1 August 2017

INTERIM RESULTS FOR THE 26 WEEKS ENDED 1 JULY 2017

Greggs is the leading bakery food-on-the-go retailer in the UK,

with 1,800 retail outlets throughout the country

Good progress in the first half

First half financial highlights

·     Total sales up 7.3% to £453m

·     Company-managed shop like-for-like sales* up 3.4%

·     Operating profit excluding property gains** and exceptional charge*** up 1.8% to £27.6m

·     Exceptional costs of £8.3m relating to previously announced restructuring

·     Pre-tax profit including property profits and exceptional charges £19.4m

·     Continued strong cash generation: £34.0m net inflow from operating activities

·     Ordinary interim dividend per share up 8.4% to 10.3p

* like-for-like sales in Company-managed shops (excluding franchises) with a calendar year's trading history

** freehold property disposal gains of £0.3m in 2017 (2016: £2.2m)

*** exceptional pre-tax charge of £8.3m in 2017 (2016: £4.0m) in relation to previously announced restructuring

Operational highlights

·     Continued like-for-like sales growth from:

-  Coffee and breakfast

-  'Balanced Choice' range including new salads and drinks

-  Hot food choices

-  Traditional savoury favourites

·     Shop opening programme progressing well:

-  61 new shops opened, 19 closures; expect around 100 net new shops for the year as a whole

-  1,806 shops trading as at 1 July 2017

·     Roll out of new central forecasting and replenishment system successfully completed ahead of plan

·     Supply chain investment programme on track

"The business has traded in line with our plans during the first half of the year.  We have made good progress with our strategic plans and remain confident of future prospects although we remain alert to short-term pressures on consumers' disposable income.  Over the year as a whole we expect to deliver results in line with our previous expectations as well as further progress against our strategic plan." 

-  Roger Whiteside, Chief Executive  -  

An audio webcast of the analysts' presentation will be available to download later today at http://corporate.greggs.co.uk/results-centre

High resolution images are available for the media to view and download from https://corporate.greggs.co.uk/media-centre/image-and-video-library

CHIEF EXECUTIVE'S REPORT

The business traded in line with our plans during the first half of the year.  Total sales for the 26 weeks to 1 July 2017 grew by 7.3 per cent to £453 million, with like-for-like sales in company-managed shops up by 3.4 per cent.  As expected the business experienced pressure from cost inflation, but despite this operating profit before property gains and exceptional items grew by 1.8 per cent to £27.6 million (2016: £27.2 million).

Operational review

Our freshly prepared food offer at great prices continues to set us apart from the competition and prove popular with consumers.  In the first half of 2017 we developed further our product offering and delivered growth across multiple categories:

-     we extended our Balanced Choice range, launching new salads and drinks;

-     the popularity of our hot sandwiches continued to increase;

-     demand for coffee and breakfast remained strong; and

-     we continued to see good growth in traditional products, such as fresh-baked savouries.

Recognition of our progress in the food-on-the-go market saw Greggs win several awards including 'Food to Go Retailer of the Year' at both the 2017 British Sandwich Industry Awards and the Grocer Gold Awards.

We continue to see exciting potential for growth in our shop estate and opened 61 new shops in the first half of 2017 (including 24 franchised units) and closed 19 shops, giving a total of 1,806 shops (of which 181 are franchise units) trading at 1 July 2017.  We opened our first 'Drive-Thru' shop at Irlam, Greater Manchester, in June and have been encouraged by its popularity, indicating a demand for further Drive-Thru locations.  We also continued to expand the estate in the south-west of England and in Northern Ireland whilst adapting our formats to suit locations such as garage forecourts.  Our pipeline of new shop opportunities remains strong and we continue to expect around 100 net openings in the year as a whole.

We have made great progress in the transformation of our shop estate with most shops trading in a food-on-the-go format.  We updated 107 shops in the first half of 2017 as part of our shop refurbishment programme.    In line with our normal shop refurbishment cycle, over the next couple of years we are entering a period where a lower number of refurbishments will fall due.  In order to maintain a steadier number per year we now plan to refurbish 130 shops in 2017 and a similar number in the following two years, before returning to the more recent run rate of 200+ shops from 2020.

