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Earnings Transcript for GNC.L - Q4 Fiscal Year 2024

Operator: Good morning and welcome to the Greencore FY '24 Results Presentation. I would now like to hand over to Dalton Philips, Greencore's CEO. Please go ahead.
Dalton Philips: Good morning and thank you for joining us for our FY '24 full year results. It's good to be sharing a strong set of numbers with you today. We've worked hard to stabilize our core operations and rebuild profitability onto what's now a really solid foundation, which we'll cover with you this morning and at our Capital Markets Day in February, we'll share more on our medium-term trajectory and ambition for our business. Let me share some key messages on Page 5. Firstly, we exceeded market expectations in terms of profitability and this performance has given us real momentum into this new financial year. Like-for-like revenue growth was 3.4% and like-for-like volume growth was 0.5%, which continues our outperformance against the wider market. We've successfully delivered against our commercial and operational excellence agendas, which has enabled us to achieve an adjusted operating profit of £97.5 million and this improvement has been driven right across our business. I'm particularly pleased by the strong execution of our turnaround plans in some of our previously lower performing categories. Our leverage is now at the lower end of our target range, which gives us wider capital allocation options. We've completed our £50 million capital return to shareholders. This includes the recommencement of a progressive dividend policy of 2p per share, which equates to circa £9 million to shareholders and our buyback of £40 million completed during the year. As we look to FY '25, we remain confident in the outlook for the business, our cash flow and our balance sheet strength. We will continue to consider all options to create value to shareholders. And today, we're committing a further £10 million to buybacks, which we will execute in the coming months. We will of course continue to review our capital allocation options and our buyback program as the year progresses. And finally, we remain encouraged by the underlying momentum in the business and expect FY '25 adjusted operating profit to be within the top half of the current range of market expectations despite the new labor cost headwinds, which we will fully mitigate. Let me now hand you over to Catherine, who's been with us for almost a year and making an enormous contribution.
Catherine Gubbins: Thanks, Dalton. Good morning to everyone and thank you for joining us in the room and on the call today. I'm delighted to be here with you this morning to take you through some further detail on the full year results for the group. If we start with an overview of the key financial metrics on Slide 7. As Dalton has referenced, we've delivered a very strong performance year-on-year from an adjusted operating profit perspective with an increase of 28% to £97.5 million and ahead of our revised expectation while our reported revenue for the period has declined 5.6% due to the decisions made in 2023 to exit a number of contracts and the disposal of Trilby Trading. This has been underpinned by an encouraging like-for-like revenue performance of 3.4%, which I will provide more details on in later slides. Adjusted earnings per share grew 37% to 12.7p driven by the increase in adjusted operating profit and a reduction in the weighted average number of shares in issue following continuation of the share buyback program. We had a free cash inflow of £70.1 million for the year, an increase of 23% when compared to 2023 driven by the improvement in adjusted EBITDA and partially offset by working capital movements and an increase in financing and tax costs for the year. We continued to make good progress on deleveraging with our leverage at 1x net debt to EBITDA being at the lower end of the group's target range and down from 1.2x for the equivalent period in 2023. Finally, return on invested capital at 11.5% has increased 260 basis points from last year with specific actions taken in 2024 to drive returns. And this is something that both Dalton and I will give you further color on throughout the presentation. Moving on to Slide 8, I wanted to highlight a couple of the key metrics and themes in greater detail. The group saw progress across like-for-like revenue growth and margin in full year '24 with an increase in the adjusted operating margin to 5.4%. That's up 140 basis points compared to 2023. This margin progression was delivered through like-for-like volume growth and other commercial activity with this volume being delivered more efficiently due to the continued deployment of our operational excellence program. The group has also continued to strengthen its balance sheet position with net debt at £148.1 million and leverage at the lower end of the group's target range, ensuring that we have the financial flexibility as we move through Horizon 2 and look ahead to Horizon 3. The group has also created shareholder value as demonstrated by the increase in earnings per share I mentioned earlier driven by the improved profit outturn and share buyback program. As Dalton mentioned, we have declared a dividend of 2p per share in respect to full year '24 and we will reintroduce the payment of a dividend going forward on a progressive basis in line with earnings growth. Moving on then to Slide 9, I'm going to take you through a little bit more detail on our revenue performance across 2024. So as mentioned, reported revenue for the 12-month period has declined 5.6% with 4.2% of the decline caused by the disposal of the Trilby Trading business and proactive contract resignations in 2023 driving a further 4.8% decline. Offsetting those declines was a like-for-like increase in volumes and mix