Kerry : Interim Management Report for the half year ended 30 June 2017

Thursday, 10 August 2017‌‌‌‌‌‌‌‌‌‌‌

Interim Management Report for the half year ended 30 June 2017

Kerry, the global taste & nutrition and consumer foods group reports a solid underlying business performance for the half year ended 30 June 2017.

HIGHLIGHTS

• Group revenue increased by 4.8% to €3.2 billion reflecting 3.8% business volume growth

  • Taste & Nutrition +4.2% volume growth

  • Consumer Foods +2.3% volume growth

• Trading profit increased by 5.2% to €338m

• Group trading margin maintained at 10.6%

  • Taste & Nutrition +20bps to 13%

  • Consumer Foods -70bps to 7.6%

• Adjusted EPS* up 7.5% to 143.8 cent

• Basic EPS of 127.6 cent (H1 2016: 126.4 cent)

• Interim dividend per share increased by 11.9% to 18.8 cent

• Free cash flow of €357m (H1 2016: €379m)

* Before brand related intangible asset amortisation and non-trading items (net of related tax)

Commenting on the results Kerry Group Chief Executive Stan McCarthy said; "Against a background of significant adverse currency movements, we achieved a strong overall business performance in the first half of 2017, outperforming market growth rates and delivering a 7.5% increase in adjusted earnings per share. In February 2017 we guided growth in adjusted earnings per share of 5% to 9% at prevailing exchange rates. Taking into account increased currency translation headwinds of 4% and a 2% improvement in underlying performance at constant currency rates, we now expect to achieve growth in adjusted earnings per share of 3% to 7% on a reported basis to a range of 333.1 to 346 cent per share (2016: 323.4 cent)."

Contact Information

INTERIM MANAGEMENT REPORT

for the half year ended 30 June 2017

Kerry Group maintained a strong overall business performance in the first half of 2017 despite significant adverse currency movements and increased raw material pricing. Business volume growth rates outpaced industry levels, capitalising on Kerry's unique taste & nutrition technologies and systems which are well positioned to deliver innovative solutions for the Group's global, regional and local customers in response to ever-changing consumer requirements. Consumer trends favouring clean label, nutritious, tasteful, natural and convenient food and beverage offerings continue to drive a strong innovation pipeline across all end-use- markets in all regions. Growth in the foodservice channel continues to outpace growth in traditional retail outlets. E-tail and convenience channels also continue to grow strongly in selected consumer preferred categories.

The Group's developing markets strategic growth model continues to achieve excellent results, particularly in Asia. Business performance in all regions continues to benefit from Group investments in its Technology & Innovation network, Development & Application Centres, and in its in-market commercial / technical support facilities through delivery of speedy innovative solutions to meet local taste preferences and consumer requirements.

Kerry Foods continues to perform well delivering sustained volume growth, despite the uncertainty following the UK electorate's decision to leave the European Union and the significant devaluation of sterling. Retail fragmentation continues to drive marketplace competitiveness as growth through convenience formats, discounter chains and online grocery shopping outperforms traditional retail channel growth.

Business Performance

Group revenue on a reported basis increased by 4.8% to €3.2 billion driven by strong organic growth offset by adverse currency movements. Business volumes grew by 3.8% in the period reflecting a good performance in American markets, an improved performance in the EMEA region and double digit growth in the Asia-Pacific region. Net pricing increased by 1.8%. Currency headwinds increased during Q2 contributing an adverse 1% translation impact and an adverse 0.4% transaction currency impact to revenue relative to H1 2016.

Taste & Nutrition delivered 4.2% growth in business volumes and pricing increased by 1.7%. Kerry Foods' business volumes increased by 2.3% and divisional pricing increased by 1.9% across the half year.

The Group trading margin was maintained at 10.6% reflecting 20 basis points improvement in Taste & Nutrition, positive underlying margin improvement in Kerry Foods offset by adverse sterling exchange rates resulting in a 70 basis points margin reduction, and an increased spend on the Kerryconnect Programme.