We have successfully deployed our new central forecasting and replenishment system to all of our shops ahead of plan.  This has been the most significant process change that the business has ever embarked upon and I am delighted with the way that our project team and retail colleagues have prepared for and managed the new ways of working.  Already we are seeing benefits in terms of product availability and the administrative tasks required of our shop colleagues have been simplified.  Inevitably there has been some increase in costs in the transition but there is a clear net benefit already and we will build on this as we learn to harness the benefits of this new technology.

We made further progress with the plans to invest in the transformation and development of our supply chain in the first half.  Our Edinburgh bakery was closed in May, with production and logistics activities transferring to our Glasgow site where we have invested to absorb the additional work.  This investment has included the first of our new consolidated manufacturing platforms, in this case for the production of Yum-Yums.  The commissioning has gone well and we are already delivering improved product quality, consistency and efficiency.  We are now placing orders for the next phase of investment, the first of which will be the consolidation of cake and muffin production at our Leeds site. Once again I must give credit to the teams working in our supply chain operations to implement these strategic changes whilst maintaining service levels to our shops and customers.

Financial performance

As expected, input cost inflation had a modest impact on margins in the first half of the year.  Despite this, operating profit excluding property gains and exceptional charges grew by 1.8 per cent to £27.6m (2016: £27.2m), giving an underlying margin of 6.1 per cent (2016: 6.4 per cent).  Operational costs were well controlled and we continued to deliver benefits from our programme of business efficiency, which has helped to mitigate some of the impact of cost inflation.

Non-exceptional freehold property disposals realised profits of £0.3 million in the period (2016: £2.2 million) and we incurred a net exceptional charge of £8.3 million (2016: £4.0 million) as described below.  Pre-tax profit including all property profits and exceptional charges was £19.4 million (2016: £25.4 million).  Excluding the exceptional items, but including the lower property gains in 2017, diluted earnings per share were 21.4 pence (2016: 22.3 pence), with reported diluted earnings per share (including exceptional items) of 14.9 pence (2016: 19.3 pence).

Exceptional items

At the start of this year we communicated proposals for the next phase of our £100 million investment programme to reshape our manufacturing and distribution operations for future growth.  We expect to recognise one-off costs in the range £9-10 million in 2017 as a result of the changes required to consolidate our manufacturing operations across the country.  £8.7 million of exceptional costs have been recognised in the first half of the year and this, combined with a £0.4 million exceptional credit related to the gain on disposal of related properties, resulted in a net exceptional charge of £8.3 million in the period.  The overall cost and exceptional charges expected to arise from the plan remain in line with previous guidance.

Dividend

In setting the interim ordinary dividend the Board applies a formula so that the interim payment is the equivalent of approximately one third of the total ordinary dividend for the previous year.  On this basis the Board has declared an interim dividend of 10.3 pence per share (2016: 9.5 pence).  The overall ordinary dividend for the year will be declared in line with our progressive dividend policy, which targets a full year ordinary dividend that is two times covered by underlying earnings.  The interim dividend will be paid on 6 October 2017 to those shareholders on the register at the close of business on 8 September 2017.

Financial position

Capital expenditure during the first half was £36.4 million (2016: £31.2 million) as we progressed the investment in our supply chain alongside new shop growth and estate refurbishment.  In the second half of the year the rate of shop refurbishment will reduce and we will continue to invest in new shop openings and the transformation of our manufacturing and logistics capacity.  As a result we now expect total capital expenditure in 2017 to be approximately £80 million (2016: £80.4 million).

The Group continues to generate strong cash flows and remains in a robust financial position.  Net cash inflow from operating activities in the period was £34.0 million (2016: £44.7 million) and we ended the period with a cash balance of £19.9 million (2 July 2016: £35.0 million).

Outlook

We have made a good start to the second half of the year and are confident that the strategic investments we are making will enable the business to continue delivering further profitable growth.  In the short term we remain alert to pressures building on consumers' disposable income and the continuing economic uncertainty.  Over the year as a whole we expect to deliver results in line with our previous expectations as well as further progress against our strategic plan.

                                                                                                                         Roger Whiteside

Chief Executive

                                                                                                                             1 August 2017