On the money: Greencore confident on EPS despite tough UK trading
Greencore offered a positive outlook for its UK division
Greencore has insisted it remains "confident" of meeting City expectations of higher earnings despite the prospect of "tough" UK trading conditions for the remainder of the year.
The private-label convenience food group this morning (21 May) booked an increase in first-half earnings despite only a 0.9% increase in revenue. The Ireland-based group pointed to "financial discipline" and improvements from lower-margin businesses.
However, Greencore, an own-label supplier of products like sandwiches and ready meals, booked a 1.8% increase in sales of convenience foods, thanks to acquisitions in the UK and the US.
However, like-for-like UK convenience food sales fell 1.3%. Greencore said its like-for-like sales of prepared meals dropped almost 6% in the wake of the horsemeat contamination scandal. Sales of Greencore's food-to-go products inched up only 0.1% amid the cold start to 2013.
CEO Patrick Coveney told analysts on the firm's earnings call this morning the UK chilled foods market had been "very tough" in last six months amid low consumer confidence and the horsemeat saga.
"The UK consumer remains under significant pressure. Our sense is that sentiment levels for consumers have deteriorated ... and the consequential loss in confidence is feeding through into overall spending. You see that been reflected in the absence of net volume growth in UK food and retail," he said.
The horsemeat scandal, Coveney said, resulted in an erosion of trust in large brand owners. "Ultimately, we think that has largely, temporarily, reshaped consumer spending behaviour," he added
Greencore said it had started a number of initiatives with a focus on provenance, health and food safety.
"When incidents like that happen to an industry there are a set of necessary things to do to rebuild trust," Coveney told analysts. "We have adopted ongoing tests for beef and other proteins that come into our business. We have also made some adaptations to hygiene and processes on site and are working with our customers on more local sourcing and labelling.
He said ready meals sales will fall again year-on-year in the second half of Greencore's financial year, although the trend will improve compared to March.
"The impacts within the ready meals market will begin to moderate but I think we'll still have, in the second half, material deterioration in like-for-like ready meals but it just won't be as bad as it was in March. It takes time to rebuild trust. Across the retail set you'll see a much stronger focus on that in late August, early September with relaunches that are targeted to those residual areas of concern, then you will see volume growth."
Coveney admitted market conditions in the UK were likely to remain "difficult" in the second half of the year. He said the company was not basing its guidance on an overall uplift in food volumes.
"We think the ready meals categories in the UK is becoming less bad but it is still going to be difficult consumer environment. We are seeing a moderation in input costs which does help us a little in terms of our margin performance. If we take that all in aggregate we do remain confident to deliver EPS growth in line with market expectations."
Analysts offered an overall positive view of the results, with Investec analyst Nicola Mallard describing the results as "solid ... in a challenging climate and against some tough comparatives".
Panmure Gordon analyst Damian McNeela offered a similar view. "The UK market in general remains challenging but we continue to see FY 2013 adjusted profit before tax growth of 10% driven by continued improvement in cakes and desserts as well as further expansion in the US."
Greencore's share price was up 4.7% at 123.50 pence at 13:22 BST today.
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