Kerry Group plc (KRZ) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. And welcome to the Kerry Group Preliminary Results 2019 Conference Call. [Operator Instructions] I must advise you that this conference is being recorded today, Tuesday, 18th of February 2020, and now I'll turn the conference over to your first speaker today, William Lynch, Head of Investor Relations.

Good morning, everyone. And welcome to Kerry Group's Full Year 2019 Results Call. I'm William Lynch, Head of Investor Relations. And with me is Edmond Scanlon, Group Chief Executive Officer; and Marguerite Larkin, Group Chief Financial Officer. Edmond and Marguerite will take you through a presentation capturing the key points of this morning's results update. And following the presentation, we will open the lines for your questions. Before we begin, please note the usual disclaimer regarding forward-looking statements. I will now hand over to Edmond.

Thank you, William. Good morning, everyone, and welcome to our full year results presentation. So turning, please, to Slide 4 and looking back at 2019. I'd characterize it as a very strong year of Kerry. We delivered a very good performance, while at the same time making significant progress right across our strategic growth priorities. For me, the 3 key highlights were: firstly, we delivered very strong overall growth. We grew revenue by 10% to EUR 7.2 billion and trading profits by 12% to over EUR 900 million. Secondly, we delivered a number of innovations in partnership with our customers by leveraging our strong integrated solutions capability, and this drove significant growth across a number of End Use Markets. And I'll give you a little bit more detail on that shortly. And thirdly, we continued our strong track record of growth in developing markets, with another year of double-digit volume growth. We now have over EUR 1.6 billion of revenue in developing markets, which is a remarkable achievement given our expansion in these markets has almost been exclusively organic over the last 25 years. So now turning to Slide 5 and looking at our global Taste & Nutrition business. We delivered good volume growth of 4%, with momentum building throughout the year and with a really strong finish to the year. Our nutrition and well-being technology portfolio had a strong performance and this was achieved through our integrated solutions incorporating our fermented, our specialty -- specialized protein portfolio, probiotics, botanicals and natural extracts. This growth is reflective of consumers' increasing demand for enhanced nutrition as they seek better health and overall well-being. Moving on to foodservice. We achieved good growth of 5.5%, and this was underpinned by new menu development and nutrition-led innovations to help customers meet ever-increasing consumer demand. From a margin perspective, we expanded our trading and EBITDA margins in the year, with our trading margin increasing to 15.3%, and our EBITDA margin increasing to 18%. The key driver of our margin expansion was the enhanced product mix as we continue to add more value for our customers. Now turning to Slide 6 and taking a moment to look at our performance by End Use Market. As we said before, our consumer-led customers -- we are consumer-led, customer-centric organization. And we developed our growth strategies through the lens of End Use Markets. This is aligned to how we partner with our customers to meet new and evolving consumer needs right across food, beverage and pharma markets, and as you can see from the breakdown on the right-hand side of the slide, with an excellent performance across a number of End Use Markets. Starting with the Meat End Use Markets, we delivered an excellent performance with volume growth in excess of 9%. And key drivers of growth here were clean label, natural preservation and plant-based innovations. In Snacks, we also had a very strong growth of 9%, with new launches focused on healthier snacking. Moving on to the Dairy End Use Markets, we had a number of innovations to meet consumer demands for healthier options in the ice cream category, we also made progress for our plant-based -- with our plant-based solutions to deliver dairy alternatives for our customers. On Meals, they were impacted -- volumes here were impacted by product churn within the category, particularly in North America. And within our Beverage End Use Markets, we had a very strong performance in Europe and APMEA, where we have been working with a number of customers as their nutrition and wellness partner, supporting them right across their beverage platforms, and I'll give you a little bit more detail on this later on in the presentation. And then finally, on the Pharma End Use Market, again, we achieved good growth, and this was primarily driven by excipients. Moving on to Slide 7 and looking at our business through the regional lens. And firstly, looking at the Americas region. Volumes grew by 2.7%, with an overall revenue of EUR 3.2 billion. North America achieved good growth driven by Meat and Snacks, and in Latin America, we're pleased with our performance with good growth in Mexico and Brazil and a solid performance in Central America. The recent acquisitions of Fleischmann's, Southeastern Mills and Ariake also performed well, and we're really excited about the potential for these businesses and how they complement our authentic taste and clean label offerings. Moving on to Europe, we delivered a solid performance with volume growth 2%, and revenue of EUR 1.5 billion, with the Beverage, Meat and Snacks End Use Markets, all delivering good growth. We're also pleased with our performance in Russia and Eastern Europe and we had strong growth in both Beverage within the foodservice channel. And then moving on to APMEA, we delivered an excellent performance right across the region, with volume growth of 10.3% and overall revenue coming to EUR 1.3 billion. We're particularly pleased with our performance in Southeast Asia and the Middle East and we also continue to make strategic investments for growth right across the region. And now moving on to Consumer Foods on Slide 8. It's been a year of solid underlying performance with a volume growth of 0.9% against what we had as a soft U.K. marketplace. Overall volumes were back 2.2%, reflecting the ready meals contract exit as previously reported. And trading margins improved by 10 basis points, with savings from the realignment program coming through as planned. And in the second half of 2019 we successfully launched a number of meat-free offerings on the Richmond brand and also the Naked Glory brand. And finally, before I hand you over to Marguerite to give you some more detail on the financials, I'd just like to recap on our M&A activity for the year on Slide 9. We completed a total of 11 acquisitions in the year for a total consideration of EUR 562 million, and as many of you are aware, we were also involved in a well-publicized transaction process in our sector. As you can see here from this slide, the acquisitions completed in the year were aligned to our strategic growth priorities of taste, nutrition, developing markets and foodservice. And for us at Kerry, M&A has always been a key part of our strategy. We believe we have a business model that has generated and will continue to generate significant value for our stakeholders through M&A. So with that, I'll hand you over to Marguerite.

