Kerry Group's (KRYAY) CEO Stan McCarthy on Q2 2014 Results - Earnings Call Transcript

Aug.10.14 | About: Kerry Group (KRYAY)

Kerry Group plc (OTCPK:KRYAY) Q2 2014 Earnings Conference Call August 7, 2014 3:30 AM ET


Stan McCarthy – CEO

Brian Mehigan – CFO


Alex Sloane – Societe Generale

Catherine Farrant – JP Morgan

Fulvio Cazzol – Goldman Sachs

Unidentified Corporate Participant

Liam Iggoe – Goodbody

Carl Walton – Bank of America Merrill Lynch

Jack Gorman – Davy Stockbrokers

James Targett – Berenberg

Stan McCarthy

Good morning everybody and welcome. I hope you are having a pleasant summer. We are delighted this morning to present a very satisfactory set of results for Kerry Group for the first half of 2014, highlighted by our continued volume growth of 2.7% and that’s made up of 4.2% in Ingredients and Flavors and a decline of 1.2% in Consumer Foods. The other key highlight is the margin expansion of 50 basis points and 60 basis points being realized in Ingredients and Flavors business and in Consumer foods an expansion of 10 basis points.

Our revenue for the period was €.9 billion reflecting 3.2% of underlying sales growth and our trading profit increased by 3% to €275 million. Our adjusted earnings per share increased 5.8% to a €1.152 per share and our return on capital employed, 14.3% versus 13.1% last year.

The Board has proposed an increase in the interim dividend of 12.5%, coming to €0.135 per share for the first half for the interim payment. Our free cash flow was €102 million for the period.

Perhaps to contextualized the performance, the macroeconomic conditions continue to impact consumer spend. There have been significant head winds from a currency perspective, adverse currency perspective and some slowdown in the developed markets and perhaps that is providing a catalyst environment for niche developments and innovations but exceptionally very noteworthy in the first six months. Developing markets were volatile in terms of currency or political issues, very strong opportunities in development in the whole nutritional space.

How does that impact Kerry we feel our positioning and our innovation we are doing very well winning through the platforms of taste and nutrition. We have a very strong pipeline of new product development going into the back half of the year. Our technologies are very suitably aligned and relevant to the demand for clean-label, enhanced nutrition and health offering and snacking; healthy snacking that is. Growth continues to accelerate in the developing markets for Kerry and the market fragmentation – while the market fragmentation increased in competition in UK and Ireland consumer markets.

Kerry Foods, as we said earlier in the year, is refocusing its business, it is refocusing its portfolio for more sustainable growth patterns and objectives for Kerry going into the future. Going into bit more detail the sales growth of 3.2%, 2.7% volume and 0.6% price. In regards to the marginal expansion of 50 basis points going from 9.5% to – going from 9% to 9.5% in trading margins, €275 million in total margin.

Looking down a little bit deeper into each business, our revenue for Ingredients & Flavors at €2.1 billion for the period, trading profit at €251 million, an increase of 4.9%, and our margin, now at 11.5, 11.7% following the 60 basis points increase and margin expansion. The volume growth very healthy at 4.2% for the period and pricing, like I said earlier of 0.6%.

Currency has been a significant head wind for the first six months and the like-for-like trading performance had it not been for that would have been closer to 9.8% closer to 10%. The performance while we mentioned back in May started out slow in January continued to improve into the second quarter. Our pace in nutrition platforms are out-performing market growth rates and America continues to perform very well for Kerry but obviously we’ve had had a very strong performance in our Asian markets.

EMEA developing markets have been weaker primarily due to currency and to some geopolitical issues in certain parts of that geography. In regards to the broader EMEA the alignment is progressing very well and in line with the 1 Kerry model and the objectives that we had set out for ourselves. Japan and New Zealand a little bit weaker and that’s a reflection on the lack of growth, of changing economic environment in both of those geographies.

When we look down perhaps more clinically at the three major geographies, the Americas grew at 4.3%, EMEA, 0.9% and Asia Pacific at 11.5%, coming at a total of 4.2%. No significant change in the makeup of the technologies, Savory, Dairy, Beverage, Cereal and Sweets, Systems and Flavors business making up 81% of the business, all three of those combined, Pharma/Functional Ingredients increased slightly to 10% and Regional Technologies no significant change at 9%.

Moving on to our Consumer Foods business, revenues of €800 million, trading profit of €62 million, trading margin, 7.8%, increasing 10 basis points from the same period of last year. Continuing volumes a decline of 1.2%, primarily due to the lack of – reduced level of promotional activity. Pricing was a positive 0.2% and the like-for-like trading profit growth was negative 3.3% perhaps more got to do with the repositioning of Kerry Foods rather than any significant change in the performance of the business.

More fragmented market players, heightened competition, the lack of growth and the overall market obviously makes Ireland and UK continue to be very competitive where our consumers are prioritizing spend.

