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Edited Transcript of GNC.L earnings conference call or presentation 21-May-19 7:30am GMT

Half Year 2019 Greencore Group PLC Earnings Call

London Jun 1, 2019 (Thomson StreetEvents) -- Edited Transcript of Greencore Group PLC earnings conference call or presentation Tuesday, May 21, 2019 at 7:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Eoin P. Tonge

Greencore Group plc - CFO, Member of the Group Executive Board & Executive Director

* Jack Gorman

Greencore Group plc - Head of IR

* Patrick F. Coveney

Greencore Group plc - Chairman of the Group Executive Board, CEO & Executive Director

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Conference Call Participants

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* Arthur John Reeves

Barclays Bank PLC, Research Division - Analyst

* Cathal Kenny

Davy, Research Division - Senior Analyst of Food and Beverage

* Charles Hall

Peel Hunt LLP, Research Division - Head of Research

* Damian Paul McNeela

HSBC, Research Division - Former Analyst

* Doriana Russo

HSBC, Research Division - Analyst

* Jason Molins

Goodbody Stockbrokers, Research Division - Analyst

* Nicola Victoria Mallard

Investec Bank plc, Research Division - Consumer Analyst

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Presentation

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Jack Gorman, Greencore Group plc - Head of IR [1]

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Okay. Good morning. Let's begin. Good morning to everyone here in the room and on the line. Now you're all very welcome to Greencore's results presentation for the half year period ended May -- ended March 2019.

My name is Jack Gorman, Head of Investor Relations at Greencore. I'm joined on stage here today by Patrick Coveney, our group CEO; and Eoin Tonge, our group CFO.

Before we begin, just a few housekeeping items. For those in the room, you'll find on your seats a copy of the presentation that we're going to go through today. And for those not in the room, the presentation is available online or via webcast on the IR section of our website.

I would also draw your attention to our forward-looking statements on Slide 2 and the agenda for this morning's presentation as outlined on Slide 3.

So with that, thank you, and I'll hand over to Patrick Coveney, our CEO. Thanks.

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Patrick F. Coveney, Greencore Group plc - Chairman of the Group Executive Board, CEO & Executive Director [2]

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Thanks, Jack, and good morning, everybody. Just before jumping into the presentation, I just wanted to make a couple of other introductions. We've got, for those of you who are in the room, afterwards, our Chairman, Gary Kennedy, is here, and several members of our senior management team and also our newest board member, Peter Haden, who we announced onto our Board today. And those of us -- those of you who know us, we have a really ambitious growth orientation in terms of what we're trying to do with the business. Peter's played a big part in that, and we're just delighted actually as a Board and Eoin and I, in particular, as the existing Executive Directors are delighted to welcome Peter onto our Board and into the revised role of group COO that he's going to take on. And he can give us a real leadership platform to take the business forward, and Peter, you're very welcome. And for those of you who don't know him, pop up and say hello afterwards.

Right. In terms of what we're going to do this morning, Eoin and I, we're going to go through the results on -- we'll focus on the performance but also some of the really interesting couple of structure reset work that we've undertaken as we've exited the U.S. business. And then I'm going to come back in after he's done that to describe some of the operating highlights from the first half of the year but also to talk about how we're thinking about the strategic agenda as we go forward.

In terms of key messages, and for those of you following on the conference call, I'm on Slide 5 here, we've had a good performance in the first half, we think, in every respect. Eoin will run through each of those financial metrics for you in more detail. But we've had good revenue growth, good profit growth, good margin progression, strong earnings per share growth and a strong increase in the interim dividend, and Eoin will explain how all of that knits together over the next little while.

This has also been a 6-month period or maybe even a 9-month period since the start of the year that has been quite dramatic for us over the course of this period. And indeed, sometimes, I think, to do this job, you have to move on quickly and forget about some of the things, the drama that's happened in the past. But it actually is in this first half that we announced and then executed the sale of our U.S. business. And following on from that, that we announced and executed at the end of January the very large-scale share buyback of over GBP 500 million of Greencore stock that we bought back. So there's been a lot of reset activity through that period. That's also resulted in us reducing both our level of indebtedness and our level of leverage and, I think, sets our business up very, very well in terms of balance sheet, resources and momentum to progress the strategy of our business.

It's important that -- I just have a couple of comments about our business. Because I think sometimes with all of the portfolio change, just the scale, the quality, the growth prospects, the role within the U.K. food market and indeed, more broadly, U.K. society that our business plays and the exciting new stuff that we're working on is sometimes missed. And we as a Board spent a good portion of this financial year so far and, in particular, the kind of January to April period really stepping back and looking hard at how do we evolve our strategy in the U.K., how do we think about the best way to complement what we've already got and accelerate the growth and returns profile of our business. And I'll touch on that more when I come in after Eoin, and indeed, I'll touch on that more through the remainder of this year. Because hopefully, you will see and hear a consistent narrative in terms of what we're doing through this announcement, through our Q3 trading statement, through the Capital Markets Day that we're scheduling at the end of September and then into our results with a very, very consistent level of theme, consistent set of themes on how we're thinking about growth, how we're thinking about returns and how we're thinking about combining what we do with the organic growth prospects of our core business in terms of how we complement that over time with M&A opportunities as well.

The 3 themes that I've touched on in that context are: one, just the real criticality of being in the right part of the market, being where the growth is, being where the excitement is, being in the part of the market where your products and your proposition really matter both to consumers and to the customers with whom we trade; secondly, how we are evolving our go-to-market model, building on some of the strength that we've spoken about for much of the last decade, but really refining our model over the course of the last 18 months in terms of our structures, in terms of our capability programs, trying to enhance and embed a sustainable and replicable model, for just -- for driving growth productivity and consistency of returns; and then thirdly, touching on how we're thinking about broadening our proposition within the food to go market, what additional product area can and should we be in, at what additional channel areas can and should we be in and what new capabilities do we need to complement what we're already doing to capture growth and returns in those parts of the market.

So I'll come back in after Eoin has run through the results to talk about each of those opportunities, and I look forward to doing that. Eoin?

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Eoin P. Tonge, Greencore Group plc - CFO, Member of the Group Executive Board & Executive Director [3]

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Thanks, Patrick, and good morning to everyone here in London and to everyone on the line.

So as Patrick has said, we're very happy with our performance in the first half and indeed the shape of the group now that we have exited the U.S. The group has now lower debt, lower leverage and a higher returns profile. Overall, a strong foundation from which to grow.

