Glanbia plc (GL9) Earnings Call Transcript & Summary

Good morning and welcome to the Glanbia plc Half Year 2020 Results Call with Siobhán Talbot, Group Managing Director; and Mark Garvey, Group Finance Director. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Liam Hennigan, Group Director, Strategic Planning and Investor Relations. Please go ahead.

Thank you, and good morning, and welcome to the Glanbia Half Year 2020 Results Presentation and Call. During today's call, the directors may make forward-looking statements. These statements have been made by the directors in good faith based on the information available to them up to the time of their approval of the half year 2020 release and analyst presentation. Due to the inherent uncertainties, including both economic and business risk factors underlying such forward-looking information, actual results may differ materially from those expressed or implied by these forward-looking statements. I'm now going to hand over to Siobhán Talbot, Group Managing Director of Glanbia plc.

Good morning, everyone, and a warm welcome. I hope you're all safe and well in what are extraordinary times. I'm joined by our Finance Director, Mark Garvey. On the call today, I'm going to run through the specific impacts of COVID-19 on our business and how we responded to the crisis so far in 2020. And I would also like to outline how the pandemic has changed our marketplace and how we're responding to these changes. I will then run through the operating performance for the first half, hand to Mark, who will cover the finances, and then we'll conclude with any questions. From the outset of the COVID-19 crisis, we set 3 priorities for Glanbia, which drove our day-to-day decision-making. These priorities were to protect our people, to maintain supply of food, and to maintain our strong financial position. Against those metrics, we delivered a resilient performance through the exemplary efforts of our people, our partners and our suppliers. I'd like to take this opportunity to thank those people and our frontline workers, in particular, who have helped us navigate the most demanding conditions I have witnessed in my career. Health and safety is our #1 priority in Glanbia, and we manage this rigorously via a group-wide continuity planning process. We maintained the production of food across the group without disruption to ensure our consumers and customers had access to our nutritious brands and ingredients. Finally, we entered this crisis with a strong balance sheet. And through a focus on cash, we've improved our position by reducing our net debt by EUR 127 million versus the prior year, to bring our net debt-to-EBITDA ratio now below 2x. This will enable us to emerge strongly from this crisis. Ultimately, our business is driven by consumer behavior, and this crisis has fundamentally changed the way we all live our lives. So we've stepped back to recalibrate how these changes may impact our brands, our customers and categories and the communities we operate in, both in the current environment and for the longer term. This is, first and foremost, a health crisis. The link between health, nutrition and diet is now more than ever cemented worldwide across all generations. We have seen from our own consumer insight work and from speaking to customers a spike in people concerned about obesity, heart health and immunity, with consumers looking for new ways to stay healthy. Globally, the onset of COVID-19 was a shock to the system, with severe restrictions on activity. As the months have progressed, we have seen consumers adapt to new ways of staying healthy and fit. And we have evolved as a business to support that. Overall, Glanbia's purpose of delivering better nutrition for every step of life's journey has never been more relevant and will continue to drive us. We know brand loyalty for established brands goes up during uncertain times, and we found this in 2020. Our Net Promoter Score for Optimum Nutrition has gone up 2 points to plus 54. And our household penetration of SlimFast in the U.S. has increased 60 basis points to 5%. This pandemic has had a disproportionate impact on certain demographics, with unemployment hitting younger folk in particular. So brands positioning and affordability is important. In fact, in the aftermath of the global financial crisis, as consumption polarized between premium and value-orientated brands, we had strong growth for our Performance Nutrition brands. Optimum Nutrition and SlimFast are great value for money and are trusted by our consumers to deliver on their needs. Both brands have outperformed their peers in their respective categories in the half year in the key North America market. In terms of customers in the first 6 months, one of the big trends we've seen is the acceleration of e-commerce. Today, 34% of GPN sales are in online channels, and this is one of the highest levels of online sales in our category. We continue to grow our presence with double-digit growth in the half year. This is a channel we have been developing a deep competency in for some time via our relationship with the key retailers and our own direct-to-consumer business, Body & Fit. Retailers are simplifying product offerings as consumers stock up more versus pre-COVID. Having the #1 brand in Performance Nutrition and the #2 brand in weight management puts us front of mind when retailers are making these choices. In our Nutritional Solutions ingredients business, we are the #2 provider of essential micronutrients globally and the #1 provider of protein solutions in the U.S. We provide nutritional solutions to global and regional brand owners as they seek to build and enhance the nutritional profile of their products. And in a COVID world, we have seen significant demand for immunity-enhancing ingredients and solutions. Glanbia is a values-led organization, highly conscious of our role in the nutrition supply chain. Through this crisis, our values really came to life across our community of over 7,000 people. There have been multiple examples of our people taking initiative and helping the communities we operate in, from donation of food to frontline medical workers and people in need in Europe, U.S. and Asia, to helping support personal