Our Foods business, our foods management team are refocusing on that in today’s marketplace and the progression is going quite well that we outlined at the beginning of the year, and a noticeable reduction in promotional activities across certain sectors. Our brands, they continue to do very well, particularly Richmond and Mattessons in the UK and our brands in Ireland and Dairygold and Cheestrings continue to do very well and further enhancing their leadership position. We’ve just launched a new healthy kids snacking product under the Yollies brand, which was rolled out in Ireland recently and will be rolled out in the UK later in the year. So a whole lot of activity in our foods business.

And with that I will turn it over to Brian and he will go into the financial highlights in more depth.

Brian Mehigan

Thanks, Stan. Ladies and gentlemen, as you can see from the financial highlights against our key performance metrics and in the context of continuing significant change going on internally under our 1 Kerry Transformation Program, and significant changes indeed going on in the marketplace in terms of changes in the consumer and consumer preference and indeed other volatilities, I think it is a pretty good performance as Stan has already said.

And against our key metrics, revenues up 2.7% in terms of continuing volume growth; trading profit on like-for-like basis, up 7.1% to €275 million; trading margin at 9.5% is an increase of 50 basis point; and adjusted earnings per share at €1.152 is an increase of 5.8% and indeed 10.5% on constant currency basis. Basic earnings per share at€1.108 and free cash flow at €102 million reflecting the significant investment in both fixed capital and working capital to support the transformation of the business.

So I will cover each one of the financial metrics individually. And to start with revenue growth and the analysis of the revenue growth in reported terms is back 1.9%. By breaking that down, the underlying sales growth which is the first three columns in the chart is 3.2% which is a combination of continuing volumes of 2.7%, price of 0.6% and negative transaction currencies at 210 basis points. Against that 3.2 % underlying sales growth we’ve had 1.6% impact from the year-on-year carryover of the rationalization volumes in relation to the factory closures in the last two years. Our reported revenue impact is at 3.2% in relation to reporting currencies or translation and acquisitions net of disposals impacting to the tune of 30 basis points in the year.

So to further analyze the underlying sales growth, 2.7% volume and 0.6% price and total split down 4.2% volume, continuing volume growth, in Ingredients and Flavors, 0.6% in relation to price and back 1.2% in continuing volumes in Consumer Foods and 0.2% positive in relation to pricing. Indeed as Stan has already covered Ingredients and Flavors the 4.2%, splits down 4.3% in the Americas region, 0.9 in the EMEA region and 11.5 in Asia Pacific. And indeed that could be further broken down to about 2% in developed markets and 12% in developing markets. And Consumer Foods back 1.2% which reflects indeed in both territories, a reduction I think in the number of retailers in relation to volume related promotions.

So to move on and look at our trading profit growth and our margin percentage, at Group level the trading profits grew by 7.1% like-for-like basis and 50 basis points in terms of margin increase. And that split down the Ingredients and Flavors business group by 9.8% in terms of like-for-like trading profit growth and increased the margin by 60 basis points and Consumer Foods was back 3% in terms of like-for like profits and increased the margin by 10 basis points. And I think a significant performance across the Ingredients and Flavors business delivering 9.8% and then Consumer Foods, as Stan said, significantly impacted by the ongoing positioning of that business to meet the changing consumer needs in that marketplace, indeed the changes in terms of retailers. And an increased investment in our brand support.

Moving on to just further analyze the 50 basis points margin progression in the period, you can see from this chart that it breaks down in terms of operating leverage or the benefit from the continuing volume growth to the tune of 20 basis points. The benefits from our 1 Kerry Transformation Program continued to flow through in relation to mix and efficiencies to the tune of 50 basis points. Pricing in the period, was a bit lag particularly in the Consumer Foods business which impacted margin to the tune of 10 basis points and translation and transaction currency were significant in absolute terms but impacted margins only to the tune of 10 basis points with acquisitions and disposals being neutral in the period.

So to move on and to look at free cash flow for a moment and €102 million free cash flow delivered in the first half, as I said earlier, significantly impacted by the increased investment in fixed capital and working capital. Fixed capital reflects the ongoing support for our global investments around the world in terms of support in the growth programs. And the R&D center program which is well under way now with the completion of [Nest], which Stan will talk about later on in the presentation. And the increase in working capital of €84 million on average across the period, reflecting the stock build ahead of the SAP roll out in the EMEA region, indeed that has been impacted by the deferral into the second half of a number of sites. And a certain amount of stock build in relation to our global nutrition business as well.

The financial ratios are in pretty good order. Net debt-to-EBITDA 1.5 times at year-end and EBITDA-to-net interest coverage 13.3 times and the return ratios also are in pretty good order with return on average equity at 18.2%, return on capital employed at 14.3% and cash flow return on investment which is impacted in this period by the investment in fixed and working capital at 10.7%.

The maturity profile of our debt is again in pretty good order with weighted average maturity of 5.8 years at this point and the repayment that you can see in 2015 of U.S. dollar bond to the tune of about $305 million easily covered through the cash on hand or indeed the revolving credit facility which is undrawn at this point substantially.

