Kerry Group plc (KRZ) Earnings Call Transcript & Summary

Good day, and welcome to the Kerry Group Third Quarter 2020 Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] and finally, I would like to advise all participants that this call is being recorded. Thank you. I'd now like to welcome William Lynch, Head of Investor Relations, to begin the conference. William, over to you.

Thank you, operator. Good morning, and welcome to Kerry's Q3 2022 Results Call. I'm joined on our call by CEO, Edmond Scanlon; and our CFO, Marguerite Larkin. Edmond and Marguerite will take you through a brief presentation, and we will then open the line 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. So moving to Slide 3 and my overview comments on our year-to-date results. Overall, we are pleased to report that we continue to deliver strong business growth in what remains a highly dynamic marketplace. Firstly, volumes in Taste & Nutrition were up 8.5% year-to-date. And this growth was broad-based across each of our regions and our markets and was led by excellent performances in Snacks, Beverage and Meat and Bakery in particular. Overall growth in the retail channel remains strong while foodservice continued to deliver double-digit growth through the third quarter. Moving to pricing, which was up 7.5% in Taste & Nutrition for the period and a little higher at group level. And as you can see from the slide, pricing has increased through the year as we continue to manage through this unprecedented inflationary environment, very much in collaboration with our customers. The resilience of supply chain remains a key focus across our industry as a result of the inflationary pressures and the geopolitical volatility in places. However, we continue to see good levels of innovation activity with our customers, and we're working very closely to support them in developing their offerings. And also to help them to meet the needs of their consumers in areas such as new taste experiences and cleaner and healthier labels, but also evolving their offerings to meet a more value-conscious consumer. So while our industry remains quite dynamic with many challenges to navigate, the excellent performance we've shown this year, combined with our strong positioning with our customers gives us confidence that we will continue to outperform and meet the opportunities in our marketplace. So with that, I'll hand you over to Marguerite for the financial overview.

Thanks, Edmond, and good morning, everyone. Moving to Slide 4 and the summary Group financial overview. Firstly, on revenues, Group volumes were up 6.6% in the period, driven by the strong performance in Taste & Nutrition. Reported revenue was up 16.1% in the period, primarily due to organic growth, with foreign exchange and M&A broadly offsetting each other. Group EBITDA margins were back 40 basis points in the period, which was driven by the increased mathematical impact from the higher Q3 pricing that Edmond referenced as we continue to offset the absolute increase in input costs. This dilution was partially offset by benefits from portfolio development, operating leverage, portfolio mix and efficiency initiatives. Reported EBITDA increased by 12.6% year-to-date due to the combination of strong revenue growth and margin development. And finally, net debt was EUR 2.4 billion at the end of the period versus EUR 2.5 billion at the end of H1. Turning next to Slide 5 and the Group revenue analysis. Overall, reported revenue increased by 16.1% in the period, driven by the components, as you can see highlighted here on the slide. Firstly, volume growth of 6.6% and price of 10.6% and which equates to 7.5% and 12.1%, respectively, on a like-for-like basis. On foreign exchange, we had a 6.6% translation currency tailwinds on revenues, driven by a weaker euro against the major currencies, combined with a 0.2% transaction impact. Overall, acquisitions and disposals was a net decrease of 7.9% with acquisitions contributing 4.8% to revenue, driven primarily by Niacet, more than offset by the effect of last year's Consumer Foods Meats and Meals business disposal of 12.7%. Moving next to Slide 6 on the Taste & Nutrition business review. Firstly, we had volume growth of 8.5% in the period with growth of 8.2% in Q3. Pricing was 7.5% year-to-date and 10.6% in the quarter, resulting in an overall organic growth of 16% year-to-date and 19% in the third quarter. While we had good absolute profit growth, the EBITDA margin for the division was back 80 basis points year-to-date due to the impact of passing through input cost inflation, partially offset by mixed leverage efficiency and portfolio benefits. From an End Use Markets perspective, leverage continues to be strong with launches in the tea and coffee, refreshing and nutritional beverage categories. Growth in Meat and Bakery was supported by increased demand for Kerry's range of food protection and preservation systems. Beverage and Snacks was strong through our authentic taste systems and Tastesense sold in sugar reduction technologies. In our channels, retail continues to deliver strong growth with foodservice continuing to deliver double-digit volume growth. And volumes in emerging markets were up 12.3%, led by growth in LATAM, the Middle East and Southeast Asia. Turning now to Slide 7 and our regional performance within Taste & Nutrition. Firstly, the Americas has had volume growth of 9.3% in the period and 9.6% in the third quarter. Growth in North America in the period was driven by our Beverage, Meat and Bakery End Use Markets and remain strong across both of our channels. In LATAM, we had very strong growth across Brazil, driven by performance in Meals and Meat, while volumes in Mexico were less by growth in Beverage and Snacks with regional leaders. In Europe, volumes were up 6.2% in the period and 4.4% in the third quarter. This growth was led by the Snacks, Dairy and Meals End Use Markets, with foodservice, a key driver of growth within the region. From a geographical perspective, growth was strongest in Central and Southern Europe while performance in Eastern Europe was impacted by the ongoing war in the regions. As previously announced, the divestment of the Group's Russia subsidiary was also completed during the period. In APMEA, we had overall volume growth of 9% in the period and 8.6% in the third quarter, led by the Meat, Snacks and Bakery End Use Markets. Growth was strong across both channels and was strongest across the Middle East and Southeast Asia, partially offset by China, which continues to be impacted by local restrictions. Turning to Slide 8 and Dairy Ireland, which delivered solid growth despite being in a period of significant price inflation. Overall, pro forma volume growth in the period was 1.8%, which growth of 1% in the third quarter. Pricing for the period was up 36.6%. The Dairy ingredients business achieved good overall volume growth while in Dairy Consumer Products, the overall category volumes were impacted by higher prices. And EBITDA margin for the division was back 190 basis points as a result of passing through input cost inflation. Finally, to cover a couple of other financial matters on Slide 9. For input costs, we are expecting elevated levels of inflation to continue through Q4 at a broadly similar level to Q3. We will continue to manage these input cost fluctuations through our well-established pricing models with the aim of recovering the absolute cost of these price increases. And on currency, we're forecasting a translation tailwind of approximately 9% on the earnings for the full year based on currency exchange rates. So to sum up on the overall financial performance, we were pleased with our continued progress and strong growth across the period, particularly given the current market dynamics. And with that, I'll hand you back to Edmond for the outlook.

