Nine to advance the program.
Good day. Welcome to the Kerry Group Q3 2019 IMS conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to William Lynch. Please go ahead, sir.
Thank you, operator. Good morning, ladies and gentlemen, and welcome to our conference call following the release of our 2019 Q3 Interim Management Statement this morning. My name is William Lynch, and I'm Head of Investor Relations. With me is Edmond Scanlon, Group CEO, and Marguerite Larkin, Group CFO. Edmond and Marguerite will take you through a brief presentation capturing the key points of our Q3 IMS release today. The presentation is available on the Investor Relations section of our website. Following that, there will be a Q&A session, which will be facilitated by the operator. Before commencing the presentation, let me draw your attention to the usual disclaimer regarding forward-looking statements. I will now hand over to Edmond.
Thanks, William. Good morning, everyone, and thank you for joining the call. Over the next 10 minutes or so, Marguerite and I are going to take you through a brief presentation. I'll start with an overview of the business highlights, then Marguerite will cover the financial performance in a little bit more detail, I'll close out with the guidance for 2019 before doing the Q&A session. If you turn, please, to slide four of the presentation. In looking at our Q3 year-to-date performance, the three most notable highlights for me were, firstly, we delivered volume growth of 3.1% in the year-to-date, which represented growth of 3.9% in our Taste & Nutrition business. We've spoken a number of times about the accelerating customer fragmentation being driven by the increased demands of the consumer.
This continues to reshape our industry and is impacting right across supply chains. It's in this context that our performance versus the underlying markets is a testament to the strength of our business model. Secondly, I'd like just to recognize the work we're doing, and our teams are doing on integrating the strategic acquisitions we've made over the last 12 months or so. We're very happy with the progress, and the performance of these businesses have been very good. We've spoken on a previous call about the acquisitions of Southeastern Mills and Ariake's U.S. business, which we completed in Q1 for just over EUR 300 million. Both of these are performing well. Since H1, we've made a number of further bolt-on acquisitions for consideration of about EUR 200 million. I'd just like to give you some color on these businesses.
Firstly, Comen is a very nice business, a good business based in Mexico focused on meat seasonings. It brings with it a facility in Monterrey and complements our meat end-use market offering in the region. IsoAge Technologies and Biosecur Lab are businesses based in the U.S. and Canada, which further add to our leading capability for clean label and natural shelf life extension technologies. I'm really excited about these two acquisitions because they bring with them natural antimicrobial technologies based on citrus and other extracts. Moving on to Pevesa Biotech. This is a company based in Spain, and they've developed a very unique process technology to manufacture high-pure plant-based proteins. For example, rice hydrolysates for applications like pediatric formulations and medical nutrition. What's really interesting here is this process technology can be applied to other protein substrates like pea, chickpea, fava beans, and sunflower seeds.
In addition to these acquisitions, we've also agreed to acquire a U.S. business based in Georgia dedicated to manufacture of natural clean label building blocks for savory taste technologies that go into multiple end-use markets. This business is a really strong complement to the Ariake U.S. business that I just mentioned earlier that we acquired at the beginning of the year. Overall, I'm very pleased with the progress on the M&A front as we continue to evolve our technology capability and our strategic manufacturing footprint. Finally, moving on to developing markets. We had a really strong year-to-date performance, and in particular, the last quarter with the growth of 10.3%. Performance in developing markets within APMEA continue to be the main driver of this growth as we continue to deploy our business model and help our customers to meet evolving consumer needs.
Overall, I'm pleased with our strategic business development and our performance in the period with good volume growth and margin expansion. With that, I'll hand you over to Marguerite, who has a little bit more detail on the financial performance.
Thanks, Edmond, good morning, everybody. Now turning to slide five to update on our financial performance. This morning, I will update on our volume and trading margin performance. Overall, 2019 year to date has been a year of continued consistent good performance with group volumes up 3.1% in the period. Year-to-date volume growth in our Taste & Nutrition business of 3.9% and 4% in the quarter. In Consumer Foods, business volumes were back 0.7%, taking into account the loss of the previously reported ready meals contracts. Excluding the impact of this, year-to-date volumes were positive, 0.6%.