The key highlights from the period are listed on Slide 7. So once again, with strong overall pro forma revenue growth, 5.4%, led by our food to go categories. Albeit we had modest adjusted operating profit growth in the half, profit progression is on track. We're continuing embedding our excellence programs. And overall, we have transformed the balance sheet with a full reset post the U.S. disposal, which of course completed in the period at the end of November. This included the GBP 509 million return of capital to shareholders through the tender offer, which was executed at the end of January. I will take these highlights all in turn in the next few slides.

Before I do, I'm just going to go through some of the highlights in the income statement on Slide 8. For continuing operations group revenue fell by 4.6% in reported terms. The decline due to exits from our cakes and desserts businesses last year and the phasing out of our longer-life ready meal manufacturing at the Kiveton site this year. There was also a very modest impact from the implementation of the new IFRS 15 accounting standard. Adjusting for these, pro forma growth is 5.4%, which I mentioned.

Despite the fall in reported revenue, adjusted operating profit advanced moderately in the period to GBP 44.7 million with adjusted operating margin increasing to 6.4%, reflecting an overall improved mix following the business exits. Group operating profit was very similar to adjusted operating profit with a large increase year-on-year primarily due to the significant reduction in exceptional items. The only exception at -- exceptional at this level in the P&L is the GBP 3 million charge relating to the GMP equalization that most U.K. defined benefit pension schemes have had to adjust for.

Adjusted EPS, which includes contribution from both continuing and discontinued operation, the latter for 2 months, grew strongly by 16.4% to 6.4p. Much of this is driven by a reduced financing charge following the disposal and reduced number of shares following the tender offer. To put this into context, if you imagine that the U.S. disposal and the capital restructure happened at the beginning of the period, the adjusted EPS would've been about 7p. We reported an overall exceptional credit of GBP 28.8 million in the first half. Other than the GBP 3 million of GMP equalization charge, the other exceptional items all relates to the U.S. disposal with a GBP 56.7 million credit relating to the credit -- to the profit on the disposal itself and a GBP 25.4 million charge relating to the debt restructuring post the disposal. When you work back in this net exceptional credit, basic EPS was up considerably year-on-year to 10.5p. On dividend, we're delighted to say we're increasing our interim dividend per share by 11.4% to 2.45p, in line with our progressive policy.

So on Slide 9, where I'll just focus on revenue performance in particular. As discussed, pro forma revenue for the continued business was 5.4%, an excellent performance in the period still characterized by continued intense retail competition, in particular in that period, a high street consumer that remained cautious, especially given the Brexit uncertainty and by ongoing inflationary pressures. Of this 5.4% pro forma growth, there was 7% in food to go categories and 2.8% growth in the other convenience categories.

Revenue from food to go categories was GBP 447 million in the first half, accounting for 64% of group revenue. The 7% growth was broadly balanced between underlying product revenue growth and growth from the revenue of the distribution of third-party products. The latter grew strongly again in the first half, benefiting from the annualized impact of business wins secured during FY '18. Product revenue growth continued to outperform the market. The rate of growth did improve as the period progressed, particularly as we didn't have the repeat of the significantly adverse weather from last year in the second quarter period. We continue to make excellent progress in these categories, which are focus areas for growth for all of our customers.

In our other convenience categories, pro forma revenue growth was driven by our ambient cooking sauce business as we won share in a market where our own label penetration continues to increase. In ready meals, pro forma revenue was broadly unchanged, and there were modest advances across the rest of our portfolio.

Turning to Slide 10 and on -- to focus on profit. In the first half, as I said, we generated modest profit growth as measured at adjusted EBITDA and adjusted operating profit levels. Drilling into that performance a little bit. For food to go categories in the period, both volume growth and a strong overall operational performance helped us generate good profit growth, discontinuing the trends seen in the second half of FY '18. This was offset by the impact of the network reset in our ready meals business now that we are in full production in the refurbished Warrington facility and have phased out longer-life ready meal production at our Kiveton site. Together, these completed initiatives set us up nicely for future growth in that category.

There was modest advances and profit elsewhere in the business. Raw materials and packaging inflation was a little lower than previously reported at just over 1%. Direct labor inflation was approximately 5% as anticipated. We continue to make really good progress in our excellence and efficiency programs across the group, and Patrick will share further detail on these programs in a bit and how they play such a critical element of our future strategic pathway. In summary, we're very happy with the profit performance in the first half. I have to note, as always, that this is the seasonally less significant period for the group but is in line with overall expectations for the year.

So moving on from profit to cash flow on Slide 11. Right, there's a lot more than usual going on, given the disposal of the U.S. so I thought it'll be useful to go through the components in a little more detail this time. The slide outlines how we define free cash flow. In the period, we had an outflow of GBP 19.4 million, albeit impacted by the final U.S. cash flows, which I'll come to. Walking through the free cash flow, we start with adjusted EBITDA from continuing operations of GBP 62.5 million. Working capital in continuing operations was an outflow of GBP 30 million, a little higher than we would typically see at this time of year, in large part reflecting a modest outflow relating to Brexit planning and the exit of ready meals from Kiveton. Maintenance CapEx was GBP 12.8 million, in line with plan. It's worth noting that the exceptional outflow of GBP 7.7 million all related to prior year charges. Interest tax and pensions were all broadly as anticipated with interest reducing post the U.S. disposal.

Overall, we then had a free cash flow of GBP 19.4 million. This included some of the transactional flows from the U.S. In free cash flow, this amounted to a net outflow of GBP 12.2 million, made up of EBITDA of GBP 9.1 million offset by working capital outflow of GBP 21.2 million. This reflects both the unwind of working capital from September and the finalization of working capital adjustments now completed. This outflow was partially offset by an increase in the consideration discussed in the -- on the next slide. Excluding these U.S. movements, the outflow in free cash flow would have been GBP 7.3 million. This is broadly in line with last year for continuing operations with a lower level of exceptionals and reducing interest offset by the modest increase in working capital. Similar to the profit comment, the first half is typically the less cash-generative half in our business, given the seasonal working capital outflow and of course this year impacted by the U.S. The second half will also benefit from continued reduction of prior year exceptional outflows.

