Kerry Group plc (KRZ) Earnings Call Transcript & Summary

Good morning, and welcome to our 2024 Half Year Results 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 H1 presentation regarding forward-looking statements. I will now hand over to Edmond.

Good morning, everyone, and thank you for joining our call. Beginning with the summary for H1, where we delivered strong overall financial performance. Firstly, in volumes, we achieved 3.1% volume growth in our Taste & Nutrition business across the first half of the year. This was led by a strong performance in the foodservice channel as we continue to enable established chains to evolve and develop their business while also working with emerging leaders to upscale their operations and their offerings. Volume growth in the retail channel was driven by good performances in the Americas and APMEA, led by very strong growth in Snack applications through Kerry's leading range of savory taste profiles, Tastesense salt-reduction technologies and new innovations with our ProActive Health portfolio into functional beverage applications. When we look at food and beverage end markets, it's clear that market dynamics over the past few years have been more variable than we've seen in a long time. What has remained consistent is Kerry's ability to continually outperform its end markets. And we've delivered 4% volume growth in Taste & Nutrition over pretty much any multiyear time frame. And while recognizing the current market context, we're focused on progressing volumes to over 4% as soon as possible. Next on to margins. We were pleased with our continued progress across the first half of the year. Taste & Nutrition delivered good margin expansion of 130 basis points in half 1. And we remain on track for Taste & Nutrition EBITDA margin of 18% in the full year. Moving to guidance. Given our strong financial performance in the first half of the year, and while recognizing food and beverage markets are subdued, we remain well positioned for volume growth ahead of our markets and combined with strong margin expansion, we are today upgrading our full year earnings per share guidance to 7% to 10% growth on a constant currency basis. And finally, on strategy and capital allocation, we continue to invest in the organic development of our business through the first half. We've also completed the Lactase enzymes business acquisition during the period, and we continue to progress our share repurchase activity, which Marguerite will cover later. So now moving next to our Taste & Nutrition overview on Slide 5. Revenue for the division was EUR 3.4 billion, with volume growth of 3.1% in half 1 and 3.2% in Q2. This was well ahead of the food and beverage end markets we serve as we continue to gain through greater penetration with our customers and through new launch activity as they innovate and renovate their offerings. Pricing was 3% lower, reflecting net overall deflation across our basket of input costs. And EBITDA for the first half increased to EUR 551 million, with margin expansion of 130 basis points. Across our end use markets, we achieved good volume growth in snacks, meals and beverage. And this growth was led by innovations incorporating our taste and ProActive Health technology ranges, with strong performance across savory taste, botanicals and natural extracts and Tastesense salt- and sugar-reduction technologies as well as ProActive Health technologies for digestive and cognitive need states in particular. Moving to our channels. We had strong volume growth of 7.3% in foodservice, with volume growth in the retail channel driven by the Americas and APMEA. And in our emerging markets, we had good volume growth of 6.6%, driven by strong performances in the Middle East and Africa. Turning to Slide 6 and Taste & Nutrition performance by region. And firstly, in the Americas, we reported revenue of EUR 1.9 billion, which was supported by strong volume growth of 3.4% across the first half of the year, with good broad-based growth across our end use markets. In North America, we had excellent growth in snacks, particularly in the areas of savory taste and Tastesense salt-reduction technologies. Meals delivered good growth through new culinary taste launches. And beverage performed well across botanicals, coffee extracts and sugar reduction technologies, with growth in functional beverage driven by our ProActive Health technologies. Foodservice delivered strong volume growth across QSRs, fast-casual outlets and coffee chains, while we had good growth in retail across both customer and private label brands. And then in LATAM, growth was led by Mexico, with good performances in beverage and snack end use markets. In Europe, revenue for half 1 was EUR 708 million, with overall volumes back 1%, given the strong prior year comparatives and soft market conditions in the retail channel. Meals had good growth through food protection, preservation and authentic taste technologies while we had good performances in functional and refreshing beverages through launches incorporating our ProActive Health portfolio. In APMEA, reported revenue for H1 of EUR 794 million represented volume growth of 5.5%, primarily driven by strong growth in the Middle East and Africa, while China broadly was similar to the prior year and Southeast Asia improving through the period. Snacks delivered very strong growth, supported by our local savory taste portfolio, with growth in meat driven by taste and preservation systems while beverage performed well through refreshing beverage innovations. And in foodservice, we had strong growth with leading regional coffee chains and QSRs. Moving to Slide 7 in Dairy Ireland, which delivered a good EBITDA performance, led by Dairy Consumer Products. Revenue for the division was EUR 592 million, with EBITDA increasing to EUR 35 million, reflecting Dairy Consumer Products growth and mix development as well as recovery in dairy ingredients. Overall, volumes were back 1.9% in the first half, with growth in Dairy Consumer Products in snacking and in branded cheese, while performance in dairy ingredients reflected market supply conditions. Pricing for H1 was lower given the reduction in dairy input costs year-on-year, and further developments in the period included the commissioning of the Dairy Consumer Products' Cheestrings capacity expansion in Ireland and the launch of the new SMUG hybrid range of oat and dairy-based products. So with that, I'll hand you over to Marguerite for the financial review.