Pricing was pretty much flat with lower pricing year on year of 0.1% as average raw material prices were neutral across the period. On margin, group reported margin was up 20 basis points with good growth driven mainly by operating leverage, enhanced portfolio mix and efficiencies being offset by investments for growth and Brexit risk mitigation costs, and some incremental spend on the KerryConnect program. Taste & Nutrition margins were up 20 basis points while we maintained Consumer Foods margins, taking into account efficiencies offset by under recovery of pricing and Brexit related costs. Now turning to slide six and taking a more detailed look at our revenue growth analysis for the nine months to end September 2019. Overall, I'm pleased to say that our group reported revenue increased by 10% in the period.
This comprised good overall group volume growth of 3.1%, which I will go through in more detail shortly by division. Lower pricing, as I mentioned, was 0.1% on a year-to-date basis, reflective of lower raw material prices on the raw material basket. Acquisitions contributed 4.7% to revenue growth, including the impact of Fleischmann's, Southeastern Mills, AATCO, and the Ariake USA business, while translation currency was favorable 2.3% in the period. All in all, to summarize, good overall revenue growth in the period. Now moving to slide seven and taking a closer look at our Taste & Nutrition business. Firstly, on volumes. Overall year-to-date, divisional volumes grew by 3.9%, and we had trading margin expansion of 20 basis points. Growth in the period was particularly good in our meat, snacks, and beverage end-use markets.
Our nutrition and wellbeing technology portfolio had a strong performance with solutions incorporating Kerry's fermented ingredients, our broad protein portfolio, probiotics, botanicals, and natural extracts, all contributing to good growth and business development. As Edmond mentioned earlier, developing markets performance continued to be very strong, with volume growth of 9.5% in the period and food service delivering growth of 5.1%. Pricing in the period, as I mentioned, marginal at 0.1%. On margin, we continued to deliver good margin expansion of 20 basis points through the continued evolution of our portfolio mix, operating leverage, and efficiencies, partially offset by investments for growth and Brexit risk management costs. Turning to slide eight and looking at Taste & Nutrition performance from a regional perspective. Firstly, to the Americas, where we had volume growth of 2.6% in the period.
North America continued to deliver solid volume growth with the meat and snacks end-use markets all performing well. In LATAM, we were pleased with the performance, with both Brazil and Mexico delivering good growth. As Edmond mentioned earlier, we made a number of complementary bolt-on acquisitions in the last quarter, further enhancing our technology capabilities. In Europe, we had good performance with 2.3% volume growth, and the beverage, meat, and snack end-use markets all performed well with a number of launches in the clean label space. We had strong growth in Northern Europe and Russia. In APMEA, we continued to deliver very strong performance with excellent growth of 9.9% year to date and indeed 10.5% in the last quarter. From an end-use market standpoint, this growth was pretty broad-based with performance in meat, beverage, and snacks most notable.
Food service in the region continued to be strong with good growth right across the region. Finally, we made good progress with our strategic expansion with our facilities in Nantong and the greater Beijing area. We also opened our new facility in Tumkur, India in June, and we expanded our capabilities in the Middle East region. Overall, I would say a very good performance from our Taste & Nutrition business in the period. Turning now to Consumer Foods on slide nine. While the overall reported business volumes were back 0.7% in the period, reflecting the loss of ready meals contracts previously reported, revenue volumes excluding this contract were up some 6% in the period against a backdrop of a pretty subdued marketplace. Pricing in the period was negative 0.6%, reflecting challenging market pricing dynamics in private label and input costs not fully recovered.