So moving on below free cash flow to net debt. I'm now on Slide 12. Net debt reduced by some GBP 217 million from the end of September 2018 levels. Now a few items to note here. Cash dividends trebled, reflecting the changing of the phasing of cash payments, in essence both the interim and the final dividend for FY '18 were paid in the first half to shareholders. We continued low levels of strategic CapEx, reflecting the well-invested nature of our manufacturing footprint. U.S. net disposal proceeds were GBP 810.4 million. As I said, this partially offset some of the working capital outflow discussed in the previous slide. These proceeds were used to repay the GBP 509 million to shareholders via the tender offer and the remainder to reduce leverage. This included GBP 12.6 million associated with the termination of swaps following the reshaping of our debt and derivative portfolio. Overall, we ended the first half with net debt of GBP 284.1 million.

A couple of points to note just before I leave net debt. Following our refinancing in January, we now have overall committed facilities of GBP 461 million with a weighted average debt maturity of a very healthy 4.5 years. Our net debt-to-EBITDA leverage ratio at the end of the first half was 1.9x. It's important to note that given the phasing discussed, we are still on track to be at the bottom end of our 1.5 to 2x range at year-end.

Which brings me nicely to the outlook on Slide 13, before I hand back to Patrick. Overall, a very good performance in the first half which sets us up well. The second half is, by far, the seasonally more significant period in profit terms, and we're confident that we can deliver on our FY '19 financial objectives and expectations.

The principal features of the second half outlook are as follows. Firstly, continued strong underlying revenue growth, in particular in our food to go categories where the balance of growth is moving back towards product revenue. Secondly, we expect growth in adjusted operating profit, underpinned by the revenue growth as well as improved operational performance across all elements of the business, including some central cost reduction. Thirdly, our free cash flow metrics will be strong in the second half as EBITDA growth is accompanied by working capital inflows, continued low levels of CapEx, lower exceptional items and lower interest charges year-on-year, leaving net debt to EBITDA at the bottom of our range. And finally, we expect to continue to have a strong returns profile, broadly in line with last year's continuing return on invested capital of 15.6% as underlying profit growth on the invested capital base offsets the impact of the moderately higher tax rate experienced in the first half.

So with that, I'll hand you back to Patrick for the strategic and operating update, and I'll pick up some of these themes in the Q&A. Thanks.

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Patrick F. Coveney, Greencore Group plc - Chairman of the Group Executive Board, CEO & Executive Director [4]

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Thanks, Eoin. And for those of you following me online, I'm now on Slide 15. I mean I think Eoin has given a very good summary of what I would characterize as good performance, in line with our expectations in the first half of the year, and that's certainly how we anticipate the second half of the year unfolding in terms of performance.

I wanted actually to do a little bit of a kind of step back and then step forward in terms of the strategic direction of our business. And for those of you who have followed us for some time, for 7 or 8 years now, we have had a strong-performing, high-growth, strong-returning and, we think, dynamic and exciting business in the U.K. with an improving culture, deep customer relationships and an increasing relevance to the food and nutrition requirements of the U.K. population. What we've done in the first half of this year is to step back from that somewhat and think quite hard about how do we evolve or complement what we're doing beyond the momentum position and dynamics of the U.K. business that we have at the moment, particularly conscious that in so doing, we have more financial resources, more leadership capacity and more focus that we can bring to bear on driving growth and accelerating returns in our U.K. business.

In that context, over the next 10 minutes or so, I wanted to touch on 3 themes: one, the importance of competing in the right parts of the market and how that governs so much of the portfolio choices that we've made and we'll continue to make as we go forward; secondly, to talk about how we're evolving our proposition and model in terms of how we're organized and the nature of our proposition to customers, suppliers and consumers in the U.K.; And then to begin a conversation, which we think will play out over the next number of years, around how we broaden and extend the product, channel and capability profile of our business within the part of the market that we broadly define as food to go to sustain growth and to accelerate returns as we go forward.

There is, as always, a lot going on in the U.K. food market. It's a dynamic market with many moving parts. And within that, it contains many different subsegments or categories of activity that are going on. What mattered to us for a long time is the structural attractiveness of the immediate consumption or food to go part of the market, and that plays out in a number of different ways. Firstly, the growth that's attached to that. And what you see on this slide is a combination of the average levels of growth for food to go category as broadly defined over the last 4 years and some of the factors that drive that growth in terms of the growth of snacking, the growth of delivery, the growth of out-of-home consumption, the growth of convenience and -- that we think will sustain and underpin growth. It's difficult to be absolutely precise about that. But our planning assumption is that the underlying level of growth of this part of the market will probably continue to be close to twice the level of growth that you see in the food market overall.

So growth is important, but it's not the only factor that makes this part of the market attractive to participate in from our perspective. The second factor, and I willingly concede it's not completely separate from growth, is the strategic importance of these categories to our customers. You see that in the role that they play in driving footfall into stores, in driving margin performance and driving differentiation one customer to the next. And just to be a little bit more clear about what we mean by that. The nature of the consumer that shops these categories is actually more attractive than the consumer shopping other food categories. It tends to be younger, tends to be more affluent, tends to spend more, tends to be less price conscious, tends to be more gender-balanced, tends to be in and out of the store more quickly. And when you put all that together, it's the sweet spot of what customers are looking for in terms of moving forward their business, their brand loyalty, their differentiation, their returns. And you see that play out now in a series of interesting new innovations around product. And you can see that in the very, very accelerated growth of hot food; other food to go offerings beyond sandwiches; the snacking propositions, which are borrowed -- in a borrowed or developing from around the world; really, really interesting executions around food trends, like veganism, free from. And that dynamic consumer activity that's playing out in different product and different technologies in stores is very, very important.

The second thing that we're seeing is changes in the channel environment. Those of you who've listened to me for a long time would have heard me talk in the past about the very, very positive match between our capability and the accelerated rollout of convenience store format, new stores across our customers. We think that's waning a little, but it's being supplemented by very interesting and equally positive dynamics in terms of the technology and capital investment into the existing store stays, in terms increasingly up some of the stronger retail brands in food to go being leveraged outside of their own store network and into other store networks, so the announcement yesterday about Co-op and Superdrug. Individually modest would be an example of that. Clearly, the M&S-Ocado relationship will play to the same space. The Morrison-McColl supply agreement, the M&S-WHSmith supply agreement, all of that plays to taking strong, interesting, innovative product forms and accessing new outlets going forward. And we think, again, that will be very important in terms of the growth prospects and the returns prospects for this part of market. So the message to take from this is this is the part of the food market that you want to be in. And it so happens that in product form today, it represents a little over 2/3 of the total revenue of Greencore.

