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Good day, and welcome to the Greencore Group plc conference call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Jack Gorman, Head of Investor Relation at Greencore. Please go ahead, sir.
Okay. Thank you, Sylvia, 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 at short notice for our business and trading update conference call this morning. I'm joined on the call today by our CEO, Patrick Coveney; and our CFO, Eoin Tonge. In a moment, I will hand you over to Patrick, to give an overview of the announcement today and after that, we will open up 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.
Thank you, Jack, and good morning, everybody. I'm going to take just over 5 minutes to point to some highlights from the trading statement that we've issued this morning and then Eoin and I will take questions from everyone together. I guess the key features of the statement are threefold: One, we're announcing a restructuring of our U.S. network to match the capacity that we have there to current demand and to the confirmed commercial pipeline that we sit on. Secondly, we're announcing some changes to both our leadership model and specifically to our team in the U.S. And thirdly, we are updating our FY '18 outlook for adjusted earnings per share to 14.7p to 15.7p to reflect these business developments and current exchanges. Before touching on the key features of the statement, I did want to make a couple of high-level points. One is just to state that in our view and the view of our board, the shape and direction of our business does remain unchanged. You will note in this statement that we have either affirmed or reaffirmed several times the performance, the capability and the growth prospects of both Peacock and the CPG parts of our business. You should also note that, although we make a small reference to developments in the U.K. our view on the U.K. is not changed, and there are no material changes to our guidance as it relates to the U.K. And finally, you'll see reference in our outlook statements to cash generation and leverage reduction, which is a big area of focus for us, driven both by profit growth and CapEx reduction. If I turn to the specifics of the statement, the -- what we are doing here is making some very specific decisions in relation to the shape of our U.S. network. Central to our U.S. network is Peacock Foods, which we believe greatly enhances the scale, the operational capabilities, the financial performance and the growth prospects for Greencore U.S. That is a large network of approximately 2.5 million square feet. And what we're doing here is communicating a number of decisions that we're making around the utilization of that network. In our 2017 results and in our 2018 trading update in January, we did flag the continued low capacity utilization at some of the original Greencore US sites. And so what today's announcement sets out is a couple of specific actions that we're doing in that regard. Firstly, a decision to take Rhode Island out of production, effective the 25th of March, and then to look at how to repurpose that site from here. That site represents approximately 4% of our manufacturing footprint in the States and 2% of the pro forma revenue last year. And this decision will address the operating losses that that site has incurred during the years in which it has been in production and continued into FY '18.Secondly, and I've put Jacksonville and Minneapolis together, and these are sites that have been -- that have had utilization challenges over the course of the last 18 months, but which we are pleased to confirm are stepping up their utilization and associated economics and we set that out in the statement. More broadly on our commercial pipeline. Again, we flag in the statement that we have well-advanced plans that we believe will secure significant new business across several sites in our network. Most particularly focused on deployment into the sweet spot of where our network fits, which is in the Midwest region. However, the contribution that we expect from this business development activity will flow through in the first half of FY '19. And the timing of these wins is, therefore, a delay versus previous guidance on an expectation. That's I think a function both of how we onboard that business and when it starts to contribute possibly financially. But it's also a function of some quite specific decisions that we've made around how we want to focus the business in terms of its delivery in terms of the part of the market that we want to be in.I'm going to move now to talk about changes in our U.S. leadership team. This is, as I said a minute ago, a function both of revising our model and also some specific changes in personnel. I'm going to step into be more involved in the strategic organizational and commercial leaderships of our business going forward, spending approximately half my time in the U.S. I'll be working very closely with Chuck Metzger. Some of you will have met him. He's been very visible during analyst and investor visits in our investor offsite in Chicago, last June. He was the COO of Peacock originally. He is a very high-quality, credible leader of the business. And he will take day-to-day responsibility for leading our U.S. business and will report to me. Chris Kirke, who some of you will know, who is the CEO of Greencore U.S. is leaving our group to return to live and work in the U.K. But he is transitioning his relationships to Chuck and I and the rest of the team. In parallel to that, we had already been planning for the delivery to bring on board several additional leaders into our business in the areas of commercial, finance, strategy and HR. These -- this additional capability, these additional resources are now in our business, and they combined with the existing Peacock operational skills and some of the investments we're already making more broadly in areas like quality, NPD and so forth, we think significantly