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Edited Transcript of GNC.L earnings conference call or presentation 26-Nov-19 8:30am GMT

Full Year 2019 Greencore Group PLC Earnings Call

London Dec 2, 2019 (Thomson StreetEvents) -- Edited Transcript of Greencore Group PLC earnings conference call or presentation Tuesday, November 26, 2019 at 8:30:00am 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 - CEO & Executive Director

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Conference Call Participants

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* Arthur John Reeves

Barclays Bank PLC, Research Division - Analyst

* Clive W. Black

Shore Capital Group Ltd., Research Division - Head of Research

* Damian Paul McNeela

Numis Securities Limited, Research Division - Analyst

* Doriana Russo

HSBC, Research Division - Analyst

* Jason Molins

Goodbody Stockbrokers, Research Division - Analyst

* Martin John Deboo

Jefferies LLC, Research Division - Equity Analyst

* Nicola Victoria Mallard

Investec Bank plc, Research Division - Consumer Analyst

* Roland French

Davy, Research Division - Food Analyst

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Presentation

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

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Okay. Let's begin, please. So good morning to everyone here in the room and on the line. You're all very welcome to Greencore's results presentation for the full year ended 27th of September 2019. My name is Jack Gorman. I'm Head of Investor Relations at Greencore.

Before we begin, I just have 1 or 2 housekeeping items for everyone in the room and on the line. For those in the room, you'll find on your seats a copy of the presentation that we're going to go through today. For those not in the room, the presentation is available online or via webcast. I will also draw your attention to the forward-looking statements on Slide 2 and the agenda for this morning's presentation that's outlined on Slide 3.

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

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

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Thanks, Jack. And again, to echo Jack's comments, welcome to everyone. I'm joined this morning for this presentation by our CFO, Eoin Tonge, and also in the room by Gary Kennedy, our Chairman, and Peter Haden, our COO; and some of the members of our management team, but you're very welcome.

In terms of how we're going to run the session this morning. Eoin and I are going to take about 30 minutes to run through the results and some of the strategic and operating drivers behind those results, and then we'll take questions from people in the room and people on the conference call.

I mean, in summary, this year has been about refocusing the Greencore portfolio, resetting the Greencore strategy and performing solidly while we've done all of that. In terms of where we now sit, we are -- just to put it candidly, we're exactly where we would like to be. We have strong entrenched positions in what we think is the most attractive part of the U.K. food market. We've got a strong team, a strong culture, a strong set of relationships and an economic model and balance sheet that enables us to both perform and grow. And we've performed well in terms of the growth that we've delivered on pro forma revenue, in terms of profits and in terms of earnings. And we've done that while working through 2 pretty significant challenges in the year. One is the level of internal change with the portfolio change, the strategy reset and some of the people changes through the year. And the second is the level of uncertainty and change that's run through the U.K. economy and the U.K. grocery sector through this year. And as I'll describe a little bit later on, we think on a comparative basis, we're running in terms of growth at 2 to 3 percentage points above the underlying markets in which we compete through the year while recognizing that those markets have moved around a fair bit through 2019.

Finally, in terms of setup, we're off to a decent start in FY '20. We're in line with plan in terms of how we're trading. We're not being especially heroic in terms of how we're thinking about the underlying trajectory of the market, particularly in the first 6 months of the year, but we're where we'd like to be in terms of current trading.

So with that, I'm going to hand over to Eoin, who's going to actually describe how these factors flow through the results of our group and how it sets us up in terms of economic model for the year ahead. 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. It doesn't seem that long since we were last together at the end of September at the Capital Markets Day. And as we guided then, we are very happy with the progress we are making in what are, as Patrick mentioned, somewhat challenging market conditions. In that context, we're satisfied with the financial performance we're going to go through today. So just to take you through the -- give you a bit more color on that financial performance, I'm going to start with the profit and loss highlights on Slide 7.

So I'm going to walk you through our revenue and profit performance in detail in later slides. At a top level, you can see we had a 3.5% decline in reported revenue due to the exit from our cakes and desserts businesses and the restructuring of our longer life ready meals activities. Pro forma revenue was up 2.6%. We delivered modest adjusted operating profit in FY '19, which when combined with lower interest charges from lower debt following the U.S. disposal, we had good growth in adjusted profit before tax of 16%. Adjusted earnings per share were 6% higher at 16p. Two primary points here. The group results from last year included the full year contribution from the U.S., so adjusted earnings in total are down year-on-year. And this year, of course, includes the effect of the tender offer on the weighted average share count, which, of course, is a positive for the per share outturn.

The tender offer was executed at the end of January 2019. It's worth noting that if the current number of shares were in place at the beginning of the financial year and you excluded U.S. earnings, adjusted EPS would have been 17p. And that's a more comparable baseline for us to assess FY '20 growth. Exceptionals were largely as presented in the first half. The only change to exceptionals in the second half of note being the transaction costs relating to Freshtime acquisition. Altogether, we had a post-tax exceptional credit of GBP 25.9 million, as detailed in the statement, driven in large part by the profit on the U.S. disposal. Basic EPS was, therefore, up significantly at 19.9p.

I'd also highlight our recommended dividend per share growth for the year of a very healthy 11.3%, reflecting our confidence in this resetting of our per share performance. It's worth noting that all of these numbers are pre IFRS 16, which comes into effect in FY '20. There is more detailed information on those effects in our annual report, and there's a summary in the appendix to this presentation.

So to take a closer look at our revenue performance on Slide 8. Our focus on pro forma growth here on this slide, just to get a clearer understanding of the underlying revenue performance. FY '19 pro forma growth was 2.6% overall, as I mentioned, with 3.3% growth in food to go categories and 1.2% in our other convenience categories. In food to go categories, the contribution from manufactured product growth, underlying sales was modestly higher than that from our third-party distribution revenue. Overall, the 3.3% was almost first half weighted; first half pro forma growth was 7%, whereas the second half pro forma growth was 0.3%. The growth in third-party distribution revenue all came in the first half with a modest decline in that revenue in the second half. So taking that into account, the growth in manufactured product revenue was approximately 1% in the second half. This exceeded the market, which, according to IRI data, declined in the second half, not helped by the tough comparators from FY '18.

In other convenience categories, pro forma growth was 1.2%. The phasing was also first half wages in these categories with first half pro forma growth of 2.8% and a modest decline of 0.4% in the second half. In the first half, our ambient cooking sauce was the driver of growth, mostly in the first quarter. There was a mixed performance in the second half, broadly tracking the market in the categories we operate in.

So turning to EBITDA and operating profit performance on Slide 9. In FY '19, we generated a 1.4% increase in adjusted EBITDA to GBP 142 million, and a 0.9% increase in adjusted operating profit to GBP 105.5 million. We generated profit growth in our food to go categories supported by both the volume growth and the continued strong operational performance during the year in that part of the business. In other category stores, some ups and downs. We continued to be encouraged by the revenue of our -- in our ready meals business following the reset of the product and facility footprint in that business in the first half, while our cooking sauce business experienced a more mixed, commercial and operational performance through the year.

