U.S. markets closed

Edited Transcript of GRG.L earnings conference call or presentation 3-Mar-20 10:59am GMT

Full Year 2019 Greggs PLC Earnings Presentation

newcastle Upon tyne Mar 24, 2020 (Thomson StreetEvents) -- Edited Transcript of Greggs PLC earnings conference call or presentation Tuesday, March 3, 2020 at 10:59:00am GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Richard John Hutton

Greggs plc - Finance Director & Executive Director

* Roger Whiteside

Greggs plc - CEO & Director

================================================================================

Presentation

--------------------------------------------------------------------------------

Roger Whiteside, Greggs plc - CEO & Director [1]

--------------------------------------------------------------------------------

Right. Good morning, everybody. We're going to make a start. We've got quite a lot to get through.

So in a moment, Richard is going to take you through financial results in detail, as we normally do. And then I'll take questions at the end. But just in terms of summary, before I hand over to Richard, 2019, obviously, is an exceptional year for Greggs, as you all have heard by now. We saw a sustained increase in customer numbers as the increased awareness and appreciation of the brand gathered momentum.

So it's been an exceptional performance, but it's not all about the vegan sausage roll, which is what -- and obviously, a lot of people who read the media might expect. It's been down to the transformational changes that we've executed in this business over a multi-year investment program to focus on food-on-the-go. And those customer visits began to build during -- took a step-up in 2018 before -- 6 months before the vegan sausage roll was launched. And then, of course, the vegan product launches came along in January last year, and that turbo boosted the step-up that we'd seen at that time.

So total sales grew by 13.5%. Like-for-likes were highest we ever achieved at 9.2%. Operating profits up 27.2% to GBP 114 million. And with the strong cash generated, we were able to both fund our investment needs, increase returns to shareholders and share profits with employees. So all that is good news.

The ordinary dividend is up, which is consistent with our policy. And given the fact that we have such a strong cash position, we are considering payment of another special dividend with our interim results in the summer, but that will depend on the economic impact of the current corona crisis.

So having made a strong start in -- to the new year in January, we've seen a significant impact on sales as a result of storms that hit us in -- during February. So also involved the temporary closure of one of our bakeries down just outside Cardiff, which meant that we had about 40 shops closed for about 4 or 5 days, but we recovered from that. Despite all of that, the first 9 weeks are up 7.5%, and total sales are up 11.7%. So we have made a strong start. I want to wait and see how the rest of the year pans out.

Alongside general trading, obviously, we've carried on making good progress with our investment program. And we're coming towards the end now of the transformational phase in our strategic road map, which I'll describe later, and we can look forward in confidence now to the next stage, which we're calling Next Generation Greggs, which is all about aimed -- it's all about aiming at increasing customer loyalty, choice, access to Greggs across multiple channels at all times of day.

So I'm going to update you on all of that in a few moments, but for now, I'll hand over to Richard.

--------------------------------------------------------------------------------

Richard John Hutton, Greggs plc - Finance Director & Executive Director [2]

--------------------------------------------------------------------------------

Great. Thanks, Roger. So I'll start you off, as normal, with the structure of the P&L, which is a few differences this year. So on Page 5, you can see that the introduction of lease accounting has made quite a big difference to the way we present the results now. So they're not -- the years are not comparable. We didn't go back and restate 2018. We simply adopted from 2019 onwards.

What is meant is a reallocation of costs through the P&L. So you can see the new interest charge coming through on the finance expense line, which is related to the imputed interest on the leases that are being capitalized. There is also an impact to operating profit where you've taken out the rental charge and reinserted an artificial sort of depreciation on our right-to-use asset, which has flatted the number there by a couple of million. So overall, the net effect is pretty much in line, we think, with what we guided last year, which is -- I think we guided GBP 4.2 million drag on profit. So despite the really strong performance this year, there is a drag of about GBP 4 million from the introduction of lease accounting if you look on a year-on-year basis. So it does change the structure of things, and we'll probably focus in future more on PBT rather than operating profit now so as to include the full cost of the imputed interest going forward.

The exceptional charge is the other thing slightly down as we work our way through to the latter stages of the investment program in our supply chain, and you'll see the forecast for this year imply another couple of million, and we're almost at the end of that now.

