Hello, and welcome to the Greencore Group plc Q3 2022 trading update conference call. My name is Ben, and I will be your coordinator for today's event. Please note this call is being recorded, and for the duration of the call, your lines will be on listen-only. However, you will have the opportunity to ask questions at the end of the call. This can be done by pressing star one on your telephone keypad. If you require assistance at any point, please press star zero and you will be connected to an operator. I will now hand you over to your host, Mr. Jack Gorman, to begin today's conference. Thank you.
Thank you, Ben, and good morning to everyone on the call. My name is Jack Gorman, and I'm Head of Investor Relations at Greencore. I'd like to thank you all for taking the time to join us for our conference call, which relates to our Q3 trading update released this morning, covering 14 weeks to the 1st of July 2022. I'm joined on the call today by our Executive Chair, Gary Kennedy, our Deputy CEO, Kevin Moore, and our CFO, Emma Hynes. In a moment, I'll hand you over to Gary for opening remarks, and Emma and Kevin will then give an overview of trading in the period. Following that, we will open up the call to Q&A. I would also like to draw your attention to the forward-looking statements included at the end of today's release. Thank you. With that, I'll pass it over to Gary.
Thank you, Jack, and good morning to everybody on the call. You're very, very welcome. As Jack noted this morning, we released our Q3 trading update for the 14 weeks to the 1st July 2022. Our year-on-year financial momentum has continued to improve in the third quarter, supported by strong underlying volume growth and good operational performance, notwithstanding the demand volatility and supply chain challenges that persist across the industry. We have recovered well against an inflationary challenge that has increased further since May, and we have worked very, very closely and very effectively with our customers to manage this challenge. As I noted at our half one results in May, profit conversion is our absolute focus for second half, and we are pleased with our progress in the third quarter.
This leaves us comfortable that we can deliver to the Adjusted Operating Profit, Adjusted EPS, and net debt metrics that we outlined in our financial year 2022 guidance today. Today, we've also issued a separate release to launch the initial tranche of our share buyback program. This is part of our commitment to return approximately GBP 50 million in value to shareholders over the next two years. Now, I'm conscious that this is our last communication before our year-end results. The performance summary I have just given you does not capture remotely the challenges and wins that the company and my colleagues have had to wrestle with, but also enjoy. Dealing with COVID as a business was huge for us, and it will always remain on our minds because of the irrecoverable impact on some of our people.
Against that yardstick, financial year 2022 will be remembered as the most business-challenging year in our history, given the host of external disruptions and volatility that we have faced, but also the leadership changes and internal transformation that is going on in our company. Yet, our economic model is rebuilding across all KPIs, adjusted operating profits, earnings per share, balance sheet leverage, and return on invested capital. We are on track to deliver close to our best ever second half of absolute profit performance in our history, and we had a record week of food-to-go volumes in the middle of July with over 14 million units produced. We continue to face into continuing challenges and further transformation in our business, but we are way better equipped to deal with these.
Finally, and particularly with this context, I want to really acknowledge and thank our teams and colleagues who have done and continue to do a fantastic job every day in driving the business forward. At this stage, I will hand over to Emma.
Thanks, Gary, and good morning from me. I would like to provide more color on our trading performance and an update on our operating and strategic developments during Q3. Specifically on Q3 trading, we continued to see good revenue momentum across our business during the quarter. Revenues were up significantly year-on-year and also comfortably above pre-COVID levels, driven by a combination of good volume growth and the impact of pricing increases during the period. Total reported revenue in Q3 was GBP 486.2 million, which was an increase of 35%. On a pro forma basis, the year-on-year increase was 25.8%, adjusting for currency and the impact of an additional trading week in this year's accounting period.
To break down Q3 revenue a little further, revenue in food- to-g o categories totaled GBP 333.4 million in Q3, growing by 41% on a reported and by 31.2% on a pro forma basis versus Q3 2021. While revenue in other convenience categories totaled GBP 152.9 million with a pro forma increase of 15.5% year on year. Looking at group revenue in price volume terms, pro forma revenue growth was driven by a combination of increased volumes, low-teens percentage increase in underlying pricing and increased revenue in our Irish ingredients trading business. If I compare the group's revenue performance versus the equivalent period in Q3 2019, pro forma revenue was 22.3% above these pre-COVID levels.
Though I would note this comparison is really becoming less relevant given the level of inflation pass-through that is in this year's revenue base. As Gary noted on inflation recovery, our market strength and our customer partnership model have continued to serve us very well in Q3 as we managed through this challenge. Now in May, we described three so-called waves of inflation. However, the rates of underlying input costs and other inflation continued to increase and as such we're working through what's a fourth wave at present. In aggregate, this is equivalent to a low teens rate of inflation on the overall cost base. To date, we've recovered over 90% of this aggregate inflation.
