REPORT ON THE DIRECTOR’S POINT OF VIEW OF KERRY GROUP FINANCIAL AND STRATEGY MANAGEMENT
TABLE OF CONTENT
- INTRODUCTION 4
- THE COMPANY OVERVIEW 4
- The firm 4
- Corporate governance 4
- Analysis of the market 4
- REVIEW OF STRATEGY 5
- Weaknesses-Opportunities strategies 5
- Weaknesses-Threats strategies 5
- Strengths-Opportunities strategies 6
- Strengths-Threats strategies 6
- BUSINESS PERFORMANCE REVIEW 6
- Nutrition and taste 6
- The EMEA Region 6
- The Asia-Pacific Regions 7
- The American Region 7
- Consumer Foods 7
- FINANCIAL PERFORMANCE REVIEW 8
- Analysis of Results 8
- Net Finance Costs 8
- Trading Profit and Margin 9
- Business Acquisitions 9
- Taxation 9
- Non-Trading Items 9
- Free Cash Flow 9
- FINANCIAL POSITION REVIEW 9
- Intangible Assets 9
- Property, plant, and equipment 10
- Current assets 10
- Net debt 10
- Retirement Benefits 10
- Going Concern 10
- The Impact of Brexit 11
- DIVIDEND 11
- FUTURE PROSPECTS 11
- APPENDIX 11
- Appendix 1: statement of cash flow of Kerry Group for the interim period
- Financial ratios
- Statement of Comprehensive Income for the half year ended 30 June 2016
- Reconciliation of EPS
- Consolidated financial position from the year 2015 to the year 2016
From a director’s point of view, this paper would give a clear report of Kerry group’s financial and strategic management with information as at June in the year 2016. This report would entail the market analysis, strategic review, the performance review of the business, its performance in terms of finance, the group’s financial positioning, dividend, the future prospects of Kerry Group, and the firm’s major activity.
- THE COMPANY OVERVIEW
- The firm
The company is a global manufacturer and key distributor of beverages and foods to various countries across the world, its distribution channels across one hundred and forty million countries (140million), since the firm’s plant commissioning in 1972 in Ireland, the company has grown to be leading in providing technological based ingredients in its market sector, the firm became public in 1986 and is quoted on the London stock exchange as well as Euronext Dublin stock exchanges with its headquarters in Ireland.
- Corporate governance
The company board members are responsible for guaranteeing that the group achieves long term success, through their collective leadership experience, creating efficient and effective management systems to oversee the firm’s activities. The board comprises of 12 members, who include; the chief executive officer, non-executive chairman, the chief financial officer, an executive director, and eight non-executive directors.
- Analysis of the market
The market in which a business is targeted plays a major role in the success of every firm; the Group has both developing and developed markets with a ratio of 26% for its developing markets and 74% for the already developed market. The group is faced with challenges in its developed markets as macroeconomics related issues are still trending such as price levels, inflation, growth rate, changes in unemployment, gross domestic products, national income, and changing fiscal policies are affecting the Kerry group, even with its challenges, there is a higher chance of success in its developed market due to an increase in consumer spending, the firm has had an increase in the demand for beverages and food in the market with expansion at a fair rate of 3.5% growth collected in revenue that was realized by the firm. The developing markets of Kerry Group is quite unstable, with currency fluctuations causing losses and gains, economic growth moving slowly, more food and safety regulations, and health awareness, the firm has put in place a programme aiming at sustainability and increase in the demand for food and beverages in their targeted developing markets with an expected favourable conversion of foreign currency.
- REVIEW OF STRATEGY
With the use of SWOT analysis as a tool to review Kerry Group strategies, four strategies were derived and it constitutes weakness-opportunities strategies (areas that need improvement by the group), weakness-threats strategies (external factors that affect the group), strength- opportunities strategies (competitive edge of the firm), and strength-threats strategies (external factors that benefit the firm).
