Kerry Group plc (KRZ) Earnings Call Transcript & Summary

Good morning, and welcome to our Q1 2024 trading update call. I'm joined on the call by our CEO, Edmond Scanlon; and our CFO, Marguerite Larkin. As usual, Edmond and Marguerite will take you through our presentation. And following this, we will open the lines up for your questions. Before we begin, please note the usual disclaimer on our Q1 presentation regarding forward-looking statements. I will now hand over to Edmond.

Thanks, William. Good morning, everyone, and thank you for joining our call a little earlier than usual. I'll start with a summary of my key takeaways in the first quarter before handing over to Marguerite to give a little bit more detail on the results. So moving first to Slide 4. Pleased to report a good start to the year and the pickup in volumes in the first quarter as Taste & Nutrition delivered 3.1% volume growth in the first quarter. This was mainly driven by another strong performance in our foodservice channel with volume growth of 8.6%, and this represents our 12th consecutive quarter of high single digit or greater volume growth. And this is thanks to our unique positioning as our customers' innovation and enablement partner. We're also pleased to see North America returning to good volume growth in Q1, following the significant customer inventory management across our industry last year. On EBITDA, we delivered strong margin expansion of 140 basis points, driven by benefits from our Accelerate Operational Excellence program, along with accretion from our recent portfolio developments and the effect from pricing. Moving to capital allocation. Firstly, on the M&A front, we have just closed the acquisition of the lactase enzymes business of Novonesis. And as previously indicated, we are announcing a new EUR 300 million share buyback program today, which will mean a total capital return, including dividends of over EUR 700 million in 2024. We will remain agile and flexible on capital allocation aligned to market conditions, prioritizing the best value creation opportunities. And finally, we remain on track for our guidance range. You will have seen we have made a slight update today to reflect the net benefit from the new share buyback program. And now I hand you over to Marguerite for the performance overview.

Thanks, Edmond, and good morning, everyone. Moving to Slide 5 and the summary group's financial overview. Firstly, on revenue. Group volumes came in at 1.9% for the first quarter, driven by good performance in Taste & Nutrition of 3.1% growth. On margins, we are pleased to have delivered strong margin progression of 140 basis points, both at group level and Taste & Nutrition as we continue to make good progress towards our targets. And net debt at the end of the period was EUR 1.7 billion, reflecting good cash generation, capital investments and the impact of the share buyback program. Turning to our group revenue bridge on Slide 6. We had group volume growth of 1.9%, as I mentioned, and lower pricing of 5.3% in Q1. Foreign currency translation was 1.4% adverse due to movements in the U.S. dollar and weakness of some emerging market currencies versus the euro. And the effects from disposals net of acquisitions was 5.1%, with the contribution from acquisitions of 0.5%, more than offset by the impact from disposals of 5.6%, primarily relating to the divestment of our Sweet Ingredients portfolio last year. Moving now to our Taste & Nutrition overview on Slide 7, where our positive start to the year was driven by continued strong foodservice performance. We delivered good volume growth of 3.1% in the first quarter despite muted consumer demand in the number of markets. Pricing for Q1 was 3.9% lower given the overall deflation across our basket of input costs. Hence, we delivered strong EBITDA margin expansion of 140 basis points in the period, driven by cost efficiencies from our Accelerate Operational Excellence program, portfolio developments and the positive effect from pricing. In our end-use markets, we achieved good volume growth across our Snacks, Meals, Meat and Beverage markets. Looking at our channels, we had strong volume growth of the 8.6% in foodservice, with volumes in the retail channel returning to growth in Q1. And in emerging markets, we had volume growth of 5.2%, led by a strong performance in the Middle East. Turning to Slide 8 now and Taste & Nutrition performance by region. In the Americas, I am pleased to say we delivered volume growth of 3.6% in the period with a return to good volume growth in North America. This was led by a strong performance in Snacks through new [ Savory ] Taste business wins and a number of launches incorporating our Tastesense Salt reduction technology. Within LATAM, we achieved good volume growth in Mexico across beverage and snacks with performance in Brazil improving in the period. In Europe, as expected, overall volumes were 1.4% lower in Q1, reflective of strong prior year comparatives of 34% and softer consumer demand. Good growth was achieved in Meals through solutions incorporating our food protection, preservation and authentic taste technologies. Beverage also performed well in functional and refreshing beverages, while we had lower volumes in dairy, given very strong prior year comparisons. In APMEA, with volume growth of 4.8%, primarily driven by strong growth in the Middle East, with China similar to the prior year and Southeast Asia improving in the period. In foodservice, we delivered strong volume growth with leading regional coffee chains and quick serve restaurants. Snacks delivered excellent growth with launches incorporating our savory taste portfolio and strong growth was achieved in each through functional and taste systems. Moving to Slide 9 and Dairy Ireland, which delivered a solid start to the year in line with our expectations. Overall volumes were about 3% in the period with good growth in Dairy Consumer Products, while performance in Dairy Ingredients was reflective of market supply conditions in the quarter. Pricing was back in the period given the reduction in dairy input costs year-on-year, and we had EBITDA margin expansion of 70 basis points for the division. The good growth in Dairy Consumer Products in the first quarter was driven by performance across snacking, Kerry's branded cheese range and private label spread. Finally, to cover off a few other financial matters on Slide 10. On the input cost, we are currently seeing a lot of variation within our overall input cost basket. We expect overall mid- to high single-digit deflation in the first half and for this to significantly ease in the second half of the year. On currency, our outlook remains unchanged with a relatively neutral translation impact in the full year. And on share buybacks, as Edmond referenced earlier, we are commencing a new EUR 300 million program this month, which will run to the end of the year at the latest. The net incremental accretion in the year from the new program of 50 basis points has been factored into our guidance range. Given our strong balance sheet and cash flow generation, combined with market conditions, we consider that the timing is appropriate to commence an additional share buyback program. On capital allocation, our objective remains to have an efficient balance sheet while importantly, retaining capacity to reinvest in the strategic development of our business. To summarize on the overall financial performance, we delivered good volume growth, particularly in foodservice and in the Americas, along with strong margin expansion in the first quarter, and we are pleased with our positive start to the year. And with that, I'll pass you back to Edmond.

