Kerry Group plc (OTCPK:KRYAY) Interim Results 2019 Earnings Conference Call August 8, 2019 3:30 AM ET
William Lynch - Head of IR
Edmond Scanlon - Group CEO
Marguerite Larkin - CFO
Conference Call Participants
Jason Molins - Goodbody
Arthur Reeves - Barclays
Heidi Vesterinen - Exane BNP Paribas
Cathal Kenny - Davy Research
James Targett - Berenberg
Faham Baig - Crédit Suisse
Good morning, everyone, and welcome to Kerry Group Interim Results 2019 Investor Call. I'm William Lynch, Head of Investor Relations. And with me is Edmond Scanlon, Group Chief Executive Officer; and Marguerite Larkin, Group Chief Financial Officer.
We are hosting today's call from our Global Technology Innovation Center in Ireland. Edmond and Marguerite will take you through a presentation, capturing the key points of this morning's results update. And following the presentation, we will open the lines for your questions.
Before we begin, let me please - let's - sorry, please note the usual disclaimer regarding forward-looking statements.
I will now hand over to Edmond.
Thank you, William, and good morning, everyone, and welcome to our 2019 half 1 results presentation.
So starting, please, on Slide 4. I'd like to call out the 3 key highlights from me regarding the group's performance in the first half of 2019. First, the group continued to outperform our markets.
Secondly, I'm excited about the good business development and progress we've made in enhancing our portfolio to deliver on key consumer trends related to Food for Life & Wellbeing, clean label and Made for Me. And I'll touch on Made for Me, again, later on in the presentation.
And thirdly in developing markets, we delivered strong growth while further expanding our technology and strategic footprints. We've opened our new Taste manufacturing center in India to serve our Southwest Asia market.
In China, we expanded our technology capabilities in the Hebei Province to serve the Beijing and Northern China region, and our Nantong complex to serve both Eastern and Southern China.
And building on our AATCO acquisition, we also made strategic investments to expand our local platform, presence and capabilities to fully deploy our business model and deliver growth in both the Middle East and North Africa.
Now turning to Slide 5, and the performance of the business. And we look at this performance through the lens of both growth and returns. We delivered volume growth of 3.3%, group trading margin is up 20 basis points and our adjusted EPS on a constant currency basis is up 8.4%. And from a returns perspective, we delivered ROACE of 11.9% and free cash flow of €195 million, and we increased our interim dividend by 11.9%.
Now moving to Slide 6, to look at our overall revenue and margin growth and the breakout by business. Group revenue grew to €3.6 billion. This breaks down into Taste & Nutrition, which grew to €2.9 billion, an increase of 3.8%; and Consumer Foods, which grew at 0.6% to nearly €700 million.
Now turning to Slide 7, and looking at the Global Taste & Nutrition business. This business delivered a very solid performance in the first half and some notable highlights include: good growth in Meat, Snacks and Beverage End Use Markets; strong performance from our nutrition and wellbeing portfolio; our developing markets achieved growth of 9.1%; and foodservice delivered growth of 5.3%; and margin progression for the business was 20 basis points.
So now moving to Slide 8 and looking through the lens of our regions. And in the Americas region, volumes grew by 2.7% to more than €1.5 billion. North America achieved good growth in our Meat, Snacks and Dairy End Use Markets against the broader market where volume growth was impacted by increased pricing at the consumer level. In Latin America, the business achieved good growth in Mexico, with solid performance in Brazil and Central America.
In Europe, the business grew by 2.2% to just over €700 million, with the Beverage End Use Market delivering strong performance, including good performance in foodservice. And the Meat and Snacks End Use Market also delivered good growth.
In the APMEA region, we outperformed the market right across the region, delivering 9.6% volume growth. This region is now in excess of €600 million. And we saw a strong performance in the Meat, Beverage and Snack End Use Markets. And as I mentioned earlier, we continued our strategic investments in China, India and the Middle East.
Now moving on to the Consumer Foods business on Slide 9. The business delivered a solid performance, led by our brand's business. Revenue growth was 0.6%, and trading margins were flat after incurring Brexit-related costs. In the period, we've expanded our Food to Go ranges with a number of new launches in both Cheestrings and Fridge Raiders.
And overall, we continued to execute our strategy to realign around our core business, invest in the adjacencies by continuing to deliver on our realignment program, which is progressing very much in line with our plans.
