Greencore Group PLC
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Greencore Group PLC
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Hello, and welcome to the Greencore Group plc Q1 Trading Update. My name is Jess, and I'll be your coordinator for today's event. [Operator Instructions]I will now hand you over to your host, Jack Gorman, Head of Investor Relations, to begin today's call. Thank you.
Okay. Thank you, Jess, and welcome to everyone on the call this morning. My name is Jack Gorman, I'm Head of Investor Relations at Greencore. I'd like to thank you all for taking the time to join us this morning for our Q1 trading update conference call, which covers the period to the 25th of December 2020. I'm joined on the call today by our CEO, Patrick Coveney; and our CFO, Emma Hynes. In a moment, I'll hand you over to Patrick to give an overview of trading in the period. And after that, we will open up the call to questions and answers. Finally, I would like to draw your attention to the forward-looking statements at the end of today's release. Thank you. And with that, I'll pass it over to Patrick.
Thanks, Jack, and welcome and thank you to everyone for joining us this morning. Good morning, first of all. I hope that you're all safe and well. As Jack has said, I'm joined on this call by Emma. And Emma and I -- well, I'm going to make some introductory remarks, and Emma and I will then deal with questions after that. As you know, this morning, we released our quarter 1 trading update for the 13 weeks to the 25th of December. And the purpose of this call is to briefly provide some more color on that update, to share our thoughts on what we're seeing in January trading to date and then to field any questions that you may have for Emma and I. As such, we would anticipate finishing by about quarter past 9. Quarter 1 has been just a challenging and, I guess, very busy quarter for Greencore. In a demanding period, we continued to work effectively and collaboratively across our organization, across our supply chain, across our production network and to deliver for and with our customers. Commercially, we've responded rapidly to the changing, quite volatile demand patterns actually associated with the changing mobility restrictions and lockdowns regionally and nationally that were introduced across the U.K. in recent months. Financially, we delivered in line with plan in the quarter, managing our costs and managing our cash carefully. And to this end, we were pleased to generate positive adjusted operating profit as well as positive adjusted EBITDA for the quarter. We continue to be energized, frankly, by the various challenges and opportunities that this trading environment has provided us. We are particularly excited about the new business opportunities that we have already secured and by the broader health of the commercial pipeline that we have, which I'll take a little more time later on in this call to describe. Furthermore, last November, as many of you will know, we took several important steps from a debt and equity perspective to protect[Audio Gap]critically to enable us to capture the multiple growth opportunities that are emerging across our categories.And finally, we released our 2020 annual report and sustainability report on the 24th of November, which will be the focus of our AGM later this morning and in the case of our sustainability report and investor seminar that we're going to hold on the 24th of February. So this morning, I wanted to provide more color on 4 topics: firstly, I wanted to provide a brief update on our progress against the 3 priorities that we've used to manage our business throughout this pandemic: keeping our people safe, feeding the U.K. and Ireland, and protecting our business; secondly, I wanted to provide specific commentary on the performance in quarter 1 and on the current run rate since we've entered the third lockdown this month; thirdly, an update on our liquidity and balance sheet position; and fourthly, our thoughts on outlook. Let me take each of these topics in turn, beginning with our 3 priorities to manage the business through the pandemic. As I start here, I would like to, again, acknowledge and thank all of our teams and colleagues right across Greencore for their skill, their enthusiasm and, perhaps most importantly, their resilience through this quarter. In particular, I wanted to acknowledge and thank my colleagues who are working at our manufacturing and distribution facilities who continue to do a fantastic job in these uniquely challenging circumstances. Our first priority is keeping our people safe. What is clear from the increasing number of cases, the severity of these new strains and the fact that it will take several months yet before every one is able to get vaccinated is that we need to take incremental or further safety actions to ensure that we're doing even more within our business to control the virus and to keep our people safe. Therefore, over the last few weeks, we've taken a number of additional steps to enable this which include: revising our COVID-19 risk assessments and site-specific action plans across every manufacturing location and distribution facility in Greencore; making the wearing of face coverings mandatory everywhere, including in our manufacturing areas, in other words, visors alone are not sufficient; stepping up further on our ventilation and cleaning protocols across our network; rechecking all office and meeting spaces to ensure the desks are physically 2 meters apart. Again, in this case, screens alone between desks are not sufficient. Perhaps most significantly, we're joining in a very large-scale way with the U.K. Department of Health and Social Care to implement weekly mass lateral flow testing across a large number of our sites, starting with our principal sites, which, in aggregate, will have by the end of this week or early next week about 80% of our colleagues being tested every week. And we're also continuing to ask all colleagues and pushing all of our leaders to actually work with colleagues to figure out who can actually successfully work from home. By doing all of these things, we are helping to keep both those working at site and those working at home safe. And while nothing and nowhere is immune from this virus, we've been able to keep all of our sites safely in production throughout this period. We remain vigilant on the potential for further disruption, of course, as a result of localized outbreaks, and we are prepared for these possibilities. The second priority is feeding the U.K. and Ireland. Throughout the pandemic, we have operated with a sense of mission to keep our communities safely fed and have worked collaboratively with all of our customers to do so. Range management remains critical, taking account of both demand and cost considerations, balancing availability and waste and tailoring our product ranges to new emerging consumer needs as they develop through the pandemic. Having been through this for the first time at scale in the first lockdown last spring, we've learned important lessons on what to do and, indeed, lessons on what not to do that we've applied to the most recent lockdowns. At the same time, we have continued to take a purposeful and community-led approach in terms of how we support and contribute in multiple different ways to initiatives at local, national and regional level to support the vulnerable and those in need of quality food all over the U.K. And our third priority, protecting our business. We've been vigilant on how we manage costs and cash in these exceptionally challenging financial circumstances. While we've started FY '21 