driving a 1.6% increase in revenue and 1.8% increase due to inflation recovery and pricing impacts with our overall like-for-like revenue growth at 3.4%. There's further detail on revenue growth by category included in the appendix in the presentation. Just moving on then to Slide 10. You will see that there has been really good progress made over the last 2 years in improving the group's profitability and returns. Gross margin has improved 310 basis points since full year '22 and is now ahead of full year '19 levels supported by volume growth being ahead of the market, margin-accretive new product development and systematic deployment of our operational excellence program. Adjusted operating profit is up 35% since full year '22 with adjusted operating margin progression of 120 basis points as the improvement in gross margin was also supported by a continued focus on tight cost control to ensure the business is moving towards being rightsized for the future. On ROIC, we've also made good progress to 11.5%, up 310 basis points when compared with full year 2022 as we continue to focus on driving returns through network optimization and onboarding of new business wins. Despite this positive progress in full year '24, we are conscious that for certain KPIs, we are still behind full year '19 levels. We are on an accelerated journey in returning the group to peak levels of adjusted operating profit and we will lay out our more medium-term financial targets at the Capital Markets Day, which we are hosting in February. Slide 11 sets out some further detail in respect of our cash flows for the year and our net debt position. There was an overall free cash inflow of £70.1 million for the year, which represents a cash conversion of 45.6%, an improvement of 280 basis points year-on-year. So walking through some of the main components of this. You will see that working capital saw an outflow of £8 million due to the timing of certain supplier payments and maintenance capital expenditure at £26.2 million was broadly flat year-on-year. We have exceptional cash flows of £5.3 million, which were predominantly related to the work done so far in our technology transformation program, which we call Making Business Easier, alongside some smaller cash items related to prior year disposals and other property-related matters. Interest and tax combined grew £6 million and with the other items down to free cash flow broadly in line with expectations. As mentioned in May, we have also made significant progress on our U.K. defined benefit pension funded plans following the latest triennial valuation and this scheme is now expected to be in a fully funded position by September 2025, at which point annual funding of approximately £10 million from the group would cease. This will obviously support enhanced cash conversion for the group going forward. Net debt, excluding lease liabilities, at the end of the period was £148.1 million, a reduction of £4.9 million year-on-year and that's following £6.2 million of strategic capital expenditure and £60 million in relation to the share buyback program and purchase of own shares. Moving on to Slide 12. I wanted to give you a little bit more context on our capital allocation plans. The group's ambition is to deploy capital to balance long-term growth and shareholder returns through operating profit growth, generating strong free cash flow and following a disciplined investment and capital allocation approach. As mentioned, our balance sheet position remains strong with our leverage at the lower end of the group's target. This continues to provide us with headroom for wider capital allocation options. As Dalton and I have both referenced, we are reintroducing the payment of a dividend on a progressive basis starting with a dividend of 2p per share and we propose that this will grow in line with earnings going forward. In the medium term our target leverage for the group remains at 1x to 1.5x and our policy post the ongoing payment of a dividend is to continue to prioritize organic investments through capital expenditure followed then by selective potential M&A that supports our sustainable growth agenda with a consideration then of the quantum and mechanism for the return of excess cash periodically to shareholders. We have recently completed a £40 million share buyback and arising from the strong performance of the group and our assessment of available cash, we are also announcing today a further share buyback of £10 million to commence immediately. I've been in my role now for 10 months and while I am delighted to be here to take you through these strong financial results, I'm going to take you to the next slide. As you can imagine, our minds have already turned to 2025 and beyond and I wanted to take a minute or so to highlight my priorities and key areas of focus as CFO. We are very focused on continuing to drive overall profitability. And while our commercial and operational excellence models are functioning well, I would be bringing increased rigor to rightsizing our overall cost base. Another key priority for me and key lever to making this group more efficient is our Making Business Easier program. This critical systems investment is a key enabler for us to become more streamlined in how we operate as a group. As we continue to see improvement in the profitability of the group, ensuring we deliver improved cash generation is also key providing us with critical investment flexibility across Horizon 2 and 3. And I also want to ensure that our capital allocation framework is used to deploy available resources in the most earnings accretive way possible. So that concludes my comments. I'd also like to highlight the technical guidance, which we've included for full year '25, at the back of the presentation. I'll be back for Q&A. But now I'm going to hand over to Dalton.
