Greencore Group plc (GNC) Earnings Call Transcript & Summary

Hello, and welcome to the Greencore Half Year Results Presentation. My name is Jess, and I'll be your coordinator for today's event. [Operator Instructions] I will now hand over to your host, Jack Gorman, Head of Investor Relations at Greencore, to begin today's call. Thank you.

Thank you, Jess, and good morning to everyone on the call. My name is Jack Gorman, and I'm Head of Investor Relations at Greencore. I'd like to thank you all for taking the time to join us for our webcast and conference call, which relates to our half 1 results statement released this morning covering the 26 weeks to the 25th of March 2022. I'm joined on the call today by our Executive Chair, Gary Kennedy; our Deputy CEO, Kevin Moore; and our CFO, Emma Hynes. In a moment, I'll hand you over to Gary and the team for the presentation itself. And following that, we will open up the call to Q&A. But before we begin, just a few housekeeping items. The presentation that we're going to go through today has been available on our website since 7:00 a.m. this morning, and you can follow it live on the webcast as well. Also, I would draw your attention to the forward-looking statements on Slide 2 of the presentation and the agenda for this morning that is outlined on Slide 3. Thank you. And with that, I'll pass it over to Gary.

Thanks, Jack, and good morning to everyone, and thanks for joining us for our results presentation today. We have delivered very good results in the first half of financial year '22, both in terms of our P&L performance and also in terms of our balance sheet metrics. I'm delighted with the way that everyone at Greencore has stepped up to the very significant challenges and displayed tremendous resilience as we progress our economic model. I'd like to thank every one of my 13,000 colleagues for that individual and collective effort. You would also be aware that we announced on the 13th of May that Dalton Philips has been appointed CEO and will begin on 26th of September. We are tremendously excited to have him join us. Dalton is a highly experienced CEO with directly relevant retail and food manufacturing experience in U.K. grocery. Last November, I promised you a seamless transition in our management model. I'm not marking my own homework, but the combination of myself, Kevin and Emma has worked well in managing the business. This will continue as we deliver on the rest of financial year '22, and there will be an effective and seamless transition to new leadership. I'd like to thank both Kevin and Emma for their fantastic work through the last number of months. So turning to Slide 5, the key messages today are as follows. Firstly, our year-on-year financial momentum continued to improve in the first half of the year. Our revenue for the first half '22 was significantly ahead of equivalent pre-COVID levels in the first half of '19, including in food to go, which was approximately 10% ahead in Q2. We outperformed market growth as we continue to onboard new business wins and partner closely with customers on both product and category development and management, which we'll discuss in more detail later. We improved capacity utilization across our facilities and restored best-in-class customer service levels. Profit conversion improved in the first half and continued to improve into the second half of the year. On the balance sheet, our leverage has remained stable over the last 6 months even with our seasonal working capital outflows, while our return on invested capital showed significant improvement year-on-year. Better Greencore will be discussed in detail later, but we first flagged in January that we were conducting an extensive review of cost and efficiency across the group. The first phase has now been launched internally. This includes a focus on organization of people and is significant in terms of impact moving from a metrics organization to a fully functional model. Phase 1 will deliver GBP 30 million of recurring annual benefits by financial year '24. The other 2 phases concentrate on further output optimization and technology-enabled benefits and are in planning. You're all well aware of the significant industry headwinds on inflation, labor availability and supply chain disruption. These have been unprecedented. They were further exaggerated by the impact of Omicron variant on mobility through December and January. Emma will talk through inflation in more detail later, but I would note, our customer engagement has been very proactive. While understandably hard conversations, they've always been constructive. In what we termed Wave 1 and Wave 2 inflation, we have recovered almost 95%, with more to come. Wave 3 has hit since March, and we are fully committed to a recovery here with 2/3 recoveries we did. Notably, the labor availability challenges has somewhat eased as we phased into the summer ramp. And low supply chain surprises continue, our people have reacted incredibly well. So then looking forward, profit conversion is our absolute focus, and we are well positioned to improve this in the second half. We are looking forward with confidence and anticipate a full year upturn in line with market expectations. This has been underpinned by the solid first half and the strong momentum we are seeing so far in the second half. This improving momentum enables us to announce today our intention to recommence value return of up to GBP 50 million over the next 2 years. We will be guided by our own capital management policy and market conditions as to what mechanisms we will deploy to return this value to shareholders. It is our intention that initially, this will be in the form of a share buyback program. So with that context now in place, I will hand over to Emma, who will bring us through the financial year for the first half.

