Glanbia Struggles in H1 on Dairy Ingredients Performance

This business, which is substantially exposed to international dairy commodity markets, became loss making in the first half of the year as the magnitude and pace of the decline in global dairy markets created an environment where milk price was maintained above market returns.

27 Aug 2009 --- Glanbia has reported that Group revenue declined 14.6% to €944.9 million (HY 2008: €1,106.2 million). Operating profit pre exceptional declined 15.4% to €47.8 million (HY 2008: €56.5 million). Operating margins were maintained at 5.1% (HY 2008: 5.1%). The highlight is the strong growth in margins in the US Cheese & Global Nutritionals business segment which increased by 380 basis points to 11.2%. Group operating margins were also supported by the benefits of recent cost saving and rationalisation programmes.

Glanbia’s first half of 2009 Group results were primarily impacted by the performance of Dairy Ingredients, which is included in the Dairy Ireland segment. This business, which is substantially exposed to international dairy commodity markets, became loss making in the first half of the year as the magnitude and pace of the decline in global dairy markets created an environment where milk price was maintained above market returns.

John Moloney, Group Managing Director, said: "A growing contribution from higher margin businesses and a strategic cost reduction programme have enabled us to counterbalance unprecedented market circumstances and deliver a reasonable set of results despite a very substantial first time loss in Irish Dairy Ingredients.

“It has been, without doubt, a difficult six months. The sustained downturn in the global economy led to weakening consumer confidence. In addition, international dairy prices were sharply down on 2008 resulting in a dramatic reduction in dairy product returns and US cheese prices reached historic lows. The expected impact of these challenges led to a revision of earnings guidance for the full year.  While we remain cautious in our outlook today, we expect the overall rate of decline to moderate in the second half. Earnings guidance for the full year is unchanged with full year adjusted earnings expected to be 30 to 32 cents per share,” Moloney added.  

Financing costs increased €3.4 million to €12.5 million (HY 2008: €9.1 million) due mainly to the financing cost associated with the acquisition of Optimum Nutrition. EBIT Interest cover was 3.8 times compared to 6.2 times in the first half of 2008. Earnings before interest, tax, depreciation and amortisation ('EBITDA') interest cover was 5.6 times compared to 8 times in the first half of 2008. The Group's average interest rate for the half year 2009 was 4.5% compared to 5.9% for half year 2008. Glanbia operates a policy of fixing a significant amount of its interest exposure with approximately 95% of the Group's net debt currently contracted at fixed interest rates for 2009 and approximately 70% contracted at fixed rates for 2010.

Glanbia's share of revenue from Joint Ventures & Associates declined 20.6% to €148.0 million (HY 2008: €186.4 million). Lower US cheese and whey markets impacted Southwest Cheese while lower market prices also reduced revenue in Glanbia Cheese. Glanbia's share of profits post interest and tax declined to €2.7 million (HY 2008: €5.6 million). Southwest Cheese delivered a good result in the first half albeit lower than a strong 2008. The performance of Glanbia Cheese in the UK declined marginally as selling prices reduced at a faster pace than raw material costs. Despite growing revenues the Nutricima result declined relative to the first half of 2008 due to the inability to recover in the market the cost of higher priced raw materials already in the supply chain.

The performance of Dairy Ireland declined sharply due to a very significant loss in Dairy Ingredients. This business exports substantially all of its output and is therefore significantly impacted by trends in global dairy markets. Relative to the first half of 2008 global dairy markets declined sharply resulting in a significant decline in the performance of this business.  Despite a reduction in the milk price paid to suppliers in the first half of the year the pace and scale of market changes were such that the full extent of market declines were not fully reflected in milk cost. The decision to support milk price in this manner was made in the interest of helping to maintain the Group's Irish dairy supply and trading base in very challenging circumstances for farming. As a result the performance of Dairy Ireland was significantly reduced.
 
Consumer Products had a challenging first half. Weaker consumer confidence, growing value consciousness and an increase in sterling based imports created an extremely competitive food retailing environment in Ireland. These factors' together with selected price reductions, which were implemented to remain competitive and defend market positions resulted in a decline in Consumer Products revenue in the first half. An improvement in operating profit and operating margin was achieved mainly through the implementation of a major cost reduction programme.

The effect of the decline in global dairy markets has had serious implications for farm incomes and this impacted Glanbia's farm supply and trading base.  Consequently revenue, operating profit and operating margin from the sale of farm inputs by Agribusiness were lower as expected in the first half. This business continues to restructure and reduce its cost base.

In the second half of 2009 some seasonal uplift in global dairy markets is expected. This combined with an improved product mix and aggressive cost management is expected to result in a small loss in Irish Dairy Ingredients in the second half. However for the full year this business will remain significantly loss making. Revenues in the second half of the year are forecast to decline in Consumer Products and Agribusiness albeit at a slower pace than in the first half. Overall operating profit and operating margin for Dairy Ireland will be significantly lower than 2008, as expected.

In the first half of the year overall demand in the US Cheese & Global Nutritionals business segment remained robust. A decline in revenue, driven by lower market pricing for cheese and certain nutritional products, was offset by the acquisition of Optimum Nutrition which further improved the Global Nutritionals mix of businesses.

US Cheese delivered a good performance in a volatile market environment with cheese prices at historical lows. While demand for cheese was resilient and operating margins were stable, operating profit declined due to lower market pricing relative to a strong 2008.

Global Nutritionals was to a lesser extent impacted by lower global dairy markets and continued to deliver good organic growth through innovation and new product development. The Group is pleased with the performance of Optimum Nutrition with demand and growth remaining positive across all areas of the business. Operating profit and operating margin for the Global Nutritional business unit increased.

The US cheese market is forecast to remain relatively low for the second half of 2009. US milk production is expected to continue to contract in response to the current low milk price and as a result some rise in market prices is expected over the medium term. However, average 2009 prices are likely to remain significantly below 2008 levels. While demand remains robust a full year decline in revenue and operating profit is expected as a consequence of significantly lower cheese markets throughout this year. US Cheese operations continue to deliver an excellent cost and operational performance.

In Global Nutritionals organic growth is expected to be solid and key growth segments are forecast to deliver a good performance in the second half.

For 2009, while revenues are forecast to be behind year-on-year for US Cheese & Global Nutritionals, this segment is expected to deliver a marginally improved operating profit and operating margin.