Two weeks ago, Kerry purchased three US food companies for €650m ($735m). This recent set of deals brings Kerry’s year-to-date spending to €900m and the Irish Farmers Journal understands a couple of further deals may bring that figure to €1bn by year-end.
Kerry is a slow and steady ship that seems to have the agility of a speedboat – continuously adapting to its customer needs down through the years. It has extended beyond its dairy heritage from the 1980s and evolved into an added-value ingredients and flavours specialist.
However, with changing industry circumstances thanks to a changed consumer, Kerry is evolving further and building on its global R&D infrastructure and manufacturing footprint to become a global taste and nutrition specialist. It is using food science and process technology across three core areas – taste, nutrition, and general wellness and pharma, and these recent acquisitions fit neatly into this evolving strategy.
Kerry rarely mentions who their customers are but such is the diversity of business that every day millions of people around the world are consuming food that uses a Kerry ingredient or flavour. A recent review of key ingredient suppliers found that out of 200 suppliers across 60 product categories, Kerry was a supplier to over 80%. The nearest competitor had less than 40%.
Kerry and ingredients are synonymous. It now has such a breadth of ingredient and process technologies that provide it a competitive advantage that is integral to the customer supply chain.
This remains a volume business and Kerry needs to grow volumes and increase margins. It is doing this cleverly, either bolting on further solutions they can offer to existing customers or knitting themselves into the customer’s product development activity. Thus Kerry aligns itself to the customer which increases switching costs and makes it more difficult for competitors to participate.
So to best describe what Kerry does today, we need to look through a customer’s eyes. For example, if Coca-Cola are bringing out a new Coke, Kerry would be on their list to develop the flavour to give it a unique taste. If Starbucks opens up a new café in the Philippines where the local dairy is supplying the milk – they may need a flavour to ensure the Frappuccino tastes the same as that in Manhattan.
And if McDonalds needs their Big Mac to taste the same in Dehli as it does in Dublin, an ingredient flavour is required. These flavours and tastes are the types of products that will be developed in Kerry’s brand new €100m global technology and innovation centre in Naas.
Model of growth
The Kerry growth model mainly uses free cashflow (circa €200-300m per annum) to spend on mergers and acquisitions (M&A) and capital expenditure. In recent years it had been relatively quiet, with the last year of major spending in 2011, when it spent €359m on acquisitions (Cargill flavour business and Sucrest). While it has spent €1bn between 2010 and 2014, €431m was spent on acquisitions since 2011.
Because it collected over 70 diverse business units from almost 100 acquisitions over the last 15 years, it had created a disparate group of businesses. It embarked on creating synergies and group-wide systems (Kerry Connect) and a customer-focused model (1 Kerry) and invested heavily in both since 2010. With the majority of this investment made and synergies in place, it was ready to grow again.
With a strong balance sheet, it had plenty of flexibility to put this to work. Net debt at year end (2014) was €1.2bn and with earnings (EBITDA) of €751m, this gave a net debt/EBITDA ratio of 1.6 times. It had the firepower to comfortably spend €1bn on businesses. This would allow it buy businesses at a 10-12 times earnings multiple and could add 10% to 15% to group earnings. And that’s exactly what Kerry did.
What did it buy?
Red Arrow, which accounts for about 60% of the €650m deal, manufactures natural smoke and grill flavours for meat. Island Oasis is a specialist supplier of beverages and provides natural cocktail mixes to the food service category. Wellmune, meanwhile, is a natural food, beverage and supplement ingredient that is clinically proven to strengthen the immune system.
The three businesses, which had revenues of $301m (€264m) and earnings of US$59m (€52m) last year, will add about 4% to group revenues and 6% to group earnings in 2016 before factoring in any growth or synergies.
With margins (EBITDA) of close to 20%, these are high-margin businesses and significantly better than the margin generated by Kerry last year (11%).
While the price is more than Kerry has paid for other similar businesses, it was not excessive at 12.5 times earnings, which puts it in line with the multiples being paid in the sector.
Busy year of acquisitions
On top of these latest acquisitions in the US, it also acquired Rollover, a hot-to-go snacking business in the UK in January. In May, it acquired Insight Beverages, a custom flavoured beverage business. In June, it bought KFI Savory a meat flavourings business from Kraft Foods. It then added Baltimore Spices, a meat flavourings and seasoning business.