Dalton Philips: Thanks, Catherine. Now let me turn to the strategic and operating update and I'll start on Page 15 by sharing a general roundup of the year and how we did against our big priorities. Firstly, we've grown ahead of the market at an overall level and also within our key categories. We've delivered strong innovation through our commercial excellence engine. We've step-changed our operational performance by driving out inefficiencies. We've successfully mobilized our new technology program and although it took us a little longer to get going, we're now fully up and running. We've built solid foundations in sustainability, but still have work to do on our key metrics. Finally, we've stood up a dedicated team to explore longer-term growth options. All in all, I'm really pleased with our performance. So let's dig in a little further below these headline messages. On Page 16, you'll remember the 3 horizon framework that we launched 2 years ago and you'll know from our FY '23 results that we did a really solid job in delivering Horizon 1 and stabilizing the business. For FY '24, we turned to Horizon 2 and you'll have seen that we've actually accelerated our delivery on the profit recovery ambitions we had set out when we launched this plan. And whilst 99% of the organization is still firmly operating within the Horizon 2 tram lines, we do have a small team looking at Horizon 3. Let me now show you how we've performed against the total market on Page 17. The overall grocery market in volume terms declined by 0.1% in the year representing stabilization after some years of inflation. We outperformed this market by 60 basis points with 0.5% volume growth over the same period on a like-for-like basis. This outperformance was driven by our 2 key categories of sandwiches and ready meals. Sandwiches outperforming a largely flat market by 170 basis points with ready meals 100 basis points ahead of its market. There's a lot going on behind the scenes to drive this growth. Certainly the focus we put into consistent quality, which is complex in a world where there's a lot of human interaction and you're handling some 1.5 million products through the year. I'd also call out the efforts we've put into our innovation engine both at an EPD and NPD level so that's existing and new product development coupled with service levels into our customers which sat above 99%. And as we look forward, there are some encouraging trends with mobility building and the growth forecast in premium alternatives and the convenience space where we've built a strong foundation. Turning to Page 18. If we look at our in-year returns from a ROIC perspective, you can see we've driven improvements right across our business through focused portfolio plans. We implemented cross-functional teams who have been deployed against each of our 9 categories to drive opportunities across commercial operations and our cost base. So our overall profit improvement is not coming from a single category or area. It's a marked stepup right across the board. This slide shows the performance of our 4 biggest categories. In salads, we increased ROIC by 590 basis points. A key driver of this being the smoothing of seasonality peaks by working with a nearby ready meals facility to leverage shared overheads and labor. In sandwiches, we increased ROIC by 380 basis points. From the commercial side, we had a significant new business win with Costa. Alongside this, our sandwich sites have been really leaning into our operational excellence program. In ready meals, ROIC improved despite the annualization of the business loss. We put a focused effort into rebuilding during the year and I'm glad to say that we've had a super onboarding of the Aldi ready meals business in September. In ambient sauce, we renewed a key partnership with our largest customer at our Selby site securing revenue for the long term. Across our other 5 smaller categories, ROIC increased by 60 basis points. An example would be sushi where we've been turning around a historically challenged category with the launch of a new format with M&S and a new concept with Aldi. Another less obvious category here is our direct-to-store business, which has turned from being a cost center to now being a real profit driver for us. So overall, we're encouraged with this level of improvement, which has been necessary in order to have a sustainable and well-invested platform to support future customer growth ambitions. Of course underpinning these improvements has been our excellence program in commercial and operations, which I'll walk you through now. Starting with commercial on Page 19. At a total system level, we drove a gross margin improvement of 350 basis points. This was underpinned by 4 key components. Starting with volume
Q - Patrick Higgins : Patrick Higgins from Goodbody. A couple of questions on my side. Maybe just starting off on your comment around your ability to offset labor costs into next year. Could you maybe just give us firstly, a sense of the overall labor inflation that you're facing into next year? And I guess what underpins that confidence of your ability to offset? Is it self-help? Is it price? And on price, have you had any conversations with retailers yet in terms of pricing into the year ahead? And if not, maybe you could just remind us of the kind of usual cadence of how you talk to customers and when, how your pricing hits shelves? That's my first question. My second question is just on guidance for next year in terms of delivery of the profit figure you've set out there. How should we think about the mix between top line and margin and achieving that kind of profit target?
