Kerry Group plc

Thank you for standing by and welcome to the Cary Q3 conference call. I would now like to welcome William Lynch, Head of Investor Relations, to begin the call.

William, over to you. Thank you, Operator.

Good morning and welcome to Cary's Q3 IMS update call. I'm joined in the 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 usual disclaimer regarding forward-looking statements. I will now pass over to Edmund.

Good morning, everyone, and thank you for joining our call. So, beginning with slide four and the key messages, and starting first with volume. We continue to deliver good volume for us in case nutrition through the third quarter. despite challenging market conditions and places. Across our regions, we get a good improvement in North America, Europe performed in line with our expectations, and Atelier continued to deliver strong growth. In food service, where we are uniquely positioned, we continue to deliver strong, high single-digit volume growth through the third quarter. This supported our good overall performance in case nutrition with Q3 volumes up 1.6%, clearly ahead of the market. And right now, we are looking at similar volume growth in case nutrition for the full year. Next, the EBITDA margin, which improved through the year, with group up 100 basis points and case nutrition up 130 basis points in Q3. While our strategy is volume-led, development of our margin profile remains the key focus of the business. From a strategic perspective, we made good progress across the year with both organic and acquisitive developments, in particular across our emerging markets footprint through a combination of acquisitions and new facilities. We also completed the disposal of our sweet ingredients business as part of our overall continued portfolio development and sustainable nutrition strategy. As part of our capital allocation framework, In addition to our dividend of around €200 million, given our strong balance sheet and cash flow generation, we are initiating a €300 million share buyback program. And with that, I'll now hand you over to Marguerite for the performance overview.

