Kerry Group plc (KRZ) Earnings Call Transcript & Summary

Good morning, and welcome to our 2025 half year results call. I'm joined on the call by our CEO, Edmond Scanlon; and our CFO, Marguerite Larkin. Edmond and Marguerite will take you through our presentation. And following this, we will then open up the lines for your questions. Before we begin, please take note of the disclaimer on our H1 presentation regarding forward-looking statements. I'll now pass over to Edmond .

Thanks, William, and good morning, everyone, and thanks for joining our call. So beginning with Slide 4 and the summary overview of H1, where we delivered a good overall performance, particularly given market conditions with continued volume growth and strong margin expansion driving strong constant currency earnings growth. So firstly, on revenue, we delivered 3% volume growth, which was well ahead of end market and channel growth. This was led by a strong performance in the foodservice channel with continued innovation activity on new menu items, seasonal launches as well as cost reduction solutions. Growth in the retail channel was supported by increased retailer brand innovation and nutritional renovation across a range of customers. On EBITDA margins, we delivered very strong margin expansion of 100 basis points in the first half with a key driver being accelerated operational excellence, along with operating leverage and also product and portfolio mix benefits. And on earnings per share, the combination of volume growth and margin expansion enabled us to deliver strong constant currency growth of 9.8% in the first half. I'll touch on the outlook in a little more detail later, but to summarize, there's no change to our full year constant currency EPS guidance range. We're slightly moderating our volume growth outlook for the full year is similar to what we delivered in H1. While increasing our expectations for full year margin expansion, which we will touch on shortly. Moving next to the business performance overview on Slide 5. Volume growth was 3% for both Q2 and H1. This represented a strong outperformance over food and beverage end markets, which were flattish overall. Pricing of 0.2% reflected limited overall inflation across our basket of input costs. Across our end use markets, volume growth was led by beverage, bakery and snacks end-use markets, this was supported by strong growth in savory taste, Tastesense Salt and sugar reduction technologies as well as botanicals, natural extracts and proactive health ingredients. And then in emerging markets, we had volume growth of 5.6%, led by a strong performance in Southeast Asia and LatAm. Turning next to the performance by region and starting with the Americas on Slide 6, where we had continued strong performance. Reported revenue for the region increased to over EUR 1.9 billion, driven by volume growth of 3.7% in H1 and 3.9% in Q2. EBITDA margins for the region increased by 90 basis points to 18.5%, driven by accelerated operational excellence benefits, operating leverage and product mix. In North America, we had strong growth in snacks through our range of savory taste profiles and Tastesense Salt reduction technologies across global and emerging brands, given the increased customer focus on improving nutritional profiles. Growth in Bakery was driven by taste and texture solutions as well as enzymes, while in beverage, we had good performances in the refreshing and lower no alcohol categories through botanicals and natural extracts. Across our channels, we had a good performance in retail, supported by innovation and renovation activity across both customer and retailer brands with foodservice continuing to strongly outperform traffic in the channel. Within LatAm, strong growth was achieved in Brazil and Central America across the snacks and meals and markets in particular. Business developments in the region included investment in enhancing our coffee extraction capabilities, which continues to be an area of innovation focus for our customers across many food and beverage applications, and also across channels. Moving to Europe on Slide 7, where performance was in line with expectations. Reported revenue for the region was EUR 731 million, with volume growth of 0.2% in H1 and 0.3% in Q2. On margins, we delivered strong EBITDA margin expansion of 90 basis points. And looking at our end-use markets. Volume growth in beverage was led by nutritional beverages through our integrated taste technologies and proactive health ingredients, while growth in bakery was led by texture systems. Across our channels, foodservice had good growth through seasonal and new launch activity with quick service restaurants, with performance in retail remaining challenged. Business investments in the region included strong progress in the development of our new biotechnology center in Leipzig in Germany, enzyme capacity expansion in Ireland as well as the expansion of our Cocoa extraction capabilities in grass in France. Turning to Slide 8 and APMEA where growth in the region was primarily driven by Southeast Asia, with solid growth in the Middle East and Africa, given disruption in places, and volumes in China remaining challenged. Reported revenue for the region increased to EUR 821 million, led by volume growth of 4.2% in H1 and 3.2% in Q2. On margins, we had EBITDA margin expansion of 60 basis points for the region in H1. And across our end markets, growth was led by bakery through food protection and preservation systems, as well as reformulation activity in areas including cocoa. Beverage continued to achieve good growth across refreshing, nutritional and functional beverages through natural extracts, botanicals and Tastesense Sugar reduction technologies with both local and regional customers. Meals also had good growth while performance in snacks was impacted by disruption to order patterns during the period. Growth in our channels was led by foodservice with leading regional coffee chains and quick service restaurants, while growth in retail was led by good performance in taste. Finally, business developments across the region included continued investment and expansion of our local taste capacity in the Middle East and Africa. And with that, I'll hand you over to Marguerite for the financial review.