Thank you, Edmond, and good morning, everyone. Turning now to Slide 9 and the financial overview for the first half of the year. Group revenue was EUR 3.9 billion, with group volumes up 1.7%, driven by Taste & Nutrition volume growth of 3.1%. Group EBITDA increased by 6.6% to EUR 552 million, with EBITDA margins up 160 basis points. Adjusted earnings per share of 194.1 cent was up 9.1% in constant currency and 7.8% in reported currency. Return on capital employed for the first half was 10.3%, and we expect this to continue to progress in the full year. And finally, free cash flow was EUR 445 million, with a cash conversion of 131% on an average basis. Turning to our group revenue bridge on Slide 10. We had group volume growth of 1.7% and lower pricing of 4% in the first 6 months of the year. Foreign currency translation was 0.9% adverse due to movements in the U.S. dollar and weakness of some emerging market currencies versus the euro. And the effect from disposals net of acquisitions was 2.7%, with the contribution from acquisitions of 0.6%, more than offset by the impact from disposals of 3.3%, primarily relating to the divestment of our sweet ingredients portfolio last year. Moving now to Slide 11 and the revenue analysis by division. Group volume growth in the first half was driven by overall Taste & Nutrition volume growth of 3.1%. Looking at this growth by region, we delivered good volume growth in the Americas across the first half. Europe was in line with our expectations given strong comparatives in market conditions. And in APMEA, we delivered a good performance, with volumes improving through the period. Turning to our group margin bridge on Slide 12. Group EBITDA of EUR 552 million increased from EUR 518 million, with EBITDA margin up 160 basis points. Looking at the key moving parts. Firstly, on operating leverage and mix, we had a 20 basis points improvement, with both operating leverage and mix contributing to this expansion. Pricing was net 70 basis points accretive in H1, driven principally by the mathematical impact of deflationary pricing, with the recovery in Dairy Ireland also contributing. As we previously indicated, our expectation is this will be lower in the second half given the current outlook for input costs. We were pleased with the contribution of our Accelerate Operational Excellence program, which delivered 40 basis points to EBITDA margin expansion in the first half. We are ahead of schedule in terms of the benefits delivered through the program over the past year. Foreign currency was net neutral from a margin perspective, and acquisitions and disposals contributed a net positive 30 basis points, primarily resulting from the disposal of our sweet ingredients portfolio. Overall, we are on track on margins, and we are very pleased with our margin expansion in the period. We expect to have good margin expansion in the second half driven by continued improvements from our accelerated program as well as operating leverage, mix and portfolio developments. Moving now to free cash flow on Slide 13. We generated strong free cash flow of EUR 445 million with 131% average cash conversion on earnings and over 80% on a point-to-point basis. The main drivers of free cash flow were as follows: firstly, the increase in group EBITDA to EUR 552 million; secondly, we had a significant improvement in working capital on an average basis, which was driven by a reduction in inventory levels through the second half of 2023, as you will have seen when we reported our full year results; and finally, capital expenditure of EUR 120 million was higher, reflecting the timing of capital projects as we continue to invest to support our group. We are pleased with our cash performance, and we are on track to deliver good cash conversion in the full year, similar to 2023. Turning to our debt profile and credit metrics on Slide 14. Net debt at the end of June was EUR 1.8 billion, with a wasted average maturity of 4.3 years. With our net debt-to-EBITDA ratio of 1.6x, we continue to have a strong balance sheet with flexibility for capital deployment, aligns to market conditions and strategic priorities. So finally, to cover off on a number of other financial matters on Slide 15. Finance costs of EUR 27.8 million were in line with the prior year. Pensions was a net surplus of EUR 57 million. Non-trading items of EUR 20 million reflected costs related to our Accelerate Operational Excellence program, which continues to deliver margin expansion ahead of schedule. On the input costs, we saw a significant variation within our overall input cost basket in the first half, resulting in overall deflation. We expect this to ease significantly in the second half of the year. On capital returns, we have announced an interim dividend of EUR 0.381 per share, a year-on-year increase of 10.1%. On share buybacks, the group repurchased EUR 279 million worth of shares during the period. Given the good cash generation and current market conditions, the group intends to initiate a further program post the completion of the current program, and details of which will be provided prior to the commencement. On currency, we are currently expecting a foreign currency translation headwind of 1% on the earnings per share in the full year. And to summarize, we are pleased to have delivered a good financial performance in the first half. We delivered good volume growth in Taste & Nutrition, with very strong EBITDA margin progression and continued good cash generation. And with that, I'll pass you back to Edmond.

