Kerry Regulatory News (KYGA)

19 February 2019

Kerry Group

Preliminary Statement of Results

for the year ended 31 December 2018

Kerry Group, the global taste & nutrition and consumer foods group, reports preliminary results for the year ended 31 December 2018.

 HIGHLIGHTS

· Adjusted EPS* of 353.4 cent - up 8.6% on a constant currency basis

· Group revenue of €6.6 billion reflecting 3.5% volume growth

- Taste & Nutrition +4.1% volume growth

- Consumer Foods +1.1% volume growth

· Group trading margin maintained at 12.2% despite a 30bps currency headwind

- Taste & Nutrition +20bps to 15.1%

- Consumer Foods -60bps to 7.5%

· Basic EPS of 305.9 cent (2017: 333.6 cent - which included a one-off US deferred tax credit)

· Final dividend per share of 49.2 cent (total 2018 dividend up 12% to 70.2 cent)

· Free cash flow of €447m (2017: €501m)

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

Edmond Scanlon - Chief Executive Officer Statement

"We are pleased with our performance in 2018, with volume growth well ahead of our markets, underlying margin expansion in line with expectations and adjusted earnings per share growth of 8.6% in constant currency. This performance continues to highlight the uniqueness of Kerry's business model in supporting customers, as consumers continue to look for innovation and drive further marketplace fragmentation.

We have also made good progress across our strategic growth priorities, including further developing our industry leading portfolio of taste and nutrition foundational technologies, completing a number of strategic acquisitions and investments aligned to growth priorities as planned.

In 2019 we expect to deliver adjusted earnings per share growth of 6% to 10% on a constant currency basis."

Contact Information

PRELIMINARY STATEMENT OF RESULTS

For the year ended 31 December 2018

The Group achieved volume growth in 2018 well ahead of the market, where the rate of change continues to accelerate. The food and beverage industry and end-to-end supply chain are experiencing unprecedented disruption, as consumers are demanding more than ever before and are challenging traditional business models. The application of Kerry's leading taste and nutrition technology portfolio through our leading business model continues to drive significant value for our customers as they seek to meet rapidly changing consumer demands and increase speed to market. Major global consumer trends such as authenticity, healthfulness, convenience, clean label, sustainability and premiumisation, aligned with local consumer preferences continue to generate increased innovation opportunities.

Taste & Nutrition achieved sustained volume growth in North America, solid growth in Latin America, a good performance in Europe and continued strong growth in APMEA.

While UK and Irish consumer foods markets encountered challenges impacting consumer sentiment, with market growth rates reducing across the year, Kerry's Consumer Foods division delivered a solid underlying performance.

Business Performance

Group revenue on a reported basis increased by 3.1% to €6.6 billion reflecting strong volume growth and contribution from acquisitions, partially offset by adverse currency movements. Business volumes grew by 3.5% and pricing decreased by 0.5% against a backdrop of lower raw material costs in the year. Taste & Nutrition delivered 4.1% volume growth and pricing decreased by 0.5%. Consumer Foods' business volumes increased by 1.1% and pricing decreased by 0.4%.

Group trading margin was maintained at 12.2%, reflecting a 20 basis points improvement in Taste & Nutrition, positive underlying margin improvement in Consumer Foods offset by adverse sterling exchange rates resulting in a 60 basis points margin reduction, and increased net investment on the KerryExcel programme.

Constant currency adjusted earnings per share increased by 8.6% to 353.4 cent (2017 currency adjusted: 325.4 cent). Basic earnings per share decreased by 8.3% to 305.9 cent (2017: 333.6 cent) primarily due to the one-off favourable impact of US tax reform in the prior year. The Board recommends a final dividend of 49.2 cent per share, an increase of 12.1% on the final 2017 dividend. Together with the interim dividend of 21.0 cent per share, this brings the total dividend for the year to 70.2 cent, an increase of 12% on 2017.