Thanks, Edmond, and good morning, everyone. We delivered a good financial performance in the first half. Now turning to Slide 10 and the financial overview to give you more detail. Revenue increased to EUR 3.5 billion with volume growth of 3%. EBITDA increased by 7.5% to EUR 556 million, with EBITDA margins up 100 basis points. Adjusted earnings per share of EUR 2.092 was up 9.8% in constant currency, and 7.8% in reported currency. Return on capital employed of 10.7% reflected continued progression in the period, and free cash flow was $309 million with a cash conversion of 89% on an average basis. Turning to our group revenue bridge on Slide 11. Volume growth was 3%, as I mentioned. Pricing was positive 0.2%, reflecting limited overall input cost inflation and transaction currency was positive 0.3%. Foreign currency translation was adverse 1.9% due to movements in the U.S. dollar and weakness of some emerging market currencies versus the euro. The contribution from acquisitions of 0.6% related to the lactase enzymes acquisition. And the effect from disposals of 0.9% related to, firstly, the divestment of 2 small noncore businesses and assets in the prior year. And secondly, the revenue associated with the exit of a manufacturing agreement as a Taste & Nutrition facility in Northern Ireland, which following the Kerry Dairy Ireland transaction, has now been separated into 2 distinct manufacturing operations. Next, to the margin bridge on Slide 12. We delivered strong EBITDA margin expansion of 100 basis points with EBITDA increasing to EUR 556 million. Looking at the key moving parts. Firstly, on operating leverage and portfolio mix, we had a 30 basis points improvement led by portfolio mix. Pricing was net neutral given limited overall inflation in the period. The Accelerate Operational Excellence program contributed strongly to growth, delivering 50 basis points of EBITDA margin expansion in the first half. Foreign currency was net neutral from a margin perspective and the acquisitions and disposals contributed a net positive 20 basis points with acquisitions and disposals, both contributing circa 10 basis points each. Overall, we are pleased with our margin expansion in the period. And as we previously said, EBITDA margin expansion is greater in the first half due to the timing of the Accelerate Operational Excellence benefits. In the second half, we expect strong EBITDA margin expansion and we are increasing our expectations for the full year to 70 basis points or greater. Moving now to free cash flow on Slide 13. We generated good free cash flow in the period of EUR 309 million, reflecting 89% average cash conversion on the earnings and 83% on a point-to-point basis. Looking at the component parts for the first half, EBITDA increased to EUR 556 million, as I mentioned, average working capital represented an investment of EUR 66 million, aligned to the growth and development of the business. For the full year, we are looking at a similar level of working capital investment. And capital expenditure of EUR 120 million was similar to the prior year, reflecting various strategic capital investments, as Edmond referenced earlier. Overall, we delivered good cash conversion in the first half, and we remain well on track to deliver cash conversion in the 80% to 90% range in the full year. Finally, on cash, as a reminder, when looking at the free cash flow statement, the reported H1 2024 comparable period includes the impact of Kerry Dairy Ireland, which contributed circa EUR 35 million to EBITDA and was the main driver of the significantly positive working capital inflow in the prior year. Turning to our debt profile and credit metrics on Slide 14. Net debt at the end of June was EUR 2.1 billion with a weighted average maturity of 5.1 years and 7 years after the repayment of the refinanced EUR 950 million bond maturing later this year. Our credit metrics are strong with a net debt-to-EBITDA ratio of 1.7x, and we have a very strong balance sheet, which will continue to support the further development of our business. Finally, to cover off a number of other financial matters on Slide 15. Finance costs of EUR 26.5 million were similar to the prior year, net non-trading items were EUR 15 million, primarily reflecting costs related to the closeout of the Accelerate Operational Excellence program. We have initiated Accelerate 2.0 as planned, which will focus on footprint optimization and enabling digital excellence across the organization, and we will update you in due course as we progress the program. On the input costs, we saw a limited overall input cost inflation in the first half which we expect to be somewhat similar for the full year. On capital returns, we have announced an interim dividend of EUR 0.42 per share, a year-on-year increase of 10.2%. On share buybacks, we repurchased EUR 256 million worth of shares during the period. And on currency, we are currently expecting a foreign currency translation headwind of 4% to 5% on adjusted earnings per share in the full year. To summarize, we delivered a good financial performance in the first half with good volume growth ahead of end markets, strong EBITDA margin progression and 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. Our strong end market volume outperformance in the first half of the year demonstrates the strength of our strategic positioning across our markets, channels and customer base as an innovation and renovation partner. Looking to the second half of the year, we continue to be well positioned for volume growth with a good innovation pipeline. By recognizing this, end market volumes have softened through the period, and we're looking at volume growth in the second half being similar to the volume growth of 3% we achieved in H1. On EBITDA margins, we're looking for strong margin expansion in 2025 of 70 basis points or greater, as Marguerite just referenced. And we are maintaining our full year adjusted earnings per share guidance of 7% to 11% constant currency growth. So with that, I'll hand you back to the operator, and we look forward to taking your questions.

[Operator Instructions] And our first question comes from the line of Patrick Higgins with Goodbody.

