Greencore still mired in ‘lost decade’ even as first-half results drive stock up 20%

Greencore’s chief financial officer of less than four months, Catherine Gubbins, has been able to speak openly about shortcomings she has found at the UK’s largest maker of sandwiches and Italian ready meals.

It’s a luxury that comes from being handpicked by a former boss to join the turnaround team he has built at a company that has more than its share of challenges in recent times.

Gubbins, the former chief financial officer at airport operator DAA (where Greencore chief executive Dalton Philips was previously CEO), highlighted this week that the company’s operating systems and processes are going to need big investment “after a lack of focus here for a number of years”.

At the moment there are five different computer software systems on which the business is run when there should be one. The result? “A lack of integration and poor data quality that is hindering how we operate,” she told analysts on a call after the company unveiled half-year results – albeit noting that work had already begun to overhaul IT systems before she had arrived.

Greencore, Deutsche Numis analyst Damian McNeela said in a recent report, “is in the middle of a lost decade”.

The Dublin-based group was only getting over a regrettable bet on the US market by former CEO Patrick Coveney – selling its operations there in late 2018 after a decade – when it was walloped, in short order, by the Covid-19 pandemic, supply-chain and labour issues, and inflation.

Philips, who took over the helm in the autumn of 2022, managed to stabilise the business in its last financial year to September. This saw operating profit edge almost 6 per cent higher as he found ways to offset or pass on £200 million (€235 million) of inflation costs, got rid of 250 management roles and walked away from contacts making little or no money.

Greencore signalled this week that profits will rise by as much as 15 per cent this year to £88 million – some 6 per cent above what the stock market had been expecting – after the company reported better-than-expected interim results, unveiled a £30 million share buyback programme and revealed it will return to paying a dividend this year for the first time in five years.

[ Greencore shares soar after it announces strong results and £50m return to shareholders ]

Hong Kong-based activist investor Oasis Management’s accumulation of a 5.2 per cent stake and its message of frustration around the dividend hiatus – communicated by anonymous sources familiar with the firm’s “thinking” to the Financial Times around St Patrick’s weekend – may have focused minds.

The shares shot up more than 20 per cent over the past five days to top £165, bringing their year-to-date advance to nearly 75 per cent. This makes Greencore the second-best performer on the FTSE 250 index for mid-sized companies on the London Stock Exchange so far in 2024.

There’s much to cheer. When Philips joined, almost a quarter of group sales volumes were coming out of plants that were essentially loss-making. That’s on track to fall to 5-6 per cent later this year, as the company rejigged capacity, cut back on waste and improved automation.

Greencore – which makes about 780 million sandwiches and other food-to-go products, such as sushi and salads, a year for retailers from Tesco to Morrisons – is preparing to ramp up production of a previously weak plant near Sheffield in England, having secured what it calls a “material new” contract to make ready meals for Aldi. The facility had been running at less than 60 per cent capacity since it moved all its soup production to Bristol.

The group has also been gaining market share with new product launches, including a new deli-style range from wraps to heat-up ready meals, and upgrades to existing products, including sandwiches with a maximum two-day shelf life at Marks & Spencer highlighted by Philips.

Greencore’s sandwich sales volumes rose 2.5 per cent in the six months to the end of March, at a time when the UK market increased only 0.3 per cent. Its ready meals volumes rose 1.7 per cent in a market that contracted 1.9 per cent.

Philips has been reticent to say which of its nine food categories are still not making enough money to cover their cost of capital (essentially the minimum profit a company must earn to justify existence). However, he said sushi, soups and ready meals remain challenging areas.

Greencore executives highlighted their focus now is on “managing and right-sizing our cost base” and increasing the use of automation and robotics. They’re words that investors would like to hear, but should send a shudder through its 14,000-strong workforce.

“Quietly, Greencore is self-improving, manifested in the improvement in operating performance but also the capability of the firm, which is feeding into greater earnings visibility,” said analysts Clife Black and Darren Shirley of Shore Capital in the UK in a report this week.

[ Greencore boss Dalton Philips: ‘I love food. I love cooking it, I love buying it, I love eating it. I’m a total foodie’ ]

But even after the recent surge in Greencore’s shares, they are changing hands at around half the price at which they were trading at their peak eight years ago.

Philips wants to return Greencore’s operating profits to its £106 million pre-pandemic level by 2026. The company’s profit margin was 3.3 per cent in the first half of this year – up two percentage points on the year. However, it is less than half the margin Greencore was delivering before Covid-19 struck.

“We don’t think that 3.3 per cent adjusted operating margins are impressive,” said McNeela of Deutsche Numis on Friday, adding that the upgraded full-year earnings guidance implies that profits will fall year on year in the second half, as the company ups tech spend and absorbs higher wage costs.

“There is still no sense of what margin or ROIC [return on invested capital] Greencore management is targeting in the medium term and little evidence that Greencore can deliver meaningful volume growth from its existing categories or channels,” he added.

Philips has signalled that longer-term growth will have to see the group return to the acquisition trail. He has promised that any deals will be in areas where it is already active, or complements them.

But he conceded: “There’s not a huge amount of growth out there, full stop. And there are no real categories that are just knocking the lights out.”