Cranswick plc (CWK) Earnings Call Transcript & Summary

Good morning, everybody, and welcome to our full year results for 2023 presentation. We're delighted to welcome you all here today to the newly refurbished Butcher's Hall, and hopefully, this will be a regular venue. Alongside myself is Mark and Jim presenting. We're joined by our Chairman, Tim Smith. We also have several members of our senior team here; Chris Alderley, Catherine Bradshaw and Mark [ Hawley ]. They will be available to assist with any queries following the Q&A session at the end. If I can just turn your attention to Page 1 on the agenda, and I'm just going to spend a bit of time here. I'll briefly comment on the progress we've made during the year. Mark will cover the financials, as usual, and Jim on the commercial progress before handing back to me for a few words on our strategy and operational performance. We'll then open up to Q&A toward the end. This year, we slightly modified the format of the presentation to place greater emphasis on the value creation we have delivered for our shareholders amidst the challenges over the last few years. Before we start turning the pages on the slide deck, I just want to recap on what has been an incredibly eventful year. Our strong results and resolute performance should be viewed in the context, not just over the last 12 months, but indeed over the last 3 years. We've managed the impact of the war in Ukraine in terms of disruption to global supply chains and the upward pressure on commodity and energy prices. With the support of our customers, we provided financial assistance to our third-party pig producers, enabling them to manage the rapid escalation in their cost base. Despite the support and the pig price reaching an all-time high in recent months, the U.K. pig herd has continued to contract with many independent producers choosing to cut back or cease production entirely. We recognize that the food security is of paramount importance. And so we've increased our internal supply with self-sufficiency, now approaching 50%. And we will continue to expand on our own herd to make sure we meet the customers' needs, and I'll comment more on this as we run through the presentation. In what is a post-Brexit world, labor availability remains tight. We continue to invest at pace with GBP 85 million spent across the asset base to drive efficiency and add automation. We've also recruited 400 skilled butchers from the Philippines to address the shortfall that we find here in the U.K. The U.K. poultry industry has experienced the most virulent Avian influenza season on record. A very small proportion of our farms were affected and the financial implications to us, although modest, was really an accolade to how the team has managed the crisis and the importance of our best-in-class biosecurity protocols. We have now successfully navigated 3 years of unprecedented disruption and uncertainty and now have a much larger and more diverse and better equipped business, which is prime to deliver the next phase of growth. On to Page 3, the long-term trading record. I mean this is a slide we always like to dwell on because we're now into our 33 years of unbroken dividend growth. And if you consider the number of crises that we have faced over those -- that period from BSE to foot-and-mouth, to the horse meat scandal to Brexit, the pandemic, and more recently, the Ukraine conflict, I think it really is a testimony to the management and the skill that we have within our business from top to bottom. On the following page, and on the financial performance, I just want to briefly reflect on some of the many financial highlights of this last year. Our revenue has increased by almost 16%, showcasing our ability to pass on inflation in the key areas of our business. We have grown revenue by over 60% over the last 4 years. Furthermore, the operating profit and return on capital employed reflect the stable long-term margins and the robust cash conversion. These results highlight the sustainable, resilient and well-managed nature of the business model. Additionally, the 5% increase in dividends brings a full year amount to 79.4p per share. And turning to Page 5 and moving from the challenges posed by the pandemic. The outbreak of war had a profound effect on material input prices, leading to a notable inflation spike across all areas of the business. However, we acted swiftly, collaborating with producers and customers to mitigate that pressure. Left unchecked, this inflation could have had a devastating effect on our supply chain. Our team demonstrated excellent management of the wider inflationary pressures across the group, and we will continue to maintain strong control as we navigate the ongoing volatility. It is worth noting that despite those -- the numerous crises that I mentioned before, and over the past year in particular, we have consistently invested in our asset base, setting us apart from the competitor set. And this last year was no exception as we expanded our branded facility in Hull, enabling us to offer a comprehensive range of poultry products to both retail and food service customers alike. Furthermore, we've added additional lines to our Cooked Bacon facility, enhancing our volume capabilities, and allowing us to offer cooked sausages and other value-added products. In line with our commitment to significant investment, we are pleased to announce our with Pets at Home in a relatively new pet food business. This collaboration will enable us to supply their premium own label products, and we plan to expand this partnership to include additional pet food offerings alongside the existing kibble range. Despite the pig pricing intervention we implemented last year, I touched on before that we've witnessed a 15% decline in pig numbers compared to the previous year. This reinforces the significance of our investment in the farming operation, and you can expect that to continue. The 5-year compounded growth metrics on the right-hand side of the page validate our value creation model, with revenue, PBT and earnings per share, all achieving close to double-digit growth over this period. And just on to that value creation model on Page 6, I just want to briefly discuss this model. The core purpose of our business has been to drive our business to expand in premium food categories, ranging from pork and poultry to pastries, olives and the mezze offering. Our products are distinguished by their exceptional taste, their affordability and sustainable production practices, along with our authenticity. We've achieved this through substantial long-term investment in our supply chains, both in poultry and pig as well as through advances in our processing capabilities. We also possess a deep understanding of our customers and consumers' needs, constantly ensuring that these products remain not only relevant, but also innovative. Aligned with our pillars of consolidation, expansion and diversification, we aim to grow our market share while enhancing our ability to deliver an improved customer proposition. The medium-term metrics and targets on the right-hand side of the page are the expected output from our value creation model. Additionally, it is essential to highlight our extremely low levels of debt, absence of pension liability and consistent mid-teens return on capital employed. I'll now hand over to Mark, who will cover the financial performance prior to Jim covering the commercials.

