Kerry Group plc

Good day and welcome to the Kerry Group 4 Year Results 2022 conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, please press star followed by the number 1 on your telephone keypad. If you would like to withdraw your question, please press star 1 again. For operator assistance throughout the call, please press star zero. And finally, I would like to advise all participants that this call is being recorded. Thank you. I'd now like to welcome William Lynch, Head of Investor Relations, to begin the conference. William, over to you.

Thank you, operator. Good morning and welcome to Kerry's full year 2022 results call. I'm joined on our call by our CEO, Edmund Scanlon, and our CFO, Marguerite Larkin. Edmund and Marguerite will take you through today's presentation, and following this, we will open the lines for your questions. Before we begin, please note the usual disclaimer regarding forward-looking statements. I will now hand over to Edmund.

Thanks, William. Good morning, everyone, and thank you for joining our call. So beginning with slide four and my overview comments on 2022, We're pleased to report that in Kerry's 50th year, we delivered a record year of growth against the backdrop of an exceptionally dynamic operating environment. So firstly, here on volume, I'm proud of the strong, broad-based growth we delivered across our induced markets, channels, and regions, and our double-digit growth in emerging markets, again, while navigating a number of macroeconomic challenges throughout the year. Then in pricing, We demonstrated the resiliency of our model in managing through the unprecedented inflationary environment in close collaboration with our customers. The strong double-digit organic growth we achieved in the year was a key driver of our record group revenue of €8.8 billion and our 13% increase in group EBITDA to €1.2 billion. We also made good strategic progress on a number of fronts during the year. We expanded our footprint, most notably across our emerging markets. We continue to invest and further develop our innovation platforms. We completed a number of acquisitions while also making good progress on integrating our recently acquired biotechnology, preservation, taste, and function health businesses. And finally, since the year end, we've also announced the proposed sale of our sweet ingredients portfolio as we continue to enhance and refine our business to areas where we believe we can add the most value. So now moving on to slide five and taste nutrition. And here we had excellent growth across our business through continued innovation with our customers. Reported revenue increased in the year by almost 30% to 7.4 billion euro. driven by strong volume growth of 7.8% and pricing of 8.7%, combined with favorable net M&A and currency impacts. EBITDA for the division was up over 20% to 1.2 billion euro, and an overall EBITDA margin of 16.5%. As you can see here from the chart, our taste and nutrition volumes remain strong through the year, despite the heightened level of pricing. From a channel perspective, we delivered mid-single-digit growth in retail and strong double-digit growth in food service. We achieved another standout year in emerging markets with volume up 10.4%, with growth in the Middle East, Southeast Asia and LATAM partially offset by China. Turning to slide six and our end-use market breakdown, as you can see from the chart here on the right, we had strong growth across our food and beverage markets. Within the food EUMs, we had double-digit volume growth in meat, driven by taste, texture, and preservation technologies to reduce food waste. Then on snacks, we had strong growth through local authentic savory taste profiles and our taste and salt reduction technology as customers continue to improve the nutritional profile of their products. In dairy, we had good growth in ice cream and also in dairy-free. And in bakery, we had very good growth in preservation. And the proposed sale of our sweet business will mean we're now essentially have exited our cereal-based operations. In our beverage end-use markets, our growth was driven by new innovations incorporating authentic natural taste, coffee extracts, and also our sugar reduction technologies. And then on the pharma EUM, overall volumes were lower in acceptance due to supply chain constraints during the year. Now moving to slide seven and our regional performance within taste and nutrition. Reported revenue in the Americas region increased to 4.2 billion euro with volumes up over 8% in the year and remaining relatively resilient at 6% overall in Q4. Growth in North America was strong in our retail channel, right across our customer base, and also in food service with quick service restaurants and coffee chains in particular. In LATAM, we had strong double-digit growth across both Mexico and Brazil. And in Europe, reported revenue increased to 1.5 billion euro with volume growth of 6% in the full year, including a strong last quarter also at 6%. Overall growth was particularly strong in the food service channel. Our growth in the region was broad-based across the UK, Central and Southern Europe, with the exception of Eastern Europe, where we divested our operations in Russia and in Belarus during the year. In Apia, reported revenue increased to €1.7 billion, with volumes up 8% in the full year and 6% in Q4. with both retail and food service channels contributing well to that growth. From a geographical perspective, we were very pleased with the strong double-digit growth achieved across the Middle East and Southeast Asia, which was somewhat offset by the impact of restrictions in China through the year. Then turning to slide eight in Dairy Ireland, which were delivered a solid performance in what was a year of significant price inflation. Total revenue in 2022 was €1.5 billion, with overall growth reflecting an exceptional level of inflation across dairy and other input costs during the year. Overall volume growth was modest at 0.2% in the year, reflecting a good performance considering the significant price increases across the business and a very strong prior year comparative. EBITDA was up slightly to €71 million on the year. And with that, I'll hand you over to Marguerite to give you some more detail on the financial performance. And then I'll close with the outlook and a review of our medium-term targets.