So like-for-like, as Roger said, we've had a very strong start to this year. But if you reflect back in terms of what was an extraordinary year last year, from quarter 1 to 3, we thought we'd seen a pattern with like-for-like starting to annualize on the year before, and we were talking about a 2-year cycle and thinking that was a sensible way to think about like-for-likes. Really, what happened in quarter 4, bucked that trend and don't really know what to guide on now, to be honest. So we obviously saw some real momentum through quarter 4 that was unexpected. We did have an upgrade then.

And coming in to start this year, as Roger said, the great news is we've seen continued growth on the back of what you can see was a very strong Q1. There was a little bit of the reflection of 2 years ago. Right now, we had the Beast From the East, so Q1 was flattered by a couple of percent last year. Perhaps, the other thing to say is within the 7.5% so far, January was very strong, and we were more like 10%. So 10% in January and relatively low single digit in February. And really, the last 3 weeks where we've seen the absolute battering from that storm or, well, a series of storms, which have really kept people indoors more or at least out of the areas where we operate. So it's been a difficult thing to call in terms of where we are right now, but we did start the year in a very strong form again.

Looking at then the margins in the P&L. I mean overall, we built margin -- PBT margin to 9.8% last year, so that's a record in terms of the profitability of the group despite that drag from lease accounting. If we work our way down the P&L, then gross margin has continued to benefit now from the structural changes we've made to the supply chain. So as we invest in consolidating our manufacturing, particularly at this stage, we're starting to see some reduction in the supply chain costs, and I'll come to that in a moment. But also, having a vertical integration and an internal supply chain means when you get really strong volumes as we have, particularly in categories we make ourselves, so the bakery categories are benefited, particularly in the last year, then we've leveraged that supply chain quite strongly and the fixed cost gearing comes through in there.

A similar story in distribution and selling, where, obviously, our rent costs are, again, relatively fixed cost and one that's relatively benign in terms of cost inflation. So again, the strong growth has leveraged that and then this small amount of benefit that I've already flagged from the move to lease accounting.

And then admin costs, as a ratio, have crept up slightly, and that really reflects the incentive costs that come with such a strong year and then the finance expense we've already covered.

Then if we look year-on-year in terms of the bridge analysis that describes the journey from one to the other, normally, what I've been looking at here with you is saying, well, look, we've got this big lump called cost inflation, which we have to recover each year. We do that either through business efficiency, trying to offset it. That was true again this year where we saved GBP 9.9 million through our efficiency programs. But then, usually, the balance is made up with like-for-like growth and gets us back to kind of cost recovery. That was strongly more than that in 2019, and you can see the contribution from like-for-like growth there in the middle. And that's a combination of our own shops, like-for-like franchised shops and any movement on the wholesale side as well.

There is some cost investment that comes from things that we've done. Some of those are one-offs. So we've had the GBP 7 million special payment we made in January where we gave all staff GBP 300. So that GBP 7 million is a one-off, nonrecurring cost. And then we talked to you last year about some of the investment we made in initiatives in the second half of last year. We set out to invest about GBP 5 million. In the end, we only spent about GBP 4 million. And the net cost after benefits from that was about GBP 3 million. So GBP 3 million of impact in the bridge analysis, plus the GBP 7 million for the special payment to staff, means there is about GBP 10 million of one-off in there, which I'll come back to when we talk about cost mitigation in a minute. But add that to the incentive costs for share schemes, bonuses, those sort of things, and you can see the drag there.

The new shops make a strong contribution, and we've been really pleased with the progress that new shops have made, particularly those shops that we opened in 2018 have been maturing very, very quickly and making a great contribution. So that's been a strong part of the story. And then this GBP 4 million drag from lease accounting adoption gets you through to the GBP 114 million of PBT in 2019.

I'll sort of talk a little bit about the supply chain investment program in a couple of different ways. Firstly, the exceptional cost phasing that goes with that, we're nearly there. The overall costs are very much in line with what we previously guided, if anything, slightly less. We had GBP 5.9 million exceptional last year. We expect over the next 2 years, there'll just be a couple of million more to come through. So broadly there in terms of that program of activity that we've pulled out and ring-fenced through the exceptional charges. And you can see the phasing of the cash is very similar at the bottom there as well.

