Good day, ladies and gentlemen, and welcome to Carrie Group Q3 2018 INS Compass Call. Information today's call is being recorded
And at this time, I'd like to
turn the conference over to your host today, sir 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 2018 Q3 interim management statement. My name is William Mention. I'm Head of Investor Relations. With me is Edmund Scanlon, group CEO, Mark McLarkin, group CFO, and Ellaimee, Group Financial Controller.
I will hand over to Edmund and Mark Breese who will take you through a brief presentation and capturing the key points of our Q3 IFS. The presentation is available on the Investor Relations section of our website. And answer session, which will be facilitated by the operator. Before commencing the presentation, let me draw your attention to the usual disclaimer regards to forward looking statements. I will now hand over to Edmond.
Thanks, William. Good morning, everyone, and thank you for joining our call. As William said, I'm joined here by Marvorie, our new CFO. And so for next 20 minutes or so, we're going to take you through a brief presentation. I call the rest of the year to date business overview.
And then Margreen will cover the financial performance in a little bit more detail. And I close out by looking at our acquisition activity so far this year and the guidance for 2018. But before I get into the Q3 year to date, I'll just turn to Page 4 and the presentation deck. I'd like to take a couple of minutes to share with you the key piece that we covered at our recent Investor Day in Singapore. But the overall theme for the day is winning locally.
And while we focus 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 100 and 40 facilities in Turkey's own country. And I could, I suppose I could summarize this approach through 3 key points. Firstly strong consumer insights and winning locally starts by being truly local in in mastering the market and part of the local community, and this encapsulates the mindset and the strategic approach that we take to serving our customers and growing our business locally. Secondly, customer connectivity, and this is beyond customer relationships. It's more than that.
It's about the fact that we're a holistic business partners with our customers. Serving as an integrated extension of our customer's capabilities, developed products that work better for their businesses. And this is the value of our model and this is part of our customer's value. Comparably capability was globally connected to the organization, wherever we're locally made and 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 those technologies to create specific business building care to nutrition solutions that meet the needs of consumers. So 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 entering a new country and growing our business in the country from early stages.
And we focused on Thailand as the example to demonstrate how this worked 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, and under there, we brought backulize through a few examples and by looking at the development of and deployment of our captive small technology as well as our BC Part D probiotic technology to E cell ECHS. So now switching gears and moving on to Slide 5 and I look at our business on a year to date basis. So when we look back at 2018 so far, there are a number of highlights. And the 3 most noteworthy ones being far clear continued group volume growth and strong market open volumes, Secondly, in order to benefit markets, we're very pleased with our strong and broad based growth performance.
And thirdly, we're excited by the ongoing progress we're making on the active front. Having spent about 500,000,000 so far with year on acquisitions, aligned to our 3 digit growth priorities, and we will continue to deepen our technology capability and will enable continued expansion in the world market. And I'll talk a little bit more about these acquisitions at the end. In terms of the market half year continue and perhaps even more pronounced as there continues to be a lot of change, driven by consumer demands for authenticity clean label, premiumization, healthiness, convenience, and developed markets to churn that we refer 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 is very much placed to our strengths for our unique business model of integrated solutions capability and agility within the market. Moving on to developing markets. We're seeing more consumers wanting to try new things with authentic case convenience and better for you, the key drivers of innovation and product development. This again was a team we talked done at the Investor Day in Singapore. We look at our overall business performance So our TNM business continues to deliver consistently underpinned by our leading cash and nutrition positioning, absolutely fully aligned and fundamental to our consumers and customers value.
Our consumer foods business continues to deliver solid growth, despite some of the softer consumer dynamics throughout there. So look, both businesses continue to outperform market growth, with So with that, are you delighted with the handover to Marbury?
Thanks, Edmund, and good morning, everybody. So just turning for a moment to slide 6, with an update, in a little bit more tell on our performance for the period. Overall, 2018 here to date has been a very good year of solid performance. In looking at the performance, I'll update you this morning on our volume and our trading margin performance. So firstly, on volume, and as Edmond has mentioned, we've had strong group volume growth of 3.5%.