with sustained and improving sales momentum, demand since then has been volatile, especially in food to go categories, driven by the imposition of necessary restrictions and regional, national lockdowns at different stages through the quarter and the impact of these -- that each of these had on mobility and associated food to go demand. From a demand perspective, this, of course, has been challenging and frustrating. The recent November lockdown and the current one to date have not resulted in as dramatic a fall as that experienced in the first lockdown last April. Importantly, the comprehensive set of operational, debt and equity measures that we introduced in late November have helped us mitigate this near-term uncertainty, but also provide us with the resources to deliver specific value creation opportunities. In quarter 1, we delivered positive adjusted EBITDA and also positive adjusted operating profit in what is typically our quietest quarter of the year. This brings me neatly to our second topic, which is our specific performance during quarter 1 and during the early part of quarter 2. Total revenue in quarter 1 was GBP 312.7 million, a decrease of 15% on a reported basis. On a pro forma basis, the reduction was 15.1%, minor difference, adjusting for currency and the timing of the disposal of the group's molasses business that was completed in December. Breaking down this performance a little further. Revenue in food to go categories totaled GBP 188.5 million in quarter 1, and the pro forma decline for this set of categories was 21.7% year-on-year in the period. Revenue in other convenience categories totaled GBP 124.1 million, which was a pro forma decline of 2.1% year-on-year. As we have done since the pandemic began, we felt it would be useful to provide a little more granular detail on the trajectory of our performance during the quarter, particularly in food to go categories, given the scale of the revenue impact from COVID-19 during the period. Starting with October. The resurgence of COVID-19 cases across the U.K. led to the introduction of tiered regional restrictions in October. This impeded the pace of recovery in demand in food to go categories that we had seen since the end of FY '20. Pro forma revenues for October were some 22% below prior year levels. Further mobility restrictions were introduced in early November for a 4-week period of nationwide lockdown. The impact of these restrictions was not as severe as that experienced in the first lockdown. The food to go demand was affected and was down a little more in November than October, down 24% on a year-on-year basis. There was actually a modest improvement in year-on-year food to go volumes in December, down 20% versus the prior year, before lockdown 3 took effect on the 4th of January. To date, the impact of lockdown 3 has not been as severe as that in March or April 2020, with more workplaces remaining open this time around. But with schools closed, it is a more severe set of restrictions than those that were implemented in November. Customers have been keen to sustain range and protect food to go volumes in so far as they can. However, there have, of course, been a significant number of store closures implemented across our customer base, including where some of our customers operate franchise arrangements, and this has had a negative impact on demand. To put this in context, current demand in food to go categories, in other words, the demand since lockdown 3 was implemented on the 4th of January, is running approximately 35% below prior year levels. This compares with a decline of approximately 70% at the height of the first lockdown period in April of last year. The scale of this impact is also reflected in our latest proprietary marketing research and insights, some of which we've shared on previous calls. To remind everybody, pre-COVID, some 45% of consumers surveyed had purchased food to go products in the previous week. This fell to a low of approximately 15% in early April and have recovered to almost 40% by the end of FY '20. The latest data would point to approximately 30% penetration rate in January, still double of what we experienced in the first lockdown. It also continues to play to themes that we discussed at our full year results. For example, retail food to go channels have been hit much less severely than foodservice ones. We also know that for many store formats and, in particular, the convenience or suburban outlets of our customers, and indeed in many regions, food to go volumes are actually holding up pretty well. In other convenience categories, pro forma revenue declined very modestly by 2.1% in quarter 1. There was actually good growth in cooking sauces through the period as it benefited from the sustained increase in scratch or component cooking and food assembly that we've all started to see since the pandemic began. Ready meal revenues were impacted modestly and negatively by the lockdown restrictions through the quarter. In overall terms, actually, we remain satisfied with performance across other convenience, with profitability improving, notwithstanding the flattish revenue profile. At the early weeks of quarter 2 and January have seen overall revenue across these other convenience categories broadly flat year-on-year. I'm building on all of this from a commercial overview perspective. We described in November the momentum and specific progress that we're having on new business opportunities, and that continued through the rest of quarter 1. As I say, we've spoken previously and at length on the opportunities provided by the exit of Adelie Foods from the market in FY '20. Since our last update in November, we have secured specific further business from former Adelie customers and now have a base of customers, new customers, that have what I would describe as a pre-COVID revenue level of approximately GBP 90 million. That's up from the GBP 75 million that we described in November. In addition, our footprint in salads is expanding, and we continue to win food to go and meal salads business with a number of existing group customers where we didn't previously have this breadth of presence. And beyond that, there's actually a healthy pipeline of further commercial opportunities in several other parts of our business that we would be pursuing. If I turn now to our third topic, which is our liquidity and balance sheet position. Simply put, the set of operational, debt and equity measures that we put in place at the end of November mean that we can proactively manage our debt and leverage levels through the rest of this pandemic to ensure that we weather the COVID-19 storm. It also means that we can invest to enable the full delivery of the new business pipeline that I've described earlier and, indeed, further opportunities that are in negotiation as well as deliver the productivity enhancement initiatives, some of which require CapEx, including automation, that's going to make our business stronger and better performing when we come out the other side of the pandemic. The previously announced revisions to our debt financing agreements were one part of this flexibility that we've secured. And we also raised a gross GBP 90 million in our placing at the end of November. Raising equity is never a decision to take lightly, but fundamentally, it was the right thing to do as it ensured that we were able to avoid what we would describe as burning the proverbial furniture and also it ensures that our business has the ability to build back stronger as we emerge out from this pandemic. And finally, the completion of the disposal of our molasses businesses in December provided additional