Kerry Group plc (KRZ) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Kerry Group Preliminary Results 2020 Conference Call. [Operator Instructions] I must also advise you that this conference is being recorded today. I would now like to hand the conference over to Mr. William Lynch, Head of Investor Relations. Please go ahead.

Thank you, operator. Good morning, and welcome to Kerry's full year 2020 results call. As in our previous calls, we are presenting from different locations, so hopefully, things run smoothly again, but please bear with us in the event of any technical issues. On the call is our CEO, Edmond Scanlon; and our CFO, Marguerite Larkin. Edmond and Marguerite will take you through the presentation, and we will then 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 thank you for dialing in today. So we'll get right into it, and turning please to Slide 4 and the overview for the year. 2020 was a truly unprecedented year where all our daily lives changed overnight. And we're really proud at Kerry to have played our part through the pandemic. When we spoke this time last year, we highlighted the impact we were seeing in China from COVID-19. And as it spreads globally, it had a profound impact on our customers and on consumers. What's been most impressive for me is the strength of our recovery through the year. So if you look here at the left-hand side of the slide, you can see the trajectory of our recovery. After the significant impact in the second quarter, our volumes improved strongly in Q3 and returned to growth in Q4 in line with our guidance on our last results call. And the key dimension to get an insight into our performance in Taste & Nutrition is to look at our business by channel. So our retail channel, which now accounts for 3/4 of our Taste & Nutrition revenues have sustained volume growth, strong volume growth, through the year at 4%, primarily through growth in authentic cooking, plant-based offerings and health and wellness products. Volumes in our foodservice channel decreased by 19% overall, but what I'd highlight here in particular is the continued recovery we made through the second half of 2020 with volumes back 8% in Q4, representing a significant market outperformance and really emphasizing that proactive nature of our business model as we continue to work closely with our customers right through the period. And then on strategic developments, we made really good progress across a number of strategic fronts in the year despite the challenges paused by COVID-19. We commenced the strategic development of our Georgia, U.S. facility which will have a world-leading manufacturing capability for integrated solutions across a variety of protein applications. We also moved into our new innovation center in Shanghai where we have seen really strong in-person customer engagement and innovation with both international and local customers, especially across the second half of 2020. I would like to commend our people for how seamlessly they have adapted to virtual engagement with our customers globally, again, right through the year. And I must say, personally, I can't wait to get back out there to meet customers face-to-face in the not-too-distant future. We also officially launched our new sustainability program, Beyond the Horizon, which is centered around innovation, enabling sustainable nutrition. We're really excited about the drive for sustainability from our customers, again, very much in line with the evolving consumer demands, which we'll talk a little bit more about later on. This provides a fantastic opportunity to showcase Kerry's true breadth of capabilities, and we're presenting at CAGNY in a couple of days, and we're going to show you exactly what sustainable nutrition means for Kerry and how we're working from ideation right through to launch, and now beyond this, right through to impact. Finally, we made a number of strategic acquisitions in the year. We previously announced the acquisitions of Jinning Nature in China, TecniSpice in Guatemala and Bio-K Plus International based in Canada, and I'm pleased to say that the integration of these businesses is progressing well. And we've just announced our intention to acquire Biosearch Life, which is a leading biotechnology company based in Spain. And we're really excited about the capabilities that these companies bring to Kerry, and we'll give you a little bit more color on each of them later on in the future prospects section. So with that, I turn to Slide 5, and the overview of Taste & Nutrition. So reported revenue for Taste & Nutrition came in at EUR 5.8 billion, which represented an overall 3% reduction in business volumes in the year, but most notably, a return to volume growth of 0.7% in Q4, which you can see here on the chart on the right-hand side. Trading margin at 14.2% was back on the prior year due to operating deleverage and net COVID-related costs, which Marguerite will go into in a little bit more detail later on. And as I said in the previous slide, our foodservice performance recovered strongly through the second half of the year. And our retail channel delivered sustained growth, particularly in beverage, snacks, meals and pharma, and we had a really strong performance across our nutrition and wellness portfolio through solutions incorporating our broad range of protein solutions, fermented ingredients, probiotics and immunity-enhancing technologies. And finally, business volumes in developing markets were back by 1.2% in the full year and up 3% in Q4, led by performances in China, Brazil and also in the Middle East. So then turning to Slide 6 and the performance by end use market, and as we said back in Q1, we've tried to give you as much of a line of sight as possible of our business performance right through the period. And this slide gives you the breakdown of our performance by end use market. But as restrictions and lockdowns impacted our performance across our EUMs in the foodservice channel, we've also included the volume performance by end use market for the retail channel on the slide here, just to help you to understand the dynamics of the year. So just to call out a few highlights from my perspective on the retail channel, beverage had an excellent performance through nutritional, plant-based and low -- or no-alcohol innovations in the Americas and Europe. Snacks had a very strong growth through an increase in demand for healthier snacking options. And also in -- of course increased at-home consumption. Meals had a very strong growth through clean-label innovations, incorporating our natural stocks and broth capabilities, with also a number of plant-based launches in the year. And our pharma business had strong growth driven by cell nutrition and immunity-enhancing technologies. So then moving to Slide 7 and our regional performance within Taste & Nutrition. The Americas region reported revenue of EUR 3.1 billion, which represented an overall volume reduction of 2.5%, and a return to volume growth of 0.5% in Q4. Performances in North America was led by beverage, snacks and meals. Within LatAm, Brazil also returned to growth, while market conditions in Mexico and CaCar remained a little bit more challenged. Reported revenue in Europe was EUR 1.4 billion, with overall business volumes back 5% in the year. The region recovered well through Q3 and Q4, but at a slower pace than the other regions with Q4 back 0.4%, as growth here in retail was offset by the impact of restrictions on the foodservice channel at the -- close to the end of the year. APMEA reported revenue of EUR 1.2 billion, representing an overall volume reduction of 1.9% in the year. Volume grew by 2.8% in Q4 with the region having already returned to growth in the previous quarter. The retail channel performed well, particularly in China and the Middle East, while foodservice continued to recover strongly and ended the year with the strongest exit rates of each of the 3 regions. And finally, we made good progress in expanding our capacity and deploying our technology capabilities both in China and the Middle East. So turning to Slide 8 and our Consumer Foods division, reported revenue for the year was just under EUR 1.3 billion, which represented an overall volume reduction of 2.6% and underlying volume growth of 2.2%, excluding the ready meals contract exit. This growth included a particularly strong last quarter with volume growth of 8.8%, driven by a good performance right across the portfolio and some retailer stocking at the end of Q4. Trading margins in the division increased by 20 basis points with efficiencies partially offset by COVID-related costs. And finally, we had really strong growth in meat-free categories, and we're particularly excited about the upcoming new plant-based innovations under both the Richmond and the Fridge Raiders brands. So with that, I'll hand you over to Marguerite to give you some more detail on the financial performance.

