up 2.9%, our strongest performance for seven years. This was despite continued deflation and tougher comparisons as we lacked last year’s improving performance. We learned so much every Christmas which makes for improvements for the following year.

This Christmas was no exception and we will continue to listen hard to what customers and colleagues tell us that will guide a successful Morrison’s Christmas in 2017. This Christmas however, sales growth was achieved by improving the customers’ shopping trip across the board and our offer, both in-store and online was more competitive, whilst our colleagues are increasingly connected to our core customers and therefore able to serve them better and better at this important time of the year.

Customers responded and transactions were up 5.2% over the nine weeks. A new automated ordering system has been introduced into all stores, in grocery and many fresh categories too, which meant there were more products available at key moments for customers to buy. Service also improved at the checkouts and on the shop floor.

Our food makers on market streets and across the whole store provided customers the service and advice they wanted to provide the perfect seasonal meals for their families and friends and customers enjoyed great value across the store too.

In Fruit & Veg for example, we had some knockout prices on key items such as any three from six, big bags of British seasonal veg for just £1. As you know, one of our six priorities is to provide local solutions and in some stores, this Christmas we sold locally sourced sprouts, kales, poinsettias and apples. We are also pleased with our performance in Scotland over the important Hogmanay festivities. Again, there was lots to learn and more to improve next year.

Our new premium, The Best range proved very popular nationwide with Morrison’s customers across Britain able to treat their guests at their various gatherings. In the autumn, we launched 470 best products and we introduced another 100 products, especially for Christmas such as our Best Port & Orange Christmas Pudding and our Best Smoked Salmon with Gold Lustre.

More than half of our customers’ baskets included at least one of the Best products and customers have told us that they are very pleased with the good quality and great value for money they received.

In addition, our Proseco Spumante was voted good housekeeping, best sparkling wine of the season. Nutmeg clothing continues to grow strongly and sales were up over 30% for the nine weeks including a record week just before Christmas with sales up over 50%.

Fuel continued to perform strongly and despite an increasing oil price, we were once again more competitive and volumes were up.

We are today providing guidance for underlying profit before tax for the year 2016, 2017 of between £330 million and £340 million, which is ahead of current consensus.

In summary, we still in the fix phase of this company’s recovery program. However our customers are responding as we turn this great British business around.

I am proud of this winning team of food makers and shopkeepers, the staff have been truly brilliant and I’d like to thank all colleagues for their dedication, delivering a better shopping trip for our customers at this most important time of the year.

Thank you, operator. We are now ready to take some questions.

Question-and-Answer Session

Operator

[Operator Instructions] We will now take our first question from François Halconruy from Morgan Stanley. Please go ahead. Your line is open.

François Halconruy

Hi, David. Hi, Trevor. Two questions for me. The first one is on deflation across the period. If you don’t mind, just clarify what the deflation figure was in the nine weeks? And also if you could isolate the like-for-like deflation from the likely trading up that would have seen with the introduction of the Best range? I don’t know if it’s something that you can do.

And then the second question is on your automated ordering system. I know this is a trading statement, but you are giving some guidance on the underlying PBT and you are just a couple of weeks from the end of the year. In terms of the opportunity for the cost savings, could you give us any indication or flavor of what we should be expecting for this year? I expect it’s going to be a bit ahead of your initial expectations, but if you could give any sort of order of magnitude around this number, it would be very helpful?

David Potts

Yes, thank you. Trevor will pick up the first part of your question in a moment. Yes, I think on the ordering system, the benefits I see really is, is ultimate outcomes. It was important to bring forward the ordering system in the way that we have, I think it was one of the things that has already contributed to customer satisfaction ticking up versus last year over that important Christmas period.

I think, looking ahead, we can rely on lower stock levels in the back more accurate data around stock movements. Actually, visibility of stock movements and customers can look forward to better availability. So, all that adds up really to our own people being able to handle stock less times and to handle stock that is required rather than surplus stock. So, I think looking ahead for the company, it will be an important move we’ve made.

Trevor Strain

Of the deflation, it was an 0.2% for the nine weeks and I think on the context of Best, it will obviously have a mix impact. It hasn’t really had a material impact on aging of deflation in the nine month period.

