Driven by strong links to blue chip customers in the food service industry, Greencore, the now sandwich and food-to-go company, reported operating profits of £91.7m (€130m) for its 2015 financial year, a 10.6% increase on the prior year.

Group revenue increased 5.2% to £1.34bn (€1.9bn), with convenience food revenues driving the growth – up 6% to £1.29bn (€1.85bn). Greencore’s food-to-go business in the US saw the largest revenue growth, increasing 15.4% over the year. This was followed by its UK food-to-go business, which increased sales by almost 9%.

More modest growth was seen in its UK prepared meals business (1.8%) while UK grocery sales shrunk 1% against the challenged market backdrop and ongoing supermarket price war.

Operating margins for the group increased 30 basis points (bps) to 6.8%, while earnings per share increased 13.2% to 18p, making it the fifth consecutive year of double-digit growth in adjusted EPS.

The group is proposing a final dividend of 3.75p/share, giving a total dividend of 6.15p/share, which is an increase of 12.8% on the prior year.

Significant investment

Over the last 18 months, Greencore has significantly increased capital expenditure from £51.3m (2014) to £93.1m (2015) to support capacity expansion in both the US and the UK. On top of this, the group is planning to spend £100m expanding capacity in 2016.

Having significantly expanded its Jacksonville facility in the US in the summer of 2014, the group completed the construction of a greenfield facility in Rhode Island in March 2015.

This led to the closure of Greencore’s other US facilities at Newburyport and Brockton, resulting in a £3.4m exception charge during the year.

The group has also started the construction of its first west coast facility in Seattle, which is due to open in 2016. This is on the back of new business which it secured with a key customer earlier this year.

This has seen net debt increase by £53.4m to £265.5m (€376.9m), giving a net debt to earnings (EBITDA) ratio of two times.

Convenience foods

Revenues from the group’s convenience food segments in the UK and US increased by 6.3% to just under £1.3bn, accounting for 96% of business today. On a like-for-like basis, which excludes revenue from Ministry of Cake which was sold in May 2014, revenues were 6% ahead.

Operating profit increased by 11% to £89.6m (€127.2m), driven by good like-for-like growth, strong operational performance and tight cost control.

US segment

Greencore’s US food-to-go business is mainly focused on small store channels, including the coffee shop market. It is a key area of investment and growth for the company as it becomes more US-focused. While it currently accounts for only 15% of overall group revenues, it is driving the growth at Greencore, with sales increasing by more than 15% in 2015 despite a reduced and streamlined product range.

However, Greencore made a modest operating loss in its US business during the year, mainly due to what it terms “disruption costs” as it moved production to its new Rhode Island facility. It blamed greater levels of labour turnover, materials waste and related operating costs for the weak performance.

UK segment

Greencore’s UK convenience foods division accounts for the largest slice of the business (circa 80% of total group revenues), with revenues increasing 4.7% in 2015. On the back of strong growth and outperforming the market, the group extended its sandwich facility in Northampton during the year. It is now planning to invest a further £12m over the next year to increase production at this site.

The UK business is broken down into three main divisions – food-to-go, prepared meals and grocery.

The food-to-go business in the UK, which makes sandwiches, sushi and salads, remains critical to the group and represents more than 40% of group revenue. Revenue in this segment increased almost 9%, driven principally by gaining new business and the rolling out of new product lines.

The prepared meals segment, which produces chilled ready meals, quiche and chilled soup and sauces, makes up another significant part of the UK consumer foods division, accounting for 20% of group revenue. It saw only modest revenue growth (1.8%) in the period, with chilled ready meals leading this (4.2%), while sales of quiche declined.

Revenues in Greencore’s UK grocery segment, which also accounts for 20% of the overall business, declined 1% due to deflation in several categories and the ongoing supermarket price war in the UK.

Ingredients division

The ingredients and property division, which represents less than 5% of group turnover, saw revenues decline by almost £10m to £50.1m (€71m) mainly driven by lower commodity prices in edible oils. Operating profit was down 4.5% to £2.1m, primarily due to the weaker euro against sterling.

Greencore’s strategy to be a fast-growing international convenience food business appears to be on track. It is sticking to the model of aligning itself to key blue chip customers in the US, such as Starbucks and 7 Eleven. From 2010 to early 2014, the group expanded its food-to-go footprint through strong market growth supplemented by acquisition. In contrast, the last 18 months have been about increasing capital expenditure to support capacity expansion in these strategic markets.

Now with a strengthened manufacturing platform, efficiencies should be seen once fully operational and bedded in. The capital expenditure programme has not added significantly to the debt and the group is well financed.

With like-for-like growth of almost 11% across its two key markets, Greencore is well ahead of the level of growth in the market and has not come at the cost of margin, which increased 20 basis points to almost 7%.

While the outlook for the UK grocery market remains uncertain, by diversifying into new markets, particularly the western US seaboard, the group should deliver further progress in 2016.