Thanks, Edmond, and good morning, everyone. Over the next 10 minutes or so, I will take you through our financial performance. We delivered a resilient performance in the year with revenues of EUR 7 billion, trading profits of EUR 797 million and adjusted earnings per share of EUR 3.454, despite the challenges posed by COVID-19 during the year. Now to look at our financial overview in more detail on Slide 10, reported revenue of EUR 7 billion reflected a reduction in volumes of 2.9%, trading profit of EUR 797 million and trading margin of 11.5% were lower year-on-year, which I'll expand on when we look at the margin bridge shortly. This resulted in an adjusted earnings per share of EUR 3.454, which was a reduction of 9.4% in constant currency terms. Return on capital employed was 9.8%, and we generated EUR 412 million of cash in the year. So now turning to our revenue performance on Slide 11 and taking each of the components in turn, overall, reported revenue reduced by 4% in the year, comprising a number of elements: reduced volumes of 2.9%, which I will give you more detail on momentarily; a translation currency impact of 2.3%; and a transaction currency impact of 0.1%; price increases of 0.3%, principally driven by increases in our Consumer Foods business; and a positive impact overall from acquisitions of 1%. Moving to Slide 12 and the breakdown of our revenue volume performance, on the left-hand side, you will see our overall group revenues by business. And on the right-hand side, you will see Taste & Nutrition's quarterly volume performance by channel across the year. I am pleased to say that the retail channel has continued to perform strongly over recent quarters, supported by launches in immune health and plant-based products across a number of end use markets. Within the foodservice channel, you can see from the trend line the trajectory of recovery since Q2. Key to the continued recovery in volume performance through the second half has been a number of new innovations with customers, targeting evolving consumer needs within the channel. So now turning to our margin performance and the group trading margin bridge, overall, group margins were down 100 basis points in the year due to the impact of COVID-19. Given the impact on our volumes due to our foodservice customers having to dramatically reduce their operations, particularly during the initial period of lockdowns and restrictions, we incurred significant operating deleverage in the second and third quarters, resulting in an overall decrease of 60 basis points in the year. The net effect was neutral from a portfolio mix perspective. During the year, we incurred additional costs in relation to COVID-19, including costs on PPE, zoning and safety protocols on our sites; additional labor to cover absenteeism; alternative sourcing and stockholding and distribution costs. These were partially offset by a number of short-term cost management initiatives, including the suspension of all nonessential and discretionary expenditure, resulting in an overall net impact of 30 basis points. There was a 10 basis point reduction on margins due to pricing, driven by our Consumer Foods business and a net positive margin contribution of 10 basis points from our KerryExcel program. And we incurred 10 basis points reduction from currency, driven principally by U.S. dollar weakness in the second half of the year. This resulted in overall margins being 100 basis lower in the year, comprising 140 basis points in the first half, 70 basis points in Q3 and 40 basis points in Q4. With the return to volume growth in the fourth quarter, the driver of the 40 basis points reduction was the ongoing net COVID costs. And as we look out into '21, we're looking forward to good margin progression. Turning now to free cash flow on Slide 14, overall, we generated a free cash flow of EUR 412 million, with a cash conversion of 67% in the year. Firstly, with a lower trading profit, as a result of the impacts of COVID-19, average working capital increased by EUR 103 million in the year. Our inventories increased due to carrying additional security stocks for our Kerryconnect deployments in North America. And we also invested raw materials and finished good stocks during the year to ensure continuity of supply throughout periods of highly fluctuating customer demand. And our receivables increased in the first half of the year, in particular, as we supported a number of customers in navigating short-term challenges. Finally, we had capital expenditure of EUR 311 million, which included the continued expansion of our technology capabilities in China and the Middle East as well as the commencement of our investments at our Rome, Georgia facility