Kerry Group plc

Good morning and welcome to our Q1 2024 trading update call. I'm joined on the call by our CEO, Edmund Scanlon, and our CFO, Marguerite Larkin. As usual, Edmund and Marguerite will take you through our presentation, and following this, we will open the lines up for your questions. Before we begin, please note the usual disclaimer on our Q1 presentation regarding forward-looking statements. I will now hand over to Edmund.

Thanks, William. Good morning, everyone, and thank you for joining our call a little earlier than usual. I'll start with a summary of my key takeaways from the first quarter before handing over to Marguerite to give a little more detail on the results. So moving first to slide four, please to report a good start to the year and the pickup in volumes in the first quarter. At Taste and Nutrition delivered 3.1% volume growth in the first quarter. This was mainly driven by another strong performance in our food service channel with volume growth of 8.6%. And this represents our 12th consecutive quarter of high single-digit or greater volume growth. And this is thanks to our unique positioning as our customer's innovation and enablement partner. We're also pleased to see North America returning to good volume growth in Q1, following the significant customer inventory management across our industry last year. On EBITDA, we delivered strong margin expansion of 140 basis points, driven by benefits from our Accelerate Operational Excellence program, along with accretion from our recent portfolio developments and the effect from pricing. Moving to capital allocation, firstly, on the M&A front, we have just closed the acquisition of the Lactase Enzymes business of Nova Nisus. And as previously indicated, we are announcing a new 300 million share buyback program today, which will mean a total capital return including dividends of over 700 million in 2024. We will remain agile and flexible in capital allocation, aligned to market conditions, prioritizing the best value creation opportunities. And finally, we remain on track for our guidance range, You will have seen we have made a slight update today to reflect the net benefit from the new share buyback program. And now I'll hand you over to Marguerite for the performance overview.

Thanks Edmund and good morning everyone. Moving to slide five and the summary group financial overview. Firstly on revenue, group volumes came in at 1.9% for the first quarter. driven by good performance in taste and nutrition of 3.1% growth. On margins, we are pleased to have delivered strong margin progression of 140 basis points, both at food level and taste and nutrition, as we continue to make good progress towards our target. And net death at the end of the period was 1.7 billion, reflecting good cash generation, capital investment, and the impact of the care buyback program. Turning to our group revenue bridge on slide six, we had group volume growth of 1.9%, as I mentioned, and slower pricing of 5.3% in Q1. Foreign currency translation was 1.4% adverse due to movements in the U.S. dollar and weakness of some emerging market currencies versus the euro. And the effect from disposals net of acquisitions was 5.1%, with a contribution from acquisitions of 0.5%, more than offset by the impact from disposals of 5.6%, primarily relating to the divestment of our sweet ingredients portfolio last year. Moving now to our taste and nutrition overview on slide seven, where our positive start to the year was driven by continued strong food service performance. We delivered good volume growth of 3.1% in the first quarter, despite needed consumer demand in the number of markets. Pricing for Q1 was 3.9% lower given overall deflation across our basket of input costs, and we delivered strong EBITDA margin expansion of 140 basis points in the period, driven by cost efficiencies from our Accelerate Operational Excellence program, portfolio developments, and the positive effect from pricing. In our end-use markets, we achieved good volume growth across our snacks, meals, meat, and beverage markets. Looking at our channels, we had strong volume growth of 8.6% in food service, with volumes in the retail channel returning to growth in Q1. And in emerging markets, we had volume growth of 5.2%, led by a strong performance in the Middle East. Turning to slide eight now and taste and nutrition performance by region. In the Americas, I am pleased to say we delivered volume growth of 3.6% in the period with a return to good volume growth in North America. This was led by a strong performance in snacks through new savory taste business wins and the number of launches incorporating our taste and salt reduction technology. Within LATAM, we achieved good volume growth in Mexico across beverage and snacks, with performance in Brazil improving in the period. In Europe, as expected, overall volumes were 1.4% lower in Q1, reflective of strong prior year comparisons of 34% and softer consumer demand. Good growth was achieved in meals through solutions incorporating our food protection, preservation, and authentic taste technologies. Beverage also performed well in functional and refreshing beverages while we had lower volumes in dairy, given very strong prior year comparisons. In apnea, we had volume growth of 4.8%, primarily driven by strong growth in the Middle East with China similar to the prior year and Southeast Asia improving in the period. In food service, we delivered strong volume growth with leading regional coffee chains and quick service restaurants. Snacks delivered excellent growth with launches incorporating our savory taste portfolio and strong growth was achieved in meat through functional and taste systems. Moving to slide 9 and Dairy Ireland, which delivered a solid start to the year in line with our expectations. Overall volumes were back 3% in the periods with good growth in dairy consumer products, while performance in dairy ingredients was reflective of market supply conditions in the quarter. Pricing was back in the period given the reduction in dairy input costs year on year, and we had EBITDA margin expansion of 70 basis points for the division. The good growth in dairy consumer products in the first quarter was driven by performance across snacking, Kerry's brand's cheese range, and private label spread. Finally, to cover off a few other financial matters on slide 10. On the input costs, we are currently seeing a lot of variation within our overall input cost basket. We expect overall mid to high single digit deflation in the first half and for this to significantly ease in the second half of the year. On currency, our outlook remains unchanged with a relatively neutral translation impact in the full year. And on share buybacks, as Edmund referenced earlier, we are commencing a new 300 million program this month, which will run to the end of the year at the latest. The net incremental accretion in the year from the new program of 50 basis points has been factored into our guidance range. Given our strong balance sheet and cash flow generation, combined with market conditions, we considered that the timing is appropriate to commence an additional share buyback program. On capital allocation, our objective remains to have an efficient balance sheet while importantly retaining capacity to reinvest in the strategic development of our business. To summarize on overall financial performance, we delivered good volume growth, particularly in food service and in the Americas, along with strong margin expansion in the first quarter. And we are pleased with our positive start to the year. And with that, I'll pass you back to Edmund.