Good morning, everyone. Good to see you all. I'm just going to spend the next few minutes running through the highlights of FY '23. And as I always say, just a bit of context, unless I state otherwise, I'll be referring to adjusted numbers. So that excludes the impact of IAS 41 on biological assets, amortization and impairment of intangibles, and also, both FY '23 and FY '22 include the impact of IFRS 16 leases, unless I comment otherwise. And you'll see in the back of the pack, as always, there are full reconciliations between the adjusted and statutory measures. So just building on the comments, Adam -- the brief comments that Adam made on the financials, we've clearly made extremely strong progress over the last year. Over that period, revenue is up 15.7%, adjusted PBT 2.3% higher, and EPS and DPS of 2.2% and 5% ahead, respectively. If we look back to [ FY '20 ] revenue across that period is up 39%, PBT is 37% ahead and EPS and DPS are 34% and 31% higher, respectively. And when you consider the challenges we faced over the last 3 years, this is no mean achievement. Our cash conversion has also been excellent with our free cash flow increasing by over 29% and our pre-IFRS 16 net debt reducing by over GBP 45 million over that same period as well. Now just turning over the page and looking at the FY '23 -- our FY '23 performance in a little bit more detail. As I said, revenue is up 15.7% at just over GBP 2.3 billion, with like-for-like revenue, which excludes the impact of acquisitions, increasing by 14.4%. Like-for-like volumes were just over 1% lower, reflecting primarily lower export volumes and lower cooked poultry volumes following the product recall this time -- about this time last year actually. But if you look at our core U.K. pork volumes -- core U.K. volumes in Fresh Pork, Convenience and Gourmet, they were all ahead year-on-year. And if we look back to this time last year in Q4, in particular, so the 3 months to March was still very much in the grip of the Omicron crisis, and everybody was eating at home, if you remember. So to maintain volumes across the year is a tremendous achievement, and we're certainly well ahead of prepandemic volumes. Adjusted gross margin was down at 13%. And as we've talked about, and we'll talk about more in the presentation, reflected the anticipated short-term lag in recovering broad-based cost inflation. Pleasingly, adjusted operating profit increased by 4.2% to GBP 146.5 million. Operating margin at 6.3% was 69 basis points lower. But we saw a step-up in performance during H2, with operating margin improving from 6.1% in H1 to 6.5%, and operating profit up from GBP 68.4 million to GBP 78.1 million, so clearly a strong acceleration, not least in terms of revenue, but also in terms of bottom line performance during H2. Adjusted profit before tax at GBP 140.1 million was 2.3%. And just a quick word on the effective tax rate, which was 20.1% compared to 20.3% in FY '22. We always see the effective rate slightly higher than the standard rate due to disallowable expenses. And we also saw this year the deferred tax charge resulting from the future enacted increase in the U.K. corporation tax rate to 25%, which will be a feature clearly of our tax numbers going forward. Those incremental impacts were partly offset by the super-deduction -- the last year of the super-deduction on eligible capital investment. Adjusted EPS increased by 2.2% to 210p reflecting the increase in pretax earnings, partly offset -- modestly offset by an increase in the number of shares in issue. And as Adam mentioned, on the dividend, we're proposing to increase the final dividend by 3.2p or 5.8% to 58.8p per share from 55.6p per share last time. This, combined with the interim dividend of 20.6p, gives a total dividend for the year of 79.4p per share compared to 75.6p last time, an increase of 5%. And look, we'll keep mentioning it an extended period of consecutive dividend growth to 33 years. I think we do want -- and I'll come on to return on capital employed in a little bit more detail in a moment. But at 15.8%, slightly down on last year's 16.9%, but that reflects the investment in start-up phase fixed assets and the acquisition of the Pet Food business this time last year -- in January last year, all of which are yet to deliver meaningful returns for the group. So if we just now turn over and look at revenue in a little bit more detail, slides are flicking over. I talked about reported revenue growth being up 15.7%, and that does include a full year contribution from products, albeit it's still a modest one. And whilst total volume growth in the year was only modest, as I said, prior year comparatives reflect pandemic-related elevated in-home consumption. And all 4 categories were well ahead of the corresponding period last year in revenue terms and like-for-like volumes remain well ahead of prepandemic levels. Underlying revenue growth of 14.4% reflects successful control and recovery of widespread cost inflation, and revenue growth accelerated in the second half of the year with a record December trading period for the group in the mix there. Total export sales did increase year-on-year, although we did mention China, China sales were slightly lower, with strong pricing offsetting lower volumes. Far East exports were modestly lower than the prior year with higher prices, again, to a large extent, offset by lower demand as China remained in strict lockdown for much of the year. Turning on to Page 11. We've talked about margins being slightly down year-on-year, but this really does highlight -- this slide just shows the stability of our margin performance over that -- over the last number of challenging years that we've talked about. And if you look at the last 5 years, our margins for FY '23 are very much in line with our longer-term average in a year when we faced a significant and sustained inflation recovery challenge. Now moving on to cash and the balance sheet. It's a feature of our business that we remain extremely cash generative. Net debt fell by GBP 4.6 million to GBP 101.4 million. The year-end position included