Of course, whilst on -- just being in the right part of the market is insufficient to generate growth and returns, you have to have a proposition that can win in that part of the market. And again, what you'll see on this slide is a series of themes that we have spoken about for some time, updated for specific developments that happened in the first half of the year. So it matters a lot to Greencore that we have leading positions in the product categories in which we play. You can see that in our sandwich business, you can see that in our sushi business, you can see that in our Italian ready meal business and you can see a strengthening and you'll hear me talk more about today and going forward about what we're doing in the salad market. Because with those market share positions comes a level of influence and a level of scale and a level of partnership with customers to evolve and develop those categories to deliver returns for them and also returns to us.

Specifically, in the first half of the year, and Eoin touched on these numbers earlier in more detail, what you saw was us delivering good, maybe even strong growth overall on a pro forma basis and, in the food to go category, 7% revenue growth in the food to go part of our business broadly mixed between -- split between what products that we manufacture ourselves versus products that we actually source and complemented our manufactured range into customers. All of that revenue growth was driven by volume, reflecting us selling more product and meeting the needs of consumers and customers in that regard.

We've seen actually a lot of activity around product in the first half of the year. And it's really important, it's always been important to us but I think it's important for people in understanding Greencore, just to recognize just how important product proposition is in terms of what we're doing. So you've seen, for example, in our core sandwich range, you've seen a set of new premium offering, best ever ranges, premium ranges into our 2 largest customers. You've seen us actually innovate very heavily around the vegan theme. In fact, about 30% of all of the new product launches in the first half of the year played to the theme of veganism across our customer set. You've seen us actually focused hard on extending our product propositions in snacking, in salads, in sushi. I'll say more about sushi a little later in this presentation. And the reason I state all of that is that, ultimately, if we're going to sustain growth and we're going to sustain relevance both with consumers and customers, we have to have really great-tasting product and we -- innovative product, and we certainly delivered that in spades in the first half of the year.

It matters a lot to us to have a consistency in terms of our relationship with customers. I feel like I'm a little bit of a broken record in sessions like this talking about contract extension. But in effect, what we've done is with 4 of our top 10 customers, we have rolled forward our supply agreements such that we sustain that 4- to 5-year average forward contracting period as we roll out across our customer base. So again, a very significant supply agreement renewal activity in the first half of the year.

And then we focused a lot on building relationships and capability that extend beyond physical product into order management, into distribution, into category insight, into taking more direct ownership and responsibility of food safety, quality, technical standards. Effectively, that responsibility being outsourced now by many of our customers to us, which leads to a more end-to-end and joined up proposition than might have been the case 2, 3 or 4 years ago.

I wanted just to talk for a minute about what I signaled earlier, which is around this -- the importance of this differentiated model in terms of what we're doing. I'm conscious that in the way in which we generally, and I in particular, talk about our business, I've tended to over the years focused a lot on customers, a lot on categories, a lot on consumers in terms of what we're doing. And of course, over the -- all of those things matter. And the proposition that we put together in terms of how we compete and how we service the market have played very much to those things, to growth, to customer relationships, to consumer insight, to technical standards in food safety and also to cost over the last number of years.

But we have very deliberately, in the course of the last 18 months, made what we believe to be a pronounced change in emphasis within our business in terms of trying to build a more systematic and more analytic model in terms of how we drive excellence in manufacturing and, increasingly, excellence in commercial and excellence in purchasing as well. It plays to the group leadership structure that we put in place last summer. And a big, big part of what Peter and his team in his role are taking on is trying to get more systematic and more consistent delivery of initiatives right the way across the totality of our estate so that you don't have this divisional emphasis by which we drove performance and capability in the past. And instead, we've got a more consistent joined up emphasis in terms of how we're going forward.

We started in FY '18 in our sandwich sites in terms of doing that, and we are working very hard now to extend that manufacturing approach, that systematic way of driving excellence in manufacturing across the rest of our food to go sites and the rest of our business, such that if you go to any Greencore site now, same methodology, same way of thinking about it, same commitment and consistency of how we're driving manufacturing.

To bring that to light a little bit in terms of what's different, it's different in terms of people. In less than 1 year, we've now brought in 15 new roles into our business focused on continuous improvement and end to end. And that is a different skill set. It's a different skill set in 3 very particular ways. It's much more focused on data analytics. All right. And the analytic capability, the background of the people who are coming in to do these roles in our business is markedly different from any recruitment that we would've done before. It's much more different than change management. But the only way that analytic skill can actually take root in our business is if we can -- if those individuals can work side-by-side with the factory management teams, the supply chain teams, the purchasing teams in our business. And thirdly, it's different in terms of orientation around empathy, collegiality in order to get that done. So we are really excited about the kind of business, culturally and capability, that we're building here.

And what will come out of that, we think, is 2 things, right? One, it'll give us an ability to progress margin while taking onboard all of the -- sometimes basis and sometimes unknown hits that can come to our business, whether that be sustained levels of labor inflation, volatility within ingredient basis. So we think we can, at worse, maintain our operating margin in the light of that, but also possibly, nudge that forward as we progress through that months and years ahead. And secondly, we think it'll give us a bedrock or a foundation to enable us to add other things into our portfolio. So you can't separate the how-to-compete business model, business proposition decisions that we're making from our growth agenda. I mean that's going to be very important as we go forward.

I want to just touch now on the theme for future strategy that we're working on. I'm sure in doing this and in the Q&A, I'm going to be unable to play to all the questions that you have about our business. But we will broaden out this conversation through the rest of this year and into next year and of course by virtue of the actions that we take as a business.

But the starting point for our strategy and proposition is that we're about growth and returns. We have always, by which I mean over the course of the last 12 years, valued growth, not just because it creates excitement and interest and opportunity for our teams, for our customers in terms of what we're doing but also because we believe in this type of business. If you don't have growth, you don't have relevance. And if you don't have relevance with customers, it's really, really difficult to be right at the heart of the agenda and to be able to sustain returns going -- on margins going forward. But the second piece of this is we're also about value and returns. We see the platform that we built, the returns profile that we have, the level of capacity and capability in our business are giving us a wonderful opportunity to be able to progress returns through equity and with very strong margin, strong cash flows, strong returns and capital as we go forward, and that's very, very important.