François Halconruy

Right, so, on a like-for-like basis, just looking at the price of the products last year, equivalent basket would be a touch above 0.2%, but not significantly, not by adding above, I mean, more important deflation. Is that correct or?

Trevor Strain

No, the technical issue deflation impact in the nine week period year-on-year is 0.2% at the company level and I think that’s the key point really.

François Halconruy

Right. Okay, thank you.

Trevor Strain

François, across the period, we’ve got like-for-like deflation.

François Halconruy

Yes, okay. Thank you.

Operator

We will now take our next question from James Tracey from Redburn. Please go ahead. Your line is open.

James Tracey

Yes, good morning guys. Two questions from me. The first question is, could you please confirm the number of trading days in the period? Was there a difference between the number of trading days in the nine weeks this year versus last year? And the second question is…

Trevor Strain

No difference.

James Tracey

No difference, okay. Could you talk about what’s the driver between - behind the improvement really? And just following up on that first question, it wasn’t the 2nd of January a non-trading day this year, but that was within the period last year for the 1st of January 2016, so I didn’t [Multiple Speakers]

Trevor Strain

In terms of the broader calendar point, in terms of the broader calendar point, the end of this reporting period is on the 1st, last year, it was on the 1st. I think the important point is, it’s the same number of weeks, or the same weeks, it’s the same number of days and the only kind of calendar impact we can see really is negative on the numbers we reported for the nine weeks this morning. Don’t know, Dave, if you want to pick with those improvements.

David Potts

Yes, thank you, James. Well, customers told us we did made some significant improvements for their shopping trip over last year. I’d say three points really, first of all our staffs were brilliant. It was a big team effort, particularly the frontline colleagues. They hear the news first, whether it’s great news or not so great from our customers and they provided advice and served our customers very well. Our customer satisfaction scores have ticked up over that period both against November and against the prior December.

Second, I would say our Christmas shopping basket, which is the basket followed the stuff people buy at Christmas was very sharply priced and then the special offers that were overlaid on top of that were both special and relevant. And third, our new premium range of 470 items launched in the autumn, better to be born lucky than smart, it turned out it was a good time to launch them.

Customers got to used to this idea of Best from Morrison’s and then we put in a 100 Christmas Best items on top of that for Christmas, they really got the idea that they could do more of their shopping at Morrison’s for treats, for their families and friends and I think our marketing or advertising which went down pretty well. That allowed people to know there was more to buy at Morrison’s.

I think there are things in addition to that we’ve talked a little bit about the ordering system. There were some standout departments like horticulture, like plants and flowers, baby cloth and children’s clothing. Home and leisure was better year-on-year. Cards wrap and Christmas crackers were stronger designs they were looking from this century not the last. And it was just all that combination we felt we were on it more.

James Tracey

Okay, that’s it. Just to follow-up on that point you made around the sharper pricing, how do you put that into the context high or less deflation, the deflation was minus 0.2 versus minus 1 in the prior quarter?

David Potts

Yes, well, I think two years it hasn’t really moved in comparison Q3 to Christmas embedded lower prices from the prior year. Really in the end, the judgment choosing is by customers. They found what they were looking for at Morrison’s at prices that they thought were great value for money, that’s the whole raison d'être of this company. So, I feel very confident that we offered great value for money against a broader choice of items to more people than we did in the prior year which you can see representative of 2.9% increase, which is our best like-for-like for seven years.

James Tracey

All right. Very good thank you, David.

David Potts

You are welcome.

Operator

We will now take our next question from Bruno Monteyne from Bernstein. Please go ahead. Your line is open.

Bruno Monteyne

Good morning, David and Trevor. Two questions for me please. Very strong fuel sales growth. Could you just help if you are still gaining volumes in fuel or whether you are just pricing so a little bit of break down between volume and pricing? And the second question is around the online contribution to your like-for-like, it’s come down somewhat. Is that simply because your base last year is materially bigger, but you are still growing it pretty well or has to grow freight to working as a percentage grow freight of your online business started coming down. Can you give a number for that please? Thank you.