Thanks, Marguerite. Finally, before we move to Q&A, I'd just like to close out with our full year outlook. While recognizing current market dynamics, we remain on track to achieve our guidance, which has not changed, other than reflecting the benefit from the new share buyback program. We have a good innovation pipeline, and we are well positioned to deliver volume growth and good margin expansion in the full year. We will continue to develop our business and our portfolio aligned to our strategic priorities. And as we said, reflecting the net benefit from the new share buyback program, our adjusted earnings per share guidance range is now increased to 5.5% to 8.5% constant currency growth in the full year. So with that, I'll hand you back to the operator, and we look forward to taking your questions.

Sir, we will now begin the question and answer session. If you have dialled in and would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. If you'd like to withdraw your question, simply press star 1 again. If you are called upon to ask your question and are listening via loudspeaker on your device, please pick up your handset and ensure your phone is not on mute when asking your question. We'll pause for just a moment to compile the Q&A roster. Our first question comes from the line of Charles Eden from UBS. Please go ahead.

Hi, good morning. Thanks for taking my questions. My first one is just on the cost savings, which obviously contributed positively to the strong margin expansion in Q1. Could you quantify the level of savings achieved in the quarter, please, and remind us the expectation for the annual savings you're expecting this year? And then the second question is just on the share buyback, if I may. Obviously, you flagged another programme this year coming into this, so this was largely expected. But how should we be thinking about share buybacks going forward? And I guess you touched on it, Marguerite, with the efficient balance sheet comment. But is a buyback of around this size something we could expect to see on a recurring annual basis going forward? I guess because net debt debit dial will still be in a healthy place at the end of this year and you're still generating strong cash flows. So could you comment on the expectation maybe medium to long term on the use of the balance sheet. Thank you.