Thank you, Edmond, and good morning, everyone. Over the next 10 minutes or so, I will take you through our financial performance in more detail. For the full year 2019, the group achieved revenues of EUR 7.2 billion, trading profit of EUR 903 million and adjusted earnings per share of EUR 3.937. Overall, 2019 saw a continuation of our consistent delivery and has been a very good year of solid financial performance. And to our financial highlights and our performance on each of our key financial metrics in turn. Firstly, we reported revenues of EUR 7.2 billion in the year, up 9.6%, including volume growth of 2.8%, impact of foreign currency and the contribution from acquisitions. Trading profit of EUR 903 million, as I mentioned, which represented growth of 9.5% in constant currency. We delivered good margin progression, with trading margin up 30 basis points. We grew constant currency adjusted earnings per share by 8.3%. Return on capital employed of 11.8% was in line with expectations, reflective of investments for growth and strategic acquisitions. And finally, we generated EUR 515 million of free cash flow, which represented 74% cash conversion. Now looking at our revenue growth performance on Slide 12, and taking each of our key measures in turn. Our reported revenue grew substantially by 9.6% at over EUR 600 million in the year. This growth was driven by a number of key elements. Volume growth of 2.8%, as I mentioned, which was up over EUR 200 million in Taste & Nutrition. Overall, group pricing was flat in the year. Translation currency was a tailwind in the year in the order of 2.1%, and we had a strong contribution in the year of 4.7% from acquisitions or just over EUR 300 million. The most notable of these were Fleischmann's, Southeastern Mills, Ariake U.S.A. and our expansion into the Middle East with AATCO. We are very pleased with the performance of these acquisitions and particularly excited that Fleischmann's and Ariake U.S.A. have further enhanced our authentic taste and clean label technology capabilities. So overall, I would say, a very good performance from a top line perspective. And to Slide 13 for a moment to look at our revenue volume performance by business. On the left-hand side, you will see our overall group revenue of over EUR 7 billion split by business. Within Consumer Foods, we had solid underlying volume growth of 0.9% and an overall volume growth decline of 2.2%, reflective of the ready meals contract exit that we have spoken about previously. Taste & Nutrition achieved good volume growth of 4%, a strong performance against the backdrop of the softer market volume growth rates, and you will see on the right-hand side of this slide that, firstly, this volume growth evolved across the course of the year. And secondly, we have continued to deliver consistent outperformance of market growth by more than 2%. Turning now to our margin performance and our group trading margin bridge. We are pleased to report good trading margin expansion of 30 basis points in the year. The key drivers were, portfolio mix and operating leverage, which contributed in the order of 40 basis points. We continued to enhance our portfolio mix as we extended greater depth of technology into new products right across the globe and we also delivered operating leverage from the volume growth achieved in the year. And you will see in the middle panel within our KerryExcel program, we delivered efficiencies of 30 basis points from supply chain, logistics and functional cost savings, offset by investments for growth of 40 basis points. These included investments in the localization of commercial leadership, further strengthening our technology expertise and capability in developing markets as well as the continued rollout of Kerryconnect to North America. Acquisitions had a positive effect on group margin of 10 basis points in the year. And in the final column of the margin bridge, as previously mentioned, we have grouped Brexit risk management costs of EUR 8 million or 11 basis points, and the effect of the transition to IFRS 16 leases, which had a positive impact on a like-for-like basis of EUR 3.4 million or circa 5 basis points. So all in all, we are very pleased with the overall group margin