Kerry Group plc (KRZ) Earnings Call Transcript & Summary

Good day, and welcome to the Kerry Group Q3 2021 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. Please go ahead.

Thank you, operator. Good morning, and welcome to Kerry's Q3 Results Update Call. I'm joined on the call by our CEO, Edmond Scanlon; and our CFO, Marguerite Larkin. Edmond and Marguerite will briefly take you through today's presentation. And following this, we will then open the lines to your questions. Before we begin, please note the usual disclaimer regarding forward-looking statements. I will now hand over to Edmond.

Thanks, William, and good morning, everyone, and thank you for joining our call. So turning first to Slide 4 and my overview comments. We were pleased with our continued overall strong growth combined with a number of important strategic developments we made through the period. Our year-to-date volume growth in Taste & Nutrition of 8.7% has been pretty broad-based when you look across all regions. From an end-use market perspective, Beverage was the standout performer, delivering strong double-digit growth across both retail and foodservice channels. And in Emerging markets, we delivered overall volume growth of almost 16%. In the third quarter, we delivered volume growth of 6.3%, with organic growth of 7.5% despite some challenging conditions in different markets across the globe. This was driven by excellent growth in Europe, with the Americas a little softer and continued strong growth in the APMEA region. Then moving on to our channel dimension. Retail delivered a good overall performance with circa 5% average volume growth across the period. And our growth in this channel was slightly lower in the third quarter at circa 4%, which is above historic levels and a very good performance when you consider our strong growth comparative performance in the channel last year. Then in foodservice, we saw volume growth at 21% in the period, which represented continued overall progression. And we're now substantially back to 2019 levels, which is an excellent achievement given the disruption the channel has seen. Europe was a key driver of this performance as people began to return to work through the year. And we also had some excellent performances in APMEA. So very positive on the foodservice side. Moving then to our strategic developments. We are very pleased with the progress we made on the strategic front throughout the year. On portfolio, we've made a number of acquisitions strongly aligned to our strategy, and enhancing our focus as a leading B2B Taste & Nutrition company. In Health and Biopharma, Biosearch Life and Natreon adds strong capability to our proactive health portfolio, under our umbrella food waste and specifically in the area of food protection and preservation. We completed the acquisition of Niacet, which again is a strong complement to our clean label preservation capability, and we also completed the disposal of our Consumer Foods, Meat & Meals business to Pilgrim's, and I'd just like to take this opportunity again to reiterate our best wishes to our former Kerry colleagues. On footprint, our new Rome, Georgia facility has commenced manufacturing, and we'll see a significant increase in operational activity over the next few months. During the period, we opened our new Taste facility here in Irapuato in Mexico, and we're also really excited about our new Taste facility in Durban, which is commencing production this week and will be a key enabler of growth in the Sub-Saharan Africa region. Then finally on strategy. At our recent Capital Markets Day, we shared our refreshed strategic priorities, our key growth platforms and midterm targets for the coming years, which gives a clear overview of our business today and our vision, how we aim to be our customers' most valued partner, creating a world of sustainable nutrition. So with that, I'll hand you over to Marguerite for the performance overview.