Adjusted earnings per share increased by 7.5% to 143.8 cent (H1 2016: 133.8 cent). Basic earnings per share increased by 0.9% to 127.6 cent (H1 2016: 126.4 cent).

The interim dividend of 18.8 cent per share represents an increase of 11.9% over the 2016 interim dividend. Net capital expenditure amounted to €102m (H1 2016: €63m). The Group achieved a strong free cash flow of

€357m in the period (H1 2016: €379m).

Business Reviews

* Volume growth

Kerry provides the largest, most innovative portfolio of Taste & Nutrition Technologies and Systems, and Functional Ingredients & Actives for the global food, beverage and pharmaceutical industries.

The changing marketplace and consumer consumption trends continued to drive demand for Kerry's globally connected Taste & Nutrition technologies and innovation capabilities, facilitated by the Group's 'in-market' development & applications expertise and local customer service infrastructure. Retail and foodservice channel disruption and expansion, coupled with growth of ecommerce and demand for convenience plus localised taste preferences benefited Kerry's unique Taste & Nutrition business model and differentiated consumer-led innovation network. Increased consumer demand for 'better-for-you', balanced nutrition and health offerings provided a strong platform for growth through Kerry's market leading clean label solutions across all end-use- markets and foodservice channels. Growth in out-of-home consumption drove strong business development in the foodservice sector. The Group's developing market strategies and investment again recorded excellent progress in all regions and double digit volume growth in Asia.

Taste & Nutrition reported revenue increased by 6.9% to €2.5 billion reflecting 4.2% volume growth. Net pricing increased by 1.7%. Trading profit grew by 8.8% to €331m, reflecting a 20 basis points improvement in divisional trading margin to 13%.

Americas Region

While consumer trends and increased market fragmentation impacted 'centre of store' branded offerings and industry growth rates, Kerry Taste & Nutrition 'go-to-market' strategies continued to deliver a strong innovation pipeline across core food & beverage end-use-markets, direct-to-retail and foodservice channels. Kerry's taste and nutrition technologies are well positioned to meet increased consumer requirements for convenient, clean label, natural, organic, gluten-free, non-GMO and meat-free solutions, together with enhanced natural food preservation. Acquisitions completed in 2015 maintained a strong market development momentum across North and South American markets. Market conditions in Brazil improved relative to H1 2016 but Mexico and Central American markets were impacted by lower regional economic growth.

Sales revenue in the Americas region on a reported basis increased by 7.6% to €1,339m, reflecting 3.6% volume growth, a 1.5% increase in net pricing and a favourable translation currency impact of 2.5%.

Taste technologies achieved a solid performance throughout American markets in particular in the meat, bakery and beverage categories. Smoke & Grill technologies maintained excellent progress throughout retail and foodservice applications - benefiting from the Red Arrow acquisition completed in late 2015. Seasonings and coatings applications grew throughout the Latin American meat industry. Dairy & Culinary systems were impacted by challenging market conditions in North American prepared meals and side dish categories. However, dairy & culinary technologies achieved good growth in Latin America - particularly in foodservice solutions. Brazil based Ben Alimentos was acquired in June, expanding the Group's dairy technology capability in the region.

The decline in the traditional R.T.E. cereals sector led to continued challenges in Cereal Systems. However, snacking trends provided solid growth opportunities in the nutritional bar sector in North America. The savoury snacks sector remains challenged due to consumer trends and industry issues in Mexico, Central America and the Caribbean region. Beverage systems grew well through R.T.D. coffee and all natural smoothie applications. Kerry's branded beverage offerings, including Island Oasis, Da Vinci, Café D'Amore, Big Train and Oregon Chai continued to progress market development.

The Group's core Functional Ingredients & Actives business continued to perform well. Solid growth was achieved through Food Preservation Systems and through cell nutrition applications in the pharmaceutical sector. Wellmune® branded food, beverage and supplement immune enhancing ingredients maintained strong growth, with successful market development in wider global nutritional and food product markets.

EMEA Region

Whilst the retail environment remained challenging across European markets, the continued growth of out-of- home consumption and channel diversification provided good opportunities for growth and market development. Kerry's increased focus on commercial effectiveness and 'in market' customer engagement achieved good progress - contributing to a strong performance relative to H1 2016.

