The spectacular year-on-year jump in Kerry Group’s first-half revenue and profit is, of course, coming off the low base of the calamitous early 2020 period that saw the onset of Covid-19. Yet beyond the ups and downs of the pandemic, chief executive Edmond Scanlon was clearly happy with the results he presented this Friday.

“While recognising we have had low comparatives in Q2 2020, the 18 per cent volume growth we delivered in taste and nutrition in the second quarter came in ahead of our expectations,” he told the morning investor call. 

Much of this came from the re-opening of restaurants, with a 25.2 per cent volume lift in that channel compared with the first half of 2020, when lockdowns devastated the sector. “At an overall level now in foodservice, we are trading at just over 90 per cent of 2019 levels,” Scanlon said. He ruled out restocking as a driver for demand at this point. “We do see further improvements but right now, we’re not expecting to be to be back at 2019 levels in 2021 yet.” 

Meanwhile, demand from Kerry’s customers in the retail sector continued to grow at a steady 5 per cent annual rate (4 per cent in its main American and European markets, and in double-digits elsewhere, Scanlon detailed).

Increasing volumes were somewhat countered by currency headwinds but still returned 4.9 per cent revenue growth. Kerry Group’s overall revenue is now above pre-pandemic levels – though with its constant stream of acquisitions, this is not comparing like with like.

In terms of profitability, earnings per share have now recovered two thirds of the ground lost last year and shareholders will receive a 10 per cent increase in this semester’s interim dividend. 

Investors weren’t much impressed, though, triggering a 3 per cent drop in Kerry’s share price during the day. This may have to do with the group’s cautious outlook for the rest of the year. “We have increased the bottom end of our guidance range and this is due to our continued confidence around the overall volume outlook for the year,” said chief financial officer Marguerite Larkin. “Having said that, we have seen a heightened level of volatility and variability across of across our markets,” she added, singling out the reintroduction of Covid-19 restrictions in Japan and parts of south-east Asia.

The recovery came from an improvement in the group’s trading margin, which has evolved differently in its two divisions.

Taste and nutrition, Kerry’s leading (and soon only) business selling integrated B2B solutions to food manufacturers, retailers and restaurant operators, achieved 12.4 per cent trading margin. That’s 80 basis points higher than in the first half of last year, but such was the drop then that profitability in this flagship division accounting for over 80 per cent of group revenue has not yet recovered to 2019 level.

More traditional consumer foods, meanwhile, returned a more modest 7.2 per cent margin, gaining 20 basis points – but it had lost no profitability last year, so this is all bonus. 

In both cases, Larkin said improvements were mostly attributable to operating leverage. As volumes grow, economies of scale deliver higher profits.

This is why, despite the better short-term improvements in consumer foods’ profitability, Kerry’s decision to sell off this division continues to make sense for the group and its shareholders. Last month, it agreed to sell the meats and meals part of this business to JBS-owned Pilgrims’ Pride for €819 million.

The dairy side remains on the market and Scanlon provided no update on that this week, following the collapse five months ago of talks with the historic Kerry Co-op of milk-supplying farmers – the group’s largest shareholder – about a potential dairy spin-off. 

Health claims and pharma-like strategy

If profits are a function of volume and scale, then it is logical for Kerry Group to allocate more capital where it has capacity to generate the highest margins, and that’s in taste and nutrition. While the sale of meats and meals consumer foods is due to close in the fourth quarter of this year, Kerry has already spent a sum exceeding the expected proceeds on taste and nutrition acquisitions this year to date.

The four deals, worth over €1 billion, are continuing a trend that is making Kerry Group look more and more like a pharmaceutical company. 

On the one hand, the group is ever more focused on health claims in the foods it helps its customers present to consumers. Detailing the recent acquisitions, especially those of Spanish-based biotech Biosearch and US-Indian health plant extracts manufacturer Natrean, Scanlon said: “This expands our penetration into the healthcare channel, and is another business where we see great potential to leverage into new areas.”

When it comes to developing innovations in-house, Kerry seeks to have them validated for therapeutic use through scientific publications. “We've also published a range of clinical efficacy studies covering areas such as reducing respiratory tract issues for children and increasing protein absorption for the elderly,” the group’s chief executive said.

Even those acquisitions outside the immediate functional foods area, such as last month’s €853 million deal for Niacet in the US, have a health connection. That company provides clean-label solutions to enhance the shelf life of products without loading them with chemicals, which scare off health-conscious consumers, and makes ingredients for the pharma industry – an emerging customer base for Kerry.

On the other hand, this growth model mimics that of pharma giants. While they do conduct some of their research internally, new blockbuster drugs are increasingly developed by independent companies, which become parts of larger groups once their products are proven. The likes of Pfizer, Novartis or Merck then act more and more like portfolio managers, using acquisitions to add drugs to their manufacturing and distribution capabilities where scale delivers profit.

Compare this with Scanlon’s presentation on acquisitions today, which aimed at explaining “how our integrated approach to bringing new businesses onto the Kerry platform really sets us apart and best positions us in our industry to create significant value for all stakeholders”. When he says things like “we have a breadth of capability and a depth of science across our portfolio,” you could be forgiven for thinking that you’ve wrongly dialled into the GlaxoSmithKline investor call.

Scanlon on restaurants’ labour shortages

The recovery in Kerry Group’s American business, with €1.5 billion in revenue in the first half of this year, wasn’t all about funky tasting drinks and new ways of extending a sandwich’s shelf life. “We also supported customers in the foodservice channel in helping them to manage labour shortages and wage inflation pressures with innovations that help to reduce complexity in back-of-house operations,” Scanlon said.

As restaurants and fast-food outlets struggle to find staff, you might worry about their ability to sell the products they source from Kerry – yet this is also a business opportunity for the group. “We've seen a step-change, frankly, in working on solutions with customers to help them to reduce complexity at back of house. That's due to the labour issues, especially in North America, that many of our customers are experiencing,” Scanlon said.

One example he gave of such simplification is foodservice customers using Kerry’s coffee extract and flavour products to replace more labour-intensive traditional coffee making in their kitchens.

“In many instances, there's just not enough labour to allow operators to run for the length of opening that they actually want to in a day. So we're seeing some of our customers on the foodservice side make decisions: ‘Okay, we're going to open for breakfast or lunch or we're just going to open for lunch or dinner, we only have one crew, we're going to have to make some decisions around day parts’,” Scanlon said. Rather than restaurant operators asking suppliers to cut costs, “it's actually more around simplifying operations where less labour is needed. And of course, ultimately, that will have a cost benefit. It's offset nonetheless by, maybe, higher wages that are going to find their way into that channel over time, and are starting already.”

Kerry Group’s chief executive added that this dynamic “could easily cross into Europe”.