Niacet Corporation (KRZ) Earnings Call Transcript & Summary

Good day, and welcome to the Kerry Group market update conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to William Lynch, Head of Investor Relations. Please go ahead.

Thank you, operator. Good morning, and welcome to our update call to discuss Kerry's acquisition of Niacet. I'm joined on the call by our CEO, Edmond Scanlon; our CFO, Marguerite Larkin; and Dr. Albert McQuaid, our Chief Technology Officer. We will take you through a brief presentation outlining the transaction, which is available on our website. And following this, we will open the lines for 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, and thank you for joining the call this morning. We're delighted to announce that we've reached agreement to acquire Niacet, a global leader in preservation technologies. And we're looking forward to welcoming the talented Niacet team to Kerry and have been very impressed with their passion for innovation as well as their product and process expertise. And today marks another important step as we systematically execute against our food protection and preservation strategy. This is a market that's growing strongly and while Kerry is playing a key role in meeting many of the most complex challenges in the market, probably none is more relevant right now than ensuring food is safe and food reaches more people. The reduction of food waste through preservation is a key element of how Kerry is leading the drive towards a world of sustainable nutrition through preservation. And preservation does 2 things: firstly, by protecting and extending food shelf life, this means people have more time to consume food products, thereby reducing waste; and secondly, preservation is about keeping that food safe and protecting consumer health. So moving on and beginning with Slide 3 of the presentation and the strategic rationale. And I'm going to give you an overview of Niacet's business, I would strongly align it with our preservation strategy, the significant and growing global market demand and how this business will extend and accelerate Kerry's sustainable nutrition impact. Then Albert will provide examples of the synergistic benefits between Kerry and Niacets' complementary technologies and how these combined technologies can be taken into multiple end use markets. And then Marguerite will share the financial profile and more details on the transaction. So now turning to Slide 4 and an overview of Niacet. And Niacet is a global leader in technologies for preservation. It's #1 in bakery, with a significant market share, and within meat and plant-based food, it's a leader in cost-effective, low-sodium preservation. And it's a global leader in high-grade acetates for the pharma market, which is also an exciting end use market from a Kerry perspective. An important differentiator of note for Niacet is its proprietary know-how and trade secrets and how they combine dehydration and granulation process technologies to make high-purity, cost-effective, easy-to-use products in different applications. In terms of the financials, the business is expected to have revenues of approximately $220 million in 2021, which breaks down approximately 80-20 between food and pharma. And you can see the geographic split on the slide there. And I would note also that there is a meaningful scale in developing markets in the zone of 20%. So then on Slide 5, Niacet's business profile and capabilities are shown across its end-use markets, its technology families and primary brands. And under the Provian brand, Niacet delivers cost-effective, crystallized product technologies that increase food safety and shows life in a free-flowing, easy-to-transport and easy-to-use format. It's the #1 player in propionates with an unrivaled scale and their capability in high-purity acetates has made Niacet the leader in the pharma market across all geographies and quality metrics. And these acetates are used for various functions across insulin solutions, dialysis solutions, in certain vitamin applications and other health products. So now moving on to how Niacet fits into our strategy on Slide 6. And we've shared a version of this slide with you in the past, and it gives you a view of our systematic approach to executing against our food protection and preservation strategy. Kerry's early foundations in food protection and preservation, as you can see there from the bottom of the slide, were established with the acquisition of Quest Ingredients. And in the past 4 to 5 years, we've made several organic innovation investments, capital investments and a number of acquisition investments to build both depth and breadth. And the Niacet acquisition marks another key step on our food protection and preservation journey. Kerry's core preservation technologies include fermentation expertise, plant extracts and functional vinegars for Niacet also enhances our position as well as expanding our position into conventional preservation. Keeping food safe over a long shelf life is a complex and multifaceted challenge. And there's no silver bullet, and it's never as simple as just adding or switching an ingredient. And each technology here has a unique mechanism of action. And when used either individually or in combination, they can offer protection across multiple applications across complex and lengthy supply chains as well as across diverse environmental conditions. So now moving on to the market on the next slide, which is seeing significant consumer-driven demand. And a statistic that you want to know is that 30% of all food produced is wasted. And if it was a country, it would be the third highest emitter of greenhouse gases. And 700 million people get sick every year by consuming unsafe food products. And recently, we did carry some Kerry research, and it highlighted that 60% of our consumers are even more concerned about food safety since the onset of COVID-19, and substantially has become a more important factor when consumers are choosing food products. So our goal here at Kerry, as we think about this market, is to deliver against 3 dimensions: firstly, to maximize food safety; secondly, to minimize food waste; and thirdly, to reduce the overall environmental impact. And this is a significant opportunity, with our target market size at approximately $1.8 billion, growing at mid-single-digit level. And this market is made up of both clean label and conventional preservation. And you can see from the footnote, the areas that we've excluded and the areas that we won't be playing in. You will also notice the intersection between clean label and conventional preservation. And this is something we're seeing, in particular, in developing markets, where the complexity and the length of the supply chain can require combination solutions. So before I hand it over to Albert, I just wanted to share with you how this acquisition of Niacet will extend and accelerate Kerry's sustainable nutrition impact on Slide 8. This acquisition enhances our nutrition impact in food safety and security, as well as clean label. And the area of food protection and preservation will become increasingly important from environmental and social sustainability perspective as our industry strives to deliver a meaningful climate impact through reduced uses of resources, combined with improved social impact by reaching more people with food that stays fresh and safe for longer. I'll now hand you over to Albert to talk through a few examples of the synergies that we can achieve through combining Kerry's capability and Niacet's capability in the whole space of preservation and food safety.