The Realignment for Growth Program progressed in line with expectations and is now well advanced. Overall, we maintained trading margin with efficiency savings from our Realignment Program offset by pricing and Brexit risk management costs. Finally, at the end of September, we were very pleased to successfully launch a number of plant-based products under the Naked Glory and Richmond brands, which are showing positive early signs. Now moving on to updates on a few other matters on slide 10, before I hand you back to Edmond. Firstly, a brief update on KerryConnect rollout. We have completed the first phase of our go lives in a number of our North American sites, which have gone well. As I mentioned before, this is the beginning of the last phase of the program, with a continued busy period of deployments.
On raw materials, as mentioned, the overall basket of raw material input costs was pretty flat, and we see this continuing for the full year. On currency, we continue to see a translation currency tailwind on earnings per share of 2%-3% for 2019. Finally, net debt with EUR 2 billion at the end of the period, reflecting the acquisition activity noted earlier. I'll just wrap up the performance update briefly. We delivered continued strong volume growth ahead of the market growth and in particular in developing markets, as we've mentioned. A good group margin expansion of 20 basis points and continued good progress on the integration of acquisitions. With that, I'll turn you back to Edmond to wrap up and give you the outlook for the remainder of the year.
Thanks, Marguerite. Moving on to slide 11 and looking specifically to our outlook for 2019 before I pass it over for Q&A. We expect continued performance ahead of our markets. In our Taste & Nutrition business, we see good growth prospects in both developed and developing markets as we continue to partner with our customers. Leveraging our unique business model, our unrivaled technologies, and our processing capabilities. Again, regardless of channel, category, or market, we have a really strong innovation pipeline, and we continue to evolve our unique business model aligned to ever-changing market dynamics. With respect to our Foods business, we are continuing to navigate the softer consumer environment. We continue to realign our core business and invest in adjacencies in line with our strategic growth priorities. We continue to scale our business model through organic growth and M&A investment opportunities.
For 2019, for the full year, we're reaffirming our guidance and expect to deliver adjusted EPS growth of 7%-9% on a constant currency basis. With that, I'd just like to thank you for taking the time to dial into our call this morning, and I'll now hand you back to the operator for any questions you may have.
Thank you. If you wish to ask a question at this time, please press star one on your telephone keypad. Please ensure the mute function on your telephone is switched off to allow your signal to reach our equipment. We shall now take our first question from Cathal Kenny from Davy Research. Please go ahead. Your line is open.
Good morning, Marguerite, William, and Edmond. Two questions from my side. Firstly, can you elaborate on the performance of China within APMEA? My second question relates to growth outlook for North America, just over the medium term, how you see the next couple of quarters evolving in the context of what you call softer market volume growth rates. Thank you.
Thanks, Cathal. I suppose, look, the context of our developing markets' performance is that we've had an acceleration in developing markets in the quarter. China, I would call, probably has not been the highlight this quarter. I think it's just reflecting back on the year, I would say the dynamics in China have been a little bit different in that some of the maybe mass market categories like dairy beverage and yogurt certainly have been under pressure in the year. The other side of that, though, is that food service has been quite dynamic for us, and I would call it out as a bright spot for us in China. Overall, our performance in China, I'd call it a solid. Some elements of the market a little bit challenged, especially the mass market areas, and food service being the bright spot.
In terms of overall APMEA region, I would say that Southeast Asia was certainly a bright spot for us in the quarter and in the year so far, and I'd call it out as an area where I believe it's a good example of our business model, I think, really working for us in a specific region. That would have been the bright spot for us in the quarter in developing markets in APMEA. In terms of North America or the second question was the Americas, yeah?
Yeah, North America outlook.
North America outlook. I think we've been flagging since the beginning of the year that pricing has had an impact in consumer demand in the region. I think that certainly has led to muted, I would say, volumes for the region. That said, we would continue to remain really positive about our position in the North American market and feel that when we consider the strategic priorities that we have, we see that our priorities and our strategy is very much aligned to what's happening in the marketplace. When we look at things like authentic taste, when we look at clean label, when we look at plant-based protein and what's happening there, we feel we're really well positioned. Yes, there's some softness in the market driven by heightened pricing. That said, we feel we're really well positioned.
