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Okay. Thank you. 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 for our Q1 Trading Update Conference Call, which covers the period to 28th of December, 2018.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. [Operator Instructions]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. Good morning, everybody. It's Patrick Coveney speaking here. For those of you who don't know me, I'm the CEO of Greencore and I'm joined at the Q&A element of this call by our group CFO, Eoin Tonge.The purpose of this call is, over the next 10 minutes or so, to provide some more color on today's trading statement and then for Eoin and I to field any questions that you have. We believe it's a relatively straightforward statement and as such I'd anticipate both the introductory comments and the Q&A finishing by about 9:00 this morning.In summary, we've made an encouraging start to the year, and specifically, we are executing well against all of the business and organizational objectives that we've had for the year so far.In particular, this morning, I would like to draw out 5 key themes: firstly, our good revenue performance during the quarter despite a more muted period for the overall U.K. market, particularly in November; secondly, how we are progressing against our organizational, commercial and operational objectives; thirdly, to provide an update on the various capital management initiatives that we've undertaken post the disposal of our U.S. business, a disposal which completed during quarter 1 at the end of November; fourthly, our continuing preparations for Brexit; and finally, reaffirming our outlook for the financial year 2019.Let me now draw out each of these a little more. Our strong relative growth was delivered in the context of a U.K. grocery market that had another challenging quarter, characterized by very competitive market conditions seen at customer level, a high street consumer that remained cautions, most particularly in November and ongoing inflationary pressures.Within this context, we delivered good pro forma revenue growth and continuing operations of 5.8% in quarter 1, an encouraging start to the year. Specifically, we achieved pro forma growth in the Food to Go categories, in which we trade of 6.4% and we achieved pro forma growth in the rest of our continuing operations at a level of 4.7%. We were happy with our performance in Food to Go categories in a period that is not as seasonally significant as in other quarters.The components of pro forma revenue growth were broadly similar to those experienced in FY '18 and we continue to outperform the broader category. We made excellent progress with each of our customers in these categories. Food to Go propositions continue to be a focus for all of our customers, and we are confident in the long-term growth dynamics of these marketplaces, as we've guided and spoken about in the past.Elsewhere, the 4.7% pro forma revenue growth in the rest of our portfolio was a positive performance against what was a tough comparative period. We had decent growth across most categories, but specifically we saw strong volume growth in our cooking sauce business, as own label propositions continue to increase their penetration in the category. More broadly, we were delighted with the progress that we're making against our organizational, commercial, operational and wider financial objectives.At an organizational level, the U.K. senior leadership team is batting down well and now leveraging the combined scale of the new structure as they engage with customers. We executed well in quarter 1 on our plan to review and reduce central costs post the disposals of our U.S. business.Commercially, and as we noted earlier, we have many initiatives in train with customers focusing on growth. In addition, we are progressing to plan with the exit of our longer-life ready meal facility in Kiveton and improving overall ready meal performance.Operationally, the efficiency programs remain on track and are delivering against internal expectations. As we said at year-end, the management focus now is on extending these programs across broader sets of our supply chain. This continues to be an important lever to mitigate against raw material and labor inflation, which in aggregate were in line with our expectations for the quarter. Each of these initiatives underpin our financial performance and business objectives for the full year.I want to now provide an update on capital management. Firstly, we completed the U.S. disposal on the 25th of November, and as such, there will be 2 months of performance presented as discontinued operations in our FY '19 results. The financial impact of the net proceeds, capital return and leverage reduction will all be incorporated in the performance of continuing operations. As most listeners on this call will be aware, our tender offer program to return up to GBP 509 million of capital to shareholders is subject to shareholder approval at our AGM today. With the tender offer scheduled to complete at 1:00 p.m. today, we expect to update the market on the details of this tender offer on Thursday.During January, we also completed the refinancing of our primary debt agreements with our lending group. We are happy with the structure and terms of our new agreements. And as of today, we have GBP 462 million of committed facilities, with a weighted average maturity of 4.7 years. Taken in aggregate, these debt facilities position us well to deploy our dynamic capital management approach. Given the balance sheet and underlying cash generation that we have, we believe we have appropriate resources to deploy over the medium term for organic and inorganic opportunities as they arise and execute against the dynamic capital management program that I referred to earlier.Moving now to Brexit. Our preparations for Brexit continue in earnest. Standing