Kerry's industry leading research and development expenditure increased to €275m due to additional investment in Taste & Nutrition (2017: €269m). Net capital expenditure amounted to €286m (2017: €297m) as the Group continued to invest in its strategic priorities for growth, in particular taste technologies and developing market facilities. The Group achieved free cash flow of €447m reflecting cash conversion of 72% in the year (2017: €501m / 83%).

Business Reviews

Kerry, the industry's leading, globally-connected Taste & Nutrition company, provides the largest most innovative portfolio of Taste & Nutrition Technologies and Systems, and Functional Ingredients & Actives for the global food, beverage and pharmaceutical industries.

¹ volume growth

· Volume growth of 4.1% driven by Meat, Beverage and Snacks End Use Markets (EUMs)

· Pricing of (0.5%) - as lower raw material costs were reflected in customer partnership agreements

· Trading margin +20bps - good underlying growth driven by operating leverage, portfolio enhancement and efficiencies, partially offset by currency headwinds and investments for growth

The division achieved good growth across an increasingly diverse customer base. Developing markets delivered strong volume growth of 9.5%, with APMEA the main driver. Foodservice delivered a good performance of 5.8% volume growth, particularly considering the strong comparatives in 2017. Trading profit grew by 5.0% to €805m, reflecting a 20 basis points improvement in trading margin to 15.1%.

Kerry's taste technologies recorded a strong performance across all regions, with TasteSense™ technology and natural extracts being key drivers of growth, as consumer demands for reduced sugar and authentic taste were met through innovations across all categories. Kerry's leading clean label technologies continued to perform well, with its broad protein portfolio, nutritional bioactives, enzyme technologies, food protection and natural preservation solutions all delivering good growth in the year. An increasing number of innovations brought to market combined technologies from both Kerry's authentic taste and nutrition portfolios, as Kerry's Technology & Innovation Centres supported customers from ideation all the way through to launch.

· 2.8% volume growth

· Good performance driven by Meat, Beverage and Snacks EUMs

· LATAM delivered solid growth

· 2.3% volume growth - versus very strong comparatives

· Good performance in Beverage, Meat and Dairy EUMs

· Foodservice performed well with a number of highly successful seasonal product launches and repeat LTOs

The Beverage EUM delivered strong performance across a number of beverage categories within both retail and foodservice channels, as Kerry's TasteSense™ sugar-reduction technology, natural extracts, and our protein range were key drivers of growth.

The Meat EUM continued to deliver good growth, with Kerry's clean label technologies, innovative texture solutions and meat-free technologies being successfully deployed in a number of new market launches, as the category continues to evolve at pace. The recent Hasenosa acquisition in Spain and the majority shareholding in Netherlands-based Ojah are performing well and contributing to business development and access to new customers in the meat category.

The Bakery EUM delivered a solid performance, with growth delivered through meeting evolving consumer demands for both clean label and premium offerings. Russia delivered strong growth, particularly into the Meat and Snacks EUMs, while production commenced in Kerry's first manufacturing facility in the country, providing a key platform for future business development and growth.

The Dairy EUM continued to perform well in the rapidly evolving ice cream category, with a number of new launches in both premium and dairy-free ranges using Kerry's taste technologies. International dairy markets remained challenging during the year. Demand from major dairy importing countries for primary dairy products continued to benefit from the appreciation of the nutritional values of dairy. While demand for butterfat in particular remained relatively strong, market stability was impacted by continued shifts in supply / demand balances.

Foodservice played a key role across a number of EUMs, particularly in the Beverage and Meat EUMs through the continued nutritional enhancement of menu ranges, with successful seasonal products and repeat LTOs delivering a very good performance across the year.

