Welcome to the Greencore H1 Full Year 2024 Results Presentation. I will now hand over to CEO Dalton Philips.
Good morning, and thank you for joining us today for our FY24 Half Year Results. Before we get going, I wanted to say a big thank you to our outgoing interim CFO, Jonathan Solesbury, and to welcome our new CFO, Catherine Gubbins. Jonathan has done a terrific job since he joined us last summer. His calm-headed and focused support has been a huge asset to our business. We will miss Jonathan, and we wish him the very best for the future.
Jonathan has also done a super job helping Catherine on board since she joined us earlier this year, and Catherine's had a busy few months of induction, and we're absolutely delighted to have you on board, Catherine. You're already making a very positive impact to our business. Right. So back to today. I'll start with a brief summary of our performance before handing over to Catherine for an analysis of the financials, and then I'll return for the strategic and operating update. This should take about 30 minutes, after which we'd love to have your questions.
Turning to page five in the executive summary, we've had a strong start to the year and have accelerated progress on restoring the group to historic absolute levels of profitability and returns. Some key highlights from the half year: firstly, we've delivered an adjusted operating profit of GBP 28.3 million, which is a 140% increase year-on-year.
Secondly, our like-for-like volume growth was 0.5% positive compared to last year, demonstrating continued outperformance against the market. We also had like-for-like revenue growth of 4.1%. Thirdly, we've delivered against our cost, operational, and commercial efficiency programs.
Fourthly, we've continued to optimize and apply a returns lens across our sites and categories. Fifthly, we have a strong balance sheet, which provides headroom for wider capital allocation options, with GBP 50 million going back to shareholders over the next 12 months. And finally, as a result of the above, we currently expect FY 2024 adjusted operating profit to be in the range of GBP 86 million to GBP 88 million, which is ahead of current market expectations. So in summary, I'm pleased to say that we've had a good, strong start to the financial year. Let me now hand you over to Catherine.
Thanks, Dalton, and good morning to everyone, and thank you for joining us in the room and on the call today, in what is my first results presentation as Greencore CFO. I wanted to spend the first few minutes of my section today giving you a flavor of my first impressions and also a sense of what my immediate priorities as CFO will be. So as Dalton said, I joined Greencore on the sixth of February, and I spent my first few months undertaking a thorough induction program, some photographic evidence of which is shown here.
This included visiting all of our 16 manufacturing sites, our distribution site in Tamworth, and indeed spending some time with some of our larger customers. While I obviously had a really good understanding of what the group did, you really can't beat an experience like that, to meet senior teams at site, understand what each site does, and walk the floor to get a feeling for our products, infrastructure, and processes.
Like many industries, the group has had a challenging few years, is coming out at the other side of that now, and has really benefited from the development of a clear strategy and some positive momentum. Dalton and the team have done a really great job at distilling a clear near-term vision and strategy, and my time in the business so far has validated three key focus areas for me going forward.
As a leadership team, we are all aligned in returning to healthy and sustainable levels of profitability, and for me, there is a requirement to continue to drive efficiencies across our business and fundamentally reassess our ways of working to improve our returns. A key part of my role going forward from here is also going to be to drive a focus on managing and right-sizing our cost base.
However, delivering on this efficiency agenda is going to require investment in systems and processes after a lack of focus here for a number of years. The group operates on five ERPs, which results in a lack of integration and poor data quality that is hindering how we operate. Work started last year to mobilize a program to address this, and we will take you through some more detail on this later.
Dalton will provide a bit more color on Horizon Three, but when I think about the medium term, I will be keen to ensure we have a strong and efficient platform to support the group's growth potential by optimizing our cost base and ensuring our systems and our processes are fit for purpose. Cash conversion is obviously going to be a key focus for me, and I will be working to ensure our balance sheet is optimized, and we are being clear on how we are increasing value and returns for shareholders. There's quite a lot of detail to cover over the next few slides, but I will first reflect on our key financial metrics on slide eight.
So as Dalton has referenced, we have delivered a very strong performance year-on-year from an adjusted operating profit perspective, with an increase of 140% to GBP 28.3 million. It is also worth noting that the equivalent period in 2023 included an additional circa GBP 1 million in relation to the Trilby Trading business. Therefore, the underlying year-on-year growth is closer to circa 165%. If you look at revenue, you can see our like-for-like revenue has improved by 4.1%, with our actual reported revenue having declined by 6.4% for the six-month period. We will look at that in more detail shortly.
The adjusted earnings per share increased GBP 0.023 to GBP 0.028 from 2023, driven by the increase in operating profit, partially offset by an increase in financing costs and a reduction in exceptional costs. We had a free cash outflow in the half, as expected, which totaled GBP 26.5 million, with our improvement in EBITDA offset by a higher working capital outflow, higher maintenance capital expenditure, and an increase in financing and tax costs year-on-year. There was really good progress in deleveraging, with leverage down to 1.4x versus 1.9x at the equivalent period end in 2023, and this brings us within the group's target range of 1 to 1.5x. Finally, return on invested capital at 10.2% has increased 270 basis points from last year.
Although we are pleased with the continued progression, we are still below our historical levels of ROIC, and the rebuilding of profitability and returns remains a key focus. Just moving on then to slide 9, some further detail on the income statement. Some of the figures on this slide are repeated from the previous key metrics slide, so I'll just focus on the highlighted metrics. The increase in adjusted operating profit against the reduction in reported revenue has led to an operating profit margin of 3.3%, compared to 1.3% in 2023. This was a result of continued focus on driving operational efficiency, commercial initiatives, and continued tight cost control. We recognize that there is still more work to do in these areas, and we are still below historical levels for the group.
