Kerry Group plc (KRZ) Earnings Call Transcript & Summary

Good morning, and thank you for joining the Q&A call for our H1 2026 results and our 2030 targets. We released the presentations and management prepared remarks earlier this morning, and both are available on our website under the Investors section. I'm joined on our call by our CEO, Edmond Scanlon; and our CFO, Marguerite Larkin. Edmond will begin with a summary of the highlights from our H1 results and our 2030 targets, and then we'll open the line for questions. Before we begin, please take note of the disclaimer on our presentation regarding forward-looking statements. I'll now hand over to Edmond.

Thanks, William, and good morning, everyone. Beginning with our H1 2026 summary overview. We're pleased to report a strong performance in the first half, reflecting a step-up in volume growth in the second quarter, combined with continued strong margin expansion, driving high single-digit constant currency EPS growth. We delivered H1 volume growth of 3.3%, well ahead of our markets. Our step-up from 3.1% volume growth in Q1 to 3.5% in Q2 represented a broad-based improvement across all 3 regions and in both the retail and foodservice channels. Growth was led by foodservice with a range of new menu innovations, seasonal launches and cost reduction solutions, and growth in retail was supported by continued product renovation activity and innovation in high-growth areas. On EBITDA margins, we delivered margin expansion of 60 basis points in H1, driven by Accelerate 2.0, net price, operating leverage and portfolio mix, with EBITDA margins reflecting progression across all 3 regions. Our volume growth and margin expansion supported constant currency adjusted earnings per share growth of 7.9% in H1. And while recognizing current market uncertainty, we remain strongly positioned for volume growth and margin expansion in the full year, underpinned by a good innovation pipeline, and we are maintaining our guidance range of 6% to 10% constant currency EPS growth in 2026. Looking beyond 2026, I'd like to outline our new 2030 targets. On volumes, we have consistently outperformed our end markets over many years. We've set a target of 3% to 5% volume growth, and our range is set in the context of current market conditions, which I'll touch on shortly. On EBITDA margins, we've delivered 320 basis points margin expansion since 2021 and have set our target to be in the 20% to 21% range by 2030, driven by efficiencies, operating leverage and portfolio mix. And on EPS, our algorithm is about delivering consistent high single-digit plus EPS growth, supported by agile capital deployment aligned to value creation opportunities. We've increased our cash conversion target to 85% plus and are increasing our returns target to 12% to 13% by 2030. In our prepared remarks webcast earlier, I outlined the key dynamics in the market and the drivers of our future volume growth, with Marguerite outlining our targets around EBITDA margin expansion, cash and returns. I'm now going to summarize the building blocks of our volume growth target and then my key takeaways from this morning's 2030 targets presentation. Starting with our recent performance. We have a strong track record of market outperformance, delivering 3.8% average volume growth across the last 4 years against pretty flat end markets. We set our target range of 3% to 5% in the context of these market conditions, and not assuming an uptick in future market growth. I believe we will see market growth in the coming years, but we're taking a pragmatic approach and not factoring in something outside of our control. We've just reported Q2 volume growth of 3.5%, which you will have seen, and our pipeline of innovation and renovation opportunities is as strong as ever. Looking at our recent volume performance and our growth target through the lens of our 3 regions. Firstly, the Americas, which is our largest region and a powerhouse for Kerry and where we see phenomenal market opportunity. We've delivered strong volume growth in recent years and are looking for volume growth to remain in that 3% to 5% window. Next, in Europe, given the market backdrop, we're looking for growth of around 1% to 2%. And in APMEA, where we have delivered volume growth of around 6% and where we're looking for growth in that 5% to 9% range. We have 3 key volume growth drivers, which will underpin our performance. Firstly, foodservice. Where we're aiming for mid-single-digit plus volumes, having grown our business by 70% since 2017. We still see significant runway for growth given our competitive advantage, which is based on deeply embedded customer innovation partnerships, our broad technology portfolio and our dedicated business model. Next, emerging markets, where we've delivered high single-digit volume growth over the long term and have a large global presence. Major growth drivers from a consumer perspective will be increased health and wellness innovation, regulatory developments and an increasing number of snacking and beverage consumption occasions. The investments we have made in building out our extensive local footprint and in-market capabilities gives us proximity to our customers, enabling us to provide locally relevant solutions and derisking their supply chains, giving us an advantage and positioning us to outperform across the medium to long term. Finally, renovation, which continues to grow as a percentage of our pipeline. It's around 40% today, and each renovation opportunity is providing a catalyst for organic growth and margin expansion as we incorporate deeper layers of technology in new launches. This morning, I provided some examples in areas like sodium reduction and protein masking. We will be hosting an investor event on the 8th of October, where we will give you more color and insight into our business at our U.S. Technology and Innovation Center in Beloit, Wisconsin, and we look forward to seeing you there. So I'll finish with my key takeaways. We have a strong track record of growth and business development. We feel confident that we will continue to significantly outperform our end markets while continually evolving and future fitting our business to ensure we remain the top-of-mind partner for the food and beverage industry when it comes to solving its most complex challenges. Today's market landscape provides significant opportunity for Kerry. Challenges are greater. Customers need to move faster to make their products better. And that is what we are built for. Our clear market differentiation is based on our ability to deliver value for our customers at pace through our deep layered taste and biotechnology capability, along with our global innovation ecosystem across our broad customer and channel base. This provides us with an in-built business resilience, which is critical in today's market landscape where dynamics continue to evolve. Our strategy is growth led, and I've outlined our building blocks by region and the key drivers of our future volume growth. And finally, this growth, combined with our EBITDA margin expansion will be the key drivers of our high single-digit plus earnings growth algorithm as part of our balanced overall financial framework. So with that, I pass you back to the operator, and we look forward to your questions on both our H1 results and our 2030 targets.