Demand for enhanced nutrition, clean label, authentic, sustainably produced offerings provided a strong platform for growth through Kerry Taste & Nutrition Technologies & Systems supported by the Group's Technology & Innovation Centre network.

Sales revenue in the EMEA region on a reported basis increased by 2.3% to €750m, reflecting 2.3% business volume growth, 2.2% increase in net pricing, a 3.1% adverse translation currency impact and an adverse 0.3% transaction currency impact. Underlying business momentum improved across regional end-use-markets and channels in particular in Q2. Kerry performed well in the UK market despite food and beverage inflationary trends and the uncertainty following the UK electorate decision to leave the European Union.

Kerry's taste technologies and systems grew solidly, in particular in the meat sector through foodservice applications. Good progress was achieved in Italy, Spain, Russia and the MENAT region. Establishment of a new manufacturing facility commenced near Moscow to meet customer requirements in the meat and savoury snack sectors. Dairy & Culinary systems benefited from snacking trends with a strong performance reported through Kerry's unique 'infused oil' applications. Innovation in the sweet sector improved with good growth in nutritional applications, yoghurt and the premium ice cream sector. Clean label trends in the bakery sector also provided a solid platform for growth. Market conditions in Sub-Saharan Africa stabilised.

Sugar reduction continued to drive innovation in the beverage sector. Beverage systems performed well in the foodservice and c-store channels, supported by market development through the recently acquired Island Oasis and Vendin beverage solutions businesses. Kerry's branded beverage offerings continued to perform well through the major chains and convenience channels.

Dairy based nutritional technologies continued to grow through infant and adult life-stage applications, in particular in Asian markets. Returns from primary dairy markets progressively improved due to lower production year-to-date in some exporting countries and to improved butterfat market demand.

Asia-Pacific Region

Kerry's strong market development and business performance momentum was maintained throughout Asia- Pacific markets in the half year. Business volumes grew by 10.3% and net pricing increased by 1.7%. Reported revenue in the region grew by 14.2% to €419m.

Solid growth was achieved through all Kerry's core technologies, end-use-markets and geographic markets in the region. In particular foodservice growth remains highly favourable - providing excellent innovation opportunities for Kerry technologies and a strong impetus for product diversification in competing channels. Strategic expansion of Kerry's Asian footprint to meet customer requirements was maintained throughout the region through organic investment in Group facilities and completion of a number of acquisitions. The acquisition of Tianning Flavours was completed in April strengthening Kerry's savoury and sweet flavour development capabilities in China. In March, Taste Master was acquired in Australia providing a significant boost to the Group's taste capabilities in the beverage, snack, meat and culinary industries in Australia and New Zealand. New production facilities were established in Batangas, the Philippines and in Cikarang, Indonesia. In India, establishment of a new production facility to support taste and clean-label technology delivery commenced. The Group has also reached agreement to acquire Hangzhou, China based Hangman Flavours - a leading producer of sweet and savoury flavours.

Kerry's Taste, Nutrition & General Wellness technologies all performed well throughout the Asia-Pacific region. Dry beverage applications grew strongly in Thailand and China. Liquid beverage systems achieved solid growth in particular in the foodservice and convenience channels in Japan, China and Thailand. Branded beverage systems including DaVinci continued to successfully progress market development throughout the region. The snack and bakery categories provided strong development opportunities for Kerry dairy technologies & systems in Indonesia, Japan, China and Malaysia. Culinary systems also benefited from foodservice trends in Australia, New Zealand, China and Malaysia. Similarly, the meat sector provided good development opportunities in the latter geographies and in Thailand.

Nutritional applications including specialised proteins and enzyme technologies maintained solid growth.

Wellmune® achieved strong growth in the regional nutritional beverage sector.

* Volume growth

Kerry Foods is an industry-leading manufacturer of added-value branded and customer branded chilled food products to the Irish, UK and selected international markets.