strengthen Greencore as we look ahead. And if I turn finally to outlook, touching first on the U.K., we continue to anticipate good organic growth and a modest improvement in operating leverage in FY '18. We do note the somewhat softer volumes in Q2, and the particular weather impacts that have impacted on that, but don't believe it's material to the fundamental performance and prospects of our U.K. business.In the U.S. again, we know that the core CPG parts of our business, the large part of our portfolio is trading in line with our expectations. And again, we reaffirm the confidence that we have around the commercial developments of that business and what that's going to mean for the financial performance, that component of our business in the second half of FY '18 and into FY '19. However, there are 3 factors which contribute to the fact that our expectations for profit growth in the U.S. in FY '18 have moderated. The first is the weak financial performance of the underutilized original Greencore sites in the first half of the year. The second is the timing and profit contribution of new business. And the third is the impact of marking sterling-dollar exchange rates to current levels. We will have a modest level of cash cost associated with resetting this U.S. network as per this statement and the associated changes, which we estimate at about GBP 3 million. We may take a noncash asset impairment charge to this year's income statement for the network restructuring. The scale of such a charge would be determined by the prospective future use or otherwise of these network assets. So if we pull that together in terms of what it means for adjusted earnings per share, we see -- we anticipate an adjusted earnings per share of being in a range of 14.7p to 15.7p with approximately 2/3 of that contribution coming in the second half and that contrasts with the current market expectations of 15.7p to 16.6p. Importantly, the group also anticipates that it would continue to progress towards the benchmark leverage ratio of approximately 2x net debt-to-EBITDA by the end of the fiscal year. So with that, I'm going to stop there, and Eoin and I will happily take questions from people on the call.
[Operator Instructions] Our first question comes from Jason Molins from Goodbody.
Few questions, if you don't mind. Firstly, you've obviously maintained the guidance around your leverage and staying around the sort of 2x net debt-to-EBITDA. Is there anything and bear in mind given the cut to earnings and earnings this year. Is there anything on the cash flow side that you see helping to offset the sort of decline that we're likely to see from the EBIT number? Is it around [ lower ] CapEx, working capital? Any thoughts on the dividend at this stage given the announcements and that would be helpful? And then, just in terms of Rhode Island and the potential repurposing, and -- when are you likely to make a sort of final decision on that? And if possible, can you remind us what capital you have invested to date in that facility or what is it sort of marked at in terms of book value? That would be helpful.
Yes, Jason, it's Patrick. So let me jump in on Rhode Island, then Eoin can then -- can talk on the -- about leverage guidance. And -- so the -- there's approximately $40 million of assets in Rhode Island. Our intent here is to -- and our decision here will stop the operating losses and pretty much all ongoing operating cost effective the 25th of March of this year. We will then take our time to figure out what the appropriate use is for those assets and for that site within our network. We have -- as I know we've indicated before, we have had inquiries of various kinds, commercial opportunities of various kinds. But I think having stemmed the operating loss and economic challenges of the site, we'll take our time to try and figure out whether the site can be repurposed. If so, for what use? And in parallel to that, we'll investigate other options to maximize the value of the assets that we have there.
And, Jason, in terms of cash flow, so clearly, obviously, we call out the reduction in operating profit that will impact the cash flow and the leverage calculation for this year. To offset that, we do expect to have a reduction in capital as we push out some of the commercial activity, particularly in the U.S. So where we may have had previous guidance of 90 to 100, I think I would adjust that to somewhere like 80 to 90. And so we will have that adjustment. And clearly, from a -- we are calling that EPS range on an FX rate of late 130. So approximately 139. And clearly, we'll have an adjustment to our net debt number, reflecting that currency translation at that rate.
We will now proceed to our next question from Charles Hall from Peel Hunt.
Could you just give an indication of your range of expectations for the new business wins, both for calendar 2018 and calendar 2019, just to give us an idea of the scale that's coming through and the timing of it?
Yes. I mean, we've given aggregate guidance, Charles, around our U.S. business having high single-digit volume growth or better. And that's where we would believe it to be. The -- one of the things we're learning with the -- particularly the CPG part of the business is that, those business wins tend to be quite lumpy in nature. The step up that we have at Kraft Heinz, for example, in the quarter 3 of last year, that would be a good example of that. And certainly, the opportunities that we're working on and planning to deliver would be material in the context of individual relationships we have with customers. And as they land, will be quite significant step ups into the site in which they go. So -- and so I think you'll see elements of it that are quite lumpy. But in aggregate, what we'd be looking to do would be to have a volume and revenue step up in high single digits.
And so if it's in high single digits that's pushing the 2019 number, the contribution for this year is, what, 1% or 2% or something?
