Kerry Group plc

Good morning and welcome to our Q3 2024 results update call. I'm joined on the call by our CEO, Edmund Scanlon, and our CFO, Marguerite Larkin. As usual, Edmund will begin with his overview comments before handing over to Marguerite for the Q3 performance review, and Edmund will close out before opening the lines for questions. Before we begin, please take note of the disclaimer regarding forward-looking statements. Now over to Edmund.

Thanks, William, and good morning, everyone. Beginning first with my overview comments.

We're pleased with our performance across the first nine months of the year, where we delivered continued volume progression through the period, combined with strong margin expansion of well over 100 basis points. In case of nutrition, we delivered volume growth of 3.4% in Q3, which was broadly in line with market expectations and notably ahead of our food and beverage end markets. On geography, this represented strong volume growth in the Americas, a good performance in AFMEA, with volumes in Europe turning positive in the third quarter. And by channel, in retail, we had a steady improvement through the period, while in food service, we continued to deliver strong growth, given our unique positioning.

So before handing over to Marguerite, I just want to give you a quick update on our recent U.S. Investor Day.

On the day, my five key strategic takeaways were as follows.

Firstly, the Americas, where we feel we have the winning model, and anyone in attendance will have seen this firsthand. Next, food service.

We gave a deep dive on why we believe food service is a structural tailwind for Terry. On emerging markets, we focused on LATAM, where regulatory changes around front-of-pack labeling is driving renovation and leading to opportunity for carry. Then on our enhanced technology portfolio, in particular our biotechnology platform, which we have significantly developed in recent years, particularly around the areas of proactive health, food protection, preservation, and enzymes. Finally, the market penetration opportunity, which is all about renovation of products through reformulation, whether that be nutritional enhancements, cleaner labels, sustainability enhancements, or cost reduction solutions, all of which are leading to increased market opportunity across the medium and long term for our sector, which we believe we feel best placed to capitalize on. If you'd like to hear more, there are materials from the day on our website, and it was well-covered by the set-aside community. For now, I hand you over to Marguerite for more details on Q3 performance.

Thanks, Edmund, and good morning, everyone.

Moving to the summary group financial overview. Firstly, on revenue, group volumes were up 2.2% year-to-date and up 3.2% since the third quarter. On margins, we are pleased to have delivered strong margin expansion of 140 basis points at group level, driven by good progression across both businesses. Net debt at the end of the period was $1.9 billion, which reflected good cash generation, capital investments, and the impact of our share buyback program.

Turning to our group revenue bridge and looking at each of the components in turn,

Firstly, group volumes were up 2.2%, as I mentioned, with lower pricing of 3.2% across the period, given the overall deflation across our input costs. Translation currency was adverse 0.7%, with transaction currency favorable 0.2%, given movements versus the euro across the period. Acquisitions contributed 0.8%, and the effect from disposals was 2.3%, primarily relating to the divestment of our sweet ingredients portfolio last year. Moving next to our taste and nutrition overview, where growth was led by a continued strong food service performance. Year-to-date volume growth of 3.2% represented progression to 3.4% volume growth in the third quarter. Pricing was 2.5% lower year-to-date and 1.2% in the quarter, reflective of net deflation. We delivered strong EBITDA margin expansion of 120 basis points in the period, driven by cost efficiencies, portfolio development, operating leverage, product mix, and the net effect from pricing. Looking at performance by end-use market, Volume growth was driven by snacks, beverage, and bakery, with good growth in savory taste, botanicals, natural extracts, and taste and salt and sugar reduction technologies. And in biotechnology, we had good performances across proactive health technologies, along with keen label food protection and preservation systems. By channel, we had strong volume growth of 6.8% in food service, with volume growth in the retail channel improving in the third quarter, driven by good performances in the Americas and Africa. And in our emerging markets, we had good volume growth of 6.4%, driven by strong growth in the Middle East and Africa.

Turning to taste and nutrition performance by region.