back and just giving you our overall point of view, as I have said and we have said many times, we, as a company, are relatively agnostic to the final Brexit solution, assuming a smooth transition. Clearly, we would be concerned about a transition that is not smooth. Over the last few months, we've been working on multiple fronts to assess and mitigate against the impact of various scenarios that may occur.In almost every instance, we are working hand in glove with our customers to ensure that our solutions match against their solutions and that we have the best possible chance to have high-quality products available for consumers on the shelves regardless the exit scenarios. We will continue to work closely with our customers and with our suppliers to prepare contingency plans in this regard, and clearly, that's the heightened area of focus for us over the next couple of months.I will conclude then with a brief commentary on outlook for the rest of the fiscal year that we have reaffirmed this morning. As noted earlier, we have made an encouraging start to the year. We expect our revenue outturn for FY '19 to be driven by continued underlying growth in our key Convenience Food categories. We anticipate that operational leverage will be driven by this revenue growth. And that we would have improved operational performance across the business and that the review of overheads following the disposal will generate positive returns. The strength in balance sheet continues strong cash generation of our group, leave us well positioned to allocate our capital sensibly across organic and inorganic opportunities as they arise. And we also reiterate the healthy outlook for underlying cash generation and returns across our group.Let me conclude by saying that our next results update will be our interim 2019 results, which are due about on the 21st of May. So hopefully, that update helps.And with that, Eoin and I are happy to take questions from the participants on the call.
[Operator Instructions] We already have some questions. The operator is just taking their names. [Operator Instructions] We already have your first question. It's coming from the line of Karel Zoete.
I have 2 questions. The first one is on the terms of the refinancing. Can you update us on interest rates and you're now paying with stronger balance sheet? The second question is on the non-Food to Go part, there you saw an uplift in the growth rates. Could you provide some more insights why growth was better in the first quarter?
Sure. Karel, it's Eoin here. Why don't I take both questions. So firstly, on the refinancing. So -- I mean, as you can imagine, quite a lot of activity from a treasury perspective post the disposal of the U.S. operations because effectively we've designed a whole new capital structure in essence. The refinancing of our primary deficits, which we completed just literally yesterday, were largely in line with our previous terms. And I think it's fair to say, you are right in saying that you do get a benefit in terms of spread versus when you operate at lower leverage and we will get that benefit, but it's in line with the previous credit profile and credit conditions, if you will. So our average spread, I think, at the back end of last year was 2.3%. So it will be a little bit lower than that, which is good. And in terms of growth in non-Food to Go, I mean, it was good performance across the board. We had good -- very good performance in our cooking sauce business, which is benefiting from business wins, but just general overall performance. We had a small win in our soups business as well. But if we look across all of the category, actually, they performed relatively well and kind of in line with category growth rates there.
We have your next question. It's coming from the line of Jason.
Jason Molins from Goodbody. And I guess, just starting off on the Food to Go and on the growth that you have there, maybe if you can just talk about the trajectory of third-party distribution revenues and what contributing factor they had in that period -- in this period rather, but also what we should expect as the year progresses, given trajectory that we saw last year? And then, just quickly on the non-Food to Go, can you maybe spread out the 4.7% between volume and pricing? Obviously, pricing was quite strong last year versus maybe a more muted volume performance, but has that reversed somewhat this year?
Jason, it's Patrick. Yes, I mean, so just to -- I mean, just to recap, of that 6.4% pro forma growth in Food to Go, about 2.5% was manufactured goods and about 4% was the distributed items that go alongside the manufactured goods to our customers. I think the -- that will move around a little through the year because we will be the growth and factored moderate somewhat as we lap against some of the new business that we signed up last year as we go through the rest of the year. We're hopeful that you'll see manufactured growth tick up as we go through the year for a whole variety of reasons as we're -- given the initiatives that we're working through with customers. So overall, I'd anticipate that the -- that growth level of north of 5% that we've been seeing it for a while in Food to Go through the rest of the year is where it will come out with -- as we transition through the year. The relative contribution of manufactured probably been a little stronger and factored -- moderating somewhat as we go through the year. On non-Food to Go, the -- I mean, it's mainly volume and it's mainly cooking sauces. It's probably the best way of putting it. And there is some price recovery, but the truth is, the -- in context of where the market is, that kind of near 5% growth and that part of our business is pretty good. And the real stellar performer in terms of growth there is the -- is our ambient cooking sauce business in Selby, where we just had very strong volume growth.