At a group level, inflation trends were broadly as anticipated. Raw material and packaging inflation decelerated through the year ending up at just 0.4% inflation. There are no -- there were no discernible changes in labor availability trends during FY '19. Labor costs rose, however, as anticipated by approximately 5%, largely as a result of the increase in the national living wage and its effect on associated pay levels. We continue to put a huge focus on the area of labor. For example, as many of you heard and saw at the Capital Markets Day, we stepped up our work on our automation program and we'll speak more of this as the year progresses.

In terms of margin, we generated 50 basis points increase in adjusted EBITDA margin to 9.8% and 30 basis points increase in adjusted operating margin to 7.3%. This was primarily driven by the positive mix effect, as expected as a result of our exit from lower margin businesses, but also underpinned by continued overall efficiency.

So moving to cash flow on Slide 10. Firstly, to focus on the moving parts in free cash flow in the year. You may recall, in May, that the first half cash flows were very noisy given the disposal of our U.S. business and the resulting reset of our capital structure. I did say at that time that the free cash flow metrics will be cleaner and stronger in the second half of the year, and this is hopefully what you see here now today. As a reminder, our free cash flow metric is after interest, tax, pensions and any cash exceptionals. So walking through the waterfall, starting from EBITDA, net working capital for the U.K. business -- U.K. and Irish business had a very modest outflow, a little better than we would normally model for. Maintenance CapEx was 2.2% of sales as expected. Exceptional cash outflows were substantially all in the first half and almost all related to prior year charges. Interest, tax and pensions were also broadly as anticipated with interest reducing given the lower debt levels and cash tax paid starting to increase as expected.

After the impact of flows from the discontinued U.S. operations, we had a free cash flow of GBP 54.9 million. If you excluded those cash flows, we had a free cash flow of GBP 67.1 million from the continuing operations. This is an increase of approximately GBP 21 million on the comparable results in FY '18. It also represents a conversion of 47% of adjusted EBITDA, up from 33% in the previous year and approaching our medium-term ambition of approximately 50%. Overall, I'm very happy with our performance here in free cash flow.

So on to Slide 11 to just to look at net debt. Driven by the proceeds from the U.S. disposal and by the underlying free cash flow we just discussed, net debt reduced by GBP 212.6 million in FY '19. Our net debt to EBITDA, as measured under the financing agreements, reduced by 0.5 turn from 2.3x to 1.8x. Now the net debt number does reflect the acquisition of Freshtime in September, as does the net debt to EBITDA measure, which is calculated to take into account the pro forma effect of 12 months of ownership. So a couple of other points to note in net debt, strategic CapEx was low as anticipated at just under GBP 14 million and cash dividends rose significantly as expected. This reflected in large part a one-off change in the phasing of cash payments following the removal of our scrip dividend option. Overall, as I say, this left us at 1.8x at year-end, in line with our expectations and guidance.

Before I hand back to Patrick, on slide -- just on Slide 12 now, let me just outline the capital allocation model that we discussed in more detail at the Capital Markets Day. I thought it would be useful just to line up FY '19 performance up against the model to see it in action.

Firstly, on leverage, we continue to maintain net debt to EBITDA in a comfortable position notwithstanding the strategic acquisition of Freshtime. And I've noted earlier, we increased our dividend per share by 11.3%. We spent approximately GBP 70 million on the combination of the strategic CapEx and the acquisition of Freshtime, and we returned GBP 509 million to shareholders in the tender offer in January. I would note that our continuing return on invested capital metric had an outturn of 14.4% in FY '19. We are still happy with this overall outturn. It is worth noting, however, that there are 2 material impacts on this metric in FY '19. One is purely technical, which is the timing of the Freshtime acquisition. And secondly, is the impact of the increased effective tax rate which at 15% is starting to resemble a more normalized rate of taxation.

Overall, FY '19 was a good example of how we are looking at our capital allocation, prudent leverage, disciplined investments with a scope to return incremental value to shareholders on an opportunistic basis.

So with that, I'll hand you back to Patrick, and I'll come back to you at the Q&A.

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

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Great. Thanks very much, Eoin. And so I now wanted to give you a flavor for how our strategy and operating model drives the results that Eoin has described. For those following me, and then on the conference call, I'm on Slide 14 now.

The -- as we step back from the year, it's really a story of 4 quarters and 4 different themes. So quarter 1 was all about the U.S. exit. Taking advantage of a strategic bid at a very significant premium for our U.S. assets, and monetizing not only the investments that we've made but the future prospects for the U.S. business at just under $1.1 billion of consideration for that business.

Quarter 2 was about taking those proceeds and flowing it through our capital structure and organization. So it was about the capital return of GBP 509 million that Eoin described. It was the reset of our organization as we became a smaller, more U.K.-centric business and setting our business up to perform in a post U.S. world.

Quarter 3 was about resetting our strategy and working with our teams, our Board to really, I guess, to capitalize on the very strong instincts and experience that we had about the strength of our market position, the strength of our capability, the strength of our relationships and the prospects for growing our revenues, our profits and our returns in the U.K. and putting that into a strategy that we could then take and share with all of our stakeholders, which is what we did in quarter 4 where we brought that strategy to life internally. We brought that strategy to life with our customers. We brought that strategy to life on our Capital Markets Day at the end of September, and we began to get traction against that with the Freshtime acquisition in September as well. So 4 quarters, 4 themes of portfolio, balance sheets, strategy and momentum against that strategy.

Turning now to summarizing what that strategy is. And for those of you who were with us at the end of September when we had the Capital Markets Day, this slide 15 should be familiar. But it's about 3 themes. It's about the theme of growth. It's about the theme of relevance, and it's about the theme of differentiation.

So the first of those things is growth. It matters that we have positioned our business in a growing, attractive, exciting parts of the U.K. food business. That part is food to go, which plays out across many channels and many product forms. It's a part of the market that is forecast to continue to grow. If you look at the IGD data and projections on that, for example, it cites a 5% compounded growth rate -- forecasted growth rate over the next 5 years. And of course, it's where our business is anchored. 2/3 of our revenue and a very significant portion of our capability and a greater proportion than that of our workforce and colleagues are focused around the food to go part of our business.

The strategy is also about relevance. The relevance flows somewhat from the growth and excitement. It's about relevance to consumers. But in particular, it's about the relevance of our business to the strategies and operating models of our customers. We have long-standing, deep, trust-based relationships with the core customers of our group. And we are working on the growth and return strategies of those customers, be that around product or formats or shopper experience that are going to matter most to those.

And thirdly, it's about differentiation. And I'll touch on these things a little later in the presentation in more detail. But it starts with the food, the 2,500 SKUs that we bring to market every year, the level of innovation we have against that and the commitments that we make in terms of the safety and integrity and consistency of those products. It's also about people. It's about how we engage, work with and bring to life our strategy and operating model with 12,000 colleagues across our business. It's about the depth and strength and culture, the leadership teams that run through our business, and it's also about how we augment and strengthen our capability and culture over time.