Thank you, Edmund, and good morning, everyone. Turning now to slide 10 and the overview of financial performance for the year. Overall group revenue increased to €8.8 billion, with volume growth of 6.1%, a key contributor. Group EBITDA increased by 12.9% to €1.2 billion, with overall Group EBITDA margin of 13.9%. Adjusted earnings per share increased by 7.3% in constant currency and increased by 15.7% in reported currency, primarily due to the stronger US dollar. Return on capital employed of 10.3%, reflective of portfolio developments, and free cash flow with 640 million, or 82% cash conversion. Turning to slide 11 and the group revenue analysis. Overall reported revenue increased by 19.3% in the year, driven by a number of components, including revenue volume growth of 6.1% and price of 11.7%. On foreign exchange, we had a 6.8% translation currency tailwind on revenue, driven by a weaker euro against the major currencies, combined with a 0.2% transaction impact. Overall, acquisitions contributed 4.3% to revenue, driven principally by NIACET, more than offset by disposals of 9.8%, primarily due to the meats and meals business disposal in the prior year. Moving to slide 12 and the revenue analysis by division. On the left-hand side is our overall group revenue by business for the year and our organic revenue growth of 18%. And on the right hand side is Taste and Nutrition's quarterly organic revenue development. Volume growth continued to be strong across the year with Q4 growth of 6.1% against a strong prior year comparative. Pricing increased quarter on quarter through the year with Q4 pricing of 11.7% as we worked closely with our customers to manage the continued inflationary environment across the year. Turning now to our Group EBITDA margin bridge. Group EBITDA increased by $139 million to $1.2 billion in the year, with margins moving from 14.7% to 13.9% in 2022. Looking at the main drivers. Firstly, we had a 40 basis points improvement from operating leverage and portfolio mix. Pricing was a net 180 basis points dilution in the year, driven principally by the mathematical impact of recovering the absolute increase in raw material input costs through pricing. Given the significant input cost inflation of over 20% in the year, I would like to recognize the continued efforts of our teams as they managed this unprecedented pricing environment in close collaboration with our customers. Operational efficiencies contributed 20 basis points to EBITDA margin, driven by the benefits from the transition to global business services. Acquisitions and disposals contributed a net 60 basis points as we improved the margin profile of our business, principally through a combination of the acquisition of the higher margin NIASET business in taste and nutrition and the disposal of the lower margin consumer foods, meats, and meals business. And finally, we had other costs of 20 basis points attributable to business disruption in China and Eastern Europe. Overall, we were pleased with our EBITDA growth of 12.9%, given the very significant raw material inflation and the volatility in the marketplace in the year. Moving next to free cash flow on slide 14. Overall, we generated free cash flow of 640 million, with cash conversion on earnings of 82%. EBITDA was up 139 million in the year. Average working capital was a net investment of 201 million. This was driven by increased raw material input cost inflation, the strong volume growth across the year, and also decisions taken to increase inventory holdings to manage through the short-term supply chain disruption. As expected, working capital on a point-to-point basis improved significantly across the second half of the year. And finally, capital expenditure was $255 million in the year, reflecting the timing and commissioning of capital development projects. For 2023, we expect cash conversion to be 80% plus on an average working capital basis and higher on a point-to-point basis. Turning to our debt profile and credit metrics on slide 15. Net debt was 2.2 billion at the end of the year. The cash balance at year-end will be used for the repayment of the 750 million US dollar bond due in April. Our credit metrics remain strong with a net debt to EBITDA ratio of 1.8 times. Overall, 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 16. On pensions, the net surplus of $61 million is similar to the prior year, On non-trading items, the overall net charge of 124 million consists of 51 million associated with the divestment of the group's Russia and Belarus operations, 38 million for the operational excellence program, and the remainder relating to acquisition integration and carry global business services. For input costs, we had significant increases in inflation as we moved across the year, with overall inflation of over 20%. Given this context, we expect to have high single-digit inflation in the first half of 2023. And while it is too early to comment on the outlook for the second half of the year, we will continue to use our well-established pricing model to manage input cost fluctuations. On dividends, we are proposing a final dividend of 73.4 cents per share, which represents an increase of 10%. And for currency, the translation tailwind on adjusted earnings per share in 2022 was 8.4%, and we're currently estimating a headwind of circa 2% on adjusted earnings per share for 2023. To summarise on the overall financial performance, we are pleased with the good financial progress we made in 2022, with continued strong volume growth while managing pricing leading to strong EBITDA growth with a good improvement in our cash across the second half of the year. And with that, I'll hand you back to Edmund.