trainers. We believe this crisis will increase the focus on social responsibility and sustainability from stakeholders. From the outset, we've been very conscious of the health and well-being of all of our employees and have had in place a range of supports, including occupational health supports and reconfiguring our work environment and practices. Finally, through our strong financial position and diligent focus on cash, we have not taken any government financial support related to COVID-19 in any of our jurisdictions. Now looking at the impact of the pandemic on the group's performance. The overall message is that we had a good start to the year in Q1. COVID hit in Q2. And while significant elements of the group were very resilient, we did dip dramatically in GPN in April and May, but the trend lines have improved through June and into July. In North America, the specialty and distributor channel slowed down rapidly as stores and gyms were closed. In international markets, lockdowns were even more disruptive to demand with a number of markets essentially closed. As I said, our sales in GPN dipped materially through April and May where they were down over 30%, but as we saw an easing of lockdowns around the world in June, we saw recovery. This improving trend has continued after the second quarter, and we saw a significant trend improvement in July with year-on-year like-for-like branded revenue down 4%. The key areas of trend improvement in July were in the North America Performance Nutrition and in our international business. I am also very confident on significant margin recovery in GPN for the second half. Our Glanbia Nutritionals business had a resilient performance to date in 2020. As you can see, GN serves a number of markets. And in the half year, we had good demand in Nutritional Solutions in the area of fortified food and beverage and supplements. During the second quarter, we did see some COVID-related volume headwinds in the sports and lifestyle space, particularly in some food-to-go categories. Our cheese business had an excellent performance. We have a broad reach of customers with demand strong from customers who supply retail partners. And finally, our joint ventures were robust, proving the strength of their economic model through volatile pricing conditions. As you know, we have 2 significant greenfield JV projects in Ireland and the U.S. And while there was some disruption, they are very much on track. Having looked at how consumer trends have evolved and the related impact on our business in the first half, we have reassessed our strategic priorities in the context of this evolving environment. Earlier in the year, we spoke to our planned actions to drive momentum across the group, highlighting 3 areas of regaining growth momentum in GPN, an organizational review to drive productivity and ongoing strategic execution, particularly in Nutritional Solutions. All of the focus areas we previously spoke to remain very relevant. Many of the initiatives we commenced in 2019 have both lessened the potential impact of COVID but more particularly will position us well to emerge strongly from this pandemic. Across the business, we have continued to drive forward key priorities despite the recent disruption. In GPN, we have previously outlined our ambition to drive revenue growth and margin improvements through actions across our brands, our operating model and our routes to market. Key aspects of our plans have been completed. In terms of our brand priorities, we have priorities -- prioritized ON and SlimFast. We have completed the streamlining of our product portfolio via the SKU rationalization, and we are on track to exit the North America contract business later this year. Our planned actions in terms of operating model and international route-to-market optimization are largely complete with new talents and new route-to-market partners in a number of key geographies. We have a significant supply chain project underway which will consolidate 3 of our North American production facilities into one. As we moved through Q2, we have responded to the learnings from the crisis so far to extend further the reach of the GPN transformation project across the business, and I'll speak somewhat further to this later. In Glanbia Nutritionals, we have continued our development of solutions capability across platforms such as healthy snacking and ingredient delivery systems, and we have successfully continued our strategic development by executing an exciting acquisition, Foodarom, which builds our flavor capabilities. During the crisis, we have changed the way we deliver innovation projects in GN with our customers and successfully managed the cadence of innovation development. Travel restrictions meant we were now collaborating with customers digitally to continue working through projects virtually that traditionally would have happened side-by-side. It has been important to be able to maintain that productivity as we've seen an increase in customer briefs looking for immunity and natural-based ingredient solutions. Across the group, most of us are working remotely. We have been agile and have used our new working practices to good effect. One highlight I'd like to mention is that we are now recruiting and training over 200 employees for our new Michigan plant completely remotely so that we will hit the ground running when we commission later in the year. I will not overly dwell on this next slide as I've made a number of the points already. But if I step back and look at our group structure and I look at the trends we are seeing accelerate today, I believe Glanbia is very well positioned. There clearly remains significant uncertainty around the degree of consumer restriction for the second half of the year and how that will influence consumer behavior. However, at a fundamental level, certain trends to which Glanbia is strategically aligned have grown all the more powerful. We have leading positions in Performance Nutrition and weight management. We have a streamlined and focused portfolio. Our 2 platform brands in those categories making up 69% of GPN sales today. Our brands are outperforming in their categories in the key North America markets, with SlimFast consumption up 13% for the