Kerry Regulatory News (KYGA)

News release

Thursday 9 August 2012

Interim Management Report

for the half year ended 30 June 2012

Kerry, the global ingredients & flavours and consumer foods group, reports a solid business performance for the half year ended 30 June 2012 and increases guidance for full year.

Commenting on the results Kerry Group Chief Executive Stan McCarthy said; "Kerry achieved a strong financial and operating performance in the first half of 2012 which augurs well for the full year. We have a strong innovation pipeline and continue to make good progress in implementation of our 1 Kerry Business Transformation programme. The Group is confident of delivering our full year growth objectives and has revised adjusted earnings per share guidance upwards. We now expect to achieve eight to twelve per cent growth in adjusted earnings per share in 2012".

INTERIM MANAGEMENT REPORT

for the half year ended 30 June 2012

Kerry Group delivered a strong financial and operating performance in the first half of 2012 despite the difficult global economic situation. Consumer confidence remains weak across developed markets resulting in constrained retail and foodservice spend. However Kerry performed well against this background and continued to make good progress in aligning and optimising our business infrastructure and resources for today's market requirements and positioning for continued growth through our strong customer alliances. Group ingredients and flavours businesses continued to benefit from our market leading technologies, innovation capabilities and speed to market - assisted by our 1 Kerry strategies and Kerry Centres of Excellence. Good progress was also made in further deployment of resources to meet the Group's growth objectives and customer requirements in developing markets. Performance in the period under review also benefited from the impact of acquisitions completed in 2011.

While the UK and Irish consumer foods markets remain intensely competitive due to the prevailing economic situation and consumer's pursuit of value offerings, Kerry Foods innovation and efficiency programmes have continued to deliver greater product differentiation supporting development of the division's leading brands and growth in selected private label categories.

Results

Group sales revenue on a reported basis increased by 10% to €2.9 billion, reflecting like-for-like (LFL) growth of 2.5% when account is taken of acquisitions net of disposals and currency translation. Continuing business volumes increased by 1.8% and pricing / mix increased by 1.1%. Cost recovery programmes proved successful offsetting input cost increases where necessary.

As outlined in the Preliminary Statement of Results for 2011, business intersegment trading was realigned during 2011 to reflect changes in management responsibility for some European manufacturing facilities. This does not impact Group revenue, trading profit or trading margin. The H1 2011 comparatives have been re-presented on a similar basis.

Trading performance progressively improved in Q2 2012. Ingredients & flavours business volumes increased by 2.4% relative to the first half of 2011. Allowing for a 1.5% rationalisation volume loss due to restructuring of production across consumer foods' sites, continuing business volumes in the division were 0.7% ahead of the same period last year.

Group trading profit increased by 12.6% to €241m. Notwithstanding the increased level of expenditure relating to the Group's ongoing 1 Kerry Business Transformation and global 'Kerryconnect' IT project, the Group trading profit margin increased by 20 basis points to 8.3%.

As previously signalled, arising from the 1 Kerry Business Transformation programme the Group has undertaken a strategic review of Kerry's manufacturing footprint to align and optimise manufacturing to our global technology strategies. The two year programme, including the integration of recent acquisitions, streamlining of existing manufacturing facilities and the disposal of non-core activities, will incur an estimated total charge of approximately €200m - with a cash cost of just over €100m before any disposals.

Ingredients & flavours achieved 30 basis points margin improvement to 10.3%. Consumer foods margin was held at 7.3% despite the aforementioned competitive market situation and level of promotional activity.

Adjusted profit before tax and non-trading items increased by 13.7% to €209m. The income statement charge arising from integration of acquisitions, restructuring / reorganisation costs and loss on disposal of non-current assets/businesses amounted to €59.2m [net of tax] resulting in a net cash inflow of €1.7m after tax. Adjusted profit after tax before brand related intangible asset amortisation and non-trading items increased by 14.3% to €174m. Adjusted earnings per share increased by 14.3% to 99.2 cent. The interim dividend of 10.8 cent per share represents an increase of 10.2% over the 2011 interim dividend.

Business Reviews

Ingredients & flavours

Kerry Ingredients & Flavours develops, manufactures and delivers technology-based ingredients and taste solutions and pharma, nutritional and functional ingredients for the food, beverage and pharmaceutical markets.