Dalton Philips: Great. Well, look, I'll kick off on the labor inflation and Catherine, you might want to pick up on the guidance piece. Look, this is a big hit to the industry. I mean it's £25 billion going across all companies; within retail, it's £7 billion. It was unexpected, it was unplanned, it wasn't trailed, but it's the world we live in and so we need to mitigate this. You've seen a lot of the retailers coming out to the BRC. I think we all saw that letter that was issued to the BRC saying this is going to result in prices going up because we are a low margin sector and there just isn't the ability in the supply chain to absorb that. Having said that, look, before we ever go back to a customer looking to put a price up, we've got to look internally at our own cost base and we've been very focused on driving costs out. We look at the top of the P&L at the gross margin line, that's all the operational excellence work that I talked about, 843 projects just trying to drive costs out of the business. The lighthouses that we've talked about previously in terms of looking at our engineering, looking at our labor planning, looking at our waste, looking at our overall planning processes. So lots of work going on there and of course in the procurement side. But ultimately, these prices are going to have to -- this is going to flow through to customers. Now the industry has some experience of this. As you know, Patrick, we've been dealing with £100 million plus levels of inflation into our P&L over the last few years. The level here, look, it's £7.5 million a year. It's a big number. It's a big number when it's not planned. but we just get on and deal with it like we've dealt with it before and of course conversations are now starting. We have trackers in place. We have customers that don't have trackers. At the end of the day this is a negotiation, but I'm confident that -- we are fully confident that we can drive this through in a combination of increased pricing. But first and foremost, we've got to look at our own cost base. I think we've done a good job there, but we will continue to squeeze our cost base to make sure that when we go to our customers, we're going to them with real integrity that we've looked inwards first. But I'm confident we can absorb it all.
Catherine Gubbins: Yes. Look, when I think about our full year guidance and how we're planning on achieving that, I suppose it comes back to a lot of the kind of levers that Dalton has just spoken to us about. If you think about our commercial levers and our operational excellence programs, I mean for full year '25, we're anticipating low to mid single-digit revenue growth. So look, that's going to be volume driven and it's also us continuing to work with our customers. We've spoken to you at length around premiumization, NPD, EPD, how we're using that to really kind of solidify our relationships and drive our top line. So obviously we're going to take that I suppose top line and essentially continue to drive operational excellence programs across the network to make sure that we're delivering that volume to our customers efficiently. So it's literally relying on those 2 key pillars of the operation and also, as Dalton referenced there, a real focus this year on the cost base probably below the line to really kind of make sure that we're driving further efficiencies out of that.
Gary Martin : Gary Martin here from Davy. First of all, just congrats on a really, really strong set of results. Just a few questions from my side. Just starting off, I guess if we look ahead into next year, I mean you've come on in leaps and bounds with regards to just some of the initiatives that were undertaken. 843 projects completed in FY '24 and 10 out of 41 initiatives kind of knocked on the head. I mean if we look forward into FY '25, have we kind of harvested all low-hanging fruit at this point? Will there be a similar kind of quantum of projects underway and initiatives underway? And how does that kind of feed into overall returns and margin progress? That's my first question.
Dalton Philips: So look, we need to continue this level of activity and when I think about what we're doing, we are moving into 1 network, Gary, and 1 network allows us to benchmark to a much greater level. So these 843 projects, that level of intensity is just going to continue and I think we call them internally rats and mice we go after. So Warrington is a big project at £750,000, but cutting the brie ends saves us £96,000. It's those sorts of things. So lots of projects there. There's a real opportunity too on our headcount across our sites. So we have different levels of headcount across our sites and we want to be much more standardized in how we look at our structures and that's a big opportunity. And then there's a big opportunity in indirect procurement, it's an area that we haven't really shone a light on. Like we're obviously buying energy on a consolidated level. But when you get into the detail, there's a lot more going on and we don't have standardized processes. And I think it's an area that Catherine has got a lot of experience in and is really working with the procurement team on. So this level of activity is going to have to continue, I think that's the reality of own label manufacturing.
Gary Martin: Good color there. And then if we just maybe think about maybe I think it was on Slide 18 that you talked about ROIC improvement just across the different verticals and different core categories. I mean how does the recent implications of the U.K. budget change your kind of calculus on how you kind of view some of what we'll call maybe less core categories? Is there some flexibility there to potentially rationalize or consolidate further?
