Kerry Co-Operative Creameries Limited (KRZ) Earnings Call Transcript & Summary

Thank you, operator, and good morning, everyone. As you will have seen, we issued a press release this morning with details of the proposed transaction involving Kerry Dairy Ireland business. Our CEO, Edmond Scanlon; and our CFO, Marguerite Larkin, will take you through the key elements of the agreement, and then we will move to a Q&A session. Before we begin, please take note of the disclaimer regarding forward-looking statements. I will now hand over to Edmond.

Thanks, William. Good morning, everyone, and thanks for joining our call. We're pleased to announce the Kerry Group plc has entered into an agreement for the sale of Kerry Dairy Ireland for an enterprise value of EUR 500 million. The proposed transaction represents a significant step in Kerry's 50-year journey. Our strategy of continuous business developments and portfolio evolution aligned to our customers has been a key underpin of Kerry's success over the years. The proposed transaction will result in a global leader in Taste & Nutrition solutions and an end-to-end dairy industry leader. All businesses are very well positioned for success, thanks to the dedication and exceptional contribution of our people over the years. On completion, Kerry will become a pure-play global B2B Taste & Nutrition company with sustainable nutrition at our core while also supporting our financial objectives of continued market outperformance, strong margin progression and delivering greater returns for our shareholders. So the key points on the deal are as follows. The proposed transaction is structured in 2 phases, an initial 70% disposal for EUR 350 million, followed by the remaining 30%, which Marguerite will give more detail on shortly. EUR 500 million consideration represents a 9.4x EBITDA multiple based on 2023 results and 7.1x EBITDA based on full year 2022, which represents a more normalized level for the business. From a financial perspective, the transaction would be accretive to the group's volume growth. It will result in a step change in the group's EBITDA margin profile, and it will enhance the group's overall sustainability profile. And it's also worth noting that the nature of the transaction structure will mean only a minimal net earnings per share dilution. Post the transaction, Kerry Co-Op will no longer be a shareholder in Kerry Group plc with most of its shareholding becoming directly owned by its members and the remainder forming part of the transaction consideration. It's important to note that the transaction structure will involve no public placement of Kerry Group plc shares. As the transaction structure will manage any share ownership changes in an effective manner. The transaction will result in 2 leading businesses, each focused on their areas of key stakeholder interest. It has received the approval of both Boards and represents a significant value creation opportunity for all shareholders. With that, I'll hand you over to Marguerite to give you more details on the proposed transaction.

Thanks, Edmond, and good morning, everyone. Firstly, I will start with an overview of the transaction structure. The disposal of Kerry Dairy Ireland for an enterprise value of EUR 500 million is structured in 2 phases. Phase 1 for 70% or EUR 350 million is expected to complete by the end of January 2025 post shareholder approvals. Phase 2 for the remaining 30% or EUR 150 million consists of call-put option arrangements for the transfer of Kerry Group's Holding in Kerry Dairy Ireland to the co-op in the forthcoming years. The proposed transaction involves a number of share ownership change steps which, in summary, will result in 85% of Kerry Co-Op's current shareholding in Kerry Group plc becoming directly owned by its members and the remaining 15% of the Co-Op's current shareholding in Kerry Group plc will be redeemed as part of the consideration for the transaction. The initial Phase 1 consideration consists of: firstly, redemption of the remaining 15% of the Co-Op's current shareholding in Kerry Group plc, as I just mentioned, for an estimated amount of circa EUR 251 million, equivalent to circa 2.9 million Kerry shares; secondly, a cash payment of EUR 56 million; and thirdly, a loan agreement between Kerry Group plc and the Co-Op for an estimated amount of EUR 43 million. Conditional on completion of the transaction, it has been agreed to establish a EUR 50 million fund for the resolution of the ongoing dispute between Kerry Dairy Ireland and certain milk suppliers. This addresses any past, existing or future claims from Milk Suppliers under the Milk Supply Agreement, which remains in place until 2026. We -- and as part of the transaction structure, Kerry Group plc will receive a fixed dividend of EUR 7.5 million per annum over the period of joint ownership. Moving to some additional detail around the transaction and future arrangements between the parties. Firstly, the proposed transaction will include the transfer of 7 manufacturing facilities across the U.K. and Ireland and over 1,500 employees. Kerry Dairy Ireland will continue to be led by Pat Murphy as Chief Executive Officer. Post the transaction, Kerry Dairy Ireland will continue to be a key supplier of of dairy ingredients for Kerry Group plc. And the TSA arrangement has been agreed for transitional services to be provided by Kerry Group plc for the Kerry Dairy Ireland business, comprising IT services, group shared services, purchasing and corporate services. Now to an overview of the financial impact of the transaction, which I'm pleased to say will significantly enhance the group's overall financial profile. Firstly, on volume growth based on recent performance of the segments, we estimated volume growth of Kerry Group would be 30 basis points higher. On the EBITDA margins, resulting from the transaction, group margins will see a significant uplift of 140 basis points. On earnings per share, the net effect of the transaction would be a minimal dilution of circa 2% given the deal structure. On free cash flow, we will have a positive effect on our cash conversion percentage and reduced seasonality around working capital. On returns, it will have a minimal overall effect and our sustainability metrics will have an overall improvement with the most notable reduction in our carbon footprint. You'll see in the appendix we've included a number of additional slides, which outline the effect of the transaction on revenue, EBITDA and on earnings per share. Finally, on the timetable and key next steps from here. Kerry Co-Operative have scheduled their EGM on 16th of December. We will be holding our Kerry Group plc EGM on the 19th of December, and further details will be found in the circular document, which will be published in or around the 25th of November and the expected closing of the transaction is by the end of January 2025. So to close out, over the years, Kerry Group has continually evolved and developed as a business aligned to our customers. This transaction represents a significant step and Kerry Group plc becoming a pure-play B2B Taste & Nutrition business with a more attractive financial profile, enhanced sustainability credentials and a more simplified and focused business structure, all of which will enhance our ability to deliver on our strategic objectives. And with that, we will pass back to the operator for any questions.