support to our financial position. Taken together, we believe that this combination of initiatives provide us with sufficient liquidity and balance sheet strength, support the business in the near term and also to enable us to build the business back strongly as the impact of the pandemic recedes. Bringing all of these things together now, with some comments on outlook. Of course, there is uncertainty around the near-term trajectory and, in particular, the trajectory of our business over the course of the next few months. We simply don't know how long these lockdown measures are going to remain in place and what the impact of these measures will be going forward on mobility and associated volumes in some of our categories. We have seen, as I mentioned earlier, a marked decline in food to go revenues as a result of the latest lockdown. In addition, we are consciously choosing to invest -- and to invest strongly in this quarter behind both the COVID-19 -- the rebound from COVID-19, in other words, specific launches that we have planned for April and May with customers and also the onboarding of multiple new businesses. In both of these cases, this requires us to keep our full network operational and to invest appropriately in new product development, technical and factory trial teams and support. COVID-19 will continue to impact us through FY '21. And in this context, the group's financial guidance remains suspended. However, we are clear that we have a set of measures that we put in place which mitigate this near-term uncertainty associated with COVID. We have given ourselves the space, the financial headroom and the organizational momentum to trade through COVID, and we believe to emerge as a strong player on the other side. One of the major concerns of the last 5 years has, of course, been Brexit. With a free trade agreement now in place, we believe that the worst-case scenario has been averted, and indeed, our own experience since the start of the year has involved only limited operational disruption, focused almost entirely on configuring and managing supply chains between Britain and Northern Ireland and between Britain and the Republic of Ireland. To reiterate then, we are optimistic, confident, actually, on our future prospects. Vaccination approvals and vaccination rollout will continue to advance in the coming months. Our markets are resilient, and importantly, they have already shown a clear ability to rebound as mobility restrictions are eased. And our new business activity with existing and potential new customers will underpin this rebound specifically. Let me conclude now with the 3 final remarks. Firstly, I wanted to remind everyone that we are hosting our AGM and an EGM later this morning. In light of the measures to minimize COVID-19 transmission, we're hosting this under very constrained circumstances, and shareholders are requested not to attend the meetings in person. As such, we expect to proceed with a minimum number of shareholders required to establish a nominal quorum under the company's articles of association. This is being done to protect the health, safety and well-being of all of our stakeholders, but in particular, our shareholders, colleagues and service providers. We do look forward to engaging as effectively as we can with shareholders later today and indeed, and hopefully, more importantly, to seeing many of you in person when we can hold such meetings in the future. Secondly, we announced in December the appointment of 3 new nonexecutive directors as part of a Board refreshment succession planning process. John Amaechi is an organizational psychologist and is the founder and CEO of APS, a talent and leadership development firm. John has extensive nonexecutive director experience across a wide range of industries, including food, having previously served on the inclusive advisory panel at Tesco. Linda Hickey brings a wealth of financial markets and nonexecutive director experience, having spent over 35 years in capital markets, more latterly at Goodbody Stockbrokers, where she served as the Head of Corporate Broking for 15 years. And Anne O’Leary is currently CEO of Vodafone Ireland and brings significant experience spanning digital and data analytics, cultural change programs and strategic acquisitions and partnerships. Each of these appointments becomes effective on the 1st of February, and all their skills, expertise and experience will be highly beneficial to the Board, to the group and to the executive team. And today, 2 current nonexecutive directors, Heather Ann McSharry and John Warren, will retire from the Board with effect from the conclusion of this AGM. I would like to thank both of them for their wisdom, guidance and support to the business and to me personally throughout their tenure on the Board. And thirdly, I just wanted to let everyone know that we are hosting a capital market seminar on the 24th of February that will focus on our sustainability strategy and bring to life our sustainability report from November, providing more detail on some of the key projects and specific work areas and case studies that are currently in progress across the business. More details on this will follow in the coming weeks. And finally, just to remind everyone that our next results update will be our interim results that will be released on the 25th of May. So with that, I'm going to turn the call back to the operator to begin the Q&A session with Emma and I.
[Operator Instructions] And the first question comes from the line of Damian McNeela from Numis.
So first question would be, I think, directed to Emma. Just I was wondering if you could quantify the costs associated with the increased sort of COVID measures that you've taken across the organization and whether you can sort of -- whether it's a Q1 impact or whether there's more to come for the rest of the year. So that would be the first question. And I guess the second question would be probably more for Patrick. So it's more just wondering, given the fact that sort of retailers have to close a lot of their counters or taking the decision to close counters permanently, whether they are thinking about how they allocate more space for food to go once we sort of get through this pandemic. Just interested to understand how retailers are thinking about sort of the food to go fixture on a sort of a -- on a longer-term view, if you could, please.
Damian, look, in terms of costs associated with COVID, we're not calling out specific onetime costs. I think we would say, when we talk about results for the period, we'd say, look, yes, we're absorbing costs, but we're not looking at substantial incremental cost. I mean, clearly, the measures that we have implemented in our manufacturing facilities around social distancing, we'll endure for some time to come. Even as we see restrictions on movement unwind, we think they'll be in place for a while. They do have some impact on operating efficiency, but we're working hard all the time to mitigate that effect. And our automation project, actually, that we are progressing will also support in that respect. If you listened to what Patrick was talking about in terms of rolling out increased testing across our facilities, I mean that does lead to some minor operational disruption in day-to-day activities, but not something that I'd be calling out as driving significant incremental cost in the business. And overall, we think those are the types of measures that protect the business by making sure that we're identifying any cases of COVID early on and doing everything we can to protect our people. If we're thinking net-net, it's a benefit to the business.