So with that, I'd hand you over to Marguerite, who'll bring us through the financial highlights.
Thanks, Edmond, and good morning, everyone. Over the next 10 minutes or so, I will take you through the financial highlights and financial performance for the first half of 2019 in more detail. And in particular, I will update on revenue performance, trading margin performance and returns.
Overall, the period saw a continuation of our consistent delivery and a very solid financial performance for the period, in line with our expectations.
So now turning to the financial highlights on Slide 11. We had revenues of €3.6 billion, which represents volume growth of 3.3%, and overall, a strong performance with reported revenue up 10.7%. Trading profits was €383 million, representing reported growth of 12.6%, reflecting underlying growth and contribution from acquisitions and currency.
We delivered good, solid margin progression with trading margin up 20 basis points. And we grew adjusted earnings per share in constant currency by 8.4% and reported currency growth of 13.8%.
Basic earnings per share was up 5.6%. And we generated €195 million of cash, which represents 67% cash conversion reflective of investments for growth and in line with our expectations.
So now turning to our revenue growth performance on Slide 12. Our reported revenue grew by 10.7%, as I mentioned, or almost €350 million in the period. This growth was driven by a number of key elements, including volume growth of 3.3%. Overall, pricing was neutral in the period, reflective of our raw material basket and customer partnership pricing models. Translation currency was a tailwind in the order of 2.7%.
And we had strong revenue contribution in the period of 4.7% or €150 million from acquisitions, most notably, Fleischmann’s, Southeastern Mills and AATCO, with Ariake USA being completed at the end of quarter 1. So all in all, a very solid performance from a topline perspective.
Moving now to Slide 13 for a moment to look at our revenue growth performance versus the market. And on the left-hand panel of the slide, our overall group revenue was €3.6 billion, with volume growth of 3.3% compared to market growth of 0.8%. A continued consistent outperformance of market growth by more than 2%.
Consumer Foods revenue was just under €700 million, with volume growth of 0.6%, representing a solid market performance in the context of a soft U.K. market. Good, solid performance from our Taste & Nutrition business, in particular, which delivered revenue of €2.9 billion, a volume growth of 3.8% versus the markets that grew volumetrically at just over 1% in the period.
And you will see a further breakdown of Taste & Nutrition by region on the right-hand side of the slide. We are outperforming across all of our regions, and particularly, in APMEA, where we continue to deliver very strong performance versus the overall market growth.
So now turning to Slide 14 and to our margin performance and group's trading margin bridge. We are pleased to report group trading margin expansion of 20 basis points in the period, with Taste & Nutrition margin progression of 20 basis points, while we maintained our margins in Consumer Foods.
So now, to look at this in a little more detail, there were a number of drivers in our margin progression. Firstly, operating leverage and portfolio mix contributed in the order of 30 basis points. Good operating leverage from economies of scale as we grew our volumes, and we continued to enhance our portfolio mix as we extended greater depth of technology into new products aligned to the evolving consumer preferences across the globe. Both operating leverage and portfolio mix continue to be key parts of our overall margin expansion outlook.
Within our KerryExcel program, we continued to deliver efficiencies, which generated supply chain logistics and functional cost savings, and this was more than offset by further investments in the localization of commercial leadership and the strengthening of our technology expertise in developing markets as well as investments in the continued rollout of Kerryconnect.
Currency was a net tailwind of 10 basis points. And we have had a positive margin accretion effect at group level of 10 basis points from the recent acquisitions.
And in the final column of the margin bridge, we've grouped 2 new items for presentation purposes that impacted our margin in the period. Firstly, we incurred Brexit risk management costs of €5 million or just over 15 basis points in the period, which included upgrading our systems, investing in training to deal with multi-tariff scenarios as well as costs associated with holding additional inventory.
The second item is the accounting effects of the transition to IFRS 16 leases, which had a positive impact on trading profit on a like-for-like basis of €1.4 million or just under 5 basis points on trading margin.
So in overall terms, a number of moving parts contributing to a good, solid group margin progression of 20 basis points for the period.