Firstly, in the Americas, we delivered good broad-based volume growth of 3.5% year-to-date and 3.7% in the third quarter. Within North America, we had excellent growth in snacks through savory taste and taste and salt reduction technologies. Growth in bakery was supported by good performance in taste and texture systems and beverage performed well across coffee extracts, botanicals, and taste sense sugar reduction technologies. Food service delivered strong volume growth across both established and emerging chains, with good growth in the retail channel across both customer and retailer brands.

And in LATAM, growth was led by Mexico, particularly in snacks and beverages.

Moving to Europe, overall volumes were back 0.5% year-to-date, reflective of soft market conditions, while noting volumes turned positive, plus 0.7% in the third quarter, representing good performances in food service and an improvement in the retail channel. Beverage achieved good growth in botanical extracts and taste and sugar reduction technologies. while bakery performed well with solutions incorporating Kerry's food protection, preservation, and texture systems. And finally, in AFMIA, year-to-date volume growth was 5.4% and 5.1% in the quarter, primarily driven by strong growth in the Middle East and Africa, with China broadly similar to the prior year. Snacks delivered very strong growth, supported by our local savory taste portfolio. Beverage performed well through refreshing beverage innovations, with growth in meat driven by taste and preservation systems. And in food service, we had strong growth with leading regional coffee chains and QSRs in particular. Moving to Dairy Ireland, which delivered a good EBITDA performance, led by dairy consumer products. firstly on volumes up 0.4% year-to-date and 5.7% in the third quarter, with good growth in dairy consumer products across snacking and branded cheese, while performance in dairy ingredients reflected soft overall market supply conditions, which improved through the period. Pricing was back 3.1% across the first nine months, given the reduction in dairy input costs year-on-year, and up 5.1% in the third quarter. EBITDA margins increased by 120 basis points, reflecting dairy consumer products growth and mixed development, as well as recovery in dairy ingredients. So finally, to conclude on year-to-date financial performance, we delivered good volume growth with continued progression through the year in taste and nutrition, And we are pleased to have delivered strong margin expansion driven by good performance across both businesses.

And with that, I'll hand you back to Edmund.

Thanks, Marguerite. So moving to our full year outlook.

We have a good innovation pipeline and remain well positioned to deliver good volume growth and strong margin expansion in the full year. We will continue to develop our business and portfolio aligned to strategic priorities. And finally, Our guidance for the full year remains unchanged, where we are guiding constant currency adjusted earnings per share growth of 7% to 10%.

With that, I hand you back to the operator for any questions.

Thank you.

We will now begin the question and answer session. If you have dialed 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 would like to withdraw your question, simply press star 1 again.

I'll pause for a brief moment to compile the Q&A roster. And your first question comes from the line of Patrick Higgins with Goodbody. Patrick, your line is now open.

Thank you. Good morning, everyone. My first question is just around the innovation pipeline. I guess in the statement, you note that it's predominantly focused on renovation. Just interested to hear a bit more color in terms of innovation focus from customers across channels and perhaps the kind of globals versus the local players. Is there any material shift that you're seeing yet in terms of, you know, towards innovation to try and drive footfall. The second question I had is just around, you know, promotional intensity. You're seeing now versus say the start of the year and versus kind of prior to the cost of living crisis, you know, have you seen customers really start ramping up promotions yet or is there still that bit of a reluctance given the kind of fragile consumer backdrop?

Thank you.

Thanks, Patrick.