Thank you.
We will now take our next question from Jason Molins from Goodbody. Your line is open. Please go ahead.
Hi, it's Jason Molins here. Couple of questions. In terms of the plant-based products within your Consumer Foods division now and obviously the work within.
T&N and the Radicle brand, how big is plant-based for you and what sort of growth rates and opportunities do you see in that market? Then just moving on to the Consumer Foods division, solid performance from a margin perspective, but given the leverage impact from the contract loss, I guess is greater in the second half of the year. How should we think about the overall margin outlook? Then just a final question, if you don't mind, just around your guidance. I guess given the improved momentum you've generally seen during Q3, just wondering if we see that momentum continue into Q4. Should that mean we're close to, I guess, the top end of the range of your guidance, possibly bearing in mind you've added a few new businesses during the second half already. Thanks.
I'll take the first part of that question, Jason, and maybe I'll hand it over to Marguerite to comment on Consumer Foods. In terms of the plant-based opportunity that we see ahead of us, firstly, I would say that in terms of the scale of that business right now, you should think about it in the scheme of maybe between 1%-2% of our revenue. That's kind of the scale of it at the moment. That said, it's growing and the growth is accelerating. I feel when you consider our portfolio of options that we have to go to that market, I think we're extremely well positioned. As customers and as consumers demand more from that category, we're very well positioned to work with those customers to generate the next generation of plant-based proteins for them.
We can help those customers in terms of taste, texture, clean label and nutritional quality. Across those four areas, I think we're really well positioned with a really strong portfolio. I think it could be a really important driver of growth in our business well into the future. Marguerite, do you want to take those other questions?
Yeah, sure Edmond. Good morning, Jason. Specifically your question in relation to Consumer Foods. As Edmond mentioned, we are reaffirming our guidance for the full year. As we think about Consumer Foods for the last quarter, obviously, it has the Ready Meals contract referenced has a greater impact in the last quarter as we've guided. That being said, consistent with our guidance, our outlook is to maintain the margins in Consumer Foods through the year. In terms of looking at overall guidance, in terms of the timing of the acquisitions we've just discussed, there's no real noteworthy impact on EPS, just giving the timing of the completion of the acquisition.
I might just add to that, Marguerite. Look, this is a very healthy pipeline across all three regions within T&N, and we do expect to see continued good growth well ahead of our markets for the remainder of 2019. I guess directionally, we would see growth in T&N in Q4 being similar to Q3 in the 4% zone.
Great. That's helpful. I'm sorry, just a point of clarification. I think you mentioned EUR 200 million of bolt-on deals. Did that include the Georgia business that you're still to complete or have completed post-quarter?
No.
Okay, thanks.
We will now take our next question from Arthur Reeves from Barclays. Please go ahead.
Good morning, everyone. Two questions from me, please. The first is continuing the debate about M&A. Is there a lot more to come in quarter four? I think you guided at the start of the year you would try and maintain the rate as in 2018. Is there more to come in quarter four, please? My second question is just a quick clarification. What are the non-trading charges likely to be in FY 2019, please?
I'll take the M&A question and I'll hand it off to Marguerite on the other non-trading. I suppose maybe to take a step back, Arthur, maybe the first point is that our M&A pipeline remains robust and we continue to look at opportunities that are aligned to our strategic growth priorities. I think nothing has changed in terms of what we have said. We don't guide specifically on the timing of when we close M&A, but I think the important point is the pipeline is robust. It's very much core to our strategy. We see M&A as something that has been a key driver of shareholder value over a really long period of time. We see it as a core competency within the organization and something we're going to continue to do. Really difficult to predict the exact timing of when these acquisitions happen.
That all said, the pipeline remains really robust.
Good morning, Arthur. Just to add on the NTIs. Very much as we've guided NTIs on the strategic acquisitions, we'll be investing in the order of 5%-6%. In the order of EUR 50 million on acquisitions, and the second component of our NTIs is in relation to our Foods realignment program, and as we guided, that's circa EUR 30 million. Overall, looking at circa EUR 80 million for 2019.