· 10.1% volume growth

· Strong overall performance across EUMs - in particular Meat, Meals and Snacks

· Strategic expansion - both organic and acquisitive

The APMEA region continued to deliver very strong growth well ahead of the market across the region's developing markets. Kerry's business model continued to be successfully deployed, with the selective rollout of our industry-leading foundational technology portfolio to meet rapidly evolving local consumer needs across the region. The region continues to evolve as a highly fragmented marketplace with broad-based market dynamics and consumer trends including convenience, authenticity, wellness and a desire for new. These trends, together with local consumer taste preferences, are driving major consumption change across both retail and foodservice channels. Reported revenue in the APMEA region increased by 10.1% to €1,105m, reflecting 10.1% volume growth, a decrease in pricing of 0.5%, an adverse transaction currency impact of 0.1%, contribution from business acquisitions of 3.4% and an adverse translation currency impact of 2.8%.

The Meat EUM delivered very strong growth through customer partnerships with a number of new innovations, as customers broaden their ranges to meet consumers' changing needs for authentic taste, value and increasingly food safety.

The Meals EUM continued to perform strongly in South East Asia and Greater China across both the retail and foodservice channels, as new authentic cooking taste profiles were deployed across a number of new products.

The Snacks EUM delivered good growth due to the continued development of new snacking occasions across the region. Local category leaders continued to innovate through the introduction of new authentic world flavours, with Kerry's Smoke & Grill, Barbecue and Dairy technologies being deployed across a range of products.

Sub-Saharan Africa achieved strong growth, through better-for-you applications into the Beverage and Snacks EUMs. The foodservice channel continued to outperform the market, with innovations to meet consumers' 'desire for new' including sparkling coffee, and convenience through home delivery, using Kerry's technologies to enhance the overall taste experience.

The Group continued to invest in its strategic growth priorities in the region to improve capabilities and capacity to meet local market opportunities. Good progress was made through investments in ongoing footprint expansion in Indonesia, China and Malaysia. Four acquisitions were completed in the year; Hangman - a leading China-based producer of sweet and savoury flavours, SIAS Food Co. - a leading China-based supplier of culinary and fruit ingredients and systems to the foodservice and food manufacturing industries, Season to Season - a leading South African supplier of taste ingredients and systems to the African snack and food sectors, and AATCO Food Industries LLC - a leading Oman headquartered provider of culinary sauces to the foodservice channel, providing a strategic platform for business development in the Middle East and Africa.

Kerry Foods is an industry-leading manufacturer of added-value branded and customer branded chilled food products to the Irish, UK and selected international markets.

¹ volume growth

· Volume growth of 1.1% led by good performance across the 'Food to Go' range

· Pricing (0.4%) - reflecting lower raw material costs

· Trading margin - growth more than offset by the adverse impact of transaction currency

The consumer and retail landscape within the UK and Ireland continued to change at pace in the year. Consumer confidence softened noticeably in the second half of the year, leading to reduced consumption across a number of categories. The UK retail environment continues to undergo major structural change through increased consolidation of major retailers, further growth of discounter volumes and ranges, and pressure on high street stores - all leading to the need for more streamlined and dynamic supply chains.

Against this backdrop, the business delivered a solid performance in the year. Reported revenue increased by 0.6% to €1,339m, as volume growth and the contribution from business acquisitions were partially offset by foreign currency headwinds. The divisional trading profit margin decreased by 60 basis points to 7.5% as the underlying margin improvement was more than offset by transaction currency headwinds, resulting in a trading profit decrease of 7.1% to €100m.

'Everyday Fresh' delivered solid growth, led by the Richmond range. Richmond chicken sausages were successfully launched in Q2 and contributed well to overall performance. The Denny range benefitted from increased marketing support in Ireland. The traditional spreads category continued to be challenged, however Kerry's softer butter offerings delivered good growth particularly with private label brands in the UK, and the Dairygold brand in Ireland maintained its market leadership position.

'Convenience Meal Solutions' had a difficult year, impacted by reduced promotional activity as well as the extended period of warm weather. Kerry had further business development with 'better-for-you' ranges, while its frozen ready meals outperformed a challenging category.

