Good day, ladies and gentlemen, and welcome to the Kerry Group Q3 2018 IMS conference call. For information, today's call is being recorded. At this time I turn the conference over to your host, Mr. William Lynch. Please go ahead, sir.
Thank you, operator. Good morning, ladies and gentlemen, welcome to our conference call following the release of our 2018 Q3 interim management statement. My name is William Lynch, I'm Head of Investor Relations. With me is Edmond Scanlon, Group CEO, Marguerite Larkin, Group CFO, and Elerina Conneely , Group Financial Controller. I will hand over to Edmond and Marguerite, who will take you through a brief presentation capturing the key points of our Q3 IMS. The presentation is available on the investor relations section of our website. Following that, there will be a question and answer 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, thank you for joining our call. As William said, I'm joined here by Marguerite, our new CFO. For the next 20 minutes or so, we're going to take you through a brief presentation. I'll cover the year-to-date business overview. Marguerite will cover the financial performance in a little bit more detail. I close out by looking at our acquisition activity so far this year and the guidance for 2018. Before I get into the Q3 year-to-date overview, just let's turn to page four in the presentation deck, where I'd like to take a couple of minutes to share with you the key themes that we covered at our recent investor day in Singapore.
The overall theme for the day was winning locally, and while we focused on Southeast Asia, our story in the region is very much representative of the strategic approach we're successfully deploying across the world with a truly global manufacturing infrastructure of more than 140 facilities in 31 countries. I suppose I could summarize this approach through three key points. Firstly, strong consumer insights. Winning locally starts by being truly local, immersed in the market and part of the local community. This encapsulates the mindset and the strategic approach that we take to serving our customers and growing our business locally. Secondly, customer connectivity. This is beyond customer relationships. It's more than that. It's about the fact that we're holistic business partners with our customers, serving as an integrated extension of our customers' capabilities, develop products that work better for their businesses.
This is the value of our model, and this is what our customers value. Thirdly, capability. We're a globally connected organization, however, we're locally led. Our local teams, along with our customers, work together to harness the full power of our global resources, our capabilities, and our business model as we deploy both technologies to create specific business-building Taste & Nutrition solutions that meet the needs of consumers. While we have and we will continue to make investments to strengthen our local capabilities, we've brought this to life through demonstrating our winning approach to entering a new country and growing our business in a country from early stages. We focused on Thailand as the example to demonstrate how this works successfully in practice. We'll also continue to invest to deploy our technologies globally into new applications, new functional areas, new categories, and new geographies.
On the day, we brought that to life through a few examples and by looking at the development of and deployment of our captive smoke technology as well as our BC30 probiotic technology in Southeast Asia. Now switching gears and moving on to slide five and a look at our business on a year-to-date basis. When we look back at 2018 so far, there are a number of highlights and the three most notable ones being, firstly, our continued good volume growth and strong market outperformance. Secondly, in our developing markets, we are very pleased with our strong and broad-based growth performance. Thirdly, we're excited by the ongoing progress we're making on the acquisition front.
Having spent about EUR 500 million so far this year on acquisitions aligned to our strategic growth priorities and as we continue to deepen our technology capability and will enable continued expansion into growth markets. I'll talk a little bit more about these acquisitions at the end. In terms of the marketplace, the trends we discussed at the half year continue and perhaps are even more pronounced. There continues to be a lot of change driven by consumer demand for authenticity, clean label, premiumization, healthiness, convenience. In developed markets, the churn that we referred to previously continues. Consumer demand for new and improved products is continuing to drive change, and the traditional models are challenged to deliver innovation and new solutions with speed. This market dynamic very much plays to our strengths, for our unique business model of integrated solution capability and agility is winning in the market.