So the core elements of our strategy will be about extending our leadership positions in a broadly defined set of immediate consumption of food to go opportunities that plays to category extension, channel extension and an enhanced capability profile to go after that. By -- what I mean by that last part, just demystifying it a little bit, is we have a conviction that (inaudible) thing is going to be hugely important in immediate consumption food going forward. And in order to get into that, it's going to bring us into technology, equipment, partnership, service, a set of capabilities that we're experimenting with but we know we have to do more with as we go forward. We can't deliver on that without continuing the momentum that we've got around our replicable, repeatable operating and commercial model that I touched on a minute ago. We anticipate that the core of the value creation from our business will come from the organic growth profile and returns profile of our existing business. But we fully anticipate complementing that with a whole series of inorganic initiatives over the course of the next 2, 3, 4, 5 years. This will be a strategy we anticipate which will deliver value from our core business and complement that with multiple acquisition activities that will play to one or, ideally, several of product initiatives, channel initiatives and capability initiatives as we go forward.

And of course, what's kind of interesting about that is this isn't just kind of theoretical or aspirational of "what we're going to do tomorrow" plan. If you look at what we've actually done in the first half of the year, we're actually already running against many elements of this. We are rapidly accelerating our proposition in salad, right? We've added new salad customers around side of plate, and we're bringing food to go salads to market with 2 of our large customers this summer, which will be completely new in terms of the nature of the proposition that we're bringing to those customers and highly complementary to the salad and sushi range that we have with them.

We've actually worked technically to crack something that no one previously had cracked in traditional sushi manufacturing, which is actually the seemingly straightforward task of actually having raw sushi and having that safe and delivered on time with a proposition that works for customers in terms of shelf life availability and supply chain to get it in and, as necessary, out of stores to ensure that consumers are safe, but that you are able to get the type of quality sushi in retail stores that you can get in a sushi specialist going forward. So we think that's really important.

We're working on channel extension activity with existing grocery customers. I touched on some of those themes earlier. The essence of this is that we have a conviction that food service and in-store theater in grocery stores is going to become more and more important. And we need to be relevant to that with ideas, propositions and capabilities that enable them to go after that.

We continue to win new business outside of grocery in limited assortment discounters and in food service in ways that are new and additive to our existing business. And as you know, we have a view that in order to access all these opportunities, it's really, really important for us to have a complementary distribution capability. And again -- I mean you've seen us step on our distribution revenues to enable our customers to go after these opportunities and, in a number of cases, where it makes sense to add new customers to our group. And as you pull all that together, this combination of organic initiatives and we think a kind of unfolding but individually modest M&A agenda, we think, sets us up very nicely to be able to sustain growth and drive returns in the months and years ahead.

So in conclusion then, clearly, if you reflect on the last 9 months and the first 6 months of the year in aggregate, a lot has gone on in terms of the reset in every sense of our exit from the United States. But what's really encouraging here is that our half 1 financial performance has been good, exactly in line with what we hoped it would be, and our guidance exactly in line with what we hoped it would be when we started the financial year. We think we're on track to achieve these financial strategic and organizational goals for our business this year. And we have a emerging road map within our leadership team and within our Board around how we evolve and build growth and value in terms of strategy going forward, which I think sets us up well to progressively build return to shareholders in the months and years ahead.

So thank you very much to -- for listening to us, and Eoin and I are happy to take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

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Charles Hall, Peel Hunt LLP, Research Division - Head of Research [2]

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Charles Hall from Peel Hunt. Patrick, you've talked about bringing in new technologies, new capabilities and, at the same time, expect to at least maintain margins. So are you seeing that as being a steady increase in capabilities, like people and technology, to be able to still deliver the margin? Or do you need to go sideways for a bit as you add that expertise before you can proceed further?

And then on the technology front, is this -- can you just give an update on where you see CapEx and, particularly, with capacity? And if you're needing to bring in new technology, do you need additional capacity and resources to do that -- deliver on that?

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Patrick F. Coveney, Greencore Group plc - Chairman of the Group Executive Board, CEO & Executive Director [3]

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Yes. If I take the first, do you need -- take the second and (inaudible).

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Eoin P. Tonge, Greencore Group plc - CFO, Member of the Group Executive Board & Executive Director [4]

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Sure.

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Patrick F. Coveney, Greencore Group plc - Chairman of the Group Executive Board, CEO & Executive Director [5]

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Yes. I mean I think the -- our intent, Charles, you can never be quite certain month by month and quarter-on-quarter in terms of how opportunities will unfold. But our plan is to do this in a smooth way where we're not sitting here talking at a quarterly or half year about having to take some hit because we made an investment.

And the reason I wanted to cite as specifically as I did the investment we're making in capability and in continuous improvement and an end-to-end, the 15 new people we brought into our business as Peter has championed is an example of us doing all that without making any song and dance around the impact that has on margin in the period in which we're doing it so we think crudely and at a high level, whether it be in terms of margin progression or investment that we'll be self-funding. And that's the kind of principle I said we're -- that we're planning against in relation to all this.

Now can you -- can I give you like kind of absolute guarantee that something won't come up that we would choose to do that would require us to talk differently about that, I can't. But the kind of intent and direction of travel here is that it would be self-funding in all respects.

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Eoin P. Tonge, Greencore Group plc - CFO, Member of the Group Executive Board & Executive Director [6]

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Yes. I mean actually, I think the concept of self-funding is probably the right concept to take away actually. I think the probably only exception to that is if we do inorganic activity in relation to this. But in terms of -- think about margin is in kind of a self-funded approach and back to what we previously said around -- look, in just trying kind of slowly build margin.

And I think it's the same principle from a capital perspective. We're just -- kind of almost self-funding element to that as well, which is if we can drive new technology, whether it be technologies in relation to more effective manufacturing or different types of manufacturing, which in the case -- in some cases, [hard], or increased automation, that does reduce some of the existing envelope of capital as well. So we'd expect that the capital level to still continue to be sort of similar levels.

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Nicola Victoria Mallard, Investec Bank plc, Research Division - Consumer Analyst [7]

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Nicola Mallard. Can I just ask on distribution business? I think we've previously been -- sort of indicated that -- where you've taken it. It's been a bit of a step change, and you weren't intending to do a lot more of it. But your comments there, I read, as being perhaps a slightly different take on that, that maybe distribution is a way into the new channels. And I guess that comes back to the margin, that clearly distribution is a lot lower than manufacturing. So do we need to be aware or think of distribution in -- differently, that I just thought as a step change and it's washing through the system and that'll be it?