Thanks, Gary, and good morning to everyone, and thanks for joining us on the call today. So my overarching focus during the first half has been very simple: to work on returning the business to profitable and cash-generative growth so that we can accelerate effectively out of COVID with a stronger economic model. Now we have a lot of details to cover over the next few slides, but I will first reflect on our key financial metrics on Slide 7. So the first metric is pro forma revenue growth, and it's clear that we've had a very strong recovery in the first half, it's up 34.9%. We were back comfortably above pre-COVID levels in food to go and remained well ahead of pre-COVID levels in our other convenience categories. We made real progress in year-on-year profitability with adjusted operating profit of GBP 17.2 million compared to breakeven last year. And this was also reflected in the strong improvement in adjusted EPS to 1.8p with earnings growth more than offsetting the increased number of shares post the 2020 equity placing. We had a free cash outflow of GBP 17.8 million in the first half, very much as expected given our seasonal working capital outflows, which we would expect to unwind in half 2. And we would also call out our 12-month free cash flow conversion of 71%, which is well above our longer-term target of 50%. And we made real progress on deleveraging. 2.1x is in line with our leverage level at the end of FY '21 and is approaching the FY '19 level that was 1.8x. But it also compares with a peak leverage of 7.2x this time last year at the peak of the COVID disruption. And finally, ROIC also improved markedly year-on-year, but off a very low base. So the half 1 outturn also compares well with our FY '21 ROIC of 4.5%. And while still considerably below historic levels, this metric will increase as profitability recovers further into half 2 and beyond. So moving to Slide 8 and the details of the half 1 income statement. Reported revenue grew by 33.6% in the first half of FY '22, mostly driven by recovery in our food to go categories. Pro forma growth was a little higher at 34.9%, after adjusting for the disposal of the molasses businesses in Q1 '21 and for movements in foreign exchange. Adjusted operating profit rose by GBP 17 million to GBP 17.2 million, with year-on-year profit conversion improving as volumes recovered. And I'll run through this in more detail in later slides. So in this context, H1 operating profit margin was 2.2% compared to 0 in the same period last year. Moving further down the income statement, adjusted profit before tax increased by GBP 19.6 million to GBP 11.7 million due to the operating profit increase and a reduction in finance costs. The exceptional cost in half 1 was related to our Better Greencore reorganization program and will be a cash outflow in the second half. And from an earnings perspective, we reported 0.2p basic EPS and 1.8p adjusted EPS. Now on the next slide, I'll look at our revenue performance. And as Gary mentioned in his opening remarks, we had to manage our business through a volatile U.K. trading environment in half 1. And the emergence of the Omicron COVID-19 variant in the middle of our reporting period had an impact on the food to go market that was still in recovery mode. And this further complicated a supply chain and labor environment that was still constrained and which meant that for periods, we cannot fully service the underlying demand of our customers. So in this context, we were delighted to deliver pro forma revenue growth of almost 35% in the first half. And I'd also note that as we came out of the half 1 period, our operational service metrics had improved to the extent that we were fully meeting unconstrained customer demand level. This revenue performance was supported by strong execution against new business wins across our food to go and other convenience categories. You will recall that we highlighted last year that we've secured new business wins across multiple channels and customers, representing annualized pre-COVID revenues of approximately GBP 175 million, and about 2/3 of this revenue has been onboarded already. And this accounted for 1/3 of group pro forma revenue growth in half 1. Most of this new business has, to date, has landed in food to go, and half 1 pro forma revenues here grew by 48%. We saw very strong year-on-year growth across our food to go categories with the strongest growth rates in sushi and sandwiches and in customers that have a balanced mix of urban and suburban locations. We were also very happy with our revenue performance in other convenience categories. Revenue grew by 15.8% on a pro forma basis in half 1. And this is considerably above the long-term trend levels, and there were several drivers here. So approximately half of the growth within our prepared meals business, which is primarily chilled ready meals and also chilled soup. The other revenue growth driver was in our Irish ingredient trading business, which continued to be helped by the sharp rise in commodity prices. And in our cooking sauce business, revenue was down somewhat against a tough comparative in half 1 '21. So now turning to profitability on the next slide. As you know, for KPI purposes, we focus internally on the absolute levels of adjusted operating profit. But it's also important to note the margin outcomes in half 1, namely a 110 basis point increase in EBITDA margin to 5.7% and a 220 basis point increase in adjusted operating profit margin to 2.2% in the first half. And we delivered these year-on-year improvements while managing through the impact of 3 factors in the period. So firstly, Omicron held back profitability in December and particularly in January, but then dissipated. Secondly, given the scale of the inflation challenge that we've seen across the business, there was inevitably some lag or phasing on recovery that has an impact in half 1. And lastly, we also decided to invest a little earlier than normal in the year. Pure labor availability ahead of product launches and are peak season trading. And this has turned out to be the correct decision, and our focus now is ensuring that new colleagues are effectively and efficiently trained to hit the ground running and be in place for the summer period. So in total, we estimate the impact of these 3 factors created a profit drag of about GBP 10 million in our first half, most of which does not repeat in half 2. And as we look into the second half, we're also seeing further improvements in profit conversion that give us confidence for half 2 performance, underpinned by the Better Greencore program that Kevin will talk through later. So Slide 11 focuses on inflation. And we addressed this earlier than most and have been engaging closely with our customers since the end of last summer. While this is a scale of inflation that we haven't experienced before, we do think our market strength and our customer partnership model has underpinned what we feel is a really impressive