A profit warning at Greencore sent shares tumbling 33% to reach four-year lows of £1.20 in London on Wednesday.

Shares are down 50% over the past year, with some £900m wiped off the value of the company.

The UK’s largest sandwich maker warned profits this year will be below market expectations and that is was to restructure its struggling US business.

Following the Peacock Foods acquisition, the company said it has “low capacity utilisation” at some of the original Greencore US sites. The group said it is now restructuring its US network to “reflect the commercial pipeline and to address these utilisation challenges”.

While the acquisition of Peacock Foods in December 2016 enhanced the scale, operational capabilities and financial performance of the group’s US operations, Greencore has struggled to fully utilise the new manufacturing network as it lost some key contracts. The company has blamed the timing of new business contributions and the dollar-pound exchange rate for the weaker performance.

As a result, it is closing its loss-making Rhode Island fresh production factory later this month. The company said it will retain the facility for “potential repurposing” in the future. This factory, which cost £20m to build less than four years ago, was said to be strategic at the time to service the New York market. It closed two existing facilities in Massachusetts at a cost of £11m, transferring the manufacturing to the new site. The move was to bring greater cost savings and efficiencies estimated at £5m to the business. It represented approximately 4% of the group’s US manufacturing footprint and 2% of the business.

In 2014, Greencore also invested £7m in its Jacksonville facility in order to create the capability to manufacture frozen food-to-go products. However, after losing contracts at this factory, capacity utilisation has also been hurt. Despite this, it is continuing activities at this factory. Performance at its other factory in Minneapolis is said to be improved after a number of new business wins.

To turnaround its US business, the group has restructured its US leadership team. This will see Patrick Coveney, CEO, taking a direct strategic, organisational and commercial role, spending approximately half his time in the US. The US business now accounts for half of Greencore revenues. Chris Kirke, who was the CEO of Greencore US, will return to the group’s UK operations, which has not been without its challenges. Despite seeing good organic revenue growth, volume growth in the second quarter has been “softer” due to the poor weather, according to the company. Greencore recently exited the cakes and desserts business after it sold its Hull facility along with closing its desserts factory in Evercreech last October.

Greencore incurred exceptional costs to the tune of £78m in the 12-month period to the end of September last year. While turnover for the year increased strongly by more than 56% to £2.3bn as a result of the Peacock acquisition, the combined charges saw operating profits decline 43% to less than £43m.

The exceptional costs included writing off a £30m investment in a computer software program, as well as £25m charge relating to the acquisition and integration of the Peacock Foods business. The company also took a £16.5m charge after the closure of its desserts manufacturing site in Evercreech in the UK. Excluding the exceptional charges, operating profits increased by more than a third to £140m.

The company, which produces around 1.5bn sandwiches and other food-to-go items a year, said there would be a further one-off cash hit to restructure the US of about £3m. However, it warned there may be a further asset write-down in the 2018 financial year, the scale of which would depend on the future use and value of the manufacturing sites.

Comment

Trying to get an insight into Greencore’s US operations and the £700m Peacock acquisition is almost impossible as it now reports them as a combined division. Before buying Peacock, Greencore’s US business had lost money every year, despite having blue-chip customers in Starbucks and Seven-Eleven. No doubt, Greencore has built up real expertise in its core business in the UK, which is based on freshly made sandwiches.

It has the scale and dominance in the market that delivers solid margins.

However, concerns have been raised over the Peacock acquisition as it is a much different business to making fresh sandwiches. A further threat to Peacock is where one of its major customers, Tyson Foods, has bought its own food-to-go business which could see it use this business to either source all supplies or to put pressure on Greencore’s prices.

Has Greencore the expertise to leverage the Peacock acquisition, to improve performance at its existing US sites, while boosting the utilisation of its US manufacturing network? Can it also improve margins in the Peacock business bringing them in line with the UK business?

The fact that the profit-making acquisition was bolted on to an existing loss making business that is so far from the group’s core UK sandwich-making business on a different continent will no doubt pose a huge challenge for Greencore.