Thanks, Marguerite. Now moving to Slide 10 and the full year outlook. While overall market conditions remain uncertain, we believe we are well positioned as we continue to work with our customers to hold their offerings. We remain confident in our ability to manage through the current inflationary cycle with our well-established pricing model and our cost initiatives. We will continue to strategically evolve our portfolio and invest capital aligned to our strategic priorities and key growth platforms. And given we have just finished the third quarter, today, we're narrowing our full year adjusted earnings guidance range from 5% to 9% to 6% to 8% on a constant currency basis. And with that, I'll hand you back to the operator, and we look forward to taking your questions.

Thank you, speakers for the presentation. [Operator Instructions] Your first question comes from the line of Cathal Kenny from Davy Research.

Two questions from my side. Firstly, on the Americas, can you speak to the performance of the North American division region within that place by channel for foodservice and retail. Second question relates to margin at a Group level, can you outline the change in margin in Q3 and the drivers of that margin and how we should think about margin for the full year? They are my 2 questions.

And I'll take the first part of that question, Marguerite takes the second part. Just in terms of, let's say, our overall business in the Americas, it's been a very strong quarter for the business. with the 9.6% growth. And just to look at that between LATAM and North America, one should think about LATAM in the, let's say, in the [ 20s ] from a growth perspective and strong performance in North America than in the mid- to high single digits or -- what I would say is there's been a lot of significant level of launches in the second and third quarter. In North America, I would say, the level of engagement with customers is quite strong. On the retail channel, I would particularly call out Beverage from an innovation perspective. I would call that category as quite dynamic. Whether it's on areas like alcoholic beverage on the one hand, nutritional and functional beverage on the other hand, areas like hydration -- so quite strong on the retail side and also on the -- on the foodservice side, we've seen a return of seasonal LTOs in the quarter, a step up from where it was a year ago. Actually, we did see some earlier launches of some of the seasonal LTOs a little bit earlier than we would have typically seen them in the past. And of course, what I talked before around reducing operational complexity at the back of the store, I can safely say at this stage, that's a structural change in the foodservice channel, and we're very well placed to take advantage of that opportunity.

And maybe then, Cathal, just your question on margins. So firstly, our overall margin at a group level was back 40 basis points year-to-date. And then in the quarter, just over 100 basis points. The higher margin dilution in the third quarter was solely due to the mathematical impacts of passing through the increased input cost inflation that I referenced to higher pricing and the phasing of profits in the second half. I would say our normal levers have continued to positively contribute to margin during the period. And then from a full year perspective, we're not calling out any changes to the fundamental drivers of margin. However, given the increased mathematical impact and the timing of the portfolio benefits, we are looking at group margins being directionally back, I'd say, 60 to 70 basis points for the full year.