So as I have said, this is going to be an ongoing area of focus. Moving further down the income statement, adjusted profit before tax increased to GBP 16.9 million from GBP 3.4 million. You can see we have an exceptional charge after tax of GBP 1.3 million for the period, which relates to the systems and process-based transformation program that I referred to earlier. We have treated this element of the project as an exceptional cost. Moving on then to slide 10, I'm going to take you through a little bit more detail on the breakdown of our revenue performance. Overall, our reported revenue for the six-month period has declined 6.4%, impacted by the disposal of the Trilby Trading business, which accounts for 4.6% of the decline.
The rest of the decline was driven by proactive contract resignations in 2023, net of new business wins, and this accounts for a further 5.9% decline year-on-year. Offsetting against these declines was a like-for-like increase in volumes and mix year-on-year, which drove a 1.2% increase in revenue and a 2.9% increase due to inflation recovery and pricing impacts, with our like-for-like revenue growth year-on-year at 4.1%. Moving on to slide 11, we've just set out the key components of the increase in adjusted operating profit, which, as noted, has increased 140% year-on-year to GBP 28.3 million.
I've already referenced the like-for-like revenue increases, which have impacted this result, and we also continued to work hard to recover inflation in the period through engagement with our customers, in addition to annualizing the impact of the inflation lag that the group experienced early in 2023, which was recovered during the balance of 2023. Dalton will go through some detail on how we continue to leverage efficiencies across our operations, but this has also helped to drive a further improvement in our adjusted operating profit number. As I mentioned earlier, we disposed of Trilby Trading and proactively resigned a number of our other contracts during the course of 2023, so they obviously also had an impact. I will now turn our focus to the free cash flow movements for the half set out in slide 12.
So as you can see, there has been an overall cash outflow of GBP 26.5 million for the period, which represents a cash conversion of 36.7%. Working capital saw a seasonal outflow of GBP 43.2 million, with cash conversion over negative 40 days, and we expect to see this unwind favorably in H2, as is usual. Maintenance capital expenditure at GBP 10.1 million is up GBP 2.3 million from a relatively low base in the equivalent period in 2023.
We have exceptional cash flows of GBP 2.9 million, which were related to fees for the disposal of Trilby and for the sale of investment properties we held in Carlow and Mallow, in addition to an exceptional cash outlay related to the work done so far on our technology transformation program. The other items, as you can see, were broadly in line with expectations, resulting in an overall free cash outflow of GBP 26.5 million. Just moving on then to slide 13, our balance sheet position remains strong, with our leverage as measured under finance agreements at 1.4x versus 1.9x for the same period in full year 2023, and this provides us with headroom for wider capital allocation options.
Net debt, excluding lease liabilities at the end of the period, was GBP 198 million, and our balance sheet strength is also reflected in cash and undrawn facilities, which stood at GBP 246 million at the end of the half, and our weighted average maturity of debt of four years. This is following the completion of our new five-year, GBP 350 million sustainability-linked revolving credit facility, which provides significant financial flexibility for us for the future. We also made significant progress on our UK defined benefit pension funding plans, following the latest triennial valuation and a new funding plan agreed with the scheme's trustees. The scheme is now expected to be in a fully funded position by September 2025, at which point annual funding of GBP 9.8 million to that scheme from the group will cease.
This will obviously support enhanced cash conversion for the group going forward. I'm gonna move to slide 14, which sets out some detail on our capital allocation plans. So the group recently completed its commitment of a GBP 50 million value return to shareholders over two years, with the conclusion of the final portion of a GBP 15 million buyback during February 2024, and today we want to outline the update to our capital allocation plan. The group's ambition is to deploy capital to balance long-term growth and shareholder returns through operating profit growth, generating strong free cash flow, and following a disciplined investment and capital allocation approach. In the medium term, our current target leverage remains at 1x to 1.5x . We will prioritize organic investment through capital expenditure, followed by selective M&A to support our sustainable growth agenda.
With a return then of up to 50% of excess cash to shareholders, either through dividends or share buybacks. We are announcing a further value return to shareholders of GBP 50 million over 12 months. This is going to be initially in the form of a share buyback of GBP 30 million, which is commencing today, and the board have also indicated the intention to declare a dividend in respect of full year 2024. The board will obviously continue to evaluate the level and method of shareholder returns through the lens of share buyback and/or dividends, and we will look to provide an update on our plans at the full year 2024 results announcement. I also just wanted to highlight the inclusion of full year 2024 technical guidance within the appendix of the pack.
But that pretty much concludes my section, and I suppose in summary, in my first few months as CFO, I am excited by the future potential of the business and the outstanding opportunity that I have to help shape it. So it has been really great to join the business at a time of such fantastic financial results. So, I'm happy to take questions after this, but I'm gonna hand back to Dalton for the moment. Thank you.
Thanks, Catherine. So now turning to the strategic and operating update on page 16. At our full year results in November, I spoke about the three horizon framework, which has guided our post-pandemic recovery and subsequent growth. We stabilized the business and achieved Horizon One last year with an operating profit of GBP 76 million. Our focus now is firmly on Horizon Two as we rebuild our profitability and returns.
There are four key areas that we've been focusing on: optimizing our portfolio, commercial excellence, operational excellence, and lastly, transforming our processes and technology landscape. Progress in each of these areas has underpinned our performance. Finally, Horizon Three, which I'll come back to later, is our framework for thinking about longer term growth, which we're kicking off in parallel with Horizon Two. Let me now focus on Horizon Two and dig deeper into these four areas.
So turning to page 17, and the first of those focus areas in Horizon Two is our portfolio optimization strategy. Previously, we would have spoken about food to go and other convenience as our two core categories. We now review our portfolio in nine categories, which you'll see on the left-hand side of this page. Each category now has a multifunctional team working on the execution of a specific portfolio strategy.
