Kerry Group plc (KRZ) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Kerry Group Annual General Meeting. I must advise you that this conference is being recorded today, the 30th of April 2020. I would now like to hand the conference over to the Kerry Group Chairman, Mr. Philip Toomey. Please go ahead, sir.

Good afternoon, ladies and gentlemen. My name is Philip Toomey, Chairman of the Board of Directors of Kerry Group plc. Welcome to the 35th Annual General Meeting of the company, which is being conducted in unprecedented circumstances due to the restrictions in place to control the spread of COVID-19. I would like to start by saying that I hope that you and your families are safe and well at this time. The Kerry leadership team has done an excellent job managing this crisis, and I am heartened by the phenomenal response by the company to the ongoing corona '19 challenge. Our CEO, Edmond Scanlon, will provide more detail on this in the course of his presentation today. I want to extend a welcome to those of you who are joining the meeting via the webcast rather than attending in person, as many of you might normally do, and I now declare the meeting open. This meeting has been adjourned from the original planned location and has been reconvened in Kerry's Global Technology and Innovation Center in Naas as the original venue is temporarily closed, and the new venue and arrangements allow the company to meet the requirements of the government's COVID restrictions. The meeting will proceed with a minimum number of shareholders present to constitute a quorum, which under Article 55 of the company's constitution is 3. Attending the meeting with me today are our Chief Executive Officer, Edmond Scanlon; and our Chief Financial Officer, Marguerite Larkin. I can confirm that a quorum has been formed for the purpose of the meeting. All of our directors and professional advisers, including the company registrar and statutory auditor, have been requested to join this meeting via the webcast rather than attending in person. The meeting will be conducted swiftly and efficiently and will be limited to the formal business required. There will be brief presentations from our Chief Executive Officer, Edmond Scanlon; and from our Chief Financial Officer, Marguerite Larkin. I now turn my attention to the formal agenda for today's Annual General Meeting. Notice of the Annual General Meeting and the Chairman's letter were sent to our shareholders on 27 March 2020 and published to our website and regulatory news services on 30 March 2020. Therefore, I take the notice of the meeting as read. I am pleased to report that in our preliminary statement of results for 2019, as announced on 18 February, we reported a strong financial performance for the year 2019. Further insights -- for further insights on this, I would now ask Marguerite Larkin, our Chief Financial Officer, to take us through the financial highlights for that year. Marguerite?

Thank you, Philip, and good afternoon, everybody. Just to echo Philip's comments, I hope you and your families are keeping safe and well. Before I start, I will just draw your attention to the usual disclaimer regarding forward-looking statements. And over the next few minutes, I will take you through the details of our financial performance in 2019. 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 financial performance. So now turning to Slide 5. And looking back at 2019, we would characterize it as a strong year for Kerry. We delivered very good performance, while at the same time, making significant progress right across our strategic growth priorities. Firstly, we delivered very strong overall growth. We grew revenue by 10% to EUR 7.2 billion, trading profits by 12% to over EUR 900 million. Secondly, we are particularly pleased how our integrated solutions capability was deployed in the year as we delivered a number of significant innovations in partnership with our customers that drove growth across a number of categories. And thirdly, we continued our strong track record of growth in developing markets with another year of 10%-plus volume growth. In 2019, we had over EUR 1.6 billion of revenue in developing markets, which is a very strong achievement given our expansion in these markets has been almost exclusively organic over the last 25 years. We also completed a total of 11 acquisitions in the year for a total consideration of EUR 562 million. And now to our financial highlights and our performance on each of our key financial metrics in turn. Firstly, as I mentioned, 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, which represented growth of 9.5% in constant currency. We delivered good margin progression with trading margin up 30 basis points, and we grew constant currency adjusted EPS by 8.3%. Return on capital employed 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 7 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 revenue contribution in the year of 4.7% from acquisitions or just over EUR 300 million. The most notable of these acquisitions 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, a very good performance from a top line perspective. And turning for a moment to Slide 8 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've spoken about previously. Taste & Nutrition achieved good volume growth of 4%, a strong performance against the backdrop of softer market volume growth rates. 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 free cash flow on Slide 9. Another year of good cash conversion. We generated free cash flow of EUR 515 million and cash conversion of 74% in the year. Looking at some of the components items. Firstly, trading profit was up EUR 97 million to EUR 903 million. Average working capital increased by EUR 89 million primarily due to investments in stocks reflecting the increased scale of our business and 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 to opening our new taste facility in India, which will serve our Southwest Asia market. We continue to be disciplined and align our investments to our strategic growth areas. So overall, a good free cash flow performance of EUR 515 million and cash conversion of 74%. Moving now to our debt profile on Slide 10. 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 just under 6 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 very important in the context of the current environment. So just to wrap up on the 2019 performance. Overall, I would say 2019 was 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. So with that, I'll turn you back to our Chairman.