management of this challenge to date. The way we look at it, there have been 3 waves of inflation. So the first was at the end of the summer and into autumn '21 as we went into our Q1 period. The second was in late Q1 or early Q2. And the third wave has emerged in spring, following the Russian invasion of Ukraine in late February. And we've scaled these waves in the graphic on the left of the slide. And while it's not easy to be precise as a constantly moving target, this represents a low-teens rate of inflation on the overall cost base for the full year. About 95% of the inflation in the first 2 waves has been recovered to date with more to come. And we're fully committed to recovery on the latest wave and are progressing well to date. So as Gary noted, about 2/3 of the third wave of inflation has already been recovered. We've also provided some direction on the composition of this inflation in these 3 ways. The largest element, as you would expect, is raw material and packaging, which is where we do have explicit price recovery mechanisms in place for quite a large component of that. The other elements are being recovered through a combination of constructive dialogue with our customers and a focus on operational efficiencies. We're working with our customers on multiple other initiatives to manage this inflationary environment that includes range alterations and product reformulations. It's a very collaborative and constructive approach moving in lockstep with our customers. Our purchasing expertise has also proven to be very important here, giving us early visibility and pricing trends and giving us flexibility to adjust rapidly across ingredients and suppliers if required. What we're seeing is that inflation is increasingly being reflected at consumer level now across all our product categories. But this has not had a significant impact on demand levels to date, and that's something that we'll continue to closely monitor as we go through the coming quarters, and Kevin will discuss this in more detail later in the presentation. So moving further down the income statement and briefly to the composition of EPS growth on Slide 12. You can see that improved profitability was the primary driver of growth in the period. Reduced interest costs partly offset the impact of a higher effective tax rate and the impact of the increased weighted average share count that arose as a result of our equity placing in November '20. So if we just turn now to Slide 13, which outlined the waterfall of free cash flow movements in half 1 '22. The most significant feature in half 1 was, as expected, the seasonal working capital outflow that we typically have in our first half. And it is worth noting the outflow was a little higher than normal, and that reflects the unwind of the year-end phasing benefit that we had noted in our full year results last November. Maintenance CapEx of GBP 6 million was a bit lower than prior year levels. And other line items were much as expected, resulting in a free cash outflow of GBP 17.8 million. And just 3 final points to note here. The scale of the free cash outflow is lower than half 1 '21 levels, which was GBP 23.6 million. This outflow is expected to unwind in the second half of the year, in particular as working capital unwind. And just to note, once again, our 12-months rolling cash conversion rate of 71%, which is well above our 50% target. And bringing all of this together on Slide 14, there was a GBP 36.1 million increase in net debt, excluding lease liabilities since the end of FY '21. We spent GBP 12.6 million of strategic CapEx in the half, which is slightly higher than the half 1 '21 spend of GBP 8.6 million. And this was due to revitalization of our Excellence agenda, but also supporting our initiative to onboard new business from a key customer. It was quieter this year on equity and M&A compared to last year where we saw cash inflows from the equity placing and the disposal of our molasses businesses. So as a result of all of this, we ended the first half with net debt, excluding leases, of GBP 219.3 million compared to GBP 183.1 million at the end of our last fiscal year. Now if we turn to Slide 15 and our balance sheet leverage and liquidity position. So notwithstanding the increase in absolute net debt during the first half, our leverage, as measured under financing agreements, remained broadly unchanged at 2.1x. This is when compared to our leverage at the end of FY '21. If we look back 12 months, our leverage was 7.2x. This balance sheet strength is also reflected in our cash and undrawn facilities, which stood at GBP 349.5 million at the end of half 1 '22; and our weighted average maturity of debt, which was a healthy 3.1 years. It's also useful to draw your attention to the reduction in our net pension deficit. There was a GBP 20.6 million reduction in the 6-month period, and our actuarial net deficit now stands at GBP 8.7 million. This was driven by an actuarial gain in our U.K. scheme liabilities as discount rates increased. Our Irish scheme remains a net surplus through the period. And separately, the cash funding requirements of the schemes are evaluated on a triennial basis. And the last assessment for the U.K. deficit was in 2021. Following this, our annual cash funding requirement is modestly below previously guided levels of GBP 15 million. So with our balance sheet in a good place and our financial model improving, this allows us to think more expansively a better capital base and capital allocation more generally. Our intention is to recommence value return this fiscal year. Our longer-term reference point for all our thinking here is reaching an appropriate leverage for a business of our size and maturity in our type of industry. And as we talked about earlier this year, a leverage target of 1 to 1.5x would provide balance sheet protection from external risks while providing enough flexibility for growth investments for a progressive value return policy and for any incremental return of surplus cash when appropriate. So in this context, we've announced today our intention to recommence value return of up to GBP 50 million over the next 2 years. We'll be guided by our own capital management policy and market conditions as to what mechanisms we will deploy to return this value to shareholders. But as Gary noted, our initial phase of value return will be in the form of share buyback program, and we'll provide more detail on this in the next month. We have reserved the right to be flexible around the future phases of the value return, whether it takes the form of future share buybacks, a reinstated dividend or a combination of both. So that concludes my section. And in summary, I would say we're happy with our half 1 financial performance. It gives us a strong platform to achieve our plans for the second half of FY '22 and beyond. I'll come back in for outlook at the end, but for now, I hand the presentation to Kevin for the operating and strategic update.