These strategies are guided by a returns lens, as every area of our business now has the clear target to meet its cost of capital. I won't talk through what we're doing in each of these nine areas, but I did want to spend a moment giving a couple of examples which bring color to the sort of interventions we're making. Some are small, others large, and in the aggregate, they all make a material improvement to our business.
Firstly, for example, in salads, we're continuing to grow with existing and new customers, and to support our growth plans, we've exited a low-margin subcategory. This gives us flexibility to sell this capacity for higher margin volume with a modest capital investment. A second example is in our direct-to-store distribution business, where we're now onboarding additional in-year volume with a new, very large customer.
In parallel, we continue to execute on plans to further grow with our existing customer base. A third example would be ready meals, where we've signed a material new and accretive long-term contract with a key customer and are getting ready to launch that volume in our Kiveton meals site in Q4. The fourth example is in soups and sauce.
Last month, we announced the closure of our Kiveton soup site and the consolidation of all soup volume into our Bristol site, which we forecast will drive a run rate, EBITDA benefit of GBP 1.8 million for the group. The message I'd like to leave you from this slide is that these types of proactive interventions across our sites and categories have improved returns already in the year, and we will continue to execute against each of these Cat Strats for the remainder of the year. Turning to page 18 and moving into the second focus area, commercial. We've developed an excellence program in each component of our commercial engine, which has enabled us to really improve how we run it. There are four parts to this. Firstly, insight.
We're really trying to get even closer to the market and have stepped up our investment in this area, be that people, data, or research. The bottom line is you can't be too close to the consumer, and to ensure we're seeing the outputs of this work. Each and every week at our P&L and trade meeting, we deep dive into individual category share trends for the week, the month, and the quarter. Secondly, planning. We've a robust product launch process, with approximately 120 people dedicated specifically to this area.
The output of this investment allows us to deliver continuous quality upgrades, be that brand-new NPD, like the Kitchen Deli range for Sainsbury's, or EPD, the E being existing product development, like M&S's max two-day shelf life sandwiches, Tesco's recently launched Al Forno lasagne, or Morrisons April café relaunch.
To put this into context, we reformulate over 600 products every year. Thirdly, sell. I now feel we've a very robust. We have very robust commercial relationships with our key customers, which have strengthened in the last 18 months. Our partnerships are settled, stable, and growing. Our focus is to consciously back customers who want to invest and win in the market.
This means backing the sales team when it's right to step away from poor-performing contracts in order to invest capacity into higher margin businesses. And finally, the buy side. We've got a really high level of procurement expertise and are proactively going deeper into the supply chain, in many cases, putting boots on the ground, be it here in the U.K. or much further afield in different continents.
In parallel, we continue to leverage our new should-cost model with our supplier partners to ensure we're paying the right price for our raw materials. Excellence across the commercial process has underpinned our performance in three areas. Firstly, volume. We've successfully launched 184 new products in the first half of the year, which has driven our market outperformance. Secondly, cost. We further streamlined our portfolio, removing 169 SKUs that weren't performing for us.
As a result, we've driven efficiency by selling 3% more volume per SKU versus six months ago, reducing complexity and driving efficiencies. And thirdly, price and mix. We've driven 4.1% revenue growth compared to 0.5% volume growth in H1, which demonstrates our effective approach to pricing and mix management. We've also ensured that we're putting resources in the right places.
For example, the premium sandwich market, which is small, but has experienced 90% growth year-over-year. This focused approach to commercial excellence has put us in a strong position relative to the market, which you can see on slide 19. We've continued to outperform the market. The overall grocery market, in volume terms, declined by 0.7% in the half, representing some improvement on previous periods, but still with the backdrop of a challenging inflationary environment.
We outperformed the market by 110 basis points, with 0.4% volume growth over the same period. In our key categories, the story was similar, with sandwiches and ready meals both significantly outperforming the market. These categories together represent approximately half of our total revenue. This market outperformance was enabled by that commercial process I mentioned on the previous slide.
In particular, a focused approach to innovation and continuous quality upgrades and reformulations through our EPD process. Now, turning to operational excellence on page 20. We've improved our performance with a 4% increase in units per direct labor hour compared to last year. This essentially means that our people are 4% more productive during their time at work, which is a real step on for the business.
This improvement is underpinned by a clear operational excellence program with five key pillars. We implement this program through what we call the lighthouse factory model. Essentially, individual sites are piloting improvement programs to drive quick wins, which we then deploy as best practice learnings right across the network. On page 21, you will see that we've made strong progress against each of the five pillars.
For example, in manufacturing and supply chain, we've reduced organizational losses, which is a technical measure of downtime on the lines, by 11 percentage points in our pilot plant in Warrington. This has been achieved through a new planning and scheduling program, which allows us to run all products on all lines. This reduction in losses from 20% to 9% brings the site in line with best-in-class performance and has improved OEE, a measure of capacity utilization, from 40 to 45%, and we'll be rolling out this process to additional plants in the coming months.
In automation, we're further ramping up our focus, moving on from automating cutting of wraps and sandwiches with ultrasonic knives or decanting sauce jars from pallets into more complex and higher returning areas.
Going forward, we have identified three focus areas: assembly robotics, partnering with the University of Essex, materials automation, and warehouse automation. In network optimization, I've mentioned the consolidation of soup volume into our Bristol plant. We've made improvements on-site to ensure that the transferred volume into that plant will be produced more efficiently, with an 18% reduction in direct labor cost per unit.
Beyond this, we will continue to look at all areas of our network planning, where there is now greater focus on moving products between plants to ensure we're maximizing efficiency. In labor optimization, we've achieved a 6% indirect labor reduction by identifying areas of spend through a detailed cost review. An example of this sort of saving is the hygiene cost savings at our Bow facility, which we've achieved while maintaining our high standards of cleanliness.