Dalton Philips: So I have some thoughts on this and Catherine may too. Look, when we set out a couple of years ago, we said everybody is going to have to cover the cost of capital and if they're not, decisions are going to be made. We made a decision with Trilby, we made a decision with our soups manufacturing site consolidating that. Actually you can see from the numbers that the ROICs really stepped on. So I would not anticipate in this financial year any further consolidation at the network level. What we will do though is we will drive much harder this movement of product around the network. So we for example haven't been leveraging our ready meals network to the extent we should be. We make certain products in certain places. But actually it's more a symptom of customer and geography whereas now we're looking at where do the economics make best sense. We work with customers and we say we want to move production from this site to that site. It's better for you as a customer. We can improve the productivity of that product, which obviously flows through into better margin for them. So I think there's a lot more going on. But overall, we're comfortable with the portfolio as it stands today.
Catherine Gubbins: Yes, absolutely. I mean I think over the last number of years, the group has looked at the performance of the business in the context of those categories. And when you look at the returns that the individual categories have been delivering, we can see really strong improvement across the board. And I think more importantly, we figured out the levers that we can pull to really try and work on that on a go-forward basis. So I don't see the NIC issue as potentially changing our view on our category composition.
Andrew Ford : It's Andrew from Peel Hunt. Firstly, well done, really good set of numbers. I wondered if I could ask a first question on volume. We see a bit of acceleration from the first half to the second. I just wanted to understand maybe what you're anticipating for next year if the exit rate is a good point of extrapolation. Next is on contracts. You mentioned there's some good renewals going in there and I know that they're helping with the gross margin. I just wondered if the nature of those contracts is changing at all, whether it be pass-throughs or longer durations, and what your sort of anticipation is on that direction of travel, what you'd like to see? And lastly, if I can be greedy and ask. On your Slide 15, one of the few ticks you didn't meet was traction in sustainability. I wondered what are the drivers for your customers in that area? What do they care about and they are looking for? Is it carbon intensity? Is it products in particular? What's the sort of main focus for you in that area and your customers on the sustainability point? Those are my 3.
Dalton Philips: So in terms of volume, it's going to be low single digits. That's the reality. I mean the market is flat. So this incremental volume that we're picking up from new customers, the Costas, et cetera, is going to be low single digits. If you want to add to that, Catherine?
Catherine Gubbins: Yes. Look, I mean we have seen -- we closed out '24 strongly and we have seen that volume momentum in that space continue into full year '25, which is relatively low.
Andrew Ford: For Second half rather than first?
Catherine Gubbins: Yes.
Dalton Philips: In terms of contracts, the change really happened over the last sort of 2 years with the trackers where a lot more has gone into the trackers. So a lot more labor has gone into the trackers, a lot more energy has gone into the trackers and there hasn't been sort of any material change in the last half. We're definitely seeing the sense that retailers are wanting to do more with less strategic partners and I think you're seeing that right across the supply chain and it makes sense and we're sort of dialing into that. Fresh is much more long term in terms of the contract length so you're talking 3-ish years on a contract length, 3 to 5 on a fresh contract. On ambient, it's still a lot more transactional. Many of the ambient contracts might just be a year and that again is an industry fact. But interesting enough, you speak with the retailers and they go, oh, no, no, we'd like to have longer-term ambient contracts, we'd like to have longer-term partnerships, but it's just slow filtering through. And in terms of sustainability, look, it just wasn't on the menu 2 years ago. Last year it started to come in. I mean commercial teams from our customers were running 1 track, sustainability teams were running another track and we were really struggling in between. Now the sustainability team is all about Scope 3. What are you doing? The commercial team is all about margin. And so that's starting to converge now. And I think the conversations -- I mean the conversations only really work when commercial and the sustainability teams within our customers are aligned because you've got one who's trying to do one thing and another who's trying to do totally different. But I think there's more alignment. But for us when I go back to the big 5 so gas, electricity, diesel, water, waste; those are big Scope 1 and 2 for us, which are our customers' Scope 3. We've got to really go after that and I think if we can demonstrate that, I think those are where the conversations are at the moment. Clive?
Clive Black : Two areas, if I may. Firstly, what's the capacity utilization or spare capacity within your network at the moment and how would you characterize capacity across your products wider industry i.e., is there overcapacity elsewhere? And then secondly, on costs going forward because it's not just really -- it's really the first half of next year where a lot of stuff hits you, which means it goes into '26, but it's also not just NIC. You've got the National Living Wage, the Employment Bill and EPR all coming in in April '25. That's a heck of a lot of stuff that you're going to absorb and pass on. So if it's £7 million for NIC, it's a hell of a lot more elsewhere. So I just wonder if you could contextualize that further.