And just to focus for a moment on currency and the currency impact on reported performance, you can see from this slide there was a significant gap between the first half average exchange rates we had in 2013 versus 2014. It impacted revenues as I’ve covered earlier to the tune of 3.2%. It impacted trading profit to the tune of 4%, and indeed impacted earnings per share to the tune of 4.7%. And you can see that there is still a gap at today’s rates in Q3, if today’s rates were to prevail turning it into a positive tailwind possibly in Q4.

And just to spend a moment to update you on our Kerry Connect Program, I think it is fair to say in relation to site roll out into our manufacturing facility we are pretty much in the eye of the storm in terms of the full suite deployment across EMEA sites, the deferred sites and some others that were originally scheduled will now be implemented in late October. We are building up to that. And the working capital investment I have already referenced which is ensuring that our customers are fully supplied and there is no interruption due to that implementation.

We have commenced the Asia Pacific design. There’s 50 people applied at that through the second half of the year in the Asia Pacific region and just to know that the program at this stage is scheduled to run into 2017 in covering the Americas region. And there is a slide in the additional information which sets that out.

So finally in relation to other financial manners, interest cost is down €4.2 million mainly due to the cash generated from operations. Tax, the tax percentage is down slightly 15.6% in first half of 2014. It was about 15% for the full year and we are recording a 14.7% as tax rate in the first half of 2014 and it may even be slightly lower than that for the full year.

The pension number in the balance sheet is up by €70 million reflecting the reduction in long term discount rates and currency which I have covered is as I said significantly negative in H1 but moderating in H2. So with that, I’d be happy to take any questions at the end, I’ll hand you back to Stan.

Stan McCarthy

Thank you, Brian. Perhaps looking forward a little bit, firstly I would like to talk about our positioning, our capability and strategy and update on that. Kerry is the largest, has the largest portfolio of taste and nutrition systems and functional Ingredients and Active for the food beverage and pharmaceutical industries. We have the sensory and application, and capability and culinary experts to support those. And now we are connected globally very well. We are unique in terms of the technologies that we have and our innovations flow through the veins of the organization every morning we get up, so it is truly a very strong global platform.

Our capability is in our business to provide foresight and technology to help develop products that delight and nourish consumers across the globe, because of our food and beverage heritage, because of our insight and innovation, because of our science and technology and our ability to apply those and have the culinary excellence and support them. The strategy, market leading taste and nutrition platforms, that has the same extent in terms of platforms or technology. Very strong global and regional customer alliances and our ability to accelerate growth in developing markets where more and more emphasis is being placed, and leverage the capabilities and expand our food service platforms from across the globe. These are the four strategies that we are emphasizing.

I will not go through all this but it is basically laying out a case in nutrition systems to support our objective and our strategy; Dairy and Savory, Cereal and Sweet, Beverage and Nutrition a long number of ingredients and active capability.

In terms of our taste position, number one globally for taste and ingredient solutions. Nobody else has the same extent and breadth of both. We are food and beverage focused only as well as the pharmaceutical business as well. We have got the leading culinary applications and sensory expertise and we are top five flavor also in the global space.

In terms of our Wellness and Nutritional positioning we’ve got a leading portfolio of general wellness and enabling technologies, nutrition ingredients and actives and in nutritional delivery systems. We have heritage in food and an in-depth understanding of the biological sciences built around the 800 scientists around the world in our technology and innovation centers. We have world class application expertise.

In terms of our applications and culinary leadership we have the best-in-class applications model. We were the first to introduce the concept of global technology innovations center in Wisconsin back seven years ago, six-seven years ago and now we have those in place around the globe. We have centers obviously in the regional development, the smaller regions as well back in to the global technologies. We spend about over 4% to 4.5% or €186 million in 2013 in expenditure and key for us in today’s environment is having that agility and nimbleness to be able to respond quickly to the marketplace. We believe that our model is very geared towards that.

Regional development and management of customized systems and technologies you have to have presence you have to have proximity to the marketplace, and you have to have local knowledge and expertise as to flavors and consumer preferences for that region. And that all has to be linked in to the global framework of technology because from that then you can leverage whether it is the flavors or whether it is the functional ingredient that are developed at – in some part of the world that can be leveraged into the developing parts of the regional parts of the business model.

We have invested heavily as Brian alluded to between Dublin, more recently Beloit, Singapore which will be complete in a couple of weeks, San Juan Del Rio in Mexico.

Just a quick look at the innovation center in Ireland. It is a €100 million investment, 900 employees, majority of those already in situ in temporary facilities to move in on the 1st of January into the renewed facilities. It will have access to Kerry’s unrivalled technology platforms and will have global expertise and support resources that will be connected throughout the whole organization. It will be our hub for infant and healthcare nutrition research as well. And obviously provide nutritional support and analysis to customers and to our businesses around the globe.