We've streamlined tasks undertaken to reduce labor required to complete daily cleaning, to reduce daily cleaning by 25%. All savings have been achieved without any redundancy costs through vacancy rate and agency labor reduction. And finally, in processes and systems, we've achieved a 7% material waste reduction in H1 through process improvements.
For example, in new practices on how we defrost raw ingredients. This has delivered a total of GBP 3.3 million cost saving year-on-year, and we still have more to go after. So in summary, we're off to a good start on our operational excellence program under the guidance of Lee, our COO, who's with us this morning. However, we recognize that there's still loads more to go after here. Moving to page 22, and our technology and process transformation.
Within the half, we've launched a program to implement a consistent infrastructure for data, processes, and technology. This will be underpinned by a common ERP, onto which we'll layer specific business needs applications. As part of this process, we've already moved from having seven different ERPs to five, with the clear goal of getting to a single ERP. In parallel, we've scoped and sized 41 IT-dependent business initiatives with concrete benefits across three areas: revenue growth, COGS reductions, and SG&A reductions.
These benefits will be achieved through an investment of circa GBP 6 million to GBP 7 million this year, which will enable us to achieve further operational efficiencies, in turn, supporting our drive to rebuild our margin levels. This is a catch-up on years of underinvestment, and the plan ensures we're utilizing existing technologies and rolling them out incrementally, rather than implementing a more riskier big bang solution.
Now, moving to page 23 and our Horizon Three framework, which focuses on our longer term growth potential. Horizon Two and Horizon Three were always intended to start in parallel. While we rebuild our profitability and returns, we also need to plan for our longer term growth trajectory, and therefore, we've stood up a small, focused team to work on Horizon Three.
We're exploring both internal and external investments as part of Horizon Three. There's no big reveal today on this, but I did want to share some early thoughts with you on how we're structuring our thinking. As you'll see on page 24, within Horizon Three, we've set down three guiding principles. The first, strategic fit. Any expansion beyond our core must have a compelling strategic fit.
Specifically, we will use expansion as a means to gain exposure to greater structural growth, but we will also ensure that we invest only where we have the right to win. Secondly, financials. Any investment must have a compelling financial logic, so we'll be looking at synergies, margins, and returns. And thirdly, sustainability. We will be biased towards investment which supports our sustainability goals, especially across the focus areas of energy, waste, and water.
In terms of how we will apply these principles to future growth, in practice, we're looking across three areas. Firstly, category expansion. There are opportunities to further consolidate in our existing categories, alongside potential to expand into adjacent and complementary chilled, ambient, or frozen categories. Secondly, channel expansion. There are opportunities to move into new channels and with new customers beyond our current core footprint of retail and convenience.
Thirdly, our balance of private label versus brands. Our core is obviously private label. However, we do have a small brand business today, with some 2% of our revenue coming from co-manufacturing and brand licensing. So we'll consider whether there is more to do here. I hope this gives you a flavor of the kind of work that's ongoing in Horizon Three, which we will share with you in more detail later in the year. Finally, let me turn to the outlook on page 26. Firstly, our principal priority is returning the business back to prior levels of profit and returns, for which we're on an accelerated trajectory. Secondly, I'm encouraged by the strong progress made in Horizon Two. There's still a lot more to go after, but we have targeted plans in place and a team at full strength to deliver them.
As a result, we currently expect FY 2024 adjusted operating profit to be in the range of GBP 86 million-GBP 88 million, which is ahead of current market expectations. Finally, as you've seen, we've announced a GBP 50 million shareholder return over the next 12 months, with initial tranche of GBP 30 million via a share buyback starting today, and our intention is to commence a dividend at the end of the year. Now as I wrap up, I'd like to say that I believe we've got off to a good start for the year. We're pleased with how we're performing. There's a huge amount of interventions that have occurred right across the business, with many more to come.
If I was to speak for the entire team, I think they'd say we've got the bit between our teeth with a focused plan ahead of us, all achievable, all doable, and very much within our control to land. Finally, thanks for being here on a very busy morning. It's great to share more about the journey we're on. I think I'll pause there, and we will now open it up to your thoughts and questions. Thank you
Michael, are you gonna? Oh, are you, are you gonna do the honors? Patrick?
Thank you. Good morning, Patrick Higgins from Goodbody. A couple of questions, please, if you don't mind. Just in terms of, I guess, you know, the nine categories that you called out and, the work you've done in terms of improving utilization rates and returns across sites, I think you mentioned in the full year that about 12% of your volume, full year 2024 or 2023 results, about 12% of your total volume was from plants that were loss-making. Where does that sit today?
And, you know, the work you're doing with Kiveton and the ready meals business, where will that fall to after that? Second question is just on the shareholder returns. You know, GBP 30 million buyback today. Should we assume the remaining GBP 20 million is in dividends, or could we see another reload, I guess, of the buyback after the current one completes? Thank you.
Great. Thanks, Patrick. Look, I'll take the first one, maybe you take the second one-
Yeah
... there, Catherine. So you're absolutely right. We'd said last year that 12% of our volume was coming from loss-making sites. With the interventions we've put in place, that number's dropped significantly. I would expect us to be exiting this year at a run rate of sort of 5% ish. I mean, you know, 5% to 6%. So we'll have cut it in half. And that's really the intervention that we've done in all those different categories, particularly soups, ready meals, and, look, the whole all those 9 Cat Strats, Patrick, each category has a focus, and we've said, "Look, if you're not meeting your cost to capital, we're going to have to have very difficult conversations." So 12 down to sort of mid-single digits.
