Oil cost squeezes Kerry's margins

By Ahmed ElAmin

- Last updated on GMT

Related tags: Cent, Revenue, Kerry

The Ireland-based Kerry Group says difficulties in raising prices
to recover the increased cost of energy slowed its growth during
the first six months of the year.

The company's difficulties are a sign that retailer pressure is restricting the amount of flexibility food companies have in responding to cost increases for their inputs, squeezing their margins.

Kerry said it would contine to focus on driving price increases through as part on a programme to recover the costs. The company will also attempt to cut the fat out of its supply chain, make more investments in developing new products and eliminate what chief executive Hugh Friel calls "non-core activities".

The reorganisation plan comes after Kerry made a long series of predominantly bolt-on acquisitions over the past few years. The company plans to develop products targeted at the growing demand for healthier, more nutritional products.

Kerry reported sales revenue growth of 7 per cent to €2,265m for the six months ended 30 June. Like-for-like revenue growth was 3.5 per cent, with operating income up 1.9 per cent to €216m. Trading profit grew by 1.5 per cent to €162m for the six months, Friel reported.

Total group sales revenue throughout European markets in the first half of 2006 grew by 5.2 per cent to €1.5bn. In American markets, the group's ingredients and flavours businesses increased sales revenue by 10.9 per cent to €635m. Sales revenue in Asia Pacific markets grew by 9.1 per cent to €174m.

Crude oil prices, which grew on average by 42 per cent in 2005, increased by a further 32 per cent during the first six months of 2006.

"The adverse impact of energy related and raw material cost inflation has continued into the second half of the current year and the group continues to focus critical attention through its long-term customer relationships and partnerships on necessary cost recovery programmes,"​ the company stated in its results.

The company's consumer foods unit suffered from significant increased costs, a weak performance in poultry markets and losses connected with the company's Hartlepool operation. Divisional revenue grew by 6.6 per cent to €875m, reflecting static overall like-for-like growth as a result of sectoral price deflation, the company report.

"The difficult market conditions restricted cost recovery programmes to offset the significant energy, packaging and distribution cost increases incurred during the period," the company stated.

The cost and price squeeze together with operational issues resulted in a 4.6 per cent reduction in trading profits for the division to €52m.

In Ireland, Kerry Foods' category leading brands all grew market share in the first half of 2006. Denny achieved market growth in the sausage, rasher and pre-packed sliced meats categories, the company reported, citing a new brand identity and marketing programmes.

In the chilled ready meals sector the slowdown in overall market growth continued into the first half of 2006, but by the end of the period the rate of growth again accelerated - driven primarily by premium categories, the company stated.

Kerry Foods recently closed its plant in Hartlepool. Noon Group acquired the plant in August 2005.

The company's food ingredients business had like-for-like revenue growth of 5 per cent, after adjustment for acquisitions, disposals and currency translation.

Total sales revenue in the division increased by 6.5 per cent to €1,548m. Trading profits grew by 4 per cent to €123m.

The unit's trading margin fell by 20 basis points to 8 per cent, reflecting the time lag in the recovery of cost increases, particularly in European markets, the company stated.

Related topics: Market Trends

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