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Good day, and welcome to the Greencore Group plc Q1 Results Conference Call. Today's conference is being recorded.At this time, I would like to turn the conference over to Jack Gorman, Head, Investors of Relations. Please go ahead, sir.
Thank you, Morgan, and good morning, everybody. 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 this morning for our Q1 trading update conference call, which covers the period to December 29, 2017.I'm joined on the call today by our CEO, Patrick Coveney, and our CFO, Eoin Tonge. In a moment, I'll hand you over to Patrick to give an overview of trading in the period, and after that, we will open the call to Q&A. Finally, I would draw your attention to the forward-looking statements at the end of today's release.And with that, I'll pass it over to Patrick.
Thanks, Jack, and good morning, everybody. It's Patrick Coveney here. I'm delighted to be able to take a few minutes this morning to walk through the highlights and themes that sit behind the trading statements that we released just an over an hour ago, and we also today have our annual general meeting here in Dublin at 11:00 o'clock this morning.As Jack said, I'm joined on this call by Eoin Tonge, who will join me in answering questions after I run through some introductory remarks. We would anticipate finishing just after 8:45 this morning.2018 has started well for us, with good financial and strategic progress. In truth, though, this is very much a continuation of the themes and overview we had of our business that we discussed at length in November when we released our FY '17 results.In this call, I would like to draw out 5 key themes: one, the strong volume and revenue across the core elements of our portfolio; two, the effective management of inflation across the group; three, the delivery of UK strategic and organizational progress, in line with the plans that we have in every respect; four, positive progress on our US commercial pipeline and intensification of the network design to match this pipeline; and five, good cash flow and financial progress in quarter 1, with that trajectory of cash generation expected to be sustained for the rest of the year.Let me now draw out each of these themes a little more, starting with the strong volume and revenue growth. We delivered 53.6% reported revenue growth and 7.2% pro forma revenue growth across our total portfolio in quarter 1. As expected, we saw strong growth in the two largest components of our group, that being UK Food to Go and US CPG.UK pro forma revenue growth of 8.7% was driven by Food to Go, but also a solid revenue performance from our newly formed convenience business within the overall division. US pro forma revenue growth of 5.1% was driven by volumes of approximately 7%.Within the UK, Food to Go reported revenue growth of 12.2%. Adjusting for the modest impact of the Heathrow acquisition that we made last summer, pro forma revenue growth grew by 11.4%. There were 2 drivers of this, split equally; first of all, underlying category market growth; and secondly, the impact of new business wins, which includes both the move to sole supply or enhanced product or distribution arrangements with several core customers, as well as the strong growth in the distribution of third-party products through our direct store fleet.Let me talk for a moment about sandwich category growth in a more detail. We saw approximately 5% market value growth, of which volume was about 3% in the period. Volume growth rates were a nudge lower than previous periods, reflecting in particular customers taking inflation-driven price recovery and 1 or 2 customers also prioritizing waste initiatives to a greater extent, particularly in the run up to Christmas.This performance is not something that changes our view in the market at all. We are still comfortable, excited even, by the dynamics of the marketplace as we have previously guided and discussed.We also saw good revenue growth in other convenience categories in the UK and Ireland, with pro forma revenue growth of 5.5% in the period, in particular as inflation was passed through to customers. Within this division, the 2 largest product areas are Italian ready meals, which grew by 5.2%, and our own-label cooking sauce business, which grew by 3.5%.We've seen a good start to the year in the US as well, driven especially by the largest part of our US business, the CPG outsourcing business that was the centerpiece of Peacock when we acquired it.Overall, pro forma revenue growth in America was 5.1%, but remember we did not own Peacock in quarter 1 FY '17. But critically, volumes, the driver of growth, in this part of our business were up 7%.Looking into more detail at that volume growth. We have previously referenced that we expect and indeed experience approximately 5% blended growth -- market growth across the categories that we supply and this remains the case. This comprises strong mid-single-digit across the sandwich portfolio, a little higher in fresh, a little lower in frozen breakfast sandwiches. Similar mid-single-digit growth in lunch and meal kits, strong double-digit growth in salad kits. And we've seen all these trends continued through quarter 1.New business on a net basis contributed the rest of the volume growth. In the US, the key business win in recent quarter was the launch of incremental lunch kit volumes at our Carol Stream facility in the second half of financial year '17.We noted several other CPG and retail wins when we last talked in November, and while many are still in launch phase, they are contributing positively to overall US performance. This significant growth momentum is of course offset somewhat by the impact of our exit from frozen production at Jacksonville that we announced