In terms of our strategy in developing markets we will continue to accelerate, mobilizing more people and increase the deployment of our resources. Local market and consumer insights will continue to grow and build a library that will strengthen our position and having the local culinary and application expertise with knowledge about Kerry’s technologies puts us in a very strong position. We will leverage the global technology portfolio and expertise when engaging with customers in these regions and we will continue to expand into new regions. This year we have been very successful in South Africa, for example and expanding in Middle East, in Dubai and that will continue in to India, for example, where we have had recent success as well.

Bringing the 1 Kerry model is now beginning to truly show why it was right in the first place in terms of being able to collate and bring that capability together under one umbrella and under one very clear strategy. In terms of food service, this is very much a dual strategy characterized around the large global chain on the one hand and regional chain and then around the brands that are relevant for the small and independent operators. And the nature of the engagement is quite different in terms of direct engagement for quality food service chain versus working through distributors and brokers for moving brands around the world, and both parts for making up a very clear strategy for food service products.

In terms of the positioning of our foods business, the re-positioning, it’s around the channel, the brands and the growth platforms, primarily snacking. We’ve touched on earlier about the changing consumer environment and the omni channel strategy for our business, the growth and e-commerce, C-stores and discounters obviously having an impact in the overall business. And then our brands where they are trusted, they are relevant, they have leadership positions there – we support them with innovation to make sure that they are differentiated and delivering not just price but a lot more than that. They are primed for growth.

Focusing on platforms for growth around snacking, bringing innovations to the total category. I spoke earlier about the introduction of Yollies. We have spoken in the past and Cheestrings continue to be a very solid platform for us as well as Mattessons in the meat category and then looking perhaps beyond UK into Europe we continue to work with that across geographies and across all channels.

The quality of the business is being aligned to meet the growth objectives, we touched on that, the plan that we laid out in the beginning of the year continues, and I would hope to have significant progress in that area by the end of the year which we will report on accordingly. Our direct-to-store, continue to be restructured both in Ireland and the UK and again a lot of progress will be made between now and the end of the year in that area. But more importantly it’s investing for today’s consumer needs and that is where the emphasis and energy is being positioned in this business.

Finally I believe that we are very well positioned to continue on the growth trajectory, continue developments despite head winds and challenging conditions in developed markets. Yes, it is a challenging time I believe that our positioning around nutrition and taste gives us that unique positioning to be able to adapt to that environment quicker and better than anybody else. We have a very good innovation pipeline and customer engagement has never been better.

In terms of developing markets our nutritional platforms gives us a very strong positioning and will provide growth near term and long term for Kerry. Kerry Food’s alignment is progressing like I said and I would hope by the end of the year to have that program very much complete.

Finally in terms of the overall Kerry position it is about continued investment and reinvestment in the company which underpin our growth strategies. Finally in regards to the outlook for the year we remain with the guidance of 6% to 10% growth that we shared earlier on this year and we are very confident of achieving that target.

Thank you very much, and that brings this presentation to an end. So now I would like to open it up to questions from the floor.

Question-and-Answer Session

Alex Sloane – Societe Generale

Yes, good morning. It is Alex Sloan from SocGen, I have three questions. Firstly I mean just looking at the volume performance in ingredients and flavors continues to be very strong in America where many of your competitors and customers in that market have seen slowdowns which I guess reflects the strength of the 1 Kerry model coming through. Is it realistic to assume, with the Dublin Center coming on line in 2015, over the next couple of years we might see an improvement in volume momentum in EMEA, if you can replicate that success that you had in Americas, is the first question.

Secondly just on M&A, there’s obviously been a lot of M&A in the ingredients space in the first half. You have been relatively quiet. Does that mean just to do with the fact that you are very busy with SAP, or have the high valuations play a part in what we might expect from you in terms of M&A in the second half and then 2015, and then just finally, we’ve seen sharp declines since February in global dairy prices. I think the global dairy trade options are down about 40% since February. What, you know, sort of broadly, what impact what might that impact have on Kerry ingredients and flavors in terms of top line and margin in 2015.

Stan McCarthy

In regards to the first question around the ingredients and flavors growth volumes in United States of 4.2% I use the word, it is continuing because it has been a very good journey and proof of our model and gives us confidence that what we have in place what we describe it as unique, it works. Will it work in Europe, we believe it will. I touched on earlier the changes that have been taking place in the market place and they are just not specific to one geography, they are fairly universal in that the demand for nimbleness and the ability to be able to develop concepts, products, apply them to opportunities for the changes that are taking place fairly quickly in the marketplace, I think our model is ideally suited to that.

It is a fact that we can house all our technologies in one center. We have the applications capability and we have the ability to in conjunction to what a customer wants and bring a product to market very quickly and by that I mean nimbleness. And I think that bodes well for business in Europe, obviously a lot of things going on in Europe and from the macro perspective though European business having gone through all the stress of the transformation have performed very well. We are expecting it to do better as the technology center settles down.