half year and Optimum Nutrition, while back, was just back low single digits. We have a nutritional solutions ingredients business that is world-class in essential nutrients and proteins, and we are expanding it into complementary technologies that we will scale. E-commerce, in particular, is a trend that has been very exciting for us as we've not only developed with leading online players in the U.S. and Asia, we've also built our own in-house e-commerce capability via the acquisition of Body & Fit in 2017. The majority of our business is orientated around growth categories that have seen consumer trends grow even more powerful this year. Protein has been resilient and will always be the cornerstone of healthy nutrition. Data points such as Google Trends show increased interest in weight management and products. And ingredients that can deliver immunity properties have been in strong demand, such as the Amazing Grass brand within GPN and the immunity ingredient solutions of Glanbia Nutritionals. On-the-go food consumption has clearly been a headwind as consumption is associated with mobility, transience and on-the-go consumption occasions. We do believe as mobility increases, these categories will regain growth momentum. Finally, in our joint ventures, we have seen good demand for dairy staples with strong demand as a result of the stay-at-home economy. In this crisis, dairy has proven itself once again to be the trusted source of nutrition. And via our joint venture models, we have robust economic models to participate successfully in the dairy category. Turning now to segmental performance of the period and Glanbia Performance Nutrition. After a good first quarter, GPN was significantly impacted by the effects of the COVID-19 pandemic in Q2. Lockdown severely disrupted demand in many of our international markets as well as the specialty and distributor channels in North America, which led to sales declining 15.6% in the half. Outside of these structured channels, we saw good performance in online and FDMC for our performance products; and online and FDM for our lifestyle brands, with SlimFast and Amazing Grass particularly strongly. As noted earlier, our July trends improved significantly, with like-for-like branded revenue for July down 4% year-on-year for the month. EBITA declined to EUR 19.6 million in GPN for the period as revenue and margins declined. This was primarily caused by negative operating leverage caused by the pace and scale of the declines in Q2, with the most significant impact in our international business. Volumes moved from being plus 4% in Q1 to a decline of over 30% in April and May. And while we both mitigated the impact as much as possible and June trends improved, a certain element of fixed overhead cannot be reduced in such a short time frame. It is also noteworthy that we had some year-on-year whey raw material inflation in the period. The trend line on margins is improving, and I feel very confident that H2 margins will be significantly better than H1, moving into double digits, as the recovery in sales and our natural second half seasonality of our business will address the negative operating leverage issue of the first half. And also, we have very good visibility on the reversal of the H1 negative whey input costs. Similarly to the top line, we have seen the improving margin trend in July performance. Turning more specifically to the GPN transformation project. As you know, we commenced this program at the end of last year. As noted earlier, we have made very good headway since then. At its essence, the transformation project is about driving demand and improving margins. We have completed the rationalization of 35% of our SKUs to make the portfolio more streamlined and the organization more agile around our 2 platform brands of ON and SlimFast, which now make up 69% of GPN sales. GPN is now reorganized around the 4 key business focus areas. And while we will continue to invest in our strategic priorities, we will, by the end of this year, have reduced overall GPN headcount by over 10%. Finally, we have changed some key route-to-market partnerships in a number of international territories that we referenced last year, particularly Brazil, India and China. In terms of work in progress, we have a significant number of pillars underway. They include the consolidation of our supply base, which would consolidate 3 production facilities into 1 in the U.S. The exit of our contract business in the U.S. has helped to facilitate this change, and that process is continuing. We have reviewed the GPN business again during the period in the light of the significant impact of COVID and have decided to broaden the scope of the transformation project as a result. We are further recalibrating our approach to international markets, and we have deepened our North American review across a wider range of demand and productivity levers, leveraging our capabilities to address the current accelerating consumer and channel trends. We have centralized and simplified many of our activities in international markets. While the lockdowns impacted the business significantly in Q2, the completed SKU rationalization lessened the impact and also focused our business teams. Looking forward, we will selectively invest in strategic growth markets in Europe and Asia with a bias for growth in the e-commerce channel. We will drive further simplification of our business, rightsizing SG&A and retrenching for markets that can be managed from a central hub. In North America, the transformation project will continue to streamline our brand's priorities in a post-COVID environment and will drive further optimization of our brand investments, pricing and pack architecture to drive consumption. In terms of productivity and efficiency levers, we are assessing all opportunities across procurement, supply chain processes and footprints to drive margin improvements. All of our work streams are now underway and will continue into 2021. Ultimately, we are extremely focused on profitable growth, and we are confident that this initiative will drive GPN margins to within a range of 12% to 13% by 2022. I have mentioned the channel shift earlier, and I'd like to highlight now how pronounced that has been