Kerry Group plc (KRZ) Earnings Call Transcript & Summary

Good day, and welcome to the Kerry Group Third Quarter 2020 IMS Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to William Lynch, Head of Investor Relations for Kerry Group. Please go ahead, sir.

Good morning, everyone, and thank you for dialing in to Kerry's third quarter interim management statement investor call. As per our interim results update, we are hosting today's call from different locations, so please bear with us if things are not quite as smooth as they would normally be. I'm joined on the call by our CEO, Edmond Scanlon; and our CFO, Marguerite Larkin. Edmond and Marguerite will take you through a brief 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, and good morning, everyone, and thanks for dialing in this morning. Over the next 10 to 15 minutes or so, Marguerite and I will update you on our business performance, and we'll also outline the progress we've made across a number of strategic fronts during this last quarter. So starting with Slide 4, which gives a good snapshot of the dynamics we've seen so far this year, which has seen significant variability and complexity across our industry. The agility and ingenuity of our teams in adapting to these changing conditions has been key to our performance in the third quarter, which was in line with the guidance we gave at the H1 results update. So overall, we're very pleased with the rate of recovery in the third quarter, starting firstly with the foodservice channel. We maintained a good trajectory of recovery through the third quarter, exiting the period back 10%. And this improvement was achieved primarily due to 2 main drivers: firstly, through a large percentage of our foodservice business being weighted towards chains and bigger players who have adapted better to the COVID-related restrictions; and secondly, we also had a number of innovations that were launched in the third quarter. Then on the retail channel, this channel continued to perform well. Key drivers of performance here were health and wellness products, such as immunity enhancements and probiotics, plant-based offerings and clean label taste solutions. On the M&A front, this morning, we announced 2 new acquisitions, which we're very excited about. Firstly, Bio-K Plus International, a company based in Canada. And it's a leading biotechnology company with a number of probiotics in beverage and supplement applications. It has a really strong science foundation with a number of clinical trials and unique claims around digestive health. It currently serves the North American market, and we do see significant potential to expand this business and leverage its technologies into different applications and into different geographies, similar to what we've done with Ganeden over the last 3 years. Then moving on to Jining Nature, this is a company based in Shandong Province in China, and it has leading capabilities in savory taste for the local meat, snacks and meals end-use markets. And we see great potential for this business to enhance Kerry's presence in the savory taste area in China. Of course, China will continue to be a key market for Kerry going forward. Just from a timing perspective, Bio-K has just completed, and Jining Nature is on track to close before the end of the year. So overall, we're very excited about the potential for these 2 businesses. And with that, I'll now hand you over to Marguerite for more detail on our performance.