Thanks, Marguerite. Overall, we're pleased with our financial performance in the first year of our new strategic cycle. 2022 was a challenging year for our industry to navigate, given the macroeconomic challenges that presented themselves throughout the year. Our strong growth and further business development through 2022 is a testament to the resilience and agility of our business and our people. The growth we have achieved across our markets, particularly in the last couple of years, gives us the confidence in our ability to firstly grow where the growth is, Secondly, gain market share while outperforming our markets. And thirdly, deliver growth even when a market is not growing. So overall, we feel very well positioned across the medium and long term. With that said and moving to slide 18, given the current level of market uncertainty, 2023 will be a challenging year to navigate. Despite this backdrop, we remain strongly positioned to grow ahead of our markets through this period. We will continue to manage the current input cost environment, and we will continue to invest capital aligned to our strategic priorities while evolving our portfolio. In 2023, we expect to achieve 3% to 7% adjusted earnings per share growth on a constant currency basis. before an expected 2% dilution in the year from the proposed sale of the sweet ingredients portfolio. Now, before we move to Q&A, I'd just like to spend a moment on our midterm outlook on slide 19. And firstly, on growth. We began our new strategic cycle with group volume growth ahead of our average target range of 4% to 6%, driven by the performance of taste and nutrition. we remain confident in delivering 4% to 6% on average across the plan. And one of the main reasons for this is our channel outlook, where we've improved our performance across the retail channel in recent years, and also the strength of our positioning in food service, where we do expect to outperform our retail channel, both in 2023 and across the life of our plan. Now, next on EBITDA margin, we have a target of 20% plus in taste and nutrition and 18% at a group level by the end of the plan. While absolute taste and nutrition and group EBITDA increased at strong double-digit levels in 2022, our margin percentage decreased as a result of passing through inflation, which we expect to continue into the first half of 2023. Beyond this, the key drivers we're focusing on to get from 16.5% to 20%, as you can see here from the slide or as follows. Firstly, on portfolio, we're expecting circa 50 basis points net accretion driven primarily by the disposal of the lower margin sweet ingredients portfolio. On operating leverage and mix, we're targeting over 100 basis points, and we have a strong track record of delivering operating leverage. as we've grown our volumes over the years, and we continue to see a lot of scope here. Next, on operating efficiencies. We previously discussed our Accelerate Operational Excellence program. We're going to see the start of these benefits coming through in the next few years, and this is expected to deliver another 100 basis points. And finally, we're expecting a level of deflation from current levels over the next couple of years given where input costs currently are, which would bring us to the 20%. Moving now to slide 20 and cash. We have a target of 80% plus conversion of earnings. We delivered 82% in 2022. And as Marguerite said earlier, we're targeting an improvement on that in 2023. Cash is a key area of focus for us. And we've recently realigned our management team's reward structures to place more of a weighting on delivering against our cash targets. On return and capital implied, we will continue to make acquisitions with our target to be within the 10 to 12% ROAC range. We've been discerning as regards to M&A over the years, stepping away from a number of deals that we felt were not in the best interest of our shareholders. So returns remains a key focus for Kerry. Now moving on to our 2030 sustainability commitments. On nutritional reach, this is a measure of the number of consumers we impact with our positive and balanced nutritional solutions. We increased our reach to 1.2 billion consumers globally as we continue to grow our business and support our customers to improve the nutritional profiles of their products. We have a target of reaching over 2 billion consumers with sustainable nutrition solutions and we feel this is an area where we can deliver a huge impact as part of our Better for People commitment. On carbon, we had a strong improvement, achieving a 48% reduction in our scope one and two emissions versus our 2017 baseline. We're pleased with this improvement, and we are conscious that the incremental steps from here will be more difficult to achieve. And on food waste, We also delivered a strong improvement here with a 32% reduction across our operations. Our range of food waste solutions are important enablers of our customers in reducing food waste in their operations. And it's incumbent on us to ensure we're playing our part across our own footprint as part of our Better for Planet commitment. So with that, I'll hand you back to the operator and we look forward to taking your questions.

