Kerry Group: Gaining Momentum In Health And Wellness

seekingalpha09-26

Kerry Group is poised to benefit from the growing wellness trend among younger generations.Despite a challenging 2023, prudent financial management and cost-saving initiatives position Kerry Group for...

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Resilient by design and capable of withstanding economic turmoil amidst the global investment markets. However, resilience is just one reason why I believe the Kerry Group is an intelligent investment in the current environment. Within the Group there are two business units that are poised to thrive following a shift in consumer behavior, particularly amongst younger generations, towards a healthier lifestyle. These business units are Pharmaceutical & Biotechnology Products and Nutrition & Health Ingredients, which are two separate product platforms within Kerry Group that are already manufacturing and distributing an array of products to end users globally, catering to this growing wellness trend. According to a report by McKinsey & Company, which has estimated the wellness and healthy living market to be in the region of $1.8 trillion, thus highlighting the expansive opportunities available to Kerry Group in this growing segment. Beyond these growth opportunities, investors can have confidence that management has aligned the business interests with shareholders through shareholder-friendly actions such as returning excess capital through a growing dividend and increased share repurchases while continuing to expand the product lines and market share across the group. Investors seeking portfolio diversification through investment in a defensive sector should consider this consumer staple business in an overvalued market. Introduction Kerry Group Plc is one of the largest food businesses globally, generating €8 billion in sales annually. Headquartered in the remote southwest of Ireland, this is an unusual location for a large multinational business, however, as a food product business the location makes a lot of sense. The southwest of Ireland is an agricultural stronghold famous for its lush green fields providing nutritious sustenance for thriving herds of livestock, which provide the raw ingredients for many of the food products through which Kerry Group has become so successful producing. Kerry Group's business lines consist of Taste & Nutrition solutions and Food Products such as dairy, meat, pastries, and ready meals, which are distributed across 150 countries. Dairy in Ireland is renowned worldwide and considered a close second in quality to New Zealand, which ranks as the best dairy producing country on the planet. Dairy Ireland is just one division of Kerry Group. However, it's one of the oldest segments within the company, on which the current business has been built around. The group has a diversified portfolio of product offerings, which serve the Food (67%), Beverage (26%), and Pharmaceutical (7%) sectors, in addition sales are geographically diversified spread across the Americas (54%), APMEA (24%), and Europe (22%), somewhat minimizing the risks related to specific geographic economic concerns as well as providing options for future growth through regional expansion through dedicated distribution channels.   Kerry Group Overview (Annual Report) Business Progress 2023 was a difficult year for Kerry Group, with a 10% decline in earnings, citing challenging market conditions with supply chain issues, inflation and strong competition impacting the business. Trading updates have been greatly anticipated to understand if the downward slide is expected to continue. Unfortunately, the news was not great, with no improvement over H1 2023 as revenue declined by 5.9% to €3.9 billion compared to the same period last year. Meanwhile, free cash flow generation was positive, improving 91% over 2023 to €445 million, in a display of prudent financial management in a time of declining revenues, which is one of the reasons I believe Kerry Group is somewhat of a diamond in the rough. Their management team has consistently maintained a strong degree of conservatism with prudent capital management, which provides a degree of confidence that the business should rebound strongly as revenues return to growth. Geographic Diversification (H1 Financial Reporting) Cost management has enabled margin expansion through the ‘Accelerate Operational Excellence Program’ which has strategically targeted areas of the business to reduce operating costs, thus far the program has achieved €45 million in savings with a further €25 million expected by the end of 2025 for an annualized cost reduction of €70 million. These cost management efforts have already facilitated margin expansion in H1 2024 in combination with strategic product pricing increases and lower input costs from the supply chain. To put the margin expansion into context, the Taste & Nutrition business segment is forecasting an impressive 18% gross margins in 2024, with the improved margins driven by the operational excellence program. Furthermore, retail performance growth has returned, following a period of restocking, with the snacks and beverages products seeing the most positive growth in retail. Management have indicated that their private label products are expected to be an important driver of growth, which have had a lack of innovation in the space over recent years. As a key partner to retailers, Kerry Group works with retailers stocking their products to innovate new ideas and methods of display marketing the products in a format which the consumers want in efforts to set them apart from their competition. Innovation Pipeline The growing trend towards wellness and healthy living has placed Kerry Group in a prime position to capitalize on this growing segment, in particular the nutrition area, as many of their products are already established and customers have adopted their brands as part of their weekly shopping budget. Looking ahead to the coming years, Kerry Group has targeted the following areas for innovation across product lines:  New taste profiles Nutritional profile improvements New menu offerings and new platforms for these products. Food service offerings are a key driver of growth in the high single digits.  