That is of the four waves in total through our various internal and external levers with more recovery to come. As we look at it today and while too early to be precise as yet, we're planning for another year of significant inflation in FY 2023. Inflation is also increasingly being reflected at consumer level now across all of our product categories. We did see some limited impact on demand in some areas, such as salads and obviously this is a factor that we will continue to closely monitor through the coming quarters. Operationally I'd add that we're actively and very effectively managing service and labor availability to reflect demand patterns through what has been a very busy summer trading period.
Kevin will speak to both inflation and consumer collaboration in more detail later in the call. Now moving to strategic developments, we also progressed in a number of important respects during Q3. Firstly, we continued to onboard new business wins during the quarter, in particular in our other convenience categories, where we launched the initial products from the expanded ready meal site at Wisbech. This was followed by the first new launches from the expanded Kiveton site in July. Secondly, our strategic CapEx program that supports these new wins has proceeded very well and is on track to be completed by the end of the year. Now thirdly, phase one of our Better Greencore program is now well underway, and as a reminder, this phase targets an annual recurring benefit of GBP 30 million in FY 2024.
The internal operational and organization model is changing fundamentally in this first phase, so realigning our teams from a business unit structure to a functional model. While this is a complex task, it will deliver a more customer-centric approach across our business. This is being supported by the full deployment of an integrated business management model that will make our specialist teams more effective across product development, operations, and overall cost management. As we noted at our H1 results in May, we will invest a total of GBP 24 million during 2022 and 2023 to unlock these improvements, including CapEx of approximately GBP 8 million that will be spent during this year and next.
We've also initiated planning of the second phase of the Better Greencore program that focuses on output optimization, and this will deliver additional benefits for the business. We will update the market with further detail at the appropriate time. Finally, on our sustainability agenda, we continued to make progress in Q3, building the relevant data and systems so that we can measure and assess our own performance against our short and long-term commitments. Now with that, I'd like to hand over to Kevin for the Q3 commercial update.
Thanks, Emma, and good morning, everyone. It's a pleasure to be with you all on the call this morning. I'd start by saying that we've continued to work closely and diligently, both internally and with our customers in what has remained a challenging but very productive and progressive quarter. Overall demand in our categories has been very resilient given the trading environment in which we're operating. It has also continued to be volatile as we face challenges. For example, the national rail strikes brought volatility, while extreme temperatures that we've seen in recent weeks across the U.K. added to our already challenging supply chains. That said, I'm very pleased to report that our demand has been supported by unconstrained and effective service levels across our network, despite having to navigate ongoing and at times challenging inbound supply.
I'd also remind everyone that our portfolio and customer mix is also strongly very defensive. This mix provides us with real protection from the worst effects of any recessionary market, where consumer choices around discretionary spend may come to pass in the coming quarters. We have a balanced exposure across customers, channels, categories, and also trading tiers, which has helped our performance. Going back to quarter three in a little more detail, where I'll start with food- to-g o. In Q3, our pro forma food- to-g o revenues increased by just over 31% versus Q3 in 2021. This was mostly volume driven with both underlying and new wins, with pricing contributing a low double-digit percentage of this growth. This revenue growth was achieved notwithstanding several factors.
As I mentioned earlier, some disruption to demand caused by rail strikes across the country in late June, where footfall declined in all retail destinations, but most severely in high streets and city office locations were seen. There was a far greater drop in activity in central London and in city centers around the U.K., where the reliance on train travel was higher. This looks likely to repeat again in July and August as it stands, and maybe beyond. We also have seen volatility over the last week resulting from the extreme temperatures across the U.K., as you would also expect, we're starting to see some level of demand response to the on-shelf inflation that Emma mentioned, manifesting itself in small demand changes by tier or more directly in overall volume terms, for example, as we've seen in our side of plate salads business.
Finally, there was impact from resizing some salad business recently in recent quarters that is also evident in revenue during the peak summer period. When we look at the food- to-g o- market in total in quarter three, it continues to expand as new shoppers spend more per trip. Sandwiches grew faster than the total food- to-g o- market, fueled by new shoppers and a rise in trip spend. We've also seen an increase in the participation of consumers more broadly across the meal deal promotion, which I think reflects our changing trading environment as consumers continue to look for value. Some growth will of course be due to inflation. However, as new shoppers continue to enter sandwiches, this remains an optimistic signal for the continual growth of our category. Salad is the only sector not to witness growth versus last year, as all metrics by penetration have actually declined.