Moving on to developing markets, we're seeing more consumers wanting to try new things with authentic taste, convenience, and better for you being key drivers of innovation and product development. This again was a theme we touched on at the investor day in Singapore. When we look at our overall business performance, our T&N business continues to deliver consistently, underpinned by our leading Taste & Nutrition positioning, absolutely fully aligned and fundamental to what consumers and customers value. Our Consumer Foods business continues to deliver solid growth despite some of the softer consumer dynamics that are out there. Look, both businesses continue to outperform the market growth rate. With that, I am delighted to hand it over to Marguerite.
Thanks, Edmond, and good morning, everybody. Just turning for a moment to slide six, with an update in a little bit more detail on our performance for the period. Overall 2018 year to date has been a very good year of solid performance. In looking at the performance, I've updated this morning on our volume and our trading margin performance. Firstly, on volume, as Edmond has mentioned, we've had strong group volume growth of 3.5%. This represents a very strong outperformance, with our Taste & Nutrition business growing at 4.1%, and our Consumer Foods grew at 1.2%, well ahead of our markets in Consumer Foods, which are just marginally positive in the period. Lower pricing of circa 0.2%, reflecting lower raw material prices on average across the period as we had anticipated. Just briefly on margin, no change to our reported margin.
We have had good underlying margin expansion of circa 30 basis points, resulting in group trading margins being maintained despite transaction currency headwinds. On a reported basis, our T&N business had margin expansion of 20 basis points, with Consumer Foods margins back 60 basis points, predominantly due to the GBP currency headwind of 70 basis points. Finally, in terms of guidance, reaffirming our guidance, and we'll outline this in a little more detail later on. Just moving to slide seven, and taking a more detailed look at our revenue growth analysis for the nine months to the end of September. We've had 3.5% volume growth on a year-to-date basis. Looking at that within the quarter, it's reflective of 3.4% volume growth in the quarter against a very strong prior year comparison and outperforming market growth.
Looking at the components of our growth, transaction currency impact on revenue relates to GBP and pricing as mentioned. Translation currency impact was adverse 4.9%, while acquisitions contributed 2.9% including Tyson Kettle and Ganeden. Just moving to slide eight and taking a closer look at our individual businesses. Firstly, on Taste & Nutrition. On year-to-date performance, very strong. Our year-to-date volumes grew by 4.1%, representing 4% in the quarter against very strong comparisons in the third quarter of 2017 of 5.4%. Consistent growth when compared to Q2 and a very strong outperformance of market growth of circa 1.4%.
A couple of call outs in this regard, as Edmond has mentioned, our leadership position in authentic taste, clean label technology continues to be key drivers of our growth as customers are looking more and more for holistic innovation partners to respond to the changing dynamics within consumer taste and demand. It's really this market dynamic that very much plays to Kerry's strength and where our unique business model and integrated solutions capability is winning in the market. A couple of other points on T&N performance, very pleased with the growth we've had in developing markets of 9.7%. Significant outperformance of market growth. food service continues to perform very well with growth of 5.8% on a year to date basis. Just turning to margins for a moment. We've delivered very good underlying growth, excluding currency headwinds, delivered growth of circa 30 basis points in the period.
Driven predominantly by operating leverage and portfolio enhancements while continuing to reinvest for efficiency savings in localizing our operating model. A couple of comments looking at the regions within T&N. Within the Americas, our volumes have grew by 2.8% on a year-to-date basis, 2.9% in the quarter. Good performance in LATAM and Brazil returning to more normalized growth in the third quarter. In Europe, we're very pleased with volume growth of 2.5%, particularly against very strong prior comparisons as we've updated previously. Finally, APMEA had a really excellent quarter, growth of 10.1% year to date. Reflecting, as Edmond said, good broad-based growth right across our end use markets. We're continuing to invest for growth in line with our strategy, investing in localizing business development and allocating capital very much aligned to our strategic areas of growth.
We've continued to invest in our footprint in Malaysia, Indonesia, and China. Very good growth overall in T&N. Turning to Consumer Foods to slide nine. We grew our year-to-date volumes by 1.2%, as mentioned. Very good performance versus our markets that grew only marginally in the period. While the U.K. consumer had been by and large resilient in the first six months of 2018, we did see signs of softness in the third quarter. In general, the market for foods is getting more challenged as we cycle through Brexit. We're very pleased with the performance of our Food to Go range and adjacencies, which grew strongly and grew by high single digits in the period.