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Patrick F. Coveney, Greencore Group plc - Chairman of the Group Executive Board, CEO & Executive Director [8]

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Yes. I mean I think in aggregate, the emphasis on distribution, I'll say more about it specifically in a second, shouldn't have an impact on overall margin. In other words, it's in keeping with the sort of self-funding kind emphasis on [moral] that we have.

Let me kind of be specific around the kinds of stuff that we're doing. So first of all, let's start with the fact, right, that, yes, it's on a stand-alone basis. It's lower margin, but it's actually very strong returns on capital. So just important that you -- we don't, in this obsession with operating margin, end up concluding that we're doing something that's value disruptive. On the contrary, it's -- the returns to capital are really, really good even off low operating margin.

But the kind of thing we're doing is so -- I don't [even mind of] saying this, but like by far the largest customer of Greencore is Co-op. And our proposition to them is heavily led by what we do in terms of manufacturing, but complemented by the fact we do a whole series of supply chain stuff, including physical order management and distribution of their very short shelf life products, most of which we make, but some of which we actually bring in alongside the products that we make, to be very specific. If you look at the food to go salads in Co-op, they are indistinguishable in every respect from the sandwich products in Co-op, except we don't make them. But we do order manage them, we do distribute them, we do co-merchandise them with the food team within. And so as long as they continue to grow more faster than the rest of the U.K. food market, which they are doing and which we're delighted with and supportive of, you're going to see our distribution revenue go up. Because every single product that's purchased in store by a consumer is actually distributed through a Greencore banner.

In -- I don't think, though, that's at the core of your question. The question is are we adding meaningful new customers in distribution that we're not manufacturing for, and the answer is not really. Or if we are choosing to do it, it's because we think it gives us a potential route over time to do manufacturing as well. So we're not in the market to have a stand-alone distribution business. That's not what we want to do. We think it's -- it needs to be embedded with our manufacturing and kind of your management proposition to customers, albeit there could be quirks of timing around what -- how things unfold between distribution and manufacturing.

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Doriana Russo, HSBC, Research Division - Analyst [9]

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Doriana Russo, HSBC. I'd like to understand a little bit your view on the food to go market as such. You mentioned that you are happy to be in a structural growth area of the market. But you also mentioned that most of the growth that you're having is volume-based rather than price-based. So how do you see that equation evolving over time? Do you think by becoming closer to your customer, you'll be able to add maybe not price, but mix to just straight volume? Because at some point, there's only a certain amount of sandwiches that we can eat. That's my first question.

And the second question is coming back to channel. You mentioned that you started a selective range distributing to the discounters. How far are you into getting into that part of the sort of food retail market? And where would you like that to be?

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Patrick F. Coveney, Greencore Group plc - Chairman of the Group Executive Board, CEO & Executive Director [10]

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Yes. Do you want to pick this up?

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Eoin P. Tonge, Greencore Group plc - CFO, Member of the Group Executive Board & Executive Director [11]

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Yes, sure. I mean think actually, logistically, the point around mix and price, I think actually that's a really important part of our business particularly in food to go. I think over the last number of years, as we moved to sole supply in the categories with all the customers that we supply, what that's really brought is -- I mean people talk about the partnership model. But bluntly, both of us are trying to do the same thing, right, which is we get to grow our combined businesses. That's working very closely together on category management to drive effectiveness of range from mix effect. So I think there's quite a lot of huge amount of both opportunity but also just recent experience about where we've been able to influence our mix and so on, maybe less price, but certainly mix and -- like specific price, if you know what I mean. So I think that's a very important part of the business with -- in food to go.

On discounters, I mean we trade well with the -- both of the primary discounters in the U.K., both in food to go and some other nonfood to go categories. We've been doing that for a number of years. It's -- for us, it's a -- it's just part of our business now I'd almost go so far to say. I mean some of their business models have evolved a little bit too, that they're becoming more like [gaining] with the rest of the grocery retail, to be fair. So -- but they're important customers that's part of our portfolio now.

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Damian Paul McNeela, HSBC, Research Division - Former Analyst [12]

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Damian McNeela from Numis. A few for me. Firstly, I think, Patrick, you mentioned that the food to go market, your product revenues had outpaced the food to go market in the U.K. in the period. Can you just give a few more specifics about what the market growth rate is and perhaps where you were, please?

The second question is on hot food. I mean hot food has been a hot topic for a long time, and it hasn't materially sort of -- or you've not really made a big impact as far as we can see in hot food yet with the -- sort of seeing places like Greggs that have a very strong like-for-like growth. What's changed in the marketplace or your view of how to address that marketplace? Do you think that's an opportunity medium term?

And then just finally, just -- I hear what you're saying about margins. Can you give us an idea of where you think ROIC might be going on a medium-term view?

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Patrick F. Coveney, Greencore Group plc - Chairman of the Group Executive Board, CEO & Executive Director [13]

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Yes. Okay. The food to go revenues, so a lot of this is kind of caught up in industry definition stuff in terms of what the market is, the reasons for these, the Nielsen, IRI data and so forth. But our best sense on a traditional grocery channel basis is that the market was growing at between 1% and 2%, and we were growing 1 or 2 percentage points faster than that in the first half of the year. And that seeped through then to the sort of 50-50 split between manufactured product and distributed product in the 7% food to go number that we had. The -- but again, there is a big issue there around how you define the addressable market and which people are in and out in that. But that would be our best sense.

In terms of hot food, I mean I think you are -- there were several points that you made that I would violently agree with, right? The first is that we haven't made much of an impact to date. The second is that it's a medium-term opportunity rather than it's going to happen overnight. And I think what's critical to how we are engaged on that topic is the increased focus that our customer set is now placing on those kinds of propositions, right? I need to be a little bit careful of -- and being specific customer by customer on that. But we have seen just a very, very significant step-up and emphasis around -- I made this point on the evolving kind of CapEx programs of some of our customers away from the kind of rapid rollout of new-to-franchise stores towards investing into the proposition in store. I think you could extend that and point to actually things like in-store food service, be it cafés, counters, different -- the whole term café involves a myriad of different types of propositions. So we see that whole space as being really, really important to the performance of our customers in the food to go space and our performance serving into them. And our view is that thoughtfully put together hot propositions, which will of course be less comprehensive than specialist food service operators that promptly put together -- hot offers will be important, most particularly for early kind of breakfast to early day parts.