Thank you very much.
We will now take our next question from Heidi Vesterinen from BNP Paribas. Your line is open. Please go ahead.
Yes, good morning. A few questions, M&A related. You said that recent acquisitions are performing well. Can you talk about how you evaluate whether an acquisition has been successful? You know it's quite hard for investors to track this once it gets integrated into the big machine. What sort of metrics do you look at? That's my first question.
In terms, feel free, Marguerite, to jump in. I think from my perspective, the first thing that we look at is, if we were to take an acquisition that brings with it a significant amount of technology, the first thing we do is look at the pipeline and how that pipeline is evolving and how that technology is being integrated into other applications, beyond the specific application that perhaps dominated that particular technology when we acquired the business. That gives us a good indication of how we're integrating that business from a technology perspective. That's number 1. Number 2 is, geographically, are we seeing that we can take that technology and deploy it into another region?
Again, our pipeline tells us that when we look at it, and usually it takes a little bit of time to do that, and it takes a little bit of time to see it just from a practical standpoint. The third thing that we look for is coming out of our R&D and our innovation, I suppose, program. Are we seeing other functionalities that those technologies are bringing to Kerry? When we plug it into the machine, is there another functionality that we can create, or we can develop that allows us to generate another stream of revenue, another stream of growth out of that specific acquisition?
I might just add from a financial perspective, we very much evaluate the acquisitions from the context of growth and returns. From our growth KPIs perspective, capacity to drive revenue growth, margin expansion, and EPS contribution, and from returns over the medium to long term, our objective is returns of in the order of 12%, depending on the nature of the acquisition.
Is it correct that when you look at targets, it tends to be more about sales synergies than cost because you're looking to basically find new revenue streams, right? As you highlighted. Would that be correct?
Yeah, certainly in terms of, I suppose if I was to reflect on many of the most recent acquisitions and even the ones that I just touched on there at the beginning of the presentation, absolutely it would be sales synergies.
One other question, if possible. You previously talked about the fact that your platform has been built for scale. Can you talk about what exactly that means?
I suppose what we talked about is that M&A is a really important part of our overall strategy. It has been for a long time. The words I've used many times is the fact that in terms of identifying, evaluating, and integrating acquisitions is a core competency within our organization. We've generated a significant amount of shareholder value over the years through our M&A strategy. In terms of our business model, in terms of the engine we've built within the organization, we're very well set up to plug M&A into our model. We've generated, as I said, a lot of value for shareholders over a long period of time in doing that.
Thank you.
As a reminder, to ask a question, please press star one. We'll now take our next question from Charles Eden from UBS. Please go ahead.
Hi, good morning, Edmond. Good morning, Marguerite. Good morning, William. Just a quick question from me on T&N volumes, and then a follow-up on Naked Glory. On the T&N volumes, obviously they accelerated slightly versus the first half and returned to 4% in Q3, but obviously that still remains at the low end of your medium-term target range of 4%-6%. My question is, how realistic do you see the medium to high end of this 4 to 6 range? I guess following up from that, what needs to change to accelerate to the middle of this range? My second question on Naked Glory is, I know this launched at the end of September. Is it fair to assume there was no real impact on Consumer Foods volumes in Q3 from this launch? Thank you.
Yeah. Maybe to take the Naked Glory one first, yeah, that's a recent launch, and while there's certainly been some early excitement about it's still early days. I think what's really interesting, I think is the fact that, from a product quality standpoint, that's a product that we've deployed the best of, I suppose, Taste & Nutrition technology into that specific product. I think in terms of our growth rates, and certainly there's been an acceleration in Q3. When we look out into the future and look at, I suppose, our strategic growth priorities versus what's happening in the marketplace, I feel really good that we're executing against our strategy, whether it's authentic taste, whether it's nutrition, wellness and functionality, developing markets or foodservice.
