Greencore Group: interim results for H1/2013

Dublin / IR. (gg) Greencore Group PLC, a leading international convenience food producer, announced its unaudited interim results for the 26 weeks ended 29 March (H1/2013). Highlights: Group revenue of 572,9 million GBP, up 0,9 percent / Convenience Foods revenue of 542,1 million GBP, up 1,8 percent / Group operating profit up 6,3 percent to 33,7 million GBP / Strong growth in adjusted EPS2, up 10,9 percent / Interim dividend of 0,019 GBP per share, an increase of 8,6 percent versus H1/2012 / Restructuring of Uniq desserts activity completed with disposal of Minsterley chilled desserts facility / Roll out of food to go range in Starbucks USA successfully commenced.

Patrick Coveney, Chief Executive Officer: «We have made good progress on our strategic agenda during the first half of the year, despite the fact that market conditions throughout the period proved very challenging. In the UK, we have completed the Uniq integration with the restructuring of the desserts business and the disposal of the Minsterley facility and the integration of International Cuisine is progressing well. In the US, MarketFare and Schau have been integrated and, since the end of April, we are supplying Starbucks from four of our six facilities there. However the UK retail environment remains under severe pressure and this was exacerbated in Q2 by the horsemeat scandal, which has temporarily driven the ready meals market lower. Although we expect market conditions to remain tough, we remain confident in our ability to deliver adjusted EPS growth for the financial year in line with expectations».

Portfolio and Strategy

During H1/2013, we have further cemented the transformation the Group underwent in FY12 to form a business with clear scale and a balanced customer mix: – In the UK, we completed the integration of Uniq with the transfer of all premium desserts production to the refurbished Evercreech facility and the disposal of the Minsterley facility. The integration of International Cuisine is progressing well. – In the US, both MarketFare and Schau were integrated, the product portfolio in the Newburyport facility was rationalised and supply to Starbucks commenced under a multi-year, multi-site contract. This focused portfolio, together with good operating and financial discipline, have enabled us to deliver strong growth in adjusted EPS in the half despite the challenging market conditions.

Financial and Operating Performance

Group revenue increased in the period by 0,9 percent to 572,9 million GBP with growth in the Convenience Foods division of 1,8 percent to 542,1 million GBP. Growth rates in our core markets in the UK were lower than in the prior year, even before the impact of the horsemeat scandal on the ready meals category. Despite this, Group operating profit increased by 6,3 percent to 33,7 million GBP as we maintained good operating and financial discipline and delivered improvements in returns in lower margin businesses. Adjusted earnings per share were 10,9 percent higher at 0,061 GBP as a result of the growth in operating profit combined with lower year-on-year financing costs and a continued low effective tax rate due to historic tax losses. Interim Dividend The Board of Directors is announcing an interim dividend of 1,90p. It remains the Board´s intention to increase the total dividend distribution for the financial year in line with the growth in adjusted earnings per share.

Outlook

We expect market conditions to remain tough during FY13, particularly in the core UK market which shows little or no volume growth and where the ready meals category, which represents c. 15 percent of Group revenue, is still to recover fully from the horsemeat scandal. However, the Group is strategically well positioned to confront these challenges given its balanced customer portfolio and exposure to faster growing convenience categories. We continue to see moderating input cost inflation and now expect this to be 2 percent or below for the financial year. With the tight financial controls we have in place, we remain confident in our ability to deliver adjusted EPS growth for the financial year in line with expectations.

Convenience Foods – Revenue and Operating Profit

Reported revenue in the Convenience Foods division increased by 1,8 percent in the period to 542,1 million GBP. This was significantly impacted by changes in the portfolio during the period. In the UK, like-for-like revenue (that is excluding both the International Cuisine acquisition and the Uniq desserts activities which were exited or sold) was 1,3 percent lower. This was due mainly to the impact of the horsemeat scandal on the ready meals business and to lower market growth rates as economic conditions continue to exert pressure on the consumer. In the US, revenues more than doubled through the net impact of the acquisitions of MarketFare and Schau, as well as portfolio rationalisation in the ‘legacy´ business, particularly in Newburyport. Despite the challenging conditions, operating profit increased by 4,7 percent to 32,1 million GBP as we maintained strong financial discipline and delivered improvements in returns in lower margin businesses.

UK Convenience Foods – Food to Go

The UK Food to Go business represents approximately 40 percent of Convenience Foods revenues and comprises sandwiches, sushi, snack and side of plate salads. Both the sandwiches sub-category and the broader chilled food to go market experienced lower growth than seen in recent periods. The sandwich sub-category grew by 1,8 percent in the period while the broader chilled food to go market (sandwiches, sushi and salads) experienced a 0,2 percent decline. This was predominantly weather related and compared to a period of strong growth in the prior year. Against this backdrop, revenue in the combined Food to Go business grew by 0,1 percent. Good gains in listings were made across the Food to Go range in a major retail customer, although overall new business wins were more modest than in the previous year.