[Operator Instructions] Our first question comes from the line of Alex Sloane with Barclays.

I've got one on '26 and then 2 on the targets, if that's okay. So just in terms of '26, obviously, maintaining the full year guidance today. Does that imply you're still assuming around 3% volume growth for the full year? Or do you see the kind of slightly improved run rate of Q2 as sustainable into the second half? And if not, if there are any kind of key factors as to what would be driving a moderation in your view? That's the first one. Then on the targets, thank you for all the color. So if I look at the kind of the medium-term volume targets, APMEA has the widest growth range, obviously, within the regions, 5% to 9%. And it's the region where today, you kind of delivering towards the sort of lower end of the range versus sort of more middle of the range in the Americas. So what needs to change for Kerry to sustain growth in the upper half of that range? Is it primarily within your control? Or does it require a more stronger external environment? And then just a final one maybe for Marguerite, on the margins, thank you for the increased disclosure on gross margins and the ambition to step that up, which is welcome. I guess it's sort of a broader question on margins. Given you have a pass-through pricing model, I guess, how feasible are these targets to and how sensitive are they to a kind of more inflationary raw material environment? And are you building in some flex for inflation as a base case?

Alex, I'll kick off here. Maybe firstly, on the outlook for 2026. So we have increased our volume expectations for the year and now expect H2 volume growth to be more like our Q2 volumes of 3.5%. So this means our full year volume expectations are close to 3.5% versus the 3% level we had outlined earlier in the year. And just from a regional perspective, Q2 volume growth by region is probably a good reference point or a good proxy in terms of our volume expectation for the rest of the year. And just to do the full loop then on EPS, as we referenced in the prepared remarks, there's no change in our constant currency EPS guidance range of the 6% to 10%, but we do expect a modest increase in our EPS expectations for the year within the range, and that's based on the increased volume outlook that I just mentioned there. Then just moving on to your question on, let's say, the medium term and APMEA specifically. Look, we outlined earlier in the year at CAGNY that we planned on building on the volume growth that we delivered in 2025 in the APMEA region with strong mid-single-digit growth in 2026 and a further growth in 2027 and beyond. And our aim here is to deliver on that high single-digit growth. So I guess, overall, our ambition for the APMEA region actually remains unchanged. The makeup versus the past might be a little bit different in that we expect the increased growth to be led by growth in Middle East and Africa, followed by Southeast Asia. Look, we have been investing in building out our footprint, as you know, and our in-market capabilities right across the 3 subregions of the APMEA region. And it's all about executing locally, executing on our growth strategies to help customers to meet the ever-evolving local consumer needs and the increased health and wellness pull that is also in that region. Out-of-home is also a factor as is the new and convenient food and beverage offerings. Macro dynamics are also on our side in that region in that over the next decade, there is an expectation that middle-class households will go from about 350 million to 700 million over the next decade or so. So overall, as we kind of look at the 3 subregions within APMEA, while the building blocks will be maybe a little bit different in the past, we do believe we are well set up. There's momentum in the business, and it's playing out more or less as we've expected here through the course of 2026.

