Glanbia Plc – Glanbia Plc 2017 Q2 Interim Management Statement

Company: Glanbia Plc

Conference Title: Glanbia Plc 2017 Q2 Interim Management Statement

Moderator: Tony O’Callaghan

Date: Wednesday, 1st November 2017

Conference Time:08:30 UK

Operator:Good day and welcome to the Glanbia Plc 2017 Q3 Interim Management Statement Conference Call. Today’s conference is being recorded. Today’s call will be hosted by Siobhan Talbot, Group Managing Director. And she will be joined by Mark Garvey, Group Finance Director. At this time, I would now like to hand the call over to Liam Hennigan, Head of Investor Relations. Please go ahead, sir.

Liam Hennigan:Thank you and good morning. Welcome to the Glanbia Third Quarter 2017 IMS Call. I would like to remind everybody that in this call, the directors may make forward-looking statements. These statements will be made by the directors in good faith based upon the information available to them up to the time of this call. Due to the inherent uncertainty including both economic and business risk factors underlying such forward-looking information, actual results may differ materially from those expressed or implied by those forward-looking statements. Directors undertake no obligations to update any forward-looking statements made on this call whether it’s a result of new information, future events or otherwise. I’m now handing over to Siobhan Talbot, Group Managing Director of Glanbia.

Siobhan Talbot:Thank you, Liam, and good morning everybody. As the operator has mentioned, I am joined today by Mark Garvey, our Finance Director to review the quarter three 2017 IMS. Overall, we had a good performance for the nine-month period and importantly we’re reiterating our guidance for the full year 2017 for constant currency growth of between 7 and 10% on a pro forma basis for the continuing group – the basis that we’ve been guiding 2017.

Our market dynamics for the third quarter remained broadly as we outlined at the half year. For the first nine months of the 2017, wholly-owned revenue from continuing operations grew 6.6% with Glanbia Performance Nutrition the main driver of revenue growth and Glanbia Nutritionals continuing to perform well. The growth in wholly-owned revenue from continuing operations of 6.6% was driven by a volume growth of 2.4%, pricing growth of 0.9% and a contribution from acquisitions of 3.3%.

Total group revenue including our share of the joint ventures and associates was 13.7% on a constant currency basis driven 2.3% by volume growth, 6.4% by pricing improvements and a 5.0% contribution from acquisitions.

Turning to the business unit segments, on a constant currency basis, as we had expected, momentum versus the prior year improved under quarter three in Performance Nutrition. In the nine-month period our revenues increased by 9%, driven by a 2.7% increase in volume, a 7.4% growth from the acquisitions of Amazing Grass and Body & Fit and that was offset by a 1.1% price decrease.

The overall year-to-date volume growth reflected branded revenue growth, offset by a decline in contract business. The drivers of growth have been a good performance in the online and mass channels in the US, as well as a strong performance across a number of our markets in EMEA and LAPAC. This positive momentum offset some of the continued challenges in the US specialty channel including the impact of weather-related issues in some key consumption states for sports nutrition.

The price decrease was primarily a function of brand investment and innovation support in the US, largely to drive awareness and trial of our new innovations. And overall at this point, we expect full year pricing for GPN to be broadly in line with the year-to-date levels.

Innovation, as we mentioned previously, continues to be a driver of growth and we have launched a range of products focused on the convenient ready-to-eat formats and in the plant-based ingredients, and they’re all performing well across our branded portfolio. We have a pipeline of new product launches continuing into the fourth quarter and these will be broadly based across channels, across formats and indeed across geographies.

The recent acquisitions of Amazing Grass and Body & Fit are performing to our expectations. And as previously stated, we continue to build out our investment program for these businesses, to build on the strong existing capabilities ultimately to drive future top line growth opportunities.

So, the full year 2017 outlook for GPN is good. The year-on-year branded revenue momentum that was a feature of the third quarter is expected to continue. And GPN continues to expect delivery of like-for-like branded revenue growth in the mid-single digit range for the full year, recognizing an expected seasonal uplift in quarter four. Full year EBITA margins are expected to be in the mid-teen range broadly in line with the half year 2017 levels.

Turning then to Glanbia Nutritional, the performance was good for the first nine months particularly in Nutritional Solutions where the business had good volume growth. Overall pricing was positive, reflecting higher dairy markets year-on-year. Our growth in Nutritional Solutions is coming from a number of areas, where across dairy we have a strong capability in value added dairy ingredients and with a range of capabilities on the non-dairy side, particularly on micro-nutrient pre-mixes. A number of our customers, as we’ve mentioned previously, are expanding out their activities globally and this continues to be positive for the volume momentum in our Nutritional Solutions business.

