Kerry Group PLC
ISEQ:KRZ
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Kerry Group PLC
Earnings Call Analysis
Q3-2024 Analysis
Kerry Group PLC
In the Q3 2024 earnings call, Kerry Group reported a steady performance over the first nine months of the year. Volume growth stood at 2.2% year-to-date, with a more impressive 3.2% in the third quarter. This growth is primarily driven by significant strides in the Taste & Nutrition segment, where volume grew 3.4%, outperforming the broader food and beverage markets. The Americas saw strong volume growth, with positive trends emerging in Europe and continual strong performance in foodservice channels.
A key highlight from the call was the substantial margin expansion of 140 basis points achieved at the group level. This reflects effective cost management and operational efficiencies across Kerry's businesses. Margins improved alongside volume growth, suggesting that the company is optimizing its operations while growing sales.
Kerry Group announced an ongoing share buyback program, committing to an additional EUR 300 million in buybacks. This decision underscores the company's confidence in its cash generation capabilities and reflects a balanced approach to capital allocation, prioritizing reinvestment in the business while returning excess capital to shareholders. Marguerite Larkin, the CFO, articulated the focus on maintaining flexibility regarding potential mergers and acquisitions that align with strategic priorities.
During the call, discussions highlighted the importance of innovation, particularly in the context of reformulation and renovation. Approximately two-thirds of innovation conducted in North America has been focused on renovations that enhance nutritional value, environmental impact, and cost efficiency. This innovation pipeline is expected to drive further growth, with an eye towards regional and local customer segments, especially among retailers prioritizing private label offerings.
Kerry Group maintained its full-year guidance, projecting a constant currency adjusted earnings per share growth of 7% to 10%. This outlook signals management's confidence in achieving robust growth while they continue to adapt to market dynamics and execute their strategic initiatives.
Geographically, volume growth varied. In the Americas, strong performance was backed by foodservice operations, elevating overall market presence. Europe faced softer conditions year-to-date but noted a positive turnaround with 0.7% volume growth in Q3. APMEA (Asia-Pacific, Middle East, Africa) performed well, registering a 5.4% growth year-to-date, underpinned by strong contributions from the Middle East and Africa. The overall diversity in performance underscores Kerry's resilience and adaptive strategies in different market conditions.
In summary, Kerry Group demonstrated a strong performance for Q3 2024, with positive volume growth, expanding margins, and a proactive stance on innovation and capital management. Investor confidence appears to be supported by solid strategic initiatives and a clear focus on delivering long-term growth. As the company navigates market complexities, the emphasis on renovation and product development positions it well for the future.
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Good morning, and welcome to our Q3 2024 results update call. I'm joined on the call by our CEO, Edmond Scanlon; and our CFO, Marguerite Larkin. As usual, Edmond will begin with his overview comments before handing over to Marguerite for the Q3 performance review, and Edmond will close out before opening the line for questions.
Before we begin, please take note of the disclaimer regarding forward-looking statements. Now over to Edmond.
Thanks, William, and good morning, everyone. Beginning first with my overview comments. We're pleased with our performance across the first 9 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 Taste & 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. By geography, this represented strong volume growth in the Americas, a good performance in APMEA 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 foodservice, we continue 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. Under this, my 5 key strategic takeaways were as follows: Firstly, the Americas, where we feel we have the winning model and anyone in attendance would have seen this firsthand. Next, foodservice. We gave a deep dive on why we believe foodservice is a structural tailwind for Kerry. On emerging markets, we focused on Lat Am, where regulatory changes around front-of-pack labeling is driving renovation and leading to opportunity for Kerry. And 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 and 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 sell-side community. For now, I'll hand you over to Marguerite for more details on Q3 performance.
Thanks, Edmond, 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% in 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 EUR 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 & Nutrition overview, where growth was led by continued strong foodservice 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 Tastesense salt and sugar reduction technologies. And in Biotechnology, we had good performances across proactive health technologies, along with clean label food protection and preservation systems.
By channel, we had strong volume growth of 6.8% in foodservice, with volume growth in the retail channel improving in the third quarter, driven by good performances in the Americas and APMEA. 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 & 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 Tastesense 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 Tastesense sugar reduction technologies. Foodservice 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 Lat Am, growth was led by Mexico, particularly in Snacks and Beverage.
