Glanbia Reports 2009 Solid Result in Very Challenging Trading Environment
We contained the decline in our financial results with a strong performance by Global Nutritionals, a resilient performance by US Cheese and the benefits of strategic cost reductions.
10 Mar 2010 --- Glanbia plc, the international nutritional ingredients and cheese Group, announces its full year results for the year ended 2 January 2010. In a separate Stock Exchange announcement Glanbia plc announces that it is in discussions with Glanbia Co-operative Society Limited, its 54.64% shareholder, in relation to the potential disposal of its Irish Dairy and Agri Businesses.
2009 full year results summary
• Solid financial results, in line with market expectations, in a very challenging trading environment.
• Strong result in Global Nutritionals; particularly Optimum Nutrition.
• Major cost saving initiatives throughout the Group during the year; continuing in 2010 in Ireland.
• Increased contribution by higher margin businesses improves operating margin by 10 basis points to 6.1%.
• Strong operational performance achieved across the business.
• Adjusted earnings per share amounted to 30.68 cent, down 14.4%.
• Dividend increase by 5% to 6.84 cents per share.
• Significant capacity expansion programme in Southwest Cheese on track for successful delivery
John Moloney, Group Managing Director, said:
“In 2009, the Group delivered a solid financial performance in very challenging circumstances. The global economic recession led to extreme volatility in global dairy markets in the first half of the year, in particular, and this had a significant impact on Glanbia’s revenue, profitability and earnings. Throughout the year we focused on embedding strategic cost reductions and running our operations as effectively and efficiently as possible. We contained the decline in our financial results with a strong performance by Global Nutritionals, a resilient performance by US Cheese and the benefits of strategic cost reductions. This cost competitiveness focus will continue into 2010. We achieved a 10 basis points improvement in the Group’s operating margin, reflecting an increased contribution by higher margin businesses and our EBITDA margin grew 80 basis points to 8.3%. Whilst the outlook remains challenging, we are seeing some positive signs in our operating environment which should underpin our performance in 2010.”
2009 was a very difficult year. Demand for dairy products weakened as a result of the global economic recession. Economic uncertainty and credit availability significantly reduced consumer confidence. As a result, global dairy prices declined sharply through the first half of the year remaining at extremely low levels until the last quarter of 2009 when market conditions improved.
It was a year of negative returns for Irish dairy processors and farmer suppliers mainly as a result of the scale and pace of market changes in the first half of the year. The sharp reduction in farm incomes, together with difficulty in accessing finance, had a significant impact on farmer spending power. A deep consumer recession in Ireland drove an exceptionally competitive food retailing environment. This led to a change in shopping profiles, to which suppliers and retailers are responding.
In 2009, nutritional markets had a resilient year despite the global economic recession. Demand was particularly robust in Performance Nutrition, a key sector for Glanbia Global Nutritionals. However, the US dairy market mirrored global trends. US cheese prices fell sharply in January and remained low and volatile until the latter part of the year.
Revenue
Total revenue (including share of Joint Ventures & Associates) declined 18.2% to €2,127.9 million (2008: €2,602.5 million). Revenue in US Cheese & Global Nutritionals was down €51.8 million to €792.4 million. This reflects the impact of significant price reductions in the US cheese markets, which were not fully offset by strong revenue growth in Global
Nutritionals (including the full year effect of the acquisition of Optimum Nutrition). Revenue in Dairy Ireland declined €311.8 million to €1,028.8 million. Weak global dairy markets reduced revenue in the Dairy Ingredients and Agribusiness divisions while extremely challenging Irish consumer market conditions impacted Consumer Products. Revenue in Joint Ventures & Associates was down €72.7 million primarily due to a decline in revenue in Southwest Cheese driven by lower US cheese prices.
Profitability and margins
Operating profit pre exceptional (including share of Joint Ventures & Associates) declined 14.9% to €128.6 million (2008: €151.1 million), driven primarily by a significant loss in Irish Dairy Ingredients. The US Cheese & Global Nutritionals segment, however, delivered a significant increase in operating margin pre exceptional, due to a strong performance by Global Nutritionals together with a resilient performance by US Cheese, despite reduced cheese prices. Joint Ventures & Associates also delivered a robust performance. Operating margin pre exceptional (including share of Joint Ventures & Associates) increased 20 basis points to 6.0% (2008: 5.8%).