Looking at our food- to-g o performance versus the equivalent pre-COVID levels in 2019, pro forma revenue was up 19%. Underlying, like for like revenues were approximately 103% of this, and therefore new business wins contributed approximately 16% to this growth, including the recent Costa M&S engagement. Moving to our other convenience categories, pro forma revenue increased by just over 15% in quarter three, still well above the long-term trends we've seen across these categories. Pricing was the driver of growth in the period, with volumes modestly lower year-on-year. Looking at this by product type, there was revenue growth in all areas in quarter three. About 40% of our overall revenue growth came from prepared meals, the largest component of which is our ready meal business.
We were very happy with our performance, and it was strong relative to the overall chilled ready meals market, where volume was down 5% in the quarter. In contrast, our volumes were down modestly against a tough prior year comparison. This is before any material impact from new wins, where we would expect to see our share of Italian ready meals market to increase from approximately 36% today to overall 48% on a full year basis moving forward. Approximately 20% of the revenue growth came from ambient sources, where we saw broadly unchanged underlying volume growth against what was a strong prior year performance, supported as consumers have started to switch more volume into private label ranges as branded promotional activity has started to slow.
The remaining 40% of growth in other convenience revenue was from our Irish ingredients business, which was largely reflective of our passthrough of underlying pricing inflation. If I now move to inflation, there are a couple of key observations that I'd like to make. For context, overall like for like price inflation at a grocery level in the U.K. is now running at around 10% according to last week's release from Kantar. It should come as no surprise to anyone that as inflation has started to rise, the population has now started to look harder for value in the grocery market more generally. Smaller grocery bills were the main factor behind a 0.5 percentage point drop in retail sales in May.
The 1.6% decrease in volume of food sold has been linked to inflation, with consumers spending less on their food shopping because of the rising cost of living overall. Our own proprietary research suggests that rising food prices is now the top concern for over 80% of shoppers, and they've actually overtaken the concern around rising utility and energy prices. In addition to that, more people are actually saying they're going to retail less than they did in February of this year. Notably, the recent Kantar data also indicates that supermarket own label lines are growing by around 4.1% currently, while sales of branded items have fallen just below 2.5%, which we are starting to see manifest itself in some of our categories. Examples of that would be soup and cooking sauce, most notably.
The traditional discounters have continued to increase overall grocery market share by 1.8 percentage points combined in the last 12 weeks to mid-July, which is also being reflected in our own numbers. With that context, how are we managing this with our customers and our supply partners? As I've said before, these relationships up and down the supply chain are central to the way in which we operate this business, and we are continuing to work with customers in both a collaborative and constructive way. Our aim being to protect and enhance both our own and their own channel positions. As such, we will see an ever-increasing focus on field to fork efficiencies as we move forward.
Areas that remain central to this are working through evolving range efficiency, which involves simplifying the products on offer to manage inflation and to optimize output and margin returns without affecting core customer choice through managing our product set in a number of different ways, including reformulation of products, distribution methodologies, and the ongoing focus on demand patterns by consumer cluster. In fact, our recent reorganization that Emma touched on builds even more expertise into this space. Finally, we've also ensured we've had a forensic focus on managing service and labor availability in line with demand effectively in this peak period, while all of the time continuing to focus and invest with our customers for future growth. I would also add that our purchasing expertise is also providing a hugely important pivot for us here.
It's given us early visibility on pricing trends, providing us with flexibility to adjust rapidly across ingredients and suppliers as required to mitigate the challenges where we can. Finally, to take a step back on what has occurred so far this year and how it sets us up for FY 2023 and beyond. I would advocate personally that we've done an incredible job on mitigating inflation so far, and we will continue to utilize all our internal and external levers to achieve this. Though the challenge remains a demanding one, I'm optimistic on our ability to succeed here for FY 2022 and into FY 2023. Driving improvements in profit conversion is built on strong demand profile across our categories, but also our ability to deliver efficiency and productivity improvements across our business.
Better Greencore has been designed to support this and as such becomes even more critical in how we deliver profitable growth moving forward. I'm more than happy to discuss these on these topics in any more detail in the Q&A, but for now, I'll hand back to Emma for outlook and Gary's closing remarks. Thank you.
