Kerry's ingredients for global market growth

By Hugh Oram

The future of the dairy industry could lie in Ireland. Kerry, Ireland's multi-national food group, started life as a farmer-owned dairy company before being transformed under the guidance of the group's managing director, Denis Brosnan.

Milk processing now accounts for about only 15 per cent of its business as it has spread into food ingredients on a worldwide scale. Four years ago it arrived in New Zealand and now claims to be number one in the business through the acquisition of DCA and then Burns Philp & Co's New Zealand assets.

It supplies many food processors, including fish, meat and poultry. Mr Brosnan says that prospects in New Zealand, including for food exports, are good. He admits that the devaluation of the New Zealand dollar against the US dollar has not helped, but says that it has not been a major inhibiting factor in the group's growth in New Zealand.

However, the group does not intend to go into the prepared foods market here, as it has done so strongly in Ireland and Britain, with dairy and savoury meat products, even Kerry Spring brand mineral water.

Kerry, which says it is the only Irish food company in New Zealand, is now a leading player in the global food ingredients market, especially in the US, and increasingly in Europe, where it is pushing strongly into eastern Europe, and now in the Asia Pacific region and Latin America. It is now the leading ingredients manufacturer not just in New Zealand but in Australia too.

Four years ago, the group bought DCA, which included the Solutek flour-based coatings and seasonings operation in New Zealand. Just over a year ago, the group bought the food ingredients side of Burns Philp for $A39 million when Burns Philp was selling off assets to avoid bankruptcy. With that purchase came the Burns Philp plant in Auckland, which had only been opened about a year, and four manufacturing plants in Australia. The Kerry Group now has just over 40 plants worldwide.

The Solutek and Burns Philp operations have now been merged to form Kerry Ingredients New Zealand and employ about 50 people. It reports to the group's Asia Pacific regional headquarters in Sydney. The rise of pre-prepared take home meals is driving Kerry's growth world wide. In New Zealand, products like seasoned batter mix for prepared fish and poultry products are strong sellers, Mr Brosnan says.

While the New Zealand operation has been well bedded in, Mr Brosnan says that rationalisation of its Australian manufacturing operations is a much bigger operation and will take another 12 months. Dublin-based Goodbody Stockbrokers, part of Allied Irish Bank, forecasts that this year, the Kerry Group will have sales of around sterling IR1850 million and will turn in pre-tax profits of about sterling IR90 million. Forecast trading margins for this year are 8.3 per cent, with sales growth forecast to be 6.8 per cent. Last year, 70 per cent of its profits came from food ingredients, 28 per cent from prepared foods and only two per cent from agri-business.

Europe, including Britain, was source of 42 per cent of its turnover last year. A fifth came from Ireland and 36 per cent from the United States. A mere one per cent came from the rest of the world, including the Asia Pacific region. The group's debt is being paid down rapidly and although it is much more highly geared than most food companies, its cash flow is strong.

Now, analysts reckon it could comfortably spend up to sterling IR1 billion on acquisitions over the next 12 months, but a more likely scenario would seem to be an sterling IR300 million purchase before the end of this year. Already this year, it has bought the Turkania company in Germany. This gives the Kerry Group control over most of the seasonings market in Germany.

Liam Igoe, food industry analyst with Goodbody Stockbrokers, says over the next 10 years, Kerry will look for much greater growth in Latin America, where it has just opened a huge new powdered beverage plant in Brazil, and in the Asia Pacific region. In 10 years' time, he reckons, the Kerry Group will be as big in Latin America and the Asia Pacific region as it is now in Europe and the US.

Mr Brosnan makes no secret of the fact that the group wants more manufacturing capacity and a greater presence in the Asian/Pacific market. Australia is seen as the springboard for the group in the region and it is expected to follow US food and beverage companies into the Chinese market.

The origins of the Kerry group are complex and fascinating. Kerry Co-op began on January 1, 1974. Around 6000 dairy farmers in Co Kerry, in south-west Ireland, put up sterling IR1 million in sterling IR1 shares to buy out the creameries in Kerry that had been owned by the state-controlled Dairy Disposal Company.

In January, 1986, Kerry Group was formed, with Brosnan as managing director and in return for 90 million shares at 35p each, bought the assets of the businesses owned by the co-op. The co-op ended up with 90 million shares in the plc and no other assets. Gradually, other investors were brought in, so that by 1996, while the Kerry Co-op still had 52 per cent of the shares in the plc, institutional and individual shareholders held 48 per cent.

The co-op was bound to keep at least a 51 per cent shareholding, but that year, 1996, this requirement was changed to a minimum 20 per cent holding.

Today, Kerry Co-op holds 37 per cent of the shares, which is indirect farmer ownership, while farmers in the Kerry area directly hold about another 20 per cent. The remaining shares are held by institutions and others. The Kerry Group is valued at around sterling IR1.6 billion, with farmers owning, directly and indirectly, about sterling IR1 billion. Employees hold 2 to 3 per cent.

The share structure means that any takeover bid would be very costly and very difficult. Today, the Kerry share value is around 900 Irish pence. The group is well regarded in Ireland. For the first six months of 1999, the Irish Stock Exchange performed poorly, with share values down about six per cent. Kerry Group was one of the few exceptions.

Mr Brosnan acknowledges that farmers in the Kerry area have done well from Kerry Co-op and the Kerry Group. Mr Igoe of Goodbody says the Kerry Group is very well managed. Every five-year period has seen strong upward sales and profit growth. He adds that they have a very Japanese style of management and that when they take over a company, they soon put the complete Kerry stamp on the place. "They are seen as very tough, aggressive competitors, expanding through organic growth and acquisitions".

He adds that Kerry Group is good at extracting inefficiencies and sweating the assets, without laying off a lot of people. The group now employs about 12,500 people worldwide. The group has spent just over sterling IR4 million ensuring total Y2K compliance. This is not MR Brosnan's only interest. He is the director of a number of other private and public companies in Ireland and Britain. He is also the chairman of the Irish Horseracing Authority.