Kerry Reports “Solid Performance” for First Half of 2014
07 Aug 2014 --- Kerry, the global ingredients & flavours and consumer foods group, reports a solid financial performance for the half year ended 30 June 2014, and the group said it is on track for its 2014 earnings target.
Commenting on the results Kerry Group Chief Executive Stan McCarthy said; “We are pleased to report a solid Group-wide performance in H1 2014 with good underlying sales growth and margin improvement. Our Kerry Global Technology & Innovation Centres continue to drive industry-leading innovation. We remain confident of delivering 6% to 10% growth in adjusted earnings per share in 2014 as previously guided.”
Kerry Group achieved a solid financial and operational performance in the first half of 2014 despite significant headwinds including adverse currency movements particularly in developing markets. In addition, developed markets remained relatively subdued with consumer spending impacted by macro-economic conditions. Nevertheless, Kerry maintained a good business performance outperforming category and market growth rates − winning a strong pipeline of new product development projects and briefs from major global and regional food and beverage accounts.
Recent major investments in Kerry Global Technology & Innovation Centres continue to drive industry-leading innovations and is a key differentiator in the marketplace. The Group also continues to successfully deploy Kerry’s taste and nutrition platforms throughout regional developing markets. Despite relatively weaker economic conditions in some regional developing markets and political instability in some zones, Kerry continues to record solid growth − in particular through nutritional applications in Asia.
Conditions in the Group’s primary consumer foods markets in the UK and Ireland remain highly competitive due to increased market fragmentation arising from consumer trends favouring convenience formats, discounter channels and e-tailing. Whilst consumers continue to pursue value offerings, Kerry Foods’ priority brands performed well in the UK market and maintained brand positioning in the Irish market.
RESULTS
Group revenue at €2.9 billion reflects underlying sales growth (USG) of 3.2%. Revenues on a reported basis were 1.9% lower reflecting the adverse translation impact of currency movements relative to H1 2013. Continuing business volumes grew by 2.7% and pricing increased by 0.6% in a relatively benign input cost inflationary environment. Volume growth and trading performance in ingredients & flavours markets improved in Q2 relative to Q1. Continuing business volumes increased by 4.2% and net pricing increased by 0.6%.
Kerry Foods continues to reconfigure its business model for sustained profitable growth in line with Group metrics. Divisional continuing volumes reduced by 1.2% and net pricing increased slightly by 0.2%.
Group trading profit increased by 3% on a reported basis to €275m reflecting 7.1% like-for-like (LFL) growth. Business efficiency improvements through the Group’s 1 Kerry Business Transformation Programme and improved product mix contributed a 50 basis points improvement in the Group trading profit margin to 9.5%. This reflects a 60 basis points improvement in trading margin in ingredients & flavours to 11.7% and 10 basis points improvement in Kerry Foods’ margin to 7.8%.
Adjusted earnings after tax increased by 5.9% to €203m. Adjusted earnings per share increased by 5.8% to 115.2 cent (H1 2013: 108.9 cent). Basic earnings per share increased from 66.8 cent to 110.8 cent. The interim dividend of 13.5 cent represents an increase of
12.5% over the 2013 interim dividend.
Kerry provides the largest, most innovative portfolio of taste & nutrition systems and functional ingredients & actives for the global food, beverage and pharmaceutical industries.
In a comparatively weak overall marketplace, Kerry’s taste & nutrition platforms outperformed market growth rates in all regions. Functional ingredients & actives recorded strong growth in particular in nutrition sectors. Growth continued to accelerate in developing markets despite economic impacts of significant negative currency movements. Sales revenue reported at €2.1 billion reflects underlying sales growth of 4.7%.
Continuing business volumes increased by 4.2% and pricing increased by 0.6%. Trading profits grew by 4.9% to €251m and the division’s trading margin ncreased by 60 basis points to 11.7%.
Americas Region
Demand for clean-label solutions, low-calorie, low-sodium, nutritional/health offerings and snacking options continued to drive development across American markets. Kerry technologies continued to win significant new briefs in all industry segments. Revenue reported at €915m reflects underlying sales growth of 4.7%. Continuing business volumes grew by 4.3% and pricing increased by 0.6%.