This represents a very strong outperformance, with our Safety Nutrition business growing at 4.1%. And our consumer foods grew at 1.2%, well ahead of our market in consumer foods, which are just marginally positive in the period. Lower pricing of 30.2 percent, reflecting lower raw material prices on average, across the periods as we had anticipated. And then just briefly on margin and 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.
And on a reported basis, our TNM business had margin expansion of 20 basis points with Consumer Foods margins back 60 basis points predominantly due to the sterling currency headwind of 70 basis points. And finally, in terms of guidance, reaffirming our guidance and we will outline this in a little more detail later on. So then just moving to slide 7 and taking a more detailed look at our our revenue growth analysis for the 9 months to the end of September. And we've had 3.5% volume growth on a year to date basis. And 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. And looking at the components of our group's, transaction currency impact on revenue relates to sterling and pricing as mentioned. Translation currency impact was at worth 4.9 percent, while acquisitions contributed 2.9% including Typhoon Kettle and Skanae. So then just moving to slide 8 and taking a closer look at the, our individual businesses. So firstly, on taste and nutrition, on year to date performance, very strong, our our year to date volumes grew by 4.1% representing 4% in the quarter against a very strong comparative 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%. And a couple of call outs in this regard, as Edmond has mentioned, our leadership position in authenticates, clean label technology, continue 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. And it's really this market dynamic that very much plays to carry strength and where our unique business model and integrated solutions capability is winning in the market. A couple of other points on TNN performance. Very pleased with the growth we've had in developing markets of 9.7%. Significant outperformance of market growth.
Foodservice continues to perform very well with growth of 5.8% on year to date basis. And then just turning to margins for a moment. We've delivered very good underlying growth. Excluding currency headwinds, delivered growth of 30, 30 basis points in the period, and driven predominantly by operating leverage and portfolio enhancements and while continuing to reinvest efficiency phasing and localizing our operating model. A couple of comments been looking at the regions within TNN.
Within the Americas, our volumes have grew by 2.8% on a year to date basis, 2.9% in the quarter, and good performance in LatAm and Brazil returning to more normalized growth in the 3rd quarter. In Europe, we're very pleased with the volume growth of 2.5% particularly against very strong prior year comparisons as we've updated previously. And finally, APMEA had another really excellent quarter, growth of 10.1% year to date. Reflecting as Edmond says, good broad based schools, white across, sir, and youth markets. And we're continuing to, invest for growth in line with our strategy, investing in localizing business development, and, allocating capital very much aligned towards strategic areas of growth with continued to invest in our footprint in Malaysia, Indonesia and China.
So very good growth overall, and in CNN. So turning then to Consumer Foods to Slide 9, and we grew our year to date volumes by one point 2% is mentioned, greater performance versus our markets. That's grew only marginally in the period. While the UK the UK consumer had been by and large resilience in the 1st 6 months of 2018, We did see signs of softness in the third quarter. And 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 flats, 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 up 70 basis points, as we've spoken about previously. We also, relaunched Freiters and early positive indicators, in terms of its appeal to the wider consumer demographic And then just finally on Consumer Foods, a couple of call outs, and we're pleased with the performance enrichment, particularly the relaunch of, the Richmond chicken sausage, as we've discussed previously, And as we've mentioned, convenience meal solutions have had challenging years. That trend has continued as retailers have reduced the the exceptional activity and sales have been negatively impacted by the exceptional warm weather in the Second And Third quarters.
And food to go, as I mentioned, has performed very strongly. So overall, the 2 businesses performing very well. So then before I hand over to Edmund and want to update you on a couple of other matters Firstly, Carrie Connect, we're pleased with the continued progress through 2018. And we've completed the implementation in LatAm. And now we're in advanced preparations for same deployment in North America in 2019.
On Brexit, we are making good progress with our Brexit mitigation plan. We do see continued UK economic uncertainty, particularly as it pertaining to consumer sentiments. And so this held up through the first half, as I mentioned, we are seeing some softening on the horizon. And 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 revenues business. The loss of this business is a latter part of FY 'nineteen matter and it doesn't have an impact on FY 'eighteen.