The consumer foods marketplace in the UK and Ireland remained highly competitive due to increasing inflationary pressures in the UK and overall competitiveness in a more fragmented market landscape. The decline in retailer promotional activity continued as the major chains responded through EDLP strategies to the growth in convenience outlets, channel proliferation and expansion of discounter chains. 'Food-to-go', foodservice and e-tail channels continue to grow at the expense of traditional outlets.

Kerry Foods' business volumes grew by 2.3% and net pricing increased by 1.9%. Reported revenue at €677m declined by 2.8% due to significant adverse currency movements. The divisional trading profit margin decreased by 70 basis points to 7.6% as the underlying margin improvement was more than offset by adverse sterling exchange rate movements. This resulted in a trading profit decrease of 11.1% to €51m.

Demand for nutritional tasteful convenience products continued to drive good growth through meat and dairy snacking lines. 'Mattessons' performed well in meat snacking. 'Cheestrings' grew market share in the UK children's cheese snack sector. 'Cheestrings Scoffies' extended the division's cheese snack offering into the after-school segment and 'Go-Go's' achieved encouraging results in the adults' snack sector. 'Cheestrings' continued to develop its market positioning in mainland Europe. 'Attack-A-Snack' achieved double digit growth in the light snacks category. 'Yollies' maintained solid growth in the children's yoghurt snack sector.

Conditions in the UK sausage sector stabilised. The relaunched 'Richmond' brand performed satisfactorily and the 'Walls' fresh sausage portfolio achieved good market penetration. 'Fire & Smoke' maintained good development momentum in the UK and Irish sliced cooked meats categories. 'Denny' branded lines performed satisfactorily in Ireland. In May 'Henry Denny's Meat Masters' was launched successfully in the premium meats sub-category.

Premiumisation and health trends contributed to a good performance in Kerry Foods' chilled and frozen prepared meals. Foodservice and 'direct-to-consumer' channels also provided good growth opportunities.

Excellent progress was achieved in the UK private label spreads category through Kerry's spreadable butter based offerings. 'Dairygold' maintained market share in the Irish spreads category assisted by successful new product introductions.

Financial Review

* Before brand related intangible asset amortisation and non-trading items (net of related tax)

Analysis of Results

Revenue

On a reported basis Group revenue increased by 4.8% to €3.2 billion (H1 2016: €3.0 billion). Volumes grew by 3.8%, net product pricing increased by 1.8% and there was a negative transaction related currency impact of 0.4%. Business acquisitions contributed 0.6% and there was a negative translation currency impact of 1.0%.

In Taste & Nutrition, reported revenue increased by 6.9% to €2.5 billion (H1 2016: €2.4 billion). Volumes grew by 4.2%, product pricing increased by 1.7% and there was a negative transaction related currency impact of 0.1%. Business acquisitions contributed 0.7% and there was a positive translation currency impact of 0.4%.

In Consumer Foods, reported revenue decreased by 2.8% to €677m (H1 2016: €697m). Volumes increased by 2.3% and product pricing increased by 1.9%. There was a negative impact of 1.4% from transaction related currency and a negative translation currency impact of 5.6% due to weaker sterling.

Trading Profit & Margin

Group trading profit increased by 5.2% to €338.4m (H1 2016: €321.6m). Group trading profit margin in the period was maintained at 10.6%. Underlying margin expansion attributable to improved product mix, operating leverage and efficiencies was offset by transaction currency headwinds, increased Kerryconnect investment and the denominator pricing effect.

Trading profit margin in Taste & Nutrition increased by 20 bps to 13.0%, due to the benefits of improved product mix, leverage and efficiencies, offset by the denominator pricing effect and currency headwinds.

Trading profit margin in Consumer Foods decreased by 70 bps to 7.6% due to significant transaction currency headwinds in the period, partly offset by underlying margin expansion.

Finance Costs (net)

Finance costs (net) for the period decreased by €4.7m to €34.4m (H1 2016: €39.1m) due to strong cash generation in the period.

Taxation

The tax charge for the period, before non-trading items was €38.5m (H1 2016: €35.7m) which represents an effective tax rate of 13.7% (H1 2016: 13.7%).