Yeah, look, just in relation to the shareholder return, look, we're delighted to be in a position to announce a GBP 50 million return today over 12 months. You know, that compares to GBP 50 million over 24 months previously. And obviously, you know, with the current trajectory of the business, that we have the confidence to, you know, consider declaring a dividend for full year 2024. I suppose, look, when we considered what the best way to return that value to shareholder was, I suppose we felt that a buyback was the most kind of effective and impactful thing for us to do at this point in time.
I think we're happy with the quantum of GBP 30 million, and I suppose we're going to execute that GBP 30 million over the next couple of months, and then we're gonna see where we go after that. I suppose we're retaining flexibility, and I certainly wouldn't take it as an indication that the GBP 20 million is going to be the quantum of dividends. I would say you could have a dividend and another buyback as part of that.
Okay. Gary?
Morning, all. Gary Martin here from Davy. Just a couple of quick ones from me, just starting off with the guide of GBP 86 million to GBP 88 million. I guess if we go back in time, just to the FY 2023 results, I think the initial split was supposed to be about 25 to 75, H1, H2 operating profit. But if we take the kind of midpoint of the guide, I think we're closer to maybe 30 to 70. So I guess, my first question is just what's kind of driving just that phasing of H1 to H2 profitability, and how does that, I suppose, give you confidence in the full year outlook? That's just my first question.
Yeah, look, I'll say some thoughts on that. We're seasonally weighted, as you know, Gary. Second half is a material number for us. Feeling confident about it, April was difficult April, I think for all the market. May, weather-wise, has been very strong, and we've got off to a good start to our summer reset. I mean, you basically need people starting to shop differently, and May is sort of the retailers have expanded out on their categories. People are starting to get used to buying some of these products that they're not typically buying.
Salads would be a great example as people sort of start putting that into their repertoire. So, there's a lot to go after in the second half but the volumes are materially up. If we do what we're doing operationally in terms of controlling that cost base, keeping the service level where it needs to be, and in terms of our commercial side, driving the product innovation, I think it's well within our grasp to have a strong second half.
If you compare what we need to do this second half versus, you know, what we did in 2019, they're sort of comparable numbers. So I think it's, whilst you might be forecasting slightly less than last year, it's- still a very solid number. Do you wanna?
Yeah, look, I suppose I don't have, you know, the historical context around the splits to the same extent that the team would have. But I think what we're seeing is that, you know, last year was kind of an unusual, kind of pretty unique year, to be honest. I think that 30/70 split is probably, you know, what we're happy with at this point in time. Absolutely, there's good momentum, but I think we probably have some headwinds that are out there as well that we just need to be cognizant of. So I think we're fairly confident at this point.
Make sense? Good color. And then just maybe just a second one just on return on invested capital. I mean, it's hit double-digit level now, which is very promising. But I guess maybe just it'd be helpful to maybe get a reminder of what you envisage the kind of cost of capital is within the company, and just also how you expect that return on invested capital to kind of progress on a go-forward basis through, you know, either rationalization or revitalization of assets and facilities. Thanks.
Yeah, look, I'm not going to get into the specifics around the cost of capital or, or where we ultimately see, the return on invested capital ending up. But I think if you think about a lot of the content that Dalton had in his presentation today, you know, all of that focus, which has been, you know, very rigorous over the past 12 months, looking at each of our categories, each of our products, all of our contracts. You know, it drove a lot of that consideration around contracts that we walk away from. I think, you know, you really get a sense that there's a real laser focus on the underlying profitability of the business. You can see that in the, the kind of interest, or sorry, the increase in the ROIC that we've seen this period.
I think, you know, without getting into the specifics, we really are trying to drive that on a go-forward basis. I think, you know, I think we're confident that we have the visibility and the focus, and we're making the right decisions as we progress now to make sure that we're, you know, increasing profitability for the group.
Makes sense. Thanks a lot.
Excellent.
Thank you. Whichever. Oh, Damian. Sorry.
Hi. Morning. Damian from Deutsche Bank. Just following on from Gary's question, perhaps asking in a slightly different way: Of the nine units, are all nine of them meeting their cost of capital at the minute?
No.
No. Can you tell us which ones aren't?
No.
Okay.
But, look, I mean, there are c learly, we've got categories like soup. That's obviously been a challenge. Ready meals has been a challenge because we've proactively taken some capacity out. Sushi's been a challenge, so, you know, there are other categories. Sandwiches is obviously knocking the lights out, but, we try not to be too specific in it, but all of them, Damian, have a focused plan to get them back to meet their cost of capital.
Is it, do they all have a varying cost of capital, or do they all point to broadly the same number?
It's actually all pretty similar when you look at it. You know, y ou wouldn't. You'd be surprised when you look down, actually it's all it's a pretty tight, narrow range. In all of them, we've got a clear plan. Soups is an example where actually, nope, didn't get where it needed to go, intervention. So we're trying to be pretty disciplined about it. I think Lee's done an amazing job bringing our general managers on the journey, so it's not, we're not, like, operating in some black box. Everybody knows what needs to be done. It's very adult conversation-like.
I think, actually, that's made a real difference, actually, 'cause people are, like, understanding what needs to be done.
Okay, thank you. Just in terms of the new ready meals business, can you quantify how big that is, please?
It's with Aldi. They wouldn't appreciate us talking about the scale of it, but it's material. Kiveton is a site that has struggled in terms of its overall performance because it just hasn't had the capacity. You'll remember that we deliberately exited out of a contract with another large customer last year. Our capacity rate in Kiveton will go from sort of late 50% up to 95%, under its current configuration. Actually, Kiveton, the way they've designed it, we could actually, at a later stage, go again if we wanted to, but we'll be operating around, it's about 95%, Lee. So feeling pretty good about that.
Okay, thank you. And then last one from me. Just in kind of two parts, sort of like-for-like growth in food to go, sort of solid 4.6. Within that volume mix was 2%. How much of that 2% is mix coming from premiumization?