The big idea that we really -- that we brought to life that's different over the last 18 months, and Greencore has been this team of excellence and consistency in terms of capability and most particularly in terms of manufacturing, and we've continued to invest behind that. And actually, it's been a very strong underpin to the margin performance and margin progression that Eoin described earlier. And finally, it's about the sustainability of our business. And I mean this in a more fundamental rather than good marketing way. Our business at its very core is about sustainability. It's about fresh, nutritious products. It's about very short length supply chains. Its' about the integrity and consistency of that food. And it's about delivering for the communities, shoppers and wider set of stakeholders in the U.K. through the role that we play in the U.K. food industry. And while we -- while that substance has been there for a long time, we have done some work in the last year that I'll describe a little later on about how we bring that together into a more joined up framework that we will talk more and more about as we go through FY '20 and beyond.

So if I go now to growth and Eoin touched on them -- on some of these themes because growth is important to our business. And I think it's important to all businesses, but especially a business like ours that actually is about delivering performance and growth for our customers and opportunities for our colleagues, it's a very important theme. So if I start with the market, I don't think it will be any great secret to state that the market has been more subdued and more challenged in aggregate in FY '19 than in prior years. And what you'll see on this slide, on Slide 16, is if you take a full year view on the market, it was modestly in decline, 0.3%, let's call that flash for the full year, driven really by what happened in the second half and most particularly in the third quarter, and Eoin touched on that earlier, where you can see on the bottom part of the slide, a 2.6% market decline in the year for -- in the second half of the year for food to go.

Now what I would say actually is even that, if you look at the market data, is a story of 2 quite different quarters. If you look at the market data for food to go, what you'll actually see is it grew by 1.8% in quarter 4. So this is really heavily, heavily influenced by what happened in the third quarter.

And if I turn now to Greencore food to go performance in the period, what you will see is that on a full year basis and on a second half basis is that we grew by between 2 and 3 percentage points above the relevant markets in the year. The drivers of that are partly that our portfolio, notwithstanding the breadth of customers that we have, is modestly overexposed to the somewhat faster growing parts of the market at the very premium end and at the value end of the market. But the second factor is the role that some of the newer product areas that we're really focusing on are contributing to in terms of our performance. So what you'll see actually is the -- of that 3.3% growth in the full year, about half of that comes from meal salads and sushi performance, right, which grew, in the case of sushi, by high single digit and, in the case of salads, in the low to mid double-digit performance in the year. So strong momentum behind that part of our business.

And we also, as Eoin referenced earlier, we had very good growth in our distributed product revenue, but that is all a story of the first half. And again, if I was just to be very specific on this for a second. We reported 7% growth in the first half of the year, about half of that was in manufactured product, half of that was in distributed revenue. In the second half of the year in food to go, we had 0.3% growth, 1 percentage point of growth in manufactured volume and a modest decline year-on-year in the distributed revenues in the second half of the year.

Now that's the year performance. There are people in this room and there are people listening on this call who will have greater insight than me on all of the different factors that impacted on the U.K. economy in the year, the U.K. grocery sector in the year. And I think it's not surprising with all of that change that consumer sentiment and consumer spending has been more subdued and more conservative than it might otherwise have been, given some of the fundamentals around employment and income because of that uncertainty. We anticipate that, that will begin to unwind in FY '20 and beyond. But more importantly, the underlying drivers of growth in food to go, we think, are very robust in the medium term. They're partly about the role that the product plays and the diet of consumers around health, around freshness, around sustainability. They're partly about the extension of these product areas in terms of time of day or occasion. And for those of you who heard me talking in September, you may have been surprised when we pointed out that based on our own research of over 40,000 consumer shopping occasions over the last 4 years, that only about 1/3 of all food to go products are actually consumed at lunchtime. There is a world of opportunity in different day parts, in the evening, in all day snacking and in breakfast, and part of our strategy is to get after that hard. And we're also seeing a proliferation of the points of consumption for U.K. consumers. And again, bringing our business and making it relevant to where consumers want to buy food to go products is going to be an important theme for us as we go forward.

And if I touch on those 2 themes now, 1 about product and 1 about points of consumption, here and just illustrate quite specifically what did we do in FY '19? What impact did it have in FY '19? And what will it mean for the trajectory of our business in each of these areas? So actually, we had in terms of product. We probably had the greatest level of innovation in terms of the percentage of our portfolio that's new in FY '19 in my time in the business. So we almost had -- with 1,200 new products in the year, very high level of product change.

And one of the real sort of secret sauces of Greencore, if I could describe it in that way, is we're able to do that quickly, we're able to do that safely and we're able to do that profitably. In other words, we make all of that product change without any real lag effect in terms of the profitability or without any real threat to the quality of our product proposition in terms of food safety to our customers there. Within that, there undoubtedly are some themes. I'm almost talking more widely to the media about this, this morning. But if you look at a -- which is about the role of us really hitting the plant-based or vegan-based product desires of U.K. consumers. So of the 1,200 or so products that we launched this year, about 1/4 of them, 300, are either plant-based or vegan products in the year. That's nearly 3x the level of plant-based or vegan products in '19 versus what we had in '18. And if I take what I referenced there a second ago about Eoin's comments earlier, of the 17 new Christmas products or seasonal products that we have right now -- in the market right now, 1/3 of those are either vegan or plant-based as in terms of the -- and the proposition that they have very different dynamics to previous years, and again, illustrating the ability of our business to hit these trends quickly and to be really relevant to both consumers and to how our customers respond to those consumer trends.

Second part of our business is -- in terms of product is taking the platform that we have in sandwiches as the core food to go product proposition and leveraging that to rapidly build scale in sushi, in meal salads, in chilled snacking, and in hot food to go. And in particular, in the first 2 of those, we have very significant momentum in FY '19. About half of our overall -- of all of the growth that we achieved in the year came in those 2 areas. With both of them growing strongly, way ahead of the rest of our portfolio, reflecting the investments that we've made there. And that's before I come to the Freshtime effect.

We haven't yet had the same impact on our revenue in terms of chilled snacking and hot food to go, but we've got some interesting experiments and interesting momentum there and will become a bigger theme for us in FY '20 and beyond. But growth isn't just going to be about product. It's also about channels, and it's also about bringing our range to the points of consumption that consumers now want. So the biggest lever is actually, as we put it, is making our existing space and our customers' existing space work better.

That's about merchandising and really it's about building a capability and investing in the analytic and supply chain capability to help our customers merchandise by format, by region, and increasingly, as it relates to food to go ranges by store. It's also about availability, and it's about matching availability to the actual shopping patterns and consumption patterns of U.K. consumers reflective of the fact that this has moved way beyond simply being a lunchtime range. And doing that without compromising the waste expectations and waste requirements and, therefore, profitability requirements for the category of our customer set. And it's also about product life and waste, right? It's trying to find ways where we can to build more life into products and also to build speed into the supply chain. So if we can get an extra half day or an extra day of life on shelf by getting the product more quickly to store, that's very valuable in terms of making space work better. And actually, the capability that we're building on that, what I might call, supply side category management is really, really important, and we've seen a big step on in terms of how our customers think about our capability in that area.

And then the fourth area where I would -- which I would put in the category here of experiments that we're running that you will see us talk more about as we go forward is finding ways to bring our products to new points of consumption for customers. We're already a very, very significant supplier of product into cafes, most particularly the cafes of our customer set, doing some work on product and on format there. But we're also actually trying to take the -- trying to establish new points of distribution, and in particular, with 3 of our customers now, we have pilot programs going on around vending, which are set up to bring our product and their proposition to point of consumption, they can't access the physical stores, whether that be events and concerts or presence in hospitals or some of those types of locations where people would be unable to actually either locate or operate a store at the hours at which consumers want those products.