Turning now to Slide 15 to our free cash flow. We generated free cash flow of €195 million and a cash conversion of 67%. So to take a moment to look at the different components: firstly, trading profit was up €43 million to €383 million; depreciation increased to €94 million, reflecting increased capital expenditure and the impact of IFRS 16; increased investment in working capital of €77 million, reflecting the investments in stocks in advance of the initial March 31 Brexit deadline at which we started to unwind in the second quarter; and the increased working capital effect due to the integration of acquisitions and higher revenues with the scale of the business.
Finance and tax were both up, reflecting the increased size of the business and timing of payments and recent acquisitions. Capital expenditure of €135 million was in line with expectations, including, as Edmond mentioned, investments in India and China. And as we said back in February, we expect capital expenditures to be circa 4.5% to 5% of revenue in 2019.
So overall, we delivered €195 million of free cash flow, which represents a cash conversion of 67% in line with our full year guidance at the beginning of the year.
So moving now to our financial ratios and debt profile on Slide 16. Overall, our return on capital employed was 11.9%, which is reflective of acquisitions and investment for growth, as mentioned. Net debt of €1.9 billion, giving us a 1.9x net debt-to-EBITDA ratio, while we have the interest cover of 14.4 times, which is well within our banking covenants.
Our debt profile is in good shape with no significant debt repayments until 2023, with a weighted average maturity profile of our debt at 4.6 years.
So all in all, we continue to have a very strong balance sheet to continue with our strategic investment programs.
So finally, moving to Slide 17. I would like to cover also a number of other financial matters. Finance costs are €39 million and are up €5 million year-on-year. The key driver of the increase is the impact of financing of acquisitions and the impact of adoption of IFRS 16, partially offset by cash generation and reduced interest rates.
A pension's deficit of €64 million, reflecting increase in movements and movements in discount rates.
Turning to non-trading items. The charge of €34 million comprises 2 main items: firstly, acquisition integration, we've invested €14 million on the integration of acquisitions, which is progressing very well; and secondly, we incurred a net cost of €21 million on the Consumer Foods realignment program also progressing to plan.
Moving on, our Kerryconnect rollout is on track. And we'll be commencing deployments in North America in the coming months. Raw materials, input costs overall were relatively neutral in the first half of 2019.
Some increases in cereals, proteins and decreases in spices, citrus and vanilla. And we expect the second half of 2019 to be very similar, with Taste & Nutrition marginally higher. So as of today, overall, we are expecting a flat to small increase.
And finally, on currency. The current outlook, we estimate a translation currency tailwind in the region of 2% to 3% on the earnings per share for 2019.
I'll just wrap up the financial performance update briefly before I hand back to Edmond.
Overall, a period of good, consistent, solid performance as our business model continues to deliver in a rapidly changing environment. Consistent, solid revenue growth of 3.3%, well ahead of market growth to circa 1%. Good margin expansion of 20 basis points and solid cash conversion and growth in our adjusted earnings per share of 8.4% on a constant currency basis.
So back to Edmond now to update more broadly on future prospects and outlook for the remainder of 2019.
Thank you, Marguerite. So before I share our updated outlook for 2019, I'd like to take a few minutes to put some color around our growth strategies and how we deliver value in today's marketplace.
Firstly, how we partner end-to-end with our foodservice customers; second, how we deliver integrated solutions to meet the trend for the next-generation plant-based products; and third, our M&A strategy generates value as part of our overall growth strategy.
But to set the context, let's start by looking at today's marketplace and how the consumer revolution is driving customer transformation and reshaping the industry.
So turning to Slide 19. Like we've said before, everything starts with the consumer. And so I wanted to begin by revisiting a slide we shared with you back in February. And looking down the left-hand side of the page, today's consumer wants more from their food and beverages. In February, we looked at this first trend, Food for Life & Wellbeing.
And today, we look at Made for Me. This trend is about personalization, and this spans many dimensions. For example, consumers want products that provide a multi-sensorial experience. They want next-generation snacking to meet their individual dietary needs.
They want positive nutrition and cleaner labels. And they want more personalized meal kits and better delivery experiences. This is all driving change for our customers, specifically in foodservice, and we're serving as their end-to-end partner to meet this change.
So turning to Slide 20. Let's look at the value we deliver for customers in foodservice, which is one of our 4 strategic growth priorities. But before we get into the slide, let me just set some context. In 2018, the top-25 foodservice markets grew collectively at a rate in the region of 3% in volume terms, with consumer spending in the region of €3 trillion in those markets.