Last point in relation to ROIC. I mean we had, I think, 14.6% was our ROIC in this period. Obviously, we make more money in the second half typically than the first. So we'd expect our full year ROIC to be stronger again than that. This might sound like a strange way of putting it, but I think we need to be cautious about aspiring to taking the ROIC up too much higher. There's a danger with a WACC of 7.5% or 8%, that you end up fixating on having a high-teens ROIC, that you turn down value-creating opportunities for shareholders. But our best sense, as we talk about this kind of self-funding plan broadly defined, is that we should have a good chance of sustaining or modestly progressing ROIC from that mid-teens number that it's now at on an after-tax basis as we go forward. And I think if we can do that in a way that's very respectful of the equity base that we have, it should be through to good returns for shareholders going forward.

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Jason Molins, Goodbody Stockbrokers, Research Division - Analyst [14]

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Jason Molins from Goodbody. Just from the Warrington side. I think you mentioned you're now in full production. If you could just clarify what sort of level of capacity utilization that site is running at. And overall, how do you see the ready meals category? We've also seen contract churn with some of your customers and also your competitors. So just an update there would be useful.

Second question is around your stranded costs at the time of the U.S. announcement. You called out the level of stranded costs that were in the business. Just an update on how that's progressing and how we should think about that improvement, whether it's second half or next year.

And then just final question is around working capital. Obviously, significant outflow in the first half. Maybe just drive some of the levers there and where you expect that to be for the second half.

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Patrick F. Coveney, Greencore Group plc - Chairman of the Group Executive Board, CEO & Executive Director [15]

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Okay. Thanks, Jason. I'll -- let me touch on the ready meal question. Eoin will address the stranded costs and working capital piece.

Yes. I mean we're actually -- let me kind of compromise, giving you kind of snap shot where is our ready meal business today because it might help. So we have a pretty much brand-new, well-invested, very well-invested actually facility in Warrington that we believe makes the best Italian ready meal markets in the -- Italian ready meal propositions in the U.K. market. And that has a very stable customer set centered around one very large customer, which gets the -- a huge proportion of the product that comes out of that site. Our ready meal business with that customer has not been impacted in any way by the reasonably high profile set of changes around ready meal supply that's rolled through the local market with that customer. And that's all I'm going to be comfortable saying in that regard.

The second thing that we have is a second, somewhat yet lesser-utilized facility in Wisbech that makes broadly similar product to what we make in Warrington. And you put those 2 sites together, that is our short shelf life Italian-focused ready meal proposition. And it -- in aggregate, it's centered around supplying 3 customers and -- with a very, very stable, a positive set of relationships with all 3 across those 2 sites.

Third thing is -- goes to what Eoin touched on earlier, which is the rationalization in Kiveton that he referenced, right? And here, what we had is we had 2 separate sites that were both doing much longer-life ready meals. And what we've observed over the last number of years is that consumers and customers have, for the most part, wanted to step away from that type of ready meal towards fresher, shorter life and, typically, better-tasting product. And as part of that, we rationalized our network from 2 sites to one with a kind of pretty simply seeking to fill up the site that we have in Consett and come out of the production that we have in Kiveton. And so that's why you see the different moving parts.

I think importantly, all of that or, in particular, the 2 big parts of that completely finished in the first half of the year and are not relevant to the second half going forward. In other words, the onboarding of all of the new capacity in the new Warrington site has fully unfolded now and the withdrawal effects of Kiveton and the transfers into Consett and that up and running have all -- has also fully happened in the first half. So we actually have -- notwithstanding kind of widely discussed across the industry around the ready meal market, we actually have a pretty stable both set of capabilities and ethnicities that we focus on and customer set that draws from those 2 different parts of our business. Did you want to...

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Eoin P. Tonge, Greencore Group plc - CFO, Member of the Group Executive Board & Executive Director [16]

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Yes. I mean just -- Jason, just one final point on ready meal is like utilization isn't kind of a challenge across those 2 facilities, Warrington and Wisbech. And over -- our overall outlook for the ready meals category, particularly our part of it, is pretty positive now that we've done all of these resets.

On stranded costs, I've got no real new news there other than it's progressing well. We've reset the organization post the U.S. business. And as I said at the back end of last year, we kind of expect to see the benefits of those in the overall cost structure, because it's now embedded in the overall cost structure, to start to come through towards the end of this year into next year.

In terms of working capital, I guess it's -- obviously, there's 2 elements at working capital in the first half of the year. You've got the GBP 21.2 million relating to the U.S. I think you have to look at that in the context of the overall cash flows for the U.S., the GBP 810.4 million and indeed some of the FX translation. So that's done. I mean that will obviously be there for the full year, but that's done in terms of the U.S.

And then the other element of working capital is the GBP 30 million outflow. As I said, it's a little bit higher than we typically see at this part of the year. Typically, we do have a seasonal outflow in this first half of the year, which unwinds through the second half of the year. We should expect that to happen. Some of the reasons why it was a little bit higher this year are temporary, which is the Brexit planning. Some a little bit more permanent, which is the small amount of business exits. But in terms of, sort of for want of a better word, guidance on working capital, it hasn't sort of changed. We expect, on a full year basis, have a modest outflow on sort of the continuing business.

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Cathal Kenny, Davy, Research Division - Senior Analyst of Food and Beverage [17]

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Cathal Kenny from Davy. Two questions for me, please. Firstly, Patrick you mentioned new product development. I think you mentioned the figure of 30% within the broader category. And just wondering, are you seeing greater levels of fragmentation, perhaps maybe a shift away from [large process runs] towards batch to accommodate, I guess, that rate of churn within the market, particularly with the advent of vegan?

And secondly, just listening to you on food service and the opportunity around in-store over the medium term potentially growing importance for Greencore, is that something we should think both in terms of maybe a partnership or maybe an associated different revenue model? Just wondering. Maybe you can elaborate on that.

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Patrick F. Coveney, Greencore Group plc - Chairman of the Group Executive Board, CEO & Executive Director [18]

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Yes. I mean on the NPD piece in a bit. Just to be clear, what I talked about is that we typically have about 30% to 40% change [tweaked down a little bit actually]. There are 30% to 40% of all of our SKUs any given year (inaudible) year. And what I think is in the first half of the year, 30% of all the products that came to market were vegan-focused this year, right, which is actually a pretty significant commitment on behalf of our business and our customers and to going after what we think is a -- will be an enduring theme around food for years and years and years and is likely to build, not scale back. That's our judgment.