If we think about the benefits that have come from that, though, it's starting to become apparent now through what you've seen in the P&L., and this chart here, which summarizes the total cost of our supply chain in terms of both manufacturing and logistics costs as a percentage of turnover. Now there are lots of moving parts in this. And you can make arguments about sort of the level of products we buy in versus make ourselves, the differences that franchisees make. But having kind of kicked the tires on it from a few directions, I think as a ratio, it broadly does stand up and tell some of the story of the cost journey that we've been on through the structural change we've made to the supply chain.

So if you see, looking back historically, from 2013, '14, there was a step-down in overall costs, which is when we took the installed bakeries out of our estate, which were the legacy of the old Bakers Oven business. Then in the latest 5 years, which is the journey we've been on that I've just described, you see a couple of breakpoints. The first one comes between 2016 and '17, and that was the effect of closing down our Twickenham bakery, our Edinburgh bakery and smaller bakeries in Sleaford and Norwich, so reducing the size of the sort of the manufacturing estate as it were.

And then more recently, the 2019 impact you can see is as we started to consolidate the manufacturing side. So investing in centralized manufacturing platforms and driving greater volumes through those. Not only has that reduced the overall cost, but also we've been seeing product quality improvements; consistency improvements, which I think we're starting to see in our like-for-like sales numbers as well; and of course, we're laying down the capacity to allow for the growth going forward.

So I think that story is starting to become apparent. And of course, it's been helped by the volume last year because we weren't expecting to have so much volume going through all these new platforms last year. So whilst we said that we thought overall the net delivery from this program would be about GBP 7 million of efficiency benefit, that ratio suggests we're already at about GBP 9.5 million, and there is probably GBP 1 million to GBP 2 million still to come over the next couple of years.

Looking at the cost base. Some important features in here. So food and energy costs last year, 3.5% cost inflation. Food and energy is about 30% of our cost base, broadly. And looking forward, the big change is that we're expecting about 7% overall ingredient cost inflation in the year ahead, which is a lot. 4% or 5% of that is coming from pork costs, which was the factor that was driving the tick-up in the second half of last year because we started to see this kick in, in May, June last year.

And this year, we expect to see quite strong cost inflation in pork, primarily driven by bacon that we buy for breakfast and manufacturing pork that we use for the sausage roll. So it'll give you some context in terms of what we're expecting there. We're relatively short covered at the moment, about 4 months forward cover in terms of our buying, which is typical in a quite steamy market, we would tend to stay fairly short.

On the people cost side, last year, we had 4.3%, which was driven by both living wage and auto-enrollment pension costs. We haven't got the pension cost this year, but we still have auto-enrollment, obviously. So we expect about 4% to be across the average of the different sort of pay awards. There is a 3% base in there. But frontline staff are getting about 5.5%, reflecting the living wage impact from April.

The other thing that we just flagged in here is there will be something which will affect our people costs in the next year or 2, will be the introduction of allergen labeling. So by the autumn of 2021, we're required to put a label on the back of every sandwich we make in shop, disclosing the ingredients and allergens. It's the sort of thing that you've seen in some of our competitors already. And as an industry, we've committed to do that. We've already got trials going on our solution, our version of that, which we're learning from.

And we have choices to make in terms of how quickly we go with the deployment. So there could be cost in the second half of this year. It could be next year. It's quite a significant cost in terms of the people cost of putting that in. So we'll see how the trials go and see what pace we go at. There are some advantages of going early and going quickly in terms of there is a consumer benefit, obviously, to having good labeling. But we want to do it at a pace that we do it really well because it's clearly a very important thing and not something you want to get wrong. So that's something we'll talk more about in terms of people costs over the next year or 2.

And then coming back to cost mitigation. Because there is quite a peak or we hope it's a peak in terms of ingredient inflation this year, we don't think it's right to pass all of that on this year. And therefore, when I talked earlier about the GBP 10 million of one-offs that we had last year, we're taking a view this year that we will take some sort of margin haircut in terms of not passing on all of the food cost inflation to customers. And in some ways, when you look at it year-on-year, because we've got these nonrecurring costs effectively using the GBP 10 million to fund some short-term mitigation of what we'd otherwise have to pass on to customers. So the combination of those one-offs and also our normal cost-efficiency program will give us some buffer to mitigate some of those cost headwinds in the year ahead.