Thanks, Edmund, and good morning, everyone. We're moving to slide five in the summary financials. Firstly, overall group volumes for the first nine months of the year were up 0.4% due to our continued good volume growth in taste and nutrition, as Edmund referenced, while dairy Ireland continued to be challenged due to prevailing market conditions. Margins year-to-date are up 10 basis points at group level, which reflects a significant improvement in the third quarter of 100 basis points. The key drivers of margin expansion in Q3 were our accelerated operational excellence program, strategic portfolio developments, and the overall positive effects from pricing, which I'll touch on in a little more detail shortly. Net set at the end of the period came in under 1.8 billion, representing continued good cash generation, partially offset by acquisition activity. We remain on track to deliver cash conversion above our 80% target in the full year. Turning next to our group revenue bridge on slide 6, group reported revenue was back 4.2% for the first nine months of the year, primarily due to the impact from disposals of 5.1%. partially offset by a positive contribution from acquisitions of 1.1%. Foreign currency translation was a 1.9% headwind in the period. Group volumes increased by 0.4%, as I mentioned, and overall pricing was 1.3% as we continued to manage input cost fluctuations, with pricing in the third quarter reflecting overall deflation. We have a very well-structured pricing model to manage the absolute level of input cost inflation or deflation in collaboration with our customers. Therefore, when entering a deflationary period in taste and nutrition, the net effect of deflation on our income statement results in a lower pricing effect on revenue, a mathematical improvement on the EBITDA margin percentage, and importantly, a neutral to positive effect on earnings. Moving to our tasting nutrition overview on slide 7, where growth was driven by continued strong performance in the food service channel. Volumes were up 1.5% year-to-date and 1.6% in the third quarter. This growth was delivered against very strong comparisons of over 8% last year. Pricing for the first nine months of the year was up 3%, with negative pricing in the third quarter of 1.4%, reflecting the deflationary environment I just mentioned. EBITDA margins in taste and nutrition were up 20 basis points, and I'm pleased to say up 130 basis points in the third quarter. From an end-use market perspective, Growth was led by meat with taste and texture systems, snacks through savory taste innovations, and a strong performance across dairy applications. Across our channels, as mentioned, food service continued to deliver a strong performance with volumes up by single digits, while volumes in the retail channel were lower due to customer inventory management in North America. And in emerging markets, we had 5.1% overall volume growth driven by a strong performance in the Midlands. Turning now to slide eight and taste and nutrition performance by region. Firstly, the Americas, where overall volumes were back 1.7% year-to-date, primarily as a result of customer inventory management in the retail channels. In North America, we were pleased to see a good improvement in the third quarter, with overall volume similar to the prior year. We had good volume growth in snacks with taste-led innovations across global leaders and emerging brands, and dairy also performed well through taste systems innovations. In LATAM, we had overall growth in the first nine months of the year, However, the third quarter was lower due to faster market conditions in the region. Growth was driven by Mexico with good performances in the snacks and meat markets. Moving to Europe, where we had volume growth of 3.7% year-to-date. As expected, we saw volumes return to a low single-digit level in Q3, with growth led by the meat, snacks, and meals markets. Overall growth was driven by an excellent performance in food service and led by the UK and Ireland in particular. In apnea, we had year-to-date volume growth of 7.5% and 8.2% in Q3. This was led by meat, meals, and dairy markets with very strong growth in food service. Within the region, growth was led by the Middle East and South Asia Pacific with a good overall performance in China, considering market conditions. Moving to slides 9 and Dairy Ireland, where performance continued to be impacted by the significant reduction in dairy prices. Volumes for the division were back 6.2% year-to-date as challenging industry dynamics persisted through the period. Pricing was back 6.5%, reflective of dairy markets. with EBITDA margins down 110 basis points due to the impact from changes in dairy prices. The lower volumes in dairy ingredients were principally due to softer market supply dynamics, with prices continuing to reduce through the period, while growth in dairy consumer products was led by Kerry's branded cheese ranges and private label spreads. Finally, to cover off a number of other matters on slide 10. Firstly, on input costs, which turn deflationary in Q3, we currently expect this deflation to continue into the first half of 2024, and we will update you on this in February at our full year results. On currency-based and prevailing exchange rates, we are forecasting a translation headwind of circa 3%, on adjusted earnings per share in the full year. And as Edmund referenced earlier, we are commencing a $300 million share buyback program at the beginning of November. Our strong balance sheet and cash flow underpins this buyback, which is aligned to our overall capital allocation framework. To summarise on financial performance, we continued to deliver volume growth despite a challenging market backdrop in places and our EBITDA margins have improved significantly in the third quarter. And with that, I'll pass you back to Edmund.

Thanks, Marguerite. Before we move to Q&A, I'd like to close out with our full year outlook. While market conditions remain uncertain, we remain strongly positioned for growth with a good innovation pipeline. We will continue to manage through the current input cost environment in collaboration with our customers. On the capital allocation front, there's no change. We will continue to develop our business through capital investment and acquisitions aligned to our strategic priorities. Case Nutrition remains strongly positioned for volume growth and margin expansion. On the other hand, performance in Dairy Ireland continues to be impacted by challenging market conditions. Given this context, we expect our constant currency earnings growth to be at the low end of our 1% to 5% guidance range, which reflects the net dilution of 2% from portfolio developments as previously stated.

So with that, I'll hand you back to the operator, and we look forward to taking your questions.

And at this time, I would like to remind everyone, in order to ask a question, press star, then the number 1 on your telephone keypad. We'll pause for just a moment to compile any questions. Again, if you'd like to ask a question, please press star, 1 on your telephone keypad now.

Our first question comes from the line of Castle Kenny from Davie Research.

Please go ahead.

Morning, all, and thanks for taking my questions. Firstly, on the outlook and the revised guidance, can you speak to the moving parts around that, please? Secondly, as we look into Q4 for TNN, I'm wondering could you provide some color just on the volume makeup there, perhaps by region? And finally, maybe a little early, but as we look into 2024 for TNN, just some first thoughts on that in the context of your long-term guidance as well, please. Thank you.

Thanks, Cahill. Good morning.