Consumers have become more health-conscious, particularly younger generations, who are reducing alcohol and tobacco intake and focusing on healthy diets in a shift towards improving their physical and mental wellbeing. Nutrition is a key part of human wellbeing and consumers are displaying this growing desire through increased spending on high-quality, sustainable and nutritious foods as they reduce expenditure elsewhere. Kerry Group’s products have always focused on sustainability and nutritional value with their ever-expanding product lines, some of which are acquired while the majority are innovated within the organization. Two divisions that rely strongly on innovation are the Pharma & Biotech products, which provide specialty solutions targeting this growing demand, while the Nutrition & Health Ingredients business provides consumable products that cater to the needs of a healthy diet. From the perspective of an investor, I believe Kerry Group has displayed savvy, forward-thinking business acumen, spotting emerging trends and getting those products into stores for the growing number of health conscious consumers. The growth of these business units is likely to increase sales volumes for the group for years to come and potentially create opportunities for divestment to larger players in the space seeking to expand into the growing health and wellness movement. Debt Debt management at Kerry Group has typically leaned towards the cautious end of the risk spectrum, highlighted by the conservative net debt position of only €1.7 billion. The most recent credit rating stands at BBB+ which is Investment Grade, and should facilitate easy access to capital as and when required. Recent reporting indicates total debt outstanding at €2.5 billion, with weighted average maturity of 4.3 years. However, it's worth mentioning a significant €979 million of this debt is maturing in 2025. The financial prudence of the management team instills confidence that the debt load is manageable when considering the impressive volume of free cash flow generation (€445 million in H1 2024) and the €660 million of cash available on the balance sheet. Thus, I see little concern with debt management at this time. Debt Maturity Profile (Kerry Group H1 Financial Reporting) Shareholder Returns Kerry Group has displayed they are a shareholder friendly business through share repurchases and a twice-yearly dividend payment which has increased by 10.1% from 2023. Furthermore, in early 2024 the board approved an additional €300 million in share repurchase authorization to opportunistically take advantage of the low share prices. Combined with the €400 million in annual dividend payments, shareholder returns for 2024 are expected to amount to a very respectable €700 million, that's a respectable 4.5% combined return based on the current market cap of €15.7 billion. Furthermore, the business routinely reinvests into the business through capital expenditures (€120 million in H1 2024), improving and expanding existing assets as well as developing new manufacturing facilities. Combined with the ongoing mergers and acquisitions, Kerry Group have continued to expand their business offerings by extending their geographic reach and strategically acquiring competitors. Kerry Group’s business operates in a low-barrier-to-entry segment, where established competitors can be the preferred products ingrained in their respective regions. For the purpose of this article, I have chosen to look at some of the larger, more direct competitors to display Kerry Group’s share price performance relative to some of their better-known competition, which include the following:  Conagra Brands (CAG) Hormel Foods (HRL) J.M. Smucker Company (SJM) Ingredion Incorporated (INGR)  Data by YCharts Risks Macroeconomic uncertainty is at the top of the list of risks that can impact business; ongoing uncertainty, declining employment and increasing prices are impacting consumer confidence, causing some to reassess their weekly food budget. Some products sold by Kerry Group are considered non-essential, which may lead to declining sales as consumers become more selective on how they spend their grocery budget. Competition poses a risk to Kerry Group’s business, with strong brands competing to get their products in front of the same customers, who may be willing to change brands, particularly if the same items can be purchased for less. In-house supermarket branded products continue to take market share from the big brands with lower cost products or larger volumes at price points that the leading name brands would struggle to achieve profitably. Food regulations vary by region, meaning testing standards lead to difficulties in expanding their products pending compliance with these local standards. As an investor, these concerns are unlikely to impact the investment thesis, as Kerry Group has extensive experience in this area and, if needed, product formulations can be altered to achieve approvals. Environmental and sustainability concerns are high on the list of issues facing food production, as extreme weather events can cause supply chain issues, impacting entire product line availability. Production of dairy products has a reputation for negative environmental impacts, as the animals produce greenhouse gases and fertilizers are known to negatively impact water sources. Thus, environmental practices are becoming more stringent, increasing the cost of production. In Kerry Group’s situation, sustainability is of high importance, and the environmental standards that their products must achieve are already industry-leading, however the growing demand for these products is likely to draw further regulatory attention. Conclusion Kerry Group operates a robust business operated in a conservative manner, which, I believe, makes ownership of the shares a prudent diversification into the consumer staples sector with a promising line of innovative products. Although revenue declines in recent times suggest operations may be floundering, there are some green shoots, such as APMEA which has been the fastest-growing region across the portfolio, and the 131% cash conversion rate is exceptional. The business expansion in the pharma & biotech products business is a shrewd move, further diversifying the business offering into growing markets. The recent share price increase in Kerry Group stock has reduced the near-term upside. Full-year 2024 EPS guidance for the year has been raised from previous estimates and is now expected to achieve 7-10% YOY growth. In addition, share repurchases for H1 2024 amounted to €279 million, leaving only €21 million remaining on the authorized share repurchase program. Management did suggest there would be a further share repurchase authorization approval; however, the timing and amount of such approval are yet to be determined. My takeaway from Kerry Group is positive, I believe the business is performing well and operates a conservative business model with reasonably priced shares in a generally overpriced market. The consumer staples sector is never going to compete with high-flying sectors such as tech in terms of margins; however, food will always be a basic human necessity, and Kerry Group has a solid balance sheet, positioned for incremental growth through innovation and strategic acquisitions. I rate Kerry Group Plc a Buy for investors seeking to diversify their portfolio with a stable, anti-cyclical, resilient business.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. 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