Kerry Regulatory News (KYGA)

News release

Thursday 6 August 2015

Interim Management Report

for the half year ended 30 June 2015

Kerry, the global ingredients & flavours and consumer foods group, reports a solid financial performance for the half year ended 30 June 2015 and increases guidance for full year 2015.

Commenting on the results Kerry Group Chief Executive Stan McCarthy said; "We delivered a strong financial performance in the first half of 2015 reporting continued business margin expansion and an 8.1% increase in adjusted earnings per share. Based on Group year-to-date performance, current exchange rates and business momentum, we are increasing our market guidance for the full year".

INTERIM MANAGEMENT REPORT

for the half year ended 30 June 2015

Kerry delivered a strong financial performance throughout its core businesses in the first half of 2015, notwithstanding challenging market conditions and volatility in many geographies. Consumer food and beverage markets worldwide continued to reflect increasing demand for 'clean-label', natural, tasteful offerings which address convenience, health & wellness and life-stage preferences. Increased volatility and currency fluctuations have contributed to inflationary trends in some countries and conversely to deflationary trends in some mature developed markets. Geopolitical issues persist in some developing market zones, impacting market development. Against this background and the significant growth in online activity, retail and foodservice channels continue to evolve and restructure rapidly.

In ingredients and flavours markets, Kerry maintained solid business development and continued to advance its Taste, Nutrition & General Wellness and Developing Market strategies. Speed of innovation and localisation of taste are key drivers of growth in the rapidly evolving global marketplace - providing solid innovation opportunities for Kerry's industry-leading Global and Regional Technology & Innovation Centres and Regional Development & Application Centre network.

While improved economic conditions in the Irish and UK markets have boosted spend in some consumer categories, food and beverage segments remain highly competitive due to increased retail fragmentation and channel diversification. However the restructured Kerry Foods' portfolio is performing well - benefiting from snacking and convenience trends.

Results

Group revenue increased by 4.7% to €3 billion on a reported basis. Business volumes grew by 2.7% in the period reflecting a strong overall performance in American markets, an improved performance in the EMEA region and continuing good growth in Asia despite a slowdown in some regional markets. Net pricing was 2.7% lower against a background of approximately 6% lower raw material costs. Currency tailwinds relative to the first half of 2014 contributed a positive 8.4% translation impact to revenue.

Ingredients & Flavours achieved 3% growth in business volumes relative to H1 2014 and pricing was 2.8% lower. Kerry Foods' business volumes grew by 1.9% and pricing reduced by 2.6%.

The consistent improvement in Group trading performance was maintained due to operational improvements arising from the 1 Kerry Business Transformation Programme, improved product mix and portfolio repositioning in Kerry Foods. Group trading profit increased by 9% to €300m. The Group trading profit margin increased by 40 basis points to 9.9%. This reflects a 40 basis points improvement in trading margin in Ingredients & Flavours to 12.1% and a 20 basis points improvements in Consumer Foods' margin to 8%.

Adjusted earnings per share increased by 8.1% to 124.5 cent (H1 2014: 115.2 cent). Basic earnings per share increased to 135.2 cent (H1 2014: 110.8 cent). The interim dividend of 15 cent per share represents an increase of 11.1% over the 2014 interim dividend.

Business Reviews

Ingredients & flavours

*volume growth

Kerry provides the largest, most innovative portfolio of taste & nutrition solutions and functional ingredients & actives for the global food, beverage and pharmaceutical industries.

In the rapidly changing global marketplace, Kerry's Taste & Nutrition technologies and systems, and Functional Ingredients & Actives platforms continued to achieve sustained business development and a solid innovation pipeline in developed and developing markets. Demand for nutritional, 'free-from', 'better-for-you' authentic taste and ingredients is increasingly driving product development across food and beverage categories for retail and foodservice channels. Reported revenue increased by 8.6% to €2.3 billion. Business volumes increased by 3% and pricing was 2.8% lower. Trading profit grew by 12.3% to €281m with the division's trading margin increased by 40 basis points to 12.1%.