GBP 81.2 million of lease liabilities. So net debt, excluding IFRS 16, decreased by GBP 16 million to GBP 20.2 million compared to GBP 36.2 million at March '22. And in terms of briefly explaining that movement, clearly, very strong EBITDA performance. Working capital, including biological assets, increased by GBP 41.5 million. And as we've already called out, the increase in biological assets reflects the ongoing investment in growing our pig herd, both organically and acquiring new herds where the opportunity presents itself. Tax paid in the period of GBP 20.4 million was GBP 10.6 million higher than the GBP 9.8 million paid last year. Really, that was the big super-deduction benefit we saw in FY '22. CapEx, net of asset disposals of GBP 83.9 million was incurred in the year and I'll look at that in a little bit more detail a couple of slides on. And the dividend paid in the year totaled GBP 36.3 million, GBP 3.5 million up on last year, reflecting the increase in the FY '22 and FY '23 interim dividends. Just turning over on to the next page. Now this slide has been languaging in the back of -- in the appendices. We used to -- I used to present this slide upfront, and I think it's well worth doing so again. I think it really draws out the strong message. Our cash generation over the last 8 years and indeed, going back much further, has been consistently strong. Over the last 8 years, we've generated almost GBP 1 billion of free cash flow. And if you look at how we've accounted for that cash, we spent over GBP 560 million on CapEx, approaching GBP 175 million on M&A, and we've returned nearly GBP 190 million to shareholders by way of our cash dividend. And we've done all this without asking support from our shareholders. In fact, you need to look back all the way to 2004, '05, and the time of the Perkins acquisition for the last time we raised equity, and that was just a 5% placing at that time. On the right-hand side of the page, you can see our banking facility. We extended the facility for another year back in November, and our GBP 250 million sustainability-linked facility now runs through to November '26. And we have got the option to access a further GBP 50 million on the same terms. So clearly, with net debt as low as it is, that gives us very generous headroom to continue our growth strategy. Turning on to Page 14 and just on the thing that, again, building on Adam's comments at the beginning of the presentation, I want to comment briefly on our track record of value creation. We have a proven track record of generating an attractive level of return on capital employed, whilst continuing to deploy capital at pace via strong investment pipeline. We spent GBP 120 million on acquisitions and GBP 430 million on CapEx over the past 5 years, including building 4 new state-of-the-art facilities. And as you can see from the red line on that page -- on the slide, our return on capital employed has consistently remained above our 15% target. And when you look at the amount of immaterial CapEx that is sitting -- that is in either in construction or very much in its early phase of development, delivering at that rate is very pleasing. If we just look over the page now at Slide 15, as I mentioned at the interims -- at the time of the interims, over the last 4 or 5 years -- so let me just turn the page, here we go. As I mentioned at the time of the interims, over the last 4 or 5 years, we've been able to point to a flagship new build projects. As I've also mentioned previously, we've commissioned 4 new facilities in the last 5 years with a combined investment approaching GBP 200 million. This slide shows that whilst we don't have 1 single large flagship project this year, we still have a heck of a lot going on. We continue to invest at pace, investing further GBP 85.1 million across our asset base to consolidate, expand and diversify our operations. And some of the key ongoing projects are covered on this slide. There's a lot on that slide, so I'm not going to run through them all in detail, but I'll be very happy to take questions later. And just for the record, I'm reconfirming FY '24 CapEx guidance of GBP 100 million, albeit with the same caveat as the last 2 years that lead times, which remain stretched, do not extend even further. It's certainly not for lack of trying that we haven't hit the GBP 100 million this year and there's a heck of a lot of our projects already approved. And in that pipeline, as you can see down in the bottom right-hand corner, I think we've got GBP 27 million of CapEx spent on assets in the course of construction and GBP 60 million spent on projects, which is still very much in the start-up phase. So there's a lot there that's still to come to maturity. We looked at this slide last year as well in terms of our capital allocation framework, a very sustainable and long established. So we'll continue to invest in the business to support our growth strategy. As I mentioned with CapEx guidance of circa GBP 100 million to add capacity capability and automation. We'll maintain an investment-grade balance sheet with targeted leverage of less than 2x net debt to EBITDA. We'll maintain that progressive dividend policy with a cover of at least 2.5x EPS and DPS, and we'll continue to explore complementary targeted bolt-on M&A with returns ahead of our group WACC. So in summary from me before I hand over to Jim, we've grown revenue by 15.7%, with categories -- on all categories ahead of FY '22. Adjusted PBT is up by 2.3% and adjusted earnings up by 2.2%. Lower, but improving group margins, reflect the anticipated short-term lag in recovering broad-based cost inflation, but we continue to make good progress in managing and recovering these incremental costs. Our cash generation is strong, and our balance sheet remains in very robust shape, and we continue to invest across our asset base at pace to add capacity, capability and to drive those efficiency improvements. And again, we're increasing our full year dividend by 5%. So on that note, I'll now hand over to Jim, who's going to give you an update on our commercial progress.