Trevor Strain

Morning Bruno. I’ll pick up both of those. In terms of fuels growing volumes mid single-digits very competitive and I’d probably split that fuel growth down one-third volume, two-thirds sort of market-led price increases really. And online contribution 0.6% in the nine weeks, I think you’ve got one of the main points there with the base, but I think the second point though obviously as we get bigger online, there is going to be less spare capacity at Dordon. And obviously, that’s why in time we wanted that extra capacity to come through the areas which we will do and obviously store peak will follow in due course. Standing back though and looking at online and how it performed over the nine weeks, and I think we were very pleased with the performance online and we think on balance we served customers very well through the period.

Bruno Monteyne

Thank you very much.

Operator

We will now take our next question. It comes from Xavier Le Mene from Bank of America. Please go ahead. Your line is open.

Xavier Le Mene

Yes, good morning. It’s actually an Happy New Year to you. One quick one actually, just on the deflation, can you give us a bit more color on which category you’ve seen in all seasons strong deflation category you’ve seen actually inflation and any thought about the going forward actually, given the input prices that you are currently seeing from new suppliers or what could be your expectation going forward in terms of inflation?

David Potts

I think, through the Christmas period, we saw some strong deflation in produce, fruit and veg. That’s the nine weeks. If I was to pick an example of one of the movements quarter-on-quarter, you obviously end up getting some specifics around commodities and an individual item would be around salmon for example, where there is macro factors impacting that specific commodity market.

And I think more broadly, in terms of outlook, to be honest, much like back in November, I am not sure it’s that helpful to speculate on what the inflation numbers are going to be going forward. There is obviously the sterling rate cost pressures in the system. But as David said right at the start, as we turnaround this business, and we continue through the fixed phase of that turnaround, we have focused on improving and those improvements are going be defined by our customers and we are going to be moving towards building the Morrison’s price list. And our intent through 2016 and one of our priorities will remain unchanged through 2017 and that will be to become more competitive. Over and above that strategic intent, that there isn’t much I can helpfully add, Xavier, I don’t think.

Xavier Le Mene

Okay, may I have one other question actually? You are guiding the consensus for full year 2017, any thoughts for full year 2018 then?

Trevor Strain

Well, I think, in the context where we are in this financial year, we have three weeks to go a range feels the right thing to do. And well, the sales side does with the models is up to obviously individual analysts, but I’d probably expect consensus to move up within that guided range. I think looking out into next year, you’ve got a lot factors impacting both the sales line and the profit line whether that be, headwinds from continued competitor openings and disruption from our fresh look program on sales, you’ve got the unknown for consumer sentiment. And obviously you’ve got headwinds in the P&L and over and above those macro headwinds, we obviously still intend to be a net investor in the shopping trip and as we move through the fixed phase into 2017 ongoing, I think that’d be some sort certainly to think about that.

Xavier Le Mene

Thank you.

Operator

We will now take our next question. It comes from Andrew Gwynn from Exane. Please go ahead. Your line is open.

Andrew Gwynn

Okay, morning and Happy New Year. Apologies, I missed your pre – sort of preamble as it were, but, last two times you’ve talked to the markets, you have basically delivered up rates and essentially, really we are in this investment phase, but essentially you are delivering a little bit more into PBT and something the market expected. Why is that? Is it down to fed away the like-for-like responses stronger than you think it is or you’re sort of underplaying your self-help opportunity or is it market conditions?

Trevor Strain

Well, I think, if you compare where were back in September and I think consensus – or sorry, in the November trading statement coming into it, the consensus published at that point was 321. 2nd of December it was published it was published 326. I think if you think about what is different compared to the outlook statement today, there is obviously a number of moving parts, but the key point is obviously performance and performance during quarter four.

And you get a like-for-like delivery that was reported this morning which comes with an operation gearing benefit into the P&L. That operational gearing benefit is from the positive volumes like-for-like and total is obviously helped through the manufacturing vertical integration element of the business and some of that we will have invested in being more competitive which I’ve touched on and David talked about our Christmas basket, if you like, and also we’ll have invested in serving customers whether that be the front-end or be an in-stock on sale later year-on-year and in availability and waste.