Thank you, Edmond, and good morning. I'm going to share some examples where we can really see Kerry and Niacet's combined capabilities coming to life. Here on Slide 9, the first example is the rapidly growing plant-based meat and dairy sector. Kerry's vinegar technology, fermentation technology and application expertise leverage and complement Niacet's unique proficiencies in drying and granulation process technology. These come together to deliver a more cost-effective and nutritionally adapted solution for the rapidly growing sector. We can deliver low sodium, improved texture, extra shelf life, better cost in use and more sustainable solutions for these growing categories. We move to Slide 10. Meat is a key growth opportunity for the combined Kerry and Niacet technology offering. Kerry is the global co-creation leader for taste and nutrition solutions for the meat industry. Niacet has the most cost-effective low-sodium, dehydrated technology for meat preservation and shelf life. The other, we can address the global need to reduce food waste and meat. We deliver food safety in the most cost-effective and sustainable way while not compromising on taste or nutrition. We enable and accelerate our customers' commitment to achieve zero waste in what is a significant part of the overall environmental impact of the food industry. If we go to Slide 11, this example is about food waste production in bakery, for Niacet is the global leader in preservation solutions. Kerry has an extensive range of technology offerings into bakery for taste, texture and shelf life, leveraging clean label solutions. The combination will make Kerry a partner of choice for reducing food waste in the bakery sector and ensuring optimal freshness for longer through conventional, clean label and combination solutions aligned to customer and regulatory demands by region. Together, we will have a really meaningful impact on reducing the global volume of bread that goes to waste each day, improving the nutritional reach of our planet's resources. I'll now hand over to Marguerite to bring you through the financial profile.

Thanks, Albert, and good morning, everyone. If you now turn to Slide 12, we've outlined the key transaction details and the highly attractive financial profile of Niacet. Beginning with the enterprise value of EUR 853 million, this represents a 2021 EV to EBITDA multiple of 15.4x excluding synergies. The acquisition is being made on a cash-free, debt-free basis subject to customary closing adjustments. Niacet is expected to achieve annualized pro forma revenue of $220 million and pro forma EBITDA of $66 million in the financial year 2021. This represents a strong EBITDA margin of circa 30%, which will enhance our Kerry margins by circa 30 to 40 basis points. The complementary nature of Niacet's capabilities will enhance Kerry's food protection and preservation strategy to serve a broader market. The resulting revenue synergies are expected to enable the Niacet business to significantly outperform the market and deliver at least mid- to high single-digit volume growth. The combination of this growth and margin enhancement means the acquisition is expected to be EPS accretive of circa 5% to 6% on an annualized basis. On funding, the transaction will be funded by a combination of existing liquidity and a dedicated bridge facility. The bridge facility will be repaid out of proceeds from the sale of our Consumer Foods Meats and Meal business, which we just recently announced. Our balance sheet remains very strong, and the net effect of these 2 transactions and Kerry's net debt-to-EBITDA ratio will be minimal. Finally, the transaction is expected to close by the end of the third quarter of 2021, subject to customary closing conditions and regulatory approvals, and we look forward to updating you more as we progress the completion process. So in closing, I would say this is a very strong strategic fit in terms of Kerry's food protection and preservation strategy, with complementary technologies and markets. It has a highly attractive financial profile, and this will extend and accelerate Kerry's sustainable nutrition impact. Thank you for listening, and we now welcome your questions. So with that, I will hand you over to the operator.