Thanks, Kevin. Now bringing all of this together with some brief comments on outlook. The key message here is that we expect to deliver broadly in line with current market expectations for FY 2022 and this is underpinned by good volume growth, recovery of significant levels of inflation and enhanced profit conversion. We expect to deliver an Adjusted Operating Profit outturn of between GBP 72 million and GBP 77 million for FY 2022 and Adjusted EPS of between 9.2pence and 10 pence. Net debt, excluding lease liabilities is anticipated to be approximately GBP 200 million with net debt to EBITDA comfortably under 2x as measured under financing agreement. Now, we must manage several key moving parts to deliver on our guidance and the first is sustaining the effect of inflation recovery.
The second is monitoring and responding to consumer sentiment and demand patterns as inflation affects increased cost of the consumer. The third is our own efficiency and profit conversion. These moving parts will carry into FY 2023. We will continue to closely monitor the impact of inflation on consumer demand and sentiment, as well as working closely with customers and supply partners to mitigate the ongoing impact on consumer prices.
Thanks, Emma. Let me conclude now with some final remarks. Our key focus this year has been to drive the economic model through effective profit and cash conversion across the business. In the near term, this means delivery to expectation in financial year 2022 against the backdrop of the various micro challenges faced by us in the broader UK food industry. In the longer term, this means continuing to improve profitability, cash flow and returns. We are optimistic and confident that we can achieve this given our leading market positions, close customer relationships, and our intense focus on efficiencies. Finally, a reminder that our next capital markets update will be our FY 2022 results that will be released on the 29th of November. With that, we are ready to turn the call back to the operator and to begin the questions and answer session.
Thank you. As a reminder, if you would like to ask a question, please press star one on your telephone keypad. To withdraw your question, please press star two. The first question comes from the line of Jason Molins calling from Goodbody. Please go ahead.
Yeah. Hi, good morning. Just firstly, Emma, just wanted some clarity on the inflation recovery. I think at the time of H1, you mentioned you'd recovered about 95%, but today mentioning 90%. Appreciate it's only a small change, but just wondering if there's any change in your recovery mechanisms or reaction from your customers. Then just the second question is really around the supply chain challenges that you've called out in the period. Can you just be a bit more specific on what they've been and whether they're ongoing and what financial impact that has had on the business so far? Thanks.
Yeah. Thanks, Jason. Look, in terms of inflation, when we were talking at the half year, I think it was, you know, about 95% of the first wave. I mean, we are now in wave four, is how we describe it, given how we've articulated each of the waves as we've worked through. I think, you know, we're really pleased, Jason, with the recovery of inflation that we've delivered. We can see it in revenue. We can see it in top line. I think as you get to this point, there's a big focus on how do you find other ways to mitigate that. It takes a little bit more time.
If you've got to do something to offset the inflation, if you've got to reformulate a product, if you've got to make changes like that, it takes a little bit longer to deliver. I'd say we're getting to the point where it takes a little bit longer, therefore there's more of a lag and taking more time to deliver it. Kevin might speak to that more in a moment. I mean, when we then talk about supply chain disruption and what we see, there are, you know, a series of different things.
I mean, Kevin alluded to, you know, the impact of the hot weather and, you know, the high temperatures and what that will have meant in a chilled food distribution world where the U.K. is not set up to deal with the temperatures that we were experiencing. A lot of the temperature control equipment is set up to manage to a high of 30 degrees and when you're up in 40s and even higher. That creates challenges in maintaining temperature of product right through the supply chain, so you're gonna see a lot more waste actually, because from a food safety perspective, you've got to maintain temperature control. The rail strikes lead to a level of disruption as well.
Broadly, we've seen tightness of availability of ingredients and disruption as a result where you're not getting deliveries of what you wanted at the right time or not in the right format or the right quantity. That creates disruption in our factories because we've got to pivot pretty quickly. Now we're good at that. We're good at reacting to change. You know, there's a cost to doing that and having to reset production plans and reset what we're planning to make, and that leads to lower levels of efficiency. I might let Kevin talk about inflation recovery mechanisms.
Yeah. Hi, Jason. Just, I'll probably make three very quick points, conscious of time. The first is that we're making nice progress around pricing overall. What I'd also say, we're supporting that strongly by very discrete activity around end-to-end focus. That's continuing to be an area for us that we're gonna continue to need to work on and continue to work very closely with our partners on, but I think we're doing that very, very nicely. The second point I'd make is the market continues to be with us as it resets. We have to stay close to that. Obviously, we don't wanna see a manifestation in demand drop, but at this point, the market continues to reset as that inflation sets through.
The third area, I'd say that discreetly in the background over the last 12 months, we've been resetting all of our models to both support us and our customers in ensuring that more of the mechanisms that we have in place covers more commodity areas to ensure that we spend actually less time talking about price to our customers and let that model play through, and more time actually managing the category at a time when consumer changes demand and their consumption patterns are shifting, and that's where we need to spend the focus of our time. Again, as we've both highlighted in the commentary, we're pleased with the progress. It continues to be challenging, but I think we're very alert to it.