Good morning everyone. Thank you, Mark. So following the theme of a slightly different format to previous years, I'm only going to briefly cover off the key events of the year, after which I'd like to focus on some of the underlying strategic progress the group has continued to make, and particularly how we've strengthened our competitive advantage through increased investment in innovation across pig meat, poultry, increasing Mediterranean foods offering, and more recently, our developing pet business with as normal and update on the progress under Second Nature. So if I just start by guiding you to Page 18, and I think it's fair to say with a backdrop of a hugely challenging consumer environment, rampant inflation, the cost of living crisis, continued pressure on the supply chain, the group has delivered a really pleasing commercial outcome. And this, I think, is a real credit to the commercial and operational teams at Cranswick over the very challenging period. From a market point of view, Sainsbury's and Tesco's, the group's 2 largest customers, were the best performers out of the large assortment retailers, with M&S also delivering on a differentiated and well-executed quality food strategy. We also have a growing share of the discount to trade with long-term partnerships, agreed with both Lidl and ALDI in different parts of the group. Flicking on to Page 19 on the out-of-home channel. And as it's turned out, this market has actually proven itself to be far more resilient than many people may have thought over this period. And the value operators and the national brand is actually pretty well holding on to sales and the share of the consumer's plate as well. And the more value orientated and more convenient operators, particularly in the QSR space continue to perform well ahead of the market, particularly the likes of Whitbread at Premier Inn, McDonald's and Nando's, all operating now well ahead of 2019 levels. We've also seen good recovery from the London-centric brands such as Pret, Itsu and Leon. And I think it's fair to say over both out-of-home and the retail trade, we are aligned to the best-performing customers in their relative sectors. So moving over the page on to Page 20. Just to reiterate some of the points on inflation, clearly, we've had inflation impacting every single part of the cost model over the last 18 to 24 months, starting with the labor squeeze in the summer of 2021, followed by utilities and base commodities as we emerge from the pandemic, and then obviously taken to another level by the war in Ukraine. I think the key point here is clearly we have the cost models in place with customers that work very well from a base commodity pig price and meat prices. But on some of the other non-meat inflation, we had to go to the retailers and negotiate increases out of the usual review cycles, which are less frequent in the pig and feed prices. I think the other key point here as well is, we have to support the farmers initially, obviously, as wheat prices escape well ahead of the pig price recovery. I mean the peak the pig price was around [ GBP 1.40 a kilo ] with a cost of production [ GBP 2.40 a kilo ]. So we really have to do something hand-in-hand with the retailers to support the industry and avoiding not to collapse and perhaps the kind of scenario that's happening in the end markets at the minute as well. We're now seeing a softening of the core commodities, and with the big price where it is now rising on its own accord, we're seeing profitability at least returning to the agricultural sector as well, which should at least support current levels of peak production here in the U.K. Just moving over the page and looking how this has affected retail prices. And I think it's fair to say that the retail prices considerably lagged the input. So there was certainly a squeeze on the supermarket margins, which the level of increase, as you can see, in poultry, up 16% on 1 year ; up 18% on a 3-year read, really showed these are not the levels of inflation that can be absorbed. So more recently, we have seen those kind of increases flow into retail. It happened first in poultry because poultry prices are absolutely directly related to the cost of feed, whereas on pig, it's an indirect relationship, which eventually fed through as per our previous commentary. But I think the key point here is what we're seeing with volumes and volumes by and large, are holding up in [ Altice ] and certainly Cranswick volumes remain in good shape here. So I think a pretty pleasing outcome given inflation even at retail level now that's literally never seen before. Moving over on to Page 22. And just a brief word really on our category sales. So I think it's really pleasing that we've managed to grow our volumes, never mind the volume across literally every aspect of the group. So again, a real credit to the team. Perhaps finally worthy of no -- actually, our food service volumes, particularly with new customer acquisitions in this space and actually now the fastest-growing area of the group. Obviously, part of that is also the recovery of certain sectors, but certainly new relationships, the likes of McDonald's has really helped drive that sector of our portfolio even harder. So moving over on to Page 23. And really, what I'm now wanting to highlight is how Cranswick's placed to continue this growth in our key market segments of obviously pig meat, poultry and continental foods as well as the recent diversification into pet food. So starting with consolidation. Here, I'm referring to mainly the key pig meat operations and in our core Fresh Pork market, we're continuing to invest at pace in our operational efficiency with semi-automated butchery development, automatic scoring, for example, for improved quality and guaranteeing good crackling every time, and marinade automation as well that improves efficiency and capability in the fastest-growing aspects of where we're going because that's certainly marinade aspect of fresh pork is a much increasing part of the portfolio. Moving on to Cooked Bacon and Cooked Sausage, which initially was a gap in our pigment portfolio a couple of years ago but production commenced in 2021, and since that time, we brought on new retail and food service customers alongside growing share of those customers as well, which, within less than a year, led to us investing in a third line at the site, which really shows the rate at which we can, once we enter these markets, drive our scale, drive our penetration with the customers. And finally, a big emerging market within pig meat and meat generally. So a lot of examples over there for you to look at on the table. But we have a really differentiated offering in our sous vide and slow operations. It's led by a guy called Kevin Morel, who has over 40 years' experience in the industry. He originally started work with Albert Roux creating sous vide dishes for his premium Michelin-starred restaurants, and has now moved that expertise into having his own business for many years and then finally working for us. So it really sets us completely apart in terms of our capabilities in this precision cooking using water bath technology. We had a hugely successful Christmas offer, where we offered M&S slow cooked Turkey operation that guaranteed real quality results for consumers as well as halving the cooking time, and that has been a real success and was up exponentially on the previous year when we launched it. Again, because of this and bringing new customers on board, we're now operating with 5 of the top retailers there. We're investing GBP 8 million to double our capacity on sous vid because that current plant is offering up -- operating at absolute capacity now, and that will be on stream by the autumn of this year. Moving over the page on to poultry. So the Eye facility, looking forward, will be running very soon at peak capacity of 1.4 million birds a week. We've been working between 1.3 billion and 1.35 million per week. This year, we brought new customers on board in the year, predominantly in both the out-of-home and business-to-business sector. That's led to an investment in a specific line to deal with business-to-business and all the grading and requirements. To service these customers, we've invested further in