Pricing slaps, reflecting neutral raw material prices and just on margins, good underlying margin improvement, 10 basis points in the period, offset by sterling transaction currency headwinds of 70 basis points, as we've spoken about previously. We also relaunched Fridge Raiders and early positive indicators in terms of its appeal to the wider consumer demographics. Just finally on Consumer Foods, couple of call-outs. We're pleased with the performance in Richmond, particularly the relaunch of the Richmond Chicken Sausage, as we've discussed previously. As we've mentioned, Convenience Meal Solutions have had a challenging year. That trend has continued as retailers have reduced promotional activity and sales have been negatively impacted by the exceptional warm weather in the second and third quarters. Foods to Go, as I mentioned, has performed very strongly. Overall, the two businesses performing very well.
Before I hand over to Edmond, want to update you on a couple of other matters. Firstly, KerryConnect. We're pleased with the continued progress through 2018. We've completed the implementation in LATAM, and now we're in advanced preparations for commencing deployment in North America in 2019. On Brexit, we are making good progress with our Brexit mitigation plan. We do see continued U.K. economic uncertainty, particularly as it pertains to consumer sentiment. While this held up through the first half, as I mentioned, we are seeing some softening on the horizon. While we don't ordinarily comment on specific customer business, as mentioned in certain media, we have made a decision not to further invest in some of our lower margin Tesco ready meals business. The loss of this business is a latter part FY 2019 matter, and it doesn't have an impact on FY 2018.
Turning to raw materials. As we signaled at the half year, we are seeing raw material deflation across a number of categories in the second half. We see this continuing through to the end of the year. Early indications though, we do see this turning to inflation as we move into FY 2019. Currency, no change to what we said at the half year update in terms of expected FY 2018 EPS currency headwinds impact, 5% translation and 2% transaction. Our net debt, EUR 1.4 billion at the end of the period, which is in line with our expectations. As normal, we will be providing a fuller update on the FY 2019 guidance in February. I'll just wrap up the performance update briefly with three main points on our performance.
Strong underlying performance year to date as our business model continues to deliver with our volume growth outperforming the market. Very strong performance with a growth of 9.7% overall in developing markets. Many of you will have seen the growth opportunity firsthand at our recent Singapore Investor Day. As I mentioned earlier, a busy period on the acquisition front, EUR 500 million spent year to date on acquisitions, which should add just below 1% to EPS in 2019. With that, I'll hand to Edmond to update on these acquisitions and outlook for the remainder of the year.
Thanks, Marguerite. Turning to slide 11 on the decks there, please. I suppose as Marguerite mentioned, as well as growing organically, we will continue to invest in acquisitions. Given the fragmentation in our sector, we see many opportunities for further consolidation. We do believe that we are very much best positioned, and we have the best business model to successfully acquire and integrate these opportunities. Aligned to our strategic growth priorities, which will maximize shareholder value. You see the eight acquisitions that we've made so far this year and how they're aligned to our strategic growth priorities. We're excited about the growth potential of these acquisitions and how they complement our industry-leading foundational technology portfolio.
We continue to invest for growth in these businesses as we seek to further localize to partner with our customers to meet ever-evolving consumer needs. We've good plans to integrate these acquisitions into our business model. This will take a little bit of time, and will cost 5%-6% of total consideration. We're particularly excited about the recent announcements of both Fleischmann and AATCO, I'd like to take this opportunity just maybe to get into those in a little bit more detail. If you can just turn onto slide 12, please. This slide gives a little bit more detail on what these businesses look like today, and how they're a strategic fit. Firstly, looking at the Fleischmann business. This brings us new authentic natural taste and clean label preservation technologies.