Thanks, Edmond, and good morning. Moving to Slide 5 and the summary overview of group's financial performance. Overall, volume growth was 8.2% year-to-date, which represented continued strong volume growth of 6.6% in the third quarter. Group pricing was 0.7% across the first 9 months of the year, and group trading margins were 60 basis points higher in the period, primarily due to operating leverage. Moving next to Slide 6 and the breakdown of group revenue components for the first 9 months of the year. Overall, reported revenue increased by 6.3% in the period, which was primarily driven by strong organic growth, comprising volume growth of 8.2%, as mentioned, and overall pricing of 0.7%, reflecting the impact of increased input costs through the period. Adverse translation currency impact of 3.6% on revenue, driven primarily by currencies in the Americas, and a positive impact from acquisitions, which contributed 1% to revenue growth in the period, primarily related to the 2020 acquisitions of Jining Nature, Bio-K Plus and TecniSpice. Turning to Slide 7 and the Taste & Nutrition overview. We delivered good overall volume growth of 8.7% across the first 9 months of the year, recognizing we had low comparators, particularly in the second quarter of last year. In Q3, we had volume growth of 6.3%, which was driven by continued strong growth in the foodservice channel, with good growth in the retail channel, led by Beverage, Meat And Bakery, with Meals and Pharma slightly more challenged. In emerging markets, we had strong overall volume growth of 15.8%, with good growth across the 3 regions. Overall pricing increased in the period, reflecting a 1.2% increase in the third quarter. Trading margins were up 60 basis points in the period, driven primarily by operating leverage. And finally, we completed the acquisition of Niacet before the end of the third quarter. Next to the Taste & Nutritional regional business performance on Slide 8, and firstly the Americas, which had overall growth of 6.6% in the period, which represented good overall growth against the backdrop of supply chain and labor challenges, impacting industry performance through the year. Growth in the North American retail channel was driven by Beverage, Meat and Bakery, while the foodservice channel continued to deliver good growth. Within LATAM, we had strong growth in Brazil, most notably in Beverage and ice cream. Mexico performed well, led by strong growth in Snack applications, while overall performance in CACAR was solid. In Europe, overall volume growth for the period was 10.6%, with an exceptionally strong performance in Q3. Growth in retail was led by Meat, Dairy and Bakery, while foodservice achieved excellent growth, supported by a significant increase in out-of-home consumption. Russia and Eastern Europe delivered overall strong growth in the period. In APMEA, we had strong volume growth of 12.5%, with a continued strong overall performance in Q3, led by growth in China and the Middle East. The retail channel delivered strong overall growth, led by Beverage, Meat and Snacks and foodservice performed well with some variation across the region, most notably in Southeast Asia, which was impacted in places by local COVID-related restrictions through the period. Turning now to Consumer Foods on slide 9. Overall volume growth of 5.6% was strong, while recognizing the lower prior year comparatives. This was led by growth in meals and meat-free, with Dairy performing well, driven by strong growth in the Strings & Things snacking range. Pricing was relatively neutral at 0.3% and trading margins were up 20 basis points in the period. And finally, the sale of the Meat & Meals business completed at the end of the period. Moving now to look at other financial matters on slide 10. Firstly, to update you on the various work streams relating to recent portfolio developments on acquisitions, the integration of both Niacet and BioSearch are well underway. We are currently working through the separation process following the disposal of Meat & Meals business, and the resulting realignment of our Dairy activities is progressing well. On raw materials, we continue to expect low single-digit input cost inflation for the full year, which was circa 1% in the first half and is expected to be more than double that in the second half, as input cost inflation has increased across the year. While recognizing the environment is challenging, we have the well-established pricing models to manage raw material input costs. Our model has been proven in the past, and we are confident that we will manage through this period of heightened input costs, albeit there may be some short-term lags as is normal during these times. On Kerryconnect, we continued our deployment through the period in North America, with a number of sites going live this month. And the overall program is scheduled to complete in the first half of next year. On currency, we are expecting a translation headwind of circa 2% on revenue and 2% to 3% on earnings per share for the full year based on current exchange rates. Net debt was EUR 2.1 billion at the end of the period, reflecting the completion of Niacet and Biosearch acquisitions, combined with the disposal of the Meat & Meals business. So in summary, and before I hand over to Edmond, given the backdrop of the highly variable market dynamics, I am pleased that we continued to deliver strong growth and margin development through the period. So with that, back to Edmond for the outlook.

Thanks, Marguerite, and moving to our outlook and future prospects on Slide 11. We are pleased with our growth and progress across both the retail and foodservice channels. We see strong growth prospects underpinned by a very good innovation pipeline and strong customer engagement, and we will continue to invest for growth and pursue M&A opportunities. We expect to deliver strong volume growth and earnings growth in the full year, and our earnings guidance range is unchanged. And we've included a table below again to show the moving part, which in summary means that we expect to deliver 12% to 15% earnings growth in constant currency. And when you reflect the impact of the 2 portfolio developments, this results in a range of 10% to 13% constant currency EPS growth for the full year. With that, I'll hand you back to the operator, and we look forward to taking your questions.

[Operator Instructions]. We will now take our first question from Cathal Kenny from Davy Research.

Two questions from me. Firstly, on foodservice. Can you provide some additional commentary on the performance by region in the third quarter? My second question relates to inflation with a couple of parts to it. Firstly, can you provide color on the current inflation mix rate between raw materials and non-raw materials? And maybe outline the mechanisms you have in place to recover costs. And finally, then just looking into 2022, how are you thinking about overall inflation?