Second question in regard to the amount of M&A activities, it’s obviously very noticeable and fair to say that we will keep in touch with it and obviously we should. Please don’t take anything into it that we haven’t had any activity in the first half of the year. We have been just as busy. It just happens that sometimes things don’t happen and M&A activity will play a part. I could not give you an estimate or idea of what it will be in the first half of the back half of the year versus the first half of next year. There is a lot of activity in the sector. It has become a very attractive space and people from outside the industry are looking into it as we have seen with some of the transactions that have taken place but for us no change. And I would be surprised – we will expect to have some activity in the back half of the year in that area.

Thirdly in regard to your question around dairy, I mean dairy commodities by and large are cyclical. What you are seeing is a volatile situation driven by shortage of supplies at the beginning of 2013, driven by oversupply in the beginning of 2014 globally. And I don’t think consumer is slowing down but the rate of increase in production is higher than the growth in consumption. And so there is a downward bearish curve right now for dairy that will have to be managed something we are familiar with.

What you find with many of these commodities cycles is that, it is the length or the breadth of the cycle in terms of managing it. And dairy typically can be a longer one because if you think of commodities can be produced harvested and so on and so forth. From our perspective we can buy let’s say flour or oil or fats or whatever and you price them accordingly. With dairy there are certain aspects of it, like cheese we’ve got to age and whatever, so it just takes a bit longer. And obviously from a per unit basis it is higher as well.

But this is something that we are used to managing and I believe that we will manage it quite well. From a business perspective it is probably easier to manage commodities on the way up than it is on the way down. They are a little bit tougher and takes a little longer, but it is right now a bearish cycle for dairy.

Catherine Farrant – JP Morgan

It’s Catherine Farrant from JPMorgan. I’ve got three questions as well, if I may. The first is on the increase resources in Asia and you mentioned a few things before which is [inaudible] and having a team in place to work on the KERRYCONNECT platform out there, could you just – because if there is anything else there any capacity expansion, investment in kind of scientists, sales people, if we could get an understanding of how this is being built there. And then in Americas I wondered if you could give any kind of more color on the difference between North America and given about how the bad market has been there and sort of Latin American side of the business.

And then lastly on the working capital, I just wondered if you could give a bit more, maybe it’s do with the price of dairy has come down so much. I would like to try to understand why the images have been built up around the nutrition and business a little bit better, and what the outlook should be really on working capital for the full year given the systems will be coming in place the second half of the year at EMEA.

Stan McCarthy

When we look at Asia and you know, I don’t want to overuse an old cliché we have an awful lot of work done and we’ve got lots more to do. But we have an awful lot of work done and we have lots more to do. And let me pick up a number of items, particularly in maybe start with Shanghai, where we have had to expand our R&D activities in Shanghai over the last 12 months or so and that is now performing and staffed very well. It is very much technology and innovations center with all the applications capabilities in Shanghai.

So that’s [inaudible], you are catching the – that we’ve got to have bonds of couple of 100 scientists there, Kathryn, at this point in time. Similarly we are expanding Singapore and a new facility which will be complete in weeks, I think it is September we are moving in there. And that will be up in the size and scale and will have a lot of people. Unfortunately, some of them had to relocate from different parts of Asia like Kuala Lumpur and some other areas where they were housed in different smaller centers as well as we are deploying people out of Europe and U.S. as well.

We are expanding in India, but we are at the early stages there. From our capacity perspective we have the facility that we acquired in Nantong and China and that would be a very significant part of Kerry in the future, I believe and that will be the combination of capital, heavy capital investment which is in the way as well as people with skills beyond technical, R&D from a time perspective whether it is engineers, processing engineers and all of that. We have got a very big facility with appropriate land to expand the business significantly over time.

There some of the, I’ll give you some of the things that are going on in Asia, in terms of the expansion. And like I said we have a lot of work done and we’ve a lot to do in places like Japan, places like Indonesia that are getting a lot of our attention right now.

In terms of America business and the growth, beverage for us across product retail branded or food service, has been an incredible journey for us. We believe that we will continue to do well because we are uniquely positioned in terms of having the technologies that help deliver better quality beverages of what the consumers are looking for today from a nutrition perspective or a taste perspective and clean-label perspective. Whereas in the whole area of citrus, protein, dairy you name it, brown sweet flavors, and we continue to remain excited and we will continue to look at the industry in those as well.

I think your question asked about Latin America as well, and probably we’re seeing Mexico, Mexico is the growth environment as is Brazil but we do have more of a chance in Brazil with inflation, but both geographies for us. We have been there for twenty years or so in that geography we are very committed to it. We are very pleased with it and we will continue to invest in those regions.

Thirdly, the working capital…

Brian Mehigan

That’s just referencing the increased investment we have in our whole nutrition supply channel and some significant parts of supply channel are much longer than normal. So exporting out of Ireland and Europe into Asia does increase their requirement and then there is various different regulations that will have to be run through which slowdown the supply channels as well.