Earnings before interest, tax, depreciation and amortisation (EBITDA)
EBITDA declined 7.6% to €176.3 million (2008: €190.7 million). EBITDA margin (including share of Joint Ventures & Associates) increased 100 basis points to 8.3% (2008: 7.3%).
Segmental analysis including Joint Ventures & Associates
Dairy Ireland is the largest business segment by revenue representing 48.3% of total revenue, including Joint Ventures & Associates. Its operating profit declined to 18.7% of total operating profit pre exceptional reflecting a difficult year. In 2009, US Cheese & Global Nutritionals represented 37.2% of total revenue and 70.0% of total operating profit pre exceptional. The Other Business segment is less than 0.5% of total revenue and was loss making in 2009. Joint Ventures & Associates, represent 14.0% of total revenue and 13.5% of total operating profit pre exceptional. Share of results of Joint Ventures & Associates are reported as an after interest and tax amount in the income statement.
Net financing costs
Financing costs increased 13.7% by €2.9 million to €24.0 million (2008: €21.1 million) due mainly to increased debt levels as a result of the acquisition of Optimum Nutrition in August 2008. EBIT to net financing cost interest cover was 4.6 times in 2009 compared to 6.4 times in 2008. EBITDA to net financing cost interest cover was 6.4 times compared to 7.9 times in the prior year.
Joint Ventures & Associates
Glanbia has three principle International Joint Ventures - Southwest Cheese in the USA, Glanbia Cheese in the UK and Nutricima in Nigeria - and a number of smaller Irish based Joint Ventures and Associates.
Glanbia’s share of revenue from Joint Ventures & Associates declined 19.6% to €297.6 million (2008: €370.3 million). Lower US cheese prices impacted Southwest Cheese. Weaker pricing for mozzarella cheese reduced revenue in Glanbia Cheese. Revenue at Nutricima was broadly flat year-on-year as double digit volume growth was offset by the impact of a depreciating Nira:Euro exchange rate. Glanbia’s share of operating profit increased to €17.4 million (2008: €17.0 million). Operating margin grew 120 basis points to 5.8% (2008: 4.6%). Southwest Cheese delivered a good performance including an increase in operating margin. Glanbia Cheese experienced a marginal decline in operating profit although margins remained stable while Nutricima achieved a profit for the year relative to a loss in 2008. The income statement reports Glanbia’s share of Joint Ventures & Associates as a post interest and tax result which increased to €10.2 million (2008: €7.3 million).
Profit before tax pre exceptional
Profit before tax pre exceptional declined 19.0% to €97.4 million (2008: €120.3 million).
Taxation
The 2009 pre exceptional tax charge decreased by €2.4 million to €19.1 million (2008: €21.5 million) reflecting the reduction in Group operating profit pre exceptional. The Group’s effective tax rate, excluding Joint Ventures & Associates increased to 21.9% (2008: 19.1%)
Exceptional items
In 2009 there was an overall net exceptional credit of €34.9 million (€45.7 million pretax).
As part of ongoing improvements focused on achieving sustainable cost competitiveness Glanbia is implementing a further significant cost reduction programme in 2010 in Dairy Ireland. A net provision of €15.1 million, mainly relating to redundancies, has been made in 2009.
A strategic review of the Group's pension arrangements was completed in 2009. The revisions to the overall Group pension arrangements gives rise to a net reduction in pension liabilities and an exceptional gain of €79.0 million in 2009. More detailed information on Glanbia’s pension liability is on page 4 of this announcement.
In 2009, a review of the internal corporate structures of the Group was also completed. This gave rise to an exceptional non-cash charge of €18.3 million on the repayment of sterling intergroup loans. This loss, which was previously recognised in the Group's currency reserve, is now recycled to the Group's income statement and therefore will not impact the overall Group's balance sheet.
