Kerry Group plc

Good day and welcome to the Carrier Group Q1 2023 results 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, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press the star one 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. 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 Q1 2023 results call. I'm joined in 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 then open the lines for your questions. Before we begin, please note the user disclaimer regarding forward-looking statements. I will now hand over to Edmund.

Thanks, William, and welcome, everyone. We appreciate you joining a little earlier than usual this morning. As we're conscious, it's quite a busy day for reporting today. So turning to slide four and my overview comments on Q1. In the quarter, we delivered organic growth of 8.5% at group level and 8.4% in taste and nutrition, which represented a continuation of the strong organic performances we achieved over the past number of quarters. Growth in Q1 was more weighted towards pricing as we continue to manage through the inflationary pricing environment. In terms of volume, we delivered 1.2% growth in taste and nutrition, despite the effects of increased pricing across the industry. Key drivers of this volume growth were strong performances in food service, particularly in the AFMEA and Europe regions, with the retail channel in North America reflecting our customers reducing their inventory levels through the period. Overall consumer demand in Q1 remained relatively resilient, while innovation activity was high, with customers primarily focused on adding new taste profiles, enhancing the nutritional characteristics of their products, and adding more value options. We had good overall growth in dairy, snacks, and farm and use markets, with strong performances in savory taste and taste sense salt and sugar reduction technologies. And just to update you on strategic progress that we've made in the period, As previously announced, we divested our sweet ingredients portfolio to ERCA for 500 million euro. And we also made good progress in developing our footprint and adding capacity for growth in a number of areas, most notably in apnea with the development of our new taste facility in Indonesia. So now I'll hand you over to Marguerite to take you through the detail of our performance, and I will close out later with the outlook.

Thanks, Edmund, and good morning, everyone. Turning to slide five and the summary financial overview. Firstly, on revenue, where we had overall reported revenue growth of 10.3%. This was driven by strong price-led organic growth, as Edmund just referenced, with group volumes increasing by 0.2%. While overall EBITDA increased in the period, group margins were 70 basis points lower, as the mathematical dilution from passing through cost inflation was partially offset by cost savings from our efficiency initiatives. Net debt at the end of the period was €1.7 billion, with the improvement coming from cash generation and the proceeds from the sale of the sweet ingredients portfolio, which, as you will have seen, completed on 27 March, as expected, and is now factored into our full-year guidance. Turning next to our Group Revenue Bridge on slide 6. Group reported revenue for the period was up 10.3%, as I mentioned. This comprised volume growth of 0.2% and pricing of 8.3%, as we continue to manage through the inflationary input cost environment. Overall acquisitions net of disposals contributed 0.3%, with acquisitions of 1.6%, partially offset by the impact from divestments of 1.3%. Foreign currency translation with net favorable 1.5% on revenue in the period. And finally, on foreign exchange, based on prevailing rates, we are currently expecting foreign currency translation to be approximately a 3% headwind on revenue, in the full year and slightly above that on earnings. Moving next to our taste and nutrition business review on slide seven. Overall volumes were up 1.2% in the period, driven by good growth in Apnea and Europe, particularly in the food service channel. Pricing up 7.2% reflected the continuous management of the inflationary pricing environment, as passing through the absolute amount of input cost increases resulted in the mathematical dilution on margins, partially offset by savings from cost initiatives. From an end-use market perspective, growth was led by a strong performance in dairy across ice cream and dairy applications for food service, snacks through savory taste, and pharma in sound nutrition in particular. Looking at our channels, Food service delivered another strong performance with continued growth across all three regions, while overall performance in the recall channel was muted, driven by customers reducing inventory levels in North America. And finally, in emerging markets, we had 6% overall volume growth, led by strong performances in the Middle East, Southeast Asia, and La Paz. Turning to slide eight and taste and nutrition's performance by region. Firstly, the Americas had overall volume decline of 1.6%, driven by the dynamics in the retail channel, as I mentioned, while food service performed well with continued strong business development. In North America, we had good performances across beverage, dairy, and meat and juice markets. Latam had strong growth in Mexico across beverage and snacks, while growth in Brazil was driven by performance in meat and beverage. Europe delivered another strong quarter with volume growth of 3.9%, while managing through significant price inflation. This growth was broad-based across the region and was led by snacks, dairy and meals. food service delivered strong growth with quick service restaurants and coffee chains in particular, with a solid overall performance in retail. In Apnea, we had volume growth of 5.2%, led by strong performances in the Middle East and Southeast Asia, with China recovering through the period as market conditions improved. Growth in the region was strong in the meat meals, dairy and bakery end use markets with good performances in the retail channel and strong growth in food service. Moving now to slide nine and Dairy Ireland, where overall performance in the period reflected dairy market conditions. Volumes were lower by 5.8% and pricing increased by 14.4% in the period, while the EBITDA margins were 80 basis points lower from passing through input cost inflation. Within the division, volumes in dairy ingredients were impacted by reduced demand due to the heightened year-on-year inflation, which softened through the period, aligned to global supply and demand dynamics. Dairy consumer products performed well with growth led by Perry's branded cheese and customer branded spreads range, supported by increased promotional activity. So to summarize on overall financial performance in the period, we achieved strong organic growth in Q1, which was a combination of taste and nutrition volume growth and the continuous management of the inflationary cost environment through pricing. And with that, I'll hand you back to Edmund.

