strategy review final 280611
TRANSCRIPT
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ThorntonsStrategy Review Presentation28 June 2011
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Business Objectives
A profitable & rebalanced organisation
A customer-focused business
A revitalised brand
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Agenda
Where We Are Today JH
The Transformation Plan JH
The Financial Implications MR
In Conclusion JH
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Where We Are TodayJonathan Hart
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Strong Brand
We are ranked 20th in the Superbrand Index
We are leading growth in our core markets
Our customers continue to see us as the strongest brand in the mass premium chocolate market
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Customer Advocacy : April 2010 2011 **
* Source: AC Neilsen MAT April 2011
**Source: Brand Tracking April 2011
We are No. 1* in inlaid boxed chocolatessubcategory with 34.0% market share, up
from 31% a year ago
We are No. 3* in boxed chocolates category
with 11.3% market share, up from 8.7% last
year
Total sales of Thorntons branded products at
RSP are more than 350m and growing5
0
5
10
15
20
25
30
3540
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Strong Product Innovation & Quality
Over 13% of our sales come from new products
Customer satisfaction with our quality remains high
Four Gold Awards from the Academy of Chocolate in 2011
Our Master Chocolatier Keith Hurdman awarded joint Chocolatier ofthe Year 2011
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Multi-Channel Model
OurCommercial channel has delivered significant double digit
growth every year for the past 5 years
Our multi-channel model provides significant opportunities and
spreads business risk
OurFranchise channel allows us to offer Thorntons productswhere we do not have our Own Stores
OurDirect channel has consistently grown in line with the overall
gifting market since it launched 13 years ago
We have a well invested & maintained UK based manufacturing
facility
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Primary Challenge - Own Stores (1)
Diverse portfolio ranging from Mega Malls to Factory Outlets, Cafes
and High Street Stores
Our Retail estate requires restructuring to reflect the significant
changes in consumer shopping behaviours over the past decade
We havent sufficiently differentiated the Retail experience
We havent de-seasonalised the business
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Our Own Stores have been impacted threefold from
The changing shopping habits as supermarkets and malls have
grown
Primary Challenge - Own Stores (2)
The impact of the economy on some secondary and tertiary retail
locations
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The Transformation PlanJonathan Hart
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Role Own Stores
Our Own Stores will play an important dual role
in our business
A profitable sales & distribution channel as part
of a rebalanced organisation
Showcase our revitalised brand, helping todrive sales across all our channels
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Objectives Own Stores
Fixing our Own Stores is an essential and urgent task with two key
elements
Create a sustainable own store structure
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We have reviewed every Own Store location against the following
criteria
Long-term sustainability through sufficient footfall
Creating a Sustainable Structure - Own Stores (1)
CACI data (strength of location)
Trading patterns and comparison to a model Thorntons store
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Creating a Sustainable Structure - Own Stores (2)
Our Own Store Review has concluded the following
We can run a profitable and sustainable Own Store channel with between 180-200 stores
We will close a minimum of 120 of our 364 stores over the next 3years taking advantage of
lease breaks
We will explore measures to exit up to 60 further stores during the same period We expect to secure a Franchisee in the majority of the locations where we are exiting an Own
Store - key in rebalancing the sales and contribution from Own Stores as they close
We may re-site or open stores in the UKs top 100 retail locations if the right opportunities
arise
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Our Own Store Channel will run three formats
Core Retail (c.150 Stores currently 299 Stores)
Profitably supporting the brand with a revitalised proposition
Located primarily in the top 150 retail locations
Creating a Sustainable Structure - Own Stores (3)
Factory Outlets (c.30 Outlets currently 29 Outlets)
Supports the ongoing requirement to manage excess stocks/misshapes etc
Further opportunities will be limited
Cafes (c.35, 10 in Factory Outlets, 25 in Core Retail currently 36 Cafes)
Profitable, all year round business Not actively seeking further opportunities at this time
Requires different model store profile and significant investment
Extension through existing non-cafe stores not an option
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Develop a differentiated and less seasonal business
While the brand will remain famous for the key seasons We will grow the relevance forother gifting occasions in our customers lives e.g. birthdays,
anniversaries, thank-yous, congratulations, love yous, just becauses, etc
Differentiate and Deseasonalise Own Stores (1)
Create new products We will extend our core gifting category by developing innovative, good value little gifts
Significantly increasing the number of opportunities to personalise and customise gifts
Improve the merchandising
Improve the customer experience
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Customers Own Stores
Our brand proposition shapes our focused customer objective
We know and understand our customers well"When I go into
Thorntons, I'd like to
see something a bit
new and different.
When I enter a
Thorntons I want to have
a bit of me-time, losing
touch with the outside
I want my shopping
experience to feel
more special.
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Nikki
(young & carefree)
Jill
(40s, family focused)
world for a while."
