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Good morning, ladies and gentlemen. Thank you for standing by. Welcome to today's Greencore Group Plc Q3 Trading Update Conference Call. [Operator Instructions] I must advise you that this conference is being recorded today, Tuesday, 30th of July 2019.And I would now like to hand the conference over to first speaker today, Mr. Jack Gorman. Thank you. Please go ahead.
Great. Thank you, Ina, and good morning, everybody. My name is Jack Gorman, I'm Head of Investor Relations at Greencore. And I'd like to thank you all for taking the time to join us this morning for our Q3 trading update conference call, which covers the period to 28th of June 2019.I'm joined on the call here 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 up to questions and answers. And finally, I would draw your attention to the forward-looking statements at the end of today's release.So with that, I'll pass you over to Patrick Coveney. Thank you.
Thanks, Jack, and good morning, everybody. It's Patrick Coveney speaking here. And the purpose of this morning is to briefly provide some color on today's trading statement and then to field any questions that you have for Eoin or for myself.We will be dealing with broader topics such as the group's vision, strategy, growth agenda, business model and capital allocation plan in detail at our Capital Markets Day at the end of September. So in the Q&A today, we do intend to focus on the contents of the statement itself.As such, we would anticipate finishing this call at about 9:00. We've achieved a solid performance in quarter 3 and what has been a particularly challenging quarter for the U.K. grocery sector.Now I would like to address 3 key themes: our revenue progress in a difficult marketplace; the delivery against our organizational, commercial and operational objectives; and our outlook for the financial year.Let me draw out each of these themes a little more. Firstly, our revenue progress in the quarter. We delivered a solid performance in the U.K. grocery market that have particular challenges in this quarter. The U.K. High Street consumer has remained cautious with regard to their spending throughout the period, and this was exacerbated by prolonged unseasonal weather right up to the end of June. I'd cite 2 statistics to illustrate the outcome of these conditions. First, overall retail footfall was negatively impacted in the quarter. The BRC, or British Retail Consortium, recently noted a 2.9% reduction in footfall in June, bringing the 3-month average reduction in retail footfall to 2.4%.Second, the U.K. food and drink market, as measured by Kantar, was flat in the 3 months to mid-July with overall grocery market sales down 0.5% and 1%. These 2 statistics, albeit at a macro retail level, give you a strong sense for the overall consumer environment in which we traded during this quarter. Against this context, we delivered a resilient revenue performance. Pro forma revenue growth was 0.8% in quarter 3. Specifically, pro forma and reported growth in our food to go categories was 0.6% and pro forma growth in our other convenience group categories was 1.4%.Within the food to go parts of our business, there are several features of the quarter that are worth highlighting. As anticipated, the driver of growth during quarter 3 was volume growth in manufactured products. Revenue growth was approximately 1% in the quarter, volume-driven and supported by the year-on-year impact of business wins. The year-on-year boost in revenue from the distribution of third-party products is now completed with distribution revenues actually modestly down year-on-year in this quarter. Our food to go business outperforms the overall market in this period. Using the most recent data to hand from IRI, the overall food to go market actually declined by 2.7% in value terms for the 12 weeks to the middle of June.Unseasonably cold and wet weather contributed to weak market conditions for much of the period impacting this overall market performance for food to go. As I mentioned before, we are also observing surprisingly varied customer food to go volume performance in recent periods, and this was very evidenced throughout quarter 3.Some customers have responded well to the commercial initiatives that we are working on together, and we've seen positive volume momentum with these. But with others, we have more work to do, and this is now progressing. Of course, our relative quarterly performance year-on-year is also impacted by the tough comparative period. In quarter 3 of FY '18, that was a quarter in which our food to go revenues actually grew by 10.5%, underpinned by a strong increase in revenue from the distribution of third-party products last year.In summary then on food to go, these are somewhat disappointing revenue numbers relative to both our history and our expectations of ourselves, but they're actually pretty solid when compared to the market, individual customer performance in the quarter and a demanding prior year comparator period.Our other convenience food categories delivered a solid performance with 1.4% pro forma revenue growth in this soft retail environment. As always, there are some puts and takes across this part of our business, but we saw a good performance in soups and ingredients, solid performance in ready meals, and our cooking sauce revenues were back a little compared to the prior year period.Taking a stand back, we are making excellent progress against our strategic, organizational, commercial and operational objectives. We have seen deep -- commercially, we