Americas Region

Kerry delivered a solid performance in the Americas region in the period despite some industry sectorial issues in North America and inflationary pressures in Brazil. Sales revenue on a reported basis increased by 18.0% to €1,080m. Business volumes grew by 3.3% and pricing declined by 2%.

Excellent progress was achieved in the meat sector through Kerry Taste technologies - particularly in North American retail and foodservice markets. Trends in international dairy markets and the adverse impact of consumer trends in culinary applications limited development through dairy and culinary systems. Performance in North American culinary segments was assisted by Wynnstarr Flavors. Brazil based Junior Alimentos acquired in Q4 2014 performed in line with expectations.

In June, Kerry acquired KFI Savory, the U.S. based savoury flavour business of Kraft Food Ingredients. KFI Savory significantly strengthens Kerry's Taste technology portfolio in meat systems and culinary applications. Industry leader in grilled flavours, the acquired business includes authentic savoury flavours with natural and speciality grill flavours, savoury enhancers and dairy flavours.

Kerry's 'clean-label' technologies continue to be a key driver of growth in particular in the meat and bakery industries. While the RTE cereals sector has declined, Kerry continues to achieve satisfactory growth through increased demand for snack applications. The savoury snack sector also continues to provide good growth opportunities, particularly in Mexico and Central American markets. Seasonal launches in the ice cream sector offset a decline in sweet applications. Beverage systems and flavours again delivered solid growth through aseptic offerings in nutritional segments and through its branded offerings in the foodservice sector. Kerry's Big Train, Da Vinci Gourmet and Oregon Chai brands continue to benefit from growing consumption of out-of-home beverage products through c-stores and specialist outlets. Solid growth in Latin American markets was achieved through integration of the Big Train range in Kerry's branded offering in the region.

Insight Beverages, a leading U.S. based supplier of custom beverage solutions (including cocoa and speciality offerings, fruit-flavoured beverages, and functional beverages to foodservice and convenience store channels in North American markets) acquired by the Group in May, performed in line with expectations.

Nutritional ingredients and systems recorded new wins through medical nutrition applications. Pharma ingredients achieved strong growth through excipient and cell nutrition applications throughout Kerry's global markets.

The Group has reached agreement to acquire Baltimore Spice, a Costa Rican based spices, seasonings and condiments producer. With production facilities in Costa Rica, Guatemala and Panama, Baltimore Spice further strengthens Kerry's leadership positioning in the meat, culinary and snack sectors in Central America and the Caribbean.

EMEA Region

While economic conditions in EMEA developed markets have broadly stabilised, consumer spend in the food and beverage sector remains relatively flat. Regional developing markets continue to be adversely impacted by geopolitical issues and currency related pressures. However Kerry's realigned business structures and technology development initiatives through establishment of the Group's Global Technology & Innovation Centre in Ireland, supported by Kerry Development & Application Centres in Moscow, Dubai and Durban, have achieved solid market development opportunities to-date and generated an encouraging innovation pipeline. Business volumes grew by 0.7% and pricing reduced by 3.8%. Reported sales revenue declined by 0.2% to €789m.

Kerry achieved an improved performance in regional developing markets as the half year progressed. Development in West Africa was impacted by adverse currency movements but overall market conditions in Sub-Saharan Africa improved relative to the first half of 2014. MENAT market conditions stabilized providing encouraging market development opportunities. Notwithstanding the continuing economic impact of political issues in Russia, Kerry maintained good progress particularly through seasonings and coatings technologies in the meat sector.