in the U.S., which Edmond referenced earlier. The overall cash conversion for the year of 67% represents an improvement in performance across the year, with a cash conversion of 46% in the first half and a good recovery with 81% in the second half of 2020. Now moving to our debt profile and credit metrics on Slide 15. Net debt was EUR 1.9 billion at the end of the year. We have a good net debt-to-EBITDA ratio of 1.9x, and our overall debt profile continues to be in very good shape, with no significant repayments until 2023, with the average -- with weighted average maturity profile of our debt at 5.2 years. And overall, we have a very strong balance sheet with a long maturity profile which will enable future strategic developments. Moving now to Slide 16. I would like to outline our plans to evolve and extend the scope of Kerry's global business services. A key part of our vision is to be our customers' most valued partner and to further advance our business-enablement strategy and support optimal resource allocation. We will be expanding the role of Kerry's global business services. There are 3 main elements to the increased scope to drive added value to our customers and our business. Firstly, for our existing Kerry GBS finance and HR activities, we will broaden the current services to integrate more knowledge-based and decision support activities. In finance, this will provide real-time performance analysis to support our commercial and supply chain teams in resource allocation and value-enhancing activities in an agile way. We will further enhance our employee experience through HR self-service delivery. And secondly, we will build next-generation customer experience services revolving around regulatory and marketing initially as well as procurement and supply chain. An example within our regulatory system is product technical documentation provision in real-time to our customers via self-service portals. And thirdly, we will further invest in innovative digital analytical solutions to ensure that the expanded activity scope is delivered through optimized processes and enabled by technology, delivering insights and analysis to support decision-making as well as deepening virtual ways of working. Kerry global business services will primarily operate from 2 locations in Malaysia and in Mexico, where we will leverage the skills and experience of teams already in place. The cost of the program will be circa EUR 30 million in 2021 and EUR 20 million in 2022, with an anticipated overall payback period of 3 years. We see this very much as a step change in Kerry global business services and a logical next step in leveraging our Kerryconnect platform and key to enabling our business, enhancing continuous excellence and building and developing talent for Kerry in the future. And finally, before I finish, I would like to cover off a number of other matters on Slide 17. On Kerryconnect, I'm pleased to say that our deployment in North America is progressing well. We completed deployment at 22 locations in 2020, and we have plans to go live in a further 20 locations in '21. We will continue to review the go-live dates at a number of facilities in 2021 as we did in 2020, to ensure that we safely enable ways of working in light of prevailing COVID restrictions and conditions. Finance costs decreased by EUR 9 million, primarily due to lower interest rates with cash generation being largely offset by acquisition spend. Our pension deficit of EUR 44 million increased in 2020 as a result of lower discount rates. On nontrading items, we had a net charge of EUR 16 million, primarily due to acquisition integration costs. Raw materials had minor input cost inflation in the year. And on currency, the translation impact on adjusted earnings per share in 2020 was a headwind of 2.9%, and we are currently estimating a translation currency headwind of circa 4% on earnings per share for 2021. And finally on a nonrelated matter, last Thursday, a short note was published on Kerry Group. The note is full of inaccuracies and errors, and we strongly refute the points raised. We have reported the notes to the relevant financial regulators, the Central Bank of Ireland and the FCA in the U.K. We look forward to engaging with our shareholders over the coming weeks. And if any shareholder would like to discuss in more details, please contact our Investor Relations team. And to conclude on the financial performance before I hand over to Edmond, I'm pleased to say we delivered a resilient financial performance and strong recovery through 2020, especially given the impact COVID-19 had on our foodservice customers in the year. So with that, back to Edmond to take you through future prospects.