Turning them to raw materials. As we signaled at the half year, we are seeing raw materials deflation. A proper number of categories in the second half. We see this continuing through to the end of the year. Early indications.
So we do see this turning to inflation as we move into FY19. And then currency, no change to what we said is the half year update in terms of expected FY 'eighteen EPS currency headwinds impact 5% translation and 2% transaction. And finally, our net debt $1,400,000,000 at the end of the period, which is in line with our expectations. So as normal, we will be providing a dates on FY 'nineteen guidance in February. So I'll just wrap up the performance update briefly with 3 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 percent overall in Developing Markets. And you'll have seen many of you will have seen the growth opportunity firsthand at our recent Singapore Investor Day. And as I mentioned earlier, busy period on the acquisition fronts, a $500,000,000 spent year to date on acquisitions. Which should add just below 1% to EPS in 2019. So with that, I'll hand to Edwin to update, on these acquisitions and outlook for the remainder of the year.
Thanks, Marguerite. So turning to, to Slide 11 on the deaths there, please. And I suppose, as Marguerite mentioned,
as
well as growing organically, we will continue to invest in acquisitions. And given the fragmentation in our sector, we see many opportunities for further consolidation. But 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 priorities, which will maximize shareholder value, You can see the 8 acquisitions that we've made so far this year and how they're aligned towards 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 the partner with our customers who need ever evolving consumer needs.
We could kind of integrate these acquisitions into our business model. This will take a little bit of time and we pass 5% to 6% of total consideration. So we're particularly excited about the recent announcement of both flightsman and ATCO, and I'd like to take this opportunity just maybe to get into those a bit more detail. So if you can just turn on to 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. So firstly looking at the deflation business, this brings us new authentic natural case and clean nails and preservation technologies. It is 7 manufacturing facilities in the U. S. And all the sales today are very much North America focused.
It's main engines market for snacks, meals and beverage with the retail channel being its focus. When we bring this under the Harry umbrella, he will add both breadth and depth to our clean label portfolio. We've been sourcing various components and flushes over the last 10 years or so. And we've been combining those with Carriage Technologies. So this is a particular strong fit for us And in time, we'll lead to new ways of extending shelf life.
We will lead to creations and alternatives natural preservation for both meat and bakery applications and perhaps meat and provides potentially a further layer of food safety opportunities for us in certain capacities. So we're very excited. We're very excited to focus acquisition. And we do see some comparisons with Red Arrow, where we're tipping into new geographies, new categories, new customers and most excitingly into new functional areas. So just moving on to backlog for a second.
This acquisition is a bit different. I'm excited because it brings us for the first time and manufacturing footprint in the Middle East and provide a significant tax on for growth and business development in that region. We build in 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 our capability in color ingredients and softness, It is 3 manufacturing facilities, through the main ones, the biggest ones on the Middle East and a smaller one in India. It's primarily focused today from the food service channel and this brings us further access to global region and local customers across the Middle East and Africa.
We're really excited about this, this step change as we look to kick on, you know, journey in the Middle East and Africa. And in many respects, it feels like where we were in Southeast Asia, about 10 years ago. So turning now on to Slide targeting, please, and our outlook for 2018. We see continued performance ahead of our markets, invitation and 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 continue to invest in value to fragmented marketplace as we look to realize growth opportunities. The
scale of
the business model, and we'll continue to grow both organically and through M And A investment. And finally, to conclude, we're confident of delivering adjusted EPS growth of 7% to 10% on a constant currency basis in 2018. So with that, I will hand it over to the operator for questions.
Thank you. Please first question is coming from Mr. Jason Barnes calling in from Goodbody. Please go ahead.
Hi. Good morning. A couple of questions, please. And, Marguerite, you mentioned the sort of broad trajectory. For raw material prices, both for the rest of this year and also next year.
And just wondering if you can put a bit of context on numbers around those sorts of expectations? And then just on the Consumer Foods division, can you remind us how big the convenience meal solutions is for you at the moment, and how, obviously, you call that the the softening environment and obviously the contract that you've lost. So maybe you can draw on how you are thinking about that part of your business strategically. Thanks.