have deep, long-standing relationships and multiple specific initiatives with customers focused on reigniting growth for the next month -- for the months and years ahead.As flagged in our half 1 results presentation, our plans to launch into food to go salads with several customers were initiated in early July, and the early signs from these initiatives are encouraging. Our capabilities have also expanded in sushi manufacturing. We can now deliver raw sushi with a proposition that works for selected customers in terms of shelf life availability and supply chain. This model can now deliver equivalent quality sushi in retail stores to that previously only available in sushi specialists. And finally, we've invested in our chilled soup capacity and capability, reflecting business wins in that category. Operationally, we've seen continued strong performance being delivered by our excellence programs across manufacturing, but increasingly also on purchasing, which is helping to underpin financial delivery in a tough marketplace. Each of these factors contributes to our FY '19 outlook that I will describe now.First off, we are progressing with our overarching strategic and financial objectives. We are excited and confident about the prospects and potential for our business in a market full of change. We are convinced that we can outperform. Q3 was a little softer than we anticipated it would be back in May. Q4 is very important to our full year profit delivery. It is and always has been our biggest quarter. In early July, we did see a pickup versus June. But the year-on-year comparator was still tough given an exceptional start to July last year. However, as we've got into the second half of July, we've seen a stronger picture emerging. Informed by all of these factors, we continue to anticipate growth in adjusted operating profit this year driven by underlying revenue growth and strong operational performance across the business.Beyond operating profit, we are particularly happy about the progress that we are making on all elements of cash generation, including working capital, capital expenditure and each of the other cash flow items. This progress sets us up for a really strong second half of the year in terms of cash generation, which we anticipate will leave us at the lower end of the net debt-to-EBITDA leverage range of 1.5 to 2x.Finally, I would like to highlight to all listeners that our next Capital Markets Day is on the 26th September in London and further details of this event will be provided later in the summer.And with that, I'll now turn the call over for questions to Eoin and I. Thank you.
[Operator Instructions] Your first question comes from the line of Jason Molins.
A couple of questions from my side. Patrick, I think you mentioned there in terms of the food to go category performance largely driven by volumes. And can you just talk about on the other side pricing and in particular raw material inflation that you're seeing? And -- just to give us a bit of context around that? And then just following the range, your outlook statement and on the commentary, you've given in terms of July and that performance that's maybe improved as that period has unfolded throughout the month. How important is July in the context of the overall Q4?
Thanks, Jason. Yes, quick answer to both, actually. The -- in -- very little inflation in aggregate terms in our food to go business, actually in raw material and packaging, I mean it's not 0, but it's pretty low. So the -- we've been able to fully recover that through the combination of mix and pricing initiatives that we have. And as a result, all of the growth that we are seeing is in volume. And that's what we'd anticipate through the rest of this year as well. In relation to -- I want to be careful in being too definitive from week-on-week performance. The first I'd say is July is a very important month for us. Quarter 4 is our most important quarter. And typically, we see food to go sales very strong in quarter 4 because they just correlate well with summer. And that's right the way across, that's salads as well as sandwiches. And so as I touched on in my comments, we've seen improvements in July on June, the early part of that we're conscious we're comping against very, very strong growth in the prior period. But as we begun to comp against a more normalized summer, we know we are then seeing growth, and that's what we hope to see and we are. So listen, we're -- we recognize that we've got a bit to do in quarter 4. So we're on with this, and our plans are working and be -- in line with what we expected and consistent with this guidance.
Your next question comes from the line of Nicola Mallard.
I think you might have just answered my questions, Patrick. The words that were missing I suppose from the outlook statement was, in line with expectations. So I'm reading from your comments just now, you said you've got a bit to do in Q4. But right now as we stand at the end of Q3, you're probably not in line with our expectations. Is that a fair assumption?
Well, Nicola, I mean the wording that we've used in the outlook statement around operating profit growth year-on-year is the same as what we used in our interim results back in May. And so if you try to do the -- join up all those pieces, what that, I think essentially means is that we are a bit softer in revenue in Q3 than we thought back in May and there have been some operating leverage impact on us, but we think we can deliver in Q4 such that we mitigate that impact and come in broadly in line with the guidance that we gave back in May.