in September and again in November of last year.We're excited about further opportunities right across our US pipeline, and I'll come back to that again in a moment.The second strength I wanted to talk about was amount of inflation. We are pleased with inflation recovery to-date for FY '18 and remain on target to recover this fully on a cash basis.In the UK, raw material and packaging inflation is running at a similar level to the second half of last year, namely about 4%. There's some sense that this may be starting to ease a little in category diary in particular and also I think reducing somewhat given the strengthening position of sterling. As with last year, we've been successful in recovering this predominantly by price increases with our customers.In the US, raw material and packaging inflation has been more modest and is also largely passed through given the structure of our supply agreements there.Labor cost inflation in the UK and the US has been at expected levels, and as per our model, is been mitigated through supply chain, product engineering, operational efficiencies and selective price increases.Turning to point 3, strategic and organizational progress in the UK. In November, we announced the streamlining of our UK organizational and cost structures. We have made excellent progress with this new organizational structure, with good management and colleague engagement and buy-in to this initiative.This now provides us with a better platform to operate in a cost-efficient manner. We've seen the consolidation of our divisional and business unit structures. We've seen the launch and scale up of the Greencore Manufacturing Excellence program, which is launched to drive significant operational benefits, and we're starting the roll-out of a more standardized set of processes and functional alignment across the various sites.On the UK portfolio, we've also recently, yesterday in fact, announced an agreement to sell our cakes and desserts business at Hull to Bright Blue Foods. This marks our exit, full exit from the cakes and desserts category. We believe it demonstrates capital discipline, a desire to optimize returns in attractive scale categories where we can win and our approach to management of risk in the asset base that we operate in.As you know, this category has struggled to hit our investment criteria over time, in that we haven't been able to achieve market-leading positions and the kind of synergy potentials which justify continued ownership.This announcement completes our exit from the cakes and desserts category and indeed it's the final component of 4 different site exits in the cake and desserts business over the last 5 or 6 years. As summarized in the statement, the transaction will have a neutral impact on group adjusted earnings this year.Turning now to an update on our US commercial pipeline and network. The background and context for this was set out both last summer when we did Capital Markets Day in Chicago and again in November. And as I've said earlier, the overall commercial pipeline in the US is developing well and we are pleased with that.After more than a year of ownership of Peacock Foods, we now have a fuller picture and a better understanding of the specifics of the commercial opportunities in front of us.Driving returns from our well-invested US asset base is now critical, and in truth we have been a little frustrated about the utilization and performance of certain parts of the original Greencore USA network.The task now is to recognize that we must quickly match the network with the scale and nature of the exciting emerging commercial pipeline that we have, and we want to do this urgently as we go through the rest of FY '18.And turning to cash flow. In November, we outlined that we felt that the improved cash generation and capital management of our business could allow us to approach a net debt/EBITDA ratio of 2x by the year-end and we remain very much on track to get this target.The capital investment into our ready meal facility in Warrington is the only remaining strategic CapEx project of scale in the UK. It will complete in the first half of this year and we're well on track with our plans for the delivery of that. We feel very good about the capacity, health and investment in our UK Food to Go division and we have sufficient capacity in place for growth there over the medium-term.Our US capital model remains built on a well-invested set of assets already, improving the utilization of that set of assets, and where necessary, using the co-invested model with customers to fund strategic capital opportunities going forward, and again to reiterate, we think is an example of capital discipline and draws on our capital and management time particularly as we look out into the years ahead.Moving away from the trading statement for 1 second. Some of you may have seen, we issued a second [ notice] this morning in which we announced that Helen Rose would join our board on the 11th of April. Helen will make an important contribution to the Greencore board. We're excited about her coming on board and she brings current and highly relevant experience to development and implementation of our strategy, and also we think a history and experience in the food sector, most particularly from her time with Safeway. We'll be delighted when she joins us in April.And finally, our statements also includes a section on taxation, which Eoin will be happy to discuss in the question-and-answer session in a minute.So with that, I'm going to finish up those introductory remarks. Overall, we hope to stay as reassuring. We're pleased with this. It reflects where we expected to be in terms of strategic, organizational and economic progress for the year so far.And with that, Eoin and I are happy to take questions.