Yes. I think -- and you have to look at the component parts, Charles, in relation to this year. So -- and on an underlying basis, we'd actually still believe we'll have high single-digit growth rate across our core part of our portfolio. That is offset by, as we know, a business loss we've had -- we talked about in Jacksonville, at the back end of last year. And then, it will be a little bit moderated by the impact of coming out of production in Rhode Island, which will account for about 1% to 2% also. So it -- that will all bring it down to a kind of a lower single-digit rate this year.
Our next question comes from Karel Zoete from Kepler Cheuvreux.
The first question is on the delay of the U.S. profit step up. Because in November, and also at the Q1 update, you sounded quite upbeat on the commercial momentum in the U.S. What has happened basically in the last couple of months or weeks? Why you now suddenly sound much more concerned on the impact of profitability of those new contracts in 2018? That's the first question.
Yes. Karel, I mean, I think the -- I guess I separate the view we have on the profitability of new business from the timing of when we landed. So I think what's happened here I think is 2 elements. One, the -- there was a level of aggregate new business activity that we have pruned back in order to have a level of focus around the things that are really going to economically progress our business and that reflects on work that the leadership team and leadership model that I have described have been -- that we've been working on hard. And then, secondly, in particular, in relation to the step up of CPG business, which is the core part of our business, we are absolutely clear about the positive economic potential of that and the scale of opportunity for us around our core customers. But it's just taking a little bit longer for that to transfer and be onboarded into our network than we might have thought was going to be the case at the turn of the calendar year.
Our next question comes from Martin Deboo from Jefferies.
Martin Deboo, of Jefferies. 2 questions, 1 sort of around the U.S. and 1 rather a technical one. Patrick, can you talk about the key customer relationship in the legacy U.S. in the light of Rhode Island? I presume that means you're no longer serving that customer in the Northeast. But just anything you can say on the general relationship there would be helpful. And the second one is a really technical one. You're guiding to 1/3, 2/3 EPS. I'm conscious you get the back-end rights issue dilution in the first half. So is that guidance reflecting that or should I think about 1/3, 2/3 more as a net income split and then the dilution does what it does below that? Just some clarity on that would be helpful.
Martin, let me deal with the first question, and, Eoin, you can jump in on the second. And yes, I mean, the key customers that we had in the Northeast were the 2 large customers of the original Peacock business, which were Starbucks and 7-Eleven. We continue to have good regional businesses with them in other region. So coming out of them, we've obviously worked hand in glove with those 2 customers around this change in relation to Rhode Island. We don't have an ability to supply that region with fresh products from other parts of our network economically for them. So it was important that they have the space and ability to reconfigure supply for their stores and shops into that region, plus the other parts of our business with both of those customers in the Midwest and on the West Coast remain solid and are actually trading fine.
Okay. And then EPS?
Yes, Martin, so I mean, that statement does relate to EPS. So i.e., the 2/3. Because obviously, the guidance we have given is at the EPS level. So there is an element of this that does reflect the dilution of impact year-on-year in relation to the rights issue. But actually, the predominant impacts on phasing is at the operating profit level. And typically, we are H2-weighted business. Actually, that's only increased with the addition of Peacock business because Peacock is also somewhat H2 -- not as H2-weighted as our U.K. business and that is going to be -- it does going to be a little bit more significant this year in terms of weighting predominantly because of the impacts we just talked about today, i.e., the impacts of losses in Rhode Island, and some of the other parts of legacy parts of the business, i.e., Jacksonville in the first half of the year, but also because of the shape of the profit delivery in the U.K. that I've previously mentioned and i.e. -- in January, which we had expected to be second half weighted as well. Does that make sense?
That makes sense.
We will now proceed to our next question from Gaurav Jain from Barclays.
I have a few questions. First is just on the U.S. legacy business. We have -- we're having problems there for quite a long period of time. Post this restructuring, are we clear that now it is -- now we will be at a place where this business can start growing or there might be some further restructuring down the road?
