Kerry Regulatory News (KYGA)

News release

Thursday 7 August 2014

Interim Management Report

for the half year ended 30 June 2014

Kerry, the global ingredients & flavours and consumer foods group, reports a solid financial performance for the half year ended 30 June 2014.

Commenting on the results Kerry Group Chief Executive Stan McCarthy said; "We are pleased to report a solid Groupwide performance in H1 2014 with good underlying sales growth and margin improvement. Notwithstanding significant adverse currency movements, adjusted earnings per share increased by 5.8% to 115.2 cent. 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."

INTERIM MANAGEMENT REPORT

for the half year ended 30 June 2014

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.

Business Reviews

Ingredients & flavours

*Underlying Sales Growth

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 increased 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

*Underlying Sales Growth

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

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

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 to the second half of 2014. As a result the programme will extend into 2017.

Finance Costs

Finance costs for the period decreased to €31.9m (H1 2013 : €36.1m) primarily due to cash generated from operations.

Taxation

The tax charge for the period (excluding non-trading items) was €33.6m (H1 2013 : €33.9m) which represents an effective tax rate of 14.7% (H1 2013 : 15.6%). 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 €102m (H1 2013 : €216m) which is stated after net capital expenditure of €98m and average working capital outflow of €73m. The working capital outflow is primarily due to the ongoing deployment of the Kerryconnect programme.

A summary balance sheet as at 30 June 2014 is presented below:

Financial Position

At 30 June 2014 net debt stood at €1,110m, an increase of €27m relative to the December 2013 position. The average maturity profile of net debt was 5.8 years at the end of the period (Dec 2013 : 6.3 years). Due to changes in the maturity profile of net debt since 2013, current liabilities have increased and non-current liabilities decreased since the year end position.

At the period end 71% of debt was carried at fixed rates and the weighted average period for which rates were fixed was 4.9 years.

At 30 June the key financial ratios were as follows;

* Calculated in accordance with lenders' facility agreements which take account of adjustments as outlined on page 12.

The Group's balance sheet is in a healthy position. With a net debt to EBITDA* ratio of 1.5 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 €277m (H1 2013 : €247m, Dec 2013 : €207m). The increase is primarily due to a decrease in the discount rates in the Eurozone and the UK. This was partially offset by an increase in the schemes' assets primarily due to ongoing cash contributions.

Related Party Transactions

There were no changes in related party transactions from the 2013 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 2013 Annual Report on pages 58 to 60. These risks include but are not limited to; global economic conditions, competition risk, a slow down in the rate of innovation, systems implementation risks, 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, volatile currencies and geopolitical risks 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.

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 13.5 cent per share (an increase of 12.5% on the 2013 interim dividend of 12.0 cent) payable on 14 November 2014 to shareholders registered on the record date 17 October 2014.

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.

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 2014 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 2014, 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

6 August 2014

FINANCIAL DEFINITIONS

1. Revenue

Underlying sales growth

Underlying sales growth (USG) is the combination of continuing volume growth, price increases and transaction currency. USG represents the increase in revenue for the period excluding the impact of rationalisation volumes, translation currency and acquisitions net of disposals. A full reconciliation to reported revenue growth is detailed in the revenue reconciliation below.

Continuing volume growth

This represents the sales volume growth period-on-period from ongoing business, excluding volumes from acquisitions net of disposals and rationalisation volumes. A full reconciliation to reported revenue growth is detailed in the revenue reconciliation below.

Rationalisation volumes

This represents volumes exited by the Group due to significant restructuring of production across the Group's manufacturing sites. A full reconciliation to reported revenue growth is detailed in the revenue reconciliation below.

Revenue Reconciliation

2. EBITDA

EBITDA represents earnings before finance income and costs, income taxes, depreciation (net), intangible asset amortisation and non-trading items.

3. Trading Profit

Trading Profit refers to the operating profit generated by the businesses before intangible asset amortisation and gains or losses generated from non-trading items. Trading Profit represents operating profit before specific items that are considered to hinder comparison of the trading performance of the Group's businesses, either period-on-period or with other businesses.

4. Non-Trading Items

Non-trading items refers to gains or losses on the disposal of businesses, disposal of non-current assets, costs in preparation of disposal of assets, acquisition transaction costs and material acquisition integration and restructuring costs. It is determined by management that each of these items relate to events or circumstances that are non-recurring in nature.

5. Adjusted Earnings Per 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. A full reconciliation of this calculation is provided within note 4 of the Condensed Consolidated Interim Financial Statements.

6. Free Cash Flow

Free Cash Flow is seen as an important indicator of the strength and quality of the business and of the availability to the Group of funds for reinvestment or for return to shareholders. See page 8 for the free cash flow calculation. Movement in average working capital is used when calculating free cash flow as management believes this provides a more accurate measure of the increase or decrease in working capital needed to support the business over the course of the period rather than at two distinct points in time. Movement in average working capital measures more accurately fluctuations caused by seasonality and other timing factors. Below is a reconciliation of free cash flow to the nearest IFRS measure which is "Net cash from operating activities".

7. Financial Ratios

The Net debt : EBITDA and EBITDA : Net interest ratios disclosed are calculated in accordance with lender's facility agreements using an adjusted EBITDA, adjusted net debt and adjusted finance costs (net of finance income). Adjustments to reported EBITDA, net debt and finance costs (net of finance income) include adjustments for the impact of non-trading items, acquisitions and disposals undertaken in the period as well as deferred payments in relation to acquisitions.

results for THE half YEAR ENDED 30 june 2014

Kerry Group plc

Notes to the Condensed Consolidated Interim Financial Statements

for the half year ended 30 June 2014

1. Accounting policies

These condensed consolidated interim financial statements for the half year ended 30 June 2014 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 2013 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 2014 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.

Information about geographical areas

3. Finance income and costs

The amount for interest rate derivative represents adjustments for hedge ineffectiveness, including the adjustment to certain derivatives that are no longer designated in a hedge relationship. The fair values of such derivatives are disclosed under liabilities at fair value through profit or loss in note 7.

4. 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.