Okay. If you don't mind, can I just ask a, sort of, follow-up question around Brexit and the contingency plans that you're working through. I guess, I see a lot of uncertainty and you mentioned that in the statement. Where do you think just generally and you said in the category, if you, around sandwiches versus say other Food to Go items, salads, et cetera that leaves you better or worse protected from the no-deal scenario with regard to sourcing products and materials?
Yes. I mean, I think the -- as I said in the introductory remarks and we think the business is pretty well set up, assuming there is a managed transition to some Brexit solution, all right? And so by that I mean, in terms of the 70% to 80% of our raw material and packaging coming from within the U.K. labor force that's not particularly seasonal, and so the -- and a good match of sterling exposure on both revenue and cost side, so we think we're -- and the direction of travel towards local sourcing, which we think will follow as well. So all of that, I think, sets us up nicely to continue to progress with our agenda, assuming there is a managed transition to something by way of Brexit solution. If there isn't a managed transition to something or if there is a no deal or hard crash out at the end of March, then I think the whole U.K. food industry and large chunks of U.K. economy are going to find things quite difficult. And then I think I would reference the letter from the BRC to Parliament yesterday as kind of setting out broadly what some of the key features are in terms of the pressure on fresh ingredients and in particular, the seasonal pressure around fresh ingredients at the end of March, given the growing patterns in the U.K. for produce and fruit and vegetables, and most particularly, produce. Now if I come narrowly to the principal sourcing challenge for Greencore in a hard Brexit scenario, it will be around fresh produce and, in particular, around various forms of lettuce or leaf of varied kind. Broadly, we think we have already got in place good contingent solutions for pretty much everything else. And so the choices that we will have and those contingency solutions that we're progressing on a daily basis now really goes to whether we would take on board 2 different things: one, a conscious decision to pivot aspects of our sandwich range away from components that require, in particular, specialist leaf solutions like rocket or fresh spinach; or two, and a little bit more radically, whether we commit now to actually air freighting portions of our fresh spinach and rocket requirements. Clearly, in order to do that, we will need customers to sign off on the cost implications of those solutions, but they are actually available. And so that's the spacing in which we're in. And our sole focus will be having available product on shelf. I could take you and everyone else on this call through a whole lot of details on this, but there are just so many unknowns here about both around what the -- whether there is, there isn't a no deal Brexit. But frankly, the other piece of this, I think, it will be a challenge for all of us is, what happens to shopper behavior in the lead into the end of March and immediately thereafter. In other words, the kind of presumption that many people appear to have here is that the task is how do you maintain supply assuming a maintenance of current demand patterns. And I think it's unlikely that demand patterns would be unchanged in the event of a hard or no-deal Brexit. And so again, we got to try and do some work around what SKUs and ranges to prioritize in the event of all of that. So lots of different things are going on. I think and as far as we can be we're doing everything we can and the nature of a business, like ours is that what we do, we have to do absolutely hand in glove with our customers and that's how we're working this.
We now have your next question. It's coming from the line of Nicola Mallard.
Just a quick question on the Kiveton exit. You mentioned, obviously, you're still working towards [ G&A. ] Was any of that in the first quarter? Or is that still something that we'll see walk through the more reported numbers, I'm guessing, through the rest of the year? And secondly, I know you said you'd update the market on the capital reorganization, but should we be prepared for any special dividend at all from what you can see so far?
Nicola, it's Eoin here. I'll take both of those questions. So I mean, the impact of the Kiveton closure, we said previously the impact on the year will be about GBP 20 million revenue. And in the quarter, it wasn't that significant. It was, sort of, kind of low single-digit millions in the quarter. And we have, as you've seen, stripped that of our usual bar at pro forma. So we've adjusted the pro forma to reflect that, so just to get a better underlying like-for-like. And just by way of note, as Patrick mentioned, the process in terms of that project is progressing in line with plan and well, so we're happy with that. And in relation to the tender, the -- I mean, to be honest with you, Nicola, we're not going to be able to -- it's a little bit like the Brexit conversation. We're not going to be able to speculate at the moment in relation to what the result is going to be. I think we just going to have to go through, first of all, what the actual results will be, which we will know, obviously, over the next 48 hours or so and communicate to the marketplace on Thursday morning. And at that point in time, we will communicate exactly what the plans are for any sort of remaining demands to capital to repay if any.
We now have your next question. It is coming from the line of Clive.