deboning of [ thigh ] meat which adds value and customers increasing obviously want boneless product as well as brand-new capability that's unique in the U.K. have been able to debone chicken drumsticks, which are generally a very low-value item and add value to that product, but particularly sausage and burger manufacturer there. And all this allows us to add more value to the carcass as a whole. Our breaded facility, obviously was commissioned during the early part of this year. That was initially running with the key anchor customer from the site [ Eye ] , Morrisons for the first half of the year and then since the second half we were able to leverage our ongoing relationships with a food service operator with the launch of the McCrispy, which is one of their first permanent menu additions for many, many years. And finally, this all builds on our most up-to-date assets in the industry, all 3 sites, both the fresh site, the cooked site and the breaded gives us the market-leading quality and the best invested assets in the industry, which considerably sets us apart. So moving over the page onto our continental meat business, and we continue to see significant growth here. It's among the fastest-growing sectors over the last 5 years and will form a significant part of our growth strategy going forward. Investment continues at the Bury facility, which was only invested in just over 4 years ago with first in the world automated lines for the production of selection packs with increasing speed, capacity and removing labor from the process, which is, to reference Adam's point, is an increasingly scarce commodity. The acquisition of the Ramona’'s brand expanded our continental range into hummus and dips, another fast-growing category and increasingly relevant to consumer shopping habits. This is operating currently from a fairly small footprint, and initially was in fairly modest distribution, but leveraging our relationships with the major retailers. We are now represented in all of the major assortment retailers. So it's hugely available, and that has grown that business to such a degree we will be outgrowing that facility. As a result, we are planning on opening a brand-new facility towards the end of this year, close to the Bury facility in Manchester to increase our ongoing capability in dips and hummus and gives us huge differentiated capability there, again, with market world-beating kit there. And finally, in terms of broadening the portfolio, our [ Katsouris ] business in London also produces a great deal of ambient products that we often don't talk about. We've rebranded the Cypressa range of ambient foods over there. And we also have made a small bolt-on facility with an acquisition of a company called Mediterranean Foods [indiscernible], which is a producer of falafel and other fried savory products and currently gives us a bit of overspill capacity for hummus as well until such a point as we move into the new facility near Manchester. Over the page in a very similar theme on Page 26. In February, we purchased the Grove Pet Food business, which was a small family-owned business in Lincolnshire. And since acquisition, we've been in close dialogue with Pets at Home, the U.K.'s leading pet care business and have now agreed heads of terms for a new long-term partnership to support their growth ambitions, customer availability and our innovation pipeline. This will place Pets at Home clearly as the lead customer from the sites with supply beginning in the second half of the year, with production and stock building taking place over the summer of this year. To support this, we're currently involved in the first phase of investment at the plant. This will increase capacity initially by around 40% And innovation clearly is a key pillar of the Cranswick strategy. And this deal provides us with the best platform to build a differentiated business model, bringing new products to customers with the market leader in this exciting and growing category. Obviously, again, this builds on our supply chain integration. We will support -- value chain is over 20% of the weight of our primary processing plants, ends up in pet food, and that will certainly help to deliver supply chain resilience, price stability and opportunities to improve sustainability of the products as well. So Cranswick has a track record of own label development, and this will deliver competitive advantage to Cranswick, while giving Pets at Home more direct focus on their needs as well. Yes. It gives us some context, that pet food market is worth around GBP 3.7 billion and grew at 14% over the course of last year. So this gives us a lot of runway to develop our pet business over the coming years. Moving over the page on to our Second Nature update. We have now established a new Board-level ESG committee led by the Chairman, and this was assembled during the year to oversee progress and to support the existing Agriculture and Manufacturing Committees, which are driving the progress on the grounds. These existing committees will now report through the ESG Committee, and we've also bolstered the team with the appointment of a new Head of ESG during the year. Moving on to Scope 1 and 2 emissions. We've managed to reduce our impact in Scope 1 and 2 by 7% during the year, which is a very pleasing performance, very much around reductions in gas leaks and lower diesel use on farms. We have 11 projects currently approved, with 6 already in build or commissioned in terms of solar installations. And one of the big issues in livestock and make production is, of course, the feed and particularly soya used. We have reduced our pig soya inclusion in the diets from around 16% down to some 10%, and we are now doing quite a lot of work around replacements, such as sunflower meal and beans and pulses and other options to really reduce the soya use within the pig diets. Animal feed contributes to around 80% of Scope 3 emissions to put this into perspective. So it's a pretty key topic for us. To support this, we're also a founding signatory of the Soya Transparency Coalition, and we are accrediting all soya on form of mass balance certified deforestation-free basis. The company donated over 500,000 meals a year and that takes the running total to over 1 million meals donated, and we've had further recognition for our progress on sustainability from a number of customers, both the Whitbread Frost for Good and a Tesco Supplier Achievement Award for sustainability. So it shows this is resonating with the customers as well, and clearly, our Scope 1 and 2 and our Scope 3s as well. So really to try and pull all this together, these examples hopefully demonstrate our differentiated business models where we can consistently, over time, deliver above average market performance through that market leading quality. Value is driven by well-invested and efficient factories, innovation in relevant products and solutions tailored to modern eating occasions, and all of this is made possible with a strong and loyal management and workforce and a very well developed and inclusive people plan. So to the point Mark mentioned, we either build a brand-new assets, which I'd say is relatively unique in our space. There's very new -- very few companies putting up brand new builds in the way we do or alternatively, we acquire smaller businesses like the Ramona or the Grove examples, and then grow them exponentially, leveraging our broader customer relationships and taking those products to a wider audience. The integrated agriculture and our supply chain, obviously supports this, and this allows us also to find solutions to the masses, the sustainability challenges we see there as well as cross control and stepping to one side of the language of agri commodities and livestock trading. Iconic one-of-a-kind products, such as Gourmet Bacon or [ Yorkshire Baker ] sets us well apart from our competitive sets as well. So that's really it for me. So in summary, really good control of widespread inflation, pricing models, ways of work -- working allow us to deliver that strong and regular financial delivery, investment and further strategic progress continues. And then we're really looking at driving competitive advantage in everything we do. So on that basis, I will hand us back to Adam.