Thanks, Cathal. I'll take the first part of your question. Like we said at the Capital Markets Day a couple of weeks ago, we are extremely well positioned in the foodservice channel in terms of our customer engagements. And like I said in the past, our relationships and our engagement with those customers have only grown throughout the last 18 months. And the second point I'd make is that our business is primarily orientated towards the larger players. So -- and we've seen those larger players progress at a faster rate during the last 18 months as well. So like I said in the presentation, we're substantially back to 2019 levels, overall volumes up 14% in Q3 in the channel. And just maybe to give a quick run around the regions. APMEA, we've seen that more or less in line with overall T&N, some variability country to country. In the Americas, we were in the high single digits on. We did see some constraints there due to labor availability at our customers. And that ended up restricting -- for some of those customers ended up restricting day parts or limiting some of their menu items. And then just on the Europe region, Europe was almost double the T&N rate. Some of this is due to weaker prior year comparators. And we're also seeing good performance within the region in the U.K. and Southern Eastern Europe.

Cathal, and I'll address your inflation questions. A number of parts to that question, so I'll take them in turns. Firstly, at an overview level, we will manage inflationary cost increases via pricing and cost initiatives, as I mentioned earlier. On raw materials, the outlook is for overall low single-digit input cost inflation for the year. This has been evolving across the year, and we believe it will continue to evolve into the first 6 months of next year. As I referenced, we do have the well-established pass-through pricing model to manage the raw material cost inflation and these costs will be managed through that model during this period. Then just in terms of the other inflationary costs mainly distribution, energy and labor, we will manage these costs through a combination of pricing and cost initiatives. On distribution and energy, we're seeing strong double-digit cost increases. Whereas labor inflation very much varies depending on the local markets and the local labor market dynamic. As you can appreciate and as you would expect, we have a lot of work underway right now as we pull various levers to manage, to part mitigate and recover these cost increases. What I would say though is that it is important to note that our overall goal is to recover these cost increases so that they do not impact our cash margins. And overall, we do feel confident that we will manage through this period of heightened input cost inflation. So as I mentioned, there may be some short-term lags as is usual during these inflationary times. And then the final part of your question in terms of '22, it's just too early to say really with any certainty in relation to '22. It's not clear what the ultimate level of inflation and pricing will be, though we do expect that the inflationary costs will continue to increase into the first 6 months of next year. and we'll update you then further next year as we see is evolving through the year. So hopefully, Cathal, that addresses your question.

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

Edmond, Marguerite, couple of questions on the volumes in T&N, if I may. Firstly, could you just -- you mentioned the supply chain shortages in -- or issues in North America affecting food and pharma. Could you maybe just talk about how much they did impact growth in Q3? Then on APMEA, obviously, strong volume performance, but Southeast Asia is a problem for a lot of companies at the moment. Could you maybe talk about the difference in growth rate between Southeast Asia and the rest of the APMEA region? So we can sort of understand how much drag that is? And then mainly on -- and then on just on the retail channel volumes, could you also give us a bit of that 4%, you said for Q3, a bit of a regional color for the 3 regions there as well?

James, and thanks for the question. First, on the Americas and maybe in North America, just to zone into that region. Like I said in the presentation, we have seen some supply chain challenges. And just in terms of giving a little bit of color on that, there's probably 3 or 4 things that we're seeing. The first thing is that we're seeing raw material delays coming into our facilities due to logistics issues and distribution issues that Marguerite just referenced. The second thing we're seeing is that some of our customers are experiencing labor shortages in some of their facilities, some of our major meat processors, customers, for example. And then we have had some localized labor availability issues in a couple of our own facilities. And the last point on foodservice, we are seeing some constraints with some of our foodservice customers that are experiencing some labor issues. And like I said in the last answer, that they are running more condensed menus and are limiting some of their opening hours. With that all said, in North America, we see demand is quite strong. The innovation pipeline is strong. Customer engagement is strong. So there are some disruptions, but we are working through these. And while we are experiencing some on cost there, expediting raw materials and what have you, we are really focusing on delivering for our customers. Our customers are appreciating what we are doing for them in a situation where everybody knows the supply chain is disruptive. The most important thing from my perspective is we don't see any demand -- market demand issues in North America. And everything that we're seeing right now is factored into our overall guidance. Then in terms of the APMEA region, like you said, it's -- it's variable. China, we've had very strong growth year-to-date, very strong growth in the third quarter. I would say, excellent performance in both retail and foodservice channels, highly dynamic. We're extremely well positioned. The integration of Jining Nature is going great and the level of activity at our innovation center in Shanghai is far ahead of 2019. In Southeast Asia, it's a little bit mixed. Malaysia was a little bit challenged in the quarter. Thankfully, that has improved in the last few weeks. And Indonesia is probably, they call, with more perspective in Southeast Asia as being the market that's most impacted for us. Then just moving on to the last part of your question on retail, let's say, and just to give you a quick run through the regions. Firstly, at an overall level, retail is at 5% growth year-to-date, just under 4% in the third quarter. Europe is in line with that overall growth level. Americas a little bit below and APMEA above. And like we said, Beverage is the standout performer across all regions, followed by Snack, followed by Meat alternatives. So hopefully, that gives you some color there, James.