It's Darren actually. So just going back to your comments around demand patterns, Patrick. I wonder if you could characterize where we are now? Obviously, as October and November were particularly tough going into Christmas. I mean, that's for the Christmas spend. Have we returned to those sort of ready demand and trading conditions or did we more normalize, which you suggest?
Yes, Darren, I mean, it's -- I mean, I want to be careful about attributing cause and effects to different things and -- but the fact is we've seen them over the first 4 months of the year are that the market was soft enough in October and November, but it was more buoyant in December. January has actually been a decent month for us, but I am also conscious that on a relative basis, we have the beginnings of some of the kind of real cold snap in January of last year, which we have not had in January of this year. So we've been encouraged with the trading trajectory both in December and since. But having done this for 11 years or so now, I tend to be very careful about drawing any real conclusions for the rest of the year from what happens in January because it can bounce around a lot for a whole variety of different reasons and it's really once you come into February or March that you get a better sense for how the spring and rest of the summer is set up. So -- but undoubtedly, as we referenced on the call, we were pleased to see an improvement in December versus the end October and November trading patterns.
Now we move on to your next question. It's coming from the line of Doriana Russo.
Doriana Russo from HSBC. Just wanted to come back to the trading patterns that you have just commented. Have you seen any major difference in terms of performances across ranges, low end of the market versus high end of the market? And can you give us some color in terms of what you think might be working better than others? And also, in terms of what you have seen in Ready Meals, you said most of the 4.7% performance in the non-Food to Go was coming from cooking sauces. Can you give us some sort of a comment on how your Ready Meal is performing at the moment after your exit from long shelf life products, please?
Yes. Doriana, again, I hesitate to point out any themes beyond the obvious that you'll be seeing elsewhere. So I mean, we -- in general, we're -- as we've seen for many years, we're encouraged to see that our Food to Go business is trading well and that, that performance is running across most customers. There are always puts and takes as ranges change or different ordering systems come in and out with different customers, but overall, I think, it's a pretty broad-based level of growth consistent with the consumer trends and consumer preferences that underpin Food to Go demand. Specifically on Ready Meals, we -- our Ready Meal business has been relatively flat in the period. As I said earlier that the really strong growth driver in the non-Food to Go parts of our business has been our cooking sauce business. There are some mix implications in Ready Meals. I think the encouraging component of that is that the somewhat more premium fresher higher-quality propositions that we're driving are doing relatively better within Ready Meals. And so one of the kind of the factors underpinning the reset that we're putting through our Ready Meals business that we described for the first time back last July, August, was this condition that we have is the fresher, more premium, higher-quality, better-tasting, better-merchandised Ready Meal range is where we ought to be and that's why we scale back somewhat on the kind of longer-life retorted items. So they are the main things that I would say. And we are truly a multi-customer business across the key categories in which we play and it is our job to make all of them successful and that's what we're trying to do.
And Doriana, it's Eoin here. Just to add to that, the mix effects that we saw in our Ready Meal business in the first quarter were carried over from the back end of last year, but there has been no material shifts and mix in the quarter at themselves.
Okay. So shall I take that, that you haven't really seen a major divergence of customer demand across different levels of product because there was -- okay.
We now have the line of Cathal Kenny.
Cathal Kenny here from Davy. Three quick questions from my side. One, just in terms of the outlook for the sushi business cognizant, there's quite a bit of capital gone into that over the last 2 years. Secondly, just to follow up on Ready Meals. How should we think about the rebuild of profitability within that segment this year? And finally, again, related question on just the phasing of operating profits this year. Is there anything own you would call out kind of relative to history in terms of the seasonality of profit delivery?
Yes. Cathal, why don't I just take the phasing quickly because I think it's fairly straightforward answer, now it's similar. I mean, we're -- obviously, with the disposal of the U.S. business, we sort of go back to what the historical phasing of our U.K. business is. So it is second half weighted business, particularly in Food to Go. And so we're not really -- we're not anticipating any material shifts to that. And maybe Patrick, you want to take the first two.