Good morning, Charles. And maybe your first question first. We were pleased with the good margin expansion in the quarter. The key driver was a combination of probably three factors. So the cost efficiencies that you have referenced from our Accelerate Operational Excellence program, and that's on track to deliver for the year. Secondly, the positive contribution from portfolio development and the overall positive effect from pricing. So while we don't give a precise bridge at the quarter as a directional sense, of the breakdown of the margin expansion in the quarter, roughly half relates to the positive impact from the Accelerate Operational Excellence Program and the portfolio developments, with the other half then relating to the positive impact from pricing. So overall, just then in terms of the outlook for the year, As I referenced in February, we do see 2024 as a year of very good margin expansion. We expect taste and nutrition to deliver margins close to 18% in 2024, with good positive underlying margin expansion driven predominantly from the Accelerate Efficiency Program and the other levers that you're familiar with are Mix, Operating Leverage and Portfolio Developments. So overall, you should think of it maybe in the zone of 50 basis plus from that underlying expansion with the balance coming from the pricing impact. In terms of the capital allocation, I might just give you some perspective and I know Edmund then will add also. So it's very much as I said in the prepared remarks in terms of how you should think about share buyback programs and how we look at capital allocation and the deployment of capital across the different options, whether it's being investing capital to develop our business organically, inorganically, and then from a capital returns perspective, a combination of our dividends and also consideration of share buybacks when market circumstances and other conditions are conducive to share buybacks. I think overall, from our perspective, as I've said, our aim here is to have an efficient and strong balance sheet, continuing to have a strong investment grade rating, but also, importantly, retaining the capacity to invest in the strategic development of the business. And it's very much around assessing the different capital allocation options based, as I said, on the prevailing market conditions and how we can create the most value for shareholders.

I have nothing to add. That's good. Thanks, Blake. Thank you.

Our next question comes from Lana Fulvio-Casol from Berenberg. Please go ahead.

Yes, good morning, and thank you for taking my questions. I have a couple. The first one is on the volume growth evolution for the rest of the year. I mean, we heard companies like Nestle, Unilever, etc., pointing to volume growth sequentially improving as we progress through 2024. Now, I understand that you may have had some timing-related benefits in your Q1, but excluding that, are you expecting a similar picture for your TNN volumes for the rest of this year? And then my second question is on the margin for TNN. Marguerite, thank you for the color that you provided on the previous question on the drivers, but I didn't I was just wondering if you can give a bit of color on how the Christian Hansen lactase business will impact the TNN margin this year. I think that this is quite a margin business that you're acquiring. So wondering what sort of contribution that could make. Thank you.

Thanks, Paul. Good morning. In terms of volume, the short answer, frankly, is we're not flagging any specific business. I would say, improvements as such over the course of the year. So when we set out our guidance for the full year, we didn't bake in a second half improvement or anything like that. So look, where we are today is we're pleased with the start, especially pleased with where we are in the Americas. With the 3.6% volume growth in the quarter, there was a timing benefit that we flagged at the full year results. And there's no change really to our go forward perspective. We are well positioned for growth. There is a strong innovation pipeline there. But having said that, the overall consumer demand continues to remain relatively subdued. And we factor that in at the full year when we give our full year guidance, and we wouldn't be changing that outlook as we sit here today. Obviously, we'll update you further throughout the course of the year.

And then, Fulvio, just on the second part of your question in relation to the lactose enzyme acids acquisition, it has a good... Profile, it's nicely accretive to margins, maybe circa 10 basis points accretive to margins, and we factored that into our guidance at the beginning of the year.

Thank you very much. Thank you.

Our next question comes in line of Edward Hawkin from JP Morgan. Please go ahead.

Hi, all. Thank you very much for taking my question. My first question relates a little bit to the previous one, which is what are you seeing on the customer launches, new activities front? Are you seeing more of your customers maybe doing more innovations, being more promotional, and that this could be supporting your volumes in the second half of the year and going forward? And my second question is on food services growth. So it was another stellar quarter for volumes in that channel. We've heard, of course, in recent days and weeks from some companies signaling weaker dynamics in the end market. I was wondering, could you comment here on perhaps your expectation for food services for the remainder of this year and going forwards, and how concerned could or should we be on potential end markets slowdown? Thank you very much.