Jean
(in her 60s)
Our current average frequency of visit and purchase is just over 5 times a year
Our customer objective is forour customers to visit and purchase from our stores just
once more per year
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Differentiate and Deseasonalise - Own Stores (2)
Developing the Proposition
New retail category management and trading team will be formedto create the plans supporting the new proposition in terms of
category focus, range and price architecture, trading and
promotional plans
New Format Store reflecting new proposition will be trialled preChristmas 2011
Investment behind new Format in 2012
Packaging refresh by Christmas 2012
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Differentiate and Deseasonalise - Own Stores (3)
Creating new products
Innovation is key
New little gifts category under 5 in development following successful trials (launch by
Christmas 2011)
for introduction throughout the next 12 months
Better align Own Stores and the Thorntons Direct channel by introducing best-selling ideas in
Own Stores - Hampers to be launched in Own Stores for Christmas 2011
New flagship boxed-chocolate brand to be developed for launch in 2012 to sit alongside
Continental and Classics
Further development of relevant opportunities in the sharing and impulse categories
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Differentiate and Deseasonalise - Own Stores (4)
Improving the merchandising by Christmas 2011
More than 100 store frontages to be refreshed
New browsing tables to be introduced
Lower-density merchandising, more open product
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Differentiate and Deseasonalise - Own Stores (5)
Improving the customer experience
More engaging POS communication Programme to recruit to the brand now underway
New Customer Service programme from serving to engaging
New customer sampling programme a chocolate for everyone
Customer experience measurement programme launchingAutumn 2011
Investment in new website and CRM system over next 12
months will enable customer relationships to be deepened and
extended outside of the store
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Implications on other channels (1)
Franchise
Will be key in rebalancing the sales and contribution from our OwnStore closures
The estate will continue to grow strongly
Will benefit from the differentiation delivered throu h the all ear
round gifting strategy
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Implications on other channels (2)
Commercial
Will benefit from the reduced Own Stores estate Will become the main sales channel over the next 3 years
Will see further growth in breadth and depth of distribution during key seasons as well as
throu h existin and new fla shi roducts
Will deliver further benefits to our business partners from Thorntons mass premium positioning
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Implications on other channels (3)
Thorntons Direct
Will continue to deliver strong sales growth Will see its role change as the customer
direct segment aligns with and supports our
Own Stores
International
Will maintain steady sales growth and we will
invest resource over the next 12 months to
investigate the longer term opportunities for
the Thorntons brand
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Implications on other channels (4)
Manufacturing
Our plan ensures that we continue to maintain and grow our factoryproduction levels within current capacity
Will see continued investment to reduce /kg produced
Our UK manufacturin base will continue to benefit us versus Euro-
based competitors
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Improve Efficiency
We have undertaken a review of all major costs and contracts
We are outsourcing our Warehousing and Distribution We will reduce our supply chain and central costs by c. 2m (annualised)
We already have plans in place to mitigate rising input costs e.g. forward purchasing
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Senior Executive Team
I will lead a new senior Executive in delivering this Transformation Plan
Executive responsibilities have been restructured
Peter Wright (Marketing Director) will leave the business
New Executive roles created for Brand & Customer Marketing, Retail Trading and Business
Development
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Financial ImplicationsMark Robson
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Current Trading FY2010/2011
Trading has continued to be challenging, as expected
Own Stores and Franchise experienced Q4 LFL declines
Commercial continued YOY growth in Q4
PBT before impairment charges and bank re-financing costs in linewith management expectations
Gross margin % (including H2) down YOY
Growth in Commercial channel sales participation
Effect of VAT rate increases
Discounting of Easter seasonal stock lines
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Financial Implications Sales FY2011/12
Retail
Ongoing challenge as implementation of plans commence andrecouping sales - low single digit negative LFL %
Commercial
Continuin rowth articularl Easter with market share rowth -
double digit positive % growthFranchise
Growth in line with new store openings
Thorntons Direct
Low single digit positive % growth
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Financial Implications Margins FY2011/12
Margin
Growth in Commercial channel sales participation and effect of VATrate increases will continue to influence margins
Improvements in manufacturing overhead absorption rates will help
offset the impact of channel sales mix / VAT
Raw materials
Continued price volatility
Hedging of cocoa prices in place, at least 6 months forward
Pro-active management via manufacturing efficiencies but also
product re-engineering and selective price increases
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Own Store Closures
Detailed property review of our portfolio including current/future trading; footfall and other fascias
Recent LFL differential between top trading stores and potential closure stores is 4 - 5%
Closure programme to follow lease expiry profile
Financial Implications Own Stores and Franchises
Potential closures stores - annual sales range from 150-250k To maintain contribution levels, only 50% of Own Store sales need to transfer to the Franchisee
opening in the same area
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Financial Implications Closure Costs
Three - year profile
Average closure costs at lease expiry/break clause forecast to be 35-
40k; implied total over 120 closures - 4.2-4.8m
.
FY2012/13 c. 40%; FY2013/14 c. 20%
Average closure costs incurred in year to June 2011 c. 32k with 16
closures in the year
Lower costs to date with employees redeployed and exit costs
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Financial Implications Operating Expenses
Cost reduction programme continues
Distribution Outsourcing
Up front transition costs: c. 0.7m
. . - .
Central Costs
Process and procurement review underway
Annualised savings c. 1m
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Capital Expenditure
Annual expenditure over next 3 financial years: 7.5m-10.0m
Store format development/refit programmes c. 3-5m
Supply Chain - improve conversion costs c. 3-4m
Financial Implications - Cashflow
Triennial review as at end of May 2011 Forecast increase in pension scheme funding deficit
Annual contributions could increase from 2.2m to 2.5-3.0m
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New facilities
57.5 million revolving credit facility
4+ year term to October 2015
Financial Implications - Banking
Interest cover; net debt & fixed charge covenant ratios
5 million overdraft facility
One-off costs of c.400k for fees and write-off of the remaining
unamortised arrangement fees of the previous facilities
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Sales Overall modest growth
Retail: Declining in line with portfolio reductions and short
term LFL weakness
Commercial: Further growth short term thereafter maturing
Franchise: Continued growth in line with Own Store closures
Financial Implications 3-5 year expectations
International: Modest continued growth short term; medium termprospects yet to be defined
Return on sales
Delivering industry competitive returns over the medium to long term
Dividend Policy
FY2011, expect to recommend a nominal final dividend
Aligned to peer group in the medium term
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In conclusionJonathan Hart
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Conclusion
Delivering this transformation will have a positive impact on our
multi-channel strategy and our long-term corporate health
A healthier de-risked business
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