Dalton Philips: Yes. Look, I'll start on that and, Catherine, I know you'll come in on that. So in terms of capacity, I think in terms of the ready meal -- sorry, let's start with sandwiches. Sandwiches at a sort of gross level across the sector, I think it's fairly well in balance. We didn't have a particularly good summer so we didn't really top out at 100% a couple of days early on in the summer, but that was it. And I think that's probably the same for the industry. Seems to be a good level of balance there. I think we're all trying to eke out more OEE and automation is clearly a part of that where automation not just takes cost out, but it can increase capacity. So I think our principal market of sandwiches feels fairly balanced at the moment. Ready meals, as you'll know, is a complex market with 6 players all around 15% market share. There was additional capacity laid down, in fact we were party to that. We laid down additional capacity in Kiveton in '22. There's still excess capacity there. When we look at our plants, we still have some additional capacity in Kiveton. Kiveton now runs at about 70% which is a strong improvement from where it had been. As you know, it had been a real drag so it's at 70%. The team have done an incredible job there. We could definitely take -- once you start getting into third shifts and stuff, you can turn on more capacity. But the ready meals market now feels a little bit more stable and certainly we've had a fantastic year. I think salads is a complex one; massive overcapacity in the winter, it's all tight in the summer. So I think at the moment we're not in a bad place as an industry. I think there's a good level, maybe ready meals would be the one that I would call out on. And in costs, well, I'll hand it to Catherine. But the £7.5 million of NICs is just the aperitif like you get into national living wage and you're into a multiple of that. So there is a lot of cost, which is why we have to really strangle the center of the P&L to take those costs out of the book.
Catherine Gubbins: Yes. And look, I suppose from my perspective, I'll just reference the point that Dalton made already. We have a good muscle built. We've had good experience over the last number of years of identifying, mitigating and engaging with our customers around dealing with these, particularly the labor and the raw mat and pack increases coming through. I suppose the 6.7% on national living wage we had anticipated that. It was a little bit higher than we had thought about, but I suppose we had built a specific plan around that and absolutely, the national insurance was new and, as Dalton has referenced, we are in the process of building a plan to deal with that. But look, I mean the muscle around how we run the operation really driving efficiencies and how we plan and run all of our lines. I know we keep saying it, but it really is targeted at looking at our cost base and just trying to minimize it and make the place as efficient as possible. And I think the most pleasing thing for us when we look back on full year '24, you can see that in the results is that has really started to show up in the numbers. So I guess the challenge for us is just making sure that we continue to do that into next year.
Dalton Philips: But the whole consumer confidence piece of it, it is going to flow through, Clive. You wrote about it this morning in terms of the BRC numbers that came out. So it's going to flow through. It has to because it's just not the capacity in the sector to absorb it.
Andy Wade : Andy Wade from Jefferies. Three from me if that's okay. The first one on automation, something you've flagged a couple of times and obviously we're aware of the cost of automation coming down and the cost of people going up. But is there a big enough runway for you guys to use automation given sort of how picky or specific the jobs that people do and the flexibility that you need from one rung to the next. So just interested on that one. Second one, you mentioned a couple of times about retailers and customers wanting to consolidate their manufacturing partners. Interested how that plays into your Horizon 3 aspirations and whether that is potentially a boon for you as you look to expand channels and categories and so on? And then the last one, the Making Business Easier exceptional £10 million to £15 million that you guided. Can you just give us what the nature of that is?
