Wednesday 16 October 2019

Coveney has plenty on his plate after pay revolt by firm's shareholders

The slim vote in favour of Patrick Coveney's pay package means he must work harder to convince Greencore shareholders, writes Dan White

Patrick Coveney has helped oversee the transformation of Greencore Picture by David Conachy
Patrick Coveney has helped oversee the transformation of Greencore Picture by David Conachy

Dan White

At the Greencore AGM last Tuesday, 40pc of shareholders voted against Patrick Coveney's new pay package. While the vote was non-binding, it was still too close for comfort, with chairman Gary Kennedy promising to consult with shareholders before next year's AGM.

The Greencore shareholders' register has been transformed by last December's rights issue, which increased the number of shares by 70pc to 702 million. Many of these new Greencore shareholders seem to have been among those who voted against Coveney's new pay arrangements last Tuesday. The rights issue, which raised £440m, largely financed Greencore's $745m acquisition of US company Peacock Foods.

Under the terms of the new performance share plan, senior Greencore executives may receive a bonus of shares worth up to twice their basic salary. Coveney's salary for this financial year is due to be €804,000, according to Greencore's last annual report. "These [share] awards are only worth something if the company performs extremely well", said Coveney after the AGM. "We will have to deliver very well on integration and on US performance."

For two decades after it was privatised in 1991, the former Irish Sugar Company, and its share price, went nowhere.

Things didn't change, at least not initially, under Coveney's leadership. The former McKinsey Ireland managing partner - and brother of Housing Minister Simon Coveney - joined Greencore as chief financial officer in 2005 before becoming chief executive three years later. It was only when Greencore acquired Uniq in 2011 and switched its listing to London the following year that things began to happen for the company, which delivered a total return, including dividends, of more than 500pc to its shareholders between 2011 and 2016.

However, the share price has languished over the past year. Before the AGM, Greencore shares were trading at 218p, down by almost a third over the previous 12 months, under-performing the FT Small Cap index by almost 40pc. While the recent Greencore share price performance has been distorted by the rights issue, it is clear that the shares have lagged behind the overall market. Investors have yet to fully buy into the Greencore story.

Greencore is now a very different corporate beast from the company that was privatised over a quarter of a century ago. It is the largest producer of ready-made sandwiches in the UK and is also a leading producer of ready meals and cakes. The group had sales of almost £1.5bn (Greencore reports its results in sterling) and operating profits of £102m in the year ended September 2016.

But Greencore's successful transformation into one of the UK's leading convenience foods producers was already in the share price. Investors are a pretty unsentimental lot. Eaten bread is soon forgotten and all eyes are now on the integration of Peacock.

The history of UK - or in the case of Greencore, UK-based - food producers and food retailers expanding into the US is littered with expensive disasters. Why should it be any different for Greencore? Peacock Foods is the largest producer of frozen breakfast sandwiches, children's snack meals and salad kits in the United States. It had 2016 sales of almost $1bn, EBITDA (earnings before interest, taxation, depreciation and amortisation) of $72m and adjusted cash flow of $47m.

There are significant differences between the Peacock business model and that of Greencore's existing UK operations. Firstly, while most of the food Greencore supplies in the UK is either fresh or chilled, virtually all of Peacock's output is frozen. Secondly, most of Greencore's UK customers are large multiples to whom it supplies own-label sandwiches, ready meals and cakes. Its customers include Marks & Spencer, ASDA, Waitrose, Morrisons and Sainsbury's.

When you treat yourself to that expensive M&S prawn sandwich it almost certainly comes from Greencore. Peacock's main customers are not retailers but branded food companies including Tyson Foods, KraftHeinz, Kellogg's and Dole. The frozen breakfast sandwiches, kids' snack meals and salad kits produced by Peacock are sold under the customer's brand. It is perhaps best thought of as a kind of out-sourced manufacturing by the branded food companies, rather than UK or Irish-style private label.

When Peacock is added to Greencore's existing US business, which supplies Starbucks and SevenEleven, the combined entity will have annual sales of $1.2bn. The single biggest risk to Greencore on either side of the Atlantic is that it has only a handful of big customers.

If one of them chooses to take their business elsewhere, the impact can be severe. This risk of losing long-standing customers is particularly severe when a company changes hands.

Kingspan learnt this lesson the hard way in 2001 when, after paying $120m for US flooring company Tate, most of its customers followed the former owners out the door. Greencore points out that Peacock's relationships with its main customers are of long standing. It has been doing business with KraftHeinz for 27 years and for 12 years with Tyson.

"These are multi-annual long-term commercial relationships," says Goodbody Stockbrokers analyst Jason Molins. Greencore has also taken steps to cement these relationships by appointing former Peacock boss Tom Sampson to its board last week. Although ostensibly a non-executive, part of Sampson's brief as a director seems to involve overseeing those all-important customer relationships, with chairman Gary Kennedy saying Sampson brings "a wealth of insight and relationships to the group".

Despite these risks, Peacock is a major player in a high-growth market segment. The American convenience food market is growing by 5-6pc annually. Better still for Peacock is that the branded food producers are farming out an increasing proportion of their output with outsourced manufacturing growing at between 5pc and 7pc a year compared to just 3pc growth for the overall packaged food market.

Even before the Peacock acquisition the Greencore share price had weakened, mainly on fears of the impact that Brexit might have on the company. "Brexit is a very big deal for Irish food companies that manufacture in Ireland and sell into the UK. Greencore doesn't do that. The essence of our UK and US businesses is that we manufacture in-market with local product and local people for sale to local customers," says Coveney.

But, and it's a very big "but", between a fifth and a quarter of the raw materials used by Greencore in the UK are imported. These are now more expensive following the post-referendum collapse in the value of sterling. In addition, many of Greencore's UK workers are non-British EU nationals.

While Coveney is confident that Greencore will be able to recover higher raw materials costs from its customers, he admits to being concerned at the possible long-term impact of Brexit on its ability to recruit suitable staff.

So will Greencore buck the trend and make it in America? A trading update issued to coincide with Tuesday's AGM stated that the integration of Peacock was "on track" and that like-for-like revenues were up 9.1pc in the first quarter of Greencore's 2017 financial year.

The market seemed to like it with the share price jumping from 218p on Monday to 252p by Friday. If Coveney can make a success of the Peacock acquisition and sustain the share price increase shareholders may take a more positive view of his pay package at next year's AGM.

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