Ingredients & Flavours sales revenue in the half year reflects solid growth of 14% as reported and 3.7% LFL growth. Business volumes increased by 2.4% and pricing / mix increased by 1.3%. Kerry's innovation pipeline remained strong driven by its integrated solutions approach and technology layering capability across food, beverage and pharma end-use-markets. Performance during the period also benefited from the impact of acquisitions completed in 2011 including Cargill's flavours business, SuCrest, FlavourCraft, EBI Cremica, IJC Fillings, General Cereals S.A. and the business and assets of Lactose India. Trading profit grew by 10.9% LFL to €213m with the division's trading margin improved by 30 basis points to 10.3%.

Americas Region

Revenue in the Americas region increased by 15% on a reported basis to €876m, reflecting 3% LFL growth. Continuing business volumes grew by 1.5% and pricing / mix increased by 1.5%. Whilst the North American marketplace proved challenging, Kerry outperformed market trends and business performance improved encouragingly during the second quarter - benefiting from the strength and breadth of our technology portfolio and applications expertise spearheaded through the Kerry Centre in Beloit [WI]. Progress in Latin American markets was assisted by strong innovation driven from the Kerry Centre in Campinas, Brazil and the recently commissioned new Kerry Centre in San Juan del Rio, Mexico.

Overall business performance in the region was also boosted by the successful integration of 2011 acquisitions, in particular Cargill's flavours business, and also by business efficiency improvements accruing from the ongoing 1 Kerry Business Transformation programme.

Savoury, Dairy & Culinary systems had a mixed performance due to marketplace sectoral issues. Dairy systems continued to perform well in the yoghurt and frozen desserts sectors. Meat systems benefited from successful product launches incorporating Kerry's all-natural shelf-life extension technology. Coatings maintained good growth in the added value poultry segment. Snack systems continued to perform well in Latin American markets.

Cereal & Sweet systems and flavours recorded good progress in all end-use-markets. Despite the relative weakness of the ice cream sector, Kerry achieved good growth through application of its inclusion technologies in new product launches. Demand for all-natural, clean label solutions provided a strong platform for growth in the confectionery and bakery sectors. Argentina based General Cereals S.A. achieved encouraging growth in the Latin American ready-to-eat cereals market.

Beverage systems and flavours benefited from health and wellness trends and 'life stage' product launches. Caffe D'Amore recorded solid growth in the branded foodservice segment. The ongoing investment programmes at Kerry's aseptic beverage facilities in Savannah [GA] and in Sainte Claire, Quebec has significantly increased Kerry's capability to provide complete shelf-stable beverage solutions including nutritional product ranges. The Group's expanded beverage flavours capability assisted delivery of solid growth through key global accounts.

Pharma ingredients continued to record excellent progress in developed and developing markets. The Lactose India business and assets acquired in 2011 were successfully integrated providing a strong platform for growth. Development in Asian markets also benefited from the new tablet coatings and applications facilities in India. A US$10m programme to establish a new Cell Science Facility also commenced at the Kerry Centre in Beloit [WI].

EMEA Region

Kerry Ingredients & Flavours achieved a satisfactory performance in EMEA markets despite the prevailing weak economic landscape and fragile consumer confidence. Reported revenue increased by 11.8% to €820m, reflecting 1.6% LFL growth. Continuing business volumes were 0.7% ahead of the same period in 2011 and pricing/mix increased by 0.9%.

Savoury, Dairy & Culinary systems & flavours achieved a mixed performance due to the challenging marketplace. Good volume growth was achieved through culinary systems due to continuing demand for solutions offering lower sodium, authenticity in taste and cleaner ingredient declarations - in particular in prepared meals, snack and soup/sauce end-use-markets. Progress in developing markets benefited significantly from the Durban, South Africa based FlavourCraft business acquired prior to year-end. Dairy systems volumes were negatively impacted due to challenging conditions in the soups, sauces and confectionery markets but dairy flavours recorded good growth in dairy and bakery applications. Development in the meat sector also proved difficult but Kerry's core business in the sector improved by the end of the half year - particularly in coatings applications and through 'clean label' solutions. Good growth was achieved in the Russian and Middle Eastern markets.

Cereal & Sweet technologies recorded a strong performance. Sweet systems saw good growth in the dairy sector and, despite the weather-related poor ice cream season in Europe, Kerry achieved good growth through development of novel inclusions for the premium ice cream market. Performance in sweet ingredients & flavours was significantly strengthened by the SuCrest business acquired in October 2011. The SuCrest business is now integrated into the Group's 1 Kerry customer service strategy broadening our technology platform for development of superior solutions. Strong growth was achieved in the cereals and bars markets through key accounts. Encouraging market development was also recorded in EMEA developing markets.