[Operator Instructions] We'll take our next -- our first question from Graham Hunt from Morgan Stanley.

Maybe just 2 from me. I wondered if you could just add a little bit of color on to the synergy opportunities that you talked a little bit about there, Marguerite, in terms of both revenues and if there's anything as well on the cost side for this acquisition. And then sort of further to that point, I just wondered, as you said with the announced disposal of the meat and meals business last week, do you have a sense of where you expect returns to land by the end of 2021, and what the trajectory of that return metric looks like over the next couple of years?

Graham, thanks for the question. And I'll kick off here and I'll let Marguerite add some more color at the end. Just firstly, on the synergies. This transaction is all about growth synergies. And just to size those synergies first, and we touched on it in the presentation, this market is growing in the zone of mid-single digits, and we see our revenue synergies driving 3 to 4 percentage points of growth above that level. And in terms of where those synergies are going to come from, I would refer you back to the presentation. But the first point here is that, is clean label, cost-effective, low sodium preservation solutions for meat and plant-based meat and cheese will be the first area. Second, the ability to meet the needs of both the premium end of the bakery market with clean label preservation and the value end of the market, with more conventional preservation solutions. The third point is in developing markets, we see the opportunity to extend days of shelf life through combining both approaches, both conventional and the clean label together into single solutions. And the fourth point here on sales synergies is on the pharma side. And while there will be a longer sales cycle there, we do see this enhancing and broadening and deepening our relationships with customers in the pharma market. Anything you want to add to that, Marguerite?

Yes. So Graham, just on your returns question, the overall impact of the 2 transactions will be slightly dilutive on returns. I would say, specifically in relation to the Niacet acquisition, it's a very strategic acquisition with a strong growth and strong margin profile.

We will take our next question from James Targett from Berenberg.

A couple for me. Firstly, just to clarify, could you talk about how much the portfolio is -- of Niacet is used for clean label applications versus conventional applications? And then just a question, really, on what we should think of the -- how we should think about the M&A pipeline going forward. This is obviously a very large deal relative to your recent ones and obviously, you've talked about the M&A pipeline being strong. But following this deal, what's the sort of the outlook for the next 18 months maybe? And maybe I can just squeeze in a third one, just take the opportunity to ask about the remaining dairy business in Consumer Foods and the Taste Nutrition segment as well. What are your plans with that now?