Thanks, Edmond, and good morning, everyone. So now turning to Slide 5 to update you on our financial performance. On the right-hand side, you will see we have made strong progress in volume and margin recovery in the third quarter. Our group volumes were 4.7% lower year-to-date, and importantly, you can see the positive rate of overall recovery in Q3, driven by a significant improvement in our Taste & Nutrition business, where we had a volume reduction of 1.9% in the third quarter. On group reported margin, was 130 basis points lower year-to-date as a result of 2 key drivers. The first and most significant was the operating deleverage we experienced, resulting from a large percentage of foodservice customers being impacted by lockdowns and restrictions that were introduced across the globe. And secondly, the COVID-related costs we've incurred across our manufacturing footprint of almost 150 facilities, which have been partially offset by cost mitigation actions we have taken. Taste & Nutrition margins were 80 basis points lower in Q3, which was a significant recovery, while Consumer Foods margins grew well in the third quarter and overall by 10 basis points year-to-date. Now turning to our revenue performance on Slide 6 and looking at the breakdown of revenue components. The overall reduction in reported revenue of 4.5% was driven by reduced volumes of 4.7%, price increases of 0.3%, principally driven by increases in our Consumer Foods business and the adverse translation currency impact of 1.1%, and the positive impact overall from acquisitions of 1%. Moving now to Slide 7, and focusing on our Taste & Nutrition business, which had volume reduction of 4.4% in the period and 1.9% in the quarter, which represented a significant improvement on Q2. Within the foodservice channel, volumes continued to recover well since April, with Q3 volume 15% lower compared to Q2 volumes, which were back 49%. The retail channel continued to deliver good growth across the third quarter, with year-to-date performance particularly strong in the beverage, meals, snacks and pharma end-use markets. Our nutrition and wellness technology portfolio performed strongly to customized solutions incorporating Kerry's broad protein portfolio, fermented ingredients, probiotics and immunity-enhancing technology. And I'm pleased to say that performance in developing markets improved approaching prior year levels with lower volumes of 1% in the quarter and 2.9% year-to-date. And on trading margins, the year-to-date performance has been driven principally by operating deleverage and COVID-related costs. We have seen a significant recovery in the third quarter, as I mentioned. Turning to Slide 8 and looking at Taste & Nutrition performance from a regional perspective. Firstly, to the Americas, which had lower overall volumes of 3.5% year-to-date and 3% in the quarter in North America. We delivered strong volume growth in the retail channel, with the beverage, meals and dairy end-use markets all performing well. While in the foodservice channel, we saw a continued recovery in the third quarter, led by performance with quick service restaurants. Our business in Lat Am was impacted later in the period by COVID, and we have started to see signs of recovery in Brazil, in particular, as we move through the third quarter. In Europe, we saw a significant improvement in the third quarter with lower volumes of 2.1% versus the 17% volume reduction in Q2. The retail channel performed well, driven by beverage, snacks and meat end-use markets, while foodservice had a strong broad-based recovery across the region. In APMEA, overall, we returned to growth in the third quarter, with strong performances in China and the Middle East. The foodservice channel continued to recover with variability across the region aligned to local conditions. On the strategic front, we made good progress in expanding our capacity and deploying our technology capabilities in the region, most notably in China and the Middle East. So now turning to Consumer Foods on Slide 9 for a few moments. The business had a good recovery in the third quarter with strong performances within the portfolio, most notably the Richmond, Fridge Raiders and Cheestrings brands. Underlying business volumes grew 1.4% in the third quarter and 0.1% year-to-date. Including the impact of the previously reported ready meals contract, overall business volumes were back 6.1% year-to-date. Trading margins improved by 10 basis points as efficiencies were partially offset by COVID costs and market pricing. And finally, the performance of our meat-free ranges under the Richmond and Naked Glory brands was very strong, as both brands continue to take market share and to extend their ranges. And moving now to Slide 10 to cover off a number of other matters. Kerryconnect, I'm pleased to say that our deployment in North America is on track and progressing well, a significant achievement given our teams are predominantly deploying virtually in the current environment. Raw materials for Taste & Nutrition, these were broadly neutral, while we had low to mid-single-digit inflation within our Consumer Foods business. We are expecting Taste & Nutrition to remain similar for the remainder of the year, with inflation in Consumer Foods softening. Our net debt was EUR 1.8 billion at the end of the period. And on currency, we are currently estimating a translation currency headwind of circa 3% on the earnings for the full year. And finally, in summary, before I hand over to Edmond. Overall, our financial performance has improved significantly in the third quarter, with notable improvements in business volumes and trading margins, and we're currently expecting to see further improvements across both measures in the final quarter. So now back to Edmond.

Thanks, Marguerite. So before I get on to the guidance, I just wanted to give you a high-level overview of our new sustainability strategy, Beyond the Horizon, which we launched just a few weeks ago. We outlined the framework to you back in February, as you can see here on Slide 11, and it's centered around innovation enabling sustainable nutrition, which is core to our growth strategy and aligned to our purpose to Inspire Food, Nourish Life. So looking at the 3 pillars, as you see here, firstly, we're going to continue to partner with our customers to deliver more impactful nutrition and more impactful innovation. Secondly, we're going to continue to deliver on our own sustainability commitments, and we have a strong history and track record of delivery against all of our sustainability targets. If I take, for example, carbon. In the last 5 years, we've increased our overall business volumes by 20% while at the same time, reducing our absolute level of carbon emissions and reducing carbon intensity by 23% in the same period. We have targeted action plans on how we're going to deliver on all of these 2030 commitments, and we feel confident that we'll meet and build on these targets. The combination of achieving these targets, in conjunction with innovation, which I'll speak to in the next slide, will mean a better impact for our customers, people, society and the planet. So moving now on to Slide 12, and specifically on the area of innovation. Innovation is central to our growth strategy. So what we're seeing more and more is that sustainability is now becoming central to our innovation strategy. And there has been a significant increase in consumer and customer demand for health and wellness products that also protect people and the planet, which led us to setting our sustainable nutrition goal. So under this framework, we're currently reaching 1 billion people with ingredients that are defined as balanced and positive nutrition. And our aim is that by 2030, we'd be reaching over 2 billion people with sustainable nutrition solutions. And this growth target is not something that Kerry can achieve on its own. We're working across the entirety of our customer base right across the nutrition spectrum. The level of engagement and the number of dedicated sustainability calls with customers this year has been incredible. For me, it's one of the biggest door openers with customers that I see, as all commercial teams are showing our customers not only the value that Kerry can add to improve their products, but also how this will help them achieve their overall sustainability goals. So the slide here just has a few examples of what Kerry's capabilities can deliver for the life cycle assessment of a product, whether it be reducing carbon or water usage by 90%, reducing saturated fats and delivering cleaner labels, all while ensuring these products taste great. So just to close here, the key point is the drive towards sustainability, we believe, is a total win-win for Kerry and our customers, and we're really excited about the potential that we see here. So turning to Slide #13, in future prospects. Within Taste & Nutrition and firstly, in our foodservice channel, we're seeing good recovery. And we're continuing to partner with our customers on new menu developments. Our retail channel continues to deliver good growth, and we have a very healthy innovation pipeline and strong customer engagement. Our Consumer Foods business continues to see some strong performances across the portfolio, while we continue to selectively focus on growth opportunities. We will continue to invest for growth and pursue M&A opportunities aligned to our strategic growth priorities. And finally, while there remains a high level of uncertainty, based on current market conditions, we expect business volumes to return to growth in the final quarter. And we're forecasting a full year earnings per share decrease of 8% to 11% in constant currency. So with that, I'll hand you back to the operator, and we'll be glad to take any of your questions.