Thanks, Marguerite. And so moving on to Slide 19, and like we've said many times before, at Kerry, we always start with the consumer. Today, food is playing a more important role than ever in consumers' lives experiences. And we're seeing an acceleration of many of the pre-COVID trends, and consumer diets continue to shift at pace to include more environmentally friendly and sustainable food practices. Today, 85% of consumers want to know what their foods products contain. They may want to learn more about how their food is made, and this is leading to an increased desire for locally produced products. Consumers are also mindful of nutritional benefits of their food. And trust is more important than ever, with 60% of consumers influenced by how trustworthy the product feels. Demanding consumers seek socially responsible companies that not only use clean and natural ingredients but also follow ethical and sustainable practices. If we look at the right-hand side of the slide and some of the opportunities that these changes present, consumers want to see evidence of the food industry players taking clear steps to reduce food waste and carbon footprint. There are also increased expectations around supply chain integrity and community involvement. And our customers are looking for partners on this journey, and Kerry is leading with our Beyond the Horizon sustainability strategy. As consumers demand more, customers are reassessing how they best meet these evolving needs to win in the market. And despite the challenges our industry has faced, we have witnessed a renewed focus on innovation. So to conclude on this slide, our industry continues to evolve at a pace, and what's key for Kerry when cocreating with our customers to meet these changing consumer demands, is having the technology capability, the business model and the local capabilities to deliver for them. So turning to Slide 20, and this slide details how we've enhanced both our technologies and local presence in 2020. M&A is a key part of our strategy and we will continue to create significant value from M&A. We completed 3 acquisitions in the year for a combined consideration of EUR 280 million. So I'm now taking a minute just to look at each of these businesses and their strategic fit for Kerry. Firstly, Jining Nature, based in the Shandong province in China. This business brings us leading capability in the area of savory taste for the local meats, snacks, meals markets, and we see great potential to enhance Kerry's savory taste capabilities in China, which will continue to be a key markets to -- for us going forward. In LatAm, we acquired TecniSpice based in Guatemala and also with sister company, Global Spice in Costa Rica, as part of the transaction. This is a strong fit for us in the region, and similar to nature, a local leader in savory taste, providing us with strong capabilities to further grow our business in the CaCar region. Then moving on to Bio-K Plus International based in Canada, this is 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 see significant potential to expand this business and leverage it into a broad range of food and beverage applications. This brings me on nicely to Biosearch Life. This business based in Spain is a leader in the nutraceutical and functional food sectors with an extensive portfolio of capabilities spanning probiotics, botanical extracts and omega-3 ingredients. The portfolio is underpinned by a range of clinical trials that supports its strong positioning to address a number of consumer need states, which I'll touch on here on the next slide. So moving on to Slide 21, and I want to talk for a moment to you about Kerry's proactive health positioning, particularly in the functional food and beverage category, where we've been investing in and adding to our capability in recent years. Today, almost 40% of global consumers are actively seeking out functional food and beverages to help satisfy their specific health needs which means they're twice as likely to look for a food and beverage option over a nutritional supplement. And we're seeing this drive for functional food with consumers across all life stages and demographics. And these functional claims are also a key driver of growth across mainstream food and beverage products. So just to touch briefly on the 5 different need states on this slide and to give you some examples of how and where we are working. Firstly, we support our customers in a variety of ways under digestive health using our ranges of probiotics, hydrolyzed proteins and enzymes. There's been a huge demand for immune health, particularly this year, where we've supported customers in launches within snacks, ice cream, tea and coffee, just to name a few applications, using our Wellmune technology. In women's health, Biosearch, as I mentioned on the previous slide, adds strong capabilities in the areas of natural extracts and omega-3s. These technologies also support cognition, stress and mood, along with our beta-glucan across all life stages from infants to the elderly. And under healthy aging, which includes heart, joint and muscle, just to call out a few areas in particular. We recently agreed a strategic partnership with PFI in Japan enabling us to leverage their leading joint health technology for food and beverage applications, which helps reduce discomfort and stiffness in knee joints and benefits people with osteoarthritis. And just one final point that I'd like to highlight is a white paper we recently published on the area of protein absorption, which is particularly important for the aging category. The study found significantly greater quantities of amino acids in those who had consumed our GanedenBC30 ingredient versus those who had not, thus supporting protein absorption. These examples of technologies, partnerships and research, give you a feel of what we're doing in the space, and I recommend our Kerry Health Nutrition Institute website for anyone that's interested in the science behind healthier food. So to close out on this slide, what's key for our customers is the combination of our technologies and our expertise in working across all food and beverage categories to enhance their offering. The area of functional foods and proactive nutrition is one that we will continue to focus on, and you will see further developments here in the coming years. And finally, turning to Slide 22 and future prospects. As we've outlined in our release this morning, we are conducting a strategic review of our dairy-related businesses in Ireland and the U.K., and we'll update you with further communication in due course as appropriate. And now moving on to the outlook, in Taste & Nutrition, we see strong growth prospects in the retail channel with continued recovery in foodservice, underpinned by a very good innovation pipeline and strong customer engagement. In the short term, given COVID-19 is continuing to impact the foodservice channel, we're expecting flat to positive volume growth in the first quarter. And we have an overall outlook for strong recovery and good growth in the full year. Within Consumer Foods, we expect continued category variability and strong performances within the portfolio. And finally, we will continue to invest for growth and enablement of our business model while continuing to pursue M&A opportunities aligned to our strategic growth priorities. So with that, I'll turn it back to the operator for your questions.