It has seven manufacturing facilities in the U.S. and all the sales today are very much North America focused. Its main end-use markets are snacks, meals, and beverage, with the retail channel being its focus. When we bring this under the Kerry umbrella, it will add both breadth and depth to our clean label portfolio. We've been sourcing various components from Fleischmann's over the last 10 years or so, and we've been combining those with Kerry's technology. This is a particular strong fit for us, and in time, will lead to new ways of extending shelf life. It will lead to creation of an alternative natural preservation for both meat and bakery applications, and perhaps new, and provide potentially a further layer of food safety opportunities for us in certain categories. We're very excited about this acquisition.
We do see some comparisons with Red Arrow, where we took it into new geographies, new categories, new customers, and most excitingly, into new functional areas. Just moving on to AATCO for a second. This acquisition is a bit different. I'm excited because it brings us, for the first time, a manufacturing footprint in the Middle East and provides a significant platform for growth and business development in that region. We're building this platform and by investing to bring it into new technologies, new application capabilities, and combining with moving into new end-use markets and channels across the region. It brings today a capability in colorant ingredients and sauces. It has three manufacturing facilities. Two, the main ones, the biggest ones are in the Middle East, and a smaller one in India.
Its primary focus today is in the food service channel, and this brings us further access to global, regional, and local customers across the Middle East and Africa. We're really excited about this step change as we look to kick on in our journey in the Middle East and Africa. In many respects, it feels like where we were in Southeast Asia about 10 years ago. Turning now onto slide 14, please, and our outlook for 2018. We see continued performance ahead of our markets in the Taste & Nutrition business. Our unique business model is continuing to deliver strong innovation in both developed and developing markets. With regards to our Consumer Foods business, we see solid business performance in 2018, while we continue to navigate the current uncertain environment.
As I said earlier, we'll continue to invest in what is a fragmented marketplace as we look to realize growth opportunities with the scalable business model, and we'll continue to grow both organically and through M&A investment. Finally, just to conclude, we're confident of delivering adjusted EPS growth of 7%-10% on a constant currency basis in 2018. With that, I will hand it over to the operator for questions.
Thank you much, sir. Ladies and gentlemen, if you'd like to ask an audio question, please press star one on your telephone keypad. Thank you. The first question is coming from Mr. Jason Molins, calling in from Goodbody. Please go ahead.
Hi. Good morning. A couple of questions, please. Marguerite, you mentioned the sort of broad trajectory for raw material prices, both for the rest of this year and also next year. Just wondering if you could put a bit of context on numbers around those sorts of expectations. Just on the Consumer Foods division, can you remind us how big the Convenience Meal Solutions is for you at the moment? Obviously, you call that the softening environment and obviously the contract that you've lost. Maybe you can draw on how you are thinking about that part of your business strategically. Thanks.
Thanks, Jason, and good morning. Maybe to take those questions in turn. Firstly, on the raw materials, I guess as we've outlined in the half year, we did signal an expectation of inflation, and that has come through in the quarter. We expect that to continue through to the year-end. It's predominantly arising on naturals, vegetables, spices, as we look through to the end of the year. A similar trend, maybe 1%-2% of an impact as we look out to the end of the year in terms of how we see the impact on the top line. As we look out to FY 2019, early days, and I guess as you know, we don't specifically guide on this call on 2019.
As we look at raw material prices, taking into consideration recent weather events' impact on crops, we are seeing early signs of inflation on crop-based ingredients. Dairy and fruits would be a key call-out, and to some extent as well on the energy transport. At this point, Jason, we don't guide specifically on 2019. Just on the Consumer Foods, and in particular the loss of the Tesco business. Again, as a norm, we don't ordinarily comment on individual customer business. Again, to reiterate, the latter part FY 2019 matter as we think about it, I guess, on an annualized basis, it's roughly mid to high single digit percentage of our Consumer Foods business. It is a lower margin business. It's fair to say, though, between now and the latter part of FY 2019, we're working on a number of initiatives to seek to alter that bit.