Thanks, James. And I'll take those questions. Maybe to start on your last question first, because it's -- I think it will be important maybe to frame it in the context of the transaction last week as well. And we've been clear for several years that our strategic focus from a capital allocation perspective is our Taste and Nutrition business. And the Private Label business, Private Label Retail business in the U.K. was not an area for capital allocation for Kerry. But until such time as the Brexit perspective was clear at the end of December, we were not in a position really to maximize the value for our shareholders. So what we did was we really challenged ourselves around the Consumer Foods business and looked at various options to maximize value for shareholders. And we looked at the dairy business on its own, the dairy business in combination with the dairy processing assets. We looked at the meat business on its own, we looked at meals on its own. We looked at merging the business in its entirety with other meal players in the market. We looked at maybe doing a transaction on private label on its own. We looked at separating out brands. And we also looked at it from a geographic perspective, running a transaction for Ireland and the U.K. with a combination of the portfolios. So we have concluded that portfolio review for now. And I would say that there was an exhaustive review completed. And what we ended up with is what we believe was the optimal way to drive the best shareholder value right now for this time. So then in terms of the portfolio coming to -- with Niacet, today, it's primarily conventional, in terms of -- conventional preservation in terms of scale with the clean label making up a smaller amount. But clearly, the clean label element of the business is growing quickly. But in the conventional preservation area, what we've seen is that the real value in preservation and for Kerry to be in the preservation space is to have the complete portfolio and a complete capability and to be able to work with customers across the range and the entire range of their products. And what we were noticing, let's say, in bakery alone, was our approach was primarily -- sorry, exclusively on the clean label elements of that market. And while it's growing fast, it's niche in terms of its premium -- the premium position that it takes within the entire bakery market. And we felt that it was important for us to be able to play both at the premium end and at the value end of the bakery market. In terms of clean label, that has been a recent innovation investment for the team at Niacet over the last maybe 3, 4, 5 years and is very complementary to what we're doing in our clean label journey, especially on the meat side as well. And a uniqueness that they have that they have brought there is really the low-sodium type preservation solutions that they have in their portfolio. And lastly, on the M&A pipeline, I would say, the M&A pipeline continues to be quite strong. I would say that like we said, maybe towards the end of 2020, we did flag the fact that in times of crisis, whether it was the financial crisis, whether it was the major regulatory changes like we saw in the U.S. maybe 4 or 5 years ago, big changes like that in our industry typically creates an environment that more transactions come to the market. So we continue to be quite busy in terms of evaluating various opportunities. And maybe one small, maybe just evolution in terms of how we evaluate these transactions on top of strategy, on top of financial is also the sustainability impact that these transactions can have on Kerry and our customers. And we see this transaction today being accretive from a sustainability perspective as well.

We'll take our next question from Heidi Vesterinen from Exane BNP Paribas.

So I have a few. Could you talk about the financial history of the business, please? Perhaps in terms of volume growth, margin profile and also its cash generation, maybe going back a couple of years? And then the second one, who are Niacet's competitors, please? And then lastly, could you talk a little bit about channel exposure in food? Do they have exposure to food service, for example?

Thanks, Heidi. I might take the second 2 questions first and pass the financial question back to Marguerite. Firstly, in terms of, let's say, competitors, on the meat end-use market first, Kerry would have been a competitor of Niacet as would, let's say, a Corbion would be a competitor of Niacet in the meat space, albeit that, let's say, all 3 companies have a slightly different approach. We would compete in the overall space on a meat end-use market first. In terms of the bakery end use market, from a Kerry perspective, we were competing with Niacet in terms of, let's say, our clean label technologies into that space, while Niacet was primarily coming with a conventional approach, albeit they have an innovation pipeline on clean label preservation for our bakery as well, albeit it's less mature in terms of their overall portfolio. Beyond that, there are a number of smaller players. What I would say, though, is that as we look at the total market, as we defined it and I outlined the scale of the market and what we've excluded from that market and included in that market in the presentation, it's sized at $1.8 billion. It's growing at mid-single digits and in that zone. And from a market share perspective, both combining Niacet and Kerry, we would be in the 20%-plus zone from an overall market share perspective. In terms of channel exposure, I would say that the vast majority of their sales goes to the retail market. They would not have, let's say, fantastic visibility of, let's say, exactly how much goes into food service. Our view right now is that it's quite limited. But that's something we will be -- we will see as -- we do see as an opportunity over time to help us bolster our own capability into food service. So that's kind of, let's say, the summary of their position from a channel perspective.

And perhaps just on the historical financials, the business has been growing well over the last number of years, in line with the market and in the zone of mid-single-digit growth. It also over that period, had a strong margin profile and good cash conversion profile.

We'll take our next question from Ryan Tomkins from Jefferies.

Just a quick one for me. I appreciate we've covered quite a lot. If I think about preservation in the portfolio, it's an area that I think you've talked about before and I would have assumed was quite strong for you. So I'm just wondering kind of what attracted you to make an acquisition in an area of relative strength for you rather than maybe building up the portfolio elsewhere? Or is that not a fair way to look at it?