Thanks, Marguerite. So moving to our full year outlook on Slide 17. We have a good innovation pipeline, and we remain well positioned to deliver good volume growth and strong margin expansion in the full year. We will continue to develop our business and portfolio aligned to strategic priorities. And as I said earlier, given our strong financial performance in H1 and our outlook for the second half of the year, we are today upgrading our full year earnings per share guidance to 7% to 10% constant currency growth. So finally, now on Slide 18. And before we move to Q&A, I'd like to flag a date for your diaries as we're hosting our in-person Investor Day on the 8th of October at our U.S. Innovation Center. We're very excited about the event as it's an opportunity to give you a greater insight on our science-backed technology portfolio and showcase how it's driving significant impact for our customers in several different ways for making products healthier, tastier, more nutritious, more sustainable or more cost-effective. On the day, you'll get to see what makes Kerry unique across each of our key growth differentiators: sustainable nutrition, foodservice and emerging markets. So we're looking forward to seeing you there. And with that, I'll hand you back to the operator, and we look forward to taking your questions.

[Operator Instructions] Our first question comes from Alex Sloane from Barclays.

I've got 2, please. The first one, in terms of the outlook, could you please give some more color on what you're expecting from end markets in Taste & Nutrition in the second half? I think at the start of the year, you had said you're not banking or much inflection in end market volumes in retail in the second half? We have heard in the last few weeks some major listed customers on their intentions to step up promotional intensity to drive volume from here. So are you incorporating that potential tailwind into the guidance raise? Or is the upgrade today based more on what you can see in your own innovation pipeline? That would be the first one. And the second one, just in terms of foodservice, obviously, impressive second quarter growth despite some well-documented traffic challenges by some listed peers and customers is driven by the penetration of solutions that help efficiency that you had said would continue. The question would be, how much runway do we have here? Can you keep up this outperformance versus the end market in the second half and into '25? And is the growth here relying on a few customers and specific solutions or more broad-based?

Alex, thanks for the question. On your first question, we haven't baked in an uptick in market conditions here, Alex. It's -- but we're -- we haven't seen a significant change from what we've seen in Q1 into Q2. And our outlook and our guidance is very much based on current market conditions. Let's see what the uptick in promotional activity and advertising activity brings over the coming months. Then with respect to our performance in foodservice. Look, we do believe we have a unique position here. We continue to be confident about the foodservice opportunity. And I think it's important to understand, we have excellent coverage across the channel. So our engagement within the channel is both broad and wide and deep not just with the well-established players that you just referenced, but also with emerging leaders, so with local and regional players, which is a feature within emerging markets, also within the convenience channel, which has been a notable feature in North America in recent months. And from an innovation perspective, while we have talked quite a bit about solutions for customers to reduce cost and complexity, and that continues to be a feature, but also, we are seeing customers very much out there trying to drive traffic with new menu ranges, with seasonal launches, and with a renewed focus on beverage and establishing and growing a beverage platform to drive differentiation and excitement. So we're extremely well-pleased there to -- well-positioned there to help customers to do that. And finally, there's continued enhancement of the nutritional profiles of menu offerings. So that also continues to be a feature. So clearly, here, look foodservice, it's a channel where we're winning. We're outperforming and we're taking market share through penetration, and we continue to be confident about the channel going forward.