At this time, I would like to remind everyone, in order to ask a question, please press star then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Charles Eden from UBS. Your line is open.

Hi, good morning. Thanks for allowing me the questions. The first one, if I can, is just on your volume and raw material outlook for 23. Excuse me. And I appreciate the visibility is low. So would you be able to comment on what you're expecting on either of those for 23 or at least in the first half, if that's easier to comment with a higher degree of certainty? My second question is on China and what you're assuming there with respect to the recovery of this market in your outlook for 23. I guess I'm particularly referencing in terms of the recovery of the food service channel demand and any associated restocking in this market. And if you could just remind us what percentage China represents of your taste and nutrition sales today, that would be helpful. Thank you.

Thanks, Charles. And I'll jump in and take those questions. As you can appreciate in the current environment when customers are dealing with a high level of uncertainty and seeking to limit their stock holdings and what have you, forecasts and projections and things like that can change. So visibility is a little bit shorter. We do have a very good pipeline of launch activity ahead of us. And like we said there in the presentation, that is what gives us confidence around the fact that we believe we will outperform our markets. From a volume growth outlook for 2023, we believe the 3% zone for TNN is a good starting place, given the market dynamics. And this, we believe, is more or less in line with the consensus volumes out there. We would expect slightly lower volumes, slightly lower volume growth in H1, given some of the market dynamics. Would it pick up in the second half? But overall, look, we are looking at volume growth here. And, you know, this coupled with mid single digit pricing for half one will result in solid organic growth for the first half of the year. Then in China, maybe just to give a little bit of color on that. China was back low double digits in the full year, with Q4 volumes back high single digits compared to mid single digits in the third quarter. So volumes were softer at the end of the fourth quarter due to COVID, and that did impact our operations and operations along the NPM supply chain. We have seen good recovery, though, in the last few weeks, and our expectation is that we will see a continued good improvement in demand over the coming months. We'll update you further, obviously, in Q1.

And good morning, Charles. Maybe on your input cost inflation question, I'll take that. So it is quite difficult at this stage of the year, just to give a full year perspective, but we currently expect taste and nutrition input cost inflation for H1 to be high single digit, maybe even double digit, I would say. And H2 really is unclear at this stage, and we'll just have to see where market prices are as we move through the year. Then on Kerry Dairy Ireland, we do expect to have deflation during the year. So hopefully that's helpful in giving you a perspective on how we're thinking about costs as they progress through the year.

Yeah, really helpful. Thank you. And sorry if I missed it. How big is China as a percentage of T&N sales today?

Yeah, China, Charles, is 5% zone. We're looking at the 5% zone.

That's great. Thanks, everyone.

Your next question comes from the line of Alex Sloan from Barclays. Your line is open.