Emerging markets like China, the Philippines and Malaysia are booming, while more established markets like the U.S., Canada and Europe are showing slower levels of growth but still faster than the retail segments in each of those markets.
In this foodservice channel, Kerry is serving as the partner of choice for our foodservice customers. And we have a target to grow our foodservice business at 7% per annum in volume terms. We work at -- work with all customers across the channel, from hospitality to institution and contract caterers to coffee houses and convenience stores, from global QSRs to fast casual restaurants and independent operators. As their end-to-end partner, we perform a variety of roles to accelerate their ability to match consumers' demand today.
So now looking at the slide, and first, to look at it from left to right. We partner on many developments to create new applications right across everything -- menu categories. Secondly, we help customers expand into new food and beverage platforms.
For example, if they have more of a food-focused menu, we can help them to expand into beverages and vice versa. Thirdly, we provide full end-to-end service to help our customers introduce new consumer teams and seasonal offerings with greater speed and frequency.
And we provide nutrition-led innovation to help them deliver under our nutritional strategies right across their menus. This is how we deliver value for our foodservice customers.
And now staying with the Made for Me theme, let's look at the specific examples.
So here on Slide 21, we have an example of how we bring our capabilities together to help our foodservice customers deliver personalization and a better delivery experience. I'd like to draw your attention to the right-hand side of the slide, where we have the Cheese Cap Tea, a product we partnered with our customers in China to bring to market. Now cheese and tea might sound like an unusual combination, yet it is one of the fastest-growing trends in China. Consumers love it as it allows them to create new personalized beverages.
The value is in how we leverage the agility of our business model and our value-creation engine in 3 key [areas]. First, our food science expertise. This includes the science of taste and nutrition and the science of how they interact with each other and within the application.
This is critical to solving the technical challenges related to infusing taste, nutrition and functionality into the finished products. Second, our dedicated Beverage End Use application expertise.
And third, our extensive processing expertise to optimize the product in both our own manufacturing facilities and our customers' back-of-house operations.
This is all underpinned by our suite of capabilities, including insights, sensory and analytics, regulatory and supply chain, which all expand our customers' capabilities. We bring all of these capabilities together to deliver specific and fully integrated solutions that delivers taste and nutrition and functionality and cleaner labels. This is where we excel and how we partner with our foodservice customers end-to-end to bring new products to market much faster.
So now moving on to Slide 22. Here is another example of how we deliver value and help customers to meet today's trends related to the second-generation of plant-based offerings. When the plant-based trend first emerged, customers were focused on getting products onto the shelf quickly.
Today, the consumer revolution, it is accelerating demand for better and more variety of plant-based products. And this is driving customers to expand our product range by improving existing products and introducing new applications and formats.
This is where we add value. We have the capabilities to deliver on all of the product's attributes that you see here on the left-hand side of the slide. We deliver the flavor, the texture and the nutrition. We deliver the plant-based solution with a cleaner label and better functionality. This is what we mean by Taste & Nutrition.
On the right-hand side of the slide are just some examples of how through our business models and integrating Taste & Nutrition we're delivering greater value for customers, driving growth for our business and generating returns for our shareholders.
Now turning to Slide 23. And before I close out, I just want to take a few moments to talk about Kerry's M&A strategy and how we deliver value from M&A as part of our overall growth strategy.
Our business model allows us to deliver significant value when we combine both M&A with our Kerry existing capabilities. Value for our consumers through better food and beverage experiences, value for our customers through improved offerings in integrated solutions, value for employees through added capabilities and new opportunities and value for our shareholders to improve returns.
We have a clear set of strategic priorities listed here on the left that we use to deploy our capital in a very deliberate way to advance our technology capabilities, expand our local presence in developing markets and enhance our overall offerings aligned to our End Use Markets and foodservice strategies. This is how we deliver sustainable growth for our business and deliver strategic value for customers and shareholders.
The Ganeden example here, highlighted in the center of the page, is a good example. We acquired the Ganeden business less than 2 years ago. This was a great technology in the probiotic space. And we saw the possibility [to the kind of business] outside where the company already operated.
The Kerry and Ganeden teams got together and began designing and deploying the technology. And as a result of the success we're having with customers, we accelerated the integration of this new technology into our taste and functional systems into new applications for ice cream, snacking, breakfast cereals, confectionary categories as well as a variety of beverages. As with Ganeden, we're also looking to fully leverage our more recent acquisitions in similar ways to generate greater value.