So I think they are real lot of it James is – Andrew, sorry is connecting with our core customer and that’s translating into the like-for-likes and that’s rolling through into the bottom-line in the end.

Andrew Gwynn

A further question is, when do you made the decision to reinvest those gains back into the offer and when does it just come through to PBT?

Trevor Strain

Well, I think it’s always some and some. I can’t remember the exact phrase I used when you were asking the question back in September, but the same sort of applies. I think the key point is, we are still in turnaround, we are still in fix. We are going to be, as I said earlier, a net investor in the shopping trip and we do need to continue to become more competitive. There is lots for us still to improve which is great, because there a lot of opportunities for us to get after and we have to do that in the right order and in the right sequence and that’s what judgments we are making every day, every week.

Andrew Gwynn

And before I hand over to someone else, I mean, do you think you found price elasticity in the sense of when you cut prices there is a volume response or actually is the better like-for-like just a function of better availability, Best, Nutmeg, all those are little sort of individually small but important things you are doing?

Trevor Strain

I think there is, Andrew, it’s some elasticity and there was some prices to become more competitive on where there isn’t obvious elasticity but it’s very, very important for those customers who buy those items that we are very, very well priced. And as we gradually become better at that, then customer loyalty improved and I think we are seeing a bit of that. Clearly, is on rather 2.9% by accidence or not too many times in your lifetime anyway.

And it is a broad range across the board improvement I think anyway and this is backed up by what customers have said so far in our post-Christmas research of improvements for the shopping trip, whether it be opening hours or attitude around people in store helpfulness, checkouts open, clean toilets, fuller shelves, more things for more people, more things that people want to buy. So, it’s a broad base recovery, but retail, retail is very much an important matter for many people, but it is also a daily thing. We have to work hard on all those things every day. So, as I look ahead, those – that’s what we will be continuing to do, I think.

Andrew Gwynn

Okay, it was so very clear. So, well done and thank you very much.

Operator

[Operator Instructions] We will now take our next question from Niamh McSherry from Deutsche Bank. Please go ahead. Your line is open.

Niamh McSherry

Morning all. I had a question about the agreement you have with Amazon and whether you can give us an update on how they are going. So if not in absolute sales terms, then maybe kind of volume increase – increasing volume going through your manufacturing facilities. I am referring to both the supply agreements and Morrison’s at Amazon.

Trevor Strain

Yes, I mean, they remain relatively small, obviously on the one hand Morrison’s is a smaller retailer in Britain, on the other hand it’s quite big when you start something new. So in our case, going through manufacturing, going through our depots it’s quite small. But obviously, the good thing about ideas is obviously it can become quite big. So, I think we will probably say a word more in March, but over Christmas it seems to do fine. Customers used it and we provided the goods that we were asked to as a wholesaler.

Niamh McSherry

Okay, and with the improvements in manufacturing profit going to be a disproportionate positive contributor this year do you think?

David Potts

Well, I think it gives a backbone to the company as a food maker. It’s something we think about every day. It’s a very important part of differentiating Morrison’s as the smaller retailer in the market. It’s something we are very proud of, people have worked very hard. So, it just gives us the opportunity to be capital-light around growth channels in convenience and online. It does give us the opportunity for control of pack size and pricing. And some of this were – just up to a couple of years into the business come March 2017 starting to get used to manufacturing. So I am sure that looking ahead the decade, it will become more and more important than it ever has been.

Niamh McSherry

Great, thank you.

Operator

We will now take our next question from Nick Coulter from Citi. Please go ahead. Your line is open.

Nick Coulter

Good morning and happy New Year. Two if I may. Firstly, on the mix impact in like-for-like which looks to be over 2%. Are you able to give a kind of a broad indication of the split between pack size and mix for the period, I guess, but both which are positive dynamics? I guess, secondly, it looks like you are winning customers back with transactions running ahead of the market despite having less of the exposure to convenience. So that I guess, the question is which sections of the market are you winning back from, if you are able to give some sort of guide. Is it the discount or is it the rest of the big four? Thank you.