[Operator Instructions] We will now take our first question from Arthur Reeves from Societe Generale.
You don't say that much about margins, but at the start of the year I think you were saying that you expected a small increase in margins in the UK and some synergies in the US. Could you update us on that please? And then my second question is about US labor inflation. Can you be clear as to whether your agreements with your customers allows you to pass that on to them please?
Yes. Let me -- sorry, Arthur, let me just give you a top line reaction to both of those. I might ask Eoin to give a little bit more commentary then around margins. I mean, you sort of answer the question, which was you summarized what we said at the full year in November. And that's what we expect. We expect on a full year basis that we will see improvements in margin in both parts of our business. And Eoin can describe the components of that and the timing of that in a second. On US labor inflation, I mean obviously we have a wide variety of different customers in the US, reflecting the history and evolution of our business there. I suspect the core of your question is on the large CPG commercial agreements that were part of the original Peacock business that we've been scaling up since. Do those allow for inflation recovery for labor? And the answer is they do.
Just add to it, Arthur. So as Patrick said, what we said at the back end of last year is still what we see in relation to margin progression through the year. So we do expect to see operating leverage improvement particularly in our Food to Go business as we get through the year. That will be held back a little bit by the non-Food to Go part of our business in the first half of the year. And in the US, we expect to see the bulk of the synergies delivery into FY '18, which will improve the operating leverage of the business, but then the operating profit will be delivered through growth as we go through the year.
We'll now take our next question from Jason Molins from Goodbody.
Just a couple of questions if you don't mind. In terms of the labor inflation, can you maybe put a sense of magnitude of what the level of inflation you're seeing from labor costs particularly in the US? That would be helpful. And then secondly, with regards to the shape of network efficiencies that you're contemplating in the US around your legacy facilities, maybe you can elaborate what implication, if there is any, on the capital expenditure program that you see for the business?
Jason, why I don't take labor inflation and Patrick will talk about the network efficiencies. So on labor, it is as we guided at back end of last year. So we're seeing about 4% in the UK. That's again predominately driven by the national minimum wage moves. There's nothing really -- no material update in relation to that. And in the US, again similar, a little bit, a nudge higher, roughly around 5%. We continue to see some tightening in some markets, but nothing more than what we really had been anticipating and we're pleased about how we're working through it.
I mean, on network efficiencies, Jason, to the -- I guess the core of your question is, is there anything that we are thinking or saying that implies a significant step up in capital expenditure. The answer is a definitive no to that. I mean, what we're -- when we talk about the intensification or urgency of looking hard at that network, I think there's a couple of points of context that are worth saying. There's nothing that I think is -- maybe the emphasis is a little new, but there's nothing in here that should be a particular surprise to anyone who has been listening to what we've been saying for a while. So the first point of context I'd says is that we've now been running this combined network for over a year. Well, obviously we did extensive due diligence before buying Peacock. It is a little different when you actually own and operate the business and we've had the benefit of doing that -- now, the pleasure of doing that actually for a little more than a year. And that's given us a much more rigorous understanding as to precisely what the commercial and growth opportunities actually look like by product type, by channel type, by region and how we -- and then that it gives us frankly much more confidence to be able to match that against the manufacturing, the capacity network that we have, which for the most part is straightforward and obvious and exciting, which is we've got tons and tons of demands, to be blunt about it, in the Midwest, Chicago sort of area and it's a case of trying to fit in all the opportunities and prioritize that from a project management perspective. But what we're also conscious of, and it will be no mystery to anyone in this call, is that there are -- across a site network of 14, there are 1 or 2 that are running at unacceptably low levels of unitization and we've got to do something about that. And so that's -- when we talk about intensification of network planning, what we're really doing is -- figuring out is, what is the right way to utilize that capacity, what does that mean for the types of products and the types of customers we put into those sites and does it bring us to a place at some point where we actually manufacture significantly different types of products for different types of customers in some of those sites than they were originally purposed for 2, 3, 4, 5 years ago. You'd expect us to be focused on that, because one of the really big performance levers for us economically is finding a way of both addressing low utilization sites from a return perspective and also getting value from the capital that we have already invested so that we can begin to match those growth opportunities against capital that we've already spent. So that's the space that we're in. I think you're right to pick up -- there was a little bit more emphasis on it in the statements than there might have been back last November. But I think that's just a natural consequence of the level of knowledge and what we're learning about the business in America over time.