Tax and earnings. Not a huge amount to say on this, but it gives you the guidance really here on tax. We would expect going forward that tax will be about 1.5% above the headline rate. We're assuming that the headline rate isn't going to reduce. It was due to reduce this year from 19% to 17%. I think the government said that won't happen. We'll wait to see if that's confirmed in the budget, but that's our working assumption, but we'll see. Whatever it comes out at, 1.5% above is our guide. And you can see the advancement in earnings and the dividend there, and obviously, we had the special dividend in 2019. All of that is in line with our distribution approach, and I'll come back to the potential for more special dividend when I get to cash flow.

So first off, CapEx. We invested GBP 86 million in 2019, and you can see the shape of it on this chart. Perhaps the things to call out, we had a bit of a step-up in shop equipment in the year, which related to a couple of things, hot cabinets but also a bit of sort of equipment stock building as a Brexit mitigation. And obviously, we're running those down. We'll probably have to rebuild them at the end of this year, again, just to make sure that we've got security for the shop opening program because you've got to have all the different bits of kit sort of in warehouses ready to go for that.

And in the year ahead, there will be more of the same but also coffee machines. We'll be investing more in our coffee machine fleet, if I can put it that way, partly through replacement and partly through bringing some of the new capabilities that Roger has referenced in the statement in terms of more sophisticated options for customers. But the step-up next year primarily will come in supply chain. Now we're broadly there in terms of the initial sort of investment program, but there is a few factors that we've already talked to you about. Completing that program involves going through our South West -- or South Wales bakery in Treforest and our bakery in Birmingham and extending their distribution capacity. We'll be doing that in the current year.

We've also got the peak year for the big investment that we've got in our cold store -- frozen cold store at Balliol Park, which is the automated cold store project, which will come with some revenue benefits over the next few years. And we will, in the autumn, be investing in our manufacturing plant in Balliol Park to increase savory manufacturing capacity to cope with the current demand. So a few things in there which are driving quite a peak year for supply chain. So about GBP 100 million worth of CapEx in 2020. And at the bottom, you can see the guidance in terms of how that will reflect refit numbers and new shop openings.

If we take a slightly longer view of CapEx, then the chart on Page 14 gives you that view. So you can see the GBP 100 million for the year ahead. We see it, on average, being about GBP 90 million in the medium term. And what you can see from the shape of it is that the blue bar, which is the refurbishment money that we spend on our shops, increasing. We've come through a kind of a bit of a dip in that cycle because we got quite a way ahead of ourselves, having gone through the conversion of bakery shops to food-on-the-go. And that cycle will come back progressively as those shops then need refurbishment.

And then what you see is that we're through the peak of the supply chain investment and back to a more steady state. But the one thing that stands out is in 2022 when we'll get to the point where we've got the opportunity then to invest in more savory manufacturing capacity, which we will need based on our opening plans and current success. So that involves putting down a fourth manufacturing line in addition to the current sort of 3 that we have. So that's the peak there.

And at the bottom, again, you've got some guidance in terms of shop numbers that would support both the refit and the opening program. All of that is being delivered, plus growth in return on capital employed, which reflects both the control over capital but also, obviously, the very strong performance in this year. Now it's been distorted slightly by lease accounting. So I've kind of given you a kind of like an old-school measure here, which is the height of the 2019 bar, which says that if we haven't done lease accounting, this would have been a 33.6% return on capital employed, which is quite a substantial move forward, obviously, year-on-year. Under lease accounting, it moves back to 20% as we put all of those leases on the balance sheet.

And that's the figure we'll report going forward, and obviously, sort of from next year on, which we'll have a comp for that. But very strong performance in terms of returns on capital, and that's something we're quite proud of because we gear our decision-making in the business about trying to drive good returns on capital and capital discipline. And through a big investment phase for the business, it's been great to see that we've been able to keep that ratio strong and then take this real step-up as the volumes have come through last year.

Then finally, on cash flow and balance sheet. Well, it was a very strong year, as you could imagine, for cash generation. And therefore, we managed to fund all of the CapEx, the dividends, the exceptional costs and the bonuses and special one-off payment for employees from the cash we generated and did all that and finished the year with GBP 90 million of cash on the balance sheet, which is a remarkable position. Now there is a little bit of phasing stuff there in terms of some of the CapEx, which will tip over into the start of this year. We've obviously got a big CapEx program in the year ahead. And also, there is about GBP 11 million of one-off bringing forward a corporation tax under the new arrangements for large companies, which is a permanent timing difference. But having taken all that into account, we still think there could be surplus cash at the end of this year, coronavirus excepted.