Our next question comes from Edward Hockin from JPMorgan.

First question is a bit on the guidance for volumes now using the language of good volume growth for the year and you said as well, focused to get over 4% as soon as possible. So could you maybe give us a little bit of more color on how you expect the phasing of the volume growth in Taste & Nutrition for the remainder of this year versus the 3% that you did in H1? And as well, just related to the prior question on foodservices, specifically whether we can expect in Q3, Q4 some contribution from the uptick in promotional intensity we see in that end market. And my second question, if I may, you mentioned quite a lot on authentic taste on Tastesense and on ProActive Health as well as third high-growth pillar you've got is preservation. Can you give us a little bit of an idea of how these 3 platforms grew in volumes versus the 3% that you saw for Taste & Nutrition as a whole?

Edmond, maybe on your last question first, one should assume that from a Tastesense perspective, both sugar and salt, and from a preservation perspective, especially as it relates to reducing food waste and therefore reducing costs for our customers, those areas one should assume have been ahead of the average from a growth perspective. Then in terms of, let's say your question in terms of, let's say, volume outlook as such. We currently expect volumes, let's say, by region to be broadly similar or slightly better in the second half. So continued good growth in the Americas, with Europe remaining relatively soft, reflective of the current market dynamics, and APMEA delivering growth around mid-single-digit volume growth or slightly better. In terms of promotions and what you've referenced there, we've seen some impacts in places. I would say it's a little bit too early to really count on those promotions really kicking in at this moment in time. So let's see how the next few months play out. So all in all, we're not seeing a meaningful change in market conditions at this moment in time. And we haven't baked in an uptick or any real significant improvement in market conditions in the guidance. Let's see what the coming months hold that play out, and let's see how those promotional activity play out as well in the coming months.

Next question comes from Charles Eden from UBS.

Two questions for me, please. First, probably for you, Marguerite. On the free cash flow, obviously, very strong both on an absolute and conversion basis. How should we be thinking about the free cash flow and conversions for the full year given that very strong first half performance? And then secondly, just on the share buyback, obviously, majority way through the first EUR 300 million, and you'll come back to this. But can you just sort of talk around the rationale there? Is it -- and sort of what has driven this decision? Was it share price? Was it the strong free cash flow? Yes, if you could just sort of comment on that as well would be great.

Charles, just taking those 2 questions. Firstly, on the cash outlook for the remainder of the year. In the first instance, I would say that we were very pleased with our cash conversion in the first half. We expect another year of good cash conversion and to be similar to the prior year in the zone of 90% on an average working capital basis. So very much committed to delivering a strong cash conversion for 2024. In terms of the share buyback, yes, we did announce our intention to commence -- to initiate a further share buyback post the completion of the current program. Maybe just to give you a sense of our thinking, it's really primarily due to a couple of factors. Firstly, our good cash generation. Secondly, the strength of our balance sheet and also the current market context. We will announce further details in relation to the quantum post completion of the current program. I think importantly for us, and as we have said previously, our objective here is to remain agile and flexible in terms of assessing the various capital allocation options very much based on prevailing market conditions and how we can create the most value for shareholders. And ultimately, our aim here, as we said previously, is to have an efficient and strong balance sheet, continuing to have a strong investment-grade rating and, importantly, also retaining capacity to invest in the strategic development of the business. So hopefully, that gives you a sense, Charles, of our thinking.

Our next question comes from Fulvio Cazzol from Berenberg.

Sorry to back about this on the volume, but I just want to make sure I'm crystal clear with what you're saying today. So previously, you were sort of saying 2% to 3% volume growth for T&N for this year. It sounds like now it should be more like a 3% to 4%, and that's driven more by the performance of Kerry, of an improvement in underlying market volumes. So if they develop further, we could even be higher than the 3% to 4% as we lap through the second half. And then my second question is on the operational excellence program, which, again, is providing some good margin improvements there. Can you just give us an update on how long before this program terminates and how much more margin you can squeeze out of this program, please?