So those 4 themes against the 2 in Paris as a product proposition and channel proposition of how we deliver growth in '19 and how it will impact on our business going forward. Freshtime is an example of us bringing the strategy to life. We acquired this business in September. We spent GBP 56 million buying this. It's a really, really nice strategic fit for us. It's 3 core customers, our existing food to go customers for Greencore. In other words, we have sandwich products that fits on shelf next to the salad product that Freshtime makes. In 2 of those customers, the 2 largest customers of Freshtime, we're actually physically distributing -- we were physically distributing those salad products already alongside the sandwiches that were going through our direct store distribution network. So the level of knowledge we had about this business, the way it works for consumers, the way it works for customers was very deep, and that really enabled us to understand, in a very fundamental way, the strategic fit and the operational fit of the business alongside our existing food to go business.

And in summary, we're after the -- a nice start in terms of integration. Customers have welcomed the acquisition, both current and prospective customers of Freshtime. We've begun to think about how to leverage the combined network in terms of where we make stuff. We're going to think about the capability in Freshtime and how we deploy some of that more widely across our business. And there are, as you would expect, some interesting synergy opportunities on the procurement and supply chain side that we'll be going after as we roll through FY '20.

But also it's beyond the specifics of Freshtime. It's an example of a lot of forward-looking model for us in relation to M&A activity will look like. It's strategic. It's individually modest. It's a good and complementary fit to both our strategy and our customer set. And it can be funded and driven out of existing resources with a disciplined approach in terms of capital allocation against that. So again, it's a nice acquisition of itself, but it's also illustrative of the Greencore strategy going forward.

I wanted to turn to the second theme now, which is relevance. The -- for those of you who joined us in September, hopefully, you will have been somewhere between intrigued and reassured by the way in which our customer set spoke about the nature of their relationship with Greencore and the relevance that we play in the strategies, growth and operating model of our customer set. I think you can -- what you can see on Slide 19 here is that, again, as customers view us and the kind of recognized industry standard for that is a survey called the advantage survey. Again, Greencore has scored very, very strongly here with the Greencore food to go business, again, as the #1 overall business cited by the wide U.K. customer set in terms of how they think about strategic alignment, people, category development, own label strategies and so forth.

So our business is very well-established alongside our customer set. You see that flowing through. It's a modest overall change in terms of the length of our supply contract and the percentage of our sandwich sales, for example, that are on these long-term contracts. It's picked up from 90% last year to 96% this year. That's reflective of 3 customers putting in place long-term supply agreements. One of those was a rollover, 2 of them were new. And that's important, not just because of the predictability it gives around our commercial model, but it also gives us the confidence to be able to invest behind those customers, to invest in capabilities like distribution, like inventory management systems, like category management. Because we've got forward-looking certainty in terms of who and how we're going to trade and what the economics of that look like -- looks like, it gives us the ability to make sensible capital decisions in relation to that and capability of decisions in relation to that.

I also wanted to touch against the theme of relevance and what we've done in ready meals, and Eoin referenced the change to that earlier. I mean, in effect, what we've done is 2 things in the first half of this year. First of all, we pivoted our ready meal business much more towards fresh. We were in fresh ready meals and long-life ready meals. We're now just in fresh ready meals. So that's really a -- that's a significant change in terms of what we're doing. And with that has come enhanced relevance to consumers, it's on trend, and we think it's going to set us up well for growth and returns going forward.

And if I turn finally then to the -- to theme 3, which is the theme of differentiation. And again, what I'm just going to try to do here over the next couple of minutes is state specifically what we have done in FY '19 against each of these 4 areas. First of all, in relation to food. I've already spoken about the level of product innovation and the ability to do that, as I said, quickly, safely and profitability -- and profitably in the year. But a big part of that is what we're doing in relation to food safety. And so we're pioneering actually in the U.K. market here in this area of earned autonomy or earned recognition where customers are outsourcing to us the responsibility for the quality assurance around our product areas. In other words, several of our large customers have stopped auditing our plans completely. And instead, we make available all of the audits that we do on those in terms of quality assurance, thereby creating a more efficient overall supply chain in terms of cost, speed, but that is only possible to do because of the level of trust that exists between the 2 businesses and the confidence that they have in our quality assurance and technical processes.

Secondly is in the area of people. I mean the 2 big changes or initiatives that we've driven through this year. One has been really trying to take -- if you think about an organization that has 12,000 colleagues, most of whom are involved in the assembly or manufacturing of food every day, there's about 800 to 1,000 people that provide the front line management or leadership interface into that group. And so we put a lot of resources into developing what we call the line manager framework and the line leader frameworks, which are really training programs to upskill those frontline leaders in terms of their management capability and their engagement capability with our frontline colleagues, and that's widely recognized now within the food industry as a powerful framework in terms of how we've driven that through.

And the second area is around the streamlining of our management team as we've come out of the U.S., setting our business up to be an operating U.K. business in terms of where our senior team fits, how they work and how we drive the growth and performance and strategic agenda of the business.

The third area, and I touched on this, again, earlier as the kind of big or different idea for our business, which is a real focus on being excellent in manufacturing and also being consistent around that excellence in manufacturing. So in terms of how we've organized, how we build capability, this concept of Greencore manufacturing excellence, which we're now extending to other parts of our supply chain, in particular, the purchasing and on to engineering, it's just a very, very important part of what we're doing. And that can only be done with an injection of new talent into our business. And for those of you who were with us when we did our half year results in May, we spoke about the fact that we have brought 50 people into our business, who are data scientists, continuous improvement experts, to really take forward what we were doing, bring best external practice into our business and help us to push on the manufacturing and supply chain capability in our business.

And finally, in terms of sustainability, as I said earlier, at its core, our business is all about sustainability. But again, we've delivered tangible improvements here in terms of the waste outcomes for our business, reducing both the waste that we generate within our own business, but also the waste that we flow through into our customer businesses by 130 basis points of improvement, significant improvement within our business. And also what we're committing to in the second quarter of this fiscal year is coming out with a more comprehensive and joined up sustainability report that really brings to life all of the different things that we're doing in this area, both in terms of how we're driving sustainability outcomes in areas under our direct control and how we're influencing and pushing the rest of the industry to improve sustainability outcomes across the U.K. food industry overall. So that will be an important theme for us as we go forward.

So if I finish then with the objectives as we look into FY '20 and a near-term outlook. I mean the first priority here is we're not naive to the uncertainties and moving parts of the U.K. economy and the U.K. grocery industry right now. Our plan for FY '20 against which we're assessing performance is not especially heroic in terms of how that's going to play out. But we have a conviction and an experience set that actually our business is resilient to the ebbs and flows of consumer sentiment across the different categories in which we operate. But we do -- we will, of course, have some work to navigate our business through whatever outcomes you'll begin to see in -- at a macroeconomic or grocery sector level.

Second priority is around continuing to build momentum against the product and channel extension activity that I described earlier. And the kind of -- the big idea here is migrating our business over time from a sandwich business in the grocery sector at lunchtime to a food-to-go business across all channels throughout the day, right? And that's the essence of what we're trying to do, and that's what's going to embed the future growth of our business.

The third area is continuing to get traction on the excellence programs. And in particular, referencing as Eoin described earlier, the experiments and investment and conviction we have behind the opportunity and automation and how that flows through and links with what we're doing in terms of manufacturing. And the magic of this in Greencore is going to be doing all of that, while maintaining the entrepreneurship and customer centricity of our business so that we can continue to get growth as well. And that's the balance that we'll have to get right through the year.

We want to capitalize on the potential of Freshtime, I have very little doubt about our ability to do that, but we still need to do that and have it flow through. And we need to do all that within the capital allocation framework and medium-term targets that Eoin described, both back in September and again this morning.

So if I put all that together into what does that mean for our business this year and the outlook for our business this year. We're on track, and we anticipate delivering profitable growth for the year ahead.

So that's our results. Eoin and I are happy to take questions in a second. But just before I do that, if you'd allow me, I wanted to publicly and very sincerely thank Peter Haden for his enormous contribution to Greencore over the last 6 years. He is a -- an absolutely outstanding business executive, 1 of the very best that I've ever worked with. And on behalf of myself, Eoin and our Board, I know Peter is going to finish up as a director with us at the end of the year, and as a colleague at the end of the half year, and I just wanted to publicly acknowledge that, and thank you for everything that you've done.

So with that, Eoin and I, we'll 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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Nicola Victoria Mallard, Investec Bank plc, Research Division - Consumer Analyst [2]

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Nicola Mallard, Investec. A couple of questions, if I may. You talked about, obviously, looking at chilled snacks and food-to-go? Are they on the agenda really for our focus in FY '20? Or is it more salads and sushi? And do you need acquisitions to really make a sort of a footprint in those new categories?

Secondly, can you comment on stranded costs? We would obviously give it a number last year that it was GBP 6 million after the U.S. sale, and we probably wouldn't expect much progress on that this year, but we should next year and just where we are on that.

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

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Eoin, do you want to do the stranded cost? And I'll pick up the charters.

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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. Yes.

So I mean, the stranded costs were in approximately around GBP 6 million, but not all of those, we believe actually -- we could actually reduce because some of them are, for example, senior management costs and -- for example. And -- but we -- all the changes that we had to make, we made. We made most of them actually at the beginning of the year, the financial year, and little bit through the year. So notwithstanding the announcement this morning, we've effectively done everything we need to do. As far as I'm concerned, that's part of our guidance now and as part of -- to a certain extent, you see a little bit of it in the back end of this year in terms of contributing and underpinning margin, and you'll get a little bit more of it into next year, but it's part of the overall guidance that we're giving.

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

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Yes, Nicola, in terms of the (inaudible) and I think the -- both the contribution in FY '19 and my expectation of the contribution in FY '20 is, I think the contribution of sushi and meal salads to growth will be in absolute terms will be much stronger in FY '20, than chilled snacking and hot eating. And I say that that's before you add Freshtime, which obviously accelerates the meal salads business dramatically over and above -- over and above that.

And so I think that will remain just a very important growth source for us. We are doing a lot of work in the other 2 areas. But the current contributions are much more modest. So where we have a -- as I just think about it quickly, we have meaningful hot eating trials in 4 customers right now. And we have interesting chilled snacking propositions in 3 customers, as I think about it right now. But the kind of pound value of those right now is modest enough, but the learnings are important, and I think will give us a platform either to put more organic efforts behind that or potentially, over time, if there's a way of going after and accelerating that through M&A, we'll be looking at that too, but there's nothing imminent in that area.

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Martin John Deboo, Jefferies LLC, Research Division - Equity Analyst [6]

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Martin Deboo, Jefferies. It's been a great year on everything apart from growth. So I just feel compelled to sort of do a bit more of a forensic analysis of growth, if you don't mind. I mean, Patrick, you're placing -- you're saying -- you're basically asking us to believe that you're gaining share in a difficult market, and that's evidenced by the IRI data. But I just want to challenge it. You are the biggest player in the market. So your LFL tells us something meaningful about the market.

Are you completely confident in IRI, given it's a difficult market to research? And do you think you're getting the right read of that. That's the sort of general question. The 1 specific, very technical, and I've just lost the plot a bit on what Freshtime consolidated in some DSD revenue is previously sort of passed through. Is that impacting the LFL in DSD? Or is that stripped out in the pro forma? Just remind me of what -- that's a very specific one. Just remind me of what happened there.

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Eoin P. Tonge, Greencore Group plc - CFO, Member of the Group Executive Board & Executive Director [7]

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So there's -- well, why don't I deal with technical point first, actually. It is stripped out in the pro forma, so that's the first point. So the 3.3%, I mean, we only had a little bit less than a month in FY '19 anyway, but it is stripped out for the 3.3%.

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

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On the forward-looking.

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Eoin P. Tonge, Greencore Group plc - CFO, Member of the Group Executive Board & Executive Director [9]

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The forward-looking effect is a little bit sort of complicated, but I'll try and simplify it, right?

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

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If you don't mind.

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

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So you -- well, I just do not. Sorry. I'll turn to it. We acquired about GBP 70 million round of revenue. About half of that we already distributed. So effectively, the net impact to next year will be about GBP 35 million. And now there will be a reclassification between manufacturing and third parties. So effectively, we'll have GBP 70 million added to manufactured and will take GBP 35 million away from third-party distributors.

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Patrick F. Coveney, Greencore Group plc - CEO & Executive Director [12]

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Okay. Yes. I mean, Martin, you are right. And I -- in a kind of previous life, I spent a lot of time talking to people about the fact that if you have such a high market share, you can't talk about the market in an entirely disinterested way, right? So I fully accept that, and we are 60% to 65% of the measured grocery style sandwich markets, right? So what we do influences enormously and what our customers do influences enormously the market performance. So if you try to square the circle as to where is our -- well, what's the source of relative outperformance, if I can describe it in that way. You come back to the outperformance in -- principally to the outperformance in meal salads and sushi, where we grew very significantly year-on-year in both cases, I would say, our sandwich performance is broadly in line with the market. It's a nudge better than the market because we have a set of customers, and I'm going to be a little bit careful around what I say here. We have a -- we're slightly overweighted towards the customer set that's actually growing better. But it's modest enough in terms of the overall impact. So does that answer your question?

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Martin John Deboo, Jefferies LLC, Research Division - Equity Analyst [13]

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Yes. No, could -- just the IRI number include that sushi or that sandwich number?

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Patrick F. Coveney, Greencore Group plc - CEO & Executive Director [14]

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It includes -- it's food-to-go, including meals -- meal salads and sushi, which are parts of the market where our relative share is much lower, roughly depending on definition between 10% and 20% in both cases. So obviously, we have scope to grow our share of those product areas, and we're clearly eating into that. And that's the implicit share gains we've had in the year, principally in those 2 categories.

Yes, Clive.

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Roland French, Davy, Research Division - Food Analyst [15]

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Roland French from Davy. Maybe just sticking with the theme of growth. Clearly, you've kind of called it out a subdued on certain environments. How should we think about your medium term targets, and in context of when they're going to be achieved? So is the run rate going to be achieved during FY '20? Or are you thinking '21 or beyond? That's the first question.

And the second question, I know in previous quarters, you've called out kind of volatility between your own customers. And I know there might have been some specific system issues. Has that trend continued? Is there still a polarization from where your customer's at? And then thirdly, maybe some color around kind of the manufacturing or per depot performance. So I know there was reset in ready meals, but generally, how should we think about utilization, efficiency, logistics costs, et cetera? Is there leaders or laggards within the depot?

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Patrick F. Coveney, Greencore Group plc - CEO & Executive Director [16]

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Yes. Okay. Let me see if I can hit each. I mean, clearly wrong. If we didn't have a conviction, supported by a level of insight around the -- each of the 4 medium-term targets in terms of their achievability, I mean, we would have introduced them in the Capital Markets Day. So what I suspect the core of your question is around the growth one in terms of how we reconcile the mid-single-digit, forward-looking growth aspiration to the current level of growth performance, most particularly at the second half of FY '19.

And my best judgment there is that we will be on a pretty good path against that as we finish FY '20, but I wouldn't be sitting here saying to you that the -- that there's been a very strong rebound in terms of market sentiment in the first quarter or indeed might view on the first half of the year is that the U.K. consumer sentiment remains pretty subdued.

And so we're delivering against the other aspirations pretty well. But we are not going to be able to defy gravity in terms of where U.K. consumer sentiment and U.K. grocery sales sit. And so I think we have a very high level of confidence that we can relatively outperform, but the actual -- the performance of the U.K. grocery in aggregate will impact on our overall revenue number.

So best judgment is I feel pretty good about that for '21 and beyond. And I think we'll transition towards a reasonable place as we go through FY '20, but you don't need me to describe the different events that are unfolding in the U.K. right now and how that's going to impact on sentiment.

On your second question -- customers, yes. I mean, it's -- we have seen a greater level of difference in terms of customer performance in volume terms in our categories this year than I remember -- than I can remember in any previous year, right?

Now again, I'm going to have to be a little bit careful about how I actually amplify that. But if I could put it in a broad theme, where if you take the big 4 grocers in aggregate, their performance in food-to-go is less good, than if you take the rest of our customer sat, which is people focused on convenience, people focused on premium, people focused on value.

And so we have seen a more marked difference between big 4 grocers and the rest. But bear in mind, if you remember from our Capital Markets Day, only about 1/3 of all of our food-to-go sales go into big 4 grocers and about 40% of our total sales go into them. So our business is quite well hedged in terms of how it's set up there. But clearly, we would -- we will benefit from a reestablishment of momentum in some of the big 4 grocers, and as we see it. And as we work with them, they are going after some of those themes, both overall and in particular in the food-to-go area, and now we just have to see how that flows through.

I think your last question was around kind of manufacturing performance and utilization. If I deal with utilization from the perspective of capital requirements first. Our judgment here based on the CapEx that we put down, GBP 300 million over the last 5 years into our U.K. network. The medium-term growth trajectory that we have in terms of value and the continued improvements that we're putting through our manufacturing network because of the Greencore manufacturing excellence investment. I think we're 4 -- we've got 4 or 5 years at least of capacity into which we can grow without having to have meaningful strategic capacity enhancement, enhancing in CapEx.

In terms of just the performance of the network, again, my judgment here is that in aggregate, it's probably better than it's ever been. And that's the -- and that has underpinned our profitability in FY '19 when volume has been a little bit softer, and it's reflective of the investments in the capability around manufacturing that we've put through. That's not to say that there aren't -- there isn't some portfolio effect across 17 manufacturing sites and 19 distribution depots. There are always things you can do better in 1 place versus another. But in aggregate, the performance is pretty decent and has been an important underpin to our performance.

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Clive W. Black, Shore Capital Group Ltd., Research Division - Head of Research [17]

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Clive Black from Shore Capital. 2 questions, if I may. Firstly, build on your last comments, Patrick, how do you see the shape of 2020, given the quite considerable differential performance between Q1 and Q2 -- sorry, H1 and H2? What should you be guiding us to in that respect?

And secondly, to what extent does this 2020 represent a meaningful year when you bring automation, supply chain, technology, data analytics, AI and all the rest of it together for the business? And where does that feed through in the P&L in terms of operating costs, working capital and so forth. Is this a transition year of block building? Or is this year that comes through? Or do we wait for '21, '22, '28, '29 for that stuff to emerge?

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

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Yes. I mean, I think the tolerance that we would -- if I deal with the last question first thing, the tolerance that we would have internally or that stakeholders to our business would have for transitory years is pretty low. So whatever investments we make, they have to -- they've got to work within our overall envelope that we've set out in terms of the metrics that Eoin described. And so I mean, FY '20 needs to perform in not itself and not just be about setting it up for '20 or '21, and that's what we would expect.

In terms of the -- just hit on the different themes that you've raised. I mean, the first point in terms of economic progression year-on-year, and that's -- I might just echo what Eoin said earlier, which is that the earnings accretion effects of the U.S. exit will flow through more in '20 than they did in '19, all right? It's because of this timing of when the capital return was done versus when the U.S. actually left. And that's the -- and that's where what we reported 16p earnings this year, the actual pro forma is really 2017. So you get that step up plus the earnings growth that we'll deliver in the year. So -- and so that's obviously going to be a contributing factor. In terms of phasing, I mean, our best sense is that half 2 is always more important for us. And I think it will continue to be so. The -- we're cognizant of the direction of guidance in the market across each of the individual metrics. And I think we sort of note that. And if we were uncomfortable, we'll be saying something about it, and we're not. But I think -- what I think we would say is that the -- our business is shaped more towards the second half of the year than the first. I think Freshtime will nudge it even more so actually, because it's principally a summer based range. And so again, you'll see the second half flow through strongly there.

In terms of your point on investment in automation and so forth. I mean, again, I think this is a -- the way we're thinking about this is it's not a one-off event, but it's a multiyear story. And so we've already done some work in automation. Anyone here who has either seen or heard us talk about what we're doing in Warrington, that's a significant level of automation in terms of how we're putting together pasta-based ready meals there. And -- but you're going to start seeing us really ease into automation opportunities in the sandwich assembly processes as we go forward, but we're going to do that in a way that validates not only the technology, but the interaction of that technology with our people across the different plants. I think that will build through this year, next year and beyond.

And last point in terms of -- on working capital.

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Eoin P. Tonge, Greencore Group plc - CFO, Member of the Group Executive Board & Executive Director [19]

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Going back to (inaudible)...

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Jason Molins, Goodbody Stockbrokers, Research Division - Analyst [20]

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Jason Molins from Goodbody. And just kicking off on the growth theme again. I guess, given the food-to-go market that you outlined of being slightly negative for the full year, can you maybe just talk about your expectations for the year ahead from an overall market perspective?

And then secondly, just on your own performance in the year just gone. Can you give a sense of volume performance within the food-to-go? Volume and pricing would be helpful. And then in terms of the, I guess, the vegan and plant-based trends, Patrick, you talked about the level of SKU penetration that you're now sitting at. What percentage of your revenues are coming from vegan and plant based? What sort of growth are you seeing? And how -- to the extent that impacts margins, is it more accretive, et cetera?

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

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Okay. I mean, on markets, I kind of feel, Jason, we sort of said as much as we can. We don't have a crystal ball in terms of the performance on grocery. What I would expect we will be able to do is to grow our business somewhere between 1 and 2 or 3 percentage points above the underlying growth because of the mix effects that I described earlier in relation to Martin's question. So my best judgment is that the market performance for grocery in calendar year '20 will be stronger than it was in '19. If that turns out to be raised, then you'll see that flow through in our volume and revenue performance. But I can't quite call when that will start. And R&D, as I said, I don't have a crystal ball on that, and there's a whole series of things that could impact on sentiments that we just see flow through over the next little while.

In relation to volume and price, pretty much all volume. I mean, it's grossly simplifying, but it's...

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Eoin P. Tonge, Greencore Group plc - CFO, Member of the Group Executive Board & Executive Director [22]

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It's been 3 quarters volume, actually, for the year, and in the second half of the year was pretty much all volume. So I'm specifically talking about food-to-go there actually.

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Patrick F. Coveney, Greencore Group plc - CEO & Executive Director [23]

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Yes. And then your last question, which was vegan and plant-based. So a very high proportion of our new product introductions, much lower proportion of our overall sales in the 2% to 3% of our sales. So in other words, what you're seeing here is lots of products being tried, lots of attention being put on it by customers, and some of those products working, some not in terms of how consumers are picking them up and working with them, and we'll just see that, and we'll see that evolve.

The margin impacts are net to -- not very much. The -- mainly because we're able to bring new products to market, as I say, profitably and quickly. We don't carry stock. So -- but clearly, it's better at the margin if products worked, and if they don't, because we're drawing them as unhelpful. But there's not -- I don't want to signal that there's any either positive or negative margin impact for us associated with supporting our customers going after this trend.

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Eoin P. Tonge, Greencore Group plc - CFO, Member of the Group Executive Board & Executive Director [24]

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I mean, theoretically, it should be margin enhancing. But it's just too nascent at the moment. And given -- the price points are similar, but the ingredient spend is lower. So theoretically, margin hunting for the total wallet. But I think it's too nascent at the moment.

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Jason Molins, Goodbody Stockbrokers, Research Division - Analyst [25]

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I understand. From the retailer and from the plant-based, is it on par with their traditional sandwich offerings? Or how are they managing the SKUs within their network?

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

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I mean, the rate of sale of the entirety of the range is less than the core, but some of them are working reasonably well. So if the rate of sale was identical to the rest, then you'd see the -- then you'd see the kind of run rate sales for the new products mirroring existing products, not quite doing that, right? So it would be how I described it -- both of them. But I do think in some form or other, Jason, I think the trend is from a consumer perspective, it's here to stay, how it builds and how it manifests itself and which particular formulations work better than others. We'll have to see, but I think the trend is here.

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Doriana Russo, HSBC, Research Division - Analyst [27]

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Doriana Russo from HSBC. I just wanted to follow-up on this theme of vegetarian and vegan. Obviously, with spreads setting up veggie breads, it seems like it's a trend to stay. Are you internally trying to be proactive? And perhaps you can extend your offer not only from the sandwich point of view and how receptive your customers are? Because this could become a substantial portion of your portfolio in 5 years.

And secondly, on the sustainability issue. I just wanted to ask you about your (inaudible) value in terms of adjusting your packaging, trying to decrease the plastics, not only the waste that you mentioned in the presentation, if you can update us on that issue?

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Patrick F. Coveney, Greencore Group plc - CEO & Executive Director [28]

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I mean, the -- I mean, the essence of our -- I'm on the first question first, which is around the share of our products veg or vegan or plant-based going forward. The -- I mean, the essence of our production system is that we're agnostic as to whether or not the individual ingredients, right? So I mean, what we're -- particularly in our food to go business, we are -- we're in the assembly business. And we can frankly assemble products with almost any ingredient back. And so it's not -- we're not carrying any particular risk or I would say, any particular upside associated with a move away from meat to plant-based proteins, right, would be how I describe it.

In terms of the skill set and capabilities that we're building in the area we're -- Doriana, we're doing, I guess, what you'd expect us to be doing, which is we're building expertise in sourcing, and our customers expect us to be really, really knowledgeable about how to access great ingredients, how to ensure that there's integrity associated with those ingredients, how they can get them at scale to ensure that the replenishment dynamics and availability of those ingredients is in place and that it can be done safely and consistently. And so the -- with a greater level of focus around these kinds of products and these kinds of ingredients, you're going to see great expertise and greater scale come into how we source them and how we assemble them.

My own instinct is that this category will become progressively more important and, therefore, to become a progressively larger part of our overall revenues as we go forward. And some of what we're doing in, for example, with the Freshtime capability set is actually accelerating us down that path. We're actually doing some contract packing for our specialist vegan and brands in that space. And again, that's the sort of get that thing that I can see us doing more of.

In relation to packaging, the -- I mean, we have -- we've got lots of work underway around. So we're very cognizant of, and we're signed up to the plastics packed in the U.K., and we're working on that. I mean, everything that we do in this space, we do in conjunction with our customer set. And my own experience of looking at this hard for 15 years now, which is the last time I've been in Greencore and 12 years in this role, is that as different themes under a broad banner of sustainability emerge, the parts of the U.K. food industry that go after those themes hardest are actually the retailer own brand product ranges. And the parts of the market that tend to be the laggard, which tend to be the international manufacturer brands. And so my expectation is that, that's what you're going to see play out here as it relates to the understandable U.K.-focused around sustainability of packaging and, in particular, a desire to actually meaningfully migrate away from the scale of plastics, generally and in particular, nonrecyclable or noncombustible plastics in the U.K. market, and we will be sort of hand in glove with our customer set in terms of how we do that.

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Damian Paul McNeela, Numis Securities Limited, Research Division - Analyst [29]

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Damian McNeela from Numis. Just a couple of ones. Returning to growth again, the -- if we look outside of food to go in the sort of the grocery environment, you've got people like Greg who are delivering very strong like-for-likes. I was just wondering whether you could give us a sense of whether your customer set feel the pressure and whether there's been a step change in their approach to category and engagement within you guys?

And then just sort of on the margin side, I think at the Capital Markets Day, you sort of had margins around 7% -- with 7.3%. Should -- is this kind of where we should expect them to be over the medium term, given FY 2020 looks fairly challenging at the minute? And then just the last one, is your [step ons] that you're doing with Starbucks around hot eating and snacking in the U.K.?

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Eoin P. Tonge, Greencore Group plc - CFO, Member of the Group Executive Board & Executive Director [30]

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Yes. Well, I mean, why don't I try and take a couple of those questions, Patrick can jump in. I think I'm not quite sure I'd tell you the customers are feeling under pressure from what they're seeing in foodservice, but they're certainly mindful of what's happening in food service. And as we talked about in the Capital Markets Day, that feeds through to a lot of the development work we do with them in different formats and to a certain extent, different channels. So for example, this year, working on a number of cafe-type initiatives with our customers. So and for example, and also the whole area of hot is another space that our customers are trying to crack into. So I definitely think they're mindful of the food service trends. I don't necessarily feel that there's sort of a pressure point that is kind of new in that regard.