And sorry, just one follow-up question on that, Patrick, is the co-investment model that you've spoken about before. With that hold true then potentially for some of that expansion?
It absolutely would if incremental capital is required. There might be a more detailed question behind that, which is if incremental capital isn't required, what does that mean for the commercial terms associated with some of those new businesses? And I think we would work that -- in other words, if we front load the investment or capital by already having it there with CPG type customers, then we'd expect to get some value from that in commercial agreements that we might have with them going forward. But certainly we are not anticipating in any respect having to put down incremental strategic CapEx for CPG style customers with a different model from how the combined business has worked with them in the past.
We'll now take our next question from Andrew Ford from Peel Hunt.
It's actually Charles. Just following on from that question, have you gone through the potential cash costs of reorganizing the network and any exceptional charges that might come as a result? And secondly, there has been chat in the industry about increased freight costs. Are you seeing an increase in freight costs and are those also passed on through the previous relationship you've had with Peacock?
Yes, sure. Charles, I might take both those questions. I think it's a little bit premature to talk about cash costs and exceptional charges that we may want to take, because we're working through those options as we speak. I think we're looking to try and get the return on incremental capital, so we will have to make some choices here, which might incur some cash costs. But of course we'll have to justify them based on what the opportunities are. So I just think it's a little bit premature to talk about that at this point in time. I think on freight, yes, we are seeing freight -- the regulations have changed such that availability of drivers is more. It's tighter now. It's fair to say the freight as a component of our P&L is quite small, so it doesn't really have a significant impact. And indeed, in the cases where we are experiencing it, we're working that too with our customers.
And 1 other question.
Charles, could I just jump in on that one, which is the --
Yes.
I mean, that's absolutely true. And I'm conscious that that question may well have been prompted by peers of ours making reference to [ Elmwood ].
Yes.
It's wholly independent about [ Elmwood ]. There is nothing that has happened in freight that is any surprise to us now relative to how we thought about this last November or last September. Yes, there is a modest increase in freight cost, but we're not -- there's no news there relative to what we might have thought 2-3 months ago.
And then just 1 other question. How much impact in the quarter was the reduction in frozen business?
About 5% of that volume is -- let's say it was negative 5%, just under 5% in that segment. Obviously, we are very pleased with this gross advancement in volume growth, particularly with the CPG customers.
We will now take our next question from Nicola Mallard from Investec.
Sorry. I was just - just I was going to ask about the Jacksonville impact, but Charles got in before me.
Don't worry, Nicola.
We'll take our next question from Damian McNeela from Numis.
Just 2 quick ones from me. Patrick, can you just give us a sense of how UK volume trends in Food to Go have performed on a shorter time frame? I think you indicated in your comments that there had been a slight slowdown as companies passed on price indications and moved on waste initiatives. What's your current view of UK Food to Go volumes? And then secondly, on the US network optimization, obviously you are intensifying your efforts. Can you give us a time frame on when you think that you might have a announcer for us on those please?