So we have a target, it used to be GBP 40 million. We're now saying GBP 50 million would be our year-end balance sheet target and that really just increase there reflects the growth of the business in recent years. But we will think about the sort of scope for special dividend at the time of the interim results. The reason we're doing that is, obviously, there is a huge amount of uncertainty in the outlook at the moment. And I think holding strong cash position is exactly where we should be to make sure that we can ride through whatever storms are ahead. And depending on where we get to over the next few months, we'll come back to you at the half year, and hopefully, be in a good position to guide on distribution at that point.

Okay. That's it for now. I'll hand you back to Roger to talk about strategic progress.

--------------------------------------------------------------------------------

Roger Whiteside, Greggs plc - CEO & Director [3]

--------------------------------------------------------------------------------

Thank you. I think [Casey] is taking the clicker. Well, thanks, Richard. So as you know, we've been on a journey, and that's the strategic road map we put in place 6 years ago to transform the business from national bakery brand to food-on-the-go and to locate ourselves in diverse places away from high street locations, different dayparts, modernized supply chain and the technology infrastructure. And that program is coming to an end now. And that means that we've got the platform in place to start to think about how we extend ourselves to customers looking for something more than just the core grab-and-go offer.

So the next stage of the journey, we are calling Next Generation Greggs, which is all about growing the size and the quality of the shop estate to significantly more than 2,500 shops whilst also adopting a multichannel approach. So the idea is to increase customer access to Greggs and continue to gain market share.

So not to scare the horses, you'll notice at the end of the plan, the plan does recognize the fact that at some point, we have to consider how we take Greggs even further through international expansion and brand reach. But just to reassure you, we have no plans to begin developments in those areas any time sooner in the near future.

So the plan, as you know, focused on 4 pillars, and they're all familiar to you, should be by now. None of those changes. What does change is the order. So developing new ways for customers to access the brand becomes the key focus over the next few years, and customer experience takes [prior] place. So all of those pillars, as you know, are supported by something that's becoming increasingly important, which is our long-standing approach to conducting business in a responsible manner, and we're proud of our track record in that area, but we know we need to step up our game again, and I'll talk a bit more about that later.

So what's been interesting in the last couple of years has been the way in which the transformation investment program is succeeding in driving the reappraise of the Greggs brand. So customer awareness of the brand has always been high, up in the 90%. But for many customers, the brand just wasn't considered suitable for them. So we've been conducting brand tracking surveys for years now, and it shows that the consideration of the Greggs brand has been on an upward trajectory since 2014, with the brand purchase intent, which goes with it, obviously, rising alongside it, and what's moving is the quality and value perception. So customers are improving their view of Greggs, if you like. And it means that there is an increased likelihood to recommend. And as a result of that, you start to see a combination of increasing customer visits. So we're getting more customers coming because they're considering the brand as more suitable for them than they used to in the past.

Marketing has had a big part to play in that. So we deliberately changed the marketing focus many years back away from price to quality to try and emphasize the quality perception of the brand alongside the value and doing the right thing. And that's how the key parts played in making customers think differently about the brand. And it's those improved perceptions of range that we offer, which features the key driver in attracting new customers and more frequent visits from existing customers.

The vegan product launches played a significant role because they signal to customers that our range has improved. And the perceptions of the brand jumped on the basis of that. 14% of all the customers that we have in the surveys that we've been conducting claim to be new to Greggs. And the biggest gains amongst those new customers are amongst the young, free and social life stage and the ABC1 demographic groups. So overall, 24% of all customers have bought vegan of Greggs, which shows that there is an increasing trend to buying plant-based food alternatives. But of those, only 15% of customers are actually claimed to be fully vegan.

So the only other factor to call out and not to lose sight of is that the heart -- the only thing that ranks higher than range perception and driving new customers to the brand and more visits to the brand is convenience. So that reinforces the importance of the new shop-opening program. So more customers try Greggs more -- for many other reason because it's more convenient now, one opened near me.