Your next question comes from the line of Charles Eden from UBS.

Just a couple of questions from me. Firstly, would you mind just quantifying the growth that you saw in the retail channel in P&L in the third quarter? And maybe just give some comments around the performance by customer type -- so thinking global FMCGs versus your local and regional customer base? And then my second question is just on the guidance. I'll be blunt, why not raise the full year constant FX EPS guidance in the midpoint, I sort of fully understand the pricing strength is just cost offset, as Marguerite just alluded to, but with volumes also very strong and coming in ahead of expectations, surprised that you haven't maybe nudged that up. So if you could just talk to that a little bit.

Sure. And thanks, Charles. Firstly, in terms of retail. Overall retail volumes were 5.6% in the third quarter. And that was primarily driven from our performance in the North America region from a regional perspective. In terms of customer type, I wouldn't necessarily call out any kind of a major shift or anything like that from a segmentation standpoint as we look at right across our customer base, there's nothing really noteworthy there to call out from what we just know over the last year. We're not seeing any significant market share shift or anything like that. What I would say is that there is quite an amount of innovation happening across the board. I guess they call it renovation, where we're working with customers right across the board to improve the nutritional profile of products, clean of labels, reduce sugar, salts and fats without compromising on -- without compromising on taste. One would not typically see that kind of activity from a category growth perspective. But from a Kerry perspective, that is certainly a driver in terms of our performance in the retail channel. In terms of guidance, maybe just to frame that a little bit, -- we do expect that there are full year growth in G&A to be in that 7% zone from a volume growth perspective. And I guess based on, let's say, my own experience with customers, I would say, particularly in the Europe region, we are seeing an element of cautiousness with customers. So our perspective on the guidance is really our own being pragmatic and we feel, let's say, our approach is appropriate given where we are at this time of the year and the level of visibility we have and our engagement with customers.

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

A couple of questions. I mean just firstly, coming back on actually your last comment, Edmond, about the volume growth. You're talking about 7% for the full year for T&N. Obviously, after what you've achieved, I guess, in Q3 I mean what are you -- you mentioned Europe being seen some cautiousness. But are you actually seeing any signs that some of your customers are starting to postpone or cancel orders. And if we look at foodservice, in particular, I mean, clearly, it was a strong -- a very strong quarter in terms of growth, but we are seeing some data showing full slowdown in QSR, and I appreciate what you're doing on the LTOs. But are you seeing any weakness materializing in foodservice at all perhaps towards the end of the quarter? And then -- that will be very helpful just to get some idea of that. And then in the retail channel, thanks to the growth rate, any big difference there between your branded volumes and your private label that would be really helpful. And then just lastly, just on -- in terms of guidance, Marguerite, any comments on free cash flow and conversion expectations for this year at this stage.

Thanks, James. Maybe just to give a few comments. We have seen some shifts in consumer behavior across different markets. And we have seen some volatility in order patterns and we have seen some customers decrease orders. But on the other hand, we've seen other customers actually increase orders. And I would say my level of cautiousness would be more from a geographic perspective around the European region, let's say, rather than what we're seeing in North America, where we're seeing North America continuing to be quite dynamic. We have seen an uptick on the level of engagements on the let's say, the private label side. Certainly, the level of engagement with retailers as they're trying to say, scenario plan and things like that certainly has increased. But overall, I guess, we feel we are well positioned with the level of engagement right across the board that we're having with customers. And as they're looking at various scenarios, and looking out into the next number of quarters. We feel that the level of engagement we have is very strong. The level of collaboration we're having with customers is very strong. So ultimately, we feel well positioned as things, let's say, evolve here in the coming quarters. I think it's fair to say that our approach is being -- is pragmatic. I wouldn't call out any kind of let's say, a major change from a destocking standpoint, we haven't seen anything kind of any meaningful level at this moment in time. In terms of, let's say, that point on, let's say, branded versus person private label, let's say, other than maybe 1 or 2 geographies, we haven't seen any meaningful, let's say, change. And ultimately, from a Kerry perspective, -- from a practical standpoint, in many instances, our customers actually serve both -- both channels, both branded and private label. So again, from an impact perspective, we don't see a major impact as that potentially will evolve in the coming quarters. In terms of foodservice, like you see there in the numbers, overall, we had growth of mid-single digits and that 14% on, and that is a strong performance. And again, it was, I would say, primarily driven by the Americas from an overall scale perspective. And I guess, at that point that I know I touched on before in terms of innovations to reduce back-of-house complexity. I would say that now is the biggest driver of opportunity, growth and innovation pipeline, I would say. When we look right across our business, -- we believe that, that is structural in terms of, let's say, the foodservice channel and we feel, while that let's say, work is primarily orientated from a geographic perspective in North America. What we typically see is when customers, especially global customers, global QSR customers, let's say, fast casual customers or coffee chains, when they make changes in the back of the stores, while they might start in North America for reasons we spoke about in the past, they actually rolled out those changes in back-of-store that they operations -- globally, subsequently. So look, we are extremely well positioned in terms of helping those customers reduce that complexity. We've talked about it many times in the past, but this is a real feature known foodservice. And again, we feel optimistic about the channel as we look forward, despite, let's say, the obvious, let's say, challenges that are going to be out there in the coming quarters.

