Glanbia Enters New Ingredients Joint Venture, Reports H1 Profits

The proposed joint venture incorporates the business and assets of Dairy Ingredients Ireland (DII), a business unit of the Dairy Ireland division of Glanbia, including its 45% share of the Corman Miloko Ireland JV and its 23% shareholding in the Irish Dairy Board. Under the proposed transaction, the new joint venture, to be known as Glanbia Ingredients Ireland (GII) will be 60% owned by the Society and 40% owned by Glanbia.

29 Aug 2012 --- Glanbia plc has signed a non-binding Memorandum of Understanding with its majority shareholder, Glanbia Co-operative Society Limited, subject to contract and approvals, to enter into a 40% (Glanbia): 60% (Society) joint venture in respect of Dairy Ingredients Ireland. Separately, but related to the joint venture, the Society has announced that it intends to seek Society member approval to reduce its shareholding in Glanbia to 41.4%.

The proposed joint venture incorporates the business and assets of Dairy Ingredients Ireland (DII), a business unit of the Dairy Ireland division of Glanbia, including its 45% share of the Corman Miloko Ireland JV and its 23% shareholding in the Irish Dairy Board. Under the proposed transaction, the new joint venture, to be known as Glanbia Ingredients Ireland (GII) will be 60% owned by the Society and 40% owned by Glanbia. The business, net fixed assets, working capital and liabilities of DII will be transferred to the joint venture, which will also assume the relevant pension obligations of DII.

The existing DII business is the largest dairy ingredients processor in Ireland, assembling a milk pool of 1.6 billion litres and processing it into c.180,000 tonnes of dairy ingredients largely for export to over 50 countries worldwide. In 2011, DII generated revenue of €738 million, operating profit of €33 million and EBITDA of €44 million. As at 31 December 2011, DII had gross assets of €313 million.

There is a compelling strategic logic for the creation of the joint venture for both parties as it facilitates the expansion of dairy processing in Ireland in advance of EU milk quota abolition in 2015, while also ensuring that Glanbia's financial resources are directed towards business segments that deliver the highest return on capital for all shareholders. The opportunity to expand milk production is underpinned by a positive long-term outlook for global dairy markets and the comparative advantage that Ireland enjoys as a grass-based system. It is envisaged that GII will seek to increase existing peak dairy processing capacity by up to 60%; a total investment programme of €180 million to 2020. Planning permission is progressing for a new greenfield facility at Belview, Co. Kilkenny. The Board of GII will reflect the relative shareholding of the joint venture partners and the existing management will remain in place. The financing of GII will be independent of the joint venture partners.

The parties have agreed a €20 million discount to the carrying value of the fixed assets which are the subject of the transaction. Based on balances as at 31 December 2011, this would equate to a fixed asset valuation of €90.4 million. For transaction purposes, the pension deficit has been valued at €16.3 million. The consideration payable will reflect any movements in asset values up to completion. Based on the numbers above, the agreed valuation would be €74.1 million and the Society would acquire a 60% shareholding for €44.5 million. The consideration payable to Glanbia will be satisfied by cash and a loan note from the Society.

In addition, GII will acquire the working capital balance of DII at completion. In 2011, DII had average working capital of €112 million. GII will pay Glanbia in cash for the working capital by 31 December 2012 or, if later, at completion.

The pension deficit under an IAS 19 accounting basis was €11.4 million as at 31 December 2011 (30 June 2012: €34.7 million). The cash flow requirements for the pension scheme remain unchanged as the scheme remains on target to meet the funding position agreed with the Irish pension regulator.

The proceeds from the sale of the 60% shareholding and the release of working capital will be used to repay existing bank facilities. The transaction is not expected to have a materially dilutive effect on the adjusted earnings per share of Glanbia.

The parties have agreed to provide equity of €29.6 million to GII at completion, in proportion to their respective shareholdings. The Society will dispose of shares equal to 3% of the issued share capital of Glanbia to fund its equity investment. The remainder of the proceeds from the share sale will be applied to part-fund the acquisition of its 60% shareholding in GII from Glanbia. The balance of the consideration will be discharged by an interest bearing loan note issued by the Society to Glanbia repayable over 10 years from completion.