Beverage systems & flavours maintained a strong performance benefiting from health and convenience trends. Beverage flavours recorded solid growth in all segments. Soft drinks provided good development opportunities particularly for low and mid-calorie variants. Growth in the nutritional sector benefited from Kerry’s aseptic technologies.
Solid growth was recorded through foodservice chains. The Big Train branded beverage portfolio saw good growth in all geographic markets in particular Latin America.
Savoury, Dairy & Culinary systems & flavours had a mixed performance due to industry sectoral market conditions. Good growth was achieved through clean-label solutions in North America. Latin American markets, in particular in Central America and the Andean region, provided encouraging growth opportunities for culinary technologies leveraging Kerry’s insights and capabilities. In North America performance in the culinary sector was assisted by Wynnstarr Flavors acquired prior to year-end 2013.
Cereal & Sweet technologies performed well despite industry challenges. Excellent progress was reported in the bakery sector through Kerry’s clean-label technologies. Satisfactory growth was achieved in the cereals sector particularly in snacking and nutritional segments.
Pharma ingredients continued to achieve solid market development with double digit growth through cell nutrition in biotechnology and pharmaceutical applications. EMEA Region. Further progress was achieved in realignment of business structures and customer service capabilities in EMEA markets in line with 1 Kerry business models. Consumer spend in regional developed markets remains constrained, impacting industry development. While Kerry continued to successfully expand its footprint in EMEA developing markets, trading proved more challenging due to currency related inflationary pressures and political unrest in some zones.
Reported revenues at €791m reflect underlying sales growth of 1.3%. Continuing business volumes grew by 0.9% and pricing increased by 0.4%. Construction of the Kerry Global Technology & Innovation Centre in Ireland to serve EMEA customers is well advanced and on schedule to be operational in early 2015. In May, the Group opened a new Regional Development & Application Centre in Durban, South Africa to serve Kerry’s expanding global, regional and local customer base in Sub Saharan Africa.
Dairy & Culinary systems & flavours performed well relative to H1 2013 particularly through foodservice and snack applications. Development in the European meat industry again proved challenging but Savoury systems recorded good growth through coatings and seasonings in Russia.
Sweet systems performed satisfactorily overall but growth in South African markets was back due to relatively weaker market conditions and intense competition. Cereal technologies achieved sustained growth in the snack and nutrition sectors.
Beverage systems & flavours maintained a solid development momentum with leading beverage and foodservice accounts. Kerry’s branded Da Vinci and Big Train ranges continued to grow throughout European foodservice channels.
Nutritional ingredients & actives and delivery systems recorded excellent growth particularly in developing markets. Kerry hydrolysed proteins grew through wider nutritional applications. Primary Dairy market price returns weakened considerably in Q2 due to significant growth in output and export volumes in key exporting countries.
Asia-Pacific Region
Despite weaker market conditions in Asia-Pacific developed markets Kerry maintained solid growth and strong momentum in the region – benefiting from the increased Group resources deployed to market development. Reported revenues of €392m reflect underlying sales growth of 12.2%. Continuing business volumes increased by 11.5% and net pricing increased by 1%.
The new Kerry Global Technology & Innovation Centre and regional headquarters for Asian markets in Singapore will be completed in September and will be supported by Kerry Regional Development & Application Centres in China, India and Thailand.
Beverage systems grew solidly through coffee and tea applications and enhanced nutritional products. Lipid technologies performed well in Asian nutritional market segments. In the foodservice sector Kerry’s branded beverage offering including Da Vinci, Caffé D’Amore and Big Train further extended listings throughout the region. Development in Australia and New Zealand was adversely impacted by currency movements and intense competition.
Savoury & Dairy technologies performed well in regional developing markets but performance in Japan and ANZ was weaker due to market specific issues. Foodservice growth in developing markets continued to provide a strong innovation pipeline through culinary systems. A significant upgrading and expansion investment programme commenced at the recently acquired Nantong, China processing facility.
Sweet technologies maintained satisfactory growth through Kerry Pinnacle in the Australian lifestyle bakery sector and through market development in Asia.