So, premiumization is small at the moment. But I would say, you know, if you look at the market, there's some green shoots there that the consumer now, as real wage growth starts to move ahead versus CPI, that people are starting to be a bit more adventurous. Now, premiumization, you've seen that obviously in the premium meal deals, for example, it's 3% to 4% of the total category at the moment, so it's very small, but growing like a rocket.
Yeah. And just kind of a longer-term one on, on volume expectations without Horizon Three, without thinking about things that are in Horizon Three, what's your expectation for sort of medium-term volume growth from, from food to go, do you think?
Look, you know, the forecasts out there are that food to go can be growing at 3% as a category, out to 28. So that's quite bullish off where you see where, where we are now, Damian which is essentially 0.1%. You know, it's pretty anemic.
I think our focus has to be on: What are the core categories that we're currently in, where we can double down? Or what are complementary categories outside of our core, that it makes strategic sense to be in, where we think we've got a right to win, where there is growth? There's not a huge amount of growth out there, full stop, and there are no real categories that are just knocking the lights out. I'm talking about material categories. So we've got to feel our way through that.
But longer term, like, there's a huge amount in our Horizon 2. We see it. Like there is so much if we just control the controllables. B ut we're gonna have to go beyond that, 'cause Horizon Two will only take us so far.
Okay, thank you. I'll give it up to someone else.
Thanks, Dalton and Catherine. It's Andrew Ford from Peel Hunt. Just a couple from me. On the like-for-like volume growth, it's up year-on-year, but it looks off to me flattish Q1, Q2. That might be wrong, but just what's the trajectory you're expecting through Q3, Q4, which is the more important part? And also, if the capacity that you're freeing up by exiting some of these contracts, how much of that do you expect to come, you know, to reactivate? And how much do you expect to, you know, never return and look to dispose of some assets there? I'll start with those two, please.
Yeah, I suppose, look, just, just on the volume, just from a Q1, Q2 perspective, I suppose, without getting into the specifics of Q1 and Q2, I think we would see the volume ticking up slightly for the rest of the year.
Okay.
But very slightly.
Yeah.
You know, it has looked pretty anemic for the first half, but we would see it closing out a little bit higher in the second half of the year.
Thank you.
I mean, we've got. What's interesting is, we've got a difficult Q3. I'm talking about the industry and us specifically in terms of volume growth. But April was neither here nor there. May is gonna be good. Think June could be bad. Like, we had such an incredible June last year.
So for the UK, June could be bad, and July and August could be fantastic. But I'm kind of learning now. I thought when I was in retailing, on the other side, that, you know, we stayed very close to the weather. I mean, at Greencore, it's a whole different level. The weather really has such a material difference. So, but H2 is obviously gonna be higher than H1 for obvious reasons. In terms of capacity, we've been pretty disciplined about taking the capacity out, and then holding our nerve to resell it at higher levels, Andrew.
So all that's come out, the plan is to sell it, and some more. In fact, I was talking about the OEE, go back to Lee again, the improvement in OEE. You take something like a Selby plant, where we've been deliberate, we have said no to certain contracts. Now in ambient grocery, it's more 12-month contracts, so we've been pretty deliberate. No, we've let stuff go. Actually, the volume has come down in Selby, and in parallel, Lee and the operational team have been increasing OEE, and you might say, "Well, that's sort of counterintuitive," but what we're doing here is, we've said to the commercial team, we said, "We'll back you.
Get rid of contracts that don't pay. Lee, drive up the OEE to increase capacity." He's done that. Now we're putting it right back on the operational, also on the commercial folks, say, "You've got to sell that capacity. You've got to sell it higher than, than where we were operating before." So something like Selby, which is making materially more than it was making last year, on quite significantly less volumes than last year but with a route through now. We've got to sell that volume.
Yeah. And, and just on those new contracts, if I can follow up, how I think you last time you spoke about increasing the amount of pass-through you had in contracts, how many, you know, where are, where are you now in terms of contracts with pass-through? Yeah, how many of the new ones have pass-through, et cetera?
Yeah. So it, the overall in aggregate number hasn't moved much, Andrew. So we've always said about 50%, and we like to keep it around 50%, for obvious reasons. We've done a good job in terms of labor, but it's got a number of caveats. So our three largest contracts today have labor included, but it's only direct labor.
So it's not indirect labor or management, and there are caveats around that. I think as we've all learned from the challenges of the last couple of years, as we onboard new contracts, we just onboarded Costa, a totally new contract, we're having to be very creative and thoughtful around what's in and what's out. But there are pros and cons, as you know-
Sure
... to what you do put in.
Really helpful. Thank you.
Thanks, Andrew. Darren?
Yeah, it's morning, Darren Shirley from Shore Capital. Just a question on CapEx. I see in the pack you've reduced guidance for CapEx from 50 to 45, to or 40 to 45. Is that a reappraisal plans since you've came, or is it timing, and how should we look at CapEx going forward?
I wouldn't say it's a reappraisal, to be honest. I think just some of the projects that we had planned just probably haven't progressed as quickly as we might have liked them to progress, to be honest. It's just looking at where we are from now. When we look out to the end of the year, we just know we're not going to get to that GBP 50 million. So we're pushing on to kind of hit the revised number. So nothing strategic or no major decisions made around any spend.
So should we look for next year to go from 50 to 60, or is it 50 to run rate? Is it just a lag as we see it?
I'd say it's a lag. I'm not, not 100% sure it's gonna have a significant knock-on impact into next year, to be honest.
Okay.