Yes. No problem. I mean I think the -- on U.K. Food to Go volumes, sorry. We fortunately have the benefit of tracking this and understanding this as a leadership team for more than a decade now and there are a few points that I think are working out in here. One is sandwich volumes and Food to Go volumes are always a bit lumpy in the period following Christmas and the early -- and the kind of back to work period in January. So we typically don't place too great a [ thought ] on volume performance in Food to Go between the 24th of December and 15th or 16th of January as providing any real insight on how the rest of the year is going to go. And what I would say is, as we have transitioned through January and up to now, we feel that the performance of Food to Go volumes is in line with where we expect it to be and in line with that mid-single-digit overall level of growth that we've spoken about for some time. In my comments earlier, I did make reference to -- first of all, to the fact that mathematically volume growth was a couple of percentage points lower than the level that we've indicated it has been at for a while; in other words, 3% in quarter 1 versus the 5% that you've heard us talked about before. And that there are a couple of what are described as customer specific features of that. And I want to be careful, because it's not for me to talk about decisions that individual customers of ours make, but you will have noted that some of them have taken greater levels of price than others and you would also have seen some of them talk in particular about the need to optimize wastes through the Christmas period as a way of really using that period not just to drive like-for-like revenues, but to drive profitability at a massive trading time for them. And that had -- and we'll see sandwich volumes bounce around then a little on that. But overall then, I really want to be crystal on this for everybody. We are not seeing -- based on all the conversations that we're having, the data that we're looking at and the plans that we have for the year, we're not seeing anything that is a source of concern for us at the moment about the volume trajectory of sandwiches in the UK. And that's I guess as strong as we can be on that point. On your second question, which is around US network -- I mean, I wanted to be careful here that I don't create an expectation of -- or a kind of a treadmill by which we are expected to say something. What I would -- hopefully flagged in my quite rambling response to Jason's question earlier is that this is our job and that we're learning more about this combined overall business both with the US leadership team that we've got and the time that we're all spending there and relationships and discussions that we're having with customers all the time, and that is inevitably and positively enabling us to refine the strategy that we have. I think that will lead to us choosing to use parts of our network a little differently than what there was originally intended. And that's what I think you would expect us to do, which both tackles the economic opportunity of finding a way of taking up the utilization of some of these sites, but also enables us in the most capital efficient way to match the kind of network that we need to what the opportunities really are. And if you listen to the language we described the growth opportunities and the growth performance of our business in America, I think it is true to say that the strongest performing and strongest potential part of that portfolio is in that CPG space, where we've had very strong volume performance in the quarter, which is the continuation of very strong volume performance in FY '17. And if that grows, we want to find the right place to make that stuff. And that's how we're thinking about using our network to do that in the most sensible way. Some of that is -- will just be modest tweaks to where we make things. And if it's -- if it ends up being more significant than that, then we'll talk about that whenever we get to that space.
Our next question is from Karel Zoete from Kepler Cheuvreux.
I have 2 on the UK and then on tax rates. On the UK, what do you expect for the non-Food to Go part and particularly for the meals business in 2018 given the completion of an extension mid-year? Second, on the UK, can you provide some more insights in the business you sold in Hull, the turnover of that business and cash proceeds? And then lastly, you expect in due time a benefit from a lower US tax rate. Can you provide more insights, what's going to be the mid-term tax rate as far as you see it at this point?
Sure. Kyle, it's Eoin here. I might take most of this and maybe Patrick might add if there's any further color. On non-Food to Go, specifically on meals, meals has been trading well. It has had good growth. It has driven a lot of the growth that you're seeing in the non-Food to Go parts of the business in Q1. Most of that was driven by price. As we said at the back end of the last year, we see some recovery in ready meals through the year. In the second half of the year, we had an impact on the margins within that business and we've seen some of that carry into this year, but the recovery has begun. And that will be certainly complete once we finish the refurbishment of Warrington, which is a month or 2 away from completion. So we feel pretty good about the ready meals part of the business and the stabilization there. In relation to Hull, just to get some numbers, last year's revenue was just over GBP 70 million. We expect to close that business -- close, say, the disposal the middle of February. So you can effectively prorate the number from that. The operating profit was effectively neutral, and as you can expect, the consideration reflects that. I wouldn't want to go into much more detail than that. And then just finally on tax, I mean obviously there's -- I could go on for quite a while on taxes and an awful lot of detail still to come. I think there's 2 pieces that we wanted to just get across today. One is a relatively straightforward reevaluation on our balance sheet of the net liability that we have on our balance sheet for our US deferred tax and liabilities. That's relatively straightforward, just a reevaluation of the rate down to 21%. And then the second piece is the impact on our normalized rate going forward. I want to put a little bit of a caveat that there's still more work to be done on this. But there is a -- there is going to be a positive benefit of the rate reduction. I think based on current modeling, current forecasting that could be around 3% of the normalized level of tax. The other thing that we'd flag is that we would expect the pace to which we get to the normalized level of tax could be longer depending on the new rules and how and when we would recognize our tax attributes. So obviously that's another positive. But I wouldn't want to give much more detail on that until we work through the detail of the actual regulation change. Hopefully, that helps.