Your next question comes from the line of Doriana Russo.
I just wanted to ask if you could give some color in terms of your performance by category, both in food to go and convenience. You have done some, but in terms of the food to go, can you give us a sense of how much your sandwich business, what did it do relative to the rest, please?
Thank you, Doriana. It's Eoin here. When I've -- I'll go with that. I think -- I mean there's couple of products -- one category in particular in food to go that impacted harder in the kind of tougher weather, which would have been our wet salad business, and effectively, there weren't any kind of nice weekends where people would have had barbecues, et cetera and so forth. So we would have seen a more adverse performance in that part of the business. And the -- our sushi business is performing really strongly. In fact, actually, a lot of the activities that Patrick mentioned are yielding good returns from a top line perspective. And I think sandwiches, I mean, a lot of the -- in the interest -- a lot of the commentary that Patrick's already gone through really relates to sandwiches. Instead of what we would have seen in sandwiches is the mix performance around the customer base and sort of the overall impact on weather would have impacted sandwiches. And if I switch to the other convenience categories, just to give you a little bit more color to what Patrick said, we've had a pretty flat performance from a revenue perspective in ready meals, but I think the bigger story in ready meals is that we're progressing really nicely in that part of our business post the reset we've done this year in terms of closing one of our facilities there, so that's progressing very nicely. And we've got some wins in soups, which is helping top line. Our Irish agri business is trading well. And the -- our cooking sauce business is back a bit. We would put that down to some destocking that we would have seen in the market post the March Brexit and data was postponed. So that's pretty much, I think, the mixes and color. I think it was outside.
I mean if I were just to add one thing, ET, on the food to go piece, which is different from the reported performance in the last 5 or 6 reporting periods, which is that within food to go, we -- and we were -- I mentioned this too Doriana, in the -- in my comments, the -- we've stopped lapping against the very big changes in our -- growth in our distribution of third-party product portion in that business. And so there -- if anything -- actually, the -- sorry, the -- actually growth in manufactured product is actually stronger than the growth in -- than the overall food to go number. So it's about 1% for manufactured products and a very modest -- flat-to-modest decline in distribution revenues. So -- but I mean the -- in substance, at least for the moment, we're working hard strategically to evolve this. Our food to go business in substance is all about sandwiches, and the -- and so it's -- that's where the manufactured volume movements come from.
And can I ask you, also, because you seem to be quite confident that you would be able to make up some of the ground lost in Q3 and Q4. But obviously, part of it must be weather-related. What sort of confidence -- how much of a -- how much room do you think you have to be able to meet these expectations?
Well, we -- if we were uncomfortable with our ability to meet expectations, we'd have to say so. So in that sense, we've got detailed plans that we think are going to deliver the year in line with this outlook. We've got 9 weeks to go now. So 4 weeks of the 13 in quarter 4 are already gone. The -- I mean, specifically on your assumption around weather, we're not holding out for some Saharan-type conditions through August and September, where we're just assuming a normal weather condition through the last 9 weeks of the year, which is -- which by the way is pretty much what we had in August and September last year. So the really strong both positive series of events, the World Cup, the Royal wedding and stuff like that, plus the very, very warm weather in May, June and early July of last year, we've lapped out of that and we're -- our plans assume a normal volume environment if I can describe it in that way.
Your next question comes from the line of Damian McNeela.
It was really just a quick one on Brexit and preparations given the fact that sort of the political environment seems to have shifted more towards -- or the likelihood of a no-deal has sort of increased as reflected by the currency markets. Just wondering whether -- has anything changed in your approach to Brexit on the 31st of October, given the backdrop?
Yes. I mean 2 things up there, Damian. First of all, I mean, we were very well-geared up in the late winter, already spring for a no-deal Brexit at the end of March, and our supply chain planning and our customer engagement was absolutely aligned with planning for that outcome. And I think if you -- if you were to talk to the supply chain and commercial directors of our customers, they'll talk about how proactive we were in working with them to plan for that scenario. As it happens, I think we do have unanimity on this topic in the political system now, which is the British European governments are all saying there's going -- we're heading towards a no-deal. So we're -- our planning is going to take that on face value. That's what we're heading towards. And what we are doing is planning our supply chain, planning our range and engaging with our customers on different demand scenarios for that outcome. And hopefully, it won't come to pass. But I think we'd look very silly if we lived on just hope based on the sentiment and public statements of all stakeholders through this process right now.