Yes, Gaurav, let me deal with that question. So -- I mean, so what we will achieve post this restructuring is, we will have -- we'll address the utilization challenges around the sites that were -- that required a step up in volume in order to perform better economically. We do have a series of sites that were partially original Greencore network in places like Salt Lake City and Fredericksburg that have continued to trade very solidly, very well in fact, for a number of years. And I think what you'll also see is that this distinction between legacy Greencore and Peacock Greencore, if I can characterize it in that way, across some of these sites will actually begin to blur. So if I take Minneapolis for example, there are customers in there that were part of the original Greencore customer set and there are now customers that -- and relationships that transfers into the wider Greencore Group post-Peacock. I think in Jacksonville, you'll see exactly the same thing where the customer -- footprints there will combine as CPG customers with -- with retail and food service customers. And that will be part of how we will move forward with a -- with -- certainly in terms of emphasis, we see the bigger opportunity in them over the next couple of years coming more around the CPG customer set, but being able to deploy that into some of these sites, which will combine customers that were part of the original group with customers that have transferred in and have been developed since we've acquired Peacock.
Okay, sure. That is very helpful. My second question is that is it possible for you to split the 6% EPS guidance downgrade into -- specifically into these 3 buckets, which you said, like what is the FX set and what is the impact from the loss of business that you thought will come in? And the third bucket is the impact from closing down Rhode Island?
Yes. Sure, Gaurav. I'll have a go at that. I think the 3 components roughly split this way. I mean, obviously, FX depends a little bit on what your frame of reference is. But our assessment would be versus consensus, would be about GBP 1 million of an impact. And the -- obviously that impact year-on-year would be more significant given that the exchange rate change happens at the back end of last year. Secondly, the impact of losses that we've carried in the -- on [ these new ] sites, principally, Rhode Island, but also Jacksonville, in the first half of the year would be about GBP 4 million to GBP 5 million. And -- and I'm going to talk sterling in total. And the -- and then the sort of the net impact of not getting business wins into this fiscal year would be sort of in and around GBP 4 million or so. And the -- and that would be just a cumulative effect there, which is, we don't have the contribution from the business wins, and to a certain extent we have invested in overhead to start to take on some of those new business wins as well.
Okay. And my last question is just on fleet cost in U.S. So a lot of companies -- a lot of food companies have warned or highlighted increased fleet costs and how it might impact their business? And that is true for retailers and for food manufacturers? Now you have said that you're able to pass on your entire raw material cost in the U.S. Is that still true or some of this loss is happening because of increased fleet cost?
I think -- I'd make 2 points about that, Gaurav. One, the nature of our commercial models mean that we are insulated from the inflationary pressures around freight for the vast majority of our business in the United States, and certainly for that key CPG component, which is the largest part of what we do. So it's not -- that is not being a material contributor to the -- our view for the year, the guidance that we've got here. Where I think that is relevant is as we look at new network opportunities, because of the -- some regional disparities around freight and the importance of actually manufacturing product close to where raw materials come from and close to where finished goods are required, I think that creates a greater opportunity actually around the Midwest region for us in terms of production and assembly growth from here that it might do in some of the more coastal locations where we've had capacity in the past.
Our next question comes from Cathal Kenny from Davy Research.
A couple of questions from my side. Firstly, Eoin, could you perhaps give a little more color on your comments around modestly reaching the U.K.? Second question relates to U.S. synergies, perhaps you could give us an update on those targets in light of today's announcement? Thirdly, just could you help us bridge the -- or give us an EBIT range perhaps or bridge the EPS to EBIT range please? And my final question is just, is there any impact on dividend in light of this morning's announcement?
Okay. Cathal, could you just state your first question again? We got the other 3, but didn't quite capture the first one.
Just a comment on the modest leverage in the U.K. business this year. Perhaps you could maybe give us some color on that in terms of just the scale of margin improvement you hope to achieve?
Yes, sure. So, Cathal, nothing really changed in that regard in terms of what we would have said at the back end of last year. So we'd expect the components of operating leverage improvement is that we would see a little bit of a reduction in operating leverage in the noncritical parts of the business to the full year effect of some of the changes we would have had in those parts of the businesses in the second half of last year. And in the -- in our Food to Go business, as we would have had less disruption in this financial year, and as we start to restructure our U.K. business into the back end of second half of the year, we'd expect to start to see an improvement in operating leverage in the second half of the year. So I think if you put all that together, I mean, I know you want me to pin me down on a return on sale number. But it's -- if we just do it on return on sale, it's probably a couple of 20 basis points type of that nature. But actually that's not really the metric we're focused on. I think if it's from an operating profit perspective, we'd expect that to grow a little ahead of revenue growth.
Okay.
So that's the first question. Just on U.S. synergies. I mean, I think, U.S. synergies, we still are on track to deliver good elements of the U.S. synergies. They are impacted a little bit by the fact that we will have some of the impacts on the retail side of things. So we have less volume to actually have procurement saving against. And I also do flag the fact that we will -- we have had investments in overheads to take on some of the new businesses that somewhat go against some of those synergies. But I think the underlying direction of synergies is still as we would have previously spoken, modestly impacted in this year. And then I think the third question was, was that bridging that to an EBIT? It's our range from...