David Potts

So let me answer the second part first. I think first of all, everyone is genuinely welcome at Morrison’s and we have said that we are not immune to the sizable changes shopping a bit more often, for a bit less and I think we have also said before that Food To Go, sort of posh words of sandwiches is become really important to us as we’ve traveled the range, doubled the space, transformed the quality and freshness. We make our own sandwiches in-store nationwide, not everyone does. Customers quite like it.

So, I feel that meal solutions, often expressed as ready meals has been important along with Food To Go. Our supermarkets remain conveniently located. This is the important point about Morrison’s and it’s on the one hand, it’s a structural advantage the company has I think as consumers change with sorts of growing into that change and it’s something we can do more of I think over time. But I haven’t really paused to look at where new our customers are coming from, I am just delighted they are coming, Trevor.

Trevor Strain

Yes, Nick, just in terms of pack size, I think it’s much more – what I’d call a trading mix impact rather than a technical mix impact from things in our pack size. I think that David talked earlier about selling more things that people want to buy and in the context of things we’ve talked about over the last 12, 18 months, where that be Nutmeg, free from - wine awards, Best, et cetera, those things all additive to mix and I think they are much more important drivers I think that’s selling more things that people want to buy rather than technical stuff.

Nick Coulter

Got it. So, but you seem like you are saying that there is more of a mix driver than a kind of a tonnage driver within that balance?

David Potts

Well, we could chat all day about how many tons of potatoes and we sold year-on-year and we have a very strong period particularly for food and veg for example. I think just standing back and looking at the shape of the growth in the company and that is actually in the trends, I think that selling more things that people want to buy is the most important driver both in the nine weeks but also in the development of that mix line over the last five quarters really posting positive like-for-like.

Nick Coulter

Okay, that’s helpful. Thanks so much.

Operator

We will now take our next question from [Indiscernible] from Goldman Sachs. Please go ahead. Your line is open.

Rob Joyce

Hi, it’s Rob Joyce actually. Happy New Year and good morning. Just two from me. Firstly, are you able to give the input cost equivalent to that deflation number of 0.2? And then the second one is slightly higher level, just as we look at the macro in the market situation you are faced with now for 2017does not look more or less appealing versus the situation you are faced with this time last year? Thanks very much.

David Potts

Second part first, Rob. The – it doesn’t really look any different to me personally because we are on a mission to turnaround this company and as we execute those six priorities around be it more competitive and serving customers better in order to make those core supermarkets stronger which is where the invested capital is our shareholders’ then we have to do our very best work. So it doesn’t matter whether the sun doesn’t shine ever again in this financial year which still up to drive the business forward. So I don’t really look at it that way at all. Clearly, we are not immune to macro changes. We are not naïve to understand or seek to understand how consumers are feeling themselves that’s very important. But we have to absorb those changes and wrap the company around those in order to be increasingly relevant to more people. That’s really what food retailing is all about in Britain.

Trevor Strain

And Rob, the answer is, the short answer to the first question, no.

Rob Joyce

No, you don’t have it. Okay. All right. Thanks a lot.

Operator

[Operator Instructions] Now we’ll take our next question from Martin Jensen from Danske Capital. Please go ahead. Your line is open.

Martin Jensen

Yes, good morning guys. Can you elaborate a little bit about how do you see the competition situation? Do you see it’s out taking actual market share? And how will continue this to go on.

David Potts

I may have missed the crucial word of how do I see the situation I heard, I don’t hear the word.

Martin Jensen

The competition situation – the competition situation please.

David Potts

Right. Well, certainly, we learn as much as we possibly can from the competition. We are blessed with great competitors. Of course, what we all set about is our customers and what we work very hard on is our own business and I don’t really see that changing at all. I can hardly imagine it changing. But, so that’s where we are.

Martin Jensen

Okay.

Operator

As there are no further questions in the phone, I’ll now turn the call back to your host for any additional or closing remarks.

David Potts

Thank you, Clina. Thanks for joining the call. We are looking forward to seeing you all in March at the end of the year, financial year and Happy New Year. Thank you very much.

Operator

That will conclude today’s conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!