I think what is very clear at the moment is the focus we're putting on robotics and automation. I think our ambition's pretty high there, Darren. We've got quite a lot of automation, as you know, in our business, but there's a lot of areas like in-line wrap, rolling or in-line wrap packing, that's fully manual, and this is where Lee's been really putting a lot of focus into what we can do. So I'd like to see, in terms of our strategic CapEx going forward, a material amount now going into robotics and, so I think you're gonna see. I'd like to be coming to the end of this year and saying, "Actually, on robotics, that's how much we're gonna be spending," because we need to.
Could you define what's material?
Say that again?
How much is material?
Oh, no, I mean, within the envelope of, of what we're doing. But strategic CapEx traditionally for our business might have been putting in new capacity, and I'm saying now, or, or Lee's saying, "Look, actually, if I can put in, you know, GBP 10 million to GBP 20 million quids worth of, of strategic CapEx within our overall envelope into automation, there could be material returns," which previously there might not have been with the National Living Wage where it was.
Thank you.
Thanks. No, I'm not, we're not about to blow it out. She'll kill me.
Yeah, Clive Black from Shore Capital, Darren's younger brother. I guess you're not planning for a June England, Scotland Euro final then?
It'd be very nice. I mean, if we had the weather, the Euros and the Olympics... It's hard, though, when you're Irish. It's hard.
Well, from Northern Ireland, it's even harder.
Yeah.
A number of questions that are kind of linked. So firstly, are all your nine operating streams core now, or are there areas where you would be open to them being non-core? Secondly, in that respect, looking at Horizon Three, which I know is some way off, is there not enough in the chilled private label arena to fulfill Greencore's ambitions? And lastly, in terms of margin, there's no need to lead you, 'cause you're not gonna tell us, rightly. But, is there a level of operating margin where you think we give some back into proposition, service, and price, i.e., there's a lid to which you'd allow margin to go? Thank you.
Just on that third one there, Clive, on, on the margin, you're saying, just expand a little bit more.
Well, let's say, take, for example, you know, a supermarket probably wouldn't want a 5% trading margin these days. So if they get to 4.5%, they're probably gonna reinvest in price, share, service, labor, whatever, to sustain rather than to maximize the margin potential of the business in the short term.
Look, I'll share some thoughts, and Catherine I'm sure you'll have some views on this. The nine categories, they are core. And we're absolutely focused on all nine of them. But we've been very clear, as we were a year ago, a year and a half ago, that if categories weren't contributing at the level they should, we'd have to have difficult conversations. So Trilby, GBP 100 million business, making money, that was, that was not core.
The other nine, you could get into very philosophical questions about whether... Yorkshire puddings is core to us or not, but it's a good category. We've got a good business there. We make money. We've got a good plan to increase our returns. So at the moment, we would very much. They are core. And it's more around turning these businesses around.
We used to make more money, and we make less money now. So for the moment, they are all absolutely core. There's a lot of opportunity in the chilled category. There's a lot of opportunity, but we have other businesses, as you know. We have a very strong ambient business. We have number one share in private label ambient sauces. So we don't want to discredit, you know, we need to look at that area as well. But I think there's a lot in the chilled category, Clive, and there's certainly enough to go after. But there's some very good competitors in this space as well and you have to really take your hat off to them, and we respect what they do. So dislodging some of them, not so easy, but that doesn't mean we're not up for it. And then in terms of the margins.
Yeah, I suppose it's not something I think, certainly in my time here, we've given a lot, a lot of thought to what's the, you know, the max margin beyond which we'd be concerned to be. I suppose my overall sense, and I'm not massively, I can't remember the, the number off the top of my head, but I think we're still behind, behind where we were historically. And, you know, I know you don't always want to be looking to the past as an indicator as to where you, and how you should be getting there, but, I think we still feel we've more to go, to be honest. And look, if, you know, if, if all of our plans come to fruition and our margin really kicks on, I think we need to understand, as a business, what's driving that.
Obviously, from a commercial perspective, we need to be able to engage with our customers and explain to them where we now are and, you know, have those commercial conversations in that context, if we end up in that space.
We've definitely invested the margin into certain categories, and I can think of a specific product where we've just said, "Actually, we're gonna swallow the cost, because the quality needs to come up in that particular range." And we know that we will back ourselves, even if our customer won't, that if we invest in the quality of that product, and yeah, I think you know the one I'm talking about, eventually we'll get the flywheel going, 'cause there'll be better quality, and off we go, and then we can have a more, mature conversation with the customer.
Hi, Andy Wade from Jefferies. First one, looking at the operating margin build in the first half, obviously pretty substantial, and there's a load of moving parts in there in terms of volumes, inflation, recovery, efficiencies, exit of lower margin contracts, and so on. Just be helpful if you, we could get just a little bit more color on which were the sort of bridging, which were the big bits in there, bridging that 200? And probably more importantly, looking forward, what are gonna be the significant drivers ahead on those. And then the other one, just looking at the contract win on the ready meals.
Just sort of interested as to whether that's the sort of thing that falls into Horizon Three, or whether that's more Horizon Two, normal course of business, and the extent to which there are more opportunities like that, that will fill Horizon Three without having to spread too much into new areas. Thanks.
Andy, we see. I'll take the last one first, and then, Catherine, you can help me on the margin rebuild. We see that very much as Horizon Two. We have existing assets in the ground, sweat them harder, be prepared to walk away from a potentially loss-making contract, reinvest into a growing customer who, who has ambitions in this space. Very much Horizon Two, for that. In terms of the operating margin rebuild, I mean, the two big levers at the end of the day are commercial and ops.
I mean, they are the big beasts, obviously. On the operational side, you've seen a whole series of different initiatives there in terms of direct losses, org losses, OEE, waste, labor planning, and, you know, there's a whole. And actually, you know, if you could see Lee's spreadsheet, it's, I mean, I don't know how many lines are on it now, but it's hundreds of lines because it's each plant, and each plant's got sort of 30 or 40 things. Many of the things are literally in the week, GBP 35, you know, on that line item, GBP 40. I mean, it's just tons of this, and, every so often, Lee shows the spreadsheet if, you know, every so often just to remind us at the level of, I think you call it rats and mice, that we have to go at.