Acquisitions

During the period, the Group completed three bolt-on acquisitions, Tianning Flavours was acquired in China, Taste Master was acquired in Australia, and Ben Alimentos was acquired in Brazil. The Group also reached agreement to acquire Hangman Flavours in China.

Non-Trading Items

The Group recorded €17.8m of costs net of tax (H1 2016: €2.8m) primarily relating to costs associated with integrating the acquisitions completed since 2015.

Free Cash Flow

The Group achieved free cash flow of €357.2m (H1 2016: €379.1m). This reflects improved profit, offset by higher capital expenditure relative to the prior period.

Balance Sheet

A summary balance sheet as at 30 June 2017 is provided below:

Property, Plant & Equipment

Property, plant & equipment decreased by €21.8m to €1,430.1m (Dec 2016: €1,451.9m, H1 2016:

€1,385.1m), as additions made in the period were more than offset by foreign exchange translation movements and the depreciation charge.

Intangible Assets

Intangible assets decreased by €30.1m to €3,414.2m (Dec 2016: €3,444.3m, H1 2016: €3,414.4m) as additions during the period were offset by foreign exchange movements and the amortisation charge.

Current Assets

Current assets decreased by €80.2m to €2,159.8m (Dec 2016: €2,240.0m, H1 2016: €1,989.0m), primarily due to a decrease in cash in hand at 30 June 2017 arising from the repayment of US Senior Notes of $192m which matured on 20 January 2017.

Retirement Benefits

At the balance sheet date, the net deficit for all defined benefit schemes (after deferred tax) was €186.4m (Dec 2016: €291.9m, H1 2016: €313.9m). The decrease in the net deficit from year end arises from good investment returns, a favourable movement in discount and inflation rates, and a liability management programme implemented in 2017.

Net Debt

At 30 June 2017, net debt stood at €1,222m, a decrease of €102m relative to the December 2016 debt of

€1,324m.

Key Financial Covenants

At 30 June the key financial ratios were as follows:

*Calculated in accordance with lenders facility agreements which take account of adjustments as outlined in the financial definitions accompanying the Interim Financial Statements.

The average maturity profile of net debt was 6.5 years at the end of the period (Dec 2016: 6.4 years). At the period end 60% of gross debt was carried at fixed rates and the weighted average period for which rates were fixed was 7.2 years. The Group's balance sheet is in a healthy position. With a net debt to EBITDA* ratio of 1.3 times, the organisation has sufficient headroom to support its future growth plans.

Related Party Transactions

There were no changes in related party transactions from the 2016 Annual Report that could have a material effect on the financial position or performance of the Group in the first half of the year.

Exchange Rates

Group results are impacted by fluctuations in exchange rates year on year versus the euro. The table below details the movement in spot rates since February guidance for the principal exchange rates used to translate results of non-euro denominated subsidiaries.

Principal Risks & Uncertainties

Details of the principal risks and uncertainties facing the Group can be found in the 2016 Annual Report on pages 62 to 67. These risks include but are not limited to; the identification and integration of acquisition targets, a slowdown in the rate of innovation, quality & food safety risks, failure to attract/retain key talent, systems implementation risks, unauthorised use of Group intellectual property, geopolitical risk and ongoing operational and compliance risks. However, risks with increased potential impact in the second half of the year include fluctuating raw materials together with volatile currencies. The Group actively manages these and all other risks through its control and risk management process.

Going Concern

The Group Condensed Consolidated Interim Financial Statements have been prepared on the going concern basis. The Directors report that they have satisfied themselves that the Group is a going concern, having adequate resources to continue in operational existence for the foreseeable future. In forming this view, the Directors have reviewed the Group's budget for a period not less than 12 months, the medium term plans as set out in the rolling five year plan, and have taken into account the cash flow implications of the plans, including proposed capital expenditure, and compared these with the Group's committed borrowing facilities and projected gearing ratios.

Dividend

The Board has declared an interim dividend of 18.8 cent per share (an increase of 11.9% on the 2016 interim dividend of 16.8 cent) payable on 10 November 2017 to shareholders registered on the record date 13 October 2017.