Thanks, Emma, and good morning, everyone. So I'm going to take the opportunity to build on a number of the themes that Gary and Emma outlined in their presentation in a little more detail. So firstly, demand. I'd start by saying that underlying markets remain very attractive to our customers and our consumers. They've been recovering strongly during the first half. And I would say, as we enter the second half, they've not only been holding up, but in many cases, remain on the increase. Secondly, collaboration. We're outperforming through this recovery. This is predominantly through working even more closely with customers and suppliers in these challenging times. Working with long-standing customers to protect and enhance their channel positions, whether that be through evolving range efficiency, managing our product set for a more inflationary environment, managing service or labor availability more actively, but also investing with them for future growth and newness. We're also working with new customers, as Emma outlined, to onboard them effectively and learn how to serve them most efficiently and profitably in what are relatively new channels for us. This all represents continued strong delivery against the growth strategy that we outlined in our 2019 Capital Markets Day despite the backdrop and wider implication to the pandemic. I also want to give you more color on our Better Greencore program that Gary set out, a really important set of initiatives that in the first phase will mean a significant change in how we're organized and focused internally. And finally, I also want to update you on the progress we've been making on delivering our sustainability strategy, our Better Future Plan. Turning to Slide 18. In this context, we've been really encouraged by the demand recovery in the first half of our year, building what we experienced in the second half of FY '21. Not only are we seeing demand holding up despite the broader consumer environment, but we're continuing to see demand growth. Overall, we have outperformed our markets. So looking at half 1 performance compared to the equivalent pre-COVID period in 2019, the U.K. food market grew by approximately 9%, but our customer and category mix has helped us deliver 10% growth, which, considering a proportion of the period saw a level of disruption, we were very reassured by. It's important to note that both our food to go and food for later or other convenience categories have contributed strongly to this performance. I'm very happy with our other convenience categories, in particular, our ready meal category where our progress continues to build on our core and premium product ranges. Specifically on food to go, that market has bounced back as mobility has returned, not equally by channel and notwithstanding some disruption from Omicron in the middle of the period, but it remains very encouraging as we move towards our peak summer trading period. Based on the run rate in half 1, the food to go market was back to approximately 93% of pre-COVID levels. So previously held concerns on working from home and its impact on our food to go market, concerns that, quite frankly, we would also have shared ourselves over the last kind of 18 months or so, are continuing to fall away. Food to go penetration also strongly recovered, but not yet fully back to the pre-'19 levels. At the peak of the pandemic, food to go market penetration across the U.K. dropped by 27%. In the 52-week period to April '22, this was back to being just 13% behind. We can also see this playing through an individual customer performance, evidenced particularly by those who have a strong suburban mix in their store portfolio. The grocery channel is also important for us and remains resilient. The volume and value share of our retail food to go channel, which includes multiples, convenience, discounters and high street, continues to build and is now higher in March '22 than was the case pre-COVID. Our own growth in food to go is stronger again. So we're now 8% above pre-COVID levels based on our half 1 pro forma revenue growth. And for Q2, this was higher still at 10% above pre-COVID equivalent levels. We're also now starting to see a real benefit from the new business wins that we've been securing over the course of the last 18 months. And in addition, our ongoing focus on range optimization is driving efficiencies for Greencore and our customers as ranges are made to be more efficient. So diving a little deeper into our new business wins on Slide 19, focusing on food to go, in particular, where we've onboarded most of the wins to date. In half 1, our food to go revenues were running at approximately 8% ahead of the equivalent pre-COVID levels of 2019. Underlying like-for-like revenues were approximately 95% of this, and therefore, new business wins contributed the other 13%, which have performed well in the half. Looking at this another way, based on half 1 run rates, the annualized revenue of these onboarded new business wins in food to go are now over GBP 110 million. There was a small proportion of wins in other convenience, and that would bring the annualized run rate based on half 1 to approximately GBP 120 million. And there is more to go in the second half, which I will talk to later in the presentation. We talked in November and also January about the challenges in meeting the full extent of the demand we were seeing and that during quarter 1, we estimated that circa 5% food to go demand was not being met. While we still face a level of these challenges, we work to tighten and manage our network configuration to optimize output and cater for the summer demand expectations that we will face. This has allowed us to improve our output and our operational service levels during the first half. And as we ended the first half, we were servicing fully and delivering unconstrained volumes. So moving to Slide 20. And alongside new business win activity, our new product development remains a critical element of our growth. We have refreshed or launched over 600 SKUs in the first half, a huge level of work given our well-documented supply chain and labor challenges that our industry has faced. It highlights once again how relevant we are with our customer base, how they want us to do more and even more in the context of the challenges the market faces today. I feel we've done an excellent job in staying relevant to customers in this context, and we will continue to be focused in that regard. New product development provides the excitement for our categories to recover and thrive, and we've had some notable examples in the period. These include a range of fresh and vibrant meals, a relaunch with Marks & Spencer, a joint development in an alternative chilled ready meal format with both heated and cold components. With consumers demanding healthier products without compromise, this range delivers strongly against that and is presented in fully recyclable packaging. We created an extended range of dine-at-home meal boxes with Tesco to tap into a building premium dine-at-home occasion. And finally, we worked closely with M&S to deliver on their recent range launch across the Costa network, a launch that has gone very, very well. So now turning to Slide 21 and building on the theme of customer relevance. We're investing behind a real step change for us in our ready meals and salads portfolios with the onboarding of new business for one of our existing key customers in half 2. We've talked about the overall detail previously. But as a reminder, this involves a strategic capital investment of approximately GBP 30 million, involving capacity extension at 3 sites: Kiveton in Sheffield, Wisbech and Boston. We will see full completion and launch by the end of this fiscal year. Diving a little deeper, this launch element will involve adding approximately 70 additional SKUs to our portfolio across ready meals and salads, with some of that salads business already landing in the market over the last month. The expansion of the site at Kiveton will increase our overall network capacity in ready meals by approximately 30%, so a meaningful increment to our existing footprint and, indeed, our market share in the Italian ready meals category. Some points for reference. Italian ethnicity, we already know well. 75% of our existing chilled ready meal volume comes from this space. Italian remains the biggest ready meal cuisine with strong volume growth of 10% over the last 52 weeks. Italian is 20% share of total meals, and Greencore will move to around about 48% share of the Italian segment in chilled ready meals post the onboarding of this new volume. This is the sort of investment that we've executed on successfully with multiple customers over multiple years. It's tried and trusted. And all the partners involved, it fundamentally illustrates the hallmark of our customer partnerships. There were lots of positives in doing this sort of investment. It provides more certainty on volume flows for our network. It allows us to work more closely with customers to invest together, be it in sites, in new product development or in category. It helps us plan for the future and for the longer term. And above all, it gives us a stronger platform in which to target new growth in categories we already know and understand. So shifting gears and introducing Better Greencore, which is a real step change for us in how we augment our Excellence programs over the next few years and is a key underpin to rebuilding our economic model, especially in light of the recent additional inflationary pressures we are facing. We previously highlighted the revitalization of our Excellence programs in manufacturing, engineering and procurement. During FY '22, we have designed the Better Greencore program to further support and enhance those programs even further. There are 3 areas of focus across many work streams: firstly, our organizational model and overhead structure; secondly, output optimization, maximizing output from our existing facilities; and finally, a focus on technology-enabled efficiencies. We have launched Phase 1 of the program, which targets a net annual recurring benefit of GBP 30 million in FY '24, with further benefits being delivered in following years. This program includes a significant change in how we'll organize it internally, moving away from individual and siloed business unit structure and realigns our business and our teams under a functional model. This change addresses customer feedback around areas of complexity in the Greencore model and will deliver a more customer-centric approach across our business. This clarity of approach will be underpinned by a full deployment of an integrated business management model, ensuring clear ownership and accountability for our specialist teams, improving the effectiveness of product development, operations and overall cost management. We will invest a total of GBP 24 million during FY '22 and FY '23 to unlock these improvements. We will communicate further as the other phases are launched, but we expect the combination of these to deliver further significant benefits to the group. Not only will these other phases deliver financially, but they will be developed with a view to unlocking additional capacity and avoiding unnecessary future capital. And finally for me, on Slide 23, and before I turn back to Emma for outlook, I want to mention our sustainability agenda that we call a Better Future Plan. At the start of this fiscal year, we reiterated our commitment to our long-term goals, and we added a host of FY '22 commitments. The key ones being to, this year, report on the health and sustainability profile of our products in line with the National Food Strategy, the development of our customer ranges in line with this strategy remains a big focus for our food teams; secondly, to ensure that FY '22 that all our food surplus goes to feed those in need; and thirdly, by 2030, to reduce the average meat content across our portfolio by 30%. The focus in half 1 has been around building the relevant data and systems so that we can measure and assess our own performance against these commitments. Just to call out a number of initiatives in this regard. We're building a substantial body of data around profiling the nutritional database of our portfolio of products. We're working with a number of customers to develop footprinting so that we can profile the carbon intensity of products at scale. We're improving our energy management strategy at factory levels, enabling us to see data at a more granular and real-time basis. And our financial team has commenced a body of work to develop climate change scenario analysis that will be used as part of our climate-related disclosures later in the year. That said, we've also faced some challenges, too. Our focus on food waste is at the heart of our plan, but we've struggled to make progress in the first half of the year. Volatile demand, system downtime and a large level of employee churn has meant that we've not been able to make the progress we would have liked. This remains a key focus for us in half 2. So that concludes my section. Thanks for now, and I look forward to discussing these topics in the Q&A later on. I will hand back to Emma for the outlook.