There's a lot operationally, and remember, this was a business that was five different business units. You bring it all together, you stick it under one COO, you bring in global best practices. There's a lot there. And then on the commercial side, the big levers there really are around innovation, because as you bring in those 184 new products, they accreted about 50 basis points in terms of overall margin for all the stuff you're very familiar with.
And then robust conversations with customers around you've seen our pricing up 4.1%. We have to be compensated for some of this. Remember, we're way behind pre-pandemic levels of profitability, so we have those robust conversations. Then there's a lot of cost in the center. We took, obviously, a lot of people out last year. We're very disciplined. Catherine, I've worked with Catherine before on this. I know how she works. It's, it's pretty relentless, actually. So there's a bit there. But in terms of, d o you want to give more flavor to that?
Yeah, just on the margin rebuild, look, I don't have a massive amount more to add to what you've said other than, I suppose if you think about it, you need to take the factual things out of it. I mean, there is Trilby, and obviously, the contracts that we walked away from, while, you know, from our own perspective, they were suboptimal, they were obviously making a contribution. And then you've got the like-for-like revenue increase. And then I think back to what Dalton has said, I mean, it literally is about the commercial negotiations, the pricing that we went after with customers, you know, inflation, and also the commercial excellence. I mean, it's a bit simplistic, but I'd say whatever is left, you know, kind of half and half is probably for both, you know, commercial excellence and the operational-
Yeah
... efficiencies that we were driving, to be honest, broadly speaking.
Great stuff. Very helpful.
Yeah.
Thanks.
I'm conscious that you all have to go to Cranswick, so I'm slightly concerned. Are we- Do you wanna call it?
Oh, no.
Oh, you've got now. Are you okay?
Yeah.
In fact, keep going, please.
Sorry, can I just go back to CapEx? 'Cause y-
Oh, no, what have I done here?
You've just highlighted there you've got a spreadsheet with hundreds of lines on, with opportunities to go at. Why are you not spending GBP 75 million in CapEx rather than GBP 50 million per annum and accelerating that, that process?
Because the work needs to be done. The work needs to be done. So there's three areas where we're looking at. We're looking at material assembly, assembly, and dispatch. Those are sort of the three core operational process, prepping the materials, putting it on, and then dispatch. And there's just quite a lot of work going on there. We're not ready to press the button. I think in terms of ambition Lee is there, but in terms of getting it past Catherine, we're not there
These are areas that can be optimized, but you haven't quite worked out how to do that yet?
We're working it out. We're working it out. But from the ambition of, like, in-line roll wrapping you've seen the lines. There is technology there. We're not sure it's fast enough that it can keep up with the line speed at the moment. Therefore, you've got to put more in. Then what's the knock-on to the adjacent line? Because suddenly you're displacing people. So it's, it's around that. I think you're gonna see more in the next couple of years versus us coming out in November and saying, "GBP 75 million.
I think if you see our prioritization waterfall, you know, around capital allocation, I mean, organic investment is top of the list there, right? So, and look, we're very clear what we're trying to deliver, across the organization from an efficiency perspective. If the right thing comes along, if it can be delivered in the business, that's the right cost, and we're satisfied it's going to deliver, you know, the appropriate level of return, then we will drive on, and, you know, allocate the capital to that.
I think, as Dalton said, we're working through that at the moment, and certainly with regard to full year 2024, I suppose we're not, we're not in the space where we're able to deliver to the GBP 50 million that we'd previously allocated, so I wouldn't read from one to the other, to be honest.
And just following from Clive's question on sort of a margin ceiling within the business?
Yeah.
Looking at it another way, is there a sort of a return ceiling that you see in the business? You used to talk pre-COVID of sort of a mid-teens return. I mean, would you got line of sight how you get to that?
I think internally we've got a good sense of what this business can do. We see a route through to that. We're not yet at a stage where we feel that we could share that externally. If we were to do a capital markets day at the end of this year, would we be committing? Don't know. This time next year, I'd say we'll be very much committing. I mean, it's, we've just got to get comfortable with where we're at. We see internally the opportunity. We see Horizon Two as huge. Don't know, would you?
No.
Okay. Is there a call on the line? Yeah, should we take one more question?
I'll stop talking now.
Okay.
Yeah.
Okay. Sorry, Damian.
Yeah, so just following on from what Darren was saying on, on asking on CapEx, it's sort of, if there is a spreadsheet, as long as we're led to believe, what's the sort of a three-year cumulative CapEx number that we could expect?
Sorry, lease spreadsheet is savings-
I know, I know it's not-
... it's not-
Yeah, I know, I know, I know it's savings, and it's slightly different, but clearly the business is being analyzed in great extent now and you've got CapEx programs across three areas.
Yeah.
Sort of what sort of cumulative CapEx can we expect?
I'll maybe pass that to Catherine, but I think typically 3% of revenue. It's a pretty good number for manufacturers of our capability to have. C ould it spike one year for X, Y, or Z reasons? Possibly, but-
Yeah, look, I think that's the benchmark that we've always kind of referred to. I think at this point in time, we wouldn't be giving any indication. I don't want to be led by the possibility to do way more, because that's not where we are at this point in time. So I don't think we'd be giving any different guidance to what we've previously said.
Okay, thank you.
Okay. Look, I'll call it a wrap there. Go to the conference. Sorry, apologies.
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Is that all clear? Okay. We'll call it a wrap. Thank you very much.
Thank you very much.
I know you've got a busy day. Appreciate you being here with us.
Appreciate that. God.