[Operator Instructions] The first question comes from the line of Cathal Kenny from Davy Research.

Three questions, firstly, can you elaborate on the outperformance of your foodservice business, particularly into the back end of 2020? My second question relates to M&A. If we take the 3 deals completed in 2020, can you outline the P&L impact from a revenue and profit perspective as you see it in 2021? And final question is just on current trading. Just wondering, if you could you provide some added commentary around what you're seeing in your key end markets within T&N at the moment.

Thanks, Cathal. And I'll take the first and the third question, and Marguerite might take the middle one. Firstly, on foodservice, yes, we're back 8% in foodservice. I guess the market consensus in foodservice is probably in the zone of 15% on a like-for-like basis. So as you say, a significant outperformance. What I would, I suppose, remind us of is that when we were here back at the half year in Q3, we did talk about that, I suppose, the proactive nature and the proactive nature of our engagement right through the COVID crisis. And that then subsequently led to a strong performance in LTOs and seasonal time offerings as it -- as we kind of transition there towards the end of Q3 and into Q4. But I think it's important to say that we have seen significant uptick in engagement, especially with the global foodservice operators as it relates to clean label opportunities, improvement of the nutritional quality of their offerings and also plant-based offerings. And the third point that I'd make is that we're seeing foodservice in China growth almost back to pre-COVID levels, primarily driven by a combination, I would say, of health and wellness opportunities and authentic taste opportunities in the channel, so right at the core of what we're good at. In terms of let's say, the beginning of the year and how the beginning of the year is shaping up, we've had a solid start to the year. What might be most useful maybe is to share a regional perspective, perhaps starting with North America first, where we have seen a softer start in the foodservice channel. Happy to say though that this is being offset by a stronger performance in retail due to some new launches kicking in, especially in the snacking and beverage side. In Europe, we are having a slightly slower start, again, due to foodservice, which effectively is a continuation of what we saw in December due to the restrictions being reintroduced in December and those continuing. And in APMEA, we've had a really strong start to the year, strong recovery and good growth in both foodservice and retail.