As we look at the group, no impact on our midterm targets and again, to reiterate, no impact for FY 2018.
Right. Thanks.
Thank you, sir. We will now go to Liz Coen calling in from Davy. Please go ahead, ma'am.
Good morning, Edmond. Good morning, Marguerite. Thank you for taking my questions. Just two from me, please. Firstly, food service, the 5.8% year-to-date volume growth. Just wondering, is there anything you would call out there? Maybe if you could give us a sense of the volume performance by region, that would be helpful. Then secondly, could you comment specifically on the performance in the quarter in China and Brazil? Then on China, is there anything that you would call out in terms of the regulatory backdrop? Thank you.
Thanks, Liz. I'll take those questions. I would say food service, look, the performance overall is very strong. Particularly if you recall, this quarter a year ago had a particularly strong quarter in Europe, driven primarily in food service. Look, 5.8% volume growth in food service, particularly strong when you consider those comparatives. I wouldn't call out any particular region being stronger than the other. I would say it's pretty much across the board. I think our business model, as I've said in the past, is very much appropriate and aligned to what our customers are looking for in food service. I wouldn't call out a particular region, Liz. I would say it's pretty consistent performance across the board despite some of the very strong comparables in Europe.
With respect to your second question in terms of China and Brazil, I would say we've seen Brazil is more back to normal activity is how I describe it. Plenty of challenges there with recent elections and lots of things going on in that particular country as usual. I would say it's back to normal activity in the most part in Brazil. With respect to China, Liz, do you mind just repeating that question? I didn't just catch that.
Yeah, sorry. Just in general, performance in the quarter and your outlook for China, and then if there's anything to do with the changes in the regulatory backdrop impacting your business, that would be helpful. Thanks.
No problem. I would say, look, China is a country we remain very optimistic about. We continue to invest there. We made a number of acquisitions in the last 12 months in China. I really like the fact now that we have a presence in the north of China, which the acquisition of SIAS brought us. It's important for us to have a physical manufacturing presence in the north of China, which SIAS brought us. Our performance is actually strong in China. We don't see that changing anytime soon. We're continuing to invest. We have a very strong team in place. We'll continue to look at some acquisitions there. Again, very happy that we have our first manufacturing footprint in the north.
Okay. Thanks very much, Edmond.
Thank you, Ms. Coen. We will now go to Mr. James Targett calling in from Berenberg. Please go ahead, sir. Your line is open.
Hello. Good morning, everyone. Three questions from me, actually, just really following up on some things already been asked. Firstly, on pricing. Marguerite, did you say that for the full year, you expect 1%-2% negative? I just want to see if I got that correct after it was slightly negative for the year to date. Just want to clarify that. Secondly, on food service. Some of your peers are talking about weakness in a limited time offer in food service in the U.S. I just wondered if you were seeing any impact from that. Thirdly, Edmond, you mentioned Brazil back to normal activity. Maybe give us some idea of what historical normal growth rates were in Brazil. Thank you.
Maybe the very last part first, James, is I am not too sure about normal activity over a long period of time in Brazil. I think, look, there is an element of, I suppose
Up and down from quarter to quarter in Brazil. We have a very strong business there, I would say. It's primarily into the meat and snacking and bakery end-use markets. From quarter to quarter, there can be a little bit of volatility. It's a market that goes through its ups and downs. This particular quarter, there was a lot of activity around the fact that there was elections there, and they were very high profile, and there was a lot of various activities that were impacting performance positively, negatively. In the net, we're saying it's a normalized type of performance in the quarter. In terms of food service, I wouldn't call out anything dramatic in the quarter or recent in the quarter that we're seeing in terms of LTOs.
I think it's important to consider, James, when we look at food service, we look at it in the context of the QSR channel, the coffee channel, convenience stores, and independent. We've a very broad, I would say, approach to the food service channel. Again, I wouldn't call out any specific lack of activity in LTOs that we're seeing anywhere when we look at it across the breadth of the channels. I'll hand the pricing question back to Marguerite.