In September, it acquired PST, a Turkish foodservice provider. Kerry formed a joint venture with IOI Loders Corklaan to develop and market an infant nutrition ingredient. It sold its Australian bakery ingredients business, Pinnacle, and its direct-to-store business in the UK for €151m.
Kerry core technologies
Kerry organises its ingredients and flavour division (74% of revenues in 2014) around five key functionalities:
Savoury and Dairy (41%): Provides flavours and coatings within processed dairy and meat products. Beverage (20%): Provides a range of flavours, bases, syrups and sauces. Cereal and Sweet (17%): Focuses on flavours, compounds and particulates in various formulations (shapes, sizes, colours, etc). Pharma and functional ingredients (14%): Focuses on ingredients for the nutrition, pharmaceutical and biotech end-markets. Regional Technologies (8%): Are primary ingredient units.Through their customers, beverage (23%) is the largest end use market, followed by meat (18%), dairy (10%), bakery (10%) and then a host of other categories from soup to desserts and prepared meals to savoury snacks.
Consumer foods division
This division is one of the leading suppliers to the UK and Irish chilled foods sector with brands such as Dairygold butter and Denny sausages.
While this business has not grown in recent years against tough trading conditions, it has provided stable cash and healthy returns and remains an integral part of the business. With the high growth of the group’s ingredients business, its importance to the overall group has halved over the last decade in revenue and profit terms to account for 26% of the business today.
Kerry’s ability to evolve with the changing customer and industry backdrop is fundamental to its success. It has maintained strong financial discipline that has been consistent and sustained even against this backdrop.
Its earnings engine has been driven by volume growth, margin expansion, and continuous investment. Its balance sheet remains solid post the acquisitions spend and the recent 10-year bond issue (€750m) at an annual coupon (interest rate) of 2.375% gives it the financial flexibility to pay down debt, extend the maturity profile or fund acquisitions into the future.
Note on share price: Shares in Kerry have increased 33% in the last year. Shares closed at €71.83 on Tuesday, slightly below their all-time record of €74.23, set last Friday.
Two weeks ago, Kerry purchased three US food companies for €650m ($735m). This recent set of deals brings Kerry’s year-to-date spending to €900m and the Irish Farmers Journal understands a couple of further deals may bring that figure to €1bn by year-end.
Kerry is a slow and steady ship that seems to have the agility of a speedboat – continuously adapting to its customer needs down through the years. It has extended beyond its dairy heritage from the 1980s and evolved into an added-value ingredients and flavours specialist.
However, with changing industry circumstances thanks to a changed consumer, Kerry is evolving further and building on its global R&D infrastructure and manufacturing footprint to become a global taste and nutrition specialist. It is using food science and process technology across three core areas – taste, nutrition, and general wellness and pharma, and these recent acquisitions fit neatly into this evolving strategy.
Kerry rarely mentions who their customers are but such is the diversity of business that every day millions of people around the world are consuming food that uses a Kerry ingredient or flavour. A recent review of key ingredient suppliers found that out of 200 suppliers across 60 product categories, Kerry was a supplier to over 80%. The nearest competitor had less than 40%.
Kerry and ingredients are synonymous. It now has such a breadth of ingredient and process technologies that provide it a competitive advantage that is integral to the customer supply chain.
This remains a volume business and Kerry needs to grow volumes and increase margins. It is doing this cleverly, either bolting on further solutions they can offer to existing customers or knitting themselves into the customer’s product development activity. Thus Kerry aligns itself to the customer which increases switching costs and makes it more difficult for competitors to participate.
So to best describe what Kerry does today, we need to look through a customer’s eyes. For example, if Coca-Cola are bringing out a new Coke, Kerry would be on their list to develop the flavour to give it a unique taste. If Starbucks opens up a new café in the Philippines where the local dairy is supplying the milk – they may need a flavour to ensure the Frappuccino tastes the same as that in Manhattan.
And if McDonalds needs their Big Mac to taste the same in Dehli as it does in Dublin, an ingredient flavour is required. These flavours and tastes are the types of products that will be developed in Kerry’s brand new €100m global technology and innovation centre in Naas.