Thanks, Ryan, and I mean you're absolutely right. We did give you a peek onto the world of -- around what were -- how we were thinking about the overall preservation market and food protection market when we -- back, I believe, at the half year results in 2020. And for us, what's important is that let's say, we are the go-to partner for our customers in preservation. And we want to be a holistic partner for customers in that market. And what we felt was that in certain end-use markets, we needed to be both in conventional systems as well as clean label systems. And in developing markets, in certain -- within certain end-use markets, in developing markets, we saw that we required both a clean label approach and a conventional approach. And to combine those to really be able to accelerate our growth in developing markets because of the complexity of the supply chains and the length of the supply chains that we were seeing in developing markets. So I'd say -- I would say in terms of our strategy, it is, I would say, center will play from a strategic perspective. We are striving for leadership position here. I think we are clear leaders now in preservation, and the breadth of end-use markets that we work across, I would say, is another strength, and I would say, is a clear differentiator versus anybody else in the market. So for us, center will play from a strategic perspective and in a strong growing market and best placed, I would say, in the industry to convert those opportunities into growth.

We'll take our next question from Cathal Kenny from Davy Research.

Just one from my side. Just if we take the Consumer Foods business to prior disposal and this morning's announcement, I just want to understand maybe from a margin and a volume growth perspective, the overall accretion dilution? Or how should we think of it at group level?

Thanks, Cathal. So post the completion of the Niacet acquisition and the recently announced Consumer Foods, Meat and Meals disposal, we will have the enhanced group volume growth of circa 20 to 30 basis points. And in relation to margin, we will have the enhanced trading margin of circa 70 to 80 basis points going forward. And this is obviously a significant expansion of the goods margin profile.

Marguerite, any comments on cash conversion? Any change?

No. So on cash conversion, as I said, Niacet is -- it's a very good cash business. We will be investing in the early years to support our growth plans. But from a group perspective, we're not calling out any change to our overall expectations on cash conversion taking into consideration both transactions.

We'll take our next question from John Ennis from Goldman Sachs.

Just a couple of quick follow-ups for me. The first is on the revenue state. You highlighted that Food accounts for 18% of revenues. Can you just give a rough breakdown between bakery versus meat versus plant-based? And then my second is on margins. Is there a big difference between the margin profile of the pharma versus the food parts of the portfolio or a big difference by region that we should be aware of?

Thanks, John, and I'll take those 2 questions. We don't see any difference from a margin perspective. I would say, between the -- across end-use markets. From a technology perspective, the -- when we look at the business through the lens of technology, those technologies going into each end-use market are more or less the same from a margin perspective. And from a geographic perspective, we wouldn't be calling out any difference either. In terms of the split out between end-use markets, the food end use market, it's primarily bakery, followed by meat, and plant-based would be quite small right now. And with that said, it would be in the combination of Kerry and Niacet that we would see the bigger opportunity in plant-based as we go forward.

We'll take our next question from Jason Molins from Goodbody.

A number of questions that I had have been answered. But maybe just a couple of follow-ups. Firstly, in terms of the cash requirement, can you maybe talk about the existing facilities, how well you see them, if they've been invested? Or you mentioned having to invest behind the combined business. So maybe just elaborate a bit more what you're expecting there. And then in terms of the potential overlap, is there any real overlap from a customer perspective at the moment?

Thanks, Jason, and I'll take those questions. Maybe the last point on customer overlap first. I believe that the company brings about 300 customers to Kerry. And I'm sure within that 300 customers, there are new customers. But I would say, I would imagine there's quite a bit of overlap from a customer perspective, albeit the types of technologies and the solutions we are providing into customers would be different. So new customers, but an overlap as well. In terms of the first part of your question, these facilities are heavily invested, highly automated. But it might be worthwhile just to share with you how we're thinking about this business from an integration standpoint. And I think that will give you some visibility on some of the areas of investment that we're thinking about. So 3 areas I would call out. Firstly, in the technology integration, in terms of achieving the synergistic benefits through combining both elements of the portfolio, whether that's on the clean label or the conventional side, so there'll be some investments there from a, I would say, probably more operating standpoint. Secondly, on the manufacturing integration side, we do want to maximize the opportunity to leverage the proprietary process technology that Niacet has developed. And the third area is on the commercial integration side, we'll be plugging Niacet into Kerry's go-to-market structure globally. So they will be some of the earlier areas of focus, and there will be some investment around that.

We'll take our next question from [ Maria Munoz ] from [ Sandenta ].

I was just wondering if you could take in both transactions together, so the one that you announced last week and the one that you have announced today, what would be your -- from your initial thoughts, the EPS dilution for the year -- for this year and I'd say, '21 and if possible, for '22, if any, at all?