Yeah, hi, morning all. Thanks for taking the questions. The first one, just in terms of the channel outlook for 2023, I think I heard correctly that you said you expected faster growth in food service in 2023. I wonder if, you know, is that a view on the underlying demand or more reflective of visibility that you have on a strong pipeline there? And then, yeah, just secondly, in terms of the sweet ingredients disposal, maybe you could give a bit more context there in terms of the rationale and Now, are there any other areas of the TNN portfolio that are kind of non-core and could be pruned? Or is this the kind of the final step in that process? Thanks.

Thanks, Alex. And I'll take those questions. I think in terms of the second part of your question, first on sweet ingredients, first point I'd make is we wouldn't be calling out any other, you know, let's say changes in the portfolio within the TNN footprint at this stage. Look, I think from an overall perspective, we felt that, you know, from a from an overall financial profile perspective and a sustainability perspective and just the overall direction of the company. We didn't feel that that sweet business was going to be part of the future and we felt there was better owners out there for that part of the business. It's accreted from a top-line perspective, a bottom-line perspective, and a sustainability metrics perspective. So that's how we came to the conclusion that there was a better owner for that business out there. In terms of food service, look, the first thing that I would say about the channel is that from an overall market perspective, the food service channel has consistently outperformed the retail channel in all bar one of the last 10 years. And secondly, from a Kerry perspective, we've outperformed the food service market 10 over the last 10 years. And I think it's important for me to say that we have developed a very unique capability set to support food service customers right across their menus in a variety of ways. Whether that's existing menu innovations, whether it's new menu platforms, whether it's new day parks, whether it's seasonal products or LTOs, you know, partnering with our customers on enhancing the nutritional profile of their ranges. There's also a lot of work going on in terms of sustainability initiatives. And then, you know, something that has made, I suppose, a step change in terms of the overall scale of the opportunity for Kerry within the channel is that over the last 18 months, we've seen a big pipeline build in terms of working with food service customers and how they can you know, change or adjust or simplify their back-of-house operations. So for us, food service is going to continue to outperform the retail channel from a volume growth perspective, and it's something that we're very excited about looking forward.

Very helpful. Thanks. Your next question comes from the line of Jason Mullins of Goodbody. Your line is open.

Yeah, hi, thank you. Just delving a bit into the food service channel, which has obviously formed well for you in the last 12 months. Any particular call out by regions, what you're noticing there? And obviously LTOs have been a feature of this channel and innovation. Can you maybe talk about what you're seeing ahead of, I guess, some of the seasonal promotions that you might be doing in the first half of the year? And then just finally around cash flow, just Interested in your comments on working capital performance, given maybe what your expectations were during the middle part of 2022. And then also, Marguerite, just to clarify your CapEx commentary, where should we think of CapEx for the year ahead? Because you obviously mentioned a bit of timing for CapEx in the year just gone. Thank you.

Jason, I'll take the first couple of parts of your question. Firstly, just on food service from a seasonal and LTO standpoint, I think important to note that LTOs and limited time offers and seasonal promotions are higher today than they were pre-COVID. This is a key strategy for our customers to drive excitement around the menu, and we believe we're extremely well placed to work with those customers in terms of bringing excitement and bringing new items to their menu to try and drive traffic from them. Just from a regional perspective, I would say that there is a slight difference in terms of not necessarily the performance as such, but certainly from, let's say, drivers of performance. In North America, what we're seeing is that the key driver of growth there is increased demands for solutions that are designed to reduce operational complexity. That is the key driver of growth in North America. In Europe, it's more around nutritional innovation, sustainability innovation, and LCOs, where we saw particularly strong performance in Q4. And in the AFMIA region, it's pretty broad-based, with Middle East and Southeast Asia performing strongly. And then, obviously, we had lower volumes in China due to the restrictions at the end of the quarter.

And Jason, just on the cash and the working capital question on CapEx, firstly on the working capital between H1 and the full year, we did make very good progress in the second half of 2022 in reducing overall working capital. just given the backdrop of the increased pricing during the second half and coupled with the very strong volume growth. On a day's basis, we reduced our overall investment in working capital between June and December by nine days, and we reduced our inventory holding days significantly as well. So as I mentioned earlier, we will be looking to continue this progress in 2023. Cash and working capital management is a key focus across the business. And then just on capital expenditure, we're looking at capital spend in the 300 to 350 million range for 2023.

Okay, thank you. Thank you.