As I've said before, this is something we're used to seeing. The magnitude is larger, but it feels now like we have found a model for operating within that.
Thank you very much.
The next question comes from the line of Ashton Olds calling from Berenberg. Please go ahead.
Hi, everyone. Thanks for taking my questions. The first one is just on the overall food- to-go- market. You know, I guess if you look at the business sort of being at 103% of pre-COVID levels, my sense is that once you strip out pricing, you know, volumes might be at 90% of pre-COVID levels. I'm just wondering if you can give us a flavor of why you think that might be, and whether you think that, you know, the market is structurally smaller, or if you think the volumes will recover.
I guess secondly, just in terms of inflation for next year, do you sort of have a sense of you know, magnitude that you'd expect for next year, and maybe what areas you would expect to contribute the most? Then finally, just on you know, inflation pass-through. Am I right in thinking that you know, you're becoming a little bit more reluctant to pass this through to supermarkets just to sort of avoid this being passed on to customers and maybe having demand impacts on volumes, and you're looking more at internal mitigation of these costs?
Thanks for the questions. I might take the first and the last one, and Emma might just touch on inflation for next year. I think, put simply in terms of food- to-g o, I'd say two things. The first thing is that one of the things that has manifested itself materially since the beginning of the pandemic has been the shift of where we are selling volume, right? As everyone on the call would understand, volume in travel locations and city center locations have taken time to recover, and they are still recovering. That is evidenced on a week-by-week basis for us. That continues to give us confidence and will continue to give us confidence.
While there are individual situations that occur with rail strikes, etc., that create challenges, I think what I'd say is that that actually continues to give us confidence. The second area that I'd say is that what we've got to remember is all of the customers, certainly our main customers, are continuing to invest in convenience formats. That particular set of formats is now the largest segment in grocery retail. It is the area for us that is seeing the most growth. It continues to see growth. Then when you think we're also seeing ongoing evolution of things like petrol forecourts as food hubs, when you think about that overall, the ongoing progress we're seeing in penetration versus where we were pre-2019 continues to give us confidence.
There isn't any metric that is suggesting that we're seeing a market that is slowing. We're actually seeing a market that not only is recovering in certain elements of it, but we're also seeing growth in other elements of it. From an overall perspective in food- to-g o, we remain very encouraged by the progress and see that there is further progress to be made. I might hand back to Emma on inflation into next year, and then I'll probably come back to answer the question on pass-through.
Yeah. Look, Ashton , I mean, in terms of inflation into next year, I think it's clear we're in an inflationary cycle and we would say that there will be substantial inflation again next year. It's across, you know, all commodity inputs actually. We'll have talked about, you know, the top areas of inflation this year being cereal, poultry, packaging and clearly energy. I think the energy challenge is well documented and it's pretty volatile at the moment around where that's gonna land. You know, we're seeing things like cereal again quite a lot into next year. We're seeing dairy a lot higher. We're seeing tomatoes substantially higher. There's been a real concentration of across a whole range of inputs again.
In terms of sort of passing that through, we've got a substantial proportion of that in our Commodity Tracker model. There's still quite a lot that needs to get negotiated and our caution is around what is the impact of those prices going to be on the ultimate consumer. If that goes into price, what are we gonna see from a demand perspective? I just circle back to sort of where you started as well on the sort of pre-COVID volumes, what we'd say is, you know, like for like pre-COVID, we're at, from a volume perspective, manufactured volume and food-to-go at 87%. We see different patterns play through depending on where stores are.
What Kevin has said around you know where consumers are shopping, it's a different. We also have re-signed some business as well as we've gone through this period. It's not necessarily the case that you look at the overall market, but we have made choices around some of the business that we will supply, as we've looked at the inflationary environment and looked at you know items that our ability to supply. Do you wanna take over?
Yeah. I think you've covered most of it. Emma, I think the only point I'd kind of just compound to everyone, it would be madness for us to not be cognizant of patterns that inflation is naturally going to impose on our market. That in no way reflects our reluctance to pass this through. In fact, one of the reasons why we have changed those commodity models to include more in the basket is actually to make sure that that gets passed through. Actually it's our role here to also make sure that demand continues to be progressive for our customers as well. I don't think it's anyone's interest for that demand to drop.
