Solid results from Kerry

By Eric Donald

Kerry Group plc's pre-tax profits grew to €224 million for the year to the end of December 2003, despite the impact of an unfavourable euro/dollar exchange rate.

In the previous year, the group reported a pre-tax profit of €159 million after an exceptional charge of €56.6 million had been deducted. The group's overall turnover was down marginally by 1.6% to €3.69 billion, with the impact of the translation hiding a 4.6% growth in sales if compared on a like for like basis. Operating profit before goodwill and exceptional items was €308.5 million last year compared to €305.4 million in 2002. Managing director Hugh Friel said that it would have been €30 million higher but for the impact of the exchange rate on translating the profit. But he said that the group wouldn’t hedge the translation of results, but have to grin and bear it.

Ninety two per cent of Kerry's total sales are in the same currency as the region they are manufactured. So on a week-to-week basis, just 8% of the total of €3.69 billion are sold in a different currency. Much of this is accounted for by sales of Irish product into UK sterling, but there are also some sales of dairy ingredients such as casein from Ireland to the United States. The returns from both have been impacted by the strong sterling and US dollar relative to the euro.

Sixty per cent of Kerry's borrowings are in US dollar so there is a natural hedge there against a weak dollar. The group's 2003 results did benefit from lower interest payments after translation of €37.4 million, compared to €50.2 million in the previous financial year. But this is also due to the restructuring of the group's debt in the middle of last year through the private placement of US$650 million. This pushed out the average repayment period for the group's borrowings.

The Americas continue to be the most important region for Kerry, generating 36% of the group's operating profits and accounting for 26% of total turnover. However, the average operating margin in the region slipped by 0.7% to 12.1% due to higher overhead costs associated with the Mastertaste business, and lower margin businesses acquired. Hugh Friel is very pleased with the performance of the soy ingredient business in the US and he has high hopes for this business.

Higher profits from Irish operations

Kerry's Irish operations generated sales of €1.33 billion with the operating margin lifting to 5.2%. Operating profits before goodwill increased by €6.4 million to €69.1 million.

The Denny-branded sales of meat products continued to grow in Ireland while cheese sales under the Charleville, Easi Singles and Coleraine brands made important gains. The first stage of a €14 million investment to expand the Cheesestrings operation in Charleville is due to be commissioned by the middle of this year.

On the back of the success of the product in Ireland and the UK, where double digit growth was achieved last year, the group are planning to expand sales of Cheesestrings into Europe.

The €14 million expansion of the sandwich operations, Freshways, in Finglas was completed towards the end of 2003 and this business continues to perform well.

Saint Brendan's cream liqueur, which was bought as part of Golden Vale, grew in volume terms but margins were hit due to the euro/dollar exchange rate.

Performance in the group's Irish and UK-based poultry businesses were down year on year. Trading conditions were described as challenging with a delay in securing price increases.

Rye Valley foods, operating from Carrickmacross and Enniskillen, grew its share of the frozen ready meals market in the UK. Towards the end of the year the group purchased the Hibernia ready meals facility at Hartlepool in the UK. The group acquired two other parts of Oliver Murphy's former business, a chilled patisserie in Birmingham and Mr Brains branded pork business which is a good fit with the Richmond and Walls businesses in the UK.

Asian expansion

The group's turnover in the Asia Pacific continues to grow, but potential acquisitions in this region have been hard to find. Kerry's facilities in Malaysia and Thailand are now well established and Kerry boss Hugh Friel is confident that before the end of this year they will have established a presence in north-east Asia, probably in China.

He said that they hope to have an announcement before the year-end. This is likely to be what he described as a "brownfield'' development, where the group purchase a suitable facility and re-equip it to produce what their customers require.

The nutritional sector in north Asia grew by 10% last year.

Strong cashflow

For the second year in succession, the Kerry business has thrown free cash of in excess of €200 million. In 2003, after capital expenditure of €93 million, and interest, tax and dividends are all paid, the group was left with €204 million free cash.

The group's net debt at year-end was €705 million, down from€764 million at the start of the period. The balance sheet shows shareholders funds of €948.5 million.

Kerry board changes

Kerry has made a number of new appointments to its board. Michael Griffin will retire as chief executive of Kerry Foods, the group's consumer foods division from the end of this month. He has been with the group since 1973 and has been on the board of Kerry plc as an executive director since 1990.

Flor Healy, who is currently general manager of Kerry Foods Ireland, takes over this role and will join the board of Kerry plc. He has been with the company since 1984.

The former US ambassador to Ireland, Michael J Sullivan has also been appointed to the Kerry board.