Your next question comes from the line of Kapil Kinney from Davie Research. Your line is open.

Good morning. Thanks for taking my questions. Two questions for me. Firstly, on slide six, just one to ask around the meat and juice market. It looks like exceptional growth there in the period. Just interested to know the drivers of that. And my second question is a broad-based question on the outlook for emerging markets ex-China. Any commentary on that, maybe over the medium term? Thank you.

Thanks, Carl. Good morning. Just on meat, yes, we had a very strong performance in that end-use market. I think it's a channel or a market where we believe we're extremely well-positioned, covers food service, retail, direct-to-retail, private labels, CPG-branded processors, and what have you. I would say the first driver there is... the whole area of preservation. We have an exceptional, I would say, portfolio as it relates to extending shelf life of meat-based products. And I think that this is certainly an important driver of growth through the year. The second area I'd call out is taste and texture, where customers are continuing to look at ways to try and differentiate their products either on the shelf or on on the menu. And again, our portfolio is relevant in the space. And the third area I touch on then is on the whole area of plant-based meat. And while we did see a slowing down of new launches in the category in the second half of 2022, that said, we have seen and are seeing a lot of renovation in the category where customers are looking for ways to improve the nutritional profile of their products, the labeling of their products, and the taste and texture of the products. So it's the combination of all these things that are, let's say, combining to give us the performance we've had in meat in 2022. And then moving on to... Emerging markets, you know, from a full year perspective, we achieved over 10% volume growth in emerging markets. We would feel quite positive going into EMs. We've put significant capacity in the ground over the last number of years in emerging markets. whether that's a new taste plant in South Africa, expansion of our footprint in the Middle East, new manufacturing facility in India, new taste facility in Mexico. We'll be commercializing a new taste facility in Indonesia in the coming months. So for us, we feel, let's say, quite confident quite positive and quite optimistic about EMs. I think we've put the capacity in place. We have a strong local footprint. We have a strong local development and applications capability. So we feel well positioned. And China, we're, you know, let's say we're positive on the outlook, but would just like to cycle through you know, a number of months here just to see how things are playing out. But generally, we see EMs as, you know, continuing to be an important part of the Kerry story going forward.

Thank you.

Thank you.

Your next question comes from the line of John Ennis of Goldman Sachs. Your line is open.

Hi, good morning, everyone, and thanks for taking my questions. My first is on the medium-term margin guide. I guess you're forecasting this year 3% to 7% EPS growth. And you've said as part of the Q&A, that will include what sounds like 3% volume growth with positive pricing in TNN. So I suppose the guide is for limited margin recovery in TNN for 2023, which effectively leaves three years to grow the TNN margin by 250 basis points. So I guess, firstly, is that right, that there'll be limited margin expansion in 2023? And then secondly, related to that, what makes you confident that those savings and the operating leverage can fully drop through to the bottom line over that relatively short space of time? So that's my first question. And then my second question is a bit of a broader one on inventory monitoring. Just in general terms, I guess, how do you monitor inventory levels with customers? And is there a difference by channel? So is it easier or harder to monitor for your retail customers versus your food service customers? And this is perhaps a bit of a naive question from me, but you obviously sell a really broad range of ingredients. But from your perspective, what do you think the average shelf life, for lack of better terminology, would be of your products? So I'm just trying to get to how long could customers plausibly sit on inventory if they are. There are two from me. Thanks so much.

Good morning, John, and I'll take the second part of your question first. Look, I think it's fair to say that, you know, let's say inventory management at our customer level is very customer-specific. You know, and I think from a carry perspective, we've seen, you know, an element of destocking, let's say a higher level of destocking towards the end of Q4, in the retail channel more so than in the food service channel. It's not down to the, let's say, the shelf life of Kerry products at all. It's more to do with, let's say, the type of products within, you know, generally speaking, within a retail channel versus a food service channel. So from a customer perspective, we've seen, you know, I would say, much more pronounced destocking in retail because the length of the shelf life of products in retail are longer than food service. We have seen some limited, I would say, destocking in food service as well, but much more pronounced in retail. In terms of let's say, our own inventory and things like that. It just depends on the particular category of ingredients or raw materials that we work with.