Thanks, Marguerite. So before we move to Q&A, I'll just close out with our full year outlook.

While market conditions are uncertain, we believe we remain strongly positioned for growth with a good innovation pipeline. We will continue to manage through the current inflationary environment with our pricing model. We will continue to invest capital and develop our portfolio aligned to our strategic priorities. And today, we are reiterating our constant currency earnings guidance of 1% to 5% growth which is stated after the previously announced net dilution of 2% from the Sweet Ingredients portfolio divestment.

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, press star, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Our first question comes from the line of Alex Sloan from Barclays. Your line is now open. Thank you.

Yeah, morning all. Thanks for taking the questions. A couple for me, please. Just firstly, just in terms of taste and nutrition and your expectations there for the full year, I mean, is it fair to assume that given the underlying EPS guidance is unchanged, your expectations for volume growth for taste and nutrition remain kind of similar to what you laid out before. I think you talked about in the zone of 3%. And then just secondly, just in terms of the net debt, obviously down on the sweet ingredients proceeds and cash generation, could you talk maybe about what your plans are in terms of use of cash and use of those proceeds from here? Thanks.

Morning, Alex. I'll take those questions. Firstly, in terms of, let's say, our volume outlook, it's unchanged from the beginning of the year. We do expect to be in that 3% volume zone for case nutrition by the end of the year. We'll expect an uptick in Q2 and a further uptick in the second half of the year. And I think from just a quick comment from a geographical perspective, I would say, you know, based on what we've just outlined there in the presentation, one should expect the Americas to be a little bit stronger as we progress through the year. Europe may be a little bit muted towards the second half of the year, and the AFMIA region being a little bit stronger primarily driven by the continued recovery in China. And then from, let's say, a use of funds standpoint, we're not calling out anything new from a capital allocation policy perspective. CapEx will continue to be in the zone of 300 to 350 million. M&A pipeline is active. We continue to believe we have a a strong synergistic platform, which we can create value through M&A. So we'll be continuing to look at that throughout the course of the year and beyond. So no change from capital allocation policy.

Thanks very much.

Our next question comes from the line of Charles Eden from UBS. Your line is now open.

Hi, good morning. Two questions for me, please. My first question is just on the TNN volume performance in America. Obviously volume's down 1.6 and you called out customer inventory destocking. Was that just a North American phenomenon? And it sort of implied from your comments, Marguerite, that it was purely a retail channel issue, but can you just confirm that or whether it also applied to food service? Are you able to quantify that sort of destocking impact, please, so we can get a sense of the underlying volume performance in Q1? And then my second question is on what you're seeing on raw material costs, or I guess more directly, how would you expect pricing to develop sequentially from here, please? Thank you.