Yeah, sure. Good morning, James. Yes, you're right, negative 1% to 2% on raw material pricing.
Thanks very much.
Thank you much, sir. Ladies and gentlemen, once again, if you have any questions, please do press star one. We will now go to Fulvio Cazzol calling in from Goldman Sachs. Please go ahead.
Yes, good morning. Thank you for taking my question. My question relates to margins. I noticed that there was a slight improvement nine months versus 1H for the group, but more specifically for the Taste & Nutrition business. You normally, or at least at the half year, you gave a very helpful sort of margin bridge. I was just wondering if you can just tell us which of the drivers that you normally flag had improved for you in the third quarter, please, i.e., operating leverage, net price, Kerry sales, currency, or acquisitions, please. Thank you.
Good morning, Fulvio. Just to comment on your question, yes, underlying margin improvement of 30 basis points offset by currency. As you would expect it to mix predominantly improvements of 30 to 40 on the operating leverage portfolio mix offset by reinvestment in localizing our Kerry operating model, and that effectively equates to the 30 basis points underlying performance.
Okay, great. Thank you.
Thank you much, sir. Ladies and gentlemen, as a reminder, please do press star one to ask questions. We'll now go to Heidi Vesterinen calling in from Exane. Please go ahead.
Hi. Good morning. Two questions. If we go back to the growth in food service that you highlighted, is this more to do with finding new customers, or is it more about increasing penetration with existing ones? Does this differ by region or type of customer? When we were talking about M&A, did I hear you correctly that the EUR 500 million spend will give us just under 1% of EPS next year? If so, why is it so little? Is it the fact that the prices are very high these days, or do the assets you bought need a lot of investment? Could you help us with that one, please? Thank you.
Hi, Heidi. I'll take the M&A one first and maybe a couple of comments. Firstly, the businesses are two very different businesses. I'm talking both the bigger ones now, AATCO and Fleischmann. AATCO needs a lot of work to do in terms of, I would say, repositioning their portfolio. It's going to take a little bit of time. It's going to take a bit of investment. It's a very nice business with a very good footprint, strong people, but we need some work in terms of portfolio and some investment in terms of integrating that business into the Kerry business model. That's one. I would say secondly, the Fleischmann's acquisition, again, it's relatively narrow in its application today when we look at it through our lens and the lens of our business model.
Again, it's an acquisition where we would see we're going to be investing in taking that technology, combining it with the technologies that we have in Kerry, and taking it then subsequently into multiple applications, multiple regions, and multiple end-use markets and possibly in probably other functional areas. Yeah, you heard that correct, that it will contribute less than 1% on EPS for 2019. In terms then of your question on food service, I would say it's a combination. Again, I go back to my comments in the previous question with respect to food service. I would say that, look, the way we look at food service across the multiple channels, QSRs, coffee chains, convenience stores, and the independent restaurants, I would say on independents, I think there's probably further penetration. I would say on the coffee chain, it's probably market share that we're looking at there.
It's a combination. Again, we manage these sub-channels within the broad food service channel in different ways, with different approaches to those sub-channels. We would have specific strategies for each of those sub-channels. We don't necessarily look at it holistically. We look at it very much at an individual sub-channel basis. Each of those sub-channels have slightly different dynamics.
Thank you.
Thank you, ma'am. We did have another person queuing. That person just withdrew their question. Ladies and gentlemen, as a final reminder, please do press star one for any questions, we'll follow questions. We do not appear to have any further questions at this time. Let me turn the conference back over to your organizers today for any additional closing remarks. Thank you.
Thank you, operator. We would like to thank everyone who joined us on the call today. We hope we've given you clarity in terms of where we are in our journey in 2018. If there's any further questions, please reach out to us and we will address them accordingly. Thank you very much and have a good day.
Thank you. Ladies and gentlemen, that will conclude today's conference. Thank you for your attendance. You may now disconnect. Thank you.