That's very helpful.

And, John, maybe some comments on margin outlook, both for 2023 and also over the medium-term horizon. So on taste and nutrition for the full year, we do expect margin expansion excluding pricing. The fundamental drivers of margin expansion haven't changed. We expect some benefits from operating leverage and cost efficiencies. and there will also be benefits to margins when the proposed sale of the suite business is completed. Obviously, pricing is still a dynamic and inflation that we have to work through in 2023, and as I mentioned earlier, We do currently expect pricing in the first half of the year to be mid-single digit in nature and it's difficult to call the second half but we see it as having limited pricing or maybe even deflation in the second half but really too early to call that and we'll update as the year progresses. So really, I guess, in FY23, we are committed to that margin expansion excluding the pricing. As we've delivered in 22, obviously, there was a significant impact of pricing in 22 at 180 basis points. From the medium term, we're very clear on the drivers in terms of driving that margin expansion, as Edmund would have outlined earlier, and we're focused on the margin expansion, be it from portfolio, from operating leverage and mix. and from operating efficiencies. And I do think it's fair to say that over the last certainly two years, the level of cost inflation has been truly unprecedented. So we do have an expectation as we move through the final stages of the plan to have deflation, which will have a positive impact on our margin percentage. So hopefully, John, that gives you a perspective in terms of how we're thinking about our 23 margin outlook and also over the medium term.

Yeah, that's perfect. Thank you very much.

Your next question comes from the line of Edwin Hawkin from JP Morgan. Your line is open.

Hi there. Thank you for taking my questions. I had two, please. One is just to follow up on that last point on destocking. So Where you have seen destocking, can you give some regional colour and also some expectations that you have built in for your 2023 3% volume in TNN, whether this includes some destocking or whether it's the case that this destocking is offset by new wins elsewhere? And my second question, please, is could you provide a bit of color looking across your customers on the volume growth for your global customers versus local and regionals and private labels? Have you seen some disparity in your taste and nutrition volumes in Q4 by those customer types? And is that something you expect to see in 2023? Thank you.

Good morning, Edward, and thanks for the question. On stocking first, we did see some limited destocking in North America. Like I said previously, it was more pronounced in the retail channel. And since the beginning of the year, there's definitely been some more destocking, particularly in the North American market. It's not a feature in other regions from what we can see. We do see this stocking in North America being temporary in nature. We have baked it into our overall guidance. We have a good, like I said earlier, a very good innovation pipeline with a lot of launch activity planned for 2023. And we will continue to... to take market share. In terms of, let's say, our customer segmentation, firstly, I talked about food service at the very outset. Food service will continue to perform very strong for us. I would say driven by you know, from a sub-channel perspective, QSR, coffee chains, and fast casuals. So, you know, typically in that type of scenario, it would be the, you know, primarily the larger players that... that we see performing well in each of those three areas. I would say on the retail side, I think it's important to recognize that within the larger CPGs, there's been significant shifts in their emphasis towards more health and wellness, And I think our ability to work with those customers, whether they're large CPGs, whether they're regionals or locals, our ability to work with customers to improve the nutritional profile of their products without impacting on taste and reducing the environmental impact, I think puts us in a pretty unique position as many of those customers are really dialing up their overall health and wellness positioning. So I think for us, we feel that our growth is going to be pretty broad based in terms of customer segmentation within retail. It's going to be, let's say, more orientated towards larger players in food service. But I do think that it's important, as you're thinking about, Kerry, to recognize that we have the capability to work right across the spectrum of end-use markets, channels, geographies, customer segments. And I think that's a key underpin for growth for us. And I think we're confident in our ability to be able to pivot to wherever the growth is. And I think we've demonstrated that over the course of the last 12 months.

Your next question comes from the line of Lauren Molyneux from Citi. Your line is open.