Yes. And I mean, just building on that, Damian, one of the things that we're tracking very closely, principally from the perspective of health, but it has a knock-on economic consequence is, what does all this mean for absence? Because clearly, if you have a very high level of -- highest level of absence, then that has significant cost implications, both in terms of pay, sick pay and so forth, but also in terms of supply chain effectiveness and operational efficiency. And so far, we're -- even right now through what we call lockdown 3, our level of absence from COVID is only about 2.5%, and our total level of absence is a nudge under 5%. So we're actually doing -- that's pretty good validation of the impact of all of these measures that we're putting through now. This compounds around Allerton. It's a volatile and dangerous disease, but I think we're managing our way through it pretty effectively at the moment. I mean, on your point of future food to go, I mean this is obviously so important to the long term of our business. And there are some unknowns and uncertainties in relation to all of this. But I think there's a few things that I could say with some real conviction and evidence. So the first is that all of our customers believe that food to go is going to be a very, very important part of their shopper and consumer proposition, but also of their economic model as they come out through COVID. And all of the activity that we're talking about, and I referenced it in my introductory remarks, in terms of relaunching of range, activation initiatives across different regions, formats, relaying in certain parts of stores, it's different customer by customer, but it's consistent in terms of the level of focus and strategic and economic priority that retailers have for what they need to do and want to do with food to go as we start to come out the other side of this pandemic. Second thing I would say is that you touched on -- specifically on counters, right? And so we do think, and our customers do think as well, that this topic of hygiene will be important both to how stores are configured and how consumers choose product. And that probably does lend itself to more premade and less in-store-made product going forward. And so we are seeing evidence, salads would be a good example across -- maybe even more of the sandwiches actually where things like salad bars, salad counters being replaced with more prepacked products as we look at what ranges like -- to look like through the summer. But then you're starting to see other important trends here. And again, I touched on it in my remarks here, but this difference in food to go volume by region or store type. And I guess, the most material effect that I think everyone in the industry is ramping up for now is this sustained role for suburbs in food to go, in meeting kind of the food to go occasions of consumers and what that means for the breadth of range and the ability of that range to target food to go occasions in suburban areas which might not traditionally have had the same incidence of food to go before COVID and before some of these changes to how people are living their lives and, in particular, how people are working. So there are some of the [ plans ] that are coming up. But we would be -- we recognize that there will be change in product, regions, occasions, channels and all of that. But we have a pretty high level of conviction that food to go and retail food to go will come back strongly as we come out the other side of the pandemic.
Your next question comes from the line of Jason Molins from Goodbody.
Look, just delving into the contract wins, Patrick, you mentioned you've secured GBP 90 million of additional business now from Adelie. Do you see further opportunities there? And obviously, pre-COVID, I think that was [ north of GBP 200 million ]. So just maybe some clarification in terms of the opportunity that still remains, but also any commentary you can make in terms of discussions and opportunities with existing customers, what sort of areas of opportunities that you see at the moment, that would be helpful. And then just regarding the current lockdown and the numbers that it's reduced in the current trading, the impact from staff in terms of furloughing, maybe just talk me through measures -- you have to maybe put more people on furlough or a way you've not necessarily closed any sites at the moment. But what sort of decline would prompt you to have -- to having to make that decision?
Yes. Thanks, Jason. Let me deal with the second question first. So just to be -- so the key difference between this lockdown, the first one, which obviously feeds through to the appropriateness and use of government programs like furloughing is that the relative falloff versus prior year volumes is much less now than it was in April. And I think without being able to be absolutely certain about this, I think we're now into our fourth week, fourth trading week of this lockdown. And we're continuing to see this, as we referenced in the statement, of the order of 35% year-on-year declines, which is not great, obviously, in any absolute sense, but considerably better than we would have seen last April. And so -- and certainly, at this type of volume level, there isn't an economic case for rationalizing our network. That's before you get into some of the other benefits of keeping the network going, like contingent supply solutions for customers and the ability to plan purposely for the ramp-up later in the spring and early summer, plus keeping people working where we can. So that's the thing I'd say about keeping. So in other words, we're not in marginal territory around whether or not it makes sense to keep sites open. It's quite clear it does make sense to keep those sites open at this sort of level. On furloughing, we're -- we have needed to take some shifts out and some functions out partly because of activity levels and restrictions on people's ability to work in plants and some of the direct relationships to volume. So we're currently at about 1/3 of the level of furloughing that we would have been at in April, May of last year. So it's material, but not as material as before. And then the other option that's available to us that we are sensibly using, it's what's called flexible furloughing, where it's possible for people who we need to work some of the time but don't have sufficient activity available for them to work all the time to take periods of time out between now and April. And so we are using that judiciously as well from a furloughing perspective. So we think we're doing everything we can to mitigate the impact through the use of what are very supportive governmental programs of different types and furloughing. On new business, what I would say in relation to Adelie is the incremental specific wins that we've had since November have largely brought us to the end of the big things that we could have secured from Adelie. And so I mean we have to see how we can really get behind that post-rebound. But as I said, we're at GBP 90 million of Adelie's pre-COVID revenue now, and just to be specific, with one material former Adelie customer added to the customers that we would have had on board when we gave the GBP 75 million guidance at the end of November. What I would say after that, Jason, is that there are -- a big part of Adelie's business was what -- was in the kind of traditional foodservice area, quite fragmented in terms of end customer. A lot served through the aggregator brand that they had, which is Urban Eat, which Samworth have acquired. And so we are -- I think we've provided more commentary on it at the end of the year, the end of November that is. We are working on a business effort to try to access parts of that foodservice channel that we think would be a good fit with our manufacturing and distribution capabilities, but it would be more fragmented in terms of the target customers there. So clearly, at this GBP 90 million level, we're largely done with the big one-off wins from Adelie. I think it's actually a pretty good answer for Greencore, for our network and for our economic model, actually. And then the rest will be kind of progressive business development efforts that may be more marginal from an Adelie perspective. And then you touched on other areas of new business. And I highlighted in the comments earlier the momentum that we feel we have in salads. And that's really consistent with the strategy that we've been pursuing for 1.5 years now since we acquired Freshtime, and the -- and we're pretty pleased actually with the momentum that we've got there. After that, I would describe it as normal business development activity. And in so far as any of it comes through that's material, we'll talk about it in our interim results.