Thanks, Kevin. So just bringing all of this together on Slide 25 and how we think about the outlook for FY '22. So we've seen encouraging revenue momentum and improved profit conversion as we enter peak seasonal trading. We've now substantially recovered the significant input cost and other inflation incurred in the first 2 waves and are progressing well on the third wave. And we are fully committed to recovery of all inflationary challenges that have materialized with profit conversion then underpinned by our Better Greencore program. We're confident about our half 2 momentum. And in this context, we continue to anticipate an FY '22 outturn in line with current market expectations. And with our clear capital management framework and our continued focus on deleveraging, we do have the scope to recommence value and return to shareholders in the second half, as we described earlier. So summing up, we have a strong position in our markets, our FY '22 momentum is strong and we're very confident about the medium-term prospects for the business. So thank you all again for your participation today. And now let's open the floor for Q&A.

[Operator Instructions] The first question comes from the line of Jason Molins from Goodbody.

A couple of questions, if you don't mind. Firstly, kicking off, Kevin, you mentioned that you're back to a position where your revenue performance is no longer constrained. Just wondering what you've done to achieve that or indeed what dynamics in the marketplace have changed. And then final question really is around cash flows. How should we think about some of those moving parts for the second half of the year? Obviously, a bit of a working capital outflow in the first half. And then just any signposts you can give us for the second half would be helpful.