And over the course of the next 12 to 18 months, I look forward to providing updates as we further expand the technologies, capabilities and geographic reach related to each of these acquisitions.
So now turning to the outlook on Slide 24. We will continue to adapt the rapidly changing marketplace, investing in and further developing our business model to consistently outperform our markets and respond with industry-leading innovation.
Our Taste & Nutrition business has a strong pipeline with good growth prospects, particularly, in developing markets where we continue to expand our footprints and roll out our consumer led in-country approach.
Within the Consumer Foods business, we continue to realign the core and invest in adjacencies, while navigating the uncertainty of the current U.K. environment.
The group will continue to invest in business development and pursue M&A opportunities aligned to our strategic growth priorities. So the -- for the full year 2019, the group expects to deliver adjusted EPS growth of between 7% to 9% on a constant currency basis.
So with that, I'll pass it back to the operator for questions.
Thank you. [Operator Instructions] All right. We have questions now. First question comes from the line of Jason Molins from Goodbody. Your line is open. Please go ahead.
Good morning. Edmond, you talked a bit about the foodservice strategy and workings [ph] overall for yourself. In terms of the performance, I guess, 5.3%, I think you mentioned in the first half, it looks to be a bit softer than previous periods.
And I guess the 7% that you see, is it a long-term and medium-term growth? Can you maybe talk about the drivers there? And what's really going on behind that performance in the first half?
And then on your [indiscernible] appreciate the color you've given around your M&A strategy. But in the macro uncertainty, can you just talk about the overall pipeline? And obviously, you gave the example of Ganeden and how that has worked within the Kerry model. Is that something that we should think about, the bolt-on type strategy rather than anything more transformational? Thanks.
Thanks, Jason. Maybe the first point on foodservice. And what we're actually seeing throughout the course of the year, there has been an acceleration or growth in foodservice from 5.1% in Q1 to 5.5% in Q2, rounding out the 5.3% for the first half. It's the challenge that we're particularly excited about. I call out maybe a geography like China, where we've had really strong double-digit growth in foodservice in the first half.
And if you recall, we did draw your attention to the fact in Q1 that we had some softness in the foodservice market in North America. And we saw that being primarily driven by the increase in pricing at a consumer level in North America.
With respect to M&A, the pipeline remains very strong. As you're well aware, we've had an extremely busy last 18 months on the M&A pipeline. So I think at this point in time, while we don't guide on M&A activity for the year, what would be fair to say and what we would expect is that the M&A pipeline and M&A activity would be quite reflective of the last 18 months for the next 18 months going forward.
Yeah, that’s helpful. Thanks.
Thank you. And your next question comes from the line of Arthur Reeves from Barclays. Your line is open. Please go ahead.
Good morning. Two questions for me, please. Taste & Nutrition volume's up 3.8%. I think that's what we were roughly expecting, but it's still at the bottom end of your mid-term target. What do you have to do to get this volume growth up near the top end of 6%?
And my second question is Consumer Foods. You seem to be drawing a clear distinction in Consumer Foods between branded and own label. And you also say you didn't recover your input costs. I'm not clear whether that was branded or own label. Would you ever completely consider pulling out of own label? Thank you.
Thanks, Arthur. So the first point in terms of growth. I think it's important to talk about our growth rates in the context of the market growth rates. So a performance of 3.8% in -- and -- in the period, it's something that we're pleased about. I think it's also important to keep in mind that we work right across the food and beverage landscape.
And while categories and End Use Markets like Meats and Snacks are performing extremely well, I would say -- I would also call out End Use Markets like sweet and cereal, fine bakery that are quite challenged and have been challenged for some time.
Having said that, we do see opportunities to accelerate growth in those categories as customers are looking to reinvent themselves in those categories. So I think, we will see an acceleration in the growth of our business. I think we're extremely well positioned from,
I would say -- I'd call out 3 areas: the whole area of clean label, we're extremely well positioned; the whole area of authentic taste, we're very well positioned; and the third area I'd call out is natural preservation.
And as those requirements, I think, continue to be a direction of travel for developing markets, that will enable us to deploy more technology into those regions as well. So I do see further acceleration of growth over time. There are some market dynamics that are always going to be impacting the business from time to time. But in the medium term, we feel very confident.