EBIT and EBIT range.
So I guess that would bridge from -- just give me 1 second here. So it's somewhere -- I guess, if the midpoint is about mid-150s, then I guess that bridge is somewhere about the high 140s to high 150s.
Okay. And finally on just some dividends.
Yes. I mean, I would say we have an -- we've no change of dividend policy anticipated comp.
And, Patrick, just 1 final question. Just on the phasing of new business wins in America. Would I be right in saying, it's more of a Greencore decision rather than a customer decision, is that fair?
I think it's a bit of both actually. And so some of it is -- I mean, I think we are finding that the decision-making process around, and I've referenced this earlier in, I think, under Charles' question, I think the decision-making process for some of these network resets and significant move towards outsourced solutions within our CPG customer set, I think that just takes time. And you can have a very positive trajectory in terms of where you're getting to from a Greencore perspective, it just takes a little bit of time. And so that's some of the delay that we referenced, is definitely down to that. And then I think the second element is, that there were frankly some things that we, as a new U.S. senior leadership team, have decided to not do that or to not pursue in terms of putting resources against it because just the economics and strategic attractiveness of some of that stuff as we've really looked at it hard, we then -- we decided to step back from. So I think it's a combination of those 2 factors.
Our next question comes from Fintan Ryan from Berenberg.
I think most of my questions have been answered. But I'd just like to get a sense, like, Eoin, you did state the range around sort of GBP 10 million operating profit leading to the EPS guidance range. Eoin, could you give us a sense like what needs to go right to get to the top end of the range? What sort of factors could see towards the bottom end of range? Or is there -- you think there is risk that you could see materially below the range that you gave?
So I mean, I think the -- what needs to go right are the things that normally have to go right in our business that the second half of the year needs to be nicely strong. So a good summer from a Food to Go business that we got a little disruption and same in our U.S. business, particularly in the back-to-school part of the period for part of our business over there needs to be strong as well. And the -- so that would be on the top end of the range. And the bottom of the range is kind of the sort of the adverse to all of those -- to those things. And I think it's fair to say. The range reflects the fact that we are coming out of a statement upon -- on March 13th and rather than the second -- rather than a typical updated guidance that we will have at the end of May, and that reflects the sort of the nature of our business.
And just -- actually a quick follow-up. Are you seeing any heightened pricing pressures in your U.S. and your U.K. business at all, particularly given the volume constraints that you've lived through to in terms of weather?
Heightened pricing pressures. We're not seeing a, Fintan, any change in commercial emphasis in terms of our customer engagement around pricing or margin. It's always a bit of nip and tuck associated with that. But the -- our model continues to work well given the market shares that we have, the assets that we've got invested, the balance of sites dedicated to individual customers versus sites that are shared in order to give cost advantage. And the strategic importance of, in particular, the Food to Go product range with our customers. So we noted the somewhat softer Q2 for a variety of reasons including weather, but we actually feel -- we feel good about our U.K. business and our U.K. relationships if we look into the rest of the year.
Our next question comes from Nicola Mallard from Investec.
Sorry, they've already been answered. Thank you.
So our next question comes now from Darren Shirley from Shore Capital.
Let's just in terms of -- if I consider the U.K. I mean, you just highlighted there softer volumes, which were -- poor weather was one of the drags that's built in. I mean, given that follows a Q1, where I think you were talking about the sandwich markets slowing to about 3%, more or [ leveled ] out. I mean, what gives you confidence that we're not seeing a structural slowdown in that fair Food to Go or the sandwich element of that market, what do you see?