Maybe on the innovation one first. If you recall back at our investor day, we said that approximately two-thirds of innovation in North America in the last year was in essence renovation or reformulation. And what we mentioned a few weeks ago was that while this is a significant feature, that we do expect it even to be more meaningful in general going forward. So that whole penetration opportunity that we talked about in terms of, you know, helping customers to renovate for nutritional enhancement, helping them to renovate around better environmental impact or for cost, we believe will continue to be the most significant feature of our innovation pipelines. In terms of, let's say, beyond that, and let's say new innovations, firstly, looking at it from a channel perspective, I would say food service, while those penetration opportunities continue to be there, like we talked about previously, the other opportunity around bringing excitement to the menu, whereby customers are frantically out there within the food service channels, targeting the occasion of the consumer and the way they're doing that is through innovation across the menu, innovation targeting specific day parts. And then on the retail side, I think what we're seeing is that there is some divergence from a customer segmentation standpoint. Of course, there's always exceptions to it, but we are seeing more activity from an innovation perspective on the regional customers and our local customers. And we've also seen a pickup in activity with retailers that have, you know, a pretty strong private label offering, especially in snacks and beverage categories. And then in terms of promotional activity, for sure we've seen... the announcements and some of the focus comments that you referenced, Patrick. But from a consumer perspective, I guess, we have not seen any noteworthy change in the overall market volumes. So we see the market more or less the same as what we've outlined in July. Yes, we've seen some customers initiate different measures to stimulate growth. We believe that is going to continue, but the impact here year-to-date has been, I would say, relatively limited at this moment in time.

Okay, thank you very much.

Your next question comes from the line of Ed Huckin with JP Morgan. Ed, your line is now open.

Morning both and many thanks for taking my questions. My first one is as you're looking to Q4, which I presume should be sequentially better volumes than Q3 given your easier comps, I'm wondering is it premature for you to give some comment on how your early thoughts are for 2025 evolving, whether this sequential improvement in volumes growth that you've been seeing year to date could set you on course for the 4% to 6% range in volumes growth for next year um with margin improvement and how your raw materials development could be into next year as well and then my second question if i may is on q3 by the regions reassuring to see a return to volumes growth in europe but in apnea some softening versus q2 i'm wondering could you break out a little bit this at mere 5.1% growth in Q3, a bit by countries and a bit by segment, what you're seeing. Thank you.

Thanks, Aidan. There's a lot to unpick there. Maybe just to give a couple of perspectives, I would say, look, we've had a good finish to the quarter in September and October is in line with expectations. So as we look out into Q4, for taste and nutrition, we do expect volume growth to improve sequentially from Q3. And we're expecting continued improvement into Q4. And like you said, the comparatives will help. I guess I would say also that the underlying market continues to be relatively subdued. So I think the approach that we've taken year to date in terms of, let's say, our pragmatic approach to the outlook, I think has served us well. And that's how we're looking here into 2024 and into 2025 as well. Maybe from a regional perspective, we currently expect volumes in the Americas to show continued improvement. I mean, remembering back to the investor day just a few weeks ago, we really, I feel, kind of brought to light how dynamic the food and beverage market is in the Americas region, especially in North America. And that's why we expect that our business in the Americas to continue to progress. We are pleased with the fact that Europe is in growth, albeit modestly. And we expect Europe to continue to be in growth, you know, modestly in growth going forward. And then in AFMI, I think it's fair to say, look, there's always, you know, there's always various moving parts. Like Marguerite mentioned in the prepared remarks, you know, China is in line with last year. market there is relatively subdued there. And while at the same time, Middle East Africa is continuing to perform strong, and we've seen some progression in Southeast Asia. So I think it's fair to say that those comments are more or less in line with what we said in July. And at this moment in time, we wouldn't be kind of, let's say, flagging any major changes in APMEA in the next quarter or two. Continued performance in Middle East, Africa, Southeast Asia progressing, and China still relatively muted. Look, I think in terms of, let's say, the broader question around four to six, I think we feel very good about where we're at. I think we're playing in the right areas. And I think that penetration opportunity that we really talked about and shone a light on in the investor day is what really kind of gives us the confidence that we can outperform the markets. There's always going to be a backdrop in terms of, let's say, the underlying market conditions, but it's really the penetration opportunity, be that in food service or retail, be that on nutritional enhancements, environmental impacts, our cost mitigations, I think we're really well positioned to take advantage of that penetration opportunity. And look, obviously, as, you know, when we're sitting here in February, we can, you know, we're happy to give more kind of perspective on 2025 and beyond. But right now we feel we have our hands in the controls. We're controlling all the controllables. The performance of the business is good. And I think we're able to pivot resources at pace and at scale to wherever the growth opportunities are at. And that's what we expect to continue to do here in the foreseeable future.