Morning, Charles. I'll take the first few parts of the question. In terms of America, as I would say, First of all, let's say the performance in the Americas came in pretty much in line of what we were expecting at the full year, kind of what we flagged as full year. In terms of the destocking dynamics, for sure it's by far and away primarily the retail channel, but we did see some destocking in the food service channel as well, but limited. From a geographic perspective, we would call it out as being almost exclusively North America, let's say, issue that we've been working through. And if you reflect back on last year from, let's say, a supply chain perspective, It was really North America was the challenge from a supply chain perspective. So we're not expecting to see any increased level of destocking in the other regions. And we do expect to be cycling through this destocking here over the coming months. We've already seen it as we've exited the quarter. And we expect that stocking to ease off here as we progress through Q2.

And Charles, just to give you a perspective on pricing, for Group and TNN, we currently expect pricing in the first half to be mid-single digit in nature, while we expect limited pricing or maybe even deflation in the second half. But obviously, we'll update you as the year progresses.

I might just come back in there, Charles, just in terms of, let's say, the underlying performance. I would say that what gives us confidence about the underlying demand scenario, and it's quite difficult to be very precise on the scale of the stocking, but what gives us confidence around the underlying demand is that for the new launches that we've seen coming into the market, In each of those scenarios, from a forecast perspective and a performance versus forecast, we've seen that for each one of those launches, the orders have come in at least the same as forecast and in many instances ahead of forecast. So what that's telling us is that underlying demand for new products coming into the market, be they actually at the premium end or at the value end, is at least as strong as the forecast, which would suggest that underlying demand continues to be quite resilient, taking into account all the pricing dynamics, et cetera, et cetera. So that's kind of how we're thinking about the destocking and underlying demand scenario.

That's very clear. Thank you very much.

Our next question comes from the line of Jason Mullins. Your line is now open. Thank you.

Hi, thank you very much. Just with the, I guess, the comments you've given on pricing and the shape of pricing from here and even your comments around the stocking, can you just give us a sense that the margin and the mathematical impact of what you've seen and what you've had to withstand, how should we think about shape of margins for the year? if you can give some color on that. Then just in terms of the performance within TNN, can you maybe call out the actual food service volume performance versus retail? I know you said strong and unusual in retail, so if you can give a bit more color on that, that would be helpful. And then the final piece really is around innovation. You flagged and you constantly talk about innovation, but can you maybe talk about where you've seen changes in patterns, particularly around driving for price and innovation for price, obviously with private label, et cetera, performing strongly. Thank you.

I let Marjorie talk about pricing, but just one point on it, just to bear in mind, is that we put very limited pricing in 2023. So the pricing that you see in our performance is carry over pricing from 2022. So limited pricing gone through, let's say, limited new pricing gone through in 2023. In terms of, let's say, looking then at TNN food service versus retail and how that has performed, Like we flagged at the full year results, we expected continued strong performance in food service volumes. And where we ended up in the quarter is mid to high single-digit growth. And from a geographic perspective, we had low to mid single-digit growth in the Americas, with both Europe and ACME in the double-digit growth zone. In terms of then innovation, we have seen, let's say, innovation with customers pitching new products at specific price points. So innovating and formulating to a particular price point. So that has continued and is continuing. But more broader in terms of innovation, The, I suppose, factors that we would have talked about at the full year results and previously around nutritional improvement of formulations around food waste, that whole area of food waste, and in terms of, let's say, reduction of food waste, both from a sustainability perspective and a cost perspective, continues to be a significant part of the innovation pipeline. And the dynamics we would have talked about from an innovation perspective on food service continue to be there as well, including that reduction in back-of-house complexity, nutritional enhancement of the menu, and some new menu development coming through food service. For example, all-day coffee beverage programs and things like that. In terms of private label, for sure we've seen an uptick in performance in food amongst our private label customers or products that are ultimately ending up in private label. But I guess if we were having this conversation a year ago, we'd have probably said our expectations were probably higher in the whole private label space. We've seen maybe some market share gain in private label overall, but not to the extent maybe that one would have expected in this phase. So private label for sure has been, we've seen growth there, but I wouldn't be calling it out as a major factor.