With respect to your question on Consumer Foods, I might just hand that over to Marguerite.
Thank you, Edmond. And so Arthur, just to take your question, while raw materials and foods were flat to slightly deflationary, pricing in foods was slightly lower, as you mentioned. There were some input costs that were inflationary in nature, where we did not fully recover the inflation through pricing. And I would say, as we look across that business, own label being more challenged and in the context of fast recovery.
Okay. I don't -- obviously, you don't give a split between own label and branded profitability. But would you ever consider pulling out of private label?
I think, Arthur, it's -- I mean we look at that business its -- in its entirety. There are things like shared assets and all things -- everything like that, and there's operating leverage across both businesses.
So it's -- I think if we take a step back from that business, what we've decided to do is manage those businesses in a slightly different way. Their merits to be managed in a different way. And that's we've done over the course of the last 12 months or so.
Okay. Thanks very much.
Thank you. And your next question comes from the line of Heidi Vesterinen from Exane BNP Paribas. Thank you. Please go ahead.
Good morning So a few, please. Could you first talk a bit more about North America, please? We've heard this result season from a number of peers that there was pronounced softness with multinational customers, in particular. And they were talking about -- a bit of a step-down, especially towards the end of Q2. Is that a sort of trend that you see as well?
And then on also North America as well, could you clarify what you saw in foodservice? I think in Q1, you had flagged that the year started soft, but there was a little bit of pickup. So what actually happened in Q2? And what is your outlook there?
And then the other question on T&N Europe. So you talked about softness in Consumer Foods at the retail level. How does that impact your U.K. business in T&N, please?
And then last question on plant-based. You talked about that as an exciting growth opportunity. In which regions are you seeing this? And what does this mean in terms of margins? Thank you.
Thanks, Heidi. I'm going to try and answer all these questions. The first thing maybe on North America. Rather maybe -- than getting into the details from a customer level, I think when we look at our business, we're seeing End Use Markets like Snack, Beverage and Meat performing very, very strong for us.
What I would say, though, is from a pricing perspective at a consumer level, consumers are seeing increased pricing and that is having an impact on demand. So some of the softness we saw on foodservice at the beginning of the year was certainly impacted by that. Now that has picked up throughout the course of the year and through the remaining part to the second half.
And I thought the third point I'd make is I'd -- the market is moving to areas that are very much in the -- our core competency areas. So what I mean by that is we look at areas like clean label, then we look at areas like authentic taste and natural preservation. These are areas where we're extremely well positioned. And I think in many respects, the market is moving closer to us and closer to where we have really strong capability. So that's with respect to North America.
With respect to the U.K., in our T&N business, the performance of our business is quite strong. I call out the fact that -- what we've said before that any growth rate that's in the 2% zone is a good performance in Europe.
I'd also mention that our Europe figures includes Russia and Eastern Europe as well. So it's Europe -- Russia and Eastern Europe, all included together. But we're not seeing any significant impact on our Taste & Nutrition business right now driven by the EU [ph] concern.
Last question on plant-based. I would say, overall, the scale of our plant-based business is primarily being driven by North America and then by Europe. So that's really the 2 regions that we see plant-based really accelerating.
And from a margin perspective, I would -- how I would answer that question is that it very much depends on the deployment of the technology that we have into that particular sector.
So as we're deploying, I will say, technologies that relate to clean label, natural preservation or authentic taste, we don't see any margin difference between the deployment of those technologies into that sector as opposed to any another sector.
So if anything, we see a bigger opportunity to deploy those technologies into those types of applications because there's various case issues and there can be some issues around and challenges around the labeling of those products as well if our consumers are looking for maybe sharper, cleaner labels in the second-generation plant-based protein [ph]
Thank you. And we shall have questions on the phone. Next question comes from the line of Cathal Kenny from Davy Research. Your line is open. Go ahead.
Good morning, Marguerite, William and Edmond, a couple of questions from my side. Just first, a follow-up on the plant-based question within North America and Europe. Just from a channel perspective, where you see the greatest opportunity. And secondly, I mean do you have to deploy more capital organically to capitalize on this opportunity?
Next question relates to the adoption of food delivery growth you've seen really, really take off in the last couple of quarters, in particular, and as a global phenomenon. Just interested on how that impacts your business model.
And finally, Marguerite, on working capital, we saw a significant outflow in the first half. Just interested in your comments how we should think about that for H2 and in the context of Brexit.