Thanks, Jason. I'll take the first part of the question, if that's okay, on demand. I think there are 2 elements to that. I think the first would be around labor. I think it would be -- it's important for us to be clear that it still remains a challenging environment, but I'd say, significantly more stable than it was previously. I think we've applied a level of greater granularity and rigorousness to our recruitment process, and we've brought the net there. And I think that's been really, really positive before. I'd also say we brought more people into the group than ever before, and there's a stronger focus on retention. And I certainly don't think that we've taken that for granted. I think that's been a real key to our success. So I think being able to stabilize that space is the first thing I'd say, Jason. I think, secondly, it's then about how we thought about the supply chain specifically. So that is around how we selectively managed our ranges with our customers. We've seen a fairly material reduction in our overall SKU range with food to go, for example, a like-for-like basis against 2019 being around 1/3 smaller. So getting the fixtures to work harder, getting our factories to work harder. And when you combine that with the fact that we've seen a stabilized labor market, it has really allowed us to optimize that outflow. And as a consequence, I think that's been successful for both us and customers more broadly. And the way I'd kind of qualify that is that we've also seen, over that period, customer availability also significantly improve. So I think that's been a win-win for everybody, and that's an area that we continue to focus on.

And Jason, look, just in terms of cash flow, working capital is clearly the big movement. So we tend to see an outflow in the first half that reverses in the full year, and we'd expect that trend to be maintained. So I'd say broadly neutral, and working capital is the biggest thing to think about there.

The next question comes from the line of Clive Black from Shore Capital Markets.

And well done actually in H1. Two questions, if I may. Firstly, Emma, you spoke to no discernible change in demand as you embarked upon price recovery. I just wondered if there was any discernible change in mix in terms of volume versus the type of products, the value of products people are buying. And then secondly, just in relation to your last answer, Kevin. Labor has clearly been a big constraint for Greencore in the last couple of years. Could you give an indication of, a, what you expect Better Greencore program to yield with respect to labor; and b, where automation fits in with that? Is it part of it, alongside it or whatever? That would be much appreciated.

Look, Clive, I'll start on demand and mix, but I think Kevin will definitely supplement what I have to say on that. And look, we've been really pleased with the performance of our categories and the resilience of demand where we are. We have seen very narrow sort of pockets of impact on demand. Actually, where inflation has gone through, the example actually that I'll use here is, if you look at side of plate salads and coleslaw, in particular, has seen quite a lot of inflation go through and impact on price. And we are seeing a volume impact of that. But more broadly, we're not seeing it across the piece. We're working with SKU range actively and consistently with our customers right through the period to help mitigate inflation. So there will be an impact on mix depending on what goes into products, and I think maybe Kevin can talk to that a little bit more.

Yes. Clive, I'd supplement it probably with 3 points. We're not seeing a huge level of movement in mix at this point. There is some movement, which is really interesting. So we're seeing a little bit of movement into certain categories towards both premium and value similarly to kind of some of the patterns that we saw in 2008, 2009, but nothing significant. I'd also say that what's interesting is our grocery business is remaining very buoyant as well, which would always be a reflection of a period like this, and that continues to be strong. And then I think the other thing I'd point out, Clive, is that the discounter segment continues to see levels of growth. And that's also pretty evident to us in some of the data that's coming through in some of our categories. But are we seeing a material shift in terms of mix of products and the kind of products that are being bought? Nothing at this stage that is material, but we are very, very mindful of that, and we're staying very, very close to that as we -- especially as we manage the mix of products in the factories to optimize our output.

And on labor?

And on labor, I'd say 2 things. I think the first thing I'd say, Clive, to your point on automation, is this remains an extremely critical part of how Greencore thinks about its future and is a significant element of Better Greencore. That phase and how we think about that is being worked through as we speak and how that applies across our categories. It won't apply equally, but it is definitely something that's core to what we do. In terms of labor, actually, the key element of Better Greencore on labor, which is I think something that both we and the industry is kind of learning more effectively from, is how we think about the retention and the control of labor volatility and movement. That is a key theme for us and has been a key theme in the first half of this fiscal. And actually, it's one of the reasons why we've been able to say confidently that our position on labor has been strong. I think that's been a real important move for us. And again, that engagement piece and that retainment piece will remain a critical element of a Better Greencore as we go forward.

And Clive, we'll have talked about this probably in November, all of the things we were doing, all the hygiene factors around onboarding, how we train people, how we make sure they're onboarded and integrated because the first week -- the first 2 weeks are critically important. But actually, measuring whether you retain them at the end of the first 12 weeks is really important. And there's a big focus right across the business over the last couple of months on onboarding and retention.

Just one supplementary, if I may. Are you seeing that in your labor turnover data that you could share yet?

We're definitely seeing it in -- so if I was to take the movement over the first half, Clive, what we're seeing is the level of attrition that we've seen has significantly reduced. What's important here is that we don't kind of declare complete victory. What we are seeing though is a significant improvement in all of those metrics, whether that be recruitment or whether that be retention. And retention is the one that we've actually become more obsessed with as we've gone through the first half, and this continues to be really positive for us. The point I would make, Clive, is that obviously, this is very, very regionally based. It remains that there are areas and pockets of the U.K. where that continues to be extremely competitive. But I would say, in those particular areas, we are doubling down and using a variety of levers to make sure that works. But to Emma's point, the key focus here is about retention and how we make sure we onboard people effectively and we make sure that people are inducted appropriately, and we're taking our time to do that in the right way, even if that's a little bit more expensive than we would have previously been used to.

The next question comes from the line of Doriana Russo from HSBC.

I have got a couple of questions. The first one is on top line. You said you went through several ways of recovering inflation. So what sort of a pricing increase shall we include in the revenue growth that you have booked for the first half? That's my first question. And the second question is on the Better Greencore, it sounds like the program has already started. You said that you expect some important changes to be delivered already in this current year. Can you give us a little bit more detail in terms of what exactly you're working on? And also, what sort of -- at what point do you think you might be able to announce further improvement that could be expected beyond FY '24, beyond the GBP 30 million that you just announced today?