Firstly, on the guidance change, the change in earnings guidance is due to the current challenging industry dynamics in the Dairy Ireland business. And the scale of the significant reduction in dairy market sales prices this year is truly exceptional and has led to a short-term dislocation versus input prices. Look, we call that situation as being exceptional in nature, short-term in nature, and we expect 2024 in the dairy island business to be in a more normalized zone. Then just moving on to TNN and how we're thinking about the rest of the year. And I think maybe just to start, maybe just to look back in 2022, where we achieved an excellent 8% volume growth. And 2022 was about market share gains. In 2023, we've retained those market share gains. and will increase volumes in the 1.5% to 1.5% plus zone. And that will be achieved through increased levels of customer penetration, and that's obviously a good performance relative to the market. It is shy of our previous expectations for two reasons. Firstly, destocking, and destocking in North America particularly, has lasted longer than anyone would have anticipated. And secondly, in China, while China has delivered mid-single-digit volume growth so far this year, it is below our original expectations. So the key and end story for 2023, volumes slightly shy of our original expectations and margins ahead of our original expectations. Then as regards 2024, and obviously we'll update you with the full year, but just at a very high level, first maybe, what's going to underpin our growth here going forward is first, food service. We continue to increase our levels of penetration. Secondly, on emerging markets, we have a strong track record here, 9% volume CAGR over the last decade. And third, the overall global health and wellness trends. Look, we've divested our suite portfolio earlier this year, built out our proactive health portfolio through various acquisitions, Wellmune, BC30, Nature, and BioK, BioSarch, and Celefta. So the combination of all those things at a high level gives us confidence about 2024 and beyond. There are some other dynamics that we're currently seeing. We are seeing an overall uptick in innovation, an uptick in promotional activity, and private label brands are continuing to innovate, and we have seen new manufacturing capacity for private label come into the market. We're not expecting the stocking to be a feature at all in 2024, and we don't expect your inflation to be a major factor. So, look, the combination of all these things – should lead to good momentum in 2024. The current unknown really is around the robustness of underlying consumer demands. And we just have to see how that evolves over the coming months. But all in all, look, we feel we're well positioned to outperform the market in 2024 from a filing perspective.

Thank you, that's very fair. Our next question comes from the line of Charles Eden,

from UBS. Please go ahead.

Hi, good morning. Thanks for taking my question. Just one for me, and it's probably for you, Marguerite, if that's okay. On the 130 basis points margin expansion Q3 for TNN, thanks for the color. Could you just outline exactly the basis points contribution from the various parts you were alluding to, so the operational excellence, pricing, I guess, operating leverage in the volumes, just sort of help us understand what that looks like. And so we can think about moving parts there for Q4 and into 2024. Thank you.

Good morning, Charles. And yes, we were pleased with our margin performance in Q3. And to your question on the drivers of the improved 130 basis points in taste and nutrition, So from a directional perspective, the key drivers, as I mentioned, were firstly our Accelerate Operational Excellence and Cost Initiative, and they delivered ahead of expectations and contributed just under a third of the improvements. Secondly, the Strategic Portfolio Actions contributed, again, just under a third of the expansions. And finally, the remainder of the expansion is attributable to pricing and some currency benefits. So, good performance in the quarter. And as we look forward to the full year, we do expect to see continued margin improvement. The key drivers being similar. And in taste and nutrition, we're looking at margins being in the zone of 17% for the full year.

Super. Thank you. Our next question comes from the line of Ed Hawkins from JP Morgan.

Please go ahead.

Hi, all. Thank you very much for taking my question. My first question is a little bit on North America. So North America, it looks as though volumes back to slattish in Q3. How do you see this volumes developing into Q4 and into early thoughts on 2024? Are we really out of the woods on destocking in that region? And how are you seeing the market growth shaping up as well? And my second question is on the share buyback rationale. I think this is the first time he's done a share buyback for quite a long time. So really, should we be thinking that this is a reflection of very, very strong cash flow, maybe better than we think for this year? Is it a reflection of an absence of M&A opportunities? Or is it also a bit of a reflection of your share price weakness of late that may change the algorithm a little bit? Thank you.