[Operator Instructions] We can now take our first question from Graham Hunt from Morgan Stanley.

Just 2 for me, if possible. You spoke about new opportunities coming from growth in the food delivery channel and foodservice, and I wonder if you could give a sense of how much that contributed to the recovery you saw this quarter versus recovery in existing volumes? And then how much do you think those opportunities are going to impact your strategy now as we're seeing lockdown measures reintroduced across a number of markets, particularly in Europe? And then second question on sustainability. As you mentioned, a number of your technologies can materially impact the carbon footprint and other sustainability metrics all of your customers' products. How meaningful do you think this could be in your existing portfolio, given most of your global FMCG customers now have net carbon-neutral targets? And is Kerry going to be a key partner in helping them achieve it? And is this something you've always been engaged with them on? Or should we see it as more incremental going forward?

Yes. Thanks, Graham. I would say -- maybe on the second part of the question first, I would say this is -- from a sustainability standpoint, what -- how we're thinking about that is that this is not something else that we need to do. We did update our targets and give you some more color in terms of what our sustainability goals are and what the big reach goal is from a nutrition standpoint. But it is important to recognize that this is not something new that we need to do. This is something that we have been doing, we have been working with our customers on, but I have seen a significant step change in terms of the level of engagement around sustainability, and the step change has really come more on the nutritional impact that we can help our customers to move along that nutrition spectrum. But it's not something new that we're doing, it's something that we've been doing for several years like the example that I just gave on the presentation there. In terms of foodservice, I would say maybe while we're -- and maybe just, let's say, talking about food delivery as such, because our impact really on food delivery is improving on the delivery experience for our customers. But the bigger point on foodservice and the recovery that we saw in foodservices that if we see the bigger players being better able to cope with restrictions. Restrictions have been imposed, lifted, reinforced over the last several months, and the larger players are better able to handle those restrictions. And like we said in the half 1, first point was that 75% of our exposure to that channel is orientated towards the larger players. And number two, we've seen a significant amount of activity, innovation activity from those larger players, both in improving that delivery experience, number one; but also the reinstatement of LTOs. So -- and so basically, what I'm saying there is that what we've seen -- or what we said we saw happening in Q2 with some of those changes that we flagged actually came true in Q3 and into Q4.

We can now take our next question from James Targett from Berenberg.

A couple of questions from me. Firstly, just actually sticking with foodservice. So obviously, the return to your anticipated return to positive volume growth in Q4, is that, I assume, driven by your expectation of further improvement in foodservice volume? Or do you expect a reacceleration on the retail side? I guess my question on the foodservice is that some of your peers have talked about some restocking benefits then in Q3, and of course, as we see big markets like Europe would go back into lock down, there's a lot of concern that these foodservice volumes could pull it again in the fourth quarter. So I just wondered what gives you that confidence that you can deliver further improvement in volumes in Q4, considering that outlook for foodservice and maybe the benefit you got in Q3 from restocking -- from customer restocking? And then secondly, just on the margin, could you maybe give us some color of how the percent of COVID cost were trending in sort of Q2, Q3, and what your anticipation is for Q4, just to get an idea of to what extent that maybe those easing is driving the margin improvement?