The next question comes from the line of Charles Hall from Peel Hunt.
A couple of questions, please. Firstly, Patrick, I think you mentioned previously that gross margin on additional -- on the new business from Adelie started off at lower levels. Can you just give an update on how you're seeing the margin progression from that new business? And secondly, could you just update on potential timing of future dividends? I know it's a bit early probably to be talking about it, but just to give a feel in light of the fundraising, but also the additional lockdown.
Yes. I mean I'm going to keep the -- obviously, I'm sensitive to our commercial position with new customers as well as existing customers and being too clear on margin differentials across customers. I mean what I would say is that we're happy with the business that we've taken on that used to be supplied by Adelie. It's a privilege actually to take down in the case of some of their larger customers who have been new customers to Greencore. We also recognize that, in particular, where we bring on completely new to Greencore customers, we have to invest to figure out how to develop those products to make the supply chain work, including distribution in several instances. They may well be in somewhat different channels or parts of the market to what we're used to. And so there's a natural learning associated with all of that. And we would expect, as we work our way through that, that we will get more efficient and more effective, and we'll begin to bring margins to a place that's kind of broadly equivalent to what we would have across our wider group. And that will be the plan that we would have in relation to that. I should also say, Charles, that right now, that was a business that was -- Adelie is a business that was actually more exposed to channels that have been hit hard by COVID than we would have been and then our customers would typically be. And so as a result, actually, the revenue levels and the associated impact on operating leverage, if I can describe it that way, with that business is going to be more pronounced now but will improve as we come out the other side of COVID. In relation to dividends, we're not going to be paying any dividends in this financial year. Without being able to -- without choosing to get into any specific guidance, I think we would hope to be able to pay dividends in the next financial year, in FY '22. And -- but we'll have to see how our -- how the business evolves and how our economic -- how quickly our economic model comes back as we emerge from COVID.
The next question comes from the line of Martin Deboo from Jefferies.
Question really that I suppose goes to the marginal economics of the business under COVID. Just the first question is sort of the drop-through margin on lost sales. Where do you think that is relatively relative to the trough in the summer? I could sort of argue it either way. I mean I don't know where furlough payments are relative to then, you're keeping more of the network open. But just what's your sense on the drop-through margin at this current time as opposed to the summer? And the associated question is, you've said your EBITDA-EBITA breakeven in Q1. Just where do you think you are in terms of actual cash flow breakeven, the difference between the 2, being CapEx, net working capital, tax and interest? I would imagine that you are on a full cash flow basis modestly negative every month, that sort of -- and I'm not expecting a number, but just to give me a feel. Okay. Those are the 2 questions.
Yes. Martin, let me just provide a kind of deal with your first point around how we're thinking about the flow-through, and I might have Emma weigh in on some of the -- what all that means for cash. I mean the -- I mean, just to be specific, we were operating profit-positive. And of course, that's going to mean we would be quite a bit more positive on adjusted EBITDA in quarter 1, right? And so -- and Emma can describe what that means for cash flow in a second. And I also -- the way -- the words I use here is like we delivered in line with the plan that we had for the quarter, and we're pretty, frankly, pleased to be able to do that given all of the demand uncertainty that we saw in the quarter. It is going to be worse in Q2, right? And you can see that, obviously, from the volume impact, that extra 10% or so falloff in year-on-year on food to go and what that means across the wider group, sort of an extra 5% or more down. I mean the truth is, the best way I can kind of guide you on this is our business tends to operate with a contribution margin of 30% to 35%. And so if revenue falls off by whatever quantum, that's the flow-through impact on the business. And frankly, the furloughing schemes, which are hugely helpful, don't get me wrong, largely deal with the variable cost elements associated with that falloff but don't materially impact on the fixed cost elements that are associated with that falloff. So in terms of what does all that mean? If we have a 15% fall in sales, we've got a 45% fall in profits. That's sort of it, right? And we can mitigate that around the hedges and really push hard on cash to kind of protect the balance sheet of the business and the cash flows of the business. But that's the nature of the operating leverage that we run with. So Emma, do you want to pick up more broadly in the flow-through?
Yes. Look, if we should sort of think about the cash flow and the model and as we went through the second half of last year, I think we would have talked to modest cash burn outside of working capital. And as we come into the first quarter of this year and, indeed, the first half, I think our normal model would be that you see a working capital outflow in the first half of the year as volumes come off. But outside of that, if we think about how we traded in Q1, Patrick said EBITDA-positive, but actually operating profit-positive. So pleased with that performance. And the impact of that on cash leaves us in a reasonable place for some sort of seasonal working capital outflow that we normally see in the first half of the year. So cash is where we would have expected it to be at the end of Q1, and I think about it as broadly neutral outside of working capital. And then clearly, we don't have the benefit of the proceeds of the equity raise. And as we have noted in the statement, we have completed the disposal of the molasses business as well and the cash coming in from that as well.
Okay. Thank you for that. Martin, did that cover -- insofar within the constraints of what we can actually say, did that give you the directional guidance you were looking for?
That is really helpful, Patrick, yes. Very clear.
Your next question comes from the line of Nicola Mallard from Investec.