Dalton Philips: Okay. Andy, I'll have a crack at the first 2. In terms of automation, is the runway big enough? It absolutely is, Andy. And if you think about the process down the line and you've seen them so the denesting and that's getting products on to the belt. In some cases, that's still manual denesting. In other cases, we've got automation, but we don't have automation everywhere. So number one is denesting. Depositors, so in some cases we're still depositing by hand because we haven't found depositors that can deposit and hold the texture right. So that's number two. Number three is the multiponds. So still a lot of opportunity in multiponds. For example chicken and bacon, in some cases, we're doing it through multipond; in other cases, we're still doing it manually. Then you go further down the line so rolling so for example sushi rolling; some of it is still done manually, some of it's done through automation. Wrapping is all done manually. So all wrapping of wraps and remember, alternative sandwich is now about 20% of the category, that's all done by hand. The packing of wraps is done by hand. In fact most of the skillet packing is done by hand and all the packaging into boxes post line on our food to go is done by hand. Okay? So these are areas where automation can play a real role. Now I think the team over the years have done a good job, but we've got 42 projects in place. Now we've got £8 million so that's 20% of our total capital this year is targeted on automation projects and that's really before you get into next gen. I think next gen automation will be how do you build some of these sandwiches where the dexterity of the robots that isn't there today is there in the future in that next gen. I mean a BLT is made by hand and we can't see a way of it not being made by hand. But if Elon came and spent the day with us, he'd probably say you clowns, like there is a way of doing this. We haven't figured it out yet. So there's a lot of opportunity in automation. There's a big runway ahead on existing processes with incremental improvements. The challenge is there's sort of 4 key suppliers we work with, the Militex and the Proseals, and it's how do we bring them on the journey or how do we find incremental OEMs that can help us. Well, in terms of Horizon 3, so all the retailers are saying, Andy, do more with existing customers or with existing supplier partners. And they come to us and they're always like I won't say the categories at the moment, but there's 2 that we are always being asked can we get into? Actually when we run it through our strategic lens of Horizon 3; does it make strategic sense, does it make financial sense and does it have a sustainability angle to it that's consistent with what we're trying to do? These 2 categories we've said no. But I expect more of that going on in the future where customers are saying look, we would just prefer to work with somebody like us; now look, we're not the only game in town; but with high technical standards, high service levels, high degree of wealth through the supply chain. I think that's where we're looking. And the Horizon 3 team are looking at all those areas and as and when we find the right targets, we will absolutely bolt them on to the business.
Catherine Gubbins: Yes. Look, and I'll pick up on your question around Making Business Easier. So look, that's a pretty significant program that was launched by the group at the start of 2024. So it's a broad program that is looking to invest in our ERP systems and business processes across the group. Our estimate I suppose at this point is going to last for another 5 years. I suppose the best way for me to explain to someone what we're hoping to achieve out of this program is to explain the problem statement that we're trying to fix. Dalton referenced, we don't have a standard ERP across all of our 16 sites or in our back office. So we've 1 ERP for 13 and 3 individual ERPs for the remaining 3 sites. We don't have a standard chartered account. We don't have a standard workforce management or a time and attendance system. We're a business that has thousands of SKUs, thousands of raw materials, 16 manufacturing sites and lots of different customers that we're trying to produce all of those SKUs for and we also don't have kind of a standard set of rules or governance process around how we manage our data. I mean one of the best anecdotes I heard recently was a co-op, a really important customer for us. I think we have about 10 to 15 ways of recognizing them as a customer in our system. So if you think about that as a problem statement, I mean sometimes I tell people about the issues that we have and I sense a bit of concern around our ability to access data. We absolutely have all the data that we need. But you can imagine with those constraints, how hard it is and how many people we need to get that information to allow us to run the business on a week-to-week basis. So when we make this investment, we're really confident that the organization is just going to be better set up to run in a much more efficient way.
Andy Wade : Specifically, that £50 million exceptional, what is that?
Catherine Gubbins: I suppose it's broad to be honest. We envisage that the overall cost of the program for the next 5 years could be within £50 million to £80 million. So I suppose for full year '25, we're giving a little bit of guidance that if the total spend is £20 million, possibly £10 million to £15 million of that could be treated as exceptional. We have external partners helping us with the program running it and deploying the individual initiatives and that would also include costs of people within our own business that we've taken out of their day jobs and have been allocated fully to Making Business Easier to make sure that the program is a success.
Andy Wade: Okay. So in that, £10 million to £15 million is exceptional [Technical Difficulty]?
Catherine Gubbins: No, there's no redundancy cost in there and there'll be cost of the various systems on plug-in applications, et cetera, different systems that we purchase over the period to make the system -- to improve the system essentially. That cost will go in there as well.
Andy Wade : What the implementation cost effect [Technical Difficulty]
Catherine Gubbins: Exactly, yeah.
Matthew Webb : Matthew Webb from Investec. Just a question on your approach to returning surplus capital to shareholders. Your dividend payout ratio this year is very low. I appreciate it's the first year you're resuming that, but you've also guided that you're expecting dividends to grow in line with earnings, which would obviously suggest that that payout ratio will remain low. I infer from that, the share buybacks will probably continue to be the sort of the default option for the majority of any capital that's being returned to shareholders. And I just wanted to ask how you ensure that that is creating value? Do you trust the market not to overvalue your shares? Do you continue going all the time it's earnings enhancing or do you have a particular share price in mind that you think is either a fair value for the company or the point beyond which you would be concerned that maybe that wasn't the right approach?
