Food group Kerry today reported a pre-tax profit of €162.3m for the first six months of this year (HI 2010), up from €115.4m in the same period last year  --  a 41% increase. It has also raised its forecast for the full year.

Total sales revenue expanded 6.7% to €2.4bn, with strong growth in the Asia-Pacific region, while the group's trading profit rose 12.9% to €204m. Kerry reported profit margins in its ingredients and flavours and consumer foods businesses improved. Adjusted earnings per share rose 19.3% to 80.2 cent and a 14.3% higher interim dividend of 8.8 cent was declared.

Commenting on the results Kerry Group chief executive Stan McCarthy said; “Kerry delivered strong profitable growth in the first half of 2010, growing continuing business volumes by 5.8% on a Groupwide basis. Adjusted earnings per share in the period increased by 19.3% to 80.2 cent. Based on our strong performance to date in 2010 we now expect to achieve mid-teen growth in adjusted earnings per share for the full year”.

Results detail

Davy analyst John O'Reilly commented: "ANALYSIS: Kerry continues to deliver good continuing volume growth: 5.8% year-on-year (yoy) in H1, an acceleration on the Q1 outturn (5.2%). This is an achievement matched by few other major food enterprises. In ingredients, continuing volume growth accelerated by 6.5%, while there was 4% continuing volume growth in consumer foods which must be counted a very good achievement in the context of current grocery market conditions, in Ireland especially. Organic volume growth across regions in ingredients was: Americas +6.2%, EMEA +4.4% and Asia Pacific +15.7%.

Price/mix was negative across the group, a function of passing back lower material costs to customers. Counter-intuitive as it may seem, Kerry gains margin on this direction in material prices. So, whereas pricing/ mix in the group was a negative 1.9% yoy in H1, there was a 40bps rise in group like-for-like trading profit margin (EBITA%) to 8.4%. In ingredients, price/mix was a negative 1.9% yoy in H1 — it varied between regions — but like-for-like EBITA% margin (EBITA%) rose by 50bps to 9.2%. In foods, price/mix was -1.6% but like-for-like EBITA% rose by 40bps to 7.1%.

Group like-for-like sales growth was 2.7%; currency change (+2.7%) and the impact of acquisitions increased reported growth by 6.7%. Like-for-like sales growth in ingredients and flavours was 3.9%. When added to by currency translation (3%) and acquisitions (1.1%), reported revenue growth was 8%. Like-for-like sales growth in foods was 0.5% — there was a negative 1.4% in the rate of growth due to volume rationalisation. But with currency positive as regards translation of acquisitions (Breeo), contributing revenue rose by 3.3% on a reported basis. There was a positive contribution of 1.4% from acquisitions but a 0.5% decline in revenue from volume rationalisation.

The narrative around the results points to a good performance across the group's product, technology and channel platforms though inevitably the particular challenge of Ireland as regards food division is noted. But the group says that with product re-positioning it has stabilised performance. Regarding market conditions, it notes trends that are familiar by now, including the emphasis on value, the migration from away-from-home eating — though it notes the good performance of the QSR sector — and the absolute and relative vitality of Asia-Pacific markets.

Intra-year, H1 of 2009 was the toughest period. Assumptions about the full-year result should have regard to this.

There was excellent free cash generation in the period: €177m compared with €76m the previous year. Net debt-to-EBITDA this half year was 2.2x (2.6x last year) while EBITDA net interest was 8.2x (7x last year). The pension deficit as of H1 was €212m (€166m and €141m at end-2009 and June 2009 respectively).

DAVY VIEW: Even if it is what we have come to expect from Kerry, it is hard not to be impressed by its H1 performance. The continuing volume growth is a key metric for us. The H1 performance shows how robust its strategy and model are. With material costs set to rise — a blend 10% or so on our assumptions based on today's prices — and given the stronger intra-year H2 in 2009, second-half comps will be tougher. For the reason noted above about the effect of rising material costs on margin, the scope to lift margin in H2 will be more limited. Still, the mid-teen guidance, which puts a floor under EPS higher than the top of its previous guidance range, looks very achievable. Acquisition spending in H1 was, for Kerry, a modest €11m. Reportedly, there is a full pipeline, so H2 should be much more active on this score. It is incorrect for observers to look for the 'big deal'. It is a cluster of small deals around a particular new technology, product trend, geography or market channel — catalysed for growth by Kerry's competence — that is a key driver of its performance and ability to sustain growth. We maintain our 'outperform' rating."