Good morning, Ed, and thanks for the question. And I might start off here and then Marguerite might want to add. Firstly, on North America, look, we are pleased with the progression in North America. And I think they say North America is coming in a little bit ahead of our expectations versus what we would have expected maybe a few months back. So that's for sure a positive thing, and there are some contributors for that that we see continuing into Q4 and beyond. The stocking continues to be a factor. It is lessening as an impact as we progress through the year, and we expect to have the stocking behind us by the end of the year. Shrinklation has also been a factor this year. It is also, I would say, a kind of lessening as the year progresses. It might be some factor into 2024, but we wouldn't be calling it out as anything major. Food service continues to perform well. I think at a high level, what we're seeing in the market is that general health and wellness continues to be a trend in North America. We're seeing Canada introduce front-of-pack labeling. In every country where nutritional profiling has been elevated, either through regulatory intervention or government intervention, that has been a positive catalyst for Terry. And while Canada is, let's say, the smaller part of North America, it is still a step in the right direction. So I think as we look at North America, there are a lot of positives as we look out into 2024. and some of the headwinds that were there in 2023 won't be there and certainly won't be there to the same extent in 2024. Maybe then just on your way back point, I might just address your question in M&A. We are and we will continue to be active in the whole M&A space. We are currently evaluating several opportunities they are of a vote on a nature and they're at various stages. So that, let's say, I would call the M&A environment has been quite active. Obviously, expectation management continues to be a feature, but one should expect Kerry here over the coming months and quarters to continue to be engaged in M&A activities. And we believe we have a strong platform to create synergistic value creation opportunities for shareholders by bringing M&A opportunities onto the carry platform.

Maybe just to add to Edmund's comments in the context of the share buyback program, in terms of timing, you're right, Ed, we initiated the buyback now given the strength of our balance sheet. and a very good cash generation in the year. Clearly, the current market context with the change in cost of debt and softening of sector share prices is a consideration. But from our perspective, our objective here is to have an efficient balance sheet while retaining capacity to continue to invest in the strategic development of the business. So I think it's fair to say that we will remain agile and flexible in terms of assessing the various capital adaptation options available. Continued to make current deliberate decisions based on the prevailing market conditions with the overall objective to seek to create the most value for shareholders. Thank you. Thanks.

Our next question comes from the line of Alex Jones from Bank of America.

Please go ahead.

Great. Thanks for taking my questions. Maybe the first one to follow up on the buyback, can you describe for us how you decided the size of that buyback program and over what period we should expect the $300 million to be deployed? And then the second question just on food service, could you talk a little bit about the trends you're seeing specifically in that channel into Q4 and in 2024, and then whether you're seeing any sort of changes in the growth outlook for that channel.

Thank you. I might start on food service, Alex, and thanks for your question. So when we think about food service in our business, we're talking about primarily QSR, fast casual, and coffee chains. And we expect those categories within food service to continue to perform well. And obviously we're pleased with our current strong performance in the quarter and year to date. As we look out, we see really three key areas as being underpins for growth in the food service channel. And this really goes to penetration opportunities for Kerry. Number one is the nutritional enhancement of the menus. Customers in this channel continue to silently reformulate behind the scenes to continue to improve the overall nutritional profile of their menu items. So that's number one. Number two is seasonal offerings and limited time offerings. These are key factors for the food service channel to drive traffic. And these LTO and seasonal offerings, as we see here today, are actually ahead of where they were in 2019. So customers in this channel continue to see these being important factors. And again, we're very well-based to help customers to bring new innovation to their menus in terms of the seasonal offerings. And the third point is improving and enhancing back-of-house efficiency. Again, we're extremely well positioned there to help customers to drive efficiency in back-of-house, and that enables them to serve their consumers quicker, either via through drive-through, be it for delivery orders, or be it for dine-in. So overall, in the medium term, long term, we feel that we're well positioned in the food service channels to continue the performance that we've seen over the last couple of years.