Actually, one of the reasons why, as I mentioned at the beginning of this section on our position from both customers, channels, tiers, and why that is so set up in the way in which it's set up, is to make sure we're kind of protected from that. I think it's our duty to be vigilant to those demand patterns and make sure that we manage them accordingly. That's exactly what we'll do, and we'll continue to do.
Great. Thank you very much, guys.
The next question comes from the line of Charles Hall calling from Peel Hunt. Please go ahead.
Good morning, everyone. Kevin, you mentioned that service levels have been pretty good over the last quarter. Presumably that means that you've got the right labor in the right places. I was just wondering if that's due to better retention or you're finding it easier to recruit and what sort of labor cost inflation are you seeing?
Thanks, Charles. I'll kind of cover the service position. I'd say two things. I think the teams have done an incredible job in terms of looking at the employee market, whether that be through age profile or particular locations or how the competitive set is operating. I think we've just found a much more manageable model to understand our local markets really effectively is the first thing I'd say. The second thing is that I think the teams have then put huge amounts of stock into a retention model.
A lot of that is, it won't be surprising for everybody on the call, that that's about putting real stock into the basics of how you onboard someone, how you make their role straightforward, how you buddy them up, how you ensure that all the basic hygiene factors for someone joining a new organization are really effectively done and managed, and I think we've done that really, really well.
As a consequence of that, I mean, it's when you think about where we were kind of last November to where we are today, to be able to deliver the peak volumes that Gary talked about at the beginning of this call, kind of in the big week last week of over 14 million units across food -to- go, I think is an incredible reflection of not only the operational teams and what we've done in terms of running the factories, but also the way in which that labor pool has been managed. Emma might just touch on in terms of where the overall inflation piece is.
All I'd say just before Emma gets into the detail of that, it's as I've said on previous calls, it really is not a national position. It is a location by location driven position. I think again, the skill of the teams to understand individual locations, availability of labor, what the pricing mechanisms need to be, what the competitive set is around the local area, and being on top of that every single day is one of the reasons why I think in those locations we've won. Emma might just wanna add a bit of flavor to that.
Hi, Charles. I mean, as Kevin said, we've had to do a lot of work to manage labor availability and that has required interventions and incentives being put in place around different sites at different times. We've planned ahead for that. Actually, you know, as far back as January, we're really by site and what we needed to do and whether we would need to intervene and put incentives in place for summer peak.
I wouldn't wanna be overly precise about what the rate is around each site, but we will have also done things around looking at the labor markets locally, and if it was tight locally, looked at putting buses in place to bring people in from further afield. It's not all about rate actually. It's about making sure that we're accessible as a place to work and that all of the hygiene factors are in place at our sites. Things like lockers for colleagues, hot food, canteens, all of those offerings. There's still a lot of inflation coming through in early rates. Clearly NLW into 2023 will lead to a significant increase again.
We'll have to look at overall salaried inflation as we go forward. I think we are looking at you know higher rates of inflation on labor than we've seen in the past on average.
Could you just give a group level of understanding? Can't give a site level.
Yeah. I mean, if we're thinking labor inflation overall, you're looking at sort of mid- to high single-digit inflation percentage.
Okay, thanks.
The next question comes from the line of Roland French, calling from Davy. Please go ahead.
Hi. Thank you, and good morning, everybody. Three questions if I could. Just in context of inflation recovery, and maybe it's one for you, Emma, are you able to split out what you refer to, I think as 90% of overall inflation recovery? Can you split that between the explicit raw material mechanisms and then direct negotiations and internal efficiencies? I guess the second question then is how that shape of recovery might shift next year in context of what we're hearing from certain U.K. retailers. It kind of feels like the environment incrementally is getting more difficult. Finally, what percentage of your contracts, I know it could be quite small, but what percentage of your contracts include an explicit mechanism for NLW?
Yeah, hi, Roland. Yeah, look, in inflation recovery in terms of direct pass through this year, it would've been about 40%. Quite a lot to be negotiated ourselves. Actually, as we go into next year, as Kevin referenced, we have rebased the basket in quite a lot of cases this year. So you're looking at something closer to a 60% on pass through. But I think what we'd say is we're gonna have to do a lot of work to see are there other ways to mitigate that as well, given the scale of the numbers. In terms of contracts, I'm not sure I'd say percentage of contracts that have the NLW.
There are several of our major contracts, ones we'll have renegotiated in recent years that will have a component of labor that goes through. It'll be, you know, a percentage, you know, any increase over a certain percentage or, you know, tracking to NLW that type of mechanism.