Thanks a lot.

Your next question comes from the line of Alex Jones with Bank of America. Alex, your line is now open.

Good morning, thanks for taking my questions. The first one, in the results release, you talk about a small acquisition of direct scents. While appreciating it is small, could you give us a little more colour on the rationale and what that adds to the group, please? And then the second question, one of your peers this week was talking more about the ban on primary smoke flavours that comes into force between 2026 and 2029 in Europe. You know, I think you're a leader in smoke. Can you talk about whether that's an opportunity for you to sort of reformulate and renovate your customers' products, as you've highlighted, in other areas, or whether there's a threat there in other people being able to take some of your market share? Thank you.

Thanks, Alex. Just for clarity, Alex, it's the LactaSense business, which is part of DirectSense. Look, maybe just from a sizing perspective, think about it from a consideration standpoint of less than 20 million. So it's quite small in the scheme of things. And what we've acquired there is a rapid testing capability for lactose. So this business very much complements our recent lactase enzymes acquisition. So by bringing that capability in-house, It enhances our overall positioning capability in providing complete solution around lactose-free dairy products, which is obviously a growing area. In terms of smoke, I really want to be clear on this subject. So maybe just to touch on a few aspects. So when it comes to smoke and our leadership in smoke, we have three different types of solutions. There's smoke flavors. there's smokeless flavors, and there's clean smoke ingredient solutions. And in reality, depending on the product applications, be it meat, be it snacking, be it meals, there's very specific functionality required. The vast majority of the smoke opportunity here is within the meat end use market. It's more than 80% of the opportunity. And if you just think about the impact of smoking that can have on meat, it has a taste impact, color, preservation, and obviously the sustainability and cost and use elements as well. So there's a lot of functionality around smoke. And we do have a leading product portfolio that spans right across the spectrum here. It is a quite complex area. The reality of the situation is that we have this capability built up since the very beginning, right across those three categories. And, you know, this is something that we've been working through over the last several years. Right now, we'd see it probably more as an opportunity as anything else. But it is quite complex in terms of the functionality that smoke can have beyond taste and flavor.

Thank you. Your next question comes from the line of Charles Eden with UBS.

Charles, your line is now open.

Hi, good morning, everyone. Just a couple of questions for me, please. And sorry if I missed this earlier. Could you give us the Q3 volume growth by channel? So between retail and food service, I think I might have missed it. And then my second one is just a sort of clarification, because obviously we've seen some headlines from McDonald's and sort of a E. coli outbreak, and they're sort of saying it's attributable to ingredients. Can you just comment if you see any impact on your business whatsoever from that headline? Thank you.

Thanks, Charles. Just on the second part of your question first, we don't see any impact on that topic. In terms of the performance by channel, in totality, We're looking at food service at 5.8% volume growth and retail in that 2.2% zone.

Super, thank you.

Your next question comes from the line of Alex Loin with Barclays. Alex, your line is now open.

Yeah, hi, morning all. Thanks for taking the questions. First of all, actually, just building on that, in terms of the retail performance there, obviously, I appreciate it's modest, but a slight uptick from Q2, and I think you've said that improved through the quarter. But at the same time, end market volumes haven't really changed much. So I guess it appears to relate to Kerry penetration. How do you feel about that trend into Q4? And the second one, just for Marguerite, in terms of the cash flow, I don't know if it's noted in the statement, but just to confirm that you're on track for the over 80% cash conversion for this year would be great. Thanks.