And Alex, on your specific follow-up question on the share buyback, we will issue a separate announcement with the relevant details at the beginning of September when we commence the share buyback, but it is our intention to complete the share buyback programme by April 2024. In terms of size and for consideration, it's all about balance, continuing to remain agile and flexible, ensuring we have an efficient balance sheet while, as I referenced, retaining capacity to continue to invest in the strategic development of the business. And so, therefore, we feel that the... share buyback of 300 million strikes that balance appropriately.

Thank you.

Our next question comes from the line of Charles Bentley from Jefferies. Please go ahead.

Thanks so much for taking my questions. I've just got one more left just on volume growth expectations, particularly in Europe, because I think if you look at the three different regions, you're saying America is improving, APME are getting better in TNN. But, like, I guess that would suggest that you should be kind of a bit more positive on Q4. Do you think kind of Q4 from a run rate perspective should be doing better? And is there anything that kind of concerns you in Europe, either on the kind of food service side or in retail? Thank you.

Good morning, Charles. Thanks for the question. I think in Europe, look, overall, we're very pleased actually with our performance in Europe. What we have been guiding throughout the course of the year was that or is that demand will be tempered and volume performance will be tempered as we move through the year. And that is, in fact, what is happening. So I would say Europe is performing in line with expectations. well ahead of the market. And, you know, any type of positive growth in our perspective is a good performance in Europe. I think, you know, let's say when we kind of take a step back and you might be a little bit surprised to hear this, but some of our best performing countries in developed markets was actually the UK and Australia. And the key underpins of growth in those two countries actually is the evolution of, let's say, labeling, nutritional labeling, you know, sugar, salt and fat regulations and what have you. And that gives penetration opportunities for Kerry where, you know, there are two markets that wouldn't historically be called out as, you know, high performing markets as such. But from a Kerry perspective, these countries have been performing extremely well on the basis that health and wellness, nutritional profiling are much bigger issues for customers. And we are going to see that, I believe, continue to roll out globally. Maybe not super quick, but certainly something that's going to roll out. I referenced Canada earlier. We're seeing new front-to-pack labeling requirements being rolled out there as well. So these are things that we continue to kind of watch out for in our space because they do give good volume opportunities for us through penetration in markets that typically would not be high growth.

Okay, thanks, Edmund. Just to follow up quickly, so just to be clear, your expectation is you still have positive volume growth in Europe in the fourth quarter?

Yeah, we're just going to have to see how it plays out, but yes, is the answer. Thanks. Our next question comes from the line of Patrick Higgins from Goodbody.

Please go ahead.

Thanks. Morning, everyone. I guess one question for me and a kind of two-parter. Look, there's obviously a huge amount of focus recently on the potential impact of the GLP-1 anti-obesity drugs, particularly since Walmart mentioned it having an impact on their fastest size. Firstly, have you seen any impact to your business in terms of volumes or in terms of the kind of customer conversations and innovation pipeline you have? And secondly, what kind of risks or opportunities do you see the drug is potentially posing to your business?

Okay. Good morning, Patrick, and thanks for the question. Look, I mean, it's something obviously that is part of the conversation with customer customers at this moment in time. But maybe taking a step back, look, I think it's a scenario where, you know, This will result in some change in the environment. And from our perspective, look, change has always been a good thing for Kerry. It means fundamentally that customers are going to need support. And we've seen that in the past through cleaner labels, reduced number of ingredients, adding functionality, reducing sugar, salt, or fat, or improving taste. And these are all areas where we have a strong capability. So the early engagement with customers, and I don't want to overstate it at all, but some of the early engagement with customers is customers asking themselves, do we need to do some reformulations? Do we need to look at some new products that we should be launching here into the market? So from a carry perspective, it's obviously an area we want to keep a very close eye on. But as we sit here today, It's driving some conversations with customers that are already kind of exposed to, let's say, the dietary space or the health and wellness space. They're looking at their offerings and they're looking at opportunities where they can complement the GLP-1 drugs. And so as we're sitting here today, some conversation is happening. I don't want to overstate it. But it is about change, and change has always brought opportunities for caring.