So on plant-based, Cathal, I just got the second part of that question with respect to CapEx, OpEx [ph] I think that was your question. Cathal, can I just clarify that?
CapEx, correct. And then just from a channel perspective, where you see the most significant opportunities.
Okay. Sorry. So from a CapEx standpoint, we don't see any increased level of CapEx following this. I think we're very well invested, and we're -- you know when we go to each of the technologies that -- we feel that we're well positioned from that standpoint.
There might be some incremental investments around people, but not significant in the scheme of things. From a channel perspective, I would say that a lot of our activity to date has been more on the retail channel, retail CPG, but we do see an acceleration in recent times on the -- in the foodservice channel.
In terms of food delivery, I would say, yes, absolutely. It's an area that is a significant focus for us. I think it's a factor in our business that we've been focused on quite some time in China. And I think it's an opportunity where we feel we have the right suite of technologies to deploy into that channel, whether it's -- the [form] that I touched on, and the cheese with tea earlier, or whether it's quoting for various types of proteins to ensure that the product stays fresh on delivery.
So I think, overall, we're well positioned. We see food delivery, I would say, continuing to grow. And I think -- our business model, I think, is just -- I don't think we're in a situation where we need to readjust our business model. I think for us, it's an area that we have had a lot of focus for quite some time in China, and we're taking those earnings and deploying them into the other regions.
And Cathal, I might just take the question on working capital. And so in the context of H2, I would suggest [figures] of H2 very similar to H1. And some of the dynamics that play in H2, it will be reflective of investments in Kerryconnect as we commence rollouts in North America.
And as you mentioned, in relation to Brexit, we will build some risk management stocks in advance of the Brexit October deadline, something that we'll continue to monitor likely lower than the builds in H1. So overall, H2 very similar to H1 from a working capital perspective.
Thank you. And we still have a question. Next question comes from the line of James Targett from Berenberg. Your line is open. Please go ahead.
Hello. Good morning, everyone. So firstly, just on your volume growth in Taste & Nutrition. I think at the start of the year, you were sort of expecting growth rates to accelerate in the second half of the year. I'm just wondering if that's still the dynamic you're seeing.
And then within your kind of customer base in Taste & Nutrition, I guess particularly in North America, are you seeing any big change in churn rates? Because as some of your peers are saying that they are seeing some kind of increased rate of volume erosion. So I just wondered what you're seeing in your churn rates.
And then just finally on Brexit, the deadline's looming. I just wonder kind of in terms of your planning, what scenario you're factoring in, both in terms of inventories or how you're operating. And also, I guess, what kind of scenario you factored in your guidance?
James, I'll leave the Brexit question to Marguerite. But maybe first on the volumes. Yes. So we are going to be seeing a slight increase in overall volume growth rates in the second half. Probably, a little bit more weighted towards the Q4, [but starting -- we do see an] acceleration. And probably for the full year, we'd be seeing a growth rate for T&N in zone of 4%.
With respect to your comments on North America. I would say, look, fragmentation continues to be a very significant factor in the North American market. And I might have said to you in the past that when we review our top-10 accounts and top-15 accounts today versus 4 or 5 years ago, there's new customers in that -- those top-10, 15 accounts that didn't even exist maybe 5, 10 years ago.
And I think -- while I wouldn't follow anything specific around our churn rate, I mean it is a factor of the market for the last several years that reference sizes when we look at our wins are a little bit lower and product life cycles are a little bit sharper [ph] that's just a factor of the market.
I think the other point from Kerry's perspective is that we work right across the food and beverage landscape, small, medium and outside customers right across all the channels and the subchannels. So like we have a very diverse spread of a customer base.
There's various dynamics happening within each of those segments of customers, and I think we're very well positioned to be able to shift resources, one way or the other, when we see something happening in the market or where we can foresee something happening in the market.
And the last point I'd make on it is that, for us, what's critical is our return on investment in terms of the amount of time and resources that we're putting into a specific project or a specific customer.
And we put up a new function within our overall finance function called a commercial effectiveness to ensure that we're constantly reviewing this and allocating our resources to the right areas that are going to give us the best return.
So just -- James, on Brexit. Obviously, we've been planning various scenarios on Brexit for some time now. And specifically, in the first half, you'll see the impact of some of the costs incurred in relation to structural changes today in the business in relation to risk management around Brexit.