Thanks, Jason, and good morning. And so maybe to take those questions in turn, firstly, on on the raw materials, I guess as we've outlined in the past here, we did signal an expectation of deflation and that has come through in the quarter. We expect that to, to continue through to the year end. And it's predominantly arising on natural vegetables spices, as we look through to the end of the year. So a similar trend, maybe 1% to 2% of an impact as we look out to to the end of the year.
In terms of how we see the impact on the top line. As we look at FY19 early days. And I guess as you know, we don't specifically guide on this call on on 2019. As we look at raw material prices and taking into consideration mean, a recent weather events impact on crop, we are seeing early signs of inflation on crop based ingredients dairy and fruits would be a key call item and to some extent, as well, on the, on the energy, transport. That's what at this point, Jason, we don't guide specifically on, on 2019.
So then just on the, on the consumer foods, and in particular, the the losses to Tesco business. And again, as a norm, we don't ordinarily comment on individual customer business, again, to reiterate, it's a latter part FY19 matter. As we think about this, I guess, on an annualized basis, it's roughly mid to I think as a percentage of our Consumer Foods business, and it is, it is a lower margin, lower margin business. It's fair to say, though, between now and the latter part of FY 2019, and we're working on a number of initiatives initiatives to seek to, to offset this. And as we look at the group, no impacts on our midterm our midterm targets.
And again, to reiterate, no impact for FY18.
Right. Thanks.
Thank you, sir. We'll now go to Liz Cohen calling you from Davy. Please go ahead, ma'am.
Good morning, Edmund. Good morning, Marguerite. Thank you for taking my questions. It's 2 for me to so firstly, food service, the 5.8% year to date volume growth. I'm just wondering if there's anything you would call out there, and maybe if you could give us a sense of the volume form of 5 regions, that would be helpful.
And then secondly, could you comment specifically on performance in the quarter in China and Brazil? And then, on China, is there anything that you would call out in terms of the regulatory backdrop?
Thanks, Liz. So I'll take, I'll take those, those questions. I would say, I would say, full service, look, the the performance overall is very strong. I mean, particularly if you recall, this quarter a year ago, was this particularly strong quarter in, in Europe, driven primarily in food service. So look, 5.8% volume growth sorry, yeah, 5 0.8 percent 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 said in the past, is very much appropriate and aligned to what our customers are looking for in full service. So, so I wouldn't call out quickly reading this. I would say it's pretty consistent performance.
Across the board, despite some of the strong, the very strong comparables in Europe. With respect to your second question in terms of China and Brazil, I would say we've seen, you know, Brazil is more back to normal activities, how we describe it. You know, plenty of challenges there are recent elections and lots of things going on in that particular country, usual, but I wouldn't necessarily I would say it's back to normal activity in the most part in Brazil. With respect to China, do you mind repeating that that question,
I didn't just capture that.
Yes, sorry, just in general, just 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.
No problem. So I would say, look, China is a country we remain very, 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 that we have a presence in the north of China, which the acquisition of CS brought us, you can partner for us to have to have a physical, manufacturing presence in the north of China, which see us brought a So our performance is actually, is performance strong in China.
We don't see that changing. Anytime soon. We're continuing to invest. We have a very strong team in sales. We continue to look at some acquisitions there.
And again, I'm very happy that we have our first manufacturing footprint in the north.
Thank you, Miss Cohen. We'll now move to Mr. James Terry calling you from Berenberg. Please go ahead, sir. Your line is open.
Hello. Good morning, everyone. Three questions from me, actually, just for you following up on some things already been asked. Firstly, on pricing, Wondering, did you say that for the full year, you expect 1% to 2% negative? I'm sorry.
You know, got that correct after your after it was slight negative in for the year to date. So I want to clarify that. And then secondly, on food service, some of your, well, I'll be kind of your sort of peers just talking about, weakness in, a limited time offer in food service, in the U. S. So I just wondered if that, if you were seeing any impact from that.
And then just thirdly, Edwin, you mentioned Brazil back to normal, maybe normal activity, maybe he was some idea of what historical, normal growth rates were in Brazil?