Board & Management Changes

As announced in February, Mr Stan McCarthy, who became Chief Executive of the Group in January 2008, will retire as Chief Executive on 30 September 2017 and as Director of the Group at year end.

Mr Edmond Scanlon has been appointed Chief Executive Designate to succeed Mr McCarthy on his retirement. Having joined Kerry's Graduate Development Programme in 1996, Mr Scanlon worked in Finance until his appointment as Vice President Finance, Supply Chain and Operations of Kerry's Global Flavours Division in 2004. In 2007, he was appointed Vice President Mergers & Acquisitions, Kerry Americas region, before being appointed Global President Kerry Functional Ingredients & Actives in late 2008. In 2012, he was appointed President of Kerry China, prior to his appointment as President & CEO Kerry Asia Pacific region in November 2013.

Mr Flor Healy has retired as an Executive Director of the Board and signalled his intention to step down from his position as CEO of Kerry Foods, the Group's consumer foods division, at year end. Over the coming months Mr Healy will assist the transition to a new CEO of Kerry Foods to be appointed by Mr Edmond Scanlon, Chief Executive Designate. Mr Healy joined Kerry's Graduate Development Programme in 1984 and served in a number of key positions across the Group's foods' businesses prior to his appointment as CEO of Kerry Foods in 2004.

Future Prospects

Notwithstanding significant currency headwinds, Group businesses are well positioned to meet customer and consumer needs in the changing marketplace and deliver sustained underlying growth. Kerry's globally connected, localised Taste & Nutrition business model, supported by the Group's Technology & Innovation Centre network, holds a strategic advantage in meeting customer requirements across all market channels in developed and developing markets. We continue to capitalise on out-of-home consumption trends and channel expansion. Prospects for sustained strong growth throughout Asian markets will be supported by deployment of increased resources. Organic and acquisition growth opportunities will continue to be pursued in all geographic regions.

Kerry Foods will continue to embrace meat and dairy snacking, meal solution and out-of-home channel growth opportunities.

In February 2017 we guided growth in adjusted earnings per share of 5% to 9% at prevailing exchange rates. Taking into account increased currency translation headwinds of 4% and a 2% improvement in underlying performance at constant currency rates, we now expect to achieve growth in adjusted earnings per share of 3% to 7% on a reported basis to a range of 333.1 to 346 cent per share (2016: 323.4 cent).

Responsibility Statement

The Directors are responsible for preparing the Half Yearly Financial Report in accordance with the Transparency (Directive 2004/109/EC) Regulations 2007 of Ireland (S.I. No. 277 of 2007) ("the Regulations"), the Transparency Rules of the Central Bank of Ireland and with IAS 34 "Interim Financial Reporting" as adopted by the European Union.

The Directors confirm that to the best of their knowledge:

• the Group Condensed Consolidated Interim Financial Statements for the half year ended 30 June 2017 have been prepared in accordance with the international accounting standard applicable to interim financial reporting adopted pursuant to the procedure provided for under Article 6 of the Regulation (EC) No. 1606/2002 of the European Parliament and of the Council of 19 July 2002;

• the Interim Management Report includes a fair review of the important events that have occurred during the first six months of the financial year, and their impact on the Group Condensed Consolidated Interim Financial Statements for the half year ended 30 June 2017, and a description of the principal risks and uncertainties for the remaining six months;

• the Interim Management Report includes a fair review of the related party transactions that have occurred during the first six months of the current financial year and that have materially affected the financial position or the performance of the Group during that period, and any changes in the related parties' transactions described in the last Annual Report that could have a material effect on the financial position or performance of the Group in the first six months of the current financial year.

On behalf of the board

Stan McCarthy Chief Executive

9 August 2017

Brian Mehigan

Chief Financial Officer

Disclaimer Forward Looking Statements

This Announcement contains forward looking statements which reflect management expectations based on currently available data. However actual results may differ materially from those expressed or implied by these forward looking statements. These forward looking statements speak only as of the date they were made and the Company undertakes no obligation to publicly update any forward looking statement, whether as a result of new information, future events or otherwise.

for the half year ended 30 June 2017