Thanks, Marguerite. Finally, before we move to Q&A, I'd just like to close out with our full year outlook. While recognizing current market dynamics, we remain on track to achieve our guidance, which has not changed other than reflecting the benefit from the new share buyback program. We have a good innovation pipeline, and we are well positioned to deliver volume growth and good margin expansion in the full year. We will continue to develop our business and our portfolio aligned to our strategic priorities. And as we said, reflecting the net benefit from the new share buyback program, our adjusted earnings per share guidance range is now increased to 5.5% to 8.5% constant currency growth in the full year. So with that, I'll hand you back to the operator, and we look forward to taking your questions.

So we will now begin the question-and-answer session. [Operator Instructions] Our first question comes from the line of Charles Eden from UBS.

My first one is just on the cost savings, which obviously contributed positively to the strong margin expansion in Q1. Could you quantify the level of savings achieved in the quarter, please? And remind us the expectation for the annual savings you're expecting this year. And then the second question is just on the share buyback, if I may. Obviously, you flagged another program this year coming into this, so this was largely expected. But how should we be thinking about share buybacks going forward? And I guess, sort of you touched on it, Marguerite, with the efficient balance sheet comment. But is a buyback of around this size, something that we could expect to see on a recurring annual basis going forward, I guess, because net debt to EBITDA will still be in a healthy place at the end of this year and you're still generating strong cash flow. So could you kind of sort of comment on the expectation maybe sort of medium to long term on the use of the balance sheet?

Charles, maybe your first question first. We were pleased with the good margin expansion in the quarter. The key driver was a combination of probably three factors, so the cost efficiencies that you have referenced from our Accelerate Operational Excellence program, and that's on track to deliver for the year. Secondly, the positive contribution from portfolio developments and the overall positive effect from pricing. So while we don't give a precise bridge at the quarter as a directional sense, of the breakdown of the margin expansion in the quarter, roughly half relates to the positive impact from the Accelerate Operational Excellence program and the portfolio developments with the other half then relating to the positive impact from pricing. So overall, just then in terms of the outlook for the year, as I referenced in February, we do see 2024 as a year of a very good margin expansion. We expect Taste & Nutrition to deliver margins close to 18% in 2024 with good positive underlying margin expansion, driven predominantly from the Accelerate Efficiency program and the other levers that you're familiar with, our mix, operating leverage and portfolio developments. So overall, you should think of it maybe in the zone of 50 basis plus from that underlying expansion with the balance coming from the pricing impact. In terms of the capital allocation, I might just give you some perspective, and I know Edmond then will add also. So it's very much, as I said in the prepared remarks in terms of how you should think about share buyback programs and how we look at capital allocation and the deployment of capital across the different options, whether it's being investing capital to develop our business [ organically/inorganically ] and then from a capital returns perspective, a combination of increase of our dividends and also consideration of share buybacks when market circumstances and other conditions are conducive to share buybacks. I think overall, from our perspective, as I've said, our aim here is to have an efficient and strong balance sheet, continuing to have a strong investment-grade rating but also importantly, retaining the capacity to invest in the strategic development of the business. And it's very much around assessing the different capital allocation options based, as I said, on the prevailing market conditions and how we can create the most value for shareholders.