Catherine Gubbins: Yes. Look, I think at this point obviously from our perspective, the group hasn't paid a dividend for 5 years. So we're obviously happy that we're in a position to reintroduce the dividend. I was happy reintroducing at a relatively low level and indicating that we're going to grow that over the next number of years that that's a good position for us at this point in time. I think you'll recall in May we announced £50 million return to shareholders and we've decided -- I suppose on the basis that £40 million of that buyback has been completed, we've decided to extend that by £10 million at this point in time. We'll obviously be considering this and giving you little bit more detail on our plans going forward particularly I suppose as we think about Horizon 3 and our overall cash available to the group and our capital allocation framework. I think it's probably at the Capital Markets Day at the start of February that we'll probably give you some greater clarity on our plans going forward.
Unidentified Company Representative: We'll go to the phone for questions.
Operator: [Operator Instructions] We do have a question from Damian McNeela of Deutsche Numis.
Damian McNeela : First one for me, I think for you, please, Catherine. Could you provide a breakdown of the gross profit margin contribution I guess either by sort of reduction in COGS, volume uplift, productivity, if possible, please? Then for you, Dalton, I think in your comments, you indicated that you've succeeded in driving growth through innovation. I was just wondering whether you could quantify the amount of growth that was delivered by innovation last year, please? And then just a clarification question on Slide 18 on the ROIC. If we add all of those up by the relative contribution, should we get back to the group number of 260 basis points improvement in ROIC or is there something else that we need to consider to get back to that 260 basis points improvement, please?
Dalton Philips: Damian, sorry to not have you with us today, but we know you couldn't be here.
Catherine Gubbins: Yes. Look, I suppose with regard to the gross margin, I think we've indicated the contribution that the revenue growth has made. So we've looked at like-for-like revenue growth of 3.4%. And I suppose if you look at gross margin closing out at 33.2% up from 29.7%. I think probably the most significant contribution to that step-on during the year has probably been from the operational excellence side of the house. To be honest, Damian, I don't have the exact breakdown in numbers with me at the moment, but I think that's probably a fairly significant impact from revenue growth. But I suppose the vast majority of that coming through then from operational excellence programs and management of the cost lines in that regard.
Dalton Philips: You do the ROIC?
Catherine Gubbins: Sorry, I'm probably going to need Damian to repeat the ROIC question.
Dalton Philips: Okay. Damian, if you look at the incremental ROIC improvement, should that get us back to pre-pandemic levels of ROIC?
Damian McNeela: No, no, I was just saying that sort of I think you've reported a 260 basis point improvement this year and I was just wondering if we've sort of apportioned out. Is there something else? Do the numbers on Slide 17 allow us to get back to that 260 basis points or is there something else we need to consider?
Catherine Gubbins: No, I don't think so. I mean I know that the change in the tax rate is impacting when we look at the ROIC levels that we are achieving now versus what we had in 2019. I know that's absolutely something that's impacting that from a like-for-like perspective. But other than that, no, I wouldn't see anything else impacting.
Dalton Philips: And Damian, in terms of innovation, look, you saw the 1.6% on the bridge in terms of volume growth through like-for-like. I think that the mix is driving about 1 percentage point and really that's through a number of different areas; but clearly the EPD and the NPD piece of that like over 400 new products is driving that and probably getting as much from EPD. So EPD, we think like Tesco's new lasagna, like brilliant EPD; Morrisons Cafe range, brilliant EPD; Aldi's al Forno lasagna, brilliant EPD; as much as new product development, which could be Porky balls or the new sushi packs for Aldi or some of the sauces we're doing for Tesco, which are totally out of the box or obviously kitchen deli for Sainsbury's. So I think we've got the EPD and the NPD engines running pretty well in balance at the moment. At any one time there's about 500 projects on the pad whether it's EPD or NPD. I mean we've already now with a number of customers done Christmas 2025, which is a staggering thought that they got done at Halloween for one particular customer. That's how far people are thinking ahead.
Dalton Philips: Okay. I think what we'll do is we will call an end because I know you all have busy lives. Thank you so much for being here today. We really appreciate it and thank you for your questions.