Martin nabbed one of mine. So thanks, Martin, I got the answer. One other though. We've seen reports coming out about the new life, what it's all going to be like, and people that you see recently on the report are suggesting that working from home might be 20% of the workforce in the future. Now I know you did an IGD report in the November presentation that suggested more like 90%. Have you got any sort of update on that? I mean do you feel that -- is that sort of number moving? The longer they're all switching at home, is that more likely that we stay at home? Just for the sort of the longer-term recovery potential.
Yes. I mean, I think there's -- we're doing lots of work on this, Nicola, but partly leveraging industry sources, obviously, very specifically engaged with each of our customers who are also doing work on that in terms of what it's going to mean for their format and regional and store format strategies, and we're kind of plugged in with all of that. I mean 2 things I would say. I think there will be more -- there's no rocket science in this, there will be more working from home and quite a bit more, actually, as we come out the other side of COVID than there was pre-COVID. But there -- if we factor that into our food to go business, it's -- let me just kind of give you a few things that might help. So less than 30% of our food to go sales are made to people for office lunches, right? So the other 70% are other occasions completely, right? So either different times of day, people, students, tradesmen, leisure traveler, people impulse purchases, nothing -- in other words, they're not caught up in this sort of stereotypical office worker popping out to grab a sandwich at lunch, right? That's less than 30% of the occasions that our products meet. And I think that's quite important because we've been kind of caught up in a sort of kind of a massive perception that, that's the core of our business when, in fact, it simply isn't. The second thing I would say is that even if you saw large numbers of that 30% permanently working from home, and I don't think you will see very large numbers of people permanently working from home, we're going to debate as to whether it's a -- it's an average of 1 day a week or 2 days a week or whatever, for whatever portion of that. But I think the other behavior that we're noticing is that for many, many people who are working from home, when the restrictions are not severe, they still choose to actually access food to go close to their home, completely separate from whether or not they're traveling to work, right? And so -- and that is a big factor behind this very, very strong growth of food to go that we would have seen in suburbs in kind of early autumn, end of summer last year and, indeed, to a certain degree, even in the month of December. And so I think you -- the kind of things to -- for us to work on and we are working on is, first of all, what do we actually think at a macro level is going to happen to work behavior and how -- what will that mean for central business districts and travel locations versus suburbs and all that. But secondly, just to remember that more than 70% of our food to go volumes are met by a different set of customers and a different occasion to that. And even within the 30%, if you get to a situation where it is safe to move about, that people are exercising, different work habits for different reasons than safety, it still may mean that having really good breakfast or morning snacking or lunchtime products where people don't have to make their lunch or make their morning sandwich or snack at home themselves, they can pop out together, specifically if they live in suburbs, I think it's going to be an important occasion for us going forward.
Your next question comes from the line of Clive Black from Shore Capital Market.
Couple of questions from me as well, if I may. Patrick, could you just give us some color as to the product -- nature of the product that will be going into the foodservice arena and the complementarity in terms of unit economics versus your retail activities? And then building on the outline of the COVID measures you articulated, where are you with automation at Greencore at the start of '21? And where do you see it progressing this calendar year, please?
Yes. So the products into the foodservice arena. We've got a series of different kind of channels within that cloud and slightly different products for each of them. So we had been steadily, but I would say modestly, building out our specialist coffee shop channel business pre-COVID, right? And we had a sort of half of -- 1/2 of the food requirement of one of the 3 larger coffee chains that we were supplying pre-COVID. Since Adelie has come out of the market, we've taken on sole supply with 1 of the other 3 large coffee channels, and we picked up a series of smaller coffee shop businesses around there. So that range is somewhat different from our retail range in that it plays more to breakfast and a little bit more to products that can be heated. And in most cases, it involves distribution services as well as manufacturing. And so in some of those, we naturally have very significant initial scale to start off with them, and some of them, we're kind of building capability as we go forward. But some of the capabilities we would have had, particularly in our Atherstone site, which we acquired 4 years or so ago, particularly around doing breakfast items and hot eating sandwiches and things like that, are relevant to that channel. As you think then about what I'm going to describe as the broader foodservice market, that's where we're effectively building an in-house business to go after that, to go -- modeled somewhat on the success that you would have seen in terms of volume anyway of the Urban Eat brand over the last decade. And so we have our own aggregator brands that we've put together on that. We have a range, which we're trying to keep pretty tight, centered around sandwiches, but drawing on some other product types as well. And then what we need to do with that is to get the right balance between all of the products that foodservice operators tell us they need and what we can actually effectively and efficiently manufacture and try to kind of balance that tension so that we not only build our presence in that channel, and I'm quite hopeful that we will, but we make sure we've got an economic model that works while we do it. And so -- and that's what I'd say there. And the last bit is we're looking hard at different ways to play in for food to go-type products in direct-to-consumer channels, too. And again, that has implications for how we think about product type as well. So we learn as we go, but what we got to balance all the time here is finding products that work for consumers in those channels and for those occasions, but making sure that we can have a decent economic model if it's behind it. Oh, sorry, your second question is on -- your second question was in automation. Yes, I mean we've actually -- we continue to -- we're going nicely on automation, but obviously, the throughput through the -- some of the technologies that we put in place is less than it would be if -- than it will be when the volume comes back in food to go. So we have in our 2 -- well, now in our 3 largest manufacturing sites, so Manton, Northampton and Park Royal, we now have working robotic technology consistent with delivering against the different parts of the sandwich assembly process that we've touched on before, namely setting, lidding and packing. And so they're pretty pleased actually with how that's going. But the full economic benefit of that, we won't see until we're running at a higher throughput than we are at the moment.
The next question comes from the line of Doriana Russo from HSBC.