Basic earnings per share
Basic earnings per share (EPS) increased 43.7% to 38.46 cent (2008: 26.76 cent) as the impact of the net exceptional gain in 2009 of €34.9 million set out above offsets the effect of the decline in profit pre exceptional for the year relative to 2008.
Adjusted earnings per share
Adjusted EPS is calculated as the profit for the year attributable to the owners of the Group before exceptional items and amortisation of intangible assets (net of tax). Adjusted earnings per share declined by 14.4% to 30.68 cent, driven by the decline in operating profit in Dairy Ireland.
Dividends
The Board is recommending a final dividend of 3.95 cent per share (2008: final dividend 3.76 cent per share), an increase of 5.0%. This brings the total dividend for the year to 6.84 cent per share (2008: 6.51 cent per share), representing a total increase of 5.0% for the year. Subject to shareholder approval, dividends will be paid on Wednesday, 26 May 2010 to shareholders on the register of members as at Friday, 30 April 2010. Irish withholding tax will be deducted at the standard rate where appropriate.
Cash flow
Net debt decreased by €9.5 million in the year to €442.6 million (2008: €452.1 million). The Group generated free cash flow of €52.0 million in the year (2008: €72.4 million). Free cash flow is after charging business sustaining capital expenditure and before acquisition costs, strategic capital expenditure and the payment of equity dividends. Free cash flow reduced in 2009 relative to 2008 due to the reduction in EBITDA driven by the decline in performance in the Dairy Ireland business segment.
Dividends of €17.9 million were received in 2009 (2008: nil) from Southwest Cheese. Total strategic capital expenditure for 2009 including loans to Joint Ventures which were driven by capital investment amounted to €45.8 million (2008: €63.9 million). The key strategic investments in 2009 included the completion of the upgrade of the cheese and whey facilities in Dairy Ingredients Ireland, investment in the whey facilities in the USA and the investment in the expansion of Southwest Cheese. The Group has made a significant investment in acquisitions and strategic organic growth projects in recent years and debt reduction is a priority for the Group in the short term.
Financing
The Group has total committed debt facilities of €729.1 million incorporating bank facilities of €665.6 million and €63.5 million cumulative redeemable preference shares. Additional bank facilities of €100.0 million were secured during the year. Bank facilities are held with nine banks under bilateral arrangements with common documentation and terms.
€255.6 million of the facilities are renewable in July 2012 and €410.0 million in July 2013. The cumulative redeemable preference shares mature in July 2014. The Group’s average interest rate for 2009 was 4.3% compared to 5.1% for 2008. Glanbia operates a policy of fixing a significant amount of its interest exposure with approximately 70% contracted at fixed rates for 2010.
Pensions
Glanbia operates defined contribution and defined benefit pension schemes in Ireland and the UK and defined contribution schemes in the USA and other international locations. At 2 January 2010 the Group’s net pension liability under IAS 19, before deferred tax, was €85.8 million (2008: €164.4 million). The Group’s provisions for other liabilities and charges also includes a provision of €20.1 million (2008: €1.3 million) in relation to administration and certain other costs associated with pension schemes in the UK relating to businesses disposed of in prior years.
The fair value of the assets of the pension schemes at 2 January 2010 was €349.2 million (2008: €301.5 million) and the value of the scheme liabilities was €435.0 million (2008: €465.9 million). The funding of the pension schemes is decided by the Group in conjunction with the Trustees of the schemes and the advice of external actuaries. Recognising the scale of the pension liability a strategic review of the Group’s pension arrangements was completed during 2009 following which the Group revised benefits under the Irish defined benefit schemes giving rise to an exceptional gain, in accordance with IAS 19, in the year of €100.1 million relating to curtailment gains and negative past service costs of €14.1 million and €86.0 million respectively. The curtailment gains and negative past service costs arise following the removal of guaranteed increases to pensions in payment for all members and the provision of benefits for members in employment on a career average basis from a final salary basis. The Group has completed its consultation process with all members of the main schemes. The Group has a number of pension schemes in the UK relating to businesses disposed of in prior years. In 2009 a provision for future regulatory and administration costs of €21.1 million relating to these schemes has been recognised.