Yes. So, Darren, I guess, let me start with the caveat that you can never be absolutely certain about these things, right. And so this is based on -- our view here is based on our kind of individual and collective judgments and multiple near daily engagements that we have with our large customers, which, as you know, represent the totality of the U.K. grocery and convenience store sector. So -- I mean, what we have seen is a -- Q1 was decent, but a little bit back from where it had been before in terms of market. And obviously, we grew much more strongly than that because of some of the new business wins that we were onboarding. Q2 has not been -- has not stepped up from that if I can describe it, and then we had a few challenges, which I'm sure you know well, particularly as a fresh food supplier given some of the snow-related disruption and so forth. But as we look into the second half, we have line of sight to the orders that are coming from customers, the -- how hard the categories are being driven, and what investments are being made potentially in ways in order to have the right level of availability across formats. We're not seeing any repurposing of stores whether from fresh convenience or Food to Go. Indeed, on the contrary, we think it's been dialed up in terms of importance. And so -- and as we track consumers, we're not seeing any channel shifts or increased incidence in at-home food preparation or whatever. So you could argue that the margin that there is a -- there may be very small impact associated with the fact that there has been a bit more price inflation that's gone through and some elasticity impact but very hard to actually to join the dots on that and point to an actual -- any type of material trend in terms of what it means. So I would concede that we will have a -- we'll be more informed when we've had -- when we've gone through spring/summer trading on some of these things, but the judgment we have is that the fundamental consumer, customer and channel proposition that we run with so hard around convenience food, but particularly around Food to Go, remains attractive and remains in growth.
And then when you talk about softer volumes, I mean, is that just within Food to Go or is that across sort of all of your preferred food activities in the U.K? Because the Kantar basis -- I think the last set of Kantar basis suggests that volumes were probably the strongest since August 2016, in the supermarkets, I'm just trying to tally the two, you see.
Yes. I would say -- I think that comment is predominantly directed at our Food to Go part of the business. And it also does reflect just the impact we would have seen across all of our business and at the beginning of this month from the extreme weather.
Okay. So you already knew it may be a bit more resilient?
Correct.
So our next question comes from Damian McNeela from Numis.
I was just looking for a little bit more reassurance, sort of clarity on U.S. growth rates. Because I think sort of when you're talking about Jacksonville, you anticipate signing all that new business coming on in Q4. Is that definitely signed to come on in Q4? And then also when we're talking about 2019 growth rates in the U.S. of high single digits, how much of that is under the assumption that new business is signed as opposed to business that is definitively signed now that you know will be coming on stream for 2019?
I mean, I think, Damian, we have a mix of business that matches against some of the tests that you've outlined there. So some of that is already locked and loaded and part of existing commercial agreements. Some of that is part of new commercial agreements that are absolutely negotiated. Some of that are -- that is verbally confirmed, but to be documented. Some that is ring-fenced capacity with key customers, but needs to be finalized in terms of exact pricing. And then, some of that's a little more speculative than that. And so what we're doing, I guess, in this statement is putting our judgment against what that means for when business will be in production, and when that business that's in production will have a positive profit contribution. And we make reference in particular to the step up in utilization in Jacksonville. And obviously, in order for us to do that, we have to have a high level of confidence that that's going to be the case. We make reference to the progress on our U.S. commercial pipeline, most particularly large CPG customers, and plan being well advanced for the Midwest region again, which I can't be more specific than we've been in that wording. But what I would want you to know is, we wouldn't be referencing it in that way unless we had a high level of confidence it was going to flow through in that regard.
Our next question comes from Arthur Reeves from Société Générale.
Patrick, you've just said you can't be more specific, but I'm going to ask you to be. What was the utilization rate of Rhode Island? And where are Minneapolis and Jacksonville now and where do you think they're going to be on utilization, please? And then, my second question is about actually U.S. EBIT. Are you actually going to make any progress in U.S. EBIT this year? Or is it -- or are we looking at flat profits from the U.S. now with the additional cost coming on and so on?
Okay. Let me try and deal with both of those and Eoin might need to kick me under the table or clarify the second question. Yes, I'm going to be very specific for you on Rhode Island, Jacksonville and Minneapolis, because it doesn't go to specific commercial sensitivity. So Rhode Island was running at a 20% to 25% utilization through quarter 1 and quarter 2 of this year. And on that basis, it was quite significantly a loss to making up the order of $5 million in the first half of the year. That's why we stopped production there. Jacksonville and Minneapolis are on slightly different trajectories. Jacksonville was -- had a very modest level of losses in the first quarter or first half. The -- that's because the productions stepped away back after the loss of contracts that Eoin referenced earlier on this call. We -- but the level of fixed cost on that site will be much, much lower than in Rhode Island, and so the site has been able to continue to run on that basis without it being material in the context of the U.S. business overall. And now we have a set of confirmed business that we are rolling through that will take utilization up very materially, particularly as we go into Q4, which will set that site up economically as we transition them out of this year and into next. And Minneapolis. The reason we've referenced it in the statement is that we were conscious that at the point at which we brought Peacock Foods, the capacity utilization and related site economics are pretty weak. But we've seen several pieces of new business already come into that site with the prospect of more going into that as well. And we're seeing -- as that utilization steps up, I think there's still plenty more headroom there, but as it steps up towards 50% or more the underlying economics of that site has moved quite quickly, and quite materially positively on a site basis. And we think that continued to progress from here. So we've dealt with the utilization challenges across those 3 sites differently. In the case of Rhode Island, the decision we've had to make unfortunately is to come out of production because the -- we didn't -- we couldn't get visibility quickly enough to a sufficient -- a sufficiently material step up in utilization necessary to have the site work economically. So we've gone out of production. In the other 2, we can, and we're progressing positively economically there. The point I'd make, and Eoin will give you some color I think in relation to U.S. profit. I refer you to the final part of paragraph 2 in the outlook statement, which is that we anticipate that the impact of these factors will reduce the expected rates of U.S. profit growth in FY '18. So, yes, there will be profit growth in FY '18, but below the level we might have anticipated or expected it to have been 3 or 4 months ago.