A couple of questions on my end, if that's okay. So firstly, you mentioned end markets have softened through the first half. Could you just give us a sense of what do you think the end markets are growing or growing at all -- if at all, in H1 and your expectation for H2? And then secondly, following on from that, maybe could you just run us through your expectations for H2, I guess, by channel or by region and what's prompted you to pull back the full year guidance around the volume piece in particular?

Sure. Thanks, Patrick, and I'll kick off here. I think in terms of, let's say, overall kind of market conditions and what we're seeing right now, our best estimate is that end markets are flattish right now versus what we would have seen earlier in the year and last year. I think, though, that headline probably doesn't tell the full story as there are a lot of moving parts. There's good growth in retailer brands. There's good growth in local and emerging brands in many geographies. They're investing behind innovation, looking to extend their brand ranges, et cetera. So I guess it's hard to kind of draw a kind of a conclusion by customer segment per se, the variability is really down to an individual customer level. But our best estimate right now is around flattish from an overall market perspective. Then in terms of our volume outlook for the full year, and just to put some color on that, we're slightly moderating our overall volume expectations to being similar to H1 in that 3% zone like we mentioned, slightly moderating our expectations for the APMEA region and very slightly moderating our expectations in Americas. And in reality, there's actually no major call out there. And again, it goes back to that variability down at an individual customer level. We have seen a little bit more variability in APMEA and some softness in places, again, down to an individual customer level in U.S. foodservice. So looking out to the first -- at the full year, we're expecting to see volumes in APMEA to progress in the second half. So H2 will be stronger than H1 in APMEA. We do remain very positive on the region longer term. We have a strong track record there, and we have a great team there. Then maybe in terms of foodservice just for a second, we see traffic has been, let's say, quite flattish overall in the first half. And at the same time, we delivered a very strong outperformance of greater than 400 basis points. And then in maybe back in the U.S., the reality is the environment is a little bit more challenging at the moment in terms of consumer sentiment and spending patterns. But at the same time, we remain very positive on the channel, and we remain very positive on the U.S. And within retail in the U.S., we're very positive in terms of the opportunity that's out there in front of us in terms of reformulation, renovation, what's happening with retailer brands and private label. And the reality, I guess, is, look, customers are aggressively out there looking at ways to defend their positions to try and grow their business. They're looking at innovation to do that, and we're highly -- we're very well positioned and ideally positioned to actually enable them to do that.

Our next question comes from the line of Charles Eden with UBS.

Just one question for me on the Americas region, where obviously, volumes accelerated to 3.9% in Q2. Could you just talk a little bit about what you think is driving that I know you've said in the past really any sort of reformulation benefits and make America healthy again is a '26 story. So is that just underlying markets a little bit better I guess you called out food service, but sort of any color there and your expectations for that region specifically going into the second half? And just to clarify, I think the answer is no, but the assumption is there's no pull forward of demand because of tariffs because you are quite local for local, is that correct?

Thanks, Charles. I think, look, in the Americas and North America in particular, I think we've been very consistent. The reality is that we have -- we have a powerhouse of the business in North America. We're clearly recognized as food and beverage applications, experts in -- globally, but especially in that region. We have a phenomenal customer access right across channels and end-use markets. The reality is that the underlying market conditions actually have deteriorated actually in the second quarter. But I guess from our perspective, what we are seeing and we're well positioned is that, number one, we've seen a pickup in innovation with retailer brands with private labels -- with private label customers and private label retailers. We see customers trying to defend their positions and new and emerging players trying to scale our businesses. So I guess that pickup of innovation that we touched on earlier in the year, that is actually continuing. The second point is that more customers are actively planning to reformulate products, and that's more ahead of us right now, to be frank. I mean the impact in our business today actually is reformulation that was planned 12, 18 months ago as such. So the reformulation that's going to be worked down now is going to be more of a kind of a 2026 impact and beyond as opposed to a 2025 impact. But there is no doubt, there is a reformulation is top of mind for many customers right across the retail landscape, in particular and customers are formulating plans, some have initiated renovation plans and others are kind of assessing and waiting. But this is very much top of mind. And I guess, is giving us confidence about or continues to give us confidence around the North American market in the medium term and long term. And then the third area, I guess, is foodservice. And while the underlying market in foodservice is challenged, we continue to outperform the market by somewhere in the tune of 400 basis points. So for us, it's really these 3 key areas that are presenting us with opportunities for strong market outperformance. And that's what you're seeing coming through in the overall volume growth performance in the region. We are very slightly moderating our expectations in that market in the second half purely based on the marketplace. Tariffs aren't a feature here. It's really back to those 3 areas of strong underlying innovation, reformulation being a key factor and food services being a consistent underpin for us in the region.

And if I could just ask a follow-up and it's semi related. On the slightly raised margin expectations for the year, is that largely a mix factor, i.e., America is a bit stronger than you thought, maybe APMEA, which is slightly lower margin, a bit weaker? Or is it cost savings coming through slightly quicker than expected? Just trying to understand the drivers of that slightly better margin expectation for the year?