As previously mentioned, a core strength of our nutritional team is the capability to develop, operate and commercialize large-scale cheese and whey facilities both in our wholly-owned operations in Idaho and through our US joint ventures. Our 25% expansion in Southwest Cheese is on track for 2018 commissioning and the discussions with our potential partners, re: a scale cheese and whey facility in Michigan, continue to progress well. As we’ve previously noted, the output from the US cheese joint ventures is commercialized through our Glanbia Nutritionals organization.

Mark will speak to the discontinued operations as part of the financial review.

So then to the joint ventures, the joint ventures being at the coalface of dairy markets have had, as you would expect, very positive pricing at the period with revenue (pricing growth) of 21.9% reflecting relatively strong dairy markets. Volume growth of 2.3% was largely driven by growth in the Irish Glanbia Ingredients joint venture. The outlook for the joint ventures is strong for the full year. And as noted earlier, we have a number of strategic initiatives across joint ventures both in Ireland and the US, all of which are on track.

I’d now like to pass to Mark, who will update on the financials.

Mark Garvey:Thanks Siobhan and good morning to everyone on the call. We’d first like to provide you with an update on the Dairy Ireland transaction. As I mentioned during our half year call, the sale of 60% of Dairy Ireland closed in early July and final proceeds were subject to agreed completion accounts and a final working capital calculation. This work has now been concluded and the total proceeds for the sale amounted to approximately €220 million, of which €210 million was received by the end of the third quarter and the remainder during October.

The gain on disposal is approximately €90 million and will be recognized as an exceptional gain in our full year financial statements. This will be somewhat offset by after-tax costs of approximately €11 million associated with the Dairy Ireland transaction which were already reported in our half year results. From the third quarter, (the) Dairy Ireland business has now consolidated within the Glanbia Ireland joint venture.

Following the Dairy Ireland transaction, we have commenced a process of reviewing the Group’s operating model and financing arrangements to ensure we’re optimizing our operations. We will update you with these initiatives at year end.

The group’s net debt at the end of the third quarter amounted to €482 million compared to €626 million at the end of the third quarter 2016 and €438 million at the end of 2016. The primary reason for the decrease compared to the third quarter last year was the receipt of most of the proceeds from the sale of 60% of Dairy Ireland, somewhat offset by the acquisitions of Amazing Grass and Body & Fit earlier this year as well as an increase in working capital.

As I mentioned during our half year results call, working capital has been a net outflow during the year primarily due to higher inventory levels. We expect reduced inventory levels at year end compared to half year levels, but they will be higher than 2016 year end primarily due to the addition of Amazing Grass and Body & Fit to our portfolio during the year and the expansion of our international business.

Based on current business activity at year end, we expect net debt to be approximately €350 million and the net debt to adjusted EBITDA ratio to be approximately one times. We continue to be focused on operating cash flow performance, albeit this year we expect to have a net outflow of working capital primarily inventory-driven compared to the three prior years of inflows.

For the full year, we expect to have incurred capital expenditure in the €65–75 million range of which €25–30 million will be on business sustaining expenditure. The strategic capital expenditure has been primarily focused on finalizing the innovation center and expanding capacity in Glanbia Performance Nutrition and Glanbia Nutritionals customer-specific projects during the year.

Our committed debt facilities amount to over €1 billion expiring in 2020 and 2021 and we are well within our finance covenants. Allowing for seasonal peaks in working capital, the Group has over €500 million in available debt facilities to fund acquisition and strategic capital expenditure activity and remain within a net debt to EBITDA ratio of three times.

Turning to outlook then, we continue to expect growth on pro forma adjusted earnings per share from continuing operations to be in the range of 7–10% on a constant currency basis. On a reported basis, we expect to have a 2–3% headwind to the constant currency growth rate by the end of the year if the euro-US dollar exchange rate stays at its current level.

Performance Nutrition will have a good year of EBITA growth. Like-for-like branded sales are expected to grow in the mid-single digits range, with good volume growth somewhat offset by continued brand innovation and price investments. Performance Nutrition EBITA margins are expected to be in the mid-teen range.

We expect Glanbia Nutritionals to have good EBITA improvement this year, driven by dairy and micro-nutrient solutions growth. Joint ventures have performed well year-to-date given dairy market dynamics and we expect they will deliver strong EBITA growth for the full year.

And with that, Siobhan and myself would be happy to take your questions.

Operator:Thank you. If you would like to ask a question on today’s conference, please signal *1 now. And we can now take our first question from Jason Molins from Goodbody. Please go ahead.

Jason Molins:Good morning. Hi, it’s Jason Molins here. A couple of questions to kick off. First, in terms of volumes, you saw a good uplift in Q3 within GPN. Can you give us an idea on how much was driven by innovation versus your existing products maybe in the context, you know, the target that you have of 20% of sales coming from new product development, how are you going with achieving that target?