And Jason, good morning. Just to add to Edmund's comments on pricing and specifically how it relates to margin outlook. So no change to what I said in February. Excluding pricing, we expect good underlying margin expansion from operating leverage, cost efficiencies, and the portfolio evolution that we completed. On pricing, we expect to see the start of easing from here and maybe deflation before the year-end deadline. So based on the expectation of pricing overall, we would expect margins for the full year to be flat to positive.

Thanks very much.

Our next question comes from the line of Edward Hocken from JP Morgan. Your line is now open.

Hello all, thank you for taking my question. It's Ed Hocken here from JP Morgan. I just wanted to follow up on the inventory management point noted in North America. So I wanted to get some clarification on what you see as the key drivers. So is it just an inventory normalization from an elevated level by your customers, or is there some anticipation of demand slowdown by them? But also related to the raw materials point, is there any sign potentially of customers delaying orders in anticipation of prices coming down? And my second question, if I may, is on the strengths in Europe. So again, in Q1, as it did in Q4, it seems to have confounded expectations of a sharp slowdown somewhat. I just wanted to get your view on what you see driving this resilience in that region. Why has the region seemingly outperformed versus expectations, not slowed as much as feared, and how you see it continuing to develop through the remainder of this year. Thank you.

Hi, Ed. Good morning. I'll take your last question first, and that is the performance in Europe. So, overall, we're quite pleased with the performance. Maybe a couple of points of note. From a geographical perspective within Europe, the performance actually has been quite broad-based. You know, whether it's UK, Northern Europe, Southern Europe, quite consistent across the region. We would note that on the food service side, where we saw double digit growth in Europe, we did see at the beginning of the year, if you remember back to 2022, we would have been lapping some, let's say, Omicron impacts in January 2022. And the second point is that we had some good launches also in Europe in the quarter. That all said, while we expect, let's say, Q2 to continue to be quite solid in Europe, we do expect a more subdued performance in the second half of the year in Europe. just driven by all the impacts of pricing coming through. So we do expect a kind of a tempering of performance in the second half. Then rounding back to North America, Frankly, we're not seeing any kind of, let's say, delaying in orders being driven by, let's say, an anticipation of price reduction at all. I think it's very much a scenario where customers had elevated levels of inventory built up possibly through the course of the last couple of years and really were carrying those inventories as an insurance policy against you know, various impacts on the overall supply chain. So this is something that we expect to cycle through here. We've been cycling through Q1. It's been easing as we've been progressing through the quarter, and we expect it to continue to ease through Q2. It will be a factor in Q2, but it will be easing in Q2. It's not exactly the same, but we saw some similar, let's say, profile of, let's say, destocking about 10 years ago in our business. And it seems to be following a similar kind of pattern to what we saw, you know, 10 or 11 years ago. So overall, in terms of underlying demand, I made a comment earlier just around what we're seeing in terms of new launches and the demand for new launches that are hitting the market are either meeting or exceeding expectations. So I think that gives an indication that underlying demand, as we sit here today, continues to be quite resilient.

Thank you.

Our next question comes from the line of cattle. Kenny from Davey Research. Your line is now open.

Good morning, all, and thanks for taking my question. It's one question on China. Can you speak to the performance in the first quarter and your outlook for volume for the remainder of the year for that region? Thank you.

Hi, Kyle. Good morning. So in terms of China, overall growth in the quarter was similar to last year. Volumes were back significantly in January, and we have seen some good recovery throughout the course of the quarter. And from an outlook perspective then, we do expect China trading to improve as we progress into Q2 here and beyond. So let's say flat for the first quarter and continue sequential improvement then throughout the course of the year.

Thank you. That's very true.

All right. Thank you for that question.

There's no further question at this time. I turn the call back over to William for closing remarks.

Thanks very much. Listen, thanks, everyone, for joining us this morning. We appreciate your time and your support. And if there is any further follow-up questions, please reach out to myself and the IR team. Thanks very much.

This concludes today's conference call. You may now disconnect.