And Alex, just on the margin target and the inflation question. As you say, firstly, on potential inflation, it's not easy to predict over a life cycle. We do have a strong track record of managing inflation over the years, and we have a strong track record of delivering margin expansion of over 300 basis points over the last number of years. So we have factored in some inflation in terms of our thinking on the increased target. I mean what is important here, a couple of points I would make. Firstly, the strong track record of margin expansion delivery. The levers are clear in the context of driving margin expansion over the plan. And those are efficiencies from our Accelerate program, mix and leverage and beyond 2028 to reach the increased margin target of 20% to 21% in 2030. We see those similar levers driving the margin expansion, leverage, mix and efficiencies. I think there's a number of factors at play as we look at the evolution of the business and as Edmond has referenced. Firstly, on leverage, we see good margin expansion opportunities as we continue to outperform in foodservice and in emerging markets where we've invested ahead of growth. And then secondly, on mix, particularly in the areas Edmond mentioned on renovation and clean label and technology and removing artificial ingredients, they're complex challenges, and they require layering of our technologies and application expertise, and that presents a margin expansion opportunity as well as growth opportunities. Thirdly, as I referenced, we will continue to deliver margin expansion through efficiencies. So it's a combination of all of those factors as we look to the increased target. I think importantly, like we've shown in the past, -- we are balancing our margin expansion with continued investment in the business, and you'll see also that we communicated earlier today our expectation to increase our current R&D spend from 4.5% -- 4% to 5% to 5% to 6%, which is also a key part of how we're thinking about the business as we go forward and the margin expansion.

Our next question comes from the line of Patrick Higgins with Goodbody.

Kind of one 2026 question and then one on the midterm if that's okay. Firstly, just in terms of, I guess, the step-up in performance in Q2, to what extent is that just Kerry kind of executing stronger versus, I guess, any improvement in end markets? And in the sense that it is Kerry outperforming or outperformance widening, where is the key drivers there? Is it renovation? Or are you seeing a step-up in innovation? And then in terms of the midterm guidance, I guess, on free cash flow, good to see the kind of increased kind of conversion target. Maybe could you just talk us through what's underpinning that? Is it lower CapEx or kind of improved working capital or just the better margin profile?

Thanks, Patrick. I'll kick off here. I would say in terms of, let's say, our general performance here, firstly, I would say we haven't seen any notable change from an underlying market condition standpoint. So we'd be calling underlying market more or less the same as we talked about at the Q1 and at the beginning of the year. So the key drivers of outperformance, firstly, are around the renovation opportunity. I did give more color on that on the 2030 targets there this morning. We see this as a structural market shift. And it's primarily driven by actually increased consumer expectations. There is -- continues to be supply chain challenges. There's obviously also increased regulatory developments in various markets. And ultimately, what we're seeing is that customers' need for renovation is increasing and customers are looking not only to, let's say, improve the nutritional profile, not only derisk from a supply chain perspective, not only strive to meet regulatory requirements, consumer expectations, but do all those things while also maintaining the quality of the product, the taste of the product. They're also doing everything they can to ensure that they're not losing market share at a minimum and trying to grow market share ultimately. So that is a key element. That's not to say that there's not innovation in the market. There is -- we're also seeing innovation in the market. We've touched on it previously, examples like poultry, the protein being, let's say, a key focus for consumers at the moment, poultry being a pretty good value source of protein. We have a very strong position on poultry globally as it relates to taste and excellent relationship with the poultry processors. Beyond that is the broader protein, I suppose, expectation from consumers. I referenced on the webcast about the desire to put the maximum amount of protein, and we've seen examples of customers wanting to put 40 grams of protein into a single serving. That is a highly complex, highly challenging thing to do, and it requires a huge amount of technical capability, applications capability, technology, and these are all areas of core competency for Kerry. Coffee is another area that is growing, refreshing beverage, especially as it relates to functionality with refreshing beverage and supplements as well. And that's -- and we're seeing this right across actually the larger CPGs, emerging leaders and of course, retailer brands as well as they are looking at the landscape and seeing how they can grow their business. And then lastly, on foodservice. And foodservice has been a key underpin of growth for us for several years. We've had an excellent performance here in the first half on foodservice, especially in the Americas region. And foodservice over the medium term will continue to be -- we will continue to outperform retail. And we do see significant runway for growth out in front of us given that competitive advantage we have. And that competitive advantage is not just based on one thing, it's based on multiple factors, those deeply embedded customer innovation partnerships, our broad technology portfolio and our dedicated business model that is absolutely orientated towards that channel. And I think maybe what's underappreciated is the fact that our market share within the foodservice channel is only still at the low teens. So we continue to have significant runway in front of us in terms of growing that market share, and we feel we're very well positioned to be able to take advantage of that and capitalize on that.