Okay. Thanks, Doriana. So look, in terms of top line, what we have talked about is an impact of -- we're seeing low-teens inflation for the full year, and we'll have said high single-digit inflation impact in the first half. And when we think about, well, where has that played through to volume or say where has that played through to price, we're seeing an overall impact into price in the first half of something close to that high single-digit number. There is a bit of a lag, and we've called that out, and we've talked about the GBP 10 million impact overall of various factors in the first half. But we're seeing quite a significant component actually come through price in the period, and we expect to see more come through in the second half as we see that ramp-up of inflation hit in the second half. In terms of Better Greencore, look, the GBP 30 million number we've talked about is what we have done all of the detailed work on mapping it and looking at the path forward on that. There are further phases, but I think we'll talk about exactly what those numbers are at a later date. We think there's quite a lot of value for us to go after on that. But for now, we're focused on implementing the GBP 30 million, delivering that in FY '24 and starting to scope out the other phases as well.

Can I just -- sorry, can I just ask you if there was a material difference between the pricing that you have taken in food to go versus the pricing that you might have taken in the other category in the first half?

No. No, there isn't. We're not seeing a difference in recovery across the categories. And really, for us, it's around timing of recovery on some of this.

Yes. I think the scale, Doriana, is purely based on the volume we've got. I think in terms of overall percentage of inflation, I'd say they're very similar across categories.

Okay. And if I may ask a follow-up question with Better Greencore. So did I misunderstood when you -- I think you mentioned that there were some benefits that were already coming through from Better Greencore. And therefore, my initial question was really in terms of what area have you already started to tackle as a result as part of the overall 3-year plan.

Yes. Look, we've already started to tackle overhead, and some of that will come through in the form of headcount. And we're seeing an exceptional charge come through related to that. A component of that will be redundancy, but also in terms of operational performance and output optimization and a lot of work we've been doing in that respect, which is helping us deliver summer peak volumes.

The next question comes from the line of Martin Deboo from Jefferies.

It's Martin Deboo at Jefferies. The key issue for me in the guidance seems to be what it implies about H1 versus H2. And I completely get that you're capable of having a much better H2 than H1, and I'm reassured by what I hear on pricing recovery, labor optimization and cost savings. But sort of the other side of the debate is you need -- to make consensus or I think it's what you guide, you need GBP 60 million of EBITDA round numbers in H2. And there've only been 3 occasions, I think, in the past when you've delivered that sort of number in H2, all in much more benign times than now. Or to put it in another way, you need probably 7.5% to 8% margins. And again, you have delivered that in H2s in the past, but only in more benign times. So I think probably the constructive question I should ask is, what are the moving parts of either H2 versus H1 or H2 versus H2 last year that give you the confidence you can deliver this GBP 60 million or so of EBIT that consensus is looking for relative to this morning's results?

Martin, it's a fair question. Certainly, we've looked at the GBP 60 million ourselves extensively and looked at the factors impacting half 1 actually and how they're flowing through to half 2. And look, I think it's been well documented, the supply chain and labor availability challenges that are in the market and have impacted through half 1. We've done a huge amount of work around inflation, which we've talked to this morning, and recovery of that. But in terms of labor and onboarding and stabilizing where we are from a labor perspective and are feeling good about where we are as we're coming into summer peak. We've done an enormous amount of work on operations through our Better Greencore program to really look at how we're optimizing what we're making, where we're making it and really enabling the delivery of summer peak because we can see that volume uplift coming through as well, and it's how we do that effectively. And there is some impact of the new business in the period that we're starting to be -- enable delivery in the second half. So it is a challenging environment. We'd absolutely recognize that, but we're feeling that we are managing those challenges as best we can. And thus, we're starting to see the improvement in conversion come through as well.

The next question comes from the line of Charles Hall from Peel Hunt.

Can I just ask a bit more on the volume trends in food to go? And obviously, you said that you were 95% of pre-COVID levels in H1, and that included a decent amount of inflation. How are you seeing volume trends going forward in the existing business?

Thanks, Charles. I might just take that one quickly. I'd say in the first few weeks of half 2, we remain very encouraged by where volume is sitting, certainly on a like-for-like basis, certainly in food to go, but also, as Emma touched on earlier, in the majority of our categories where, to this point, our demand profile continues to build. Look, we're very, very mindful of what is going on in the broader market. We have seen retail pricing movements in many of the categories, what I'd describe at this point, at a sensible level. And actually, what is not manifesting itself is any material change in our demand profile, as I said in my section, that we remain encouraged by where that is. And food to go continues to now move towards an improvement versus 2019 on a like-for-like basis, and that has to be encouraging for us considering the basis of where we've been for the last 18 months. So I'd say we're very, very confident. And when you bear in mind that we sat here in November, certainly with a position of not quite sure where that demand would sit, I'd say that as the profile of working from home and consumer dynamics have played through, we're encouraged and we remain very positive from where that demand will flow through.

That's great. And one other question, if I may. When you were taking on the new business, the comment was that it would take some time to lift up to similar margin levels for the rest of the business. Where are you on that margin journey for the new business?