Hi, morning, everyone. Thanks for taking my questions. I just have a couple. I wanted to firstly come back to the volume performance by region. Europe stood out for me as being one that's quite a lot higher than expected in terms of volume growth. I was wondering if you can elaborate a bit more on the drivers of this, how sustainable you think this is, and how much of this is being driven by maybe more private label customers than elsewhere, and just kind of what's driving kind of the outperformance, especially in Q4 in that region. And then the second question would be, again, looking to your mid-term EBITDA margin bridge and the Accelerate, Operate Excellence program that you have. And just any comments on how this is progressing? Obviously, you've taken some costs here already. And how would you think about the savings of those benefits coming through? I think you mentioned about 100 bits of benefits over the time period.

Thank you. Thanks, Lauren. And I'll take the first part of that question. So Europe had a very good year of growth and, like you said, a strong finish to the year. And growth was strongest in Central and Southern Europe, and the UK and Ireland had a strong finish to the year. Private label certainly is a factor. I think it goes back to our ability to be able to pivot our resources to where we're seeing the growth. But certainly, we work with customers that actually cover private label, they cover branded, they actually cover food service as well. So overall, while private label was a factor, especially coming up to the last, let's say, part of the year, in the UK and I. We've also seen a good performance in the food service channel in the last quarter as well within Europe. Going forward, maybe just to give, let's say, an indication of, let's say, what we expect to see in Europe going forward, we do expect a significant inflationary pressure to temper market performance in Europe. And that's something we will continue to give you updates on in the coming quarters.

And Lauren, on your question on the Accelerate Operational Excellence Program, the program has progressed very well during the year, very much aligned to our plans and building on the preparatory work that we did last year. We do see the recurring benefits, we expect to see the recurring benefits coming through at the end of, some benefits coming through in 2023. and then through 2024 and 2025. And on completion of the programme, we see annual recurring benefits in the zone of £17 million.

Thank you.

Your next question comes from behind, Dave, of Credit Suisse. Your line is open.

Morning, guys. Thanks for the question as well. Two from me as well. Firstly, on TNN volume growth, could you help us with what your end market growth was in 2022? And I guess that would highlight to us the outperformance that Kerry has and how you see the end market evolving in 2023. If you could quantify this, it would be much appreciated. The second question is on the use of cash. Your net debt to EBITDA fell in 2022, and with the disposal of sweet ingredients and the cash that you're likely to generate in 2023, it will fall further. Where are we on M&A looking at the next 12 months? How would you compare that? from bolt-ons to maybe more sizable acquisitions, which you've shown interest in the past. And if you don't see M&A in the near term, how do you see the use of share buybacks in your capital allocation policy?

Thank you. Good morning, Farhan. I'll take some of those questions. Firstly, from a market perspective, let's say we would have been pitching 2022 at the low single-digit rate from a volume growth perspective, 2022. In 2023, I'm not going to pitch a growth rate right now, but with that said, we feel confident that we're going to outperform the markets in which we operate in. In terms of just, let's say, our strategy around M&A. We're not calling out, firstly, any change in our capital allocation policy. We continue to, let's say, to see a pretty healthy M&A pipeline in front of us. Like I said in the presentation, we're quite discerning and disciplined in terms of let's say, what we pursue. Let's say from a scale and size perspective, one should expect M&A, you know, similar to what you've seen in the past, so more bolt-on in nature. But fundamentally, we're not calling out any change in our outlook on M&A or capital allocation policy. Margaret, you might want to add.

No, I think you've covered it. Thanks, Edmund.

Your next question comes from . Your line is open.

Yes, good morning, and thank you for taking my question. I only really have one follow-up, and it's to do with the working capital reduction. So, you know, following up Jason's question earlier and your response, which was increased focus on cash flows and continued reduction on working capital days, I was just wondering if you can sort of give us a bit of a guide on how lower working capital could contribute to your cash flows in 2023. Because I guess when I see the last two years, cumulative, it's held back your cash flows by around $400 million. So I was just wondering how much of that could unwind, if you like, if you take the current spot prices of raw materials. if you consider some of the destocking that you yourselves could be doing over the next 12 months, how much of that 400, I'm saying, could we see coming back to the cash flow statement, please? Any comment on that would be great.

Good morning, Solveig, and maybe just to give you some perspective on how we're thinking about working capital. Obviously, it's very early in the year to predict the end outcome. I think maybe just going back for a moment, overall, as I said, we expect cash conversion to be 80% plus on an average working capital.