Okay, Patrick. And just to be clear, I know most of your inputs are short shelf life so you can't really sort of build stocks of them. But packaging and stuff, we shouldn't be expecting any sort of big outflow of working capital at the year-end as you sort of get ready for Brexit?
I don't think a material one, Damian. I think -- I mean, certainly, if I take our planning to March and you got our proxy, we had a modest amount of working capital outflow for March, and I'd kind of expect something similar again for year-end. I mean year-end is 1 month before the actual date, so that gives us a little bit of help in that regard. And -- but it would be the same things that we would have looked at in March. It would have been, as you say, ambient product in the main and in packaging.
Damian, the other thing I would just highlight -- I don't want to consume the rest of this call on talking about Brexit planning. We'd be well entitled to, but I don't want to do that -- use this. A lot of the short shelf life ingredients that you referenced, which of course is a feature of short shelf life product are sourced from within the U.K., the majority, in fact. So and -- bread, protein and so forth so -- and aspects of our produce. So it's a relatively -- in the context of our overall raw material and packaging consumption, it's a relatively modest part that comes from outside the U.K., and a portion of that is fresh, and we are working on mitigants of multiple kinds in terms of sourcing, supply chain and also tweaking of ingredients and range to reflect that as we were back in the spring. And that's what we'll be doing this time.
Your next question comes from the line of Cathal Kenny.
Two questions from my side. Firstly, Patrick, you referenced, I think it surprised me, varied customer performance within the quarter. Do you think that's a dynamic that's going to persist over the next couple of quarters? And my second question just relates to your point on seasonality. I just wondered would it be possible to get a sense of the percentage distribution of profit that typically lands in Q4?
Yes. Let me talk to the customer variability points and Eoin will jump in on seasonality. The -- one of the -- I would touch this frankly as a surprise to us, right, in food to go. And it's not -- hasn't been unique to this quarter, it's probably -- it's unfolded through the -- all of the 9 months of this year, which is -- bear in mind that in terms of our product supply arrangements and customer terms, we actually have tremendous stability in the food to go part of our business, right? So the big customers that we have, we do -- as you know, Cathal, we do -- in almost all instances, we do all of their product. So you -- in that context, it is somewhat surprising to see the level of variability of our performance across that customer size. And by that, we're talking about kind of mainstream groceries, some who are running at high single-digit or even early double-digit outperformance and some that are high single-digit or low double-digit underperformance. So it's quite a wide spectrum of performance across our customer set in their food to go sales in the context of there being no change in their supply arrangements. And so that's really what I'm referencing now. The truth is all these customers matter a lot to us. We're working hard with all of them. So I -- it'd be completely inappropriate for me to be drawn on the specifics of which customers sit where on that continuum. But suffice to say that the average, both our average and the market average, is somewhat meaningless to the relative -- to the individual performance of those customers because they span a very wide continuum of performance in volume terms.
Okay. That's clear, Patrick.
Yes. And then in terms of seasonality, Cathal, as we said, the fourth quarter is the most important quarter in terms of profit delivery. And it's approximately -- because it's on 1/3 if you kind of look at last year's sort of contribution. And so it's -- and that's been the case for a long number of years. That's -- it's always been the big part of our performance.
[Operator Instructions] No further question at this time. Please continue.
Great. In fact, thank you, Ina, for hosting us this morning, and thanks. I understand we had 35 or so people on the call. So thank you for joining us this morning. Happy to follow up as need be. And I know Jack will be doing that with some of you in any event. Where -- I do want to just finish by reminding everyone that we're looking forward to the Capital Markets Day that's scheduled for the 26th of September. And hopefully, many of us will get -- many of you will be able to join us in person for that in London. That's where we will take the opportunity to do more of a stand back on the market in which we are sitting and to set out our vision, strategy, business model, economic model, capital allocation model and also showcase both our food and our wider team, who are delivering all of this. We think it's going to be an exciting day, and hopefully, many of you will be able to join us in person for that. But thanks for being with us this morning, and we look forward to talk to you soon. Bye-bye.
Thank you. That does conclude your conference for today. Thank you all for participating. You may now disconnect. Speaker, please stand by.