Maybe the very last part first. First, James, is, I'm not too sure, but normal activity over a long period of time in Brazil is I think, look, there is an element of, I suppose you know, up and down from quarter to quarter in Brazil. We've a very strong business there, I would say. We've, it's primarily into the meat and snacking and battery end use markets. So from quarter to quarter, there is there can be a little bit of volatility It's a it's a market that goes through.
It's ups and downs. This particular quarter there was a lot of activity around, the fact that there was, there was, elections there and there were quite, I suppose, that, you know, they were very, very high profile and there was a lot of various activities that were impacting performance positively being negatively. But 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 in the quarter that we're seeing in terms of LCOs. I think it's important to consider, James, when we look at full service, we look at it in the context of you know, the QSR channels, the costly channels, convenience stores, both it's, and independent.
So we have a very broad I would say, approach to the full service channel. And again, I wouldn't, I wouldn't call out anything, any specific lack of activity in NTOs, but we're seeing anywhere when we look at it across the breadth of the channels. I'll hand the pricing question
back to Marbury. Yes, sure, Evelyn. And good morning, James. Yes, you're right. Negative 1% to 2% on raw material pricing.
Thanks so much.
We'll now go to Fulvio Kazal 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 on months versus 1H for the group, but more specifically for the based on 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? Quoting leverage net price, Keri Xcel currency or acquisitions, please? Thank you.
Good morning, Fulvio. And just to comment on your question, yes, underlying margin improvement of 30 basis points offset by currency. And as you've expected to mix predominantly, improvement of 30 to 40 on the operating leverage portfolio mix, offset by reinvestment in localizing, our, our, our carry operating model and that's effectively equates to the 30 basis points underlying performance.
Okay, great. Thank you.
We'll now go to Heidi Messerinman calling you from Exane. Please go ahead.
Hi, good morning. So, 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? And does this differ by region or type of customer?
And then, when we were talking about M and A, did I hear you correctly that the $500,000,000 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 bought need a lot of investment. Could you help us with that one, please?
Hi, Heidi. I'll take the M and A 1 first and maybe a couple of comments. Firstly, the businesses were very different businesses. I'm talking about the bigger ones, no alcohol and and and and and and inflation. Apple is a lot of work to do in terms of, I would say, a win position in their portfolio.
It's going to take a little bit of time. It's going to take a bit of investment. It's a, it's a very nice business. It's a very good footprint, strong people, but we'll need we'll need some work in terms of, of portfolio. And some investments in terms of integrating that business into the carrier business model.
So that's one. I would say secondly, the deflation of the acquisition. Again, it's relatively narrow in its application today. When we look at it through our lens in the lens of our business model. So again, it's an acquisition where we would see we're going to be investing in taking that technology, combining with the technologies that we have in Cary and taking events subsequently into multiple applications mostly regions and mostly land use markets and possibly and probably other functional areas.
So yeah, yeah, you heard that correct, but, but that is considerably less than 21% on on PS, for 2019. So in terms then of your question on food service, I would say it's a combination. Again, I go back to the maybe the my comments in the previous question with respect to foodservice. I would say that, look, the way we look at foodservice across the multiple with QSRs, coffee chains, convenience stores and the, independent restaurants, I would say on independents, I think there's probably, there's probably further penetration. And I would say on the, on the coffee chain, it's probably market share that we're looking at there.
So it's a combination. And again, we manage being soft channels within the broad, broad food service channels in different ways, on the different approaches for soft channels. So and we would have specific strategies for each of those, some channels. So we don't necessarily look at it holistically. We look at it very much and an individual sub channel basis and each of these all sub channels have slightly different dynamics.
Thank you.
Thank you,
We do not appear to have any further questions at this time. Let me turn the conference back over to you, or can I just today for any additional or closing remarks? Thank you.
Thank you, operator. Listen, we would like to thank everyone who joined us in the call today. We hope we've given you clarity in terms of where we are in, in, in, in our journey in 2018. And if there's any further questions, please reach out to us and we will address them accordingly. Okay.
Thank you very much, and have a good day.
Thank you. Thank you.
Ladies and gentlemen, that will conclude today's conference. Thank you for your attendance. You may now disconnect. Thank you.