Just to take the second part of your question first, and then I'll ask Edmond maybe to give a perspective on the foodservice question. So in terms of the COVID cost in the second half, it is fair to say that we continue to incur COVID-related costs. You remember at the half year that we provided some detail in relation to the cost, they primarily relate to, firstly, costs ensuring the safety and well-being of our employees, including personal protective equipment, zoning, segregation and other employee support cost; and secondly, cost to ensure continuity of supply, including additional labor, raw material costs, stockholding and distribution costs. And they continue to be a feature just given the current environment. Obviously, we continue to take a number of short-term actions to reduce the impact of the cost, like we updated at the half year, and there's various measures that we have deployed. That being said, it is fair to say that an element of cost will continue. And as we currently see things, we would expect the net impact in the second half is to be similar to H1. Again, you'll appreciate many moving parts in the current environment. In terms though of the overall margin and the margin in Q4, we are looking at a further recovery in margins in the fourth quarter, with volumes improving and very much linked to volumes improving. And obviously, as I referenced, the COVID-related cost will continue. So maybe with that, I'd ask Edmond on the foodservice.

Yes. Thanks, James. And maybe just to follow on from the last question, just to maybe frame, first of all, our overall foodservice volumes improved from being back almost by half in the second quarter to 15% in the third quarter, with the run rate of 20% lower entering the quarter and 10% lower exiting September and exiting the end of the quarter. So in terms of, I suppose, maybe Q4, first of all, we're in the first week of November, and we saw October performance in line with 2019, which we're pleased about. We also see current trading as quite solid. And we have visibility on a number of product launches coming to the market in the next few weeks. So the combination of all this, I suppose, we believe we will be in positive territory from a volume growth perspective in the fourth quarter.

Sorry, sorry, just to clarify, when you said -- when you're talking about the -- in line in prior year in October, so are you talking about foodservice? Just foodservice? And when you just talked about that positive, sorry, return to positive volumes in Q4, again, is that about T&N or you also think foodservice will be positive in Q4? Sorry, just to clarify.

Yes. So sorry, James. Yes. So to clarify, I was talking about a -- from a total T&N perspective, October performance is in line with 2019. And in terms of the outlook, we do see volumes to be in the positive territory for the full quarter -- for the fourth quarter for total T&N.

[Operator Instructions] We can now take our next question from Jason Molins from Goodbody.

You've answered quite a few questions on foodservice, so I won't delve into that in any more detail. But maybe just in terms of some of the M&A deals that you've completed, can you give any sense of quantum of those combined deals? And maybe in particular on the Bio-K, the probiotics business, what sort of complementary opportunities that gives you over what you already had with Ganeden? That'd be something I'd be interested to explore. And then just sort of finally, in terms of your guidance, the minus 8% to minus 11% that you've set out, what are -- given we're at the start of November, what do you think are some of the key issues that maybe get you either at either end of that sort of guidance range?

Jason, I might just take your first question on acquisitions, before handing to Edmond to give some further color on the acquisitions. So firstly, we're very excited about the acquisitions that we announced this morning. In terms of consideration, the consideration for the 2 acquisitions we announced this morning was just north of EUR 200 million and towards a high-teens EBITDA multiple. So maybe just to bifurcate it, I'll hand to Edmond to give some additional color on it.

Yes. Jason, thanks for the question. So maybe I would like maybe to touch on both acquisitions, because we're quite excited by both of them. But the first one, in terms of Bio-K, first of all, it brings with it a very strong science and clinical foundation. There's a very strong ethos in this company from a clinical and a science background, which is the first positive. The second point here is that it is the only probiotic in the world that's approved by Health Canada in reducing certain antibiotic-associated conditions. And the third point is that it opens up a new channel to us, which is the health care channel. And we believe, in time, and I'm sure with some investment, we will be able to push more of our existing portfolio through this channel. And it also then gives us a slightly bigger exposure to the dietary supplement market, so quite complementary to Ganeden. We do see it evolving more or less in the same way as Ganeden. As we mentioned in the presentation, there will be opportunities to grow this business by expanding the end-use market reach as well as the geographic reach. So that's it in Bio-K. But just in terms of Jining Nature, that brings with it a strong local Chinese savory taste capability. It has a strong reputation in the local Chinese market for that capability. It brings with it a new manufacturing facility that they've been transitioning into over the last few years. And that's pretty much completed at this stage. And their focus has been on natural authentic savory taste, which would complement -- and those complements are on par from a food approach. And then in terms of the guidance, I suppose, look, it's somewhat similar points that I made in the previous question. We are in the first week of November. We have a relatively -- a decent level of visibility on how things are playing out. Trading is solid. And we do know we have a number of new launches kicking in here in Q4 and like we said we would at the H2 -- sorry, at the H1 presentation.

We can now take our next question from John Ennis from Goldman Sachs.