On your cash question, your cash target question, we have increased the cash target to 85% plus, and that is driven by profit growth and margin expansion expectations incorporated into our cash target of 85%. Firstly, it recognizes working capital investment aligned to our growth strategies and also capital expenditure of 4% to 5%, which is above -- which is in line with our current investment. So no change on our capital expenditure of 4% to 5%. We do have a strong record of delivering roughly 88% cash conversion over the 4 years. And just in relation to 2026, we expect 2026 to be a year of good cash conversion of 80% plus for the year.

Our next question comes from the line of Ed Hockin with JPMorgan.

I hope you can hear me okay. I've got 2, please. One is broadly on the renovation opportunity that you see for the midterm. I think you say 40% of your pipeline is related to renovation. I think in North America, a figure of 60% had been given before. So I'm curious on where you see renovation opportunities developing in the rest of world in Europe and in emerging markets. And also within Americas, clearly, renovation is a reality now. But to what degree do you see over the next 12 to 18 months a building pipeline of reformulations by customers? Should we expect that there's a pickup further to come? Or is this quite a smooth pace of renovation year in, year out? And then my second question, please, is on the return on average capital employed metrics, which are quite stepped up from the 10% to 11% level that you've been at for the past several years. So what is it underpinning this? Obviously, improving profitability is one part. But does it tell us anything about your appetite for acquisitions over the coming years? And if you could remind us some of the spaces that you're looking at for bolt-on deals? Should we be thinking areas like fermentation, enzymes, biotech, proactive health as before and some emerging markets capabilities or anything shifted on the M&A outlook for the coming years?

Thanks, Ed. I'll kick off here. Maybe firstly, on renovation. We've sized the renovation -- our current pipeline as it relates to renovations approximately 40%, and like we've said, it's going to be a key driver of growth in the medium term, and we expect that to continue to be at that level or slightly greater in coming years. Maybe just looking back first, I mean, we have seen a significant step-up in recent years in that scale of renovation activity within our pipeline. So maybe historically, one should think about that as approximately maybe 1/3 of our, let's say, business development activity was in renovation, if we were to go back a number of years. It does vary by geography. Like we've said previously, we're currently in that 60% zone as it relates to renovation activity in North America as we outlined. And as you can appreciate, it's typically higher in developed markets compared to emerging markets. We do expect that to evolve over time. Right now, like I said, it's the highest in North America. That's driven by lots of things, but it's primarily driven ultimately by the consumer pull. Things like regulations and things like that, I mean, maybe just to give an update on that, the -- probably the most recent development, what we've seen is that there is more alignment between the federal government and the states that food regulation is more of an activity of the federal government. And obviously, that is a positive development in recent months that it's more realistic, I think, and encouraging development. Look, it's obviously still hard to predict exactly when front-to-pack labeling will actually be implemented in North America or in the U.S. But we genuinely believe it's a matter of when, not if. And I also believe even regardless of that, the consumer pull ultimately is the key driver. And I think here, over time, more and more customers will start thinking about renovation. But our expectation that it will be a gradual evolution here, Ed, as opposed to kind of a big spike and a kind of, let's say, a falloff. We see customers being very strategic, very purposeful, very systematic in their approach to reformulation, ensuring that they don't do any damage to their brand and ensure that they're bringing their most loyal consumers along with them. So that is typically how this plays out. Like we've mentioned previously, these are highly complex formulations to reformulate and do it in such a way that there isn't -- the consumer essentially doesn't -- can discern the fact that there is a formulation change. So this is typically a gradual evolution. That is what we have seen in other regions in the past, and that is our expectation in North America as well.

And just on returns, as you referenced, we have increased our returns target to 12% to 13% in 2030. And it very much reflects our high single-digit plus EPS growth expectation. While we are retaining flexibility for some bolt-on M&A under our capital allocation framework in the areas that you've mentioned, but I'll maybe pass to Edmond here in a few moments. In terms of our overall returns, our objective is continued focus on growth-led value creation and continued disciplined capital allocation in line with our capital allocation framework. Edmond?