Gotcha. That's helpful. If I could squeeze in maybe a final one just on demand elasticity. I think you called out salad seeing some negative response. Are you able to give us a little bit of color around that dynamic, in particular in salads, and then I guess how you think about pricing strategy going forward? Are there natural ceilings around products that you're unwilling to kind of breach, or is this very much kind of an iterative process where you price and test and see what the demand response is?
Yeah, Roland. Look, on salads, I mean, I know we'll have talked about it before, is that in our salads business, we'll have seen, you know, substantial inflation in Europe on coleslaw, for example, on side-plate. We will have seen lower volume as a result. We are seeing now a bit of a mixed effect actually within salads, where your sort of more premium grain salads are seeing lower levels of demand and actually much higher demand for a pasta style salad, so a chicken pasta salad, things like that. So we are seeing a switch from the consumer into the more value end of that. Then when we come to kind of thinking about pricing, I'll ask Kevin to talk about how we think about price points and that overall.
Roland, just a kind of, this is general sentiment, but we're seeing a slight movement. It's very early, but a slight movement in some of where demand is sitting. Interestingly, we're seeing an increase in certain categories at kind of what we describe as entry range level. If I take food- to-g o as an example, anything between kind of GBP 1.25-GBP 1.75, we're seeing growth in that area. In addition to that, in the premium tiers, anything kind of GBP 2.80, GBP 3 and above, we're also seeing growth in those areas. Whereas, we're seeing the core, the center kind of being squeezed a little bit.
In addition to that, as I mentioned earlier, we're seeing a kind of, if I take the last four weeks, about a 7% increase in the meal deal redemption in food- to -go, which I think is reflecting people looking for value. It isn't the fact that people are trading down, i.e., the fact that we're seeing premium tiers continue to expand in generally most categories says to me that there is still further to go from an elastic perspective. We aren't seeing, with the exception of side of plate where the pass through really the demand drop off has mirrored the pass through. Everywhere else, we're continuing to see progress and growth.
I think it's really, really important for our category teams and our commercial teams to stay very close to that because clearly it is important for us to think about that demand profile in the most effective way. I genuinely believe as we continue and move into this cost of living crisis, that one of the areas that will continue to come under pressure is food service. I think when food service comes under pressure, we do naturally see consumers move back into core grocery and move back into premium tiers as well. I actually think we're well positioned to manage that demand profile. What's key is that we stay close to it. We understand the supply chains because each of those channels are served in slightly different ways.
That's exactly what we're set up to do, and we kind of did as part of Better Greencore as well. That would be what I'd add to Emma's point.
That's great, clear. Thanks, Kevin. Thank you.
The next question comes from the line of Damian McNeela, calling from Numis. Please go ahead.
Yeah. Hi, thank you for taking the call. Morning, everybody. My first question is just on the specifics of the product or the scope of product reformulation that you're able to do, given that we're now in sort of moving into wave four. I don't know whether it's gonna be wave five or it resets. I just wanted to understand, like, how often can you reformulate the products? How many times you've done it this year, and what can we expect next year? I don't know if you can give me a percentage number of what products are being reformulated this year. Then my second question is around the sort of long-term margin aspirations.
I think very clearly the second half is going to be a pretty decent absolute number. In the context of the revenue number, margins are still gonna be relatively depressed versus historic levels. I was just wondering how we should think about that recovery over the next sort of two to three years.
I might start, Damian, with the reformulation. At a broad headline level, obviously this is an aggregated level because it differs by category, but we would touch in the space of a year between 70%-80% of our portfolio in one way, shape, or form. That can be anything from a small tweak to a specification all the way through to a complete reformulation and new product development. None of that has changed. The number of cycles that retailers will go through on an annualized basis, depending on the retailer, is 3-4x for each of the actual trading seasons. Obviously, again, that differs by category. That gives us an opportunity in which to look at and reformulate as we move forward.
Again, what I would also say, and I think this is really important to make the point, the retailers are very cognizant here that what we don't do is overtly affect quality. Quality still has to remain. There is a reason why the tiers exist, and therefore, as a consequence, quality is a reflection of those tiers as opposed to all we do is downgrade quality within each of the tiers. It's not in our interest to do that because that's how consumer demand does get affected when you reduce that level of quality. What these are sensible levels of reformulation, whether that be thinking as part of our sustainability plan, reducing the levels of protein that are in each individual SKU, whether that be changing the portion size as part of that sustainability plan.
That'll be about increasing specification so allowing us to buy ingredients from a broader set of suppliers, which gives us optionality and allows us to mitigate inflation. There are a variety of different ways in which we've been able to do that, and there will continue to be different ways across all tiers that we can do that. One, I'd say we're continuing to use that lever and, two, there's still plenty of growth and opportunity for us in that space should we need to use it. The second area I'd say, just to add into that, is that the retailers have been very sensible and pragmatic with us around ranging decisions where, for example, we'll have had, I don't know, different types of, shall we say, chicken SKUs.