Hi, Arthur, it's Eoin here. Just to add to that, I mean, obviously we do have a couple of headwinds, which we're highlighting today in relation to profit growth in the U.S. One, is foreign exchange. Because the year-on-year movement in foreign exchange is relatively significant. But let's move off of foreign exchange. Two, is obviously the losses that we will incur, particularly in Rhode Island and other parts of business. But all said that, we are seeing particularly strong growth in our CPG business. And we will reiterate that again. And we're feeling very good about the core part of our CPG business.
So just a follow-up on that. How is -- did Rhode Island deteriorate in the first half and losses of Rhode Island grew bigger in the first half quickly?
It did. It did, yes.
Our next question comes from [ Carson Dehens ] from [indiscernible].
It's related to Rhode Island. What's the risk that you have to take a write-down on your facilities on Rhode Island, since there is no production taking place anymore?
Yes, Carson, I think -- I mean, there is a risk and we highlight that in the statement. The nature of the write-down will be dependent on the use that we will test on an every 6-month basis. So clearly, if we don't have a visibility around alternative use to -- for the plants, we will have a write-down.
Which is GBP 40 million. So the downturn risk is GBP 40 million?
Yes. As Patrick mentioned before, the downturn risk is GBP 40 million. And obviously, the nature of that write-down will be dependent again, as I say, on the view of alternative use.
So why don't we take a write-down right now? I mean, it seems -- I mean, to be on the conservative side, why don't you do it right now?
Well, because we -- well, because we have been open till pretty recently in engagement with customers to find an alternative use of that site.
And in terms of new business. I mean, I just had -- you need for me to elaborate again. I mean, a few months ago, you were extremely positive of new business wins in the U.S. Suddenly, it takes longer time, suddenly, the -- to get these business wins. Suddenly, the profitability on new business is not as high as you expected. I mean, it seems to me that you -- I mean, were you overly optimistic or are you still too optimistic on new business wins in the U.S.?
I mean, I guess. Carson, its Patrick. I mean, self-evidently, I think it's a reasonable conclusion that we were too optimistic before, and hence the statement and clarifications that we've made today. I don't think we are now, and the -- in doing what we're doing today, I think you can take it that we have worked very hard together with our teams and as needed with our customers to have very specific line of sight to what we have, when we're going to do it, what contributions it's going to make, and how that builds through this year and next year. And that's what we're doing.
And, Carson, what I want to say in defense on this, but I will just highlight that we did say in our outlook statement at the end of November here that the pace of delivery of operating profit will be dependent on the time frame of new business pipeline. So it is something we have been conscious off in relation to the delivery in our U.S. business. And we are updating as to where we stand today, which, not to repeat Patrick here, is we feel good about certain aspects of that, but the time frame is -- we're updating on time frame.
The new guidance you're giving to the markets, is the risk on the upside or the risk on the downside?
I'm not going to actually answer that question, Carson, because we've given a range for a reason and that's the range.
[Operator Instructions] We now have a follow-up question from Karel Zoete from Kepler Cheuvreux.
I just have 2 follow-up questions. The first one is on a follow-up on the synergies. Looking at the U.S., what do you think is a reasonable assumption with regard to medium-term profitability? So 2018 will be a bit lower than expected, but what should we expect looking at the business hopefully medium-term? Not so much on the growth angle, you've been clear on that. But what is a realistic profit assumption of the medium-term on return on sales? And the second question is more on the U.S. strategy in general, as it's been a concern to many of course. And you expressed a -- or talked a bit about the full year reference. And what measures do you think you can take aside from the ones today to improve the trust in the U.S. strategy and that it will be accretive to shareholders over the medium-term?