Functional Ingredients & Actives continue to achieve solid growth in Asian nutritional, beverage and pharmaceutical markets. Significant development was achieved through premium infant nutrition applications in regional developing markets, particularly in China.
CONSUMER FOODS
Kerry Foods is a leading manufacturer and marketer of added-value branded and customer branded chilled foods primarily to the UK and Irish consumer foods markets.
Increased fragmentation of food retailing coupled with prioritised spend and drive for value by consumers in the Irish and UK markets continued to impact performance in Kerry Food’s chilled foods categories. However, the division has continued to improve efficiencies through advanced lean programmes. Kerry Foods’ focus brands continue to perform well, particularly in the UK market.
Divisional revenue in the period reported at €801m reflects 0.9% lower underlying sales. Continuing business volumes (primarily due to reduced engagement in promotional activity)declined by 1.2% and net pricing increased by 0.2%. While trading profit decreased by 2.4% to €62m, the division’s trading margin improved by 10 basis points to 7.8%.
UK Brands continue to perform well. In the sausage sector Richmond again improved its brand leadership − growing by 4% in the period. With reduced more strategic promotional spend Mattesson’s Fridge Raiders improved the quality of its business in the meat snacking sector. Cheestrings recorded a significant uplift in brand share in the children’s cheese snack category.
Kerry Foods’ UK Customer Brands’ business was adversely impacted by category performance at major multiple retail accounts. In chilled ready meals, reduced retailer promotional activity led to a 4% decline in sales in Kerry Foods’ meal categories. Sales in the frozen meals category improved relative to weak 2013 comparatives. Customer branded dairy spreads achieved good growth due to reduced promotional activity by major sectoral brands.
Brands Ireland continues to face intense competition from heavily promoted discounter and private label offerings. Performance in Kerry Foods’ branded sausage and cooked meats segments was impacted as a result but the re-launch of Denny Gold Medal Sausage and Denny Deli Style cooked meats stabilised brand positions in Q2. Dairygold maintained market share in the dairy spreads sector and Cheestrings continues to advance brand development in Continental European markets.
Since the period-end, Kerry Foods introduced a novel children’s snack offering Yollies yoghurt lolly range. Yollies has already achieved leading retailer listings in Ireland with a planned launch in the UK market later in the year.
As stated at year-end 2013, Kerry Foods is focused on strengthening the quality of its portfolio and repositioning certain businesses. Restructuring of the direct-to-store services to the independent and convenience retail sectors in the UK and Ireland is ongoing.
FINANCIAL REVIEW
Analysis of Results
On a like-for-like basis revenue grew by 1.6% in the first half of the year attributable to continuing volume growth of 2.7%, pricing of 0.6% and rationalisation volumes of (1.6%).
Continuing volume growth in ingredients & flavours was reported at 4.2% with Kerry Foods showing a decrease of 1.2% in the period.
Group trading profit increased by 3.0% to €275m reflecting 7.1% LFL growth (excluding impact of translation currency (4.3%) and acquisitions net of disposals 0.2%). Group trading margin increased 50 basis points to 9.5% (H1 2013 : 9.0%) in the period driven by improved product mix, operating leverage, business efficiency programmes and the positive impact from exiting non-core business activities.
The deployment of the Kerryconnect programme continued during the period. As previously communicated, implementation at a number of sites in the EMEA region has been deferred tothe second half of 2014. As a result the programme will extend into 2017.
FUTURE PROSPECTS
Kerry’s taste & nutritional systems and functional ingredients & actives are well positioned and resourced to outperform across global food, beverage and pharmaceutical markets. Our Global Technology & Innovation Centres continue to drive closer customer alliances. The Group has a strong product development pipeline in developing markets – in particular in nutritional segments. Kerry Foods is progressively building a quality business as the division continues to adapt its business portfolio and structures for today’s consumer markets.
The Group has a strong balance sheet and is in a strong position to capitalise on organic and acquisitive growth opportunities. We remain confident of delivering 6% to 10% growth in adjusted earnings per share to a range of 273 to 284 cent per share in 2014, as previously guided.