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 foodservice and an improvement in the retail channel. Beverage achieved good growth in botanical extracts and Tastesense sugar reduction technologies, while bakery performed well with solutions incorporating Kerry's food protection, preservation and texture systems.
And finally, in APMEA, 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 foodservice, 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 9 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 mix 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 & 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 Edmond.
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'll hand you back to the operator for any questions.
[Operator Instructions] And your first question comes from the line of Patrick Higgins with Goodbody.
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 global versus the local players. Is there any material shift that you're seeing yet in terms of towards innovation to try and drive footfall?
The second question I had is just around promotional intensity and you're seeing now versus, say, the start of the year and versus kind of prior to the cost of living crisis. Have you seen customers really start ramping up promotions yet? Or is there still a bit of a reluctance given the kind of fragile consumer backdrop?
Thanks, Patrick. Maybe on the innovation one first. If you recall back at our Investor Day, we said that approximately 2/3 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 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 pipeline.
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 foodservice, 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 foodservice channel, targeting the occasional consumer. And the way they're doing that is through innovation across the menu, innovation targeting specific dayparts.
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 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 there's -- that is going to continue. But the impact here year-to-date has been, I would say, relatively limited at this moment in time.
Your next question comes from the line of Ed Hockin with JPMorgan.
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 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 APMEA, some softening versus Q2. I'm wondering could you break out a little bit this APMEA 5.1% growth in Q3 a bit by countries and a bit by segment, what you're seeing?
Thanks, Ed, and 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 & 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 we -- 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 modest. And we expect Europe to continue to be in growth -- modestly in growth going forward.
And then in APMEA, I think it's fair to say, look, there's always various moving parts. Like Marguerite mentioned in the prepared remarks, 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 2, 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 4% to 6%, I think, look, 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 shine a light on in the Investor Day is what really kind of gives us the confidence that we can outperform the market.
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 foodservice or retail, be that on nutritional enhancements, environmental impacts or cost mitigations, I think we're really well positioned to take advantage of that penetration opportunity. And look, obviously, as -- when we're sitting here in February, we can -- 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.
Your next question comes from the line of Alex Jones with Bank of America.
The first one, in the results release, you talked about a small acquisition of DirectSens, while appreciating it is small, could you give us a little more color 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 flavors that comes into force between 2026 and 2029 in Europe. 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?
Thanks, Alex. Just for clarity, Alex, it's the LactoSens, the LactoSens business, which is part of DirectSens, look, maybe just from a sizing perspective, think about it from a consideration standpoint of less than EUR 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 position and 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 the subject. So maybe just to touch on a few aspects. So when it comes to smoke and our leadership in smoke, we have 3 different types of solutions. There's smoke flavors, the 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 3 categories. And 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.
Your next question comes from the line of Charles Eden with UBS.
Just a couple of quick ones for me, please. And sorry if I missed this earlier. Could you give us the Q3 volume growth by channel, so between retail and foodservice, I think I might have missed it. And then my second one, just a sort of clarification because obviously, we've seen some headlines from McDonald's and sort of the 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?
Thanks, Charles. Just on the second part of your question first, we don't see any impact on us on that topic. In terms of the performance by channel, in totality, we're looking at foodservice at 5.8% volume growth and retail in that 2.2% zone.
Your next question comes from the line of Alex Sloane with Barclays.
First one, 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 said that improved through the quarter. But at the same time, end market volumes haven't really changed much. So yes, I guess it appears to relate to kind of Kerry penetration. How do you feel about that trend into Q4?
And the second one, just for Marguerite, just 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, Alex. Yes. 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 APMEA. 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 reduction. And that's what you're seeing coming through in the performance of Snacks and Meals, and we expect that to continue.
And 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.
Your next question comes from the line of Nicola Tang with BNP Paribas Exane.
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 Investor Day a lot around sort of 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 customer -- sort of 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 EUR 300 million tranche of buybacks that will start when the current one finishes. So I was wondering whether you could talk about the rationale to maintain at the EUR 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.
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, there 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 EUR 300 million program, it's really a couple of drivers and 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. 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 in proactive health this quarter. I was wondering, could you give us more color in terms of -- I don't know, is it something specific in terms of customers or geographies? Or is it more broad-based?
Yes. I mean we sized that business in totality at around EUR 1.3 billion, made up of a number of pieces, proactive health, food protection and preservation and our enzymes business. Specifically on proactive health, I would call it out 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 you 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 our 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 quarter 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.
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.