And then secondly on pricing dynamics in GPN, it appeared quite soft in the period as you highlighted the investment around brands and new products. Can you maybe talk about the competitive dynamics you’re seeing in the market at the moment maybe in the context of your comments on margins and pricing? What are you seeing on the input cost side? Thanks.

Siobhan Talbot:Good morning, Jason, and thank you for that. Yes, as we said, innovation was a function of our volume growth in the third quarter. Obviously, we’re not going to calibrate it right down to the extent it would be products and innovation. I mean, in truth, as we’ve said previously, we see innovation really as part of the core operation of GPN. You know, we’re very pleased with the innovation growth that we’ve had in the current year. We’ve dialed it up over the last number of years, cognizant as you said of our target of 20% of our net revenue coming from products we didn’t have three years earlier. So, we’re very much aligned with that.

And so as we look through the third quarter and fourth quarter, innovation is very much a part of our story. We’ve had some really nice product formats in the ready-to-eat space such as the cake bites that we’ve mentioned previously. As a format, I think that’s been very well-received by customers across a number of different channels.

And indeed actually, that was part of the pricing story in the third quarter as well. To facilitate trial, to increase awareness of some of those innovations, we took some pricing decisions across some channels particularly in the US in the third quarter. And that was a very strategic decision on our part. So we were quite comfortable to do that.

As we’ve said previously, the competitive set particularly in the US market has remained very competitive. There’s a lot of activity in markets. We have – we mentioned at the half year that we would invest where we felt it was appropriate. We have no desire clearly to race to the bottom in terms of pricing, but we will make both strategic and tactical pricing decisions where we feel that that’s appropriate to continue to drive our volume growth which we’d be pleased with overall.

Allied to that, to your question in terms of input cost, it’s been probably a bit of a story of two halves in terms of elements of the whey input cost, WPC80. Prices were relatively firm for the first half and then weakened somewhat in the second half. Again, WPI, similar trend. We have seen prices come up in the second half. Our supply really has outpaced demand. Demand in both categories has been relatively robust but we have had supply come on track in both WPC80 and indeed 90.

So, as we look forward, we’ll obviously manage that margin piece. What we’ve said for the full year 2017 is that, in that management of pricing between cost of goods and any investment which is to do on top line, we still would expect our overall margin for the full year to be broadly in line with what it was at the half year level.

And it’s important maybe just to make a final observation on that, but despite my trends that I’ve mentioned on input cost, they still will actually be higher year-on-year for the full year 2017 relative to where they were for the full year 2016.

Jason Molins:Great. That’s perfect. Thanks.

Operator:We can now take our next question from James Targett from Berenberg. Please go ahead, sir.

James Targett:Hi, good morning. Few questions for me. Firstly, just on global nutritionals and the pricing, you flagged some challenging conditions in the cheese market. Could you – is this something, you know, which is going to be ongoing over the next few quarters, just this level of pricing pressure in cheese or is there – were there particular factors impacting, you know, Q3 from new supply in the market?

And then secondly on volumes in Global Nutritionals (GPN), you mentioned a strong performance in mass. I’m just wondering, you know, what sort of – what’s driving that? Is that – you know, is this now with thinkThin coming into like-for-like calculation or, you know, are you seeing resurgence in Tru Source? Just trying to get an idea of what’s driving your growth in mass?

And then also with volumes in GN (GPN), again, a decline in private label contract manufacturing. Do you have any visibility on, you know, what GNC’s plans are now with their private label, because it’s a low proportion of your portfolio now unless it’s going to zero? I assume things are going to bottom out fairly soon. Thanks.

Siobhan Talbot:Good morning, James. In relation to the cheese pricing, yes, I think it’s fair to say that there was a particular dynamic in a certain format that was magnified in the third quarter. But as we look to our own fourth quarter expectations, we don’t expect to be as magnified. And that, as we mentioned, was a particular piece around the barrel format where new capacity came on stream. What you had in the market – and you see this if we look at the Chicago Mercantile Exchange, you had a gap opening up between the pricing of barrel format for cheese versus the block format for cheese. And that led to that pricing negative on the cheese side in the third quarter. High pricing with Nutritional Solutions would have been positive.

So to your question about what we see for the last quarter, again, it’s an assessment of how best you can judge market dynamics, but we believe that there will be some pricing negativity on the cheese side but not as magnified as the third quarter. And just to mention in relation to that piece, clearly we have a range of cheese formats. You know, we market our cheese as one organization, cheese coming from our wholly-owned operations in Idaho and indeed our joint ventures. And there are a number of things that we are looking at in terms of relatively modest projects that might increase our flexibility around format in Idaho. So we’ll be evaluating that over the next number of months.