Fulvio Cazzol – Goldman Sachs

Yes, good morning this is Fulvio Cazzol from Goldman Sachs, three questions from me as well. Firstly on the margin progression, and so you improved margins by 50 basis points driven by the efficiencies. Can you just explain how you expect that to progress as I believe rationalization volumes are probably going to be falling into the second half and into next year, if you can just confirm that, and what impact that is going to drive in terms of the margin progress. The second question is on the pension deficit and how is this likely to impact cash outflows going forward, given that the deficit seems to be bigger than it has been? And lastly on the dividend increase of 12.5%, can you just give us an indication of where you expect dividend payout ratios to trend for the full year and maybe even the next years. Thank you.

Stan McCarthy

I will try and fully to answer the question, I did miss second part of it but let me speak about the margin first. When we laid out our objectives a couple of years ago, we set targets of expansion of the 30 basis points for five years – at the end of it. We have commented on, that it is very difficult to really project the margin, because you are obviously dealing with a lot of things, you are dealing with volatility in the first place, you are dealing with product mix, with some acquisitions that have been integrated as well as obviously the whole 1 Kerry program that we put it in place to streamline the business and to get a payback on that.

We have had a couple of very good years. I think we had flagged at the beginning of this year that around 40 basis points expansion and we are seeing the weighted average of 50 coming from 60 and 10 in Ingredients and Flavors and Foods. We see that expanding, certainly this year that expansion continuing. If I were to pick up the five year plan it will show that we have 30 basis points expansion for the next year, if you keep looking at one year. We haven’t given any guidance for that but there is, we believe that we can bring further efficiencies and expansions into that. But I wouldn’t be able to quantify or shouldn’t quantify 2015 today but obviously we will do that in due course.

It is a very good model, in terms of our ability to run our businesses now globally to able to look through the operations and optimize the production model as well as all the other things, procurement functions and services. So that has worked well and has over delivered maybe, but there is more to be delivered. And I will finally answer the question on dividend before we – I pass the pension one on to Brian. We technically grow our dividend in the line with the earnings growth and it has traditionally yielded about 1%. Obviously it is a little lower than that right now but I would expect the dividend to continue to grow double digit, wouldn’t be any more specific than that, but double digit dividend growth is a fair assumption at this point.

Brian Mehigan

And then Fulvio I wouldn’t expect the pension, deficit payments from a cash perspective to change materially, due to the volatility in terms of long term discount rate. It’s reviewed every three years and there is a fixed paid on schedule in place. So wouldn’t be material.

Unidentified Analyst

Good morning, [Fitch Ryan], here from Berenberg. I just have a question going into the EMEA region, would you be able to roughly break out roughly the growth rates between Western Europe and the rest of the developed markets, the developing markets. Do you think you foresee any impact with the geopolitical situation with regards to Russia and certainly the sanction that they seem to put in overnight.

Stan McCarthy

So just to clarify developing Europe for us is Mainland sub-Saharan South Africa and Eastern Europe and that makes that up. And it’s a fairly significant business, roughly it is got to be about 8%, maybe more than 10% of the total business. Not quite more than 10% business, about 8% to 10% I guess. It’s kind of one of those things, we are in, I’m not sure we’re in a reflection point but we are in a point where it is very difficult to predict because for us the opportunities and the growth there is really exciting but it is obviously clouded by the fact that some of the things, that are happening that we read in the newspapers every day. We are pretty comfortable about sub-Sahara Africa having had to deal with a lot of the impact of currency was very significant there this year. And I think that has been worked through and we are very well positioned in that part of the world.

Obviously when you get into Middle East and the Eastern Europe and there are a lot of things happening that could impact it. We don’t see any significant impact that would derail our outlook for the year. It’s not derailing our approach from a strategic perspective of continuing to pursue those markets, but obviously it is wide open time and see what happens. They are progressive countries irrespective of what we read in the newspapers and the opportunity exits there. So we like everybody else are watching it every day and it hasn’t changed our strategy one bit whatsoever.

Unidentified Corporate Participant

We will now hand over to the operator to take calls from conference call participants.


Thank you. We take our first question from James Targett of Berenberg. Please go ahead your line is open. James Targett, please go ahead your line is open. James appears to be no longer on the line. We take our next question from Liam Iggoe of Goodbody. Please go ahead, your line is open.

Liam Iggoe – Goodbody

Thanks for that. Just a couple of points just some clarity, in relation to margins and you’ve [been] over delivering recently, what is your expectation let’s say into second half of the year, do you think you might over deliver there and second half of the year or can you talk to maybe sort of that [level]? On the food side of things, do you see negative like-for-like kind of easing off from here or is there more to go for there and on the ingredients side you mentioned that there is a lot in the pipeline coming into the back end of the year and obviously the growth has been pretty strong.

And are you suggesting that it might be even stronger than that in the back end of the year? And lastly if I may just ask you in relation to emerging markets, I mean quite interesting you were saying the growth there was 12% I think versus 2% in developed markets. And can you just give a brief kind of overview of what percentage, is it better than 25% of your total business in ingredients now and where do you see that going in the next couple of years.