- Weaknesses-Opportunities strategies
- The group’s finance needs adequate planning for effective management
- The turnover rate of unemployment when compared to other firms in the industry is not favourable and needs improvement
- Development of new marketing strategies and current strategies in place needs improvement
- Turnover of inventory is not quite favourable when compared, so an upgrade in the management and distribution of inventory is needed.
- Weaknesses-Threats strategies
- The online purchasing behaviour and taste of consumers changes, and this affects the performance of the group financially
- Due to imitations, there are close substitutes the products of the group by competitors and rival firms, thereby decreasing the demand of its products.
- Due to various liability policies in foreign countries, Kerry Group is open to a lot of liability claims
- Exchange rates and its fluctuations cause the firm to incur losses from translation as it operates in various countries, and uses foreign currencies
- Due to ever-changing laws and standards in different countries, Kerry Group is exposed to lawsuits.
- The profitability of the group is affected by the rise or inflation of the cost of raw materials in production.
- Strengths-Opportunities strategies
- Customer satisfaction is premium
- Effective raw material supplies to curb the problems of overwhelming supply chain
- The group’s capital expenditure has good returns which enable the firm to be more creative with opening new revenue streams and avenues
- The firm is constantly innovating and has been very successful in launching and developing new products
- The group is packed with proficient skilled workers as it provides programs for learning
- The firm’s cash flow is high and this allows the group to engage in new productive projects and expand its existing projects.
- Strengths-Threats strategies
- With the emergence of e-commerce, Kerry Group has increased profitability and more distribution of its products
- New tax laws and incentives from foreign countries have created an opportunity for Kerry Group to reduce its tax liabilities by applying appropriate tax planning systems.
- Interest rates are fairly low due to stable inflation, which is an opportunity for the firm.
- Loyalties of customers are retained through price and quality adjustments, with government incentives such as “green incentives”.
- BUSINESS PERFORMANCE REVIEW
- Nutrition and taste
- The EMEA Region
Continuous deflation on prices in the developed market and political doubts in developing markets of Kerry Group in the EMEA regions has remained a source of the problem for the firm. The region contains Europe, Middle East, and Africa. Kerry Group responded competitively to high demands of consumers through product mix up, the division of the food service continues to create more opportunities in growth for the group, the revenue derived from sales is reported as seven hundred and thirty-four million euro (€734million) as at June 2016, showing the firm’s overall growth volume of 0.3% and lower price of 2.7%. With the use of technology to assist the firm to innovate more value-added products; the meat market has remained weaker, in eastern European the meat business and snack demand is on an increase and causing success in that market region, especially in Russia. Competitiveness is high in the sub-Saharan African markets, there is significant growth in the beverage market, and also there is lucrative growth in nutritional technology, infant nutrition is booming
- The Asia-Pacific Regions
The company gained a substantial growth in South Korea and Japan with its noodle line, the firm purchased Junglin foods in the year 2016, and this laid a solid ground in South Korea with the company taste technology, demand for dairy products increased significantly in China, Indonesia, Philippines, and Vietnam. Kerry Group also had a boost in its revenue from snacks in the Philippines, Malaysia, and Thailand. The overall growth rate increased by 9.5% and price lowered by 1.8%, revenue for the region amounted to three hundred and sixty-seven million euro (€367m) with a reduction showing 11.4% due to the impact of disposing of Pinnacle Lifestyle bakery of 13.3% and 5.8% after currency conversion.
- The American Region
Kerry group has operations in North American and Latin American, the business performance of Kerry group bounced up in this region due to newly innovated technology adapted in 2015 and other various acquisitions by the firm like red arrow products, demand of meat grew in North American, demand for snack grew in central American and Mexico,wellmune product is also doing well in nutrition and pharmacy markets, revenue on sale grew by 15.2% to one million two hundred and forty-four thousand (€1, 244m) showing a 3.5% overall business volume growth and a 2% lower pricing. Trading profit expanded by 7.9% to three hundred and four million (€304m).