expansion of 30 basis points for the year, which was underpinned by portfolio mix enhancements and operating leverage. Turning now to free cash flow on Slide 15, another year of good cash conversion. We generated free cash flow of EUR 515 million and cash conversion of 74% in the year. So looking at some of the component parts. Firstly, trading profit was up EUR 97 million to EUR 903 million; depreciation increased to EUR 191 million, reflecting increased capital expenditure and the impact of IFRS 16; average working capital increased by EUR 89 million, reflecting the investment in stocks as part of our Brexit risk management program, the increase in contingency stocks in North America as we commenced the deployment of Kerryconnect, and the increased working capital, reflecting the increased scale of the business. Finance costs and tax were both up, reflecting the increased size of the business and recent acquisitions. Capital expenditure of EUR 315 million or 4.4% of revenue during the year, which included upgrading and expanding our facilities in China, investing in our capabilities in the Middle East and opening our new taste facility in India, which will serve our Southwest to Asia markets. We continue to be disciplined, underlying our investments toward strategic growth areas. So overall, a good free cash flow performance of EUR 515 million and cash conversion of 74%. Now moving to our debt profile on Slide 16. Net debt was EUR 1.9 billion at year-end, up from EUR 1.6 billion in 2018, reflective of acquisitions in the year and a very good net debt-to-EBITDA ratio of 1.8x. In June, we completed our EUR 1.1 billion revolving credit facility, extended the maturity date to June 2024, and in September, we issued 10-year EUR 750 million bond notes. Our debt profile is in very good shape, with no significant debt repayments until 2023. And the weighted average maturity profile of our debt is 5.9 years. So all in all, we continue to have a very strong balance sheet with a long maturity profile to enable our growth strategy. And finally, before I finish, I would like to cover off a number of other financial measures on Slide 17. Finance costs increased by EUR 15 million primarily due to acquisitions and the transition to IFRS 16 as mentioned. Our pension deficit of EUR 9 million is down from EUR 44 million in 2018, primarily driven by a strong return on assets, partially offset by the effect of the reduction in discount rates. Non-trading items, a net charge of EUR 92 million, comprising 2 main items. Firstly, on acquisition integration and transaction-related costs, we invested EUR 48 million on the integration of acquisitions and incurred transaction-related costs of EUR 18 million, reflecting costs on the transaction process that Edmond referenced earlier. We are very pleased with our progress on the integration of acquisitions completed. And secondly, the Consumer Foods' realignment program, as previously outlined, with a net cost of EUR 22 million, was completed during the year and delivered to plan. Moving to Kerryconnect, we commenced the deployment in North America in the second half of 2019, and I'm pleased to say that this is progressing well and will continue through 2020. On raw materials, input costs overall were neutral in the year, with increases in Cereals and Proteins being offset by decreases in spices, citrus and vanilla. And at this stage, the overall outlook is currently looking like low single-digit inflation for 2020. And finally, on currency, the translation impact on adjusted EPS in 2019 was a tailwind of 3.1% and we are currently estimating a translation currency tailwind in the region of 2% to 3% on the EPS for 2020. So I'll just wrap up the financial performance update briefly before I hand you back to Edmond. I would say, overall, a period of very good consistent performance as we continue to deliver in a rapidly evolving market and industry landscape. Taste & Nutrition delivered good volume growth, particularly in developing markets, good overall group margin expansion of 30 basis points and good cash conversion and growth in our adjusted earnings per share of 8.3% on a constant currency basis. And with that, I'll hand you back to Edmond for outlook and future prospects.