Thank you, Marguerite, for the update. I would now like to ask our Chief Executive Officer, Edmond Scanlon, to comment on our response to the COVID-19 pandemic and to give you an update on 2020. Edmond?

Thank you, Chairman. Firstly, I'd just like to take this opportunity to thank everybody for dialing into our AGM. And I hope you and your families are keeping well and staying safe. So I'd like to just take a few minutes to talk about our first quarter results and the challenges, impacts and opportunities the current COVID-19 crisis is presenting Kerry, our customers and the industry at large. So at an overview level, we came into the year with really good momentum. And as Marguerite shared, we had a very strong finish to 2019. And we also had strong growth coming into January and February before the lockdowns and before the restrictions on movements were introduced. North America had a very good quarter, and our nutrition and wellness portfolio continues to drive good performance and strong business development. COVID-19 has impacted and will continue to impact our business, particularly in our important foodservice channel. On the strategic front, we made very good progress in the first quarter. We announced the significant investment at our Rome, Georgia facility in the United States, and this will be a truly world-class ingredients manufacturing facility for a wide range of protein applications. I'm also delighted to report that we moved into our new state-of-the-art technology innovation center in Shanghai in China. And we also acquired a company called TecniSpice, which is a savory taste business in Guatemala. And finally, and most importantly, our people's response to COVID has been truly inspiring. As an industry leader providing food and beverage solutions that are consumed over 1 billion times daily, we are aware that keeping the food supply chain intact is more critical than ever. And our purpose and our values have served as our guide. And I'm proud of the response of our people, and I'd just like to take this opportunity to sincerely thank them for all their efforts. So then moving on to the next slide and our role and priorities. From the outset -- from the very outset of COVID-19 in China back in January, we've managed our response very much according to these 3 priorities: safeguarding the safety and well-being of our people, ensuring continuity of supply for our customers and supporting our local communities. And a large percentage of our employees have been working from home for the last 6 weeks now. We've increased zoning, segregation, use of personal protective equipment right across our entire global footprint of 150 manufacturing facilities. We're ensuring our solutions continue to reach customers and consumers around the world, supporting our customers with real-time insights and helping them to adapt their offerings to address the ever changing consumer demands. At a number of our facilities, we've shifted production to making hand sanitizer. We continue to donate food, PPE and sanitizer to frontline staff, and through the MyCommunity initiative, we're also pledging up to 26,000 days and EUR 1 million to support local community initiatives. So moving on to the next page. Look, we've all experienced major changes in how we live our daily lives. We're seeing significant short-term shifts in market dynamics right across the end-to-end supply chain. And I've shown this slide before, and I think it's really helpful to frame what's happening across our industry right now. So looking first from a consumer standpoint at the left-hand side of the page. How people are purchasing, where people are consuming and what people are purchasing and consuming have all been impacted. And on how people are purchasing, the changes in purchasing behavior and shopping behavior are clear to everyone. And we're seeing habits that are more akin to those of 10 to 15 years ago. More people are doing that big shop in the local supermarket. Trips are much more functional and deliberate. People are sticking to shopping lists with a very notable decrease in impulse purchases. Where people are consuming has also changed, with the vast majority of food and beverage now being consumed at home. And a really important point that has developed in our industry in recent weeks is the disconnect with what people are purchasing versus what they are consuming. And we've all witnessed the panic buying and pantry loading of long-life products, leaving many shelves in supermarkets empty. And previously, retailers could accurately track purchasing habits, what you were purchasing and when you were consuming it. But this almost overnight shift in the consumer psyche has had a huge impact on our customers. And needless to say, this disconnect between purchasing and consumption has meant much more volatility for our customers. So customers are having to be much more agile, more agile than ever before, as they need to be able to pivot at pace and at scale in response to this rapidly changing landscape. And from an industry perspective, the knock-on effect of all these dynamics is