When I look at those strategies, when we look at our execution plans, when we look at what's happening at a consumer level globally across the organization, we feel we're really well-positioned to grow our business well into the future. That all said, I suppose, there is a market context. What we have said is that we absolutely want to grow our business at least 2% beyond the market. If you look at any one of the markets that we've been operating in, we certainly are achieving that. The acceleration of our growth that we're achieving in just the recent quarter in Europe, in the APMEA region, certainly gives me a lot of confidence into the future. There's a very healthy pipeline across all our regions. We expect to see continued good growth.
We're exactly where we need to be in terms of our medium-term targets, and we're really optimistic about what this organization can achieve from a growth perspective.
Thank you very much.
We will now take our next question from James Targett from Berenberg. Your line is open. Please go ahead.
Hello. Good morning, everyone. A couple questions from me. Just on Taste & Nutrition food service growth. Don't want to be picky, I think it did decelerate a little bit in the Q3. I just wonder where you're seeing the weak spots in food service in Q3 relative to H1, and whether that's just in reference to the U.S. comments you made earlier. My second question is on M&A as well. I just wondered, generally, do you consider major industry consolidation a good thing for the Kerry business? If you did want to participate in anything bigger, how do you feel about use of significant amounts of equity to fund that deal? Thank you.
Thanks, James. Yes, as you mentioned, James, food service has slightly came back in Q3. We had flagged it actually in Q1. It improved actually in Q2. It's come back a little bit in Q3. It's exclusively, I would call it, a U.S. market issue, like I mentioned earlier on. That said, I would say that from a developing market standpoint, especially in APMEA, we've achieved really strong growth in the food service market and feel like we touched on at the half year that we're really well positioned to take advantage of the opportunity in the food service market. I suppose in terms of consolidation and large scale M&A, I think our view on that is that we see ourselves, like we've said in the past, as the consolidator of the industry.
I've mentioned a few times on the call that we feel this is a strong area for Kerry. We've talked in the past about the scaling our business model, and we feel we're really well positioned in terms of generating significant shareholder value on any M&A that we look at. We have a long track record of making sure that any M&A that we look at is a strong strategic fit. We have a long track record of having a disciplined approach, and we have a long track record of delivering, I would say, shareholder value from both organic and M&A sources. In terms of equity, I feel that we would be prepared to go to our shareholders for support in the event of a strategic opportunity that would generate shareholder value.
Great. Thank you.
We will now take our final question from John Ennis from Goldman Sachs. Your line is open. Please go ahead.
Hello. Good morning, everyone. A couple from me as well, please. The first is on Taste & Nutrition. I think earlier in the year, the expectation was for volume growth to modestly improve in the fourth quarter, I guess we've already seen a bit of a pickup in 3Q. I just wondered, is it still your expectation to see a further step up in 4Q? My second is on the Consumer Foods contract loss. You said the contract loss will have a bigger impact in 4Q. Can you also talk about phasing into 2020? Maybe just remind us of the overall impact on a 12-month basis and whether there'll be any spillover effect from this in the second half of 2020, i.e. 3Q 2020. Thank you.
Thanks, John. I'll kick off here, and Marguerite might want to add something. In terms of Q4, firstly maybe looking at Q3, we've had an acceleration into Q3, and we expect that to continue into Q4. We should be thinking about Q4 pretty much in line with or pretty similar to Q3.
Just on the ready meals contract, in the context of the impact for 2019 and 2020, very much as we have spoken about in the past, from a revenue perspective on an annualized business, the impact is roughly high single digit, 7% in overall at annual is EUR 100 million. EUR 40 million in 2019 and EUR 60 million in 2020. The last quarter, there will be some tracking in the last quarter of 2020.
Great. Thanks a lot.
As there are no further questions in the queue at this time, I'd like to turn the call back for any additional or closing remarks.
We'd like to thank everyone for joining us on the call this morning. With that, we will conclude the call. Thank you.
Thank you. That concludes today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.