Thanks, Marguerite. So before I share our outlook for 2020, I'd just like to take a couple of minutes to revisit the evolving marketplace and just put some color on how we're partnering with our customers to deliver on our growth strategies. So turning to Slide 19, we've spoken previously about how everything starts at Kerry with the consumer. And we've looked at how our marketplace and industry is changing rapidly and how the accelerating consumer change is driving customer transformation and reshaping our entire industry. And we've looked at different aspects of this change, and today, I want to look at how sustainability is driving change right across the end-to-end supply chain, impacting consumers, customers and suppliers. And how we, at Kerry, are embracing this opportunity, and embedding sustainability into our strategies and also into our ways of working. So now turning to Slide 20 to look at our sustainability strategy. And since the beginning, sustainability has been rooted in Kerry's heritage an essential part of our company's growth and evolution. Our company started as a community-based cooperative, and this foundation set us on our journey to become the world's leading Taste & Nutrition company. Our commitment to sustainable development and innovation, and our ability to create natural farm food for our food solutions, remains at the core of our business, and we're very proud of the achievements we've made to date with our 2020 -- with our Towards 2020 program, but we know there's still much more to do. And to give some context, we estimate that every day, there are more than 1 billion products consumed that contain a Kerry solution, and this provides a phenomenal platform for us to innovate, to enable sustainable nutrition, which we can then use to co-create solutions with customers for their consumers. And examples are, improving nutrition using lower impact ingredients, extending shelf life, reducing emissions and waste through process technologies and creating more value from byproducts. And a recent example of this actually is, where our enzyme technology was deployed as part of a solution to reduce food waste by almost 60% in a customer's leading baked product brand. When combined with our 2030 sustainability commitments, we will deliver a better impact for people, communities and the planet. This all means a great deal to us at Kerry. It is core to our purpose and is all part of our aim to be our customers' most valued partner. And now turning to Slide 21, where we just wanted to share with you some insights on the global beverage market. We at Kerry are uniquely positioned as the nutrition and wellness partner serving customers right across this dynamic market. This market is undergoing massive consumer-led change with categories, subcategories and niche markets all being redefined and reinvented. Central to all this is the heightened consumer demand for beverages that deliver Better-For-You nutrition and wellness benefits, and this is playing out right across all beverage categories, be it Frappe, Kombucha, teas, coffees, hard seltzers, or soft beers and soft spirits, and the list goes on and on. And on this slide, we've included a few examples, and one I'd just like to highlight is the Oat Frappe for foodservice. We partner with our customers -- with our customer and leveraged our enzymes, protein science, flavor and texture capability and combined this with our baristas and applications expertise. We created a great tasting, nutritious and on-trend consumer solution for a subcategory that's forecasted to grow at double digits. And now while we focused on beverage as the example for today, similar dynamics are at play across a number of other categories from Snack, to Meat, to Dairy and this all presents exciting opportunities for Kerry going forward. So now looking and turning to the outlook for 2020 on Slide 22. Just before I talk about the overall business, I wanted to speak about the ongoing developments relating to the coronavirus in China. Let me start by saying that our priority, first and foremost, is the health and safety of our people and their families. We have a really strong, experienced team in China and we've been supporting them through this difficult time. In addition, we're working together with the Chinese authorities, our customers and our suppliers as we navigate through this situation. As a result of these ongoing developments, we've included in our full year guidance an estimated impact in relation to our China business for the first quarter. So now turning to where we are overall as a business and looking out into the full year 2020. As we share today, we had a very strong year in 2019, with volume growth building over the course of the year and a particularly strong finish in Q4, and we're very excited about the opportunities ahead. In Taste & Nutrition, we have strong growth prospects as we continue to further deploy our industry-leading business model. We believe we are best placed to support our customers as their co-creation partner for sustainable nutrition. Within the Consumer Foods business, we'll selectively focus on growth opportunities. We've continued to invest for growth and pursue M&A strategies aligned to our overall strategic growth priorities. So to close, and for the full year 2020, the group has a strong innovation pipeline and we remain confident in our ability to continue to outperform our markets. Reflecting our estimated impact of the developments in China in the first quarter, we expect to achieve adjusted earnings per share growth of 5% to 9% on a constant currency basis. So with that, we'll open the line for questions.