So whilst we ought to celebrate the success we had in the last 6 years, we also got to recognize the fact that how they keep -- we keep being compared with the retail market, but we're not in the general retail market. We are in the food-on-the-go market. The food-on-the-go market, unlike general retail, is in growth. We are growing in a growing market. Greggs, we think, accounts for just 5% of that market, valued at GBP 24 billion. And our success in growing customer numbers is almost entirely driven by the one channel to market. So most people walk into Greggs and eat the food and drink off the premises. We believe these -- that leaves us with a considerable scope to gain market share as we invest in increasing customer loyalty, more choice, multichannel access to Greggs, whenever, wherever, however the customers choose.

Now customer expectations, obviously, are changing rapidly. And so the digital technology, in particular, is providing access to this greater convenience and better service. And in 2019, we trialed all sorts of things in these different channels to see what would work for us. So digital loyalty, click-and-collect options, home delivery, bespoke ordering, all of those were tried. And all of these extend the appeal beyond our existing grab-and-go channel, if you like. And it overcomes obstacles that customers tell us are there to choosing Greggs that will enable us to attract visits from our competitors. So we've been sufficiently encouraged in the results of those stand-alone trials and they're not connected in any way.

To embark on a strategic program of investment, which we're calling Next Generation Greggs, which brings all those channels together on an integrated platform centered around the Greggs rewards digital loyalty scheme, so that's good, but that's going to take time. So while that's going on, we've, as you know, signed up with Just Eat to roll out delivery, which will stand-alone to start with but ultimately will be integrated to that platform. And that's going to provide national coverage for delivery, which is the fastest-growing of those channels on a national basis over the coming year.

Now those new channels, obviously, are going to need new solutions, and the extent and the variety of the estate that we have means that we're going to be able to offer -- going to match basically shop to channel to serve catchment area. So not all shops are going to be required to have all channels. We'll be able to look at each of these catchment areas and decide which shops are best suited to provide service in each of the channels and that gives us versatility and ability to compete that some of our competitors won't be able to have.

And we're also pushing ahead with doing more from our existing shops in the grab-and-go channel. So that means offering -- extending our offer to trade later in the evening. And again, that's not going to be appropriate for every shop. But it will mean that we could open later in high customer traffic locations, and there is a synergy with delivery. So opening for delivery as well as opening for the walk-in customer is an opportunity we think we can bring together.

Relocating and upgrading the shop estate has been critical to our strategic transformation, and we still see significant potential to grow shop numbers. And whilst we have always signaled that our supply chain plans that were coming to an end now were designed to build capacity for 2,500 shops, we see much greater opportunity than that. And we're bringing forward our plans to invest in more capacity, as Richard's outlined, particularly in savories, which will need to meet increased demand and prepare this next phase of growth in the business.

Convenience is, as I say, the #1 consideration when customers choose where to shop for food-on-the-go. So being within easy reach is an absolute prerequisite. Last year, we opened 138 new shops, 45 of which were franchised, closed 41. So we're up to 2,050. 302 of those are franchised. And we celebrated the opening of the 2,000th shop in South Shields. So that's all good, but we still got a very strong pipeline of new shop openings as we look ahead. So we expect to add another 100 net this year. And the thing is as the brand recognition grows amongst our customers, it's also growing among landlords. So the new pipeline opportunities start to opening up really quite interesting. So that allows us to extend our reach into such things as drive-throughs, railway stations, airports. And now as you've read about recently, major supermarkets are thinking about putting Greggs within a large supermarket shed.

So at the end of 2019, 41% of our shop estates were located away from high streets, if you like. We expect that proportion to continue to rise as we expand and relocate the estate in the years ahead.

An interesting further opportunity is coffee. So as coffee -- as our reputation for coffee grows, we can see that there is real opportunity for a fully seated offer. So this is a journey some of our competitors have been on already. We've got about 160 shops that offer, what I call, a food-led coffee shop experience. So that's shops with over 25 seats, and these shops sell significantly ahead. The average sales per shop of those shops are significantly ahead the group average. So with falling costs of retail space, basically, we're going to take the opportunity to extend space in those types of locations where we think a coffee -- a food-led coffee shop experience can take market share. And that's another area of growth opportunity for us.

As far as refurbishments are concerned, you know we slowed down in the last year or so, and we've only got about 90 shops left that are old bakery shops changed to food-on-the-go. But then we've got to think about what we do when we restart the cycle, if you like, in earnest, and that partly will be informed by what level of investment we need to support the new channels that we want to open up, which will be our shop-by-shop appraisal.