'Food to Go' performed well with strong growth in Cheestrings across the year. Progress continued to be achieved in the development of the out of home segments with good growth particularly with restaurant chains. The Fridge Raiders brand was relaunched during the year and now encompasses a broader range of snacking products across a wider consumer demographic.

Financial Review

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

Revenue

Group reported revenue increased by 3.1% to €6.6 billion (2017: €6.4 billion), including volume growth of 3.5%, pricing decrease of 0.5% related to raw material deflation passed through to customers, an adverse transaction currency impact of 0.1%, an adverse translation currency impact of 3.4%, and contribution from business acquisitions of 3.6%.

FY2017: Group reported revenue +4.5%, volume growth +4.3%, pricing +2.0%, transaction currency (0.2%), translation currency (2.4%), acquisitions +0.8%.

Taste & Nutrition reported revenue increased by 3.7% to €5.4 billion (2017: €5.2 billion), including volume growth of 4.1%, pricing decrease of 0.5% related to raw material deflation pass through, an adverse transaction currency impact of 0.1%, an adverse translation currency impact of 4.0% and contribution from business acquisitions of 4.2%. 

FY2017: Taste & Nutrition reported revenue +5.7%, volume growth +4.7%, pricing +2.0%, translation currency (1.9%), acquisitions +0.9%.

Consumer Foods reported revenue increased by 0.6% to €1.3 billion (2017: €1.3 billion), including volume growth of 1.1%, pricing decrease of 0.4% related to raw material deflation pass through, an adverse transaction currency impact of 0.3%, an adverse translation currency impact of 0.6% and contribution from business acquisitions of 0.8%.

FY2017: Consumer Foods reported revenue (0.1%), volume growth +2.4%, pricing +2.0%, transaction currency (0.9%), translation currency (3.8%), acquisitions +0.2%.

Trading Profit & Margin

Group trading profit increased by 3.1% to €805.6m (2017: €781.3m). Group trading profit margin was maintained at 12.2%. Underlying margin expansion attributable to operating leverage, portfolio enhancement, efficiencies and the effect of lower pricing were offset by transaction currency headwinds and increased Kerryconnect investment due to the rollout in LATAM and planning for North America.

Trading profit margin in Taste & Nutrition increased by 20 bps to 15.1% (2017: 14.9%), due to the benefits of operating leverage, portfolio enhancement, efficiencies and the effect from lower pricing, partially offset by foreign currency headwinds. Trading profit margin in Consumer Foods decreased by 60 bps to 7.5% (2017: 8.1%) due to significant transaction currency headwinds, partly offset by underlying margin expansion of 10 bps.

Finance Costs (net)

Finance costs (net) for the year increased by €1.4m to €67.0m (2017: €65.6m) as acquisition expenditure was partially offset by cash generation and a reduction in pension interest. The Group's average interest rate for the year was 3.8% (2017: 3.5%).

Taxation

The tax charge for the year before non-trading items was €89.2m (2017: €89.5m) representing an effective tax rate of 13.0% (2017: 13.4%). The reduction in the effective tax rate was due to changes in tax rates in a number of jurisdictions.

Acquisitions & Joint Ventures

During the year the Group completed 10 acquisitions at a total consideration of €502.2m and an investment in a joint venture of €15.6m. These investments were aligned to the Group's strategic priorities for growth, bringing additional taste and nutritional technologies, expanding our presence in developing markets and adding to our foodservice offering.

The Group also announced it had reached agreement for two further strategic acquisitions for an expected total consideration of €325.0m, subject to regulatory approval and customary closing conditions. The acquisition of Southeastern Mills' North American coatings and seasonings business (SEM) was completed after the year end. The Group also expects to complete the acquisition of Ariake USA Inc. - a leading producer of natural clean label savoury taste solutions by the end of Q2 2019.