Our next question is from Fintan Ryan from Berenberg.
I just have some questions, please, on the non-sandwich part of the Food to Go portfolio. I know you mentioned that volumes within the third-party distribution have seen good growth in Q1. Could you give us a sense of how much of a contribution that they gave to the pro forma growth and like what percentage of total of those Food to Go sales are -- will be nonthird-party volumes? And then also within the investments that you made within sushi last year, how is that progressing and do you see further scope for expansion in the non-sandwich Food to Go area of manufacturing?
So out of the 12 points, the reported growth on Food to Go were of the pro forma of 11.4. About 2 percentage points of that is -- would be distributed items that we don't manufacture. In other words, if you -- if I was a little bit more precise, if 11.4 is the pro forma, it would have been just about 9, just over 9% growth if you haven't had the very strong growth in those factored goods. Again, the -- to be clear on why we're doing that, it's not that we're trying to build a direct to store distribution capability per se. It's a case of us in the context of our overall relationships with our Food to Go customers where we effectively have a pipe into their small stores and where they don't have a good solution for other items, be it a fruit pops or specialist chill drinks or at times savory products, chilled savory products of different kinds that we don't make. We're happy to put those into our -- to pick those and put them into the cases that we distribute direct to those stores as an additional service and we get well paid for it. So it's a -- that's -- but again, it's us coming from a perspective of it being a critical part of our Food to Go relationship with those customers and us being able to effectively do them a favor while making a small churn on doing that without adding incremental cost into our distribution networks. On the manufactured piece of additional items that we're manufacturing in Food to Go, I mean obviously the most material is the step up in our sushi production since we brought the additional unit on stream as we went into the second half of financial year '17. That's trading nicely for us. I mean, the big task here, to be blunt about it, was figuring out how to make that stuff at scale in a facility that hadn't previously made sushi at all. And there we were able to draw on some of the experiences and learnings that we had from our site in Crosby. And we feel pretty good actually about the operating metrics of both parts of our sushi production now and we think it has a -- it plays an important support role to the sandwich category as part of the overall picture proposition that we bring to customers. We have also seen our business in salads and salad components of various kinds step up a little bit in the UK. And again, that's we think important as we both grow and also defend our position in Food to Go with customers that we are not simply dependent on sandwiches, but we were able to effectively manufacture and category manage and merchandise and distribute, as for your first question, that whole set of products that sit in the Food to Go mixture for our customers.
And just a quick follow on please. Given that 1 of the customers that you're doing the third-party distribution for seems also to be gaining share within -- in the independent convenience store and wholesaling there. Should we expect Greencore to take a little bit of extra piece in that business as that customer grows on its own through networking distribution?
Yes. I mean, I think -- yes is the answer to that. We're excited about that. I'm pleased that the impending combination and/or acquisition of those 2 franchises, Nisa and particular with Co-op, I think that would be good. But there's a broader theme here, which I think will go to potential for decent growth into the future in this fixture, which is what I would describe as the professionalization of the independent convenience trade in the UK -- and certainly what you're seeing with Martin, with McColl's, what you're seeing most significantly and materially, Tesco Booker. But also what you're seeing with Co-op with Nisa, I think is an encouraging trend for us, which is the category management, capital scale and fresh food capability on their own-label brands. All those customers being brought to a part of the market that previously wouldn't have had the credibility or capability to do fresh food -- fresh chilled food products like may happen in the future. So we're all for this trend and delighted to work with our customers where they've got incremental new opportunities coming out of that.
We'll take our next question from Cathal Kenny from Davy.
Just 1 question for my side. Previously you had called out [indiscernible] to our conversation point, gross saving from a margin perspective. Just wondering, could you update a bit on that, particularly in the context of how you anticipate that being phased to the current financial year?
Yes. I mean, Cathal, like we feel it's going -- proceeding to plan. There's 2 elements just to remind people of the financial effects. There's the overhead reduction to the organizational changes, and then secondly, the impact of a refocus and quite a signification investment into operational effectiveness. So we still stand behind the 50 to 100 basis points and we were hoping to try and push the gross effect to the upper end of that range. But in terms of delivery in the year, clearly it will be second half weighted. But we will be clearly talking about what that means, which trajectory into FY' 19 later on in the year.