Yes. A couple of questions that I had has already been answered, so thank you very much for -- to everyone. I do have one area that I want to understand a little bit better, and it's with regards to the dynamics of the food to go business in terms of cost base. Obviously, we discussed about the need of investing more on one hand to deliver more products, to secure more business with different channels and also to make sure that people are safe and we don't lose in terms of unit cost and productivity in terms of efficiency of your supply chain. So is there a risk that the cost structure of the food to go business might actually change going forward? And with that, I'm trying to understand whether we could see perhaps a less profitable business in the short term to perhaps see a more profitable business in the longer term? Or is that something that you might have been looking at? And is there a negotiation, some flexibility in negotiation when you secure new business because of the cost structure changing? And I'm not sure, it's very convoluted, but I hope you understand what I'm trying to get clarity on.
Yes, Doriana, I get it completely. And the -- let me try and kind of position it starkly because it's something that we're looking at hard here. So if I go back to the beginning of March last year when we would have done our -- what I would call our kind of 6 plus 6 forecast, and which we did just before COVID hit and took our Board through, I think at that particular point in time, if I just use EBITDA as a metric, the consensus for our business was between GBP 160 million and GBP 170 million of EBITDA for then FY '20, right, across all of you guys and others. And that was off -- it's a revenue base crudely of, call it, GBP 1.5 billion or GBP 1.55 billion or something like that, right? That was the kind of shape of where we sat at the business pre-COVID. We still had a second half to deliver and/or to land it, but that was kind of where things were. Obviously, we're going to miss that EBITDA number by 1 million miles, like we did last year, and we're going to miss it this year, right? So -- and the revenue number is going to be off of the 2, and Martin Deboo asked earlier kind of how to think about the impact of the revenue and all that, and I've kind of answered that question already. One of the key things, first of all, here is, I think at some stage in -- whether -- hopefully, it's FY '22 when we're going to get the revenue back to where it was in that forecast or in that guidance. And the big question is, do you get the EBITDA back to that level and how quickly? And I could construct all sorts of explanations for things that are hitting us, but also things that will benefit us as we go through that. And so things that are hitting us are our assembly and manufacturing processes are compromised appropriately, by the way, by a lot of the safety process that we put in place to -- in terms of how we're configuring our factories and looking out to our people, and that's absolutely as it should be. Many of those processes we will absolutely be able to unwind when everyone's been vaccinated and the virus is under control. The -- we've got the automation initiatives, which I mentioned to Clive a minute ago, which should help us a lot, too. So we don't believe that there are changes to our economic model which should permanently impair our ability to convert to the sort of metrics we would have had before. We don't believe that's the case. But I think there will be some transitional challenges as we migrate back to that sort of economic model, and it will be dependent in part on how volume comes back and where it comes back and what it means across customers and channels and product type and service model. And then there will be how we get our conversion processes really humming in terms of efficiency. And so where -- you would be right to expect us to be all over that internally, and we are. But we're not at a stage of being able to provide specific guidance for this year or next year in relation to that. But hopefully, Doriana, I've kind of framed how we're thinking about it and the work that we're going to have to do to get our economic model back to where it needs to be as quickly as we can.
Okay. I guess what I was trying to understand was if there was any flexibility in your contract agreement to readjust your unit cost and therefore your unit price if things were to change permanently.
Yes. There are in some -- yes, there are is the short answer. Some are easier to deliver than others. So things that relate to direct costs, in particular, cost of goods, are pretty straightforward to pass through and modify. I think where you have other areas, particularly as they relate to overhead, that's a bit more difficult. But if we have to confront that and manage it through with our customers, we would.
I would take that all the extra security measure, all the sort of people-related costs that you have to incur because of the pandemic and not step forward the cost that you can pass on, am I correct in this one?
Yes. Well, we have got -- I want to be clear on this, we have got some and, in fact, lots of support from customers in different areas because of the economic impact of the volume fall. And -- but I was more interpreting your question less on near-term trading and near-term economics while we're in the pandemic and more how should we think about this as we come out the other side of it. And so there's so many different moving parts right now.
No, that was absolutely my question. But I understand, I think you answered my question. I do have one small follow-up one, which is in terms of CapEx. If -- shall we expect also some sort of holding back of CapEx for FY '21? And what would be the impact of that, if any?
Doriana, what we did when we released the results in November, we did talk about how we were thinking about CapEx for FY '21 at that point. And we had reviewed it and taken an incremental GBP 10 million out of the plan spend for this year. We are holding at that level, so we're not anticipating going again and reviewing that. That did allow us to protect our automation project somewhat, so that we could progress that a bit during the year. But certainly, we weren't spending the level we might have a plan to spend, but we want to ensure that we're protecting the business for future ramp-up and making sure we do invest in capability.
The next question comes from the line of Sriram Gurijala from Barclays.
I have 2 questions from me. The first one is on the new business wins. Are there any synergy opportunities there from those new contracts, be it in terms of revenues by cross-selling new products or be it in terms of cost synergies where you have an overlap in operations? And the second one is on new channels. You -- back in November, you spoke about Ocado. [ MN ] is going live on Ocado, and you're looking at new channels besides retail and foodservice, be it delivery models or e-commerce. Are there -- has there been any progress on that? And if people continue to eat at home post-COVID, is there any way you can address that opportunity?