Non-Trading Items

During the year the Group incurred a non-trading charge of €55.1m (2017: income of €10.2m) net of tax. The charge in the year related to costs associated with the integration of recent acquisitions and the completion of the Brexit Currency Mitigation Programme, where good progress was made in reducing the Group's sterling transaction exposure. The prior year non-trading income arose primarily due to the one-off deferred tax credit arising from the US tax reform changes.

Adjusted EPS in Constant Currency

Adjusted EPS in constant currency increased by 8.6% in the year (2017: +9.4%). This was achieved through volume growth ahead of our markets, underlying margin progression, together with the contribution from the effective integration of acquired businesses. Adjusted EPS increased by 3.6% to 353.4 cent (2017: 341.2 cent) after reflecting the adverse translation currency impact of 5.0%.

Basic EPS

Basic EPS decreased by 8.3% to 305.9 cent (2017: 333.6 cent) primarily due to the effect in 2017 of a one-off deferred tax credit arising from US tax reform changes. Basic EPS is calculated after accounting for brand related intangible asset amortisation of 16.3 cent (2017: 13.4 cent) and non-trading item charge of 31.2 cent net of related tax (2017: net credit of 5.8 cent).

Return on Average Capital Employed

The Group achieved ROACE of 12.0% (2017: 13.0%) which was in line with the Group's strategic target of 12.0%. The 2018 ROACE was adversely impacted by the timing of investments made in the year and foreign currency movements.

Exchange Rates

Group results are impacted by fluctuations in exchange rates year-on-year versus the euro. The average rates below are the principal rates used for the translation of results. The closing rates below are used to translate assets and liabilities at year end.

Balance Sheet

A summary balance sheet as at 31 December is provided below:

Property, Plant & Equipment

Property, plant and equipment increased by €237.4m to €1,767.0m (2017: €1,529.6m) primarily due to capital expenditure in the year offset by depreciation. Net capital expenditure in the year amounted to €285.5m (2017: €297.3m). This planned level of capital investment supports our growth initiatives, and included expanding our industry-leading clean label capability at our facility in Rochester, MI, USA; enhancing our savoury taste centre of excellence in Clark, NJ, USA; and expanding our facility in Nantong, China.

Intangible Assets

Intangible assets increased by €448.9m to €4,095.6m (2017: €3,646.7m) as additions of €478.6m primarily relating to the 10 businesses acquired during the year were partially offset by foreign exchange movements and the annual amortisation charge.

Current Assets

Current assets increased by €239.7m to €2,271.4m (2017: €2,031.7m), primarily due to an increase in cash in hand at 31 December 2018.

Retirement Benefits

At the balance sheet date, the net deficit for defined benefit schemes (after deferred tax) was €44.0m (2017: €102.0m). The decrease in the net deficit arises mainly due to favourable movement in discount rates, inflation rates and the liability management programme. The net deficit expressed as a percentage of market capitalisation at 31 December 2018 was 0.3% (2017: 0.6%).

Free cash flow is an important indicator of the strength and quality of the business and of the availability of funds to the Group for reinvestment or for return to the shareholder. In 2018 the Group achieved free cash flow of €446.5m (2017: €501.3m).

¹ Cash conversion is free cash flow expressed as a percentage of adjusted earnings after tax

Net Debt

Net debt at the end of the year was €1,623.5m (2017: €1,341.7m) reflecting the cash flow generated offset by investment in acquisitions and the dividends paid in the year.

A significant portion of Group financing facilities are subject to financial covenants as set out in their facility agreements. The Group's balance sheet is in a healthy position. With a net debt to EBITDA* ratio of 1.7 times, the organisation has sufficient headroom to support future growth plans. Group Treasury monitors compliance with all financial covenants and at 31 December the key covenants were as follows:

Share Price and Market Capitalisation

The Company's shares traded in the range €78.05 to €98.85 during the year. The share price at 31 December 2018 was €86.50 (2017: €93.50) giving a market capitalisation of €15.2 billion (2017: €16.5 billion). Total Shareholder Return for 2018 was -6.8% (2017: +38.6%) reflecting a general decline in global equity markets during the last quarter in 2018 arising from uncertainties due to global trade and Brexit.

