Greencore: results analysis

Here we provide some analysis of Greencore’s Q1 financial results  which were announced yesterday.

Greencore remains cautious about the UK – unsurprising considering the renewed focus on price from the major multiples and the value-conscious mindset of the majority of consumers. In its favour, it has managed input costs well and management forecast these to be c.4% below 2012 levels. Product ‘renovation’ and innovation are also key areas of focus (e.g. ingredient reformulation and smaller pack sizes), which should help to further mitigate margin pressures.

We believe Greencore is well placed to ride out the pressures in the UK market. The Uniq acquisition has bought with it a more balanced customer mix (Marks & Spencer now accounts for c.25% of sales), reflecting the broader food-to-go market. The acquisition of private label ready meals producer International Cuisine from Hain Daniels was a logical move that has also bought new customer wins, particularly at the attractive value end of the market.

The Bright lights of the US…

On the international front, 2013 will be a defining year for Greencore in the US. It has more than doubled revenues over the past 12 months via two acquisitions (Marketfare Foods and Schau) and has restructured its operations in Massachusetts to focus on the growing food-to-go/convenience channel, as well as releasing capacity in preparation to serve Starbucks across the North East region.

The vast convenience store channel in the US, unlike the UK, has never really benefited from a well-executed fresh food-to-go offering and this is where Greencore has identified a significant opportunity. 7-Eleven is a major customer of both Marketfare and Schau and the c-store chain has outline aggressive expansion plans for the US over the next few years, to build on its current 8,200+ outlets in the country. This provides an excellent backdrop for future growth in the US.

Further tweaks to optimise

Greencore will need to work hard to keep costs down in its core UK operations, if it is to preserve margins in an intensely price competitive market. We believe that scope still exists to ‘fine-tune’ its business in the UK – with a particular question mark hanging over its cakes division, a sector which is characterised by considerable overcapacity and alarming exposure to commodity price pressures. We also question Greencore’s commitment to the foodservice sector. The acquisition of the Ministry of Cake business in 2007 was based on becoming a leading multi-category foodservice supplier – but this has yet to come to fruition.

Nonetheless, Greencore has worked hard to develop its business since it lost out on the acquisition of Northern Foods in December 2010 (as evident from the rise in its share price since). The integration of Uniq is now complete and though the UK market will be tough in the short term, we believe it is well placed to weather the storm and benefit from the anticipated uptick in the latter part of 2013, buoyed by a more benign trading environment.

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