As far as product is concerned, we know we differentiate by preparing food each -- every day in the shops themselves and offering outstanding value for those products. The supply chain we invested in is now delivering even better, more consistent quality than we've ever had before. And of course, that's allowing us to maintain prices in the way that Richard's described already in terms of the efficiency of our supply chain.

At the same time, we're building a reputation in new areas that create more reasons to visit Greggs, and that's been part of our plan for 6 years now. So bakery food-on-the-go remains at the core. And we're seeing good growth there because those new customers that are coming to us are buying those traditional bakery products, which is good. And our mission there is to make those products as best as they can be but without losing their essential taste characteristics. So we've got to reduce sugar, and we've done that. We've got to reduce salt, fat and the rest of it, but in the end, they've got to remain bakery products. And innovation is important. So developing vegan versions of those products has attracted new customers to those categories, whereas you might expect growth to be difficult in those areas.

So as our reputation grows, we're starting to be known for much more than just sausage rolls. So last year, we became #1 for sandwiches; #3 for coffee, a big -- overtaking Starbucks. Put the 2 together and we're now #2 for both breakfast and lunch. So people are coming to us for a broad repertoire of needs, which we have, we think, a fairly unique appeal in the food-on-the-go market place for.

So that product innovation stays at the heart of what we're trying to do. The fact we've invested to centralized production means we can do that more effectively than we could before. We could move more quickly to reformulate products and achieve both new products and achieve sustainability objectives, and we've already mentioned the sugar reduction, which we achieved a 20% reduction 1 year ahead of the Public Health England target.

Vegan has obviously proved to be very popular. And all we're doing is going around trying to produce vegan versions of our best-selling lines. So, so far, we've got a doughnut. We've got a vegan sausage roll. Obviously, we've got a vegan steak bake. Hot cross buns went out last week. And we'll just continue to offer a vegan option for those people looking to avoid meat and dairy in their diet.

Coffee is still an opportunity for us. We're #3 in the market, but we don't even do bean-to-cup decaf. So the new investment program will start in replacing coffee machines to allow us to extend our reach in coffee repertoire, which allows us again to offer a better service of those areas. Hot food, you've heard about. So we rolled out 500 cabinets for hot food self-service last year. That hot and cold menu balance is absolutely essential, is a key attribute of the food-on-the-go model. If you're going to make it sustainable, so you can cope with -- on all temperature types at all times a day. And it will extend our appeal, like, we think, in the evening as we add to our hot sandwich and meal deal options.

Healthy options is another one that we know has a key role to play. People would like us to stop selling bakery stuff and just have a chain of salad shops, that's not going to work. There just isn't demand for healthy eating to support full chain. So we've committed to offering healthy choices alongside bakery choices. We already are one of the largest brands in healthy food as a result of that because of our reach through the Balanced Choice program, which, again, most of you are familiar with, offering less than 400 calories. And that will sit alongside our traditional bakery offers, as I say, trying to make that as best we can.

Richard's mentioned the customer food allergy area, which is an area of risk concern, obviously, but it's also an opportunity. A lot of customers are seeking to avoid food types of one form or another. And we basically recommended the government that they went the labeling route once we'd heard about the problems that had been seen at Pret a Manger. And that's going to mean that we're going to have to change the processes in shops with labeling and everything else that carries on.

It also means that we've got to change processes in our manufacturing to separate production types to avoid cross-contamination, for example. And whilst all that in one way is painful because it requires operational change, on the other hand, it makes it easier for customers to shop for those types of products where they're seeking to avoid different types of food at Greggs as opposed to our competitors. So we see it as both opportunity and operational challenge.

2019 was obviously a big year for our supply chain. So we know or you know, I think, by now, we opened our new distribution center at Amesbury in Wiltshire. We centralized doughnut manufacturing at Gosforth, and we put an automated roll plant at Enfield. We put vegan-friendly doughnuts into Treforest.

And in this last year now -- between now and mid-2021, we'll finish the conversion of Birmingham, which is the last of our dedicated distribution center that goes from a bakery distribution center.

So as we come to the end of the supply chain program, of course, we haven't stopped there. New opportunity is already arising. So Richard has already mentioned the fact we're investing in automated freezer, which allows us to take in-house some of the things that we outsource currently in freezer distribution now. And that will release space then to introduce the fourth line for additional capacity at Balliol as we increase capacity of sausage rolls and the like. There is also the opportunity as we finally get to the point where we're now picking from stock rather than waiting for production, means that -- means that we can take a fresh look at the way we pick and the way we distribute, which means there are opportunities to save space and look at delivery windows, all of which leads to a more efficient logistics service.