The Group's Annual Report will be published at the end of March and the Annual General Meeting will be held in Tralee on 2 May 2019.

Future Prospects

Kerry continues to adapt to the rapidly changing marketplace, investing in and further developing the Kerry business model to consistently outperform our markets and respond to evolving local consumer trends and customer requirements through industry leading innovation.

Kerry's Taste & Nutrition has a strong innovation pipeline with good growth prospects, particularly in developing markets where the business footprint expansion and successful roll out of the consumer led in-country approach continues. Within Consumer Foods we will continue to build on the strategy of realigning the core and investing in adjacencies, whilst navigating the current uncertain environment.

While there continues to be uncertainty with respect to the outcome of the UK's exit from the European Union, Kerry currently anticipates that a managed transition will be the most likely outcome of the negotiations. The Group has mitigation plans in place to limit the potential short term implications of a 'no-deal' scenario. Kerry remains cautious on the UK consumer landscape, but is confident it will continue to outperform the market.

The Group will continue to invest in business development and pursue M&A opportunities aligned to strategic growth priorities.

In 2019 the Group expects to deliver adjusted earnings per share growth of 6% to 10% on a constant currency basis.

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 YEAR ENDED 31 DECEMBER 2018

Notes to the Financial Statements

for the financial year ended 31 December 2018

1. Accounting policies

The financial information included within this statement has been extracted from the audited financial statements of Kerry Group plc for the financial year ended 31 December 2018. The auditors' report was unqualified. The financial information set out in this document does not constitute full statutory financial statements for the financial years ended 31 December 2018 or 2017 but is derived from same. The consolidated financial statements of Kerry Group plc have been prepared in accordance with International Financial Reporting Standards ('IFRS'), International Financial Reporting Interpretations Committee ('IFRIC') interpretations and those parts of the Companies Act 2014 applicable to companies reporting under IFRS. The financial statements comprise of the Consolidated Income Statement, the Consolidated Statement of Comprehensive Income, the Consolidated Balance Sheet, the Consolidated Statement of Changes in Equity, the Consolidated Statement of Cash Flows and the notes to the financial statements. The Group's financial statements have also been prepared in accordance with IFRS adopted by the European Union ('EU') which comprise standards and interpretations approved by the International Accounting Standards Board ('IASB'). The Group's financial statements comply with Article 4 of the EU IAS Regulation. IFRS adopted by the EU differs in certain respects from IFRS issued by the IASB. References to IFRS hereafter refer to IFRS adopted by the EU.

The consolidated financial statements have been prepared under the historical cost convention, as modified by the revaluation of certain financial assets and liabilities (including derivative financial instruments) and financial asset investments which are held at fair value. Assets classified as held for sale are stated at the lower of carrying value and fair value less costs to sell. The investments in associates and joint ventures are accounted for using the equity method.

The Group's accounting policies will be included in the 2018 Annual Report & Accounts, which will be published at the end of March and are consistent with those described in the 2017 Annual Report & Accounts.

New standards and interpretations

Certain new and revised accounting standards and new International Financial Reporting Interpretations Committee ('IFRIC') interpretations have been issued. The Group intends to adopt the relevant new and revised standards when they become effective and the Group's assessment of the impact of these new standards and interpretations is set out below:

2. Analysis of results

The Group has determined it has two reportable segments: Taste & Nutrition and Consumer Foods. The Taste & Nutrition segment manufactures and distributes an innovative portfolio of taste & nutrition solutions and functional ingredients & actives for the global food, beverage and pharmaceutical industries. The Consumer Foods segment manufactures and supplies added value branded and consumer branded chilled food products to the Irish, UK and selected international markets.