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Damian Paul McNeela, Numis Securities Limited, Research Division - Analyst [31]

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I mean, we talked about it, seemingly a very long time, and no one seems to have made any real progress in your customer set. I think outside of that, there has been progress. Are the barriers moving?

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Patrick F. Coveney, Greencore Group plc - CEO & Executive Director [32]

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Yes. I mean, I would -- I think if you were having that conversation with Co-op or M&S or [Aldi], I think they would dispute that characterization. They haven't made any progress in hot. So you will see multiple different both hot food, particularly at breakfast, that's available in the cafes on many of those stores, but you'll also see hot cabinets. I'm not talking about rotisserie chicken. That's been there for a long time. But the -- but our view here, Damian, would be that the -- if we're going to meaningfully progress the share of food to go occasions that are done at breakfast early to mid morning, that the unlock for that is principally hot. And so what you're trying to see here, what you are seeing is a variety of different propositions emerging that are being trialed across U.K. retail. My own personal view on that is a very narrow range done in -- by which I mean, sort of 2 to 4 SKUs done in hot cabinets is the way forward. But -- and there are -- some of our customer set, who would like a much larger range than that. I just don't know how you quite make the integrated economics of all of that work. But there is -- there's a reasonable level on that.

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Damian Paul McNeela, Numis Securities Limited, Research Division - Analyst [33]

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Can I just make 1 point on your food to go? Are the customer sets influence of what's happening the outside grocery?

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Patrick F. Coveney, Greencore Group plc - CEO & Executive Director [34]

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Yes. Particularly at the more premium end of the grocery market. And if I take 2 of our very large customers, they actually have moved the target quality cues of their products away from a comparator with grocery and towards take paneling versus what you'll find in a Greggs or Pret A Manger, for example. So I think you will see just as consumers don't actually view food to go through the prism of what's in grocery and what's elsewhere, they think about just what do they want, and where can we get it. I think you'll actually see the -- you'll see a lot of movement back and forth in terms of taste queues, packaging queues, how hot gets executed over time between the different formats. I think you'd be -- I think you'll be left behind if you add the either a retailer, traditional grocery retailer or as a provider of retail, if you think about it only in a traditional grocery sense. So Eoin, do you want to pick up on the margins?

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Eoin P. Tonge, Greencore Group plc - CFO, Member of the Group Executive Board & Executive Director [35]

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Yes.

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Patrick F. Coveney, Greencore Group plc - CEO & Executive Director [36]

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You can pick up the Starbucks issue. We're doing both those things.

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Eoin P. Tonge, Greencore Group plc - CFO, Member of the Group Executive Board & Executive Director [37]

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Yes. So I mean, our margins -- so 7.3%, I'd be pretty much consistent with what I said actually at the Capital Markets Day. I mean, what we're thinking about in terms of margins, there's not significant gains going forward. It's about defending and kind of modestly accreting our margin, and that's sort of how we've set up our model. I will pick up 1 point of what you said, Damian, as you say, FY '20 is looking challenging. I'm not quite sure I recognize that characterization of FY '20 as it comes to margins, right? So we feel we're pretty well set up actually from an FY '20 perspective in terms of margins. But the overall model is to look to kind of modestly accrete. And sometimes, that might be a little bit better in some years and not in other years.

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Patrick F. Coveney, Greencore Group plc - CEO & Executive Director [38]

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Any other questions.

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Unidentified Analyst [39]

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A couple of us are going to go upstairs and hear this African swine fever situation and protein inflation across the board. Do you have a view in terms of kind of secondary or third derivative effects around protein inflation piece that we're seeing in other geographies, making its way across? And if so, how are you positioned to potentially deal with it?

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Eoin P. Tonge, Greencore Group plc - CFO, Member of the Group Executive Board & Executive Director [40]

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I'll start with the last part of it, I think we are pretty positioned pretty well. I don't think that the impact on us is that significant in terms of -- because, as you rightly say, most of it's kind of second order and third order, does a little bit direct, but not a huge amount. So we likely will see inflation. I don't think it will be material in the grand scheme of things for us. And again, the way our model is set up, that we're pretty well protected in terms of how to deal with material inflation. So it's probably not 1 that impacts our model as directly as you say, others in the marketplace.

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Patrick F. Coveney, Greencore Group plc - CEO & Executive Director [41]

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I'm just going to turn us to whether there are any questions on the conference call.

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Operator [42]

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(Operator Instructions) Right now, we have first question. And our first question comes from the line of Arthur Reeves from Barclays.

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Arthur John Reeves, Barclays Bank PLC, Research Division - Analyst [43]

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I've got 2. The first is about labor inflation, 5% this year. What are you thinking next year? And are you concerned that the 2 political parties are having a fight as to who can claim to be raising the minimum wage the most? My second question is on mix. You've talked about mix on vegan and vegetarian products, thank you. What's it like on sushi and salads? How does your margins match up compared to sandwiches in those 2 areas, please?

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Eoin P. Tonge, Greencore Group plc - CFO, Member of the Group Executive Board & Executive Director [44]

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Yes. I mean, why don't I take the labor 1, Arthur? So I think we're pretty consistent in saying this is actually -- we kind of expect the current level of inflation to maintain. And that certainly is our budgeting assumption for FY '20, largely driven by the same facts, actually, which is the raising of the lower level, which kind of has an impact on the overall wage structures. And I think I mean, we've also been on record in saying that this has been our planning assumption for the last 3 or 4 years. And in fact, actually, our assumption is, to a certain extent that from a societal perspective, the minimum wage or the national living wage will continue to increase. And that is our budgeting assumptions.

So as a result, we've been working on all the various different definitions we have in relation to labor. So I mean, like, I'm not going to say -- I'm not going to tell you sort of what the political position in relation to this, but our assumption is that labor inflation is here and here to stay. And we need to be set up well in terms of automation, in terms of how we have our efficiency set up in our factory on how we are structured with our customers in terms of passing through costs through our product development to be able to look to offset that. And we think we're pretty well set up in that regard.

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Patrick F. Coveney, Greencore Group plc - CEO & Executive Director [45]

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Yes. Arthur, on your question in terms of mix, and if I just deal with them in order. In sushi, the sushi margins are converging towards our sandwich margins. As we started out the kind of the new sushi plant, as you know and expect, the economics would have been lower. But as we've got to reasonable scale, it's a -- immaterial difference versus the margin that we would get in sandwiches now. And in salads, the story is pretty much the same. The -- and in fact, the underlying economics of Freshtime, 1 of the appeals of it that it was very similar to the underlying food-to-go economics that we had. So I would -- there's not really -- sorry, there is no mix impact in food to go that rolls through to any change in our margin guidance around that category.

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Operator [46]

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(Operator Instructions)

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Patrick F. Coveney, Greencore Group plc - CEO & Executive Director [47]

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No more questions from the conference call. So listen, thank you very much for joining us. Thanks, everyone, for staying. I know there's some -- you've got other session to go to and attend. Thank you too for the question. We look forward to talking to you soon. Thank you.