Hi, Ed. Good morning. Look, in terms of innovation, we have seen the ongoing renovation that I would have spoken about previously, so that continues. But there has been a pickup in activity on innovation activity across the board, across different customer types. There has been an increase in innovation, and we expect that planned launch activity towards the back end of 2024. I would call out particularly in private label. There also continues to be increased focus on innovating for value, also launching new taste profiles, you know, to bring excitement to categories that haven't seen, you know, a significant level of innovation, you know, in recent years. And that improvement of nutritional profiles continues to be a focus across most geographies. So, look, while there, you know, continues to remain uncertainty around the consumer landscape, there is a clear pickup in customer innovation activity, which could play true in the market towards the end of 2024. Then in terms of food service, look, I think it's fair to say, you know, we have a very strong position in food service and And the important thing from our perspective is that that strength is not down just to one thing. It's a combination of factors, along with a significant investment that we have made over many, many years. And I feel confident about the food service market going forward for a couple of reasons. Firstly, we don't necessarily need the channel to be in growth for Kerry to grow. That's a super important point. And we've proven this through our performance quarter after quarter. And we achieve that through greater penetration with our customers, through back-of-house efficiency solutions, nutritional or sustainability improvements on their existing menu items. And on top of that, we're also well positioned as regards to key drivers of new growth or new traffic. bringing excitement to the menu with new menu items, new menu offerings, new menu platforms, and also developing seasonal products and LTOs. So, look, the 8.6% volume growth in Q1 was, you know, was very strong. And if you're looking out for the full year, like we said at the beginning of the year, we expect the food service channel to be in that strong mid-single digit zone by the end of the year.

Thank you. Thank you. Our next question comes from Alex Sloan from Barclays. Please go ahead.

Yeah, hi, morning all. Actually, just to follow up on that previous question on food service, obviously impressive growth and thanks for the colour on the full year outlook. Obviously, we have heard from a number of customers around slowing traffic. So just to maybe just to pick into that a bit more, is that mid-single digit or strong mid-single digit growth outlook entirely driven from penetration of these new efficiency enabling solutions and you can deliver that even with potentially kind of negative traffic at some of the key customers? Thanks.

The short answer is yes. It's mainly down to penetration. There are bright spots in terms of some customers are winning. You know, while some have been challenged, there are also other players in the market that are continuing to perform extremely well. And, you know, as everybody well knows, our orientation is towards success. QSR, coffee shops, fast casual, and there are winners in those categories as well. So that is part of it, but the biggest driver is the penetration that I previously mentioned. Very helpful. Thank you.

Thank you. Our next question comes from Patrick Higgins from Good Buddy. Please go ahead.

Thanks. Morning, everyone. A couple of questions on my side, please. Maybe just switching channels then to retail, because you maybe elaborate on performance there, obviously back into volume growth. How are you with customer stocking levels now into retail? What's your expectation on retail performance as you progress through the year? That's the first one. Second one then, maybe just on Atmia, you noted China flat year on year. Any kind of green shoots of that improving from here, or maybe just a little bit more color on trading conditions in that market, please?

Thanks, Patrick. So I would say in terms of retail, pleased that we're back into growth on that channel for the quarter. The stocking factors are behind us. We did have some, let's say, lapping of shrinkflation in Q1, but that is now, I would say, by and large behind us from here out. So those two, I guess, headwinds are behind us in terms of, let's say, or go forward on retail. I would say in the Americas, just to give a little bit of color on our retail performance, the two areas were snacks and meals. But when I take a step back and look at retail, it is really beverage and snacks and that we feel, I would say, most positive about as it relates to the retail channel. There is a lot of innovation going on in beverage. While there is a lot of churn in the category, there continues to be a lot of innovation, especially around functional beverages, coffee-based beverages, low and no alcohol beverages. And then snacking, a really important underpin of growth for us in the whole snacking space. is salt reduction, especially in North America. There is a significant level of reformulation going on there, and it's something that we feel we are really well positioned around, thanks to the proprietary technology we have as it relates to salt reduction. So they're the two categories we're most excited about. A little bit, you know, there's specialty snacking, followed by beverage. And then in terms of your question on China and the APMEA region, what I would say about China is that despite a better January, volumes were in line with last year in the quarter, with the growth primarily driven by food service, while retail volumes were a bit lower. Maybe taking a step back and looking at apnea in totality, we would expect a modest progression in China. We expect Southeast Asia to progress and Middle East to continue to hold up. So generally from an apnea perspective, you know, progression throughout the course of the year and, you know, probably to be in that strong mid-single digits on by the end of the year.