Thanks, Alex. Yeah, just on the volume growth on retail, like you said, it has improved. And it's driven primarily through, let's say, from a regional perspective, strong performance in both the Americas and in APMIA. And from an end-use market perspective, it was led by performance, strong performance in snacks, snacks first and then meals. I think as we look out into Q4, we would expect retail performance to continue quite, let's say, positively and progress. I think it is exactly what you're calling out, Alex. It is the penetration opportunity. At the investor day, we talked a lot about the nutritional aspects of that penetration opportunity, be it salt and sugar. We stated how we believe how strong we are in the whole area of salt production, and that's what you're seeing coming through in the performance of snacks and meals, and we expect that to continue.

Alex, on your cash question, no change to what we've said previously. We expect another year of good cash conversion. and to be similar to the prior year in the zone of 90% on an average working capital basis.

Thanks very much.

Your next question comes from the line of Nicola Tang with BNB Paribas XN. Nicola, your line is now open.

Hi, everyone. Thanks for taking the questions. The first was, I guess, a bit of a follow-up on Alex's question there around retail and outperforming the market. You've touched today and also at the Invest Today a lot around penetration opportunity and reformulation and so on. I was just wondering whether there's any areas where you think the outperformance might be driven by customers restocking at all and whether that's anything to be mindful of in any categories. And then the second, also on the cash flow or use of cash, You've extended or you have another 300 million euro tranche of buybacks that will start when the current one finishes. I was wondering whether you could talk about the rationale to maintain at the 300 million level and just perhaps remind us a bit on capital allocation priorities and M&A pipeline, which I know we also discussed a few weeks ago at the investor event. Thanks.

Hi, Nicola. we don't really see restocking as being a feature. And the reason I say that is that customers and right across the supply chain, there's more confidence around the end-to-end supply chain. And I think that has been put in place over the course of the last few years. Look, they can always be once-off events that can have an impact, but through our engagement with customers, which is obviously, let's say, intense and quite embedded, we don't get an impression that there was any restocking happening in general across the piece. So we wouldn't be calling that out as a feature.

And Nicola, just on the share buyback, and maybe a couple of the comments that we went through, during the investor day. As we think about the capital allocation framework, it's well balanced between reinvestment in our business and capital returns. So in the context of the further 300 million program, it's really a couple of drivers, our confidence in the cash conversion, but also retaining that flexibility and agility to reinvest in a combination of first the priority of capital reinvestment in the business and also retaining the flexibility to invest and evaluate M&A opportunities that align with our strategy and where we believe we can generate synergistic value. So I would say in summary, it's really that ongoing evaluation of market conditions, the strategic alternatives to determine how best to generate value and always retaining that agility and flexibility across the capital allocation priorities.

That's clear. Thank you. And if I could just squeeze in a very quick one on the biotechnology side of your business, which obviously you're also profiling at the Investor Day. I think you called out strength and proactive health this quarter. Could you give us more color in terms of, I don't know, is it something specific in terms of customers or geographies? Is it more broad-based? Thanks.

Yeah, I mean, we signed that business in totality at around 1.3 billion, made up of a number of pieces, proactive health, food protection, preservation, and our enzymes business. Specifically on proactive health, I would call it all pretty broad-based from a, I would say, geographic perspective. And like we touched on at the investor day, Nicola, there's We've definitely seen a pickup from customers around products that have strong clinical foundations, proven efficacy. And you saw and heard that we've invested quite heavily around clinical studies and developing proof points around our portfolio. And in many instances, our customers actually let's say they lean very hard on those clinical studies and also in many instances actually brand their products with our specific technologies in the proactive health space. So I wouldn't be calling out any kind of once-off, let's say, kind of impacts in the court or anything like that. This is an area that we feel good about It's an area that we feel is fully aligned to where the consumer is going and customer is going. And it's an area we feel will continue to underpin growth for us here in the coming quarters and coming years.

Thank you.

There's no further question at this time. I will now turn the conference back over to Kerry for any closing comments.

Kerry?

Yes, thank you everyone for joining the call today. We do appreciate your support. If there are any follow-up queries, please do reach out to us here in the IR team. And we just want to wish you all a very good day. Thank you.