through the first half of the year. 74% of GPN sales were online or through FDMC channels for the first half of 2020. These are growing channels where we have category-leading positions. In online, we have the highest level of penetration in our category. Despite the disruption in Q2, these channels grew in the period overall with FDMC up 1% and online growing 11%. This change resulted in a renewed emphasis on how we can best leverage our category leadership and capability to drive further demand, in particular for ON and SlimFast. The distributor and specialty channels both declined substantially in the period as the closure of gyms and lockdowns across many markets limited consumer engagement in these channels. We believe that the specialty and related distributor channels in North America and globally will continue to be important outlets for some of our key brands. However, we remain cautious on the trends for the rest of 2020. We continue to engage strongly with these customers with an emphasis on working capital management. Now looking to the business area review. You will see that GPN has a significant business in North America with 72% of sales in that region for the period. North America, in totality, performed well for GPN. And while revenue was back, the portfolio strength across performance and lifestyle resulted in profit in the half year broadly in line with the prior year and margins increasing. International performance declined substantially in the first half by 33% to now represent 21% of GPN sales. As noted earlier, building on the actions of 2019 and the learnings from COVID, we are further recalibrating our approach to international markets, prioritizing a fewer number of key geographies. Turning now to performance within the GPN business areas. North America Performance Nutrition had like-for-like branded revenue decline of 11% in the period. The ON brand outperformed this with overall consumption down 4% for the half year. The overall trend was driven by the decline in the distribution and specialty channel, which were particularly disrupted in the second quarter. This most particularly impacting our more specialty-based brands such as BSN and Isopure. As the period progressed, we saw a sequential improvement in sales and consumption, and this has continued post the period end and into July. The majority of our business now in Performance Nutrition in North America is now in online and FDMC channels, which delivered a good performance in the period. While we continue to see a role for the specialty channel, we see continued growth online and in the FDMC as a scale opportunity for our business. We also plan to optimize our brand's positioning to the changing consumer behavior. Dairy protein remains the primary performance protein source. Powder is still the preferred format of protein and was very resilient through the pandemic. The RTD sector declined but has started to recover, and the ready-to-eat space declined significantly with the risk of a slower recovery. We have pivoted our creative twice during COVID, first in May and June to support personal trainers; and secondly, to inspire consumers to keep on track with their fitness targets. We see consumers hungry to keep up or increase their performance levels. And to keep ON top of mind with consumers, we have launched an omnichannel campaign titled Better Than Before. It will help consumers achieve their fitness goals in the new normal we are living in. What is truly exciting about this is that we are running the campaign seamlessly across online and FDMC retailers in multiple product formats and supported by great storytelling in digital media. Our North America lifestyle business had a good performance for the period, growing revenues 2%. This was led by our platform brand, SlimFast, where consumption growth outpaced shipments with consumption and measured channels growing 13% and outpacing the category in the period. As with other brands, our lifestyle portfolio had significant growth online in the period. After a strong first quarter, we did see some consumption volatility as we moved through Q2, but this stabilized with trends improving at the end of the period. Positive trends have continued in July, but we are conscious we have a very strong prior year shipment comparator for SlimFast as we had very significant pipeline filling in Q3 last year with significant distribution gains. Fundamentally, the trends remain positive for SlimFast as we believe consumers have become more focused on weight management as a result of the lockdowns, but also a clearer link than ever between obesity and illness. SlimFast has a 98% brand awareness and is the trusted go-to brand for weight management, with household penetration increasing by 60 basis points to 5%. The ready-to-eat category was challenged in the second quarter as constraints on consumer mobility reduced on-the-go occasions. While trends also improved as the period ended, we believe this will be a continued headwind as consumer mobility remains restricted due to the pandemic. The recent rebranding of the think! brand, however, did result in that brand outperforming the category decline. Finally, our Amazing Grass brand had a strong performance in the period as consumers gravitated towards plant-based supplements for natural immunity. As noted earlier, international markets were severely disrupted by COVID-19, resulting in revenue down significantly for the half year. Lockdowns in many markets significantly impacted demand as gyms closed and many route to markets were essentially shut down. In addition, some economic challenges and adverse currency movements were a feature in some geographies. The model we deploy in international markets results in significant negative operating leverage and a declining top line to that extent, so this reduced overall GPN margins and profits. We continue to believe that international markets represent an opportunity for our pillar brands, but as noted earlier, we are recalibrating our approach. We are streamlining the business and rightsizing SG&A to the growth opportunity. We have new talent in place and new route-to-market partnerships in key geographies. We will scale back our approach in certain markets and have a bias for