All the right ingredients

Simon Carswell talks to Stan McCarthychief executive of Kerry Group.

STAN McCARTHY well remembers his first day at food group Kerry. It was November 1st, 1976. He was finishing his accountancy exams at the time and "the potential" of his new employer was not uppermost in his mind.

McCarthy, himself a native of Kerry, later discovered that he had joined "a frontier" company.

In 1984, he was chosen to help lead one of the group's new frontiers, becoming financial controller of its US operation, based in Chicago. And last year, after 23 years' service in the US, the lifelong Kerry Group man was called home to succeed Hugh Friel as chief executive of the company.

McCarthy is setting his own new frontiers for Kerry. He marked his arrival emphatically last February, within two months of taking over as chief executive, when he announced that he aimed to double Kerry's revenues to €10 billion over the next five to six years.

"Clearly, that was a vision statement and I wanted to get that message across early in terms of setting the tone for the organisation for the next five years," he said.

If McCarthy is to meet his target, he will have to complete a significant acquisition. First, in his view, he has to streamline the company to make it more efficient and "scalable". "Getting that right will enable us to absorb or make a larger acquisition. It may take a little while, but it will be within the timeframe."

Having earned his corporate spurs in what is the more profitable ingredients and flavours end of the Kerry business, which accounts for 70 per cent of revenues, McCarthy knows this will be the area to drive organic growth and takeovers.

Before embarking on a new acquisition drive, McCarthy's first strategy involves a "go-to-market" campaign. This is corporate-speak for improving the ingredients and flavours division, so Kerry can sell cost-conscious food producers the newly-developed ingredients and flavours that deliver the new types of tastes and foods.

The company is investing €50 million in a new food centre near Chicago where up to 600 food technicians will be based in research and development labs. The centre will allow customers to sample new flavours.

McCarthy still holds Kerry's 1988 takeover of the US milk ingredients business, Beatreme, as a turning point for the group. It showed that Kerry could "go out and acquire research and then be commercially successful with it".

It was a bold step, as Kerry spent slightly more on the US deal than the group's own market capitalisation at the time. "It was perceived to be way too high a price, but we applied Kerry principles and got some energy back into the business. We knew we were on to something very special within two years," he said.

It sowed the "seeds of success" behind Kerry's later expansion into Mexico, South America and Asia, he said.

Beatreme developed food products based on casein, the protein in milk. This showed McCarthy that, with the right technology, Kerry could create a food product for many new customers and markets. The protein is used in a variety of products, from infant foods to nutritional drinks.

"It just took us into so many areas where we learned so much," said McCarthy, adding that Kerry is "always looking for Beatreme-type acquisitions".

He says that, during the company's subsequent expansion, it has been "blindly ambitious at times, trying to achieve something," but has also had to "pave the way to find where to go".

Announcing Kerry's results for the first half of this year, the first reporting period of his tenure as chief executive, McCarthy said last Tuesday that the company would have at least $250 million (€170 million) a year in cash for acquisitions over the next five years.

Kerry can certainly generate plenty of cash - it has thrown off €1.25 billion in the last five years. This makes this year's €165 million acquisition of Breeo Foods, the consumer foods division spun out of Dairygold, appear small in comparison. McCarthy will be focusing on much bigger targets.

But, since taking charge, he has had more pressing concerns - battling against weaker currencies and higher food costs.

He said this week that Kerry was still on course to grow earnings per share to 151 to 155 cent this year from 143.8 cent in 2007, despite the various challenges facing the group. The breakdown of revenue across euro, dollar and sterling areas reflects just how global the group has become - 37 per cent of revenue was reported in dollars last year and 24 per cent in sterling. The Tralee-based company employs 23,000 people and has manufacturing operations in 19 countries and sales teams in 140. McCarthy spends half his year travelling overseas, with home divided between Ireland and the US.

McCarthy's stewardship has been steady in challenging times. Revenue rose slightly to €2.36 billion for the first half. So too did pretax profit, to €132.8 million.

However, excluding currency changes, acquisitions and disposals, like-for-like sales rose 7.3 per cent and trading profit was up 8.1 per cent to €175 million.

The ingredients and flavours business still has a higher profit margin than the other side of the group, consumer foods, which is focused on Ireland and Britain - 8.1 per cent versus 6.4 per cent in the first six months of this year.

Despite "significant" pressures from the weak dollar and sterling, and food inflation, Kerry managed to increase its profit margin on consumer foods, while its Asia-Pacific business enjoyed strong growth over the first half, with revenue growing by 20.3 per cent.

McCarthy says that, as the price of oil has retreated, other commodities, including food, will start to return to "more normal levels". "There is a lot of evidence out there to suggest we will not see the lows we experienced five years ago. The lows will be significantly higher over a 10-year period."

During that time, investors will be hoping McCarthy can deliver the annual double-digit growth that Kerry enjoyed under one of his predecessors, Denis Brosnan.

"He is obviously a hard act to follow. He accomplished a lot and taught us all a lot," said McCarthy. "It is something that you cannot get distracted by because, at the end of the day, as chief executive you are accountable for your own decisions and delivering on your own objectives. If you try to be someone else or live on someone else's ideas, that doesn't work."

McCarthy is working closely with recently retired deputy chief executive Denis Cregan who is a consultant to the company.

Earlier this year, McCarthy said 2007 had been "almost anaemic" for acquisitions by Kerry. He acknowledges that the credit crunch has removed some potential private equity rivals from the takeover market, although he says valuations on ingredients and flavours companies remain high.

He believes that, to become a €10 billion company, Kerry will eventually have to buy a business as big as itself. "To get to that size, it would have to be something with a global reach that would complement our own."

ON THE RECORD

Name:Stan McCarthy

Position:chief executive of Kerry Group

Age:50

Family:married with three children.

Interests:golf, skiing and a keen follower of Irish sport.

Something that you might expect:he has worked for Kerry Group for 32 years.

Something that might surprise:he lived in the US from 1984 until he took over as chief executive of Kerry Group at the end of last year.