[Operator Instructions]. And your first question comes from the line of Charles Eden from UBS.

Just 2 quick ones for me, please. Firstly, does this transaction in any way change your attitude towards continued share buybacks in the company? And then secondly, I apologize if I missed this, but is there any stranded sort of central costs that will be reallocated to the Taste & Nutrition division following the completion of this transaction.

So firstly, on the share buyback question, no change to our capital allocation policy and share buybacks going forward. And then on your question on stranded costs, there's very minimal stranded costs somewhere in less than EUR 5 million. And in fact, in the appendix, which you may not see yet, we have included details of this transaction going forward.

Your next question comes from the line of Lisa De Neve from Morgan Stanley.

Could you just please outline how the supply arrangements will work with the Creamery business over time? Any detail on that would be very helpful.

So Lisa, there's no change to the trading arrangements with the Dairy business. I mean we set up this business in 2021, let's say, quite independently of the Taste & Nutrition business. Any transaction between Kerry Dairy Ireland going forward. The new entity going forward are -- and the Taste & Nutrition business will be under the same set of circumstances on an arm's length basis going forward. Kerry Group plc will continue to have access to high-quality, low carbon dairy ingredients to support our dairy taste business and other elements of our portfolio. So no change from, let's say, what we've had for the last number of years, to what we have open to the future.

Your next question comes from the line of Alex Jones from Bank of America.

Two questions, if I can. The first, just to follow up on Charles' question on the corporate line, I think last year, that was EUR 184 million negative. Should we expect that to remain the same going forward? Is there any cost cutting you can do there in due course? And then the second question, just on any cash taxes associated with this disposal or want to frame it another way, what's the book value of Dairy Ireland today.

Alex. And just maybe taking your last question. First, the transaction from a plc perspective, is effectively cash neutral -- tax neutral and then on your first question on the central component, we're not calling out any significant change going forward.

Your next question comes from Cathal Kenny from Davy.

One question is from my side on the metrics. You called out Marguerite a positive impact on free cash conversion, just any quantum around that, please?

Cathal. Yes, it will be positive to the free cash flow conversion percentage a modest increase. But importantly, as you're aware, over the years, the Kerry Dairy Ireland business has had significant seasonality in working capital at points during the year, which will no longer be a feature post completion of the transaction. So this reduces a significant level of variability throughout the year. So overall, a positive impact, as I've referenced.

Your next question comes from the line of Alex Sloane from Barclays.

A couple of questions for me if that's okay. The first one, could you just remind us in terms of the co-op members, what percentage of shareholding of the plc do they already have? And how has that looked over time? I have in mind that they've been quite sticky shareholders, but yes, any color on that would be useful. And the second one, Marguerite, if you could just give us a bit more color, I think you said returns expected to be kind of neutral of minimal impact, if you could maybe talk through the dynamics there in a bit more detail would be great.

Alex, I'll take the first question. So like we said in the presentation, the transaction will involve no public placement of Kerry Group plc shares and the individual shareholders that will receive the shares from Kerry Co-Op are the same shareholders, the same community that currently own about 20% of Kerry Group PLC in terms of retail shares. So that personal holding of those shareholders will go from approximately 20% to approximately 30%. And -- and it's important also to note that history has shown us that they hold their shareholding and only sell down very limited amounts over time, and we don't foresee this changing.

And Alex, on your return question. Yes, as I referenced, it will have a minimal overall effect. So there's no change to our forward statement in relation to continued expansion in returns in line with our targets as we go forward.

Your next question comes from Patrick Higgins from.

Apologies if I missed this on the call, but could you just give us an idea of what the percentage approval acquired across the plc and then the co-op side? And then my second question is just, as you know, become a kind of pure-play T&N business, could you look at changing or looking into how you report maybe different level of disclosure for the T&N business?

So from a voting requirement standpoint, from a Kerry Group plc perspective to affect the transaction and the related resolutions a 75% shareholder approval is required. And from the Co-Op side, it's a 66% approval. And then from a go-forward perspective, in terms of segmental, as you can appreciate, this is under review, we'll revisit it post the transaction completing and it's our intention to update you with our year-end results.

I'd now like to hand the call back to Kerry Group.

So thanks to everybody for joining our call. This transaction represents the culminating step in the group becoming a pure-play B2B Taste & Nutrition company. It represents a significant transformation in our journey as we continue to evolve our portfolio aligned to our strategy to where we believe we can generate the most value for our shareholders and it significantly enhances our overall financial profile being accretive to volume growth, significantly accretive to EBITDA margins, enhances our sustainability metrics and has a positive impact on our cash conversion. And thanks to the optimized transaction structure, the EPS dilution has been minimized. So with that, look, thank you for taking the time this morning to join the call, please reach out to us if you have any questions and have a good rest of day.