Stan McCarthy

Stan McCarthy here, Liam and I’ll to answer the question as best I can but I am not sure I heard it all, but please ask me again if I fail to answer the question. I am going to pick up pieces that I think I heard. In regards to the margin in the first half of the year, the 50 basis points we would expect to see that continuing on into the back half of the year and no pull back. That is the best estimate at this point in time.

In regards to the question around the ingredient pipeline of new activity, it’s I want to put it the need for innovation, I mean the demands from consumer driven – the demands by consumers are driving our customers for looking for that increased innovations in a very efficient and nimble way. The question will be always will the macro environment be such that it endorses more and more innovation and new products. If you look at the trends that are making a difference in terms of what’s happening in the marketplace, it is all about nutrition, clean label, the consumers paying attention to what they eat, calories are being counted, ingredients are being read. People want to see less items on the label back and so the need for all natural ingredients, less ingredients on the labels. This bodes very well for us and we are seeing lots of activity.

Even if you look at for, example for us bakery across the board in retail and food service the need for ingredients clean-label in that space has become increasingly popular in the market place and relevant to the consumer.

In terms of merger I am not sure I got all your questions but I am sure we are all reading the same things in regards to what’s happening particularly in this space and the valuations. You know I often get asked questions about why don’t more people get into this space. Maybe the evaluations are a reflection in how difficult it is to get into the space, and what people are willing to pay to get into but certainly it has become an attractive space for the people outside the industry traditionally.

Liam Iggoe – Goodbody

Just so does that mean does the high multiples currently being paid in a sense that you stand back from wanting to expand as you might have planned to acquisition.

Stan McCarthy

Liam, could you repeat the question?

Liam Iggoe – Goodbody

The high multiples that are being paid for acquisitions at the moment would those high acquisitions make you think twice about doing the significant deals because initially returns in capital would be low?

Stan McCarthy

Oh, yeah and right for the strategic obviously very questionable if you can but strategic and we will be very well primed for synergies but I take your point in terms of you have to get return at the end of the day.

Liam Iggoe – Goodbody

Okay and the last just on the Kerry Foods side of things, in terms of like-for-like, do you see that continue to be negative in the second half of the year?

Stan McCarthy

No significant change, but I don’t see it any different than the first half of the year.

Liam Iggoe – Goodbody

Okay that’s great, thanks a million.


We take our next question from Carl Walton from Bank of America. Please go ahead, your line is open.

Carl Walton – Bank of America Merrill Lynch

Good morning gentlemen. Just before I ask, can you hear me clearly.

Stan McCarthy


Carl Walton – Bank of America Merrill Lynch

Okay, great. First question just on FX, obviously highlighting that that’s moderating into the second half, are you able to quantify that to any degree and I am also looking at the chart, if things hold it looks like broadly speaking relatively flat FX headwind, I don’t know if I am reading that right. And also could you remind us what were the kind of major key currencies that really contributed to the headwind for the first half, so that we can obviously keep an eye on those second half, so just remind us what are the key exposures are.

And then the second question in terms of sort of improving the market share progress, you mentioned the elements of it, obviously the breadth of the offering, the innovation centers and improvements on 1 Kerry. Just in a kind of abstract way could you, could you say maybe what you think is the most important factor that gives you a unique differentiation against your competitor, or if you are particularly seeing pick up from customers really valuing, is it the breadth or is it the innovation centers or is it an equal sum of all three above. Thanks a lot.

Stan McCarthy

I will pick the last question and then turn it over to Brain in regards to FX. But certainly the whole metrics around the technologies, the innovation centers, the connectivity and the breadth of the technology, the unique breadth of technology gives us an unrivalled position if you will in terms of how we are structured, and to be able to imitate that structure would be very, very difficult and would take a long time for anybody.

We are really excited about it because it’s working and we see the difference every day compared to where we were, in regards to being efficient and agile about utilizing the technology and utilizing it in an effective way for the business. So it’s a great situation to be in but the next, but it is positioning the company and priming the company for growth into the future that we have that network and we have the breadth of the technologies. I think that’s what makes, both from a business perspective and from the customer perspective, that we have the breadth of technologies.

It was always a challenge for us in terms of organizing ourselves and the challenge at the outset is that we were in too many technologies but if we could organize them and align them with the needs in the marketplace then that would be a great position to be in and I feel that we are there at this point of time. In regards to FX can I hand it over to Brian?

Brian Mehigan

Yeah, I mean the chart really shows that FX will continue to be a drag in Q3 but may be slightly positive in Q4. So pretty neutral at this point in second half, maybe a slight drag. And then in relation to the key currencies in the basket across the world that are important to us, obviously China, we have spoken about Brazil the real, the Mexican peso, the Canadian dollar, the Australian dollar and then the ringgit in Malaysia is quite significant at this stage as well.

Carl Walton – Bank of America Merrill Lynch

Thanks a lot, guys.


We take the next question from Jack Gorman of Davy. Please go ahead, your line is open.