Cathal, I might just take your question on the financial impact of the acquisitions. So in respect to the 3 acquisitions, we spent a total consideration of EUR 280 million. And in the context of the impacts on the profits and loss accounts, on a full year basis, looking to revenue first, the revenue contribution is circa EUR 75 million. And we expect to see FY '21 impact to be approximately EUR 50 million. From a margin perspective, the margin for these businesses are broadly in line with the Taste & Nutrition margin and we expect EPS accretion of 0.5% in 2021.

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

Three questions from me. First, just starting off with current trading -- sorry, not current trading, sorry, the full year outlook. You haven't given a sort of, well I guess, quantitative guidance for the full year. I'm just trying to understand if that's just based on your uncertainty over the rate of unlocking in different countries throughout the year? Or was there anything else giving you a bit of caution on guiding an absolute level of growth at this stage? And then secondly, on the dairy business strategic review, could you just give us some idea of the -- remind us of the size of the business and the rationale for this review? That would be helpful. And then finally on M&A, thanks for the detail on the financials for the deals done in 2020. And I think in the past, you've outlined your rationale for combining M&A transactions rather than sort of detailing the individual purchase prices and financials. Could you perhaps remind us of your reasoning for still doing so, particularly as that strategy now appears to be affecting market sentiment on the company?

James, and thanks for the questions. I might take the 3 questions in the order that you have asked them, James. Firstly on guiding, I think you should think about it just on the basis that we're being pragmatic in terms of our approach to guiding. The reality is that we just don't have the same level of visibility that we would normally have at this time of the year. Obviously, that's COVID-related. So we're trying to be as helpful as possible by giving guidance in -- for Q1 on the volume side. We do remain optimistic about the year. I'm sure I'll get into reasons around that later on. But it's really about being -- taking a pragmatic approach. There isn't the same visibility as there normally is, and we will resume guidance as soon as is practical. Then in terms of the dairy business, I suppose there's 2 elements of the dairy business. Firstly, the business has revenues of about EUR 900 million, and the business breaks down roughly 50/50 between Taste & Nutrition and Consumer Foods. And I would say, from a rationale standpoint, maybe just to give some context on that, clearly, within our Taste & Nutrition business, our strategy has been centered very much around that value-add co-creation partner that we've talked about today and talked about in several of our sessions and having that technology capability to enable that strategy. And you've seen that again today from the recent acquisitions and investments that we are making, and you would continue to see that. So clearly, the dairy processing activities have a different profile, and I suppose the rationale of combining, let's say, the milk-processing assets with Consumer Foods dairy business, there are some synergies there, and that's why that -- we've put that perimeter around those 2 elements. Then back to your question in terms of our approach to M&A, I think the first point I'd make is that our M&A activities should not be seen as a stand-alone independent transactions, but they're an element of a well thought out multistep systematic approach to get from point A to point B in executing against our strategy. And we have laid out for ourselves maybe a 10-step approach to get from point A to point B. That might -- they might -- those steps might entail organic innovation investments or reallocation of resources or hires or CapEx, and perhaps 5 or 6 different acquisitions. Clearly, we don't get all -- we always don't get the acquisitions done, that we -- or the number of acquisitions done that we want to do, but we do have a high success rate, and I'll come back to that point again. But we have shared with you this approach in the past when we brought you through our clean label preservation journey back at the half year results. And we touched it again briefly when we touched on our proactive health journey here in the presentation. So look, based on my own time in M&A, and I suppose, my experience over 25 years now, the way we conduct ourselves before, during and after any transaction is critical. I've said many times in the past that our -- the majority of our transactions are bilateral in nature and we've built up strong relationships with owners. And many times, they are individuals and their family members. And in many times, they've asked us not to disclose different aspects of their -- of the deals, whether it's the consideration, the earn outs, the noncompete, the employment agreements, whatever it is. And they understand and respect the fact that we have to make certain disclosures, but we also respect their wishes as best we can. And I would suggest that this approach has -- has not only unlocked opportunities for us. But also led to, I would say, subsequent transaction opportunities coming in our direction. And from my engagement with shareholders, I believe they understand this. They support our approach and encourage us to continue doing what we're doing. And I'm sure we'll have the opportunity over the next days and weeks to discuss this topic, and I'm sure other topics in the upcoming road shows. So I hope, James, that helps.

Your next question comes from the line of Graham Hunt from Morgan Stanley.