There might have been 20% of the range would have been chicken SKUs. When you're seeing the level of inflation on chicken, there is a sensible approach here where we've decided there are certain SKUs that we're just gonna take out the range and put greater volume on a smaller number of SKUs, which makes it more efficient for us, makes it better for them, allows us to mitigate a level of the inflation. And that kind of level of focus will continue to be the case. There are certain SKUs where retailers have just not been able and didn't feel it was credible to absorb the level of increase that we wanted to put through, which would have manifested itself in big retail changes.
A great example of that would have been on certain salmon lines this year, where we've seen ridiculous levels of inflation. Quite frankly, what the retailers have done is they've therefore changed either the protein or the amount of SKUs that they've got. What I'd say, as I said at the beginning in the script, is the retailers are being very pragmatic here. There is no poor behavior. There is very sensible discussions about this. They're very cognizant, and we're very cognizant that we just can't put this all up necessarily at the shelf edge. It's also important that everybody makes a living from this process. I'd say that those particular reformulations and those levers of reformulation are something that's at front of our minds and we'll continue to work on.
Yeah. That's very clear. Thanks, Kevin.
The last question comes from-
Hey, Damian.
Oh, sorry.
Sorry. I do apologize. Please go ahead.
Sorry, Damian. I was just gonna round out on margin. Look, we're really pleased with how we've delivered through the second half and how we're seeing the build back. There's a lot of work to do and for us, there's a big focus on operational conversion. I think we're doing all of the right things for the business, resetting how we run the business. Better Greencore is a big part of that, how we drive operational efficiency as we go forward. I think we've been clear that our priority has been to get back to FY 2019 profitability and margin will come thereafter. You're right to make the point around inflation that there was a mathematical impact on margin.
As we look into next year and see more inflation coming, you know, that will continue to have an impact. You know, we just hope that inflation will come off at some point in the not too distant future, which would clearly lead to an improvement.
Okay, brilliant. Thank you, Emma.
The last question comes from the line of Doriana Russo calling from HSBC. Please go ahead.
Yes, thank you very much. My question is on the new business wins in the onboarding of this business. What sort of level of profitability have you achieved, if any, come Q3? Are you satisfied with the amount of revenue in terms of volume you are reaching with this new business? How would they compare with pre-pandemic levels? That's my first question. I've got another question regarding the evolution of your pass-through models and mechanics. Historically, you would have sort of automatic recovery of raw material prices. Sorry, raw material costs and increasingly of labor. How about other things like energy costs and utilities and any other thing that you might be exposed to?
Is that something that you have to still absorb internally, or is that something that you have started to negotiate?
Hi, Doriana. Look, in terms of new business, I mean, we've clearly been going through a phase of onboarding substantial new business, which we'll have been talking about over the last sort of 12-18 months. Some of that is in the process of being onboarded as we speak, as we're launching the meals out of our Wisbech and Kiveton sites. I'd say that we're pleased with how all of that onboarding has gone. There's you know been quite a lot even onboarded from March of this year, actually, in our food- to-g o business. I mean, we wouldn't typically talk about exactly what the contribution is from various contracts.
You know, depending on the channels that we're serving, there are different costs to serve associated with these and the volumes that are delivered need to build back up to where they were on a pre-COVID basis as well. Still some work to be done, but pleased with how they're onboarding and pleased with contribution that we're starting to see come through the P&L in the second half.
Hi, Doriana. I'll just pick up on the pass-through piece. I'd say two things. I'd say, as Emma already touched on, there is now significantly more that is sitting in the models, elements of labor, some parts of utilities, mainly distribution, those kind of areas. In addition to that, we've also put into certain customers an additional fuel surcharge, which links directly to that particular position. These all continue to be fluid. It's in our interest to put more into that basket, and we'll continue to do that. With certain retailers, that's been supported. With certain other retailers, they wanna do it in a different way. We just continue to work with them on that.
I think the fact that we've seen a material level of increase in the amount of items that go into those commodity baskets, again, whether they be materials, packaging or utilities, just reflects the changing environment in which we're trading. We're very pleased with the progress that we've made on that, and we'll continue to make progress on that.
Thank you.
There are no further questions. I will now hand you back to your host to conclude today's conference.
Good. Well, look, let's wrap it at that. Thanks again to everybody for participating, and we look forward to talking to you on the 29th of November. Thanks very much.
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