Model of growth
The Kerry growth model mainly uses free cashflow (circa €200-300m per annum) to spend on mergers and acquisitions (M&A) and capital expenditure. In recent years it had been relatively quiet, with the last year of major spending in 2011, when it spent €359m on acquisitions (Cargill flavour business and Sucrest). While it has spent €1bn between 2010 and 2014, €431m was spent on acquisitions since 2011.
Because it collected over 70 diverse business units from almost 100 acquisitions over the last 15 years, it had created a disparate group of businesses. It embarked on creating synergies and group-wide systems (Kerry Connect) and a customer-focused model (1 Kerry) and invested heavily in both since 2010. With the majority of this investment made and synergies in place, it was ready to grow again.
With a strong balance sheet, it had plenty of flexibility to put this to work. Net debt at year end (2014) was €1.2bn and with earnings (EBITDA) of €751m, this gave a net debt/EBITDA ratio of 1.6 times. It had the firepower to comfortably spend €1bn on businesses. This would allow it buy businesses at a 10-12 times earnings multiple and could add 10% to 15% to group earnings. And that’s exactly what Kerry did.
What did it buy?
Red Arrow, which accounts for about 60% of the €650m deal, manufactures natural smoke and grill flavours for meat. Island Oasis is a specialist supplier of beverages and provides natural cocktail mixes to the food service category. Wellmune, meanwhile, is a natural food, beverage and supplement ingredient that is clinically proven to strengthen the immune system.
The three businesses, which had revenues of $301m (€264m) and earnings of US$59m (€52m) last year, will add about 4% to group revenues and 6% to group earnings in 2016 before factoring in any growth or synergies.
With margins (EBITDA) of close to 20%, these are high-margin businesses and significantly better than the margin generated by Kerry last year (11%).
While the price is more than Kerry has paid for other similar businesses, it was not excessive at 12.5 times earnings, which puts it in line with the multiples being paid in the sector.
Busy year of acquisitions
On top of these latest acquisitions in the US, it also acquired Rollover, a hot-to-go snacking business in the UK in January. In May, it acquired Insight Beverages, a custom flavoured beverage business. In June, it bought KFI Savory a meat flavourings business from Kraft Foods. It then added Baltimore Spices, a meat flavourings and seasoning business.
In September, it acquired PST, a Turkish foodservice provider. Kerry formed a joint venture with IOI Loders Corklaan to develop and market an infant nutrition ingredient. It sold its Australian bakery ingredients business, Pinnacle, and its direct-to-store business in the UK for €151m.
Kerry core technologies
Kerry organises its ingredients and flavour division (74% of revenues in 2014) around five key functionalities:
Savoury and Dairy (41%): Provides flavours and coatings within processed dairy and meat products. Beverage (20%): Provides a range of flavours, bases, syrups and sauces. Cereal and Sweet (17%): Focuses on flavours, compounds and particulates in various formulations (shapes, sizes, colours, etc). Pharma and functional ingredients (14%): Focuses on ingredients for the nutrition, pharmaceutical and biotech end-markets. Regional Technologies (8%): Are primary ingredient units.Through their customers, beverage (23%) is the largest end use market, followed by meat (18%), dairy (10%), bakery (10%) and then a host of other categories from soup to desserts and prepared meals to savoury snacks.
Consumer foods division
This division is one of the leading suppliers to the UK and Irish chilled foods sector with brands such as Dairygold butter and Denny sausages.
While this business has not grown in recent years against tough trading conditions, it has provided stable cash and healthy returns and remains an integral part of the business. With the high growth of the group’s ingredients business, its importance to the overall group has halved over the last decade in revenue and profit terms to account for 26% of the business today.
Kerry’s ability to evolve with the changing customer and industry backdrop is fundamental to its success. It has maintained strong financial discipline that has been consistent and sustained even against this backdrop.
Its earnings engine has been driven by volume growth, margin expansion, and continuous investment. Its balance sheet remains solid post the acquisitions spend and the recent 10-year bond issue (€750m) at an annual coupon (interest rate) of 2.375% gives it the financial flexibility to pay down debt, extend the maturity profile or fund acquisitions into the future.
Note on share price: Shares in Kerry have increased 33% in the last year. Shares closed at €71.83 on Tuesday, slightly below their all-time record of €74.23, set last Friday.
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