profound. The robustness of supply chains are clearly being tested. Having scale, being local with the experience and the established ways of working are absolutely key. The ability to redeploy resources effectively in an expedient fashion requires an organization to have the culture, the ways of working, the flexibility and the capability to make it happen. And customers are looking for suppliers with a full support model to help them address all these short-term challenges and there's an openness to change now more than ever before. So moving on to the next slide and specifically the impacts COVID-19 has had in our business and the actions that we are taking to address. So starting with our Taste & Nutrition business and specifically the impact in China. Overall, volumes in Q1 were pretty much in line with what we've guided in February. So back over 30% in the first quarter in China, and this was weighted more towards February and March. But I'm pleased to say now that for the month of April, we are in line with last year. At a global level, creating in our foodservice channel in the month of April is back by 2/3, with some form of restrictions in place during the month of April right across the majority of our markets. The retail channel continues to be highly dynamic. We've actually set some production records in some of our manufacturing facilities serving the nutritional beverage category, while other categories are seeing much lower demand. But from an overall Taste & Nutrition retail viewpoint, we're seeing good mid-single-digit growth year-on-year in April. With regards to our Consumer Foods business, after seeing mid-single-digit growth tailwind in March, we're seeing volumes back mid-single digits in April. Again, overall, a high degree of variability and volatility by category. Chilled meals are being impacted by less impulse purchasing, and our snacking products have been impacted by the school closures. But we are also seeing positives in areas like spreadable butter and also our Oakhouse foods home delivery business, which has delivered a huge number of meals to many elderly people who are cocooning. Now moving on to the actions we've taken to mitigate the impact of COVID. In addition to the 8,000 employees now working from home, we've also brought in additional protective measures right across our entire footprint to ensure safety and well-being. We've reallocated resources from some of our facilities servicing the foodservice channel to others servicing a number of specific retail categories. We've also implemented cost measures, including suspension of all nonessential and discretionary expenditure. And finally, what has really impressed me is how we've been working in new and exciting ways with our customers through this period on a whole range of fronts, from our procurement teams sourcing key raw materials to support our customers, to our integrated operations teams sharing playbooks with customers and our nutrition and wellness teams partnering with customers to improve the immunity and functionality of their products. We've seen our pipeline in our Wellmune portfolio alone growing by 400% in the last few weeks. We've also been working with our foodservice customers to pivot their offerings into retail while also planning for post-COVID product launches. So as I said earlier, this is a really dynamic marketplace. Things that took months before are now taking days, and this is where we're seeing our people really stepping up to the plate. So now moving on to the outlook on the next slide. Firstly, as we outlined in our release this morning, due to the uncertainty and -- around the duration and impact of COVID-19, we're withdrawing our full year 2020 guidance. So moving on to our Taste & Nutrition business, we're managing through the short-term challenges to emerge as an even stronger customer partner. The foodservice channel remains challenged, while restrictions are still in place. We're focusing on opportunities in more resilient areas of the channel while planning with customers on menu developments for later in the year. The retail channel continues to deliver good growth as Kerry's core creation model and leading solutions offering are enabling customers to react with speed. We've also got a very good innovation pipeline to drive growth once we emerge from this crisis. From a Consumer Foods standpoint, we continue to see changes in consumer purchasing behavior during the period of restrictions, and this is driving significant volatility across categories. We will continue to invest for both organic growth and continue to pursue M&A opportunities aligned to our strategic growth priorities. Our unique business model, broad taste and nutrition portfolio and our industry-leading integrated solutions capabilities are more critical now than ever as we support our customers throughout this very changing -- much changing environment. So before I finish and on behalf of our 26,000 employees all over the world, I just want to thank you for your ongoing support and confidence in our future. So thank you, and I now hand you back over to the Chairman.