That's great. Thank you. Our next question comes from the line of Lauren Mullineaux from Citi.

Please go ahead.

Hi. Morning, both. Thanks for taking my questions. Just to come back on volumes quickly, I just had a question around the outlook for TNN. I think when we last spoke, Edmund, you mentioned kind of a 2% to 3% range of volume growth for TNN in FY23. I wanted to check whether you're still happy with that or some of the moving parts, maybe since you last spoke, that might change that view. And then on FY24, you mentioned outgrowing growth The market next year is in your expectations, just wondering what you're expecting for the underlying market growth and also whether you're expecting to be within this mid-term volume range of 46% next year and kind of what the moving parts are that will get you kind of to the top or the bottom end of that range if that's the case. And then also just a quick point on whether you're still seeing a shrinkation as a potential headwind in the market or whether this is no longer a feature. Then my second question would be around Dairy Island. So it seems like that business performed quite a lot worse on volume than maybe we were expecting. Just wondering if you could touch again on why we're seeing so much pressure on that part of the business. It seems like that's mostly your commoditized part of the business, but kind of what are the drivers of this, I guess, and any view on how quickly that could rebound or recover that part of the business? and then obviously kind of expectations maybe into Q4 and a bit further beyond. Thank you.

Thanks, Lauren, for the question. I have covered some of this already at the very outset, Lauren, but I will just go back over the points. Firstly, on Dairy Ireland, Look, we have seen a significant scale of dairy market price reduction throughout the course of the year that is truly exceptional and unprecedented in the industry. And that has led to a short-term dislocation versus input prices. So we would call that situation as being exceptional in nature, unprecedented in nature, short-term in nature, And we expect 2024 to be back in a much more normalized zone. Then moving on to TNN and taking your kind of question there holistically. As we look back maybe 12 months, we've had 8% volume growth in 2022. And that was all about market share gains. In 2023, we've retained those market share gains and increased volumes by 1.5%, 1.5% plus. That's where we are here today, and we expect that to continue into Q4. So that is shy of our previous expectations for two reasons. Firstly, the stocking in North America has lasted longer than any of us expected. And secondly, while China has performed well in the mid-single digits volume zone, So far this year, it is below our original expectations. So then as regards 2024, and obviously we'll get more color then, and I'm not going to go through all the moving parts there, but from a food service perspective, from an emerging market perspective, from a global health and wellness trend perspective, we feel we're extremely well positioned at a very high level. And then some kind of near-end dynamics that we're seeing in the market is we've seen an uptick in innovation. Generally speaking, and I would say especially in North America, we've seen an uptick in promotional activity, and we expect that to continue. We've seen more capacity come in to private label brands, to support private label brands. So we are seeing private label brands continuing to innovate We're not expecting destocking to be a feature in 2024, and shrinklation would be a far, far less factor in 2024. So it's the combination of all these things that we feel should lead to good momentum into 2024. And I guess as we're sitting here today, the current unknown, if you will, is around the underlying consumer demands. And we're just going to have to see how that plays out over the coming months. But all in all, we do feel we're well positioned to outperform the market. We don't know exactly where the market is going to be. It's going to be down to where that consumer plays out. But through the combination of everything that we've done from a portfolio perspective, from a positioning perspective, we do feel confident that we will outperform the market like we have this year. Like we have done in previous years as well.

There are no further questions at this time.

I would now like to turn the call over to William Lynch for closing remarks.

Thank you very much. All that's left from our side is just to say thanks to everyone for joining us on the call today, and we wish you all a good day. And if there's any further follow-ups, please revert to the IR team here. Thank you.

I would like to thank our speakers for today's presentation, and thank you all for joining us. This now concludes today's call. You may now disconnect.