Dairy systems recorded good growth in the EMEA foodservice sector and through branded 'Kerrymaid' offerings. Kerry's branded beverage products continued to expand market penetration in the region. Beverage systems & flavours maintained good growth in Western Europe and regional developing markets. The meat sector again proved challenging but Kerry achieved good progress through the fast growing snacking sector and through gluten-free coatings lines. In the savoury snacks sector demand for 'health' lines also provided good development opportunities. 'Clean label' requirements in the bakery sector assisted Kerry performance through its fermentation technologies and systems.

The ongoing investment programme at the Group's facilities in Ireland assisted continued growth in nutritional applications across all life-stage end-use-markets, particularly in the infant sector in Asia. In the primary dairy sector, the continuing increase in output in exporting countries coupled with softer demand in importing countries significantly reduced international market price returns.

In April, Kerry and IOI Loders Croklaan reached agreement to form a joint venture company to develop and market the nutrition lipid Betapol® business. The joint venture partnership will significantly extend the Betapol® portfolio for infant nutrition and broaden application to other key nutrition market segments globally.

Since period end, Kerry has acquired PST Pastacilik Gida - a Turkey based branded foodservice provider of sweet ingredient solutions to the fine bakery, confectionery, ice cream and foodservice sectors in Turkey and the Middle East. The acquisition establishes multi-technology manufacturing capability in the region, providing a wide portfolio of fillings, creams, sauces, toppings, chocolate products, ice cream bases and cake mixes marketed under PST's industry-leading Krater brand.

Asia-Pacific Region

Despite the reported lower level of economic growth in the Asia-Pacific region in the half year, Kerry maintained good overall market development through its Taste and Nutrition strategies. Reported sales revenues increased by 5.6% to €414m. Business volumes increased by 7.2% and pricing reduced by 2.4%.

Kerry continues to record good progress in delivering nutritional & wellness applications and customised products to meet the needs of global, regional and local brands across the region. Dairy systems and 'Dairy Complete' achieved significant new business in Indonesia, the Philippines, China and Vietnam. Culinary systems grew solidly through snack categories in South East Asia. Premium sauce systems maintained strong growth in Malaysia and China, particularly in the foodservice channel.

Establishment of a new sauce systems production facility at the Kerry Plentong facility in Malaysia will be completed later in the year. The major investment programme at the Group's Nantong, China production facility, acquired in 2014, continues to be progressed.

The growing penetration of e-commerce in the Chinese infant nutrition sector has contributed to destocking in traditional market channels, leading to lower sales in the period. However Kerry continues to advance market development through nutritional systems and ingredients tailored to infant and adult life stages throughout Asian markets. Beverage systems maintained strong growth in the foodservice sector in Asia and Australia. Kerry's branded beverages offerings including Da Vinci, Café D'Amore and Big Train continue to broaden market reach into new territories and channels including c-stores. Solid market development continues to be achieved in India through beverage flavours, emulsifiers, texturants and meat systems. Savoury and dairy applications in Australia and New Zealand were impacted by continuing industry competitive issues. The sale of the Pinnacle lifestyle bakery business in Australia was completed in May.

Consumer Foods

*volume growth

Kerry Foods is a leading manufacturer and marketer of added-value branded and customer branded chilled foods, principally to the UK and Irish consumer foods markets.

While economic conditions continue to improve in the Irish and UK consumer foods markets, trading remains highly competitive due to deflationary trends and retail competitiveness arising from increased market fragmentation and growth of etail. Following the sale of the division's pastry manufacturing assets in August 2014 and the management buy-out of the Direct-To-Store business in the UK completed at the end of February 2015, the repositioned Kerry Foods portfolio has achieved encouraging results to-date. Results in the period were impacted by the timing of the business disposals. Reported sales revenue was 6.4% lower at €749m. Business volumes increased by 1.9% and pricing reduced by 2.6%. While trading in the divisions continuing businesses improved satisfactorily, trading profit was reduced by 3.9% to €60m due to the business disposals. Divisional trading margin increased by 20 basis points to 8%.

UK Brands maintained strong brand positioning. However deep promotional activity continues with an increased focus on EDLP. In particular this has impacted Richmond sales in the sausage sector due to Kerry Foods' disciplined promotional approach. Wall's achieved an improved performance assisted by the 'Wall's Ready Baked' range. 'Mattessons Fridge Raiders' achieved 8% growth in the meat snacking sector relative to the first half of 2014. Cheestrings performed well despite deep cut promotional activity in the children's cheese snack category. 'LowLow Snack Packs' also maintained solid growth in the adult cheese snack sector.

Rollover Ltd was acquired in January, extending Kerry Foods' 'hot-to-go' offering and channel distribution in the UK market.

UK Customer Brands saw strong growth in meal solutions but a decline in the dairy sector. Kerry Foods outperformed market growth rates in chilled ready meals and achieved good volume growth in frozen meals in Q2. While the ready-to-cook category declined, Kerry Foods product offerings recorded good growth. The private label spreads sector lost market share to heavily promoted branded butter offerings.

Brands Ireland performed satisfactorily in the period. 'Denny Gold Medal' achieved strong growth year-on-year but 'Galtee' and 'Shaws' brand shares were lower. The recently launched 'Denny Fire & Smoke' cooked meats range has enjoyed a strong consumer response and encouraging sales growth momentum. Branded dairy spread volumes were lower but 'Charleville' gained strong brand growth in the cheese category. 'Cheestrings' achieved good growth in France, Germany and Poland.

Financial review

* Before brand related intangible asset amortisation and non-trading items (net of related tax)

Analysis of Results

On a reported basis Group revenue increased by 4.7% to €3.03 billion (H1 2014: €2.89 billion). Like-for-like (LFL) revenue grew 0.1% after allowing for the positive effect of reporting currency of 8.4% and the negative impact of business disposals net of acquisitions of 3.8%. Volumes grew by 2.7%, product pricing decreased by 2.7% and there was a positive transaction related currency impact of 0.1%.

In Ingredients & Flavours, reported revenue increased by 8.6% to €2.32 billion (H1 2014: €2.13 billion). LFL revenue grew 0.2% after allowing for the positive effect of reporting currency of 8.8% and the negative impact of business disposals net of acquisitions of 0.4%. Volumes grew by 3.0%, product pricing decreased by 2.8%.

In Consumer Foods, reported revenue decreased by 6.4% to €749.3m (H1 2014: €801.0m). LFL revenue decreased 0.5% after allowing for the positive effect of reporting currency of 6.7% and the negative impact of business disposals net of acquisitions of 12.6%. Volumes grew by 1.9%, product pricing decreased by 2.6% and there was a positive transaction related currency impact of 0.2%.

Trading Profit & Margin

Group trading profit increased by 9.0% to €300m. Group trading margin increased 40 basis points to 9.9% (H1 2014: 9.5%) in the period driven by improved product mix, operating leverage, business efficiency programmes and the positive impact from exiting non-core business activities.

Finance Costs

Finance costs for the period increased to €36.3m (H1 2014: €31.9m) primarily due to foreign exchange movements and higher interest costs relating to post retirement benefit obligations.

Taxation

The tax charge for the period (excluding non-trading items) was €35.2m (H1 2014: €33.6m) which represents an effective tax rate of 14.3% (H1 2014: 14.7%). The decrease in the effective tax rate is primarily due to variations in the geographical split of profits earned, significant Group investment in R&D and changes in local statutory tax rates.

Free Cash Flow

The Group achieved a free cash flow of €192.2m (H1 2014: €101.6m) in the first half of the year. The improvement in free cash flow is primarily due to a lower level of working capital investment.

Acquisitions and Disposals

During the period, the Group completed five acquisitions at a total cost of €155.8m. The Group also disposed of the Pinnacle lifestyle bakery business in Australia and the Consumer Foods Direct-to-Store business in the UK for a total consideration of €151.3m before disposal related costs.

A summary balance sheet as at 30 June 2015 is presented below:

Return on Investment

During the period the Group achieved a ROAE of 18.1% (H1 2014: 18.2%), ROACE of 14.1% (H1 2014: 14.3%) while CFROI was 10.9% (H1 2014: 10.7%).

Intangible Assets & Acquisitions

Intangible assets increased by €209.8m to €2,838.8m (H1 2014: €2,423.0m; Dec 2014: €2,629.0m), primarily due to acquisitions completed by the Group (€139.7m) and exchange rates used to translate intangible assets other than those denominated in euro.

Retirement Benefits

At the balance sheet date, the net deficit for all defined benefit schemes (after deferred tax) was €361m (H1 2014: €277m; Dec 2014: €393m). The decrease is due to an increase in the discount rates in the UK, Eurozone and the US, cash contributions and exchange rate movements.

Net Debt

At 30 June 2015 net debt stood at €1,277m, an increase of €82m relative to the December 2014 position. The increase is principally due to exchange rate movements.

At 30 June the key financial ratios were as follows;

* Calculated in accordance with lenders' facility agreements which take account of adjustments as outlined in Financial Definitions.

During the period, the Group agreed a new 5 year €1.1bn revolving credit facility replacing the existing facility which was due to mature in April 2016. The facility provides a line of committed debt, thereby significantly extending the maturity profile of Group debt.

The average maturity profile of net debt was 6.1 years at the end of the period (Dec 2014: 5.2 years). At the period end 42% of gross debt was carried at fixed rates and the weighted average period for which rates were fixed was 6.1 years.

The Group's balance sheet is in a healthy position. With a net debt to EBITDA* ratio of 1.6 times, the organisation has sufficient headroom to support its future growth plans.

Related Party Transactions

There were no changes in related party transactions from the 2014 Annual Report that could have a material effect on the financial position or performance of the Group in the first half of the year.

Principal Risks & Uncertainties

Details of the principal risks and uncertainties facing the Group can be found in the 2014 Annual Report on pages 46 to 48. These risks include but are not limited to; the identification and integration of acquisition targets, a slowdown in the rate of innovation, quality & food safety risks, failure to attract/retain key talent, systems implementation risks, unauthorised use of Group intellectual property, catastrophic loss such as the loss of a critical manufacturing facility and ongoing operational and compliance risks. However, risks with increased potential impact in the second half of the year include volatile currencies, fluctuating raw materials and cybercrime risk. The Group actively manages these and all other risks through its control and risk management processes.

DIVIDEND 

The Board has declared an interim dividend of 15 cent per share (an increase of 11.1% on the 2014 interim dividend of 13.5 cent) payable on 13 November 2015 to shareholders registered on the record date 16 October 2015.

future prospects

Kerry has successfully embraced the changing marketplace and is well placed to respond to consumer trends and customer requirements in all geographies through exploiting the Group's Technology & Innovation network and unrivalled speed-to-market. Our significant business structure and capability investment in recent years positions Kerry well for future growth through organic development of the Group's Taste & Nutrition platforms and developing market strategies - together with complimentary acquisition investments.

Based on Group year-to-date performance, current exchange rates and business momentum, we are increasing our full year guidance. The Group now expects to achieve 6% to 9% growth in adjusted earnings per share to a range of 296 to 304 cent per share in 2015.

responsibility statement

The Directors are responsible for preparing the Half Yearly Financial Report in accordance with the Transparency (Directive 2004/109/EC) Regulations 2007 of Ireland (S.I. No. 277 of 2007) ("the Regulations"), the Transparency Rules of the Central Bank of Ireland and with IAS 34 "Interim Financial Reporting" as adopted by the European Union.

The Directors confirm that to the best of their knowledge:

· the Group Condensed Consolidated Interim Financial Statements for the half year ended 30 June 2015 have been prepared in accordance with the international accounting standard applicable to interim financial reporting adopted pursuant to the procedure provided for under Article 6 of the Regulation (EC) No. 1606/2002 of the European Parliament and of the Council of 19 July 2002;

· the Interim Management Report includes a fair review of the important events that have occurred during the first six months of the financial year, and their impact on the Group Condensed Consolidated Interim Financial Statements for the half year ended 30 June 2015, and a description of the principal risks and uncertainties for the remaining six months;

· the Interim Management Report includes a fair review of the related party transactions that have occurred during the first six months of the current financial year and that have materially affected the financial position or the performance of the Group during that period, and any changes in the related parties' transactions described in the last Annual Report that could have a material effect on the financial position or performance of the Group in the first six months of the current financial year.

On behalf of the board

5 August 2015

DISCLAIMER: FORWARD LOOKING STATEMENTS

This Announcement contains forward looking statements which reflect management expectations based on currently available data. However actual results may differ materially from those expressed or implied by these forward looking statements. These forward looking statements speak only as of the date they were made and the Company undertakes no obligation to publicly update any forward looking statement, whether as a result of new information, future events or otherwise.

results for THE half YEAR ENDED 30 june 2015

Kerry Group plc

Notes to the Condensed Consolidated Interim Financial Statements

for the half year ended 30 June 2015

1. Accounting policies

These condensed consolidated interim financial statements for the half year ended 30 June 2015 have been prepared in accordance with the requirements of IAS 34 'Interim Financial Reporting' and using accounting policies consistent with International Financial Reporting Standards as adopted by the European Union. The accounting policies applied by the Group in these condensed consolidated interim financial statements are the same as those detailed in the 2014 Annual Report. Some comparative information has been re-presented to align with the current half year presentation.

The following standards and interpretations are effective for the Group from 1 January 2015 but do not have a material effect on the results or financial position of the Group:

2. Analysis by business segment

The Group has two operating segments: Ingredients & Flavours and Consumer Foods. The Ingredients & Flavours operating segment manufactures and distributes application specific ingredients and flavours spanning a number of technology platforms, while the Consumer Foods segment manufactures and supplies added value brands and customer branded foods primarily to the Irish and UK markets. Corporate activities, such as the cost of corporate stewardship and the cost of the kerryconnect programme, are reported along with the elimination of inter-group activities under the heading 'Group Eliminations and Unallocated'.

Information about geographical areas

The accounting policies of the reportable segments are the same as those detailed in the statement of accounting policies in the 2014 Annual Report.

3. Non-trading items

Profit/(loss) on disposal of businesses and assets

During the period, the Group disposed of the Pinnacle lifestyle bakery business in Australia and a non-core business in the Consumer Foods division in the UK. The Consumer Foods business was classified as held for sale in 2014. Additionally, the Group disposed of property, plant and equipment and assets classified as held for sale primarily in the US, UK and Ireland. Given the timing of the business disposals the profit on disposal disclosed above is provisional and subject to change.

In 2014, non-trading items related primarily to the disposal of a non-core business in the Consumer Foods division in the UK, a subsidiary in Argentina, and the sale of property, plant and equipment and assets classified as held for sale in the US, UK and Ireland (30 June 2014: a loss of €0.4m; 31 December 2014: a profit of €0.1m). In addition the cumulative exchange difference on translation recycled on disposal of a subsidiary for the year ended 31 December 2014 was a loss of €0.4m and for the half year ended 30 June 2014 was €nil.

A net tax credit of €0.7m (30 June 2014: a tax charge of €0.2m; 31 December 2014: a tax credit of €3.9m) arose due to tax deductions available on the losses.

4. Finance income and costs

The interest rate derivative cost represents adjustments for hedge ineffectiveness for credit risk attributable to the fair value of interest rate swap derivative financial instruments. The current period movement is primarily attributable to movement in foreign exchange rates on cross currency interest rate swaps (see note 8).

5. Earnings per A ordinary share