I'd say, look, we were very acutely aware that some of that business was definitely at a more dilutive margin level than our core business that we've been operating with for a longer period of time. I'd say 2 things to that, Charles. I'd say, number one, that margin is improving and continues to improve as we get used to operating with them in that particular channel, whether that's with range simplification, whether that's with delivery models that become more simplified, whether that be moving from 5- or 6-days-a-week delivery to 3-days-a-week delivery. So we are just getting used to being able to be more granular in that particular category. So it's applying all the things that we know and have learned over the years from the grocery channel into those areas. So I'd say they're improving, and they'll continue to improve as the Greencore model gets hold of them, that -- whether that applies through efficiency of manufacture, whether that applies through the way in which we procure and think about the supply chain more effectively or whether that's also helping them with their own demand profiling. So I think that will continue to take time and evolve, but it is definitely improving and will continue to do so.

And I think just as a reminder, the significant component of that new business is distribution revenue, so you do have a different margin profile attaching to that.

The next question comes from the line of Damian McNeela from Numis.

Damian here from Numis. A couple of questions from me, please. First one, I think you've talked about the cost recovery and the progress that you've made there. But I think, Kevin, you've sort of talked about the inflation that has gone through on shelf. Are you able to quantify that and perhaps provide some color about how much further you might expect the sale prices to go up, please? And then the second question is around the CapEx around Better Greencore. Can you -- I know you sort of said you're going to spread it over 2 years, Emma, but can you give us a bit more granularity on the phasing of that in the context of wider group CapEx as well, please?

Thanks, Damian. So if I just take the pricing question narrowly, what I'd say, we have seen around -- if I take food to go first, I'd say we've seen around 300 SKUs move maybe in our top 10 retailers by an average of about 15p an item at this point. And in addition, in food to go, what we've also seen, as many of you will have probably lived through, we've seen some movement in the meal deals across the market as well. And 2 things have happened there: one, we've seen an average movement in price of around about 50p per deal; and secondly, we've seen a very sensible approach as part of our own approach to inflation mitigation, a level of simplification across the range, so not a broad availability of all SKUs being involved in the meal deal, retailers being much more selective about that. So there's been some movement from that perspective. And pleasingly for us, as I say, we've not seen demand change. In fact, we've also not seen, in a lot of cases, in the meal deals, not many of the triggers reduced, i.e., the demand in that particular area continues to be held. And then if I move to ready meals, again, similarly, probably around maybe across the top 5 retailers, we've seen 300 SKUs move by an average of, again, 15p to 20p an item. Again, at this particular point, we've not seen movement. We've also seen some movement in kind of weight distribution. So many of the retailers have started to move products from between 425 and 450 grams down to 400 grams as well as part of the product resizing piece. So there's a variety of things that are playing through at shelf which, again, I'd say 2 things, too: one, the retailers, I think, are being very sensible about that in terms of how they're managing it; and secondly, it's really, really important from us from a category perspective to stay very, very close to that in both terms of how consumers are behaving a bit, to the question earlier on from Clive in terms of whether the mix is going to change, and I think that's a really important thing for us to stay close to. And then also whether or not overall demand changed, and at this particular point, we've not seen any movement from that perspective.

Yes. And look, in terms of CapEx, I think we might just talk more broadly about the overall CapEx number. We have previously said we expect to spend about GBP 80 million this year and then GBP 60 million into '23. That will probably come down a bit this year to something between GBP 70 million to GBP 75 million. But then in '23, we are going to see a number a bit above the GBP 60 million is how we think about it.

Okay. That's pretty clear. And then perhaps just one last one. In terms of industry consolidation opportunities, I mean the balance sheet is clearly in a much better place than it was. Are you seeing greater opportunities for consolidation? Or is there sort of not really much to do there and the focus is really about sort of driving Greencore forward organically?

Look, our near-term focus has been on driving our economic model. And things like recovery of inflation, managing the labor pool and delivering on our Better Greencore initiative and we're more inwardly focused right now. And once returns start to come through, that's when we would start to think about broader sort of industry consolidation and things like that. I mean it's part of our strategy, it has always been part of our strategy. But for now, we're focused on delivering within the framework of the business we have today.

The final question comes from the line of Nicola Mallard from Investec.

A couple of questions from me as well. Just finally on the Costa new business wins, can you give us an idea of the timing of when that came in? Did it actually help the first half at all? And if not, what are we expecting for sort of full year contribution given that you said, I think, you commented that it's going well so far? And secondly, the return or recommended value to shareholders, you've said that was initially going to be in the form of a share buyback. I mean one assumes the share price might change that. But are there any other triggers that would encourage you to switch from a buyback to a dividend?

Yes. Thanks, Nicola. Look, I mean I don't think I can give specifics on exactly what contribution of Costa is. But I mean if we think about that delivery of the second half, new business, including the incremental cost of business, is certainly a component of that as we look at profit build through the second half. I mean it landed just at the end of half 1, so we won't see an impact of it in those numbers at all. In terms of share buyback, look, what we do is retain flexibility around mechanism. So we're announcing up to GBP 50 million of return to shareholders over the next 2 years. If share price changes materially, yes, we'll have a look at that. But our view today is that share buyback is the right mechanism, and we will keep that under review.

There are no further questions. So I will hand the call back to your host for some closing remarks.

Great. Thank you, everyone, for joining us this morning. I'm very happy to engage with you thereafter in further calls for this morning. I'll say thank you, and goodbye.

Thank you for joining today's call. You may now disconnect your lines.