Kerry is one of the industry’s 10 major firms, which accounts for less than 50% of industry revenue

Business Strategy and Outlook

Kerry Group has evolved from its humble roots as an Irish dairy co-operative into a global flavour and nutrition powerhouse serving the food, beverage, and food-service sectors. The wide economic moat rating is supported by intangible assets and switching costs stemming from the company’s wide range of ingredient solutions and strong service component, which contributes to partnership like client relationships. Kerry works with clients to find market opportunities that can be successfully delivered, in contrast to its flavour and fragrance competitors, which take a more transactional strategy that focuses on delivering bespoke taste solutions utilizing their considerable research and development resources.

These holistic collaborations with a range of customers from various end-use segments and geographies produce essential market and consumer insights that enrich Kerry’s service offering, a virtuous cycle at the heart of the company’s considerable competitive advantages. Post coronavirus, Kerry has unique exposure to the most dynamic segments of the global food and beverage business, since two thirds of its revenue comes from local and regional food and beverage clients and approximately one fifth is derived from the food-service market. Taste and nutrition accounts for over 92% of sales and is the primary growth engine for Kerry. The worldwide food ingredient and taste industry is fragmented, with projected sales of more than $70 billion and a growth rate of 2% to 3%. Kerry is one of the industry’s 10 major firms, which accounts for less than 50% of industry revenue. Kerry’s other section is a somewhat undifferentiated dairy business, after the recent sale of the company’s meals and meats division.

Financial Strength

Kerry is in strong financial health. The company has moderate financial gearing, with net debt/2021 adjusted EBITDA of 1.9 times, and consistently generates good amounts of free cash flow, though at a lower level than F&F companies and the leading consumer staple companies in general. Aggregate acquisition spending of around EUR 1.25 billion through the next five years based on the company’s strategy to lead consolidation in the fragmented food ingredient and flavour market. Due to Kerry’s acquisitive nature and above-average capital spending, discretionary cash generation (free cash flow will average close to 5% of sales over the next five years) is moderate. Typically, Kerry spends 3%-5% of sales on capital expenditures and around 6.5% (based on taste and nutrition sales) on average on bolt-on acquisitions. Although the former is to remain in line, the capital spending on acquisitions normalising a bit over the next five years, but still remaining adequate driven by the company’s core strategy to further develop its integrated solutions offering through a broader geographic presence and a wider range of ingredient solutions, catering better to both the food-service and developing markets. The dividend policy looks conservative, given a fiscal 2021 payout ratio of about 25% despite moderate financial gearing and good free cash flow generation. It appears Kerry may be deliberately keeping sufficient financial flexibility in case it decides to undertake a significant, transformational acquisition mostly paid in cash, though past experience.

Bulls Say’s

Kerry’s integrated solutions model is hard to replicate due to its high service component (based on decades of experience) and wide range of solutions offered.

Kerry is one of the largest firms in a fragmented flavour and specialty food ingredient industry, which provides ample opportunities to consolidate and gain meaningful scale.
Ingredient sales are expected to grow faster than food or beverage sales because of outsourcing, secular trends like clean labelling and health and wellness, and a rising number of applications and technologies (driving volume growth).

Company Profile

Kerry Group is a global leader in taste and ingredient technology servicing the food, beverage, and pharmaceutical sectors. The company’s more than 150 manufacturing facilities supply clients in 150 countries with 18,000 food and ingredient items. It gets around 80% of its revenue from developed countries and 20% from the developing world, servicing a wide range of end-use sectors, such as meat, meals, snacks, dairy, drinks, and pharmaceuticals. Kerry has expanded through a combination of organic development and multiple tuck-in acquisitions.

(Source: MorningStar)

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