Just on the -- sorry, follow up very quickly, just on the issues in the [ spices ] or in the Pharma business. How meaningful a drag was that? I know it's a relatively small part of your business, but you did call out. So I was wondering how significant that was?

Yes. We'd categorize that, James, as in very short term in nature. And we see that coming back as we just walk through some of these short-term disruptions in that specific space over the next few weeks and months. So not a major call out there. It's just a little bit of a flag for the quarter, and that's something that we're hugely concerned about as the weeks and months roll on here.

We will now take our next question from Patrick Higgins from Goodbody.

Just 2 questions for me. Firstly, just on Europe, obviously, another strong performance there. How much of that is simply just recovery versus previous levels? Or are you seeing a ramp-up in terms of levels of innovation within the foodservice? And should we expect stronger growth there going forward I guess? And then secondly, just in terms of innovation. Have you seen much switches in terms of what customers want you to work with demand to help, I guess, address some of the inflationary pressures or supply chain disruptions that they're facing?

Sure, Patrick, and thanks for the question. Just in terms of your -- in terms of your first. Excellent performance in the quarter, like we said, with growth of 10.6%. We did see a strong quarter in retail and in foodservice. Of course, there is a comparator factor here in Europe. And just maybe going back to the Capital Markets Day we had a couple of weeks ago, on an ongoing basis, we look at T&N growth in the 4% to 6% on. And while we had a very, very good performance in Europe, going forward, we do see Europe being more or less in the 2% to 4% range. That said, we did see an excellent performance, frankly, over the course of the year in Europe. Meat alternatives is certainly a call out for us. Clean label innovation as a call out for us. And we did have a number of new ice cream launches as well that were, let's say, seasonal in nature. Then on the innovation side, maybe just to give a little bit of color on what we're seeing in foodservice because I have touched on this a little bit previously, but there's one particular call out that's been a factor here in the last quarter that we -- that we see positive momentum coming from as in 2022. But the first point is that this concept of making it easier in the back of the store, in the back-of-the-house operations of foodservice customers is global at this stage, bringing convenience into the back-of-house operations. The work we've been doing with customers there over the course of the last 6, 12 months or so is really sticking and our customers are really seeing the benefits of us working with them and enabling them to be more efficient in the back of the house. And I touched on a number of examples in the past, whether it's in marinades and getting efficiency by using one marinade for multiple menu items as opposed to multiple shelf-life extension in dispensed beverage programs that enables customers to extend the amount of time between cleaning. And then maybe the major call out from an innovation perspective in foodservice is that the concept of this 90- to 100-day product launch plan, new product launch plan, targeting 2022 with new and exciting LTOs, really going back to the thought process of maximizing traffic, driving repeat customers at every day apart. We're delighted that, that activity is back and back really strong. And like I said in the first question, our business on foodservices is orientated towards the larger players, and they're really looking to the future in terms of reintroducing LTOs, reintroducing excitement across their menus. So that's probably the standout change that we've seen over the course of the last few months in foodservice innovation.

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

My first actually relates back to the CMD, if that's okay, and the EUR 120 million investment plan. I just wondered if you could provide a bit more detail as to how that's split between CapEx and OpEx? And then related to this, I suppose, can we get a guide on cash conversion for FY '21? Do you think, based on the first 9 months, it will be within your greater than 80% target? And then my second question is coming back to the 3Q update. Can you give us the Consumer Foods volume growth, excluding the business that has been disposed of, i.e., what was the Dairy, Consumer Foods volume growth effectively in the third quarter?

John, And maybe I'll just take your -- the first part of your question. First, in relation to the program that we discussed at the Capital Markets Day and the cost that we outlined, they're predominantly operating costs rather than capital in nature. Just in the context of the cash conversion, no change to what we communicated at the half year, we expect to deliver in the [ zone ] of 80% cash conversion for '21 after reflecting the slight dilution from the portfolio items completed.

And in terms of the Consumer Foods Dairy business, one should think about it on a year-to-date basis on the low single-digit zone.

[Operator Instructions]. We will now take our next question from Alex Sloane from Barclays.

Just a quick follow-up from me. Just in terms of the labor constraints that you've talked about in North America impacting somewhat your own business and some of your customers in foodservice. Are you seeing any sort of signs of improvement on that front as the government is dialing back COVID support programs? Or should we expect Q4 to be similarly impacted as Q3 on this front?