So thank you for the question. On a full year basis, on an annual basis, just in relation to the EPS impact, the sales of the Consumer Foods, Meats and Meals business is circa 9% to 10% dilutive. And Niacet is circa 5% to 6% accretive. And then if one looks at it from a final quarter perspective, and obviously, it's heavily impacted by the timing. But if one assumes that both completes at the end of Q3, as the sale of the Consumer Foods Meat and Meals business will result in an EPS dilution of circa 3% in the quarter, while the Niacet acquisition will be EPS accretive of circa 1% in the quarter, just reflecting bridge finance costs in the final quarter.

So that will mean altogether around 2% dilution in Q4?

Very much depending -- yes, broadly in line, but very much dependent on the timing of the completion.

I would say -- sorry, Maria, just even -- just to give an extra angle on that is, in terms of our Foods, it is kind of the 9% to 10%, where Foods business, actually the Meat and Meals part of the Foods business, it does generate higher profits in the second half of the year. So in the last quarter, it is a higher weighting of an impact versus the annualized impact. So when we're talking to kind of the quarter, Maria, there is a couple of moving parts, which mean it's not reflective of the annualized impacts that Marguerite has called out.

That was what I was going to add. So you have mentioned the -- if I've correctly understood what you said, that the potential dilution in Q4 '21 would be around 2%, depending on -- obviously, when these transactions are closed, but assuming that they are closed sometime during Q3. And I was wondering if we go for 1 whole year, so let's say, year '22, what would be overall the potential dilution from -- or accretion from both transactions?

Just in the context of the EPS impact, the annualized impact that I referenced is in relation to FY '21. And we've been as transparent as possible in relation to the impact in '21, assuming that the transaction closes in the final quarter. Obviously, in relation to FY '22, we'll update in more detail at the half year.

We will take our next question from Alex Sloane from Barclays.

Yes. Just 2 follow-ups from me. Just the first one, in the mid- to high single-digit growth you're expecting from the Niacet asset, are there any areas of the conventional preservatives that the company is playing in that -- there are or might come under pressure as consumers and customers see cleaner label solutions as we've seen in some other preservative markets like sorbates and benzoate? Appreciate you're not playing in those areas. And then just the second one, just a follow-up to Marguerite, just on the cash conversion, good to hear no change there net of these 2 transactions. Just to clarify, that means you're still targeting an on-course in 2021 for cash conversion above 80%?

Alex, yes, just on the cash conversion to reconfirm, from a group perspective, we're not calling out any change to our overall expectation on conversion. As we indicated before, the -- in the zone of the [ 82% ] cash conversion.

Alex, I'll take the first part of your question. In terms of the bakery market, let's say, where Niacet primarily plays from a conventional perspective, what we're seeing is that there's 2 parts of bakery, let's say, that are growing, and they're at both ends of the spectrum. I would say the first is that the premium end of bakery is growing. And we see that as primarily the opportunity from a clean label perspective. I would say, at the value end of the market, so the lower end of the market from a cost standpoint, we see the opportunities on the conventional side. There is and there has been a conversion obviously. And I think we're very well positioned to be -- to take advantage of the conversion as if and when customers in Bakery convert from clean label to -- or sorry, from conventional to clean label. Another point I would make, though, is in the developing markets. And bakery is a massive market in developing markets. As you can appreciate, it's -- baked goods are staples in developing markets. And what we're seeing there is, firstly, as markets evolve towards more, let's say, processed bread and, let's say, bread being manufactured at scale, the starting point is conventional. So we see opportunities there as markets, let's say, continue to evolve, especially the market continues to evolve in developing markets. The next point I'd make on developing markets is that we're seeing the opportunity to combine both conventional approaches as well as clean label approaches to extend this. There is only -- from a regulatory perspective, there is only a certain level of preservatives that you can put into certain products. So an opportunity to extend overall days because of the length of the supply chain in developing markets and because of the complexity of the supply chain in developing markets, there is an opportunity to combine both solutions and we see that as a better opportunity. So overall, look, we're really excited about this transaction. We feel that we know this business well. We know the market well, and we feel that the synergy perspective that we have on this business and the combined business is something that's achievable well out into the future.

It appears there are no further questions at this time. This will conclude today's call. Thank you.