Yes. So thank you. Yes, so I mean on the -- I mean the answer is slightly different depending on the different customers. So -- where some of that, the business wins are with existing Greencore customers, then you would expect some levels of synergies in terms of shared leadership teams, commercially; product development, technically; and in some instance, the ability to co-locate them where we would have existing ranges. Where it's a completely new customer, the level of synergies are -- tend to be less. We -- you can expect customers who are engaging with us and us engaging with them to have kind of very robust discussions around what the effect or otherwise of that is in terms of pricing, and we're flowing that through. So I think we're doing a nice enough job for shareholders in terms of how we're managing those discussions in each case. On new channels, I mean, I think the point I'd make there is we're putting incremental capability down to do that. So some of you on this call will know Kevin Moore, who's our Chief Commercial Officer. So we put a kind of online and B2C channel team working for him. That would include how we make our ranges most relevant to Ocado and how we take onboard an area that previously wouldn't have been a big focus for us, which is online activation and all of the digital marketing capabilities for the online offers of our core customer set. So whether that's how ready meals and soups get category managed on the online platforms of our existing grocery customers, that kind of thing. So -- and I think the last bit I would say is we are thoughtfully working on what kind of business we think we can have with some of the more specialist B2C businesses. But I think the impact of that will take a little bit longer to flow through when -- we'll probably wait until we're a bit more advanced on that before we talk about it more broadly.
Great. That's helpful. Just one follow-up, if I may. Are you able to quantify what share of that GBP 90 million is from new customers versus existing customers?
Yes. The -- and I'm doing it just in real time in my head, I would say more than about 3/4 of that revenue is new customers.
The next question comes from the line of Roland French from Davy.
Right. So I've got 3 questions, I think. So maybe starting on the commercial side. So thanks for the color on Adelie. Are you able to quantify -- you called out some new business wins or potential new business wins in the salads category. Are you able to quantify the associated revenue with those wins? And then equally, just on the commercial side, you've previously called out meal kits, and I think it was in context of some innovation trials you're undertaking. So maybe an update on those trials. And then just on the -- your workforce. Are you able to give us a sense as to what percentage of that workforce is vaccinated and I guess how important a metric that is maybe for you and how you're categorizing the risk? I guess you've outlined kind of an increase in the steps that you've taken, but equally, clearly, the number of cases has risen as well. So maybe just kind of a little bit of color around that. And then finally, it's fairly direct with -- I just wanted to ask, in any case, do you think -- just around sector consolidation, do you think there's a strategic merit for Greencore to play a part of a broader consolidation event? Clearly, we've listened to yourselves today and other executives over the last few weeks and months, and I'm thinking here about the broader U.K. food supply chain, but also about capacity and utilization and accessing wider baskets of products and broadening the channel mix might be unfair, but just maybe some -- your thoughts around that. I'll leave it at that.
Yes. Roland, I'm going to try and crack each of them pretty quickly, because I'm conscious that we've gone on longer and there's -- I think we're going to take one more question after this, so that's okay, Jack. So on commercial, I'm not going to be able to give you specific numbers on either of the 2 questions that you asked. We've got good momentum on salads, and it's in line with the strategy we'd have outlined in our Capital Markets Day in September. And we are -- we're making that. One way to think about it is the new business activity is doing a very nice job of mitigating the kind of the temporary falloff in COVID in that -- that's COVID-related in that part of our business. I think it's going to leave us nicely set up. But the core business wins there are with traditional grocery customers. That would be big Greencore customers, where we wouldn't previously have had material salad businesses with them. And so we're kind of cracking on nicely with that. And the team there under the leadership of a guy called Lee Ormrod are doing a really nice job. That is also, from a product development perspective, Roland, where we would be housing the capability within Greencore around plant and plant-based recipe development. And so -- because it is a very nice fit with some of the Freshtime skills, [ culinary ] skills that they would have had when we acquired that business 18 months ago. Meal kits, nothing material at the moment, but a lot of engagement from customers with us on product development activity, really trying to figure out this at-home food for later occasion and where ready meals versus meal kits versus restaurant delivery component types. Lots and lots of kind of thinking and work being done in very large part by our customers, actually, and trying to figure out how they configure their network against that, including potentially to some of the -- Damian's earlier question, thinking about what that means for use of counter-type assembly capability and all of that. And so it's a very, very fluid space, that meal kit, ready meal, fresh food for later, meal components food for later space, and I think it will be a big focus of the global and U.K. food industry for years and years to come actually, and it's an important space. But no, nothing that's material from a revenue perspective there. Workforce, I mean we've got virtually nobody vaccinated because we don't have people in the age cohorts that are being vaccinated, notwithstanding the very good progress in the U.K. and whatever 6 million people or so already vaccinated. We note and are very supportive of the strong push from DEFRA to get key workers or essential workers vaccinated earlier in the hierarchy, and we know that lots of different sectors are shouting louder [ governments, person ]. But the direct answer to your question is very little vaccination so far, but encouraging overall progress in the U.K. on vaccinations so far. And hence, the additional safety metrics, and in particular, the move towards mass testing, which is pretty material in terms of what we're doing as a business to keep our people safe until they get vaccinated. On consolidations, and we can talk about it for a long time, I mean, hopefully, I've been pretty consistent on this over a long period of time, which is we are a believer in category scale, not necessarily corporate scale. And what we've done in the food to go market is very consistent with that. We've also been clear that we'd like to do more in salads because we think it's a very good fit with our wider food to go capability. But I don't believe and never have in scale for scale's sake. Others may, but that's not our view.
There are no further questions in the queue, so I'll hand the call back to your host for any closing remarks.
Great. Thanks to everyone for that. We had, frankly, as many questions that I ever remember us having on one of these calls. So we have the time, so we [ answered that ] at once, to deal with all of that. Again, thank you to everyone for joining. And if there are any follow-up questions, Jack will be very pleased to [ fill ] them. Two things, just to remind everybody, do put the 24th of February date in your calendars. Jack will be sending more details about that, and we'll be letting the market know around this seminar and sustainability that we want to do. And then the -- after that, our next formal market communication will be our interim results in May. So thanks for joining us, and stay safe and well, everybody. Bye-bye.
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