- Consumer Foods
Kerry Group has been able to position the firm’s financial portfolio against various market conditions; it has been favourably competitive in the Irish and United Kingdom markets as its retailers are more adaptive to market changes, trends, and buying behaviour of consumers, the group has maintained a stable position in the market and developing penetration strategies for new market. There has been continuous growth in the meat and snack sector in United Kingdom market which springs out a yearly growth of 8%, changes made in the promotional strategy of its sausages aided in more demand, snacks with cheese also increases yearly by 5%, the introduction of new products like cooked and frozen meats and innovated spreads got introduced in the year 2016. The business volume increased by 2.3% and decreased pricing by 2.1%. Revenue on sales is reported at six hundred and ninety-seven million euro (€697m) showing a 7% decline resulting in free disposals and acquisitions in the year 2015. With the group’s improvement of product quality, the firm has achieved a 30 points basis in growth and sales margin of 8.3%, although the firm was affected by disposal of various units in the business, and so it is depicted as fifty-eight million euro (€58m) with a reduction of 3.7%.
- FINANCIAL PERFORMANCE REVIEW
- Analysis of Results
The revenue of Kerry Group in the year 2016 amounted to three million forty thousand euro (€3.04m) depicting a rise of 0.3% when compared to the three million and thirty thousand euro in the year 2015, the volume of the business increased by 3.2% in 2016 and price lowered by 2.2%, there is a decrease in raw material cost as a result of 0.2% currency conversion effect, the disposal purchases of new business units amount to 3.2%. There is a revenue increase of 2.6% amounting to two billion and four hundred thousand billion euro (€2.4billion) in 2016 by the taste and nutrition category market when compared to the two billion and three hundred thousand euro (€2.3billion) derived in 2015. The volume increased by 3.5% and lowered price by 2.2%. There is a revenue decrease of 7% in consumer foods which amounted to six hundred and ninety-seven million euro (€697million) compared to 2015 financial figure of seven hundred forty-nine million euro (€749million). The growth of business volume amounted to 2.3% and pricing lowered by 2.1%, disposal and acquisitions of business units affected the firm by 3.8% and currency translation affected the business by 0.3%.
- Net Finance Costs
The group incurred a more financial cost due to financing acquisitions of the business; there is an8.3% increase from thirty-six million euro (€36m) in the year 2015 to thirty-nine million euro (€39m) in 2016.
- Trading Profit and Margin
The group had an expansion of 7.4% in trading as it derived three hundred and twenty-two million euro (€322m) in 2016 compared to three hundred million euro (€300m) it got in the financial report of 2015, due to the influence of mixing products, coupled with disposals and acquisitions, the group scored more 70points from 9.9% to 10.6% in 2016.
- Business Acquisitions
Kerry Group acquired Vendin S.L in Spain and Junglin foods in South Korea within 2016 financial reporting.
The differences in a tax rate of various countries led to the growth of tax liability of an additional one million euro (€1m), from thirty-five million euro (€35million) to thirty-six million euro (€36million) in 2016.
- Non-Trading Items
The group derived twenty-seven million euro (€27million) in disposal income, and three million euro (€3million) charge related to tax attributed to the acquisition of a business.
- Free Cash Flow
The firm has a free cash flow of three hundred and seventy-nine million euro (€379million) during 2016 financial report, the increase in cash inflows resulted due to a reduction in fixed assets and working capital for the year when compared to the one hundred and ninety-two million euro it realized in the year 2015.
- FINANCIAL POSITION REVIEW
- Intangible Assets
The intangible assets of Kerry Group are reported as three million four hundred and fourteen euro (€3.414million), there is a decrease of thirty-five million euro (€35million) due to gains and losses from exchange when compared to the report of HI 2015 AND FY 2015 with total of two million eight hundred and thirty-nine million euro (€2.839m) and three million four hundred and forty-nine million euro (€3.449m) respectively.