And I guess as we think about the second half of the year, we'll see some continuation of Brexit costs, slightly lower than the first half. And we've already incurred structural investments around systems and -- et cetera. And so slightly lower than the first half.
We will build a dimension as some -- take a few stock levels also. And this is something that we'll continue to monitor. It's fair to say that we've planned for numerous scenarios and looking at the business to pass business protection, trade facilitation and tariff mitigation. Given the uncertainty, it's difficult to get into all of those scenarios on this call but it is fair to say that the impact of working capital and cost is -- are reflected in our guidance.
And clearly, if there was to be a hard Brexit, there would be an impact on the consumer pensions in the U.K., and that's just something that we'll continue to monitor and update later in the year on.
Great. Thanks so much.
Thank you. And our next question comes from the line of Faham Baig from Crédit Suisse. Your line is open. Please go ahead.
Good morning, team. Thanks for allowing some questions. I have that, if that's okay. Firstly, on emerging markets. Is it possible to zone in on China and how the market is developing from a food and beverage standpoint? We've heard a couple of your customers/peers call out a sequential softening of demand. How do you see it?
And in that context, you seem to be performing very well. Could I -- could we just understand whether it's significant market share gains? And in terms of penetration levels, where does Kerry stand versus the market?
Secondly, you -- I think you mentioned you expect a strong innovation -- you expect -- you have a strong innovation pipeline in the second half. Are you able to discuss what innovations you guys have planned? Whether it's driven by Kerry? Whether it's driven by the customers? And in which categories? That would be helpful.
And finally, a question on M&A. You mentioned, as part of the strategic priorities, you're always looking at new channels, new technologies, categories, et cetera. Where would you say currently, you would be the most underexposed and would like to increase your presence? Be it by channel, geography, technology. Thank you.
Thanks, Faham. I'll take those questions. So -- I mean, firstly, with respect to emerging markets and specifically in China -- I just actually just returned from a trip in China in the last few weeks. And I think -- I mean what we've seen in that market over the last several years is it is incredibly dynamic.
I think with respect to how our business is performing there, I would specifically call out foodservice. I mean we've had really strong double-digit growth in our foodservice in China, driven across primarily Meat and Beverage into the foodservice channel.
I think a dynamic there is that the foodservice channel is growing substantially faster than the retail channel. And there's certainly some shift there, especially when I look at the Beverage End Use Market. I would say the Beverage End Use Market at a retail level, I would say, is under significant pressure.
The Beverage End Use Market as a total level is positive, but it's very much driven by foodservice. And I think that's one of the reasons that you're seeing outperformance [ph] China.
I would also call out that we have a very, very strong team there and a very well-invested facility to take advantage of the growth and a very strong business model that we talked about many times that enables us to deploy technology into that market.
With respect to our pipeline, it's not only related to the point in China. I would call out areas like clean label, natural preservation and authentic taste as being 3 key areas for us where we continue to see excellent business development. And while in the past, that was probably more of a North America and European phenomenon, and that's continuing.
Again, going back to my most recent trip to China, we are certainly hearing customers across both the foodservice channel and the retail channel being much more interested in talking about those 3 areas of clean labels, natural preservation, authentic taste. And that there has been a significant acceleration in the level of interest around that in recent times.
With respect to M&A, I think -- look, M&A has always been part of our strategy. It's very much linked to our overall growth strategy, whether that relates to authentic taste, developing markets, nutrition or foodservice. So any M&A that you see Kerry participating in or any acquisitions that we bring on board will be very much aligned towards for [ph] strategic growth priorities.
And I wouldn't necessarily call out any specific gaps, but they -- those 4 areas, anything that accelerates our penetration, brings new technologies to us, albeit even it might be a small acquisition, it doesn't matter. Once we can get our hands on a good technology, we have the capability in-house. I'll go as far as to say we have a core competency in taking that technology and deploying it right across our business, whether that's geographic, whether it's into different channels or whether it's across End Use Markets or even into different functionalities.
Thank you. And there are no further questions at this time. Please continue.
Okay. Thank you very much. I think this brings us to the end of the call. We'd like to thank our participants very much for joining us this morning. If you have any further follow up, please refer to the Investor Relations team, and we'll be glad to respond accordingly. Thank you very much.