Yes. Cathal, by the way, I'm glad to clarified you where there because it was confusing to us all. I mean, we're pretty positive from the outlook for sushi, in particular, the work that we're doing to get value from the investments that we made into Northampton sushi. So the -- it remains a relatively modest part of our -- in total volume terms of our Food to Go business, but important in a variety of different ways. And I think we've got a nice plan thus to continue to get value from the investments we made, particularly the investments in Northampton. And certainly, if you are in-store with our sushi customers and, in particular, the principal sushi customer from which we source product in Northampton, I think, you'll see some pretty cool stuff over the course of the rest of this year. On Ready Meals, I mean, I think, the view that we have here is that we're executing this reset through this year with the phased exit from Kiveton and the various different moving parts. I think the most prudent planning assumption is that Ready Meals will -- in terms of its profit contribution will probably remain flat year-on-year as we deliver through those changes with the step-up in performance in Ready Meals anticipated for FY '20 rather than FY '19. And overall, I think that some of those kind of reset plans can be complex to deliver. And I think you'd have heard us be pretty bullish on how we're getting on operationally against the delivery of that plan, but we're certainly cautious enough about the phasing of the kind of rebuild and Ready Meal profitability. And I think it will be more in FY '20 than FY '19 opportunity for us.
We now have your last question. It's coming from the line of Damian McNeela.
And just take a couple of quick ones for me, please. Firstly, can you just remind us of the level of labor inflation that you're expecting to see this year? And what given current FX rates you expect raw material inflation to be, please? And then finally, as, I think, Patrick you mentioned that you're pretty encouraged about returning to that sort of core 5% growth in Food to Go due to some initiatives that you've got going. Can you give us a bit more color on that? Whether that's in terms of the timing? Is that sort of H2 weighted? And whether that's with some new customers or with the existing customer base, please?
Yes. Thanks, Damian. Just to -- so I mean, I think, we expect our direct labor inflation to approach 5% and our raw material on packaging inflation assuming a continuation of broadly similar exchange rates to where we are at the moment, with the order of 2 to 3. And importantly, all of our guidance and all of our initiatives that are designed to enable us to hit the financial metrics that we've been speaking about while handling inflation at that level in those 2 parts of our cost base. On the growth in manufactured sandwich units and the kind of 5%-or-so, I think that inevitably bounces around a little bit month-on-month and quarter-on-quarter, but I think, as per my comments earlier and when Jason asked me about that, I think, you will see the relative contribution of manufactured volumes within the overall growth components of Food to Go strengthen as we go through this year and our grounds for believing that are a combination of new commercial activity and particular programs across sandwiches, sushi and salads that we've got locked in for the rest of this year. So that's probably all I can say on it.
So is new commercial activity with existing customers though? Or is it with new customers as well?
It's a combination of both. And some of that, of course, is the annualization of things that we landed in -- at various points last year too. So again, I want to be a little bit careful here. I mean, we obviously have a very significant overall level of market share, as I think everyone on this call would know. So the scope for adding material with new customers into our business is limited. So the really big driver here is achieving strong like-for-like or same-store growth in sandwiches, salads and sushi with our existing customers, and we think there is a ton of scope to do that through availability programs, promotional programs, new range launches and it's the really tightening up ordering and supply chain issues, and we just got a lot of that work going on with each of our customers. And I think we're pretty encouraged by what we're seeing and what we're planning for the rest of the year.
We have one last question. It's coming from the line of Martin.
It's Martin Deboo, Jefferies. Sorry, there seems to be a few problems on the line, my apologies. Maybe a just quick follow-up to Damian's question. You mentioned 5% wage inflation. Can you just give an indication of how much of that is feed through national living wage and how much is sort of underlying wage inflation? It's probably difficult to be scientific, but any indication you can give would be helpful.
It is difficult to be fully scientific, but the vast majority of it is to do with the flow through of the national living wage. As we said many times before, it's not the actual national living wage itself, it's the fact that a lot of our salaries are set by reference to the national living wage. So as the national living wage increases, you get the flow through effect into the wage structure. It is a fairly big adjustment scheduled for April. And on the program, it goes to GBP 8.20 and that we budgeted for that and that's what reflected into that number. So there's no real new news actually on labor inflation, Martin. That's the big movement really. And we're not really seeing anything else that's different other than that one.Thanks to everyone for joining and apologies if it's been just administered or it's a little bit difficult for people to ask questions, and we'll make sure to sort that for next time out first. Listen, as we said on the call, we'll be updating the market on Thursday in relation to the outcome of the tender offer, and our anticipated next trading update is at the end of May when we'll have our interim results. But thanks to so many people for joining us and we look forward to speaking to everyone soon. Bye-bye.
Ladies and gentlemen, this does conclude our conference call for today. Thank you all for participating. You may now disconnect.