Jack Gorman – Davy Stockbrokers

Thank you. Good morning, gentlemen. Maybe two questions if I may, one for Stan and one for Brian. Stan, just on the pipeline more generally and I note your very optimistic view on how your pipeline is looking, just wondering if you can perhaps look it in slightly different way for us, both from your own pipeline and from the marketplace as you look into the back end of the year and in the year 2015, are you seeing any mixed shift or mix changes as regards to the proportion of pipeline looking at new products versus reformulated product, just wondering if you can give us a view or perspective on that?

Second question to Brian, I remember in Q1, Brain, you talked about the fact that in some of the developing markets that there were some effects related inflationary pressures that you wanted to get some pricing to offset that. Just that wondering where you are on that at this stage, Brain, and whether you have worked through on that. Thanks.

Stan McCarthy

I will try and answer the question this way, Jack, because it is – there is a subtlety that we believe that is taking place in the marketplace and it is principally this that for a while the whole issue of clean-labeling and nutritional demands at consumer level have been spoken about and what would we see is that, that portion of the consumer of the marketplace that has been demanding that for sometimes has just raised the bar significantly we would say the last year or so.

And the demand for, like I said, greater efficacy around the claims that have been made, fewer items on the ingredients deck, the growth in all natural and the bar has been raised in terms of, significantly in terms of the consumer that is looking for that and is this thing formed just a macro trend, yes, you have more and more people eating healthy food. But there still exists certain populations that are not paying attention to it as much. But the people that do and have paid attention to it have raised the bar in terms of their expectation, that’s what we have seen.

Companies are paying a lot more attention to it, in terms of the efficacy and making sure that the product is good and it meets the taste profile of what the consumer is looking for. So I would say that the bar has been raised in a short sentence.

Brian Mehigan

And Jack in relation to the inflationary pressures in developing market just they have been quite significant. They have required us to I guess adapt our model to ensure that we got recovery wherever it was necessary in those markets and indeed there is more imports and exports in those markets as well also. So I think by now or certainly through the third quarter we will be in pretty good shape to make sure that, that is fully managed. So it shouldn’t be an issue through the back half of the year. It is reflected in pricing in the first half and will be reflected in pricing in second half as well.

Jack Gorman – Davy Stockbrokers

Great, thanks, thanks guys.


We take our next question from James Targett of Berenberg. Please go ahead your line is open.

James Targett – Berenberg

Good morning I hope you can hear me this time. Hello?

Stan McCarthy

Hello, yes.

James Targett – Berenberg

Great, so yes, two questions from me, firstly on the beverage category, couple of your peers have been saying that, in absent some softness [inaudible] in beverage category, I mean it clearly isn’t the case for you. Just wondered if that was down to the [inaudible] particularly the category exposure or whether you do think you are gaining significant share in the category? And then secondly on consumer in looking at the other volume growth, I wonder if you – whether you are positioned to say you are looking at the realigned portfolio, what kind of drag I guess it’s on the fulfillment cost, [inaudible] are on volume growth and what sort of benefits we could expect from that once the distributor realignment is complete? Thank you

Stan McCarthy

I am sorry, I’m really struggling with the question, I couldn’t – I know the second part was Consumer Foods but I couldn’t hear the question and I couldn’t make out the first part.

James Targett – Berenberg

Okay, I will try again, then firstly was on beverages and some of your peers are saying the beverage category has slowed significantly in the U.S. and that’s clearly not the case with you, so I wondered if that’s down to your particular category exposures or whether you are gaining share significantly? My second question on consumer food the portfolio realignment, I’m trying to get an idea of the drag on volumes of the part of the portfolio that you are looking to realign is and what kind of benefit we could see once the realignment has been completed.

Stan McCarthy

Yeah it’s – the drag on volume on Consumer foods has been a combination of a few things, certainly in the whole chilled store label category, that category has been declining and certainly we have felt that. And that’s where we felt most of the decline. Certain categories like I mentioned earlier in terms of reduced promotional activities and moving towards more, call it everyday low pricing type of mentality, that seems to be gaining traction, yet to see if it will continue but just less volume promotional activity has impacted our performance. And obviously everybody is looking for that change, that we will try and ignite that growth but in the UK environment, the consumer and their quest for value is dictating what has taken place in the marketplace.

I believe your first question was in relation to beverage and market share. In terms of defining the market traditionally, I mean the beverage market is being redefined particularly with what has taken place in regards to reformulations the removal of sugary beverages from schools, and all I can say to you and I am hoping I am answering the question properly, is that we see opportunity for beverage in the global markets and in particularly in US, given the breadth of technologies that we have. We are very excited about it and we have got great confidence in that area.

James Targett – Berenberg

Okay, thanks.


As we have no further questions in the queue, I would like to turn the call back to the speakers for any additional or closing remarks.

Stan McCarthy

All right, at this stage then we will bring it to a close. I would like to thank everybody that has called in and everybody that has joined us here this morning. Thank you for taking the effort to be with us. Thank you very much.

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