Just 2 questions from me. Again, on M&A, maybe I'd just ask it slightly differently, whether you could talk about some of the deals that you haven't done over the last few years and maybe what the main reasons for walking away from those were? And into that, what your process is for maintaining capital discipline? And then second question on returns. I just wondered if you had any sense of what the path back to your target level is around 12% is and what your expectations are for 2021. Is this just a case of volume recovery? Or are there some other moving parts to that, that we should be thinking about?

Thanks, Graham. I think there was 3 questions there, and I think what you're asking is effectively [ deals we've done ] in Kerry and what are the reasons we walk away from deals. And maybe to take the second part first, look, we walk away from deals for many reasons, and I would call out the strategic fit being the #1 reason. And that rules out the vast majority of, let's say -- let's call them unsolicited approaches. So perhaps 90% of what we see, where entities approach us, get ruled out of this hurdle. So I mean that -- we might look at more than 200 opportunities in a year, and 90% of them are ruled out on the basis of strategic fit. But other reasons could be culture, financials, environmental, customer relationships, IP issues. And regulatory in our space is probably the other significant watch out for us. But I think the main point here is -- and I have my own personal experience from working in that, specifically in M&A transaction management for the company is that -- look, we have built up a significant capability, a very strong capability over the decades as it relates to the identification, evaluation and integration and subsequent value creation as it relates to acquisitions. And then in terms of, I suppose, how it works. I would say it's very much a bottom-up process. And I'm talking here now more in the context of bolt-ons, but it's very much a bottom-up process. And at the local business entity level, whether that is at an end use market level, a sub end use market level, a country level, a subregional level, regional level, the management teams are absolutely mandated to know their -- the market, to know their peers, their competitors, the players in adjacent areas. And those potential opportunities then are discussed in the normal monthly cadence, and acquisition targets or candidates are identified during that process. So look, from a governance standpoint, I suppose the identification of targets sits with the local management teams. The evaluation of transactions is coned between local management and central regional strategy and M&A teams, within oversight and engagement as required from a global level. And the integration then is also coned. But the execution of the integration plan as well as the targets are owned by the local management team, and we feel that this approach has served us well over the years. Perhaps, Marguerite, you can touch on the returns question?

Sure, and thanks, Graham. So just on returns, returns were impacted during the year by trading due to COVID. As we look to '21, we're looking at returns on capital employed of somewhere between 10% and 11% zone, and we look to build on that in 2022 and going forward.

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

Just first one on cash conversion, I mean, good to see that stepping up in the second half as you laid out. But obviously, for the year overall, we're 67% below the over 80% target that you have for the medium term. I just wondered if you could kind of flesh out the levers you see to getting consistently above that 80% level. I mean when I look at your CapEx to sales level, it has been more elevated over the last few years than going back to the earlier part of the last decade. I guess there's been a heavy spend on Kerryconnect and building out your R&D centers globally. I guess with that investment having taking place, do you see any scope for kind of more moderation in CapEx sales going forward? Will that be a lever to improving free cash conversion? And then just secondly, just for Marguerite, hopefully just a quick one, but useful to clarify, I think, can you just confirm that the purchase of business line in your net cash used in investing activities over the past decade? I think it's cumulatively more than EUR 3 billion spend there. It would be useful just to maybe confirm that is a fully audited cash outflow. There's been no material revisions to this line historically, and it represents spend on brands, IP and other assets that you legally own, in no cases represents prepayments.

Alex, maybe on your last point first, obviously, fully audited is included in our financial statements. Maybe just then to take the cash conversion point -- and very much as we guided in terms of our performance in FY '20, clearly, cash conversion was impacted significantly as a result of COVID-19 and the conscious actions that we took in relation to investment in stocks, ensuring continuity of supply and also the investment that we made in inventory and stocks in relation to Kerryconnect. Our cash conversion, as you will also have seen, improved as we anticipated in the second half with the recovery of volumes, and we delivered 81% cash conversion in the second half. As we look forward into 2021, we are looking at that continued significant improvement year-on-year and a cash conversion in the zone of 80%. Just a couple of points that I would add to some of the comments that you made. You're correct in the context of us making investments in relation to the rollout of Kerryconnect as we have done very much to de-risk the deployment of Kerryconnect. And you'll have heard from my earlier comments, that we rolled out Kerryconnect in 20 locations during 2020. It's important to remember that we will continue to roll out into a further 20 locations in North America towards -- during the course of '21. So we will continue to de-risk and hold investments in inventory. So hopefully, that gives you color just in relation to our future cash conversion.

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