And then, James, on your cash points, we don't give the detailed cash update on the quarter, I will say that we are continuing to work to a cash conversion in the zone of the 80% for the full year. Obviously, balancing this against requirements linked with the increased inflationary environment. So hopefully, that gives you our thinking.

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

Just for clarity around the cash flow performance. I appreciate you don't necessarily give color during the quarter. But I guess, the definition that you've traveled with from half year to where you're sitting at the moment hasn't necessarily moved that much. So maybe just give a bit of context in terms of particularly the working capital that maybe was a drag in the first half, how we should think about that for the rest of the year. And then just finally, read, the input cost situation, I appreciate a bit of color that you've mentioned for the second half. But how should we think about, I guess, the early part of next year or what you're thinking about how some of those input costs are going to travel through next year.

Good morning, Jason. So just in terms of cash I think it's fair to say we're making progress. And it's -- obviously, at this juncture, we don't give a detailed update on the moving parts. But in summary, our reduction in debt from EUR 2.5 billion to EUR 2.4 billion does reflect profits in the period, working capital and also our capital expenditure during the period. I think in the context of the full year, just to reiterate, my earlier point in the context of the full year, again, to confirm that we're continuing to work to that cash conversion in the zone of 80%. And obviously, at the full year, as we give you the full breakdown of the various working capital components, et cetera, that makes up that cash conversion. Then in terms of the raw material cost inflation; firstly, maybe looking at it from a take a nutrition perspective on raw materials, we're looking at mid-teens raw material cost inflation overall year-to-date since we expect that to be more like high teens for the full year. And then within Dairy Ireland, input cost inflation is obviously more significant. And the combination of those 2 lead to an overall input cost inflation to the group, more than 20% -- in the zone of 20-plus percent for the full year as we look out for the remainder of the year.

Your next question comes from the line of Faham Baig back from Credit Suisse.

A couple of, hopefully, quick questions from me. Would you suggest the very strong volume performance in T&N in Q3 also reflects a normalization of the supply chain? Or would you say there are still areas of difficulties that you still have? And the second question comes back to your brief comments on destocking. What visibility do you have on inventories at your customers? I'm conscious because one of the largest food and beverage companies spoke about running on significantly higher levels of inventories that they're going to look to normalize over the next few months or it could be up to a year and how that might impact your volumes in FY '23?

Thanks, Faham. I'll try and give a few perspectives. I would say, overall, from a supply chain standpoint, look, there does continue to be ongoing supply chain challenges. And we are continuing to mitigate that supply chain disruption, and we have been carrying, let's say, extra inventories. And I would say, while there's lots of challenges across the industry from a pricing standpoint and an inflation standpoint and we're all asking ourselves questions about price elasticity and trading down and what have you. At the end of the day, the most important point with any engagement with a customer continues to be a guarantee of supply and security of supply. And I think in terms of, let's say, but, let's say -- one of the drivers of our business is I feel is that we've been doing a pretty decent job at supplying our customers over the last number of years. Despite all the challenges, whether it's COVID or geopolitical events or other supply chain disruptions and I think we've been benefiting through engagement with our customers as a reward, if you will, for, let's say, doing a good job from an overall supply chain perspective. We don't have perfect visibility in terms of what's out there, let's say, across the industry from an overall stocking level standpoint. But for sure, it is at an elevated level across the industry. We haven't seen any, let's say, meaningful level of destocking. We're not expecting to see a meaningful level of destocking. I'm sure some customers are maybe taking some actions. It's something we keep a very close eye on, but not something that I would be calling out here at this moment in time as we should be expecting something to see something in the short term. Maybe over the long term, there might be a gradual destocking across the supply chain. But right now, I just don't expect that to be a major factor here in the coming quarter. As for 2023, I just feel it's just a little bit too early to comment on that at this moment in time.