The original planning horizon, as you know, as far as the [play gym] is concerned was around 2,500 shops. We know we have to go beyond that. And we know that savory demand has risen as a result of vegan sausage roll and steak bake. So we brought forward those plans to increase the production at Balliol Park. And all of that needs some calling out because I think I've done it every year, if I'm going to do it again this year. The supply chain teams have done an amazing job. So making every site that's been going through that change whilst, at the same time, meeting demand from the increased sales that we've seen through the course of last year has been exceptional. And they had the recognition at last. So in February, they were named the Bakery Manufacturing Company of the Year. So they should be particularly proud of that, and we're certainly very grateful for what they've been able to achieve in that time.

As far as systems are concerned, again, we're coming towards the end now, so getting everything onto the SAP platform. Rollout happened last year across payroll and across parts of our supply chain. It will complete as we complete the supply chain program by 2021. And that means the teams are then released to stop thinking about our stuff and start thinking about how we develop the multi-channel capability we need to support our vision for Next Generation Greggs, which is what they're starting to do now.

And then lastly, of course, this whole issue of socially responsible business. Now we've got a long-standing tradition in that area. And I think our reputation is a good one. We're very proud of that record, but we also recognize that customers and other stakeholders now are increasingly aware of the economic impact of our activities on the environment and on society, generally. So they're becoming more demanding in that respect. And we are becoming -- we recognize the fact we need to do more. So even though we've got a good reputation, we want to go further. So to that end, we've engaged with our employees over the last year to agree how we can raise our ambitions, move faster, reach further with sustainability goals. And we've aligned that to the work the United Nations has done. The result of that is a program that we're launching at the end of this month or in early April called The Greggs Pledge. And we'll be publishing our first-ever separate sustainability report to go alongside that.

Having said all that, we didn't stand still through last year. And if you read the statement, there is lots that we've achieved. I'm not going to hold up the meeting with reading it all out. But some things we want to celebrate. So one is we removed 350 tonnes of plastic just by getting rid of the cutlery in the bags. We celebrated 20 years of the Breakfast Club program. So we now serve over 7 million breakfasts a year. We've got a Lifetime Achievement Award for supporting the North East Children's Cancer Run. We've been doing that for 40 years. And we were able to celebrate our 15 years anniversary with the Fairtrade organization. So all of that is to be celebrated.

We also keep moving forward with our food redistribution program. So we're now working with 1,700 charities across the U.K. to redistribute unsold food. And on top of that, we've given a new lease of life to something we started back in the 1970s, which is a chain of second-day outlet shops, where we distribute our own food because a lot of these charities aren't set up to handle food in a safe way. So the other ways of redistributing more of that food is to do it ourselves, so that's what we're doing.

And as part, as you know, of the culture of Greggs and something that we certainly want to nurture and celebrate is the recognition of the role our colleagues play in that. So it's -- we have a long tradition, as you know, of sharing 10% of profits with employees. This year, it'll be another record, GBP 12.8 million we're going to share with them at the end of this month, but we also made the GBP 7 million special payment in January. So that's GBP 20 million of profit share that we've, in effect, put into play for this past year. And it's totally well-deserved amongst a very hard-working team of people, 25,000 of them.

So as far as outlook is concerned, you've heard already from Richard, it's been a very strong start in January, around about 10% mark. Saw significant impact in February because of those storms. So we're sort of waiting to see how that will bounce back from the 7.5% that we've now reported for the first 9 weeks. The flood that happened in Wales was recovered very quickly. And our teams did an amazing job of getting that back up and running, but -- although we're still impacted on the manufacturing side. So distribution is back up and running, but we're not -- we're out of stock of vegan sausage roll or vegan doughnuts, for example, because that's where we make the vegan doughnuts, and it's all under -- was underwater and now needs deep cleaning to get back into production.

Costs, Richard's already mentioned. And we're going to, obviously, look to protect customers from that to the best that we can. And really now, it's all about the uncertainty outlook around the coronavirus. So that aside, we expect to make good year-on-year progress, and we're leaving our expectations at this stage unchanged.