I have nothing to add.

Our next question comes from the line of Fulvio Cazzol from Berenberg.

I have a couple. The first one is on the volume growth evolution for the rest of the year. I mean, we heard companies like Nestle, Unilever, et cetera, pointing to volume growth sequentially improving as we progress through 2024. Now I understand that you may have had some timing-related benefits in your Q1. But excluding that, are you expecting a similar picture for your T&N volumes for the rest of this year? And then my second question is on the margin for T&N. Marguerite, thank you for the color that you provided on the previous question on the drivers. But I didn't -- I was just wondering if you can give a bit of color on how the Chr. Hansen lactase business will impact the T&N margin this year. I think that this is quite a [indiscernible] business that you're acquiring. So wondering what sort of contribution that could make.

Thanks, Fulvio. In terms of volume, the short answer, frankly, is we're not flagging any specific, I would say, improvements as such over the course of the year. So when we set out our guidance for the full year, we didn't bake in a second half improvement or anything like that. So look, where we are today is we're pleased with the start, especially pleased with where we are in the Americas, with the 3.6% volume growth in the quarter. There was a timing benefit that we flagged at the full year results, and there's no change really to our go-forward perspective. We are well positioned for growth. There is a strong innovation pipeline there. But having said that, the overall consumer demand continues to remain relatively subdued and we factor that in at the full year when we give our full year guidance, and we wouldn't be changing that outlook as we sit here today. Obviously, we'll update you further throughout the course of the year.

And then, Fulvio, just on the second part of your question in relation to the lactase enzymes asset acquisition, it has a good profile. It's nicely accretive to margins, maybe circa 10 basis points accretive to margins, and we factored that into our guidance at the beginning of the year.

Thank you very much.

Thank you. Our next question comes from the line of Edward Hockin from JPMorgan.

My first question relates a little bit to the previous one, which is what are you seeing on the customer launches, new activities front? Are you seeing more of your customers maybe doing more innovations, being more promotional and that this could be supporting your volumes in the second half of the year and going forward. And my second question is on foodservice's growth. So it was another stellar quarter for volumes in that channel. We've heard of course, in recent days and weeks from some companies signaling weaker dynamics in the end market. I was wondering could you comment here on perhaps your expectation for foodservices for the remainder of this year and going forward? And how concerned could -- or should we be on potential end market slowdown?

Look, in terms of innovation, we have seen the ongoing renovation that I would have spoken about previously, so that continues. But there has been a pickup in activity on innovation activity across the board, across different customer types. There has been an increase in innovation, and we expect that planned launch activity towards the back end of 2024. I would call out particularly in private label. There also continues to be increased focused on innovating for value, also launching new Taste profiles to bring excitement to categories that haven't seen a significant level of innovation in recent years, and that improvement of nutritional profile continues to be a focus across most geographies. So look, while there continues to remain uncertainty around the consumer landscape, there is a clear pickup in customer innovation activity, which could play through in the market towards the end of 2024. Then in terms of foodservice. Look, I think it's fair to say, we have a very strong position in foodservice. And the important thing from our perspective is that, that strength is not down just to one thing. It's a combination of factors, along with a significant investment that we have made over many, many years. And I feel confident about the foodservice market going forward for a couple of reasons. Firstly, we don't need -- we don't necessarily need the channel to be in growth for Kerry to grow. That's a super important point, and we've proven this through our performance quarter after quarter. And that's -- we achieved that through greater penetration with our customers through back-of-house efficiency solutions, nutritional or sustainability improvements under existing menu items. And on top of that, we're also well positioned as regards to the key drivers of new growth, our new traffic, bringing excitement to the menu with new menu items, new menu offerings, new menu platforms, and also developing seasonal products and LTOs. So look, the 8.6% volume growth in Q1 was very strong. And if you're looking out for the full year, like we said at the beginning of the year, we expect the foodservice channel to be in that strong mid-single digits on it by the end of the year.