Karel, I'll try and have a go at the sort of medium-term outlook for profitability and obviously Patrick will take the U.S. strategy point. And I think the -- we've talked about this before, I think, as a group, in relation to our belief that we can get the business above a 5% type of return on sale, I do flag that return on sale as a metric that is somewhat difficult given the nature of our -- positive nature of our businesses. But just to give a sense of what profitability could be with the big headwinds being solving the retail or legacy parts of our utilization. And then abetting them the cost base that's rightly set up for the business growth that we are looking to attain. And that includes synergies, but includes just having the right cost base to reflect the nature of business that we have. And look, we are absolutely flagging that. It's going to take longer to do. It's not going to happen this year. And we believe we are set up correctly to look to do that into next year. And without giving -- starting to give too much guidance into FY '19. And so I think we would say that we're not changing our longer-term view in relation to the operating profit delivery capability of the U.S. business.
That's clear.
Karel, let me just give you some thoughts on U.S. strategy in terms of how we're -- both in terms of what -- how we're thinking about it, and also what we're doing. And so the view that we as a leadership team and also our board have is that we have a business, a set of customer relationships and a set of capabilities that fit in a very, very attractive part of the U.S. food market. We have 2 very significant positive trends that play towards what we're trying to do. So one is the sustained desire for more convenient food offerings, which manifests itself differently in different geographies, but manifests itself everywhere as a consumer food trend playing to portion control, help with nutrition, ease of preparation, ease of shopping, ease of storage and so forth. The second, which is a U.S.-specific trend, which we don't see this to the same degree in the U.K., is this move towards high-care outsourcing, and where you got large CPG, typically domestic brand owners in America, who are choosing to come out of high-care regulated food assembly in particular. And we've seen that in our growing business with Tyson, in our growing business with Kraft, our growing business with Dole and Apio, and a pipeline of engagement, both with those customers and also with others that plays to that trend. And so what you've -- what's referenced in a number of different places in our trading statement today is the sense of progress, a potential against the CPG customer part of our business. And the performance of Peacock being in line with expectations and so forth. So as we look at the business today and we try to balance the strategic opportunities between high-care outsourcing with CPG companies versus the development of new fresh food for retail and food service, we are definitely seeing more opportunity in the former area than the latter. We think that's partly a feature of timing and that there is more near-term opportunity there and over time that may balance a little bit. And if I step away from that to what does that mean in terms of the kind of process by which we're working after this -- we're going after this, we're working hard with our leadership team in terms of how we're resourcing it in America, to really look after that. So we have got, and I referenced this earlier as part of the additions that we're bringing to our team. We've got a new head of strategy in America, who actually joined us, a guy called Craig Albert, in fact he used to work for Sheffield, who is a large investor into us, but steeped in the food industry and working most in that regard alongside some of our kind of operating and commercial talent and our group leadership. So we -- I know it may be difficult for people to engage on a day like today. But we see very, very significant potential for growth returns on economic delivery in the U.S. We are refining precisely where on that spectrum of high-care outsourcing versus a convenience food for directly to retailers and food service operators what the need space we think is attractive and our capabilities that we believe matches up well against that. And so then, in terms of what that's going to mean for investors, like we have to get on with refining that ourselves. I think we can talk about it at somewhat as we go forward, but really the proof of the success or otherwise of this strategy will be in the delivery over the course of the next number of years, starting with ensuring that we deliver against what we're talking about here. And then, seeing that step up as we go into '19 and beyond to get those opportunities.
We now have another follow-up from Darren Shirley from Shore Capital.
I thought I'd try to squeeze maybe a little bit of sort of potentially good news. I'm assuming a story last week about sort of a levy miscalculation in your sugar, sort of from 1991 to 2001, and the fact that you'll reimbursed on that. Is that meaningful in terms of the potential income from that --
Hey, Darren, by the way, thank you for the sentiment. It's not meaningful.
Gentlemen, we have no further questions. So at this point, I'd like to turn the call back to you for any additional or closing remarks. Thank you very much.
Thank you guys. We're going to wrap up there. I know we've covered a lot of territory in the Q&A and the statement itself, I think, is comprehensive. Jack, Eoin and I are very happy to follow up with people individually over the course of today, and tomorrow and as we go forward. But thank you for joining us and for charge numbers on the call and for understanding and clarifying what's in our statement today. And we look forward to speaking to you.
Thank you. And again, ladies and gentlemen, this will now conclude today's conference call. Thank you very much for your participation today. You may now disconnect. Thank you.