Thanks, Jim. Just on the strategy and growth agenda on Page 30. We have, as you have seen, and heard throughout the presentation, we've made further progress in strengthening our 3 strategic pillars, consolidating, expanding and diversification, and by doing so, delivering on the long-term sustainable growth strategy. We're continuing to drive further consolidation as we gain market share in the core primary categories and value added, including convenience categories as well. Ongoing capital investment and expansion of the pig herd underpins the momentum. Through a combination of new greenfield site developments and targeted complementary bolt-on acquisitions, we've expanded our presence in the fast-growing poultry and the Mediterranean food categories. Under diversification, this includes moving into new markets, as we have done so successfully in China, and developing new product categories close to home. Our new pet food business is a great example of this approach. And since acquiring this in January 2022, we've strengthened the management team and embarked on a GBP 9 million capital investment program and gained BRC Grade A status to boot at that same site in Lincoln. We're also focused on realigning the customer base, as Jim has highlighted. And although our pet food is relatively modest contributor to the group revenue and earnings, we're extremely excited that the opportunity that it opens up. And as Jim said, it's [ GBP 4 billion ] category in any event and it's a large, fast-growing market. So just on the summary and outlook on the last page before Q&A. Over the last 12 months, hopefully, we've demonstrated resilience, determination and abundance, which enables us to deliver a strong set of results and make further meaningful progress in delivering our strategic objectives. We've made a positive start to the year, the strength of the business, which include our diverse and long-standing customer base, breadth and quality of products along with channels, the robust financial position and industry-leading infrastructure will hopefully support the further development of Cranswick over the longer term. And on that point, I will open the floor to Q&A. Thank you. Charles?