[Operator Instructions] Your first question comes from the line of Arthur Reeves from Barclays.

My first question is about your midterm guidance. You've several times this morning said that your performance was very strong. But in fact, volume growth was below the bottom end of your midterm guidance, cash conversion was below your midterm guidance, return on capital is below your midterm guidance. Is this a temporary thing caused by market circumstances? Or actually, are you now looking for the bottom end of your midterm guidance to be a very strong performance? That's my first question. And then second question, coming on to 2020, what sort of volume growth do you see supporting the EPS growth you've guided us to, please?

Thanks, Arthur. I might kick off here and Marguerite might just come in after me. But maybe just to refer you back to the End Use Market page on the deck, and just focusing on T&N for right now. The volume growth in that page, if you can see, there's a wide range of End Use Markets there on the page with a wide range of growth. And if you look at the Beverage End Use Markets, the Meat End Use Markets, the Snack End Use Markets and the Pharma End Use Markets, each of them are performing really, really strongly: Meat at 9%, Snack at 9%, Beverage at 5% and Pharma at 6%. So when I just take a step back and look at that performance, it certainly gives us a lot of confidence in terms of the growth trajectory of the business. This is our third time giving you these End Use Market growth rates. In 2017, we outlined what our expectations were in the sight for our 5-year plan. In 2018, we gave you a full year look. And in 2019, another full year look, and you can say there's -- you can see, there's quite a bit of variability there. And that really gives us, I suppose, a good look at the challenges, but also the opportunities that are in front of us. So I think, by any stretch, looking at those -- that list of End Use Markets and recognizing that there are challenges in the market, we continue to be confident about reaching and achieving our midterm targets. In terms of 2020, look, we had a strong finish to the year, and we feel we're very well positioned going into 2020. And so -- as you're thinking about 2020, as we are 6 weeks into the year, maybe letting coronavirus aside for the moment, we'd expect our performance to be more or less in line with the 2019 performance.

Your next question comes from the line of Jason Molins from Goodbody.

Three questions, if you don't mind. Just kicking off there with China, can you maybe give me a better sense of your exposure by channel in the region? I'm particularly interested around the foodservice channel, given what we've seen from the number of the QSRs in China, and how they are about to close up a number of their sites and stores. Just on plant-based, your statements are littered with commentary on the performance around plant-based. Can you maybe talk a bit more about your capabilities compared to your competitor set? As such, where Kerry differentiating yourselves in this field? And then just a final question really, given the impending IFF DuPont transaction, I appreciate the deal won't close until 2021, but would welcome your thoughts on how you see that deal impacting the competitive dynamics in the marketplace, given the size of that combined business?