- Property, plant, and equipment
The property, plant and equipment at the 2016 accounting period amounted to one million three hundred and fifty-two million euro (€1.385m), there was a decrease of forty-six million euro due to disposals, PPE for FY 2016 was one million four hundred and thirty-one million euro while HI 2015 amounted to one million three hundred and fifty-two euro (€1.352m)
- Current assets
the current asset of Kerry Group increased in 2016 report, it increased from one million eight hundred and forty-two euro (€1,842million) in FY 2015 and one million nine hundred and nine euro (€1,909million) in H1 2015 to one million nine hundred and eighty-nine euro €1,989m, the cash and its equivalent at the end of June 2016 had a growth of one hundred and forty-seven million euro (€147million).
- Net debt
Kerry Group has a downfall in its net debt by one hundred and thirty million euro from 2015, as at 2016 the net debt was one million five hundred and twenty euro, the consolidated balance sheet of the firm can be said to be situated in a healthy position.
- Retirement Benefits
Employees retirement benefits expanded, it was reported to be three hundred and fourteen million euro, compared to three hundred and sixteen million euro in FY 2015 and two hundred and fifty-three million euro in HI 2015, this expansion is as a result of the rate of discount in Europe, USA, and the UK.
- Going Concern
The board of Kerry Group has faith in the firm to continue to be in existence for a long time as it is evident in the preparation of their periodical consolidated balance sheet, the firm has the resources to operate for a long time and has an adequate budget to arrive at such claims.
- The Impact of Brexit
The political decision of UK to leave the European Union affected the financial performance of Kerry Group, although the firm believes strongly it can still retain the loyalties of customers and still be competitive
Kerry Group increased its dividend to shareholders by 12%, in HI 2015 it was previously 15cents per share, and now in 2016, it increased to 16.8%, this change is to take place in October and payable in November.
- FUTURE PROSPECTS
Despite the uncertainties and market changes, the firm is positive to flourish in both their developed and developing markets, as the firm as put in place sustainability program that would address the trends in customer’s desires and create innovated products and solutions for them, the firm’s 2015 acquisition has created an opportunity for the firm to expand and exploit new markets and get competitive edge over its rivals.
- Appendix 1: statement of the cash flow of Kerry Group for the interim period
|H1 2016 €m||H1 2015 €m|
|Movement in average working capital||120||9|
|Pension contributors paid less pension expense||(20)||(24)|
|Cash inflow from operations||489||346|
|Finance costs paid (net)||(24)||(22)|
|Income taxes paid||(23)||(13)|
|Capital expenditure (net)||(63)||(119)|
|Free cash flow||379||192|
- Financial ratios
|Banking ratios||H1 2016||H1 2015||FY 2015|
|Net debt: EBITDA||1.7x||1.6x||1.9x|
|Met interest : EBITDA||15.7||19.4x||17.3x|
- Statement of Comprehensive Income for the half year ended 30 June 2016
|Reconciliation of Adjusted earnings per share||% Change||H1 2016
|Computer software amortization||(11.4)||(9.9)|
|Finance costs (net)||(39.1)||(36.3)|
|Adjusted Earnings before taxation||6.6%||271.1||254.2|
|Income taxes (excluding non-trading items)||(35.7)||(35.2)|
|Adjusted Earnings after tax||7.5%||235.4||219.0|
|Brand related intangible asset amortization||(10.2)||(8.4)|
|Non-trading items (Net of related tax)||(2.8)||27.2|
|Profit after taxation||(6.5%)||222.4||237.8|
- Reconciliation of EPS
|% change||HI 2016||HI 2015|
|Brand related intangible asset amortization||(5.8)||(4.8)|
|Non-trading items (net of related tax)||(1.6)||15.5|
- Consolidated financial position from the year 2015 to the year 2016
|Statement of Financial Position|| H1 2016
| H1 2015
| FY 2015
|Property, plant and equipment||1,385.1||1,352.2||1,431.5|
|Other non-current assets||261.6||273.8||290.5|
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