Inside Kerry Group’s top-secret global innovation centre in Naas, Co Kildare, multiple research and development labs and scale-model food factories are fronted by a suite of customer-facing facilities.

The “discovery suite” is a restaurant-like space surrounded by flat screens where international food company executives come with an idea and Kerry’s marketing team rummages through decades of accumulated technical expertise and consumer knowledge – collated into its “eat the streets” database – to turn it into a product. This is where the likes of the plant-based mojito sorbet were born. 

Down a corridor, a bank of individual sensory booths isolate tasters from the outside world to record their perception of new samples – for example, do they enjoy newly-engineered lower-salt crisps as much as a leading brand’s regular recipe?

Upstairs, a team of mixologists and chemists operates a full bar to demonstrate how processes and ingredients developed by the group blend into new drinks. The shelves are stocked with bottles from the world’s leading drinks manufacturers – Diageo, Bacardi, Pernod-Ricard – all incorporating Kerry technologies.

“The main trends are no or low sugar or alcohol,” said Kerry Group’s global director of beverages Paul Villis as he blowtorched herbs to combine their smoke with home-made vermouth into a “fire spire” cocktail. “It gets interesting when you’re trying to turn water into wine.”

When The Currency toured the Naas innovation centre last year, we already knew the food tech developed there had driven Kerry Group’s global growth for the past decade. Annual results released this Thursday now show that it was also instrumental in helping the business beat the latest shock to the global food industry – last year’s inflation spike.

One key chart presented by chief financial officer Marguerite Larkin on Kerry’s 2022 investor call says it all. It shows how the group’s Ebitda evolved last year.

Skyrocketing raw material prices could have wiped out Kerry’s profitability last year. Chief executive Edmond Scanlon reported “an exceptional level of inflation across dairy and other input costs during the year”. But the group managed to recover nearly all these costs by passing them on to their customers.

In the end, “pricing was a net 180 basis points dilution in the year, driven principally by the mathematical impact of recovering the absolute increase in raw material input costs through pricing,” Larkin said. “Given the significant input cost inflation of over 20 per cent In the year, I would like to recognize the continued efforts of our teams as they managed this unprecedented pricing environment in close collaboration with our customers.”

Drilling down further into Kerry Group’s annual figures, the price increases it applied to its own products and services was significant – but, at 11.7 per cent, it was only about half of the inflation seen in the raw materials it was buying in.

So, how can a business increase its own prices only half as fast as its suppliers, and still lose only 1.8 point in margin along the way? The answer is technology. At this point, Kerry Group justifies most of the prices it charges to its customers by the patents and processes allowing them to achieve unique shelf life, taste or nutrition claims. The ingredients going into achieving this, while essential, have become a minor part of the financial equation. 

This is evident in the breakdown of annual results between the group’s two divisions. Taste and Nutrition, the high-tech business accounting for the vast bulk of Kerry’s revenue last year at €7.4 billion, applied price increases of just 8.7 per cent. Meanwhile, it continued to grow the volume of sales by 7.8 per cent, most of which occurred in the last quarter of 2022. 

By comparison, the simpler Irish dairy processing business was a lot more exposed to the rise in prices paid to farmers for their milk. Without its own technology layer to add as much value, Kerry’s dairy Ireland division passed on a much higher fraction of inflation than Taste and Nutrition.

In the peak summer production months of 2022, Irish milk prices were around 40 per cent higher than in the previous year. Last year, Kerry’s Irish dairy processing business increased its own prices by 36 per cent. As a result, it was unable to grow sales, with volumes remaining static. This reinforces the argument for Kerry Group to dispose of its domestic dairy division, and the door was never fully closed on previously unsuccessful talks with the group’s founding farmers’ co-op to buy back the business.

Kerry Group’s chief financial officer Marguerite Larkin.

Overall, inflation left Kerry Group with a lower margin last year but, thanks to Taste and Nutrition’s ability to keep growing volume (and some help from exchange rates) it ended 2022 with €1.2 billion Ebitda, up €139 million. Unusually, the group ploughed the resulting extra cash flow into additional working capital to hold a larger – and more expensive – buffer of raw materials “to manage through the short term supply chain disruption”, Larkin said. This includes Covid-19 restrictions in China and the disposal of Kerry’s operations in Russia and Belarus. She added that working capital was expected to remain flat this year.

Still, Kerry had enough in the tank to increase dividends by 10 per cent. Shareholders were happy with that, judging by the four per cent jump in the group’s share price when markets opened on Thursday.

The question now is what is coming next and, again, this is all about inflation. “We are committed to margin expansion excluding the pricing, as we’ve delivered in 2022,” said Larkin. Regardless of the inflationary environment, Kerry is continuing to implement an internal efficiency programme and to adjust its portfolio, with the sale of its sweet ingredients business moved to the exclusive negotiations stage last month and expected to conclude this year for €500 million.

“It’s fair to say that over the last two years, the level of cost inflation has been truly  unprecedented, so we do have an expectation as we move through the final stages of the plan, to have deflation, which will have a positive impact on our margin percentage,” Larkin said.

When will this happen? “We currently expect Taste and Nutrition input cost inflation for H1 [2023] to be high single digits, maybe even double digits I would say, and H2 really is unclear at this stage. We just have to see where market prices are as we move through the air. Then on Kerry Dairy Ireland, we do expect to have deflation during the year,” Larkin said.

At some point after the middle of this year, Scanlon was confident prices would decrease. “We’re expecting a level of deflation from current levels over the next couple of years, given where our input costs currently are,” he said. His objective, once this happens, is for Kerry to achieve an Ebitda margin of 20 per cent by 2026.

Is a record fine the end of Kerry’s US salmonella woes?

On February 3, the US Department of Justice announced that Kerry Group’s US subsidiary had pleaded guilty to a charge that it manufactured breakfast cereal under insanitary conditions at its Gridley factory in Illinois that was linked to a 2018 salmonellosis outbreak. Kerry also agreed to pay a $19.228 million fine, which must now be confirmed at a sentencing hearing before a federal court next month.

Kerry used to contract-manufacture Honey Smacks for Kellogg’s at the plant. “For every month between June 2016 and June 2018, routine environmental tests showed at least one positive sample for salmonella at the plant. During that timeframe, routine environmental tests showed approximately 81 positive environmental salmonella samples,” the Department of Justice reported. “The plea agreement also states that, during the period between June 2016 and June 2018, the Gridley Facility routinely failed to accurately document corrective and preventative action regarding positive tests from its environmental monitoring program.”

US authorities also prosecuted Ravi K. Chermala, who occupied the position of Director of Quality Assurance at Kerry in the US until September 2018. Chermala, too, has pleaded guilty to “causing the introduction of adulterated food into interstate commerce”. He admitted that he had “directed subordinates not to report certain information to Kellogg’s about conditions at the Gridley facility” and to “alter the plant’s program for monitoring for the presence of pathogens in the plant, limiting the facility’s ability to accurately detect insanitary conditions”.

Chermala was due to be sentenced on Thursday, the day of Kerry Group’s annual results release, but this has now been postponed to June. 

Although the US Department of Justice has described the fine as the largest-ever criminal penalty following a criminal conviction in a food safety case, it is too small to be disclosed individually as a material fact in Kerry Group’s accounts.

Asked by The Currency whether the group had booked it or any other costs associated with the case this or last year, a Kerry spokesman said: “This was provided for in our 2021 accounts.”