Commenting today, John Moloney, Group Managing Director of Glanbia plc said: "The proposed joint venture offers a compelling proposition for all stakeholders for the longer-term as it facilitates the desired expansion of dairy processing by Society members and allows Glanbia to continue to focus on its successful international growth strategy. The abolition of EU milk quotas in 2015 will initiate a new era for milk production and offers increased prospects for the Irish dairy industry through a clear opportunity to expand milk supply. Glanbia already has a number of successful international dairy joint venture operations in the UK, USA and Nigeria."

The news comes as Glanbia plc announced a solid half year performance for the six months ended 30 June 2012, compared with an exceptionally strong first half in 2011. The Group is also upgrading the 2012 full year outlook to 8% to 10% growth in adjusted earnings per share on a constant currency basis. Commentary in this release is on a constant currency basis.

Moloney said: "The Group delivered a solid first half operating and financial performance. EBITA margin grew 40 basis points on a constant currency basis to 7.9% reflecting the focus by the Group on both innovation in higher margin nutritional products and ongoing efficiency measures. We have also been active in pursuing our growth strategy this year with a US$60 million nutritionals acquisition and significant capital development projects in Ireland, Germany and the USA. Today, we have announced the details of a joint venture with Glanbia Co-operative Society Limited, creating an exciting new business model for post quota growth in Irish dairy processing.”

“The overall outlook for the Group for the remainder of the year is positive and we are upgrading our guidance for 2012 to 8% to 10% growth in adjusted earnings per share on a constant currency basis. We also look forward to the successful completion of the joint venture agreement, which offers a compelling strategic proposition for both parties, before the end of the year."

After a strong 2011, global dairy markets generally weakened during the first half of 2012 mainly as a result of substantial growth in global milk production. Demand remained favourable during the period with all of the major regions showing positive growth versus prior year. However, this was insufficient to offset the increase in supply, resulting in higher inventories and weaker pricing. The exception to this trend continued to be the higher end whey products where tight supply conditions and strong demand resulted in firm pricing through the first half. Recent drought conditions in the US are expected to impact milk supply in the second half of the year, although accurate forecasting remains difficult as the situation continues to evolve. Latest expectations are that general dairy prices should be stable for the remainder of 2012.

US Cheese & Global Nutritionals
US Cheese: Consistent with general global dairy market trends, US Cheese prices were weaker in the first half of 2012, reflecting stronger US milk output and higher levels of cheese production. This lower pricing encouraged positive demand growth particularly in the foodservice and export markets although the retail channel remained broadly unchanged. The outlook for US Cheese prices for the remainder of the year is broadly positive. Recent drought conditions across much of the US have resulted in a sharp rise in feed prices which has already started to impact milk production levels, reducing milk supply. This is expected to result in higher cheese prices for the second half of the year.

Global Nutritionals: The significant growth in whey pricing that was observed during 2011 continued throughout the first half of 2012 due to strong underlying demand outpacing supply growth. Demand was fuelled by growth across each of the key nutritional markets and reflects the ongoing structural trend towards more nutrition-aware consumers with a desire to live healthy lifestyles. The addition of new sources of supply of higher end whey products in the second half of the year had been expected to ease whey pricing, however, the impact of recent drought conditions in the US across the dairy value chain is expected to result in just a modest price weakening in the latter part of the year. Market growth within the customised premix solutions segment in the first half of the year has been strong and indications are that this growth will continue for the remainder of the year. Market demand is driven by customised premix solutions for beverages, breakfast cereals, infant formula product fortification requirements, supplements and nutrition bars.

Dairy Ireland
Dairy Ingredients Ireland: The weaker performance of global dairy markets in the first half, as outlined above, is the key driver of the performance of the Irish Dairy Ingredients business, as substantially all of its dairy output is exported. Expectations for further weakness in global dairy markets in the second half have been adjusted in recent weeks following weather-related milk supply concerns. While the situation continues to evolve and a substantial recovery in prices appears unlikely, the outlook is for a stable market tone in the second half of the year.

Consumer Products: While the Irish food retail environment is showing some degree of stabilisation, particularly from a volume perspective, the market remains fragile and consumer's focus on price remains the key feature. The outlook for the remainder of the year is satisfactory as the business continues to invest in brand development and operational efficiencies.

Agribusiness: Global dairy markets also indirectly impact the performance of Agribusiness whose core customers are Irish farmers. As a result, demand for key farm inputs was slightly weaker in the first half of the year. The outlook for the remainder of the year remains satisfactory.

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