Thank you. Thank you.

Our next question comes from Alex Jones from BOA. Please go ahead.

Good morning. Thanks. One question just to follow up on the food service point. Are you able, even if it's just qualitatively, to split out the sort of contribution from penetration versus back of house um solutions versus sort of menu enhancement in terms of which one of those is most impactful for your outperformance versus your your end customers um and then the second question just on dairy island um there's a note in the piece about a sort of change in contractual arrangements that's reflected in revenue due to ifrs 15 could you give any more color on that and whether it's had any impact on results this quarter thank you

Maybe on your second part of your question first, Alex, no, it doesn't have any impact on the results in the quarter. And obviously at the half year, we'll be providing the normal full detailed disclosures at that point.

In terms of penetration within the food service channel, it's I would say the vast majority of engagement, I would say, is around driving solutions into reducing back-of-house complexity. And that is penetration for us. We didn't really have access to that opportunity previously. By virtue of the fact that what has actually happened here is that there's been a structural shift in the food service channel. Twenty dollars an hour is the norm now for back of house operators in the U.S. market primarily. And that is effectively a doubling of cost for the operator over the course of the last few years. That is not going to reverse itself. So we're seeing customers being really engaged and committed to make these changes at the back of the store, they take quite an amount of time actually to roll out. So there's no spike here. Don't expect a spike in performance. This will be a continued, constant rollout of these operational improvements over several years. And that is the key underpin of why we're, you know, why we're sounding so confident about that food service channel going forward. Thank you.

Thank you. We'll now take our last question from Nicola Tang from BNP Paribas Exame. Please go ahead.

Hi, everyone. Thanks for taking the questions. First, I wanted to ask about private label activity in general. I think last quarter you talked about how you were reallocating a bit more resource into this area. So could you talk about kind of your discussions and innovation with customers there? And the second one on M&A, I think last year you increased the hurdle rates around or criteria around new deals. Could you talk a little bit about your current M&A pipeline? Thanks.

Yeah, so we've talked several times about private label, Nicola, and I think it's an area for us where whether it's branded CPGs or whether it's private label, we believe there's an equal opportunity for us in terms of driving growth. Clearly, there has been a lack of innovation in the retail space in certain categories. And private label owners and retailers are really looking at how they can drive growth into categories. And we are a key partner to retailers to help them to do that. And in many respects, it's somewhat like how we describe our engagement in food service. We don't sell directly to the retailers. We work with the retailers and pull our technology through contract manufacturers. So we've seen an uptick in the level of engagement with retailers around their private label strategies. I think this is going to be more back-end weighted or into 2025 before we see, I believe, a significant impact on our own performance. But for sure, there has been a pickup in innovation engagement on the private label side. In terms of M&A, we have an active M&A pipeline. And I guess more importantly, we have seen some moderation in the expectations around multiples in recent months. And while the pipeline is active, it's always hard to predict timing. And it's important to remember, we have a very synergistic platform to create value from acquisitions, be it integrating complementary technologies or expanding our emerging market footprint. So look, we will continue to deploy capital to create value via M&A. where those opportunities present themselves.

Thank you. There are no further questions at this time. I'll now turn the call back over to Kerry Group for closing remarks.

Thank you very much for joining us on the call today. If you have any further questions, please do reach out, and we wish you all a great day. Thank you.