Alex. And look, the short answer is that we are seeing improvements. I think I touched on some of the points there on foodservice. I see it in our own business, and I see it in our customers' business. The reality is that every part of the challenged -- every part of the end-to-end supply chain is quite challenged, and it has been quite challenged over the last number of months. But everybody is working extremely hard in terms of, let's say, mitigating as many of these challenges and constraints as possible. On the foodservice side, like I just said, there is -- everybody has the heads off. Now everybody is looking out to 2022 and thinking about that innovation they can bring to drive excitement on the menu that hasn't been there over the course of the last 18 months. So what that's telling me is that our customers are getting a handle on this, working through it. I'm slow to put a timing on it for obvious reasons, but generally speaking, there's an optimism coming in there around the fact that, generally speaking, the industry is getting their hands around these challenges and are looking to the future. In the couple of facilities that we saw impacted on labor, for instance, a new Amazon warehouse opened up near one of our facilities that put a little bit of pressure on our labor availability over weekends for -- to fulfill orders and things like that. We see these things normalizing here over the coming months. Super hard to put an exact timing when everything will be, let's say, back to a more, let's say, huge BAU level, but an incredible amount of work going on, working through these constraints, and everybody, I think, looking optimistically to 2022.

[Operator Instructions]. We will now take our next question from Lauren Molyneux from Citi.

I have 2. So firstly, I'm just wondering how to think about expectations for your pricing going into Q4 in T&N? Should we expect the momentum to be building and it to be even stronger than Q3 and year-to-date? And then how to think about that into 2022 as well on kind of the shape of pricing into 2022, when will, I guess, it peak obviously in H1? I understand there's a lot of moving parts there as well. And then Secondly, kind of related to that, more around going back to cost inflation. How to think about the moving parts of your margin and the different dynamics between contribution in pricing, operating leverage that you're expecting and also the cost efficiencies that you have to offset from the headwinds on pricing? And just for this year and also maybe next year, if you have any color that you can give?

Lauren, maybe just to take some of the components of your question in terms of -- in terms of the inflation question. First, as I mentioned at the outset, we're looking at overall low single-digit input cost inflation on raw materials and obviously higher inflationary costs, as I mentioned, on the non-raw material elements. And as I said, we'll manage the inflationary cost increases via pricing and cost initiatives. And very much our goal is to recover as the cost increases those that they do not impact our cash margins. As I referenced earlier, we've seen in terms of input cost inflation circa 1% in the first half, and we're looking at more than double that in the second half just given the cover that we have in place. So similar to what I mentioned at the outset of the call, and in relation to '22, it's just very difficult to call that right now. we do see inflation continuing to be a feature, as I mentioned, in the first 6 months of next year. And then we will update you as we would normally do at the outset. In terms of the various moving parts, in terms of the margin impact, and for the full year, again, just to reiterate some earlier comments, overall, we do expect strong improvements in group margins in the zone of 50 basis points versus 2020. There are obviously a number of moving parts, as you referenced. But predominantly, the improvements will be driven by operating leverage and mix with some M&A benefits. There will be some partial offset due to the currency and the pricing impact and some of the costs that -- on costs that we referenced in relation to -- in relation to the supply chains, but we factored that into the overall movement in our overall expectation in terms of that improvement in group margins. In relation to FY '22, I think it's fair to say it's just too early to comment in any great detail, but just in an effort to be helpful I will just frame our thinking and give some perspective of how we see things evolving. We will be looking for some operating leverage benefits and mix benefits in '22, as I referenced at our Capital Markets Day, as well as the substantial improvement from the recently announced strategic portfolio development in the zone of 60 basis points on portfolio. And then in terms of the current inflationary environment, there will obviously be the usual mathematical effect on margins, will be a feature next year. We'll clearly give you more color on that when we guide in February. And the other component parts that you're familiar with is our various cost initiatives and balancing that with the reinvestments to support the growth in the business. So a lot of moving parts, both in the margin delivery for '21. Too early to give any real definitive position on '22 at this juncture, but similar moving parts. So hopefully, that is helpful.

And just on the shape of pricing kind of this year and next year?

So really, at this juncture, it's -- it's too early to talk to the specifics on pricing for next year. But clearly, we'll outline that in detail in February.

As there are no further questions at this time, I would like to turn the call back to William Lynch for any additional closing remarks.

We'd like to just thank everyone for joining us on the call. If there's any further follow-up, please reach out to the IR team, and we will follow-up with you. And that really brings us to the end of the call and just wish you all a good day. Thank you.

Thank you. That will conclude today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.