Thank you, Edmond, for that. We are now going to move on to the formal business of the meeting. No questions were received by the due date from shareholders in advance of the meeting, and in the current environment, there will be no live question-and-answer session this year. Under normal circumstances, we would vote on resolutions put to the AGM based on the show of hands of those present in person and display the proxy votes received. This year, given the circumstances, we need to adopt a different process. The company's articles of association provide for voting by poll if it is duly requested by the members or the Chairman. Under the current circumstances and in accordance with Article 60 of the Company's Articles of Association, as Chairman, I propose that each of the resolutions in today's notice of meeting are put to a vote by way of a poll. The Annual General Meeting has been convened for the purpose of considering 9 resolutions, the full details of which are set out in the notice of meeting. Attendees via the webcast should now be able to see the 9 resolutions on their screens. Of the 9 resolutions being voted upon today, 6 are ordinary resolutions, which, in order to be passed, must be approved by a simple majority, that is 50% plus 1 share voting in favor. Those ordinary resolutions are identified in the notice of meeting. The remaining 3 resolutions are special resolutions, which, in order to be passed, must be approved by a majority with 75% voting in favor. Again, these special resolutions are also clearly identified in the notice of meeting. To those of you who have joined us via the webcast, please be advised that there is no webcast voting facility available today. For shareholders who submitted their proxy votes before the meeting, where the Chairman was appointed as your proxy, your votes will be included in the poll. I have received proxy votes of circa 112 million, representing approximately 63% of the company's issued share capital in respect of all of the resolutions in the notice of meeting. Where I have been given discretion to vote, I will vote in favor of the resolutions. I now propose that each of the resolutions is put to the meeting, and I direct that the company's registrar should commence the poll and deliver the results to me once they have completed the formal process. I expect that this process will be completed within the next hour or so. The results of the poll will be published to the company's website and to the regulatory news service as soon as possible after the meeting has concluded. As there are no other matters on the agenda, that concludes the formal business of today's meeting. I would, however, like to make a number of concluding remarks. As Edmond has reported, overall, from a performance perspective, we continue to deliver solid growth in the first quarter of 2020 across our business considering the significant impact of COVID-19. The Americas, in particular, delivering strong growth, and importantly, we continue to invest in our strategic priorities to underpin sustained growth in the future. Clearly, we are living through unprecedented times, and I would like to compliment Edmond and the leadership team in Kerry for their swift and decisive action with the onset of COVID-19. The clarity of focus around protecting and safeguarding our people's health and safety, ensuring our customers have a continuous supply of product and supporting the communities in which we live and work has served the company well. And we look forward with measured confidence to the years ahead. May I also record my appreciation to the members of the Board of Directors for their contribution, to management at all levels in the Kerry organization and to all employees for their individual contributions to the group's strong performance in 2019. I would like to particularly thank one of our nonexecutive directors, Mr. Jim Kenny, who, having served as a nonexecutive director of the company for the past 9 years, retires from the Board after this meeting. Jim's contribution to the Kerry Board was invaluable, and we wish Jim all the very best in the years ahead. A sincere thanks also to our shareholders for your continued support and to the media for their continued interest in reporting on Kerry's activities. I thank you all for attending today's Annual General Meeting. Many thanks, and that concludes today's proceedings. Thank you.

That does conclude the conference for today. Thank you all for participating, and you may now all disconnect.