Our next question is from Darren Shirley from Shore Capital.
I mean, you just probably answered what I was going to ask to Cathal's question, but I just wanted to get you to confirm that -- I mean, in terms of UK margin accretion, I mean that's not all being driven by your exit from cakes. There is going to be the underlying margin progress from the better coverage of new volumes. Also, could you confirm whether the business you're getting through these third-party distribution agreements, would they be incremental to margin as well?
Yes. So we don't really kind of -- as we've spoken to you before, Darren, we are not really focused hugely on just return on sale as a measure of margin. So the exit of both Hull or Evercreech will obviously have a benefit on return on sale. I think the more important thing is how do we feel about the operating leverage, particularly in Food to Go as we got less activity, a higher focus on conversion, et cetera. And we feel good about that and I link that back to what I said to Cathal in that regard, in that we feel good that trajectory is as we guided at the backend of last year. I mean, as Patrick described on the third-party distribution part of the business, it's an ancillary part of our overall offering to our Food to Go customers. As you would expect, what we receive is in terms of contribution reflects the value add that we gave, which is predominately distribution. So it is lower return on sale. It's single-digit lower return on sale, but a good return on the assets that we've invested in for our distribution business.
Can I just ask you 1 on -- then on the US as well. I mean, obviously you've done this review of your manufacturing infrastructure. Does this reflect the change in your views and the opportunity mix between frozen and fresh? You announced you could be more focused around the frozen and ambient rather than just the fresh. Has that got any margin implications going forward, because I think you guided that where you were bringing some of the UK knowhow to the US there was a long-term margin potential there?
Yes. I mean, there is a ton in that. I mean, Darren, the best answer I can say is that, if I were to say to you that our points of view were not changing with increased experience in the market, you would be rightly worried about what the hell we were at. What I would say is that we are evolving our view on where the biggest opportunity for us is and how we should pivot our network and our customer relationships against that in the States. I don't think, though, it is as simple as more frozen, less fresh, because actually I think 1 of the most critical things for us in terms of opportunity and in terms of the discussions we are having with our product development team and our customers in the States right the way across the spectrum is what constitutes fresh. Because if you speak to Kraft, for example, they will rightly view what we are doing together in Lunchables has been very much fresh, although that's 60-day life fresh. Similarly, if you talk to -- in contrast, if you talk to Starbucks -- and the direction will travel now around the sandwich range that we are doing for them and where they are prioritizing growth, it's against programs like Mercato, which is incredibly short shelf life fresh, 1 day life on product. And so you have a spectrum across fresh that spans everything from products that are -- need to be consumed within a day of manufacture to ones that run for 60 days or longer. And if you were to ask I think our best judgment as to where growth opportunities look like over time in the States, I think it probably is more in fresh, but against that broader definition, than in frozen. We are delighted with the frozen business that we've got. We are continuing to track now obviously the -- it's the centerpiece of our relationship with our largest US customer, indeed largest group customer now. But I think you absolutely can expect us to very much have a portfolio that views fresh as really important in the States, but probably leaning more towards products that has greater life to us and therefore greater reach in terms of distribution and the potential for greater scale than the very short life products that some of us with a kind of UK hat on would have grown up thinking about when you start with the definition of fresh.
It appears there are no further questions at this time. I would like to turn the conference back to you for any additional or closing remarks.
Yes. I mean, just to thank everybody for joining the call. We were delighted both with the attendance on the call and the number of and specificity of questions. So I hope that has given you a greater sense about how the business is doing.I mean, just to summarize, this is a -- we think we've had a nice start to the year in quarter 1. What we have delivered is in line with the expectations that we had for the business as we went into the year and in line with the guidance that we would have had at the start of the year.And we've got tons still to do in the rest of the year. We've touched on those themes in the Q&A in particular. But overall, the business is in nice shape and we'll continue on the path that we are on. And we look forward to talking again to everyone when we release our interim results on the 22nd of May.So thanks for joining us and we look forward to meeting you all soon.
This concludes today's call. Thank you for your participation. You may now disconnect.