We have our microphone...

We have a microphone, but you can shout if you like, Charles, it depends on...

Charles Hall from Peel Hunt. Can you talk a little bit about where you are on inflation? Obviously, a huge amount last year? How much more is there to be done, or are we largely through it? And also on volume is obviously very difficult to move volumes up in a year when you're driving pricing. Are we now looking at different ways of trying to drive volumes? Obviously, you're getting business wins, but anything over and above that?

Yes. I'll let Jim cover maybe some of the inflationary pressures off. I think it's fair to say though, and we've reiterated this point many times in the past, Charles, both pig meat and Poultry sit very well in that value category. They are extremely versatile and we are extremely good at putting facilities down to expand upon that capability. So we still remain quite a competitive set in the proteins that we offer.

Yes. I think from a pig price point of view, I think there's still some room to go. Obviously, the pigs are short now and [ made too short ]. That's allowing us to drive decent price into our manufacturing meats and the like. I think some of the big kind of out there big spikes in labor, big energy things we think are behind us, but who knows. If you'd asked us prior to last year, we wouldn't have told you that was going to happen inevitably. But now, it feels like it's settling to -- back to a more normalized kind of pig price-related conversation, which, again, either what we know is dealt with through the models. And from a driving volume growth, I think we touched on it quite a bit with the innovation. And I think, particularly in pig meat and poultry, where they are such value proteins relative to everything else. Very much I often say the master view and destiny as long as we innovate, provide flavors and solutions to customers to meet their needs, and we're very confident we can continue to grow volumes in this sector. So I think we'll see a shift in the kind of products we sell, but it will still be derived from pig meat and sous vide, the example I've highlighted here today shows how people are now consuming these products. But that doesn't mean we're not eating pork or chicken anymore by any stretch as we've been saying for a good long while.

And then just thinking about China, obviously, a pretty strange year last year and sales down, but now the market is reopening, how do you see volume performance? And clearly, prices in China have been pretty weak for the last few months. How do you see that affecting the price you're getting? And do you have any view as to where it might go?

Yes. I mean all indicators are suggesting that there's quite a lot of meat at present that is supposed to ease by the third quarter of this year, and I think we'll find a timing in the market in China as well. We are still incumbent, of course, with the issue of not having China license out of our Norfolk facility. Much to our frustration, it is very difficult to get most traction at the governmental level. Unfortunately, we got the warm words and platitudes, but not much real traction there. So -- but elsewhere within our business, then we are very, very active in that region. We're also active in many other regions as well across Dominican Republic is the favored destination of product out of that Norfolk facility because of the next best market for us. But the Philippines is also a key market. And one area that we're looking at, in particular, at the moment is California. California and the Proposition 12 now requires a far wider requirements for housing of livestock. The U.K. is the only country in the world that actually offers that at this moment in time. And California is 15% of the whole of the U.S. market. And they can't supply themselves. So that's a key area that we're looking to develop now we're already shipping product out to that region. So we do look at other regions as well. But yes, the China situation is somewhat frustrating, but we anticipate prices to tighten and demand to increase towards the latter end of this year.

Jason Molins from Goodbody. Just in terms of the poultry business, you mentioned fresh, cooked and the branded, where are you in terms of capacity? And do you see yourselves becoming stretched in 2 to 3 years' time on that? Second question is in terms of pig supply in the U.K. Obviously, there's been challenges at a farm level. How do you expect that to unfold in the coming 12 months? And what is your ideal level of self-sufficiency that you want to run the business at? And then final question, if you don't mind, just around the pet food business, and the agreement that you've put in place now with Pets at Home. Where will that bring you in terms of the -- I guess, the opportunity with Pets at Home or on a sort of stage 1 implementation with that product set?

Yes, I'll cover the poultry and pig, you cover the Pets at Home. On the poultry side, with the additional business that Jim alluded to before additional customers in there, we are at capacity now. So a second facility is one that we've talked about for some period of time, and that has been scoped as we speak. And it probably will be in a similar area, geographical area as such from that point of view. So that's what we're scoping at the moment. In terms of pig supply, Jason, well, we're 15% down year-on-year now. I don't see that recovering even though it's far more advantageous for producers where they are today. The input prices, the soft commodity prices that, again, Jim touched on before, have dropped, but they still have a lot of losses to recover from previous. The aging demographics of the farming community as well means that I don't anticipate there'll be a swift recovery in the third-party supply. So that almost determines that we continue our investment in our own herds as well and expanding that area, which we've done with a significant increase over the last 12 months, and we will continue to invest in that facility -- in that sector, should I say. So I expect to see more growth from an internal point. As regarding the hurdle rate, I wouldn't really like to put an amount on it. We're obviously 100% self-sufficient in poultry and 50% in pig meat and that will increase slightly. But at the same time, we have ambitions to increase our processing capability as well. So I really wouldn't like to put a percentage on that. But certainly, we will be looking to expand it. And Jim, on the....

Yes. In terms of the Pets at Home, we've been awarded 2 key segments. So one is their Wainwrights brand, which from a customer-facing point of view is a brand, but it's wholly owned by Pets at Home. So we'll be producing the dry dog kibble for that range and another range called Step Up to Naturals as well. So it's their 2 premium brands -- owned brand, we should call it rather than own label. So it's a very good start, and that will leave us pretty full until the GBP 9 million investment comes on stream that we mentioned, which will be in the kind of towards the end of the financial year. And there's certainly room to grow from there and a lot of innovation and different things we're talking about that to come on to later. But yes, I think it sets us incredibly well with the national leader to go from a small family-owned business to that within a year is pretty phenomenal, really.

Damian McNeela from Numis. Perhaps first question maybe for you, Mark, on your medium-term guidance around ROCE. I think you acknowledged that there's quite a lot of immature assets in the sort of portfolio at the minute. And I was just wondering, if you could sort of help us think about maybe the downside to that sort of -- you're already at 16%, the target is 16%. What things weigh on your mind as why that target shouldn't be high teens, for instance?