Thanks, Jason. Maybe taking the last point first, I think, look, we're very confident about where we are as an organization. I think from a strategy perspective, it's business as usual for us. We have a great business, a great team of people. We are -- in terms of our integrated solutions capability, like I kicked off at the very beginning of the call, I feel it's -- I feel we are well ahead of the game there. I think everybody else has to work really hard to catch up with us, and of course, we're not going to stand still where we are at. We're going to continue to evolve. So we're not hugely concerned about how the -- how our competitors and how our peers are performing or what they're doing. We're very focused on our business, feel good about where we're at, and as I said, it's business as usual. We have a great strategy, a strong team, and we're -- we feel we've a great runway ahead of us. Maybe then just to touch back in China, as you probably know, it's a region and a country that's very close to my heart. I'm in regular contact with the team there and we have a very strong team there. And that team is very focused in -- as well as getting our business back up and running there. The -- in terms of foodservice and channels and those types of things, we have said that our overall foodservice business represents 25% to 28% of our business, and that's the same globally. There isn't a huge amount of difference in terms of that weighting. I would say then in terms of the -- our plant-based performance, again, if you look at the performance in our Meat End Use Market, again, a growth rate of 9%. That business almost represents 1/4 of our total business, and there is -- the -- our performance in plant-based is reflective primarily in that Meat End Use Market. So if you think about the challenges that customers have and consumers have with plant-based alternatives, it's primarily around taste, nutrition and texture, and I believe we're extremely well placed in terms of helping customers to improve the quality of those products across those 3 areas.

Your next question comes from the line of Heidi Vesterinen from Exane PNB Paribas.

So a couple of questions. I think last quarter, when you spoke, you were a bit cautious on North America. But that seems to have turned out better than expected, but Europe had a bit of a slowdown. Could you talk about what happened in both markets, please? That's my first question.

Thanks, Heidi. Look, I wouldn't call out anything specific as such. I'd maybe call out timing as opposed to anything else. I think, in terms of North America, we wouldn't say that from a market perspective, anything has really changed. Maybe about this time last year, we did see that inflation was impacting the marketplace. Nothing has really happened throughout the course of the year to change that. I think we had looked some good wins coming into the end of the year, and I feel we're well positioned going into 2020 as it relates to North America. In terms of Europe, again, look, I wouldn't call out anything specific. We don't see any structural change as such in Europe. Again, I'd put it down to a little bit of timing, and as you remember, we have called out in the past that orders around seasonal offerings and things like that might change from time to time. So nothing out of the ordinary to report really on Europe either.

And then the next question is on T&N margin. So you are currently lagging your midterm targets, could you talk about why that's been? And what is the outlook from here? How do you think you'll be able to catch up?

Heidi, I might take the one on the T&N margins. So -- I mean firstly, I would say we're very pleased overall with the expansion of the margins in the current year, and as we look ahead to 2020, we do see continued opportunity to expand our margin, particularly and as on the portfolio mix in terms of layering in technologies. Very much aligned with some of the examples that Edmond shared earlier, and so we see good opportunity to expand our margins in 2020 somewhere above 20 in the region of 30, before we take into account the impact of the coronavirus.

And then last question, please. You talked about your involvement in a well-publicized transaction last year. So now that that's now gone, is that it for large M&A? Or do you still have other sizable targets in the pipeline? That's my last question.

Thanks, Heidi. First of all, look, we've never made a secret of the fact that we run the rule across many acquisition targets or potential acquisition targets or merger targets, and I think that, that strategy hasn't changed. We're -- I think we have the confidence, the capability, we have the business model to do acquisitions. We believe we're well supported from a shareholder standpoint. I think we have shown discipline, and I believe we've shown a strong track record in terms of delivering value for our shareholders. Ultimately, that's the key measure here in terms of how we evaluate acquisitions. So look, we keep -- we remain open-minded about any opportunities that turn up, regardless of scale.

Your next question comes from the line of James Targett from Berenberg.