UK Convenience Foods – Prepared Meals

The Prepared Meals business comprises chilled ready meals, quiches, chilled soup and chilled sauces. The chilled ready meals market saw growth moderate to 3,1 percent in the period, while the Italian ready meals market, our major sub-category, experienced a 1,8 percent decline. This was predominantly driven by the impact of the horsemeat scandal which affected the broader processed beef market from late January. Although all industry tests on chilled products were negative for the presence of horsemeat, the chilled ready meals market, in particular Italian meals, was negatively impacted in Q2. The quiche market exhibited more robust performance against a softer comparative with 4,5 percent growth and the soups market benefited from poor weather with 10,4 percent growth. The Prepared Meals business grew revenue by 10,7 percent in the period due primarily to the acquisition of the International Cuisine business. On a like-for-like basis (excluding the acquisition of International Cuisine), revenue was 5,9 percent lower as a result of the decline in ready meals. Across other product categories, namely soup, sauces and quiche, the business performed well, growing in line with or exceeding, market growth rates. The integration of the International Cuisine business, acquired in August 2012 is progressing as planned. The business is performing well, albeit with some impact from the horsemeat scandal. More than 200 tests were conducted for the presence of horsemeat on both Greencore finished products and ingredients. All tests were negative at the Food Standards Agency´s 1 percent threshold, except one positive test carried out by Asda, who withdrew the product. A thorough and detailed investigation, including further extensive testing, concluded there was no evidence of contamination and the product was subsequently put back on shelf by Asda. As a response to the broader issue, additional species screening procedures were introduced throughout the supply chain for beef-related ingredients and we continue to work with our customers to rebuild consumer confidence in the supply chain.

UK Convenience Foods – Grocery and Frozen

The Grocery and Frozen business provides meal components with Grocery activity focused on cooking sauces, table sauces and pickles and Frozen supplying Yorkshire Puddings. The own label cooking sauce market was flat in the period whilst Yorkshire Puddings grew by 3,1 percent in value terms. The businesses performed well with overall revenue growth of 4,5 percent. This was driven by gains in cooking sauces in the discounter sub-channel and in Yorkshire Puddings in major multiples.

UK Convenience Foods – Cakes and Desserts

The Group´s cakes and desserts activity includes the Hull facility, the food service desserts facility in Taunton and the chilled desserts facility in Evercreech. The largest sub-category in which we participate, celebration cakes, declined by 3,6 percent in the period. The cheesecake sub-category, in which we also participate, continued to exhibit good growth. Overall, Cakes and Desserts revenues were 2,9 percent lower on a like-for-like basis. The Hull facility experienced modest growth in the period and delivered stronger financial performance than in recent periods due to operational improvements and a lower inflationary environment. The Food Service desserts business saw modest revenue decline in a tough market; during the period, the business secured additional volumes with a key customer which should underpin growth over the next twelve months. The refurbishment of the Evercreech facility was completed during the period and the remaining premium desserts lines were all successfully transferred from the Minsterley facility. The disposal of the Minsterley facility was completed at the beginning of January.

US Convenience Foods

The US business has been transformed with the acquisitions in H2 12 of MarketFare and Schau and with the addition of Starbucks as a material new customer. Reported revenues were over 120 percent higher following the acquisitions. The ‘legacy´ business in Newburyport and Brockton experienced some planned revenue decline as we decided to exit several unprofitable product lines. This has left a much tighter product portfolio concentrated on food to go and salads. The rationalisation at Newburyport reduced complexity prior to the successful launch of a food to go range for Starbucks in January in the Boston area. Subsequent to the period end, the business has successfully commenced supply to Starbucks from the Jacksonville, Fredericksburg and Chicago facilities. The MarketFare and Schau businesses have been integrated and we continue to build out capability in the combined business with a blend of assignments from the UK business and local hires. Overall financial performance was enhanced through a combination of the acquired profit streams, tighter product portfolio and combinational benefits.

Ingredients + Property

The Ingredients + Property division accounts for around 5 percent of Group activity. The revenue decline in the period was driven by the edible oils trading activity while the molasses feed business benefited from the poor weather, reducing grass growth. Despite lower revenues overall, operating profit benefited from better mix in oils and the growth in molasses revenues. The planning consent on the Littlehampton site is now definitive and marketing will commence over the next few months as planned. As detailed in the note to the financial statements on exceptional items, the Group has recognised an exceptional charge of 9,2 million GBP in the period related to its Irish property portfolio. This comprises an impairment charge following the rezoning of one of the former production facilities and reflecting the continued soft property market, together with a charge for the expected costs to complete the re-mediation of the former Irish sugar sites.

Revenue and Operating Profit

Revenue in the period was 572,9 million GBP, an increase of 0,9 percent versus H1/2012. Group operating profit of 33,7 million GBP was 6,3 percent ahead of the prior year. Operating margin of 5,9 percent was 30 basis points higher than H1/2012. The impact of currency in the period was a modest reduction in revenue and operating profit, predominantly driven by the relative strengthening of sterling against the Euro compared with H1/2012.

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