I think in terms of the target, it's really the pace at which we continue to invest in. If we just let the assets that we've invested and already reached maturity, then there's obviously no reason why it shouldn't sort of head back up to that high teens levels. And if you look back historically, we've certainly been there. I think it's a pace at which we continue to invest, so you're going to get that continued pipeline of immature investment. If we talk about [ Eye 2 ] , for example, that will be a significantly bigger investment than [ Eye 1 ] was because it's not just the inflation in the actual site, build itself, but it's all the infrastructure that goes behind it. I think the important thing is that we're deploying capital at pace, and we are delivering above mid-teens returns even with all that ongoing investment, which is yet to reach maturity. So I think it's a blend. If you look at our core asset base, it's fully functioning. It will be delivering returns well above that 15%. But when you're investing at GBP 100 million a year, clearly, there's always a lot of your asset base that's still got to get up to that full capacity and really deliver those high returns. So I guess it's that equation to stop investing and improve your ROCE, or you keep investing and grow your returns in absolute terms, and that's exactly what we're doing.

Okay. And then just a second one on the pet food business. You've invested GBP 9 million. Can you give us a sense of how much investment may need to be put into that business over maybe the next 5 years to get it to where you want it to be?

Yes. Well, at the moment, we're just in kibble, of course. And there's a number of different formats from tracks through to wet food as well that we're looking to explore. So a bit premature of us to start putting a number on that, but it will be significant.

I think the important thing is that there's a big runway there, and we're occupying about 5 acres of the 28-acre site currently. So it's a big footprint for us to expand on.

Yes. And I think following that, that's the theme. We did that in poultry. We've done that on pet. So there's form to what we do here. We get into a market relatively modest, understand that market, put the investment and the expansion in at the same time as Jim and the team are working with the customer to develop the proposition, but these take time. I've said this many times before now, when you're building a greenfield operation, it's 2 years to build something and there is 2 years before you really get established within it. So it's a 4-year project, and we're ahead of the curve, I think, on this one, as we were on poultry, but those are the kind of time lines that we look at it.

Ashton Olds here from Redburn. First question, I suppose, just trying to understand maybe the shortage of volumes that may arise in the U.K. market with regards to pig meat. I suppose like when you are talking to prospective farmers that you might buy at the moment, are they looking to get back into the market? Are they earning sufficient net margins at the moment that it's becoming, I guess, economic gain? And if that's the case, does that mean that there's only going to be a shortage of pork for like a small amount of time? So I suppose that's my first question. And any comments that you may have just around how you're feeling about security of supply. Second question, just quickly, how does your level of self-sufficiency compare to your major peers in the pork market? And thirdly, just on sort of the longer-term ambitions in pet food, what type of customers are you looking for? Is own label pet food something that your grocer customers looking to get into? And that's it for me.

Yes. Again, I'll let Jim answer the last one. But regarding volumes of pig meat, pig producers -- independent pig producers as well as organizations of ourselves have had a very difficult last 2 years. And the last year, in particular, with the spike in wheat prices and input prices generally, you saw wheat go from GBP 200 to [ GBP 350 ] a tonne and people had a short order book even at that time. So the losses were quite colossal. So I don't anticipate there being a significant growth in pig numbers from certainly independent producers and even cooperation such as ourselves. We will be expanding to the extent that you would possibly imagine because the pain was so significant. Also the aging demographics of many farmers, mean that they don't necessarily want to come back in, in any event, but the losses were fairly significant. So it's unlikely that they would go back in before the profitability is there for a sustained period of time. And that's what I suppose what gives us comfort about having to put more pigs down, and we have to do out of necessity [indiscernible] we did to the level that we did. Our self efficiency is about 50% now. We wouldn't be the #1 pig producer in the country, though, that will probably be Pilgrim's. Still, we have a slightly differentiated model. We've got indoor pigs as well as outdoor pigs as well. So we have a commercial arrangement as well as an extensive arrangement. And as I mentioned before, with Jason, I'm not sure I'd want to put a figure on exactly where we want to go, but we will continue to invest as much out necessity, but we do want to expand our processing capabilities as well as our sites as well, of course.

Yes. And in terms of the pet food, I mean, certainly, in the short term, the Pets at Home work keeps us very busy as I alluded to. Clearly, we've got very close relationships there with the major retailers. And they're very aware of what we're doing, and there is a dialogue there. But as I say, the short to medium term will be very Pets at Home centric. It keeps us incredibly busy in terms of both current capabilities and what's coming on stream in the kind of spring of next year.

Clive Black from Shore Capital. Following on from a lot of the questions around farming, how does your agricultural strategy link into your Second Nature work, particularly around sustainable farming, regenerative farming? Interested in your thoughts around that. And also the link between what you produce in primary and pet ingredients? Secondly, young and thrusting analysts used to ask lots of questions about the nonmeat sector, and just be wondering [indiscernible] the realities of that and where it stands in your strategy? And it's the first time we've heard Cranswick really talk about hummus. And maybe give us a feel for your supply chain there, where that comes from and how competitive you are in that market?