I mean I think inevitably, there is a healthy tension between the kind of pure operational manufacturing mindset of wanting to make a smaller number of SKUs as possible with as long a set of [runs] as possible and of course have that then be reflected, both in our pricing but also our customer's pricing through to end consumers, and the need to also be able to be kind of sharp and alert to emerging trends, try things, see if they scale. And then -- and we tried to put together our network to enable us to do that in a sensible set of ways as possible, all right?

And if I give you 2 such examples. So one way to think about our sandwich network is that we have a dedicated complex for sandwich and related food to go companies for one of our customers, and then we have a 5 or 6 other sites that play to the rest of the market. And so in both actually, what we have done is to configure either a portion of the campus in Northampton or a particular site, most particularly -- which can either be Heathrow or Atherstone in the context of our sandwiches and where we're actually setting ourselves up to be able to do batch production and innovation or regional short shelf life propositions in a way that doesn't compromise the efficiencies you always want to get around core range in some of our larger sites like Manton or Park Royal or Unit D and Northampton. So we're trying to work our way through that.

But I think the principle will be that we have got to keep our business relevant to what consumers want to eat and what consumers want to buy and then find a way of making money on the back of maintaining that relevance. And so you could argue, there's a modest element of tension, but we think we're pretty well equipped to be able to manage our way through that.

In terms of food service, I mean I'm glad that you picked up the nuance of what we were talking about in relation to food service because this is not -- and I just want to be -- this is not a kind of a Greencore strategy of let's jump all over the food service market. That's not the core of what we're talking about here. What we're looking -- the view we have from our engagement with customers is that serving and theater in-store will become more important, whether that's done through -- you see this most particularly, for example, in sushi counters around the U.K., which by the way is replicated in many other markets as well, but you also see it in propositions around café, drop in, convenience.

And so what we're looking to do is to really work hard on how we pilot test, resource and the capability to help our current customers go after that with that kind of broad objective. I don't think -- we're not close minded to whatever the right business model is to go after that with our customers. I think it's more likely than not that it'll be a -- we make our money in the manufactured product piece of it. But I wouldn't close down the other stuff depending on what evolves. But the focus is doing it with our -- principally with our existing customers.

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Jack Gorman, Greencore Group plc - Head of IR [19]

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I think we'll take one more question in the room, and we have one question on the call. So we'll take the next question from the room.

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Doriana Russo, HSBC, Research Division - Analyst [20]

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Just a very quick follow-up question. You mentioned the changes that you have adopted in the ready meal business. Do you see any other portfolio changes? Any other scope for rationalization within the non-food to go business as it stands at the moment?

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Patrick F. Coveney, Greencore Group plc - Chairman of the Group Executive Board, CEO & Executive Director [21]

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No. We don't. Now let me try give you a kind of more multiyear view on that. We're -- you could always see modest tweaks in what we're in and out of. But the -- we knew we needed to make, for a couple of years, the change around our network for [long-life ready meals], and we got on with doing that in the second half of last year.

Having done that and having made the decisions we made last year around cakes and desserts, we actually -- from a planning perspective, we are really comfortable with the portfolio that we have and actually excited that we can grow it from here. The 2 centerpieces of that are our cooking sauce business and our ready meal business. And we think both are well set up in terms of the network that we now have to build from here. I mean so that would be -- that'd be our point of view.

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Operator [22]

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We have a question from Arthur Reeves from Barclays.

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Arthur John Reeves, Barclays Bank PLC, Research Division - Analyst [23]

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It's 2 parts. Just going back to growth. I think you said this morning that the growth in half 1 was volume-related. Does that mean that we're not managing to recover the higher input prices? That's my first question.

And my second question is could you bring us up to speed with what's happened to growth since the end of the half, please.

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Patrick F. Coveney, Greencore Group plc - Chairman of the Group Executive Board, CEO & Executive Director [24]

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Yes. Arthur, sorry, (inaudible). It's Patrick answering your question.

Yes. I mean I think in terms of emphasis, principally volume-related. In fact, Eoin is elbowing me here. You can't see. (inaudible) there was actually a very modest uptick in price, about 0.5 percentage point of the growth that came from price. But predominantly volume-related, so to clarify that. I mean -- but also to stress that, that does not at all imply that we're not recovering inflationary pressures or protecting or indeed even enhancing margin because the -- we operate with a range that fits at every point on a -- the pricing architecture of our customers. And in a market that's a little softer or more price-sensitive, they choose to up-weight the ranges of the more entry levels on brand ranges. There you'll see our -- you can see that reflected in the price/volume mix that we have without there being any negative consequences for our margin whatsoever.

So certainly, we would absolutely observe -- we -- for what it's worth, maybe this is a -- this, I think, is a Greencore mindset, we actually prefer volume growth to price-led growth. We think that's a -- continues to dial up our relevance, and we've got more consumers picking up our products and our categories are churning faster in-store for customers. So we actually think it's a good thing that the growth is coming from volume rather than price. But we're -- but please don't read into that a -- that there's any element of non-recovery of inflation through that.

I think the second question on...

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Eoin P. Tonge, Greencore Group plc - CFO, Member of the Group Executive Board & Executive Director [25]

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Growth since half.

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Patrick F. Coveney, Greencore Group plc - Chairman of the Group Executive Board, CEO & Executive Director [26]

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Yes. Well, we were -- the only thing I can really refer you to is our integrated guidance here, which was this -- which was our reconfirmation of our expectations for the full year as we described that. I mean the point that I think any kind of seasoned Greencore watcher will know is that the product range that we have is heavily indexed to the summer. And so in good summer weather, our volumes are stronger than a weak summer weather. And so -- that's how we would look at it.

And so we're not -- in issuing the guidance that we're giving, we're not being heroic around our assumptions around what will or won't happen in terms of weather. We have this debate every year internally, we've been at this for a while, around what constitutes a normal summer. And we tend to issue our guidance consistent with that, and then that's what we've done today. Great. Thanks, Arthur.

Great. So with that, we said we'd try to finish, folks, at 9:30. It's just after that. So thank you, everyone, for joining us in the room, and then thank you to those who have joined us on the conference call. We're -- I'm happy to take up questions afterwards and look forward to speaking to everyone when we next issue our results, which should be our Q3 trading statement at the end of July.