Beverage systems & flavours is progressing integration of the Cargill flavours acquisition. Performance in the beverage sector continued to benefit from the demand for cost effective beverage solutions and Kerry's fmtTM flavour technology. The UK and Irish private label beverage sectors provided good flavour development opportunities in the soft drinks sector. In developing markets Kerry saw continued growth through global accounts in the African brewing market.

Functional ingredients again grew strongly in EMEA markets due to 1 Kerry 'go-to-market' opportunities and integration of Kerry's portfolio of technologies into wider application areas and integrated solutions. The new emulsifier plant in Zwijndrecht, the Netherlands, was commissioned as planned enabling further cost optimisation within the Group's global emulsifiers' footprint. Enzymes recorded good growth in the bakery and beverage sectors in Africa and the Middle East.

Primary Dairy markets weakened considerably during the first half of 2012 due to significant growth in production and export volumes in key exporting countries.

Asia-Pacific Region

Kerry continued to perform well throughout Asia-Pacific markets. Sales revenue on a reported basis increased by 16.7% to €342m, reflecting 9.8% LFL growth. Continuing business volumes grew by 8.1% and pricing / mix increased by 1.7%.

Savoury, Dairy & Culinary systems performed well throughout the region. Lipid systems recorded a strong performance in the nutritional sector in particular in China and Indonesia - utilising the additional production capacity from the newly commissioned plant in Penang, Malaysia. Culinary systems won significant new approvals in both retail and QSR applications. Dairy systems benefited from market recovery in Japan and achieved continued growth in snack applications in South East Asian markets. Meat systems maintained good growth in Australia and New Zealand and won new QSR listings in Asian markets. Construction of a new coatings plant commenced in India.

In June, agreement was reached to acquire Angsana Food Industries - a customised food coatings and culinary systems business serving food manufacturing and foodservice markets in Asia. With modern manufacturing facilities located in Selangor, Malaysia and in Shanghai, China, the acquisition significantly extends Kerry's capability to service key industry growth sectors and customer requirements in Asia. The transaction in Malaysia was completed before the end of the period and is scheduled to be completed in China in August, subject to local regulatory approvals.

Sweet technology performance progressively improved during the period. Kerry Pinnacle won new listings in the Australian bakery sector. IJC Fillings acquired prior to year end was successfully integrated - extending Kerry's technology base in ice cream and bakery markets. Since the end of the period Brisbane, Australia based Food Spectrum Group Pty Ltd was acquired - strengthening Kerry's capability to meet added value dairy, nutritional and infant food / beverage product development and specialist aseptic processing / packaging requirements throughout Asia-Pacific markets.

Functional ingredients continued to record good growth. Proteins grew strongly in confectionery markets. Emulsifiers extended market development in the UHT beverage sector.

Consumer Foods

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

Notwithstanding the impact of the economic situation in Ireland and the UK on consumer trends and spend, Kerry Foods performed satisfactorily in the first half of 2012 achieving continued growth in the UK branded and private label sectors and a stabilised market positioning in Ireland. Divisional revenue increased by 1.8% on a reported basis to €881m, reflecting 0.1% LFL growth. Allowing for 1.5% rationalisation volume loss on restructuring of production across a number of Foods' sites, continuing business volumes increased by 0.7%. Pricing/mix increased by 0.7% reflecting good recovery of raw material inflation offset by continued promotional activity. Trading profit increased by 0.6% LFL to €64m, maintaining the divisional trading margin at 7.3%.

UK Brands achieved a solid performance. Richmond again improved its brand leadership positioning in the sausage category delivering growth of 8% year-on-year. In the cooked meats category the Richmond all-natural ham range was successfully launched - a market first in the UK industry with 100% natural ingredients. Wall's continued to make good progress in the savoury pastry market and Mattessons maintained momentum in the meat snacking sector. Cheestrings outperformed market growth rates in the children's cheese snack sector. Low Low continued to drive penetration of the UK cheese sector with Low Low Cheddar Spreads and a new range of Low Low 'Delightfully Creamy Slices'.

The UK Customer Brands business performed well during the period, in particular in the chilled ready meals and dairy spreads markets. Kerry Foods maintained its leadership positioning in the chilled ready meals category which grew by approximately 10% year-on-year. In the frozen segment, the division restructured its manufacturing base following the acquisition of Headland Foods in 2011. The Flint and Grimsby plants were closed with production transferring to the Carrickmacross facility.

Market conditions in the cooked meats sector remained highly competitive. Following a review of production requirements, a decision was taken to close the Durham plant and transfer production to the Spalding and Attleborough facilities in the UK and to the Shillelagh plant in Ireland.

The Brands Ireland business benefited from the successful launch of 100% Natural Ingredients Denny Deli Style ham. Denny Gold Medal Sausage was re-launched with a new improved recipe. The Galtee range of value offerings continued to record good progress. Dairygold and Charleville performed well in the spreads and cheese categories respectively. Cheestrings again recorded encouraging market development in Germany and the Ficello brand maintained good growth in France.

Financial review

* Before brand related intangible asset amortisation and non-trading items [net of tax]

Analysis of Results

Group revenue increased by 10.0% on a reported basis. Excluding the impact of reporting currency (+3.4%) and business acquisitions net of disposals (+4.1%) like-for-like (LFL) revenue growth was 2.5%. Underlying volume growth was 1.8% (before the elimination of non-core activities associated with the 1 Kerry transformation programme which reduced volumes by 0.5%) while pricing was positive 1.1%.

Group trading profits increased by 12.6% on a reported basis. The period benefited from a €10m reduction in maintenance expenditure due to a change in phasing of the spend from the first half to the second half of the year.

The Group trading margin increased by 20 basis points to 8.3% in the period. Excluding the impact of cost recovery pricing (-20 bps), acquisitions/disposals (-20 bps), currency movements (+10 bps) and the impact of increased expenditure on Kerryconnect (-20 bps) the Group's underlying trading margin increased by 70 basis points reflecting margin improvement due to operational leverage, business efficiency programmes and the deferral of maintenance expenditure until the second half of the year.

Finance Costs

Finance costs for the period decreased slightly to €27.9m (H1 2011: €28.2m) as cashflows and lower interest rates offset the impact of acquisitions made in the latter part of 2011.

Taxation

The tax charge before non-trading items for the period was €34m (H1 2011: €31m) which represents an effective tax rate of 17.1% (H1 2011: 17.5%). The decrease in the effective tax rate is primarily due to variations in the geographical split of profits earned and changes in local statutory tax rates.

Free Cash Flow

The Group achieved a free cash flow of €57m (H1 2011: €48m) which is stated after net capital expenditure of €78m (H1 2011: €60m) and working capital outflow of €106m (H1 2011: €85m).

* Earnings before finance costs, income taxes, depreciation & impairment, intangible asset amortisation and non-trading items.

Financial Position

At 30 June 2012 net debt stood at €1,335m, an increase of €47m relative to the December 2011 position. The average maturity profile of net debt was 4.4 years at the end of the period (H1 2011: 5.4 years, Dec 2011: 4.9 years).

At the period end 54% of debt was carried at fixed rates and the weighted average period for which rates were fixed was 2.7 years.

At 30 June the key financial ratios were as follows;

* Calculated in accordance with lenders' facility agreements

The Group's balance sheet is in a healthy position. With a net debt to EBITDA* ratio of 2.1 times, the organisation has sufficient headroom to support its future growth plans.

Retirement Benefits

At the balance sheet date, the net deficit for all defined benefit schemes (after deferred tax) was €231m (H1 2011: €130m, Dec 2011: €213m). The increase since December 2011 reflects higher estimated liabilities caused by a decrease in discount rates in the Eurozone partially offset by an increase in schemes' assets. Pension expense increased by €5m versus the same period last year.

Related Party Transactions

There were no changes in related party transactions from the 2011 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 2011 Annual Report on pages 57 and 58. These risks include but are not limited to; competition risk, a slow down in the rate of innovation, operational and technical compliance risks, the loss of a critical manufacturing facility and the execution of a value destroying acquisition. However, fluctuating raw material costs and volatile currencies, remain the most likely to affect the Group in the second half of the year. The Group actively manages these and all other risks through its control and risk management processes.

Post Balance Sheet Events

Since the period end the Group has entered into an agreement to purchase the business and assets of Shanghai Angsana Food Company Limited, a savoury ingredients company based in China and has also entered into an agreement to purchase the business and assets of Food Spectrum, a specialist provider of food ingredients and aseptic solutions based in Australia.

Going Concern

The Condensed Consolidated Interim Financial Statements have been prepared on the going concern basis. The Directors report that they have satisfied themselves that the Group is a going concern, having adequate resources to continue in operational existence for the foreseeable future. In forming this view, the Directors have reviewed the Group's budget for a period not less than 12 months, the medium term plans as set out in the rolling five year plan, and have taken into account the cash flow implications of the plans, including proposed capital expenditure, and compared these with the Group's committed borrowing facilities and projected gearing ratios.

DIVIDEND

The Board has declared an interim dividend of 10.8 cent per share (an increase of 10.2% on the 2011 interim dividend of 9.8 cent) payable on 16 November 2012 to shareholders registered on the record date 19 October 2012.

future prospects

Group businesses continue to align and optimise our business resources and capabilities for today's marketplace and future growth opportunities. We are successfully progressing our 1 Kerry business excellence programme across all operations and functional areas to leverage Kerry's global expertise whilst optimising manufacturing, scale and efficiency benefits.

We remain confident of achieving our strategic growth objectives for the full year and, taking current trading conditions into account, the Group has revised adjusted earnings per share guidance upwards. We now expect to deliver eight to twelve per cent growth in adjusted earnings per share in 2012.

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 2012 have been prepared in accordance with the international accounting standard applicable to interim financial reporting adopted pursuant to the procedure provided for under regulations 5, 6, 7 and 8 of the Regulations and Article 6 of the Regulation (EC) No. 1606/2002 of the European Parliament and of the Council of 19 July 2002, and give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group for the half year ended 30 June 2012;

·; the Interim Management Report includes a fair review of the development and performance of the business and the position of the Group;

·; 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 2012, 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

8 August 2012

results for THE half YEAR ENDED 30 june 2012

Other Reserves comprise the following:

\* The 30 June 2011 cash and cash equivalents balances have been re-presented to include bank overdrafts of €3.8m in the Condensed Consolidated Cash Flow Statement which continue to be included in borrowings and overdrafts in the Condensed Consolidated Balance Sheet.

Kerry Group plc

Notes to the Condensed Consolidated Interim Financial Statements

for the half year ended 30 June 2012

1. 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 to the Irish and UK markets.

Information about geographical areas

\* The 30 June 2011 analysis by business segment has been re-presented to reflect the change in management responsibility in 2011.

2. Non-trading items

Material restructuring costs

Included in restructuring costs detailed above are redundancies and contract compensation of €28.2m and impairment of assets of €24.4m. The costs to date reflect the impact of closing or streamlining 10 sites within the Group.

Loss on disposal of non-current assets

This loss primarily relates to the sale of property, plant and equipment in the Americas.

Loss on disposal of businesses

This loss primarily relates to the disposal of non-core businesses in the UK and Ireland.

2011 Non-trading items

Acquisition integration costs included transaction expenses incurred in completing the 2011 acquisitions as well as costs in integrating the acquisitions into the Group's operations and structure. The loss on disposal of non-current assets primarily related to the sale of property, plant and equipment in the US, UK and Brazil. The profit on acquisition of businesses was due to the group acquiring the controlling interest of previously held investments which was partially offset by losses on the sale of non-core businesses in the US and Ireland.

Cash impact

The non-trading items resulted in net cash inflow (after related tax) of €1.7m. The future expected cash outflow on non-trading items already provided for is estimated to be €32.2m.

3. Earnings per A ordinary share

In addition to the basic and diluted earnings per share, an adjusted earnings per share is also provided as it is considered more reflective of the Group's underlying trading performance. Adjusted earnings is profit after taxation before brand related intangible asset amortisation and non-trading items (net of related tax). These items are excluded in order to assist in the understanding of underlying earnings.

Shares issued during the period

During the period ended 30 June 2012, a total of 90,201 A ordinary shares, each with a nominal value of 12.50 cent, were issued at nominal value per share under the Long Term Incentive Plan.

The total number of shares in issue at 30 June 2012 was 175,625,013 (30 June 2011: 175,522,816; 31 December 2011: 175,534,812).

4. Dividends

Since the end of the period, the Board has declared an interim dividend of 10.80 cent per A ordinary share. The payment date for the interim dividend will be 16 November 2012 to shareholders registered on the record date 19 October 2012. These condensed consolidated interim financial statements do not reflect this dividend payable.

5. Deferred tax on items taken directly to reserves

6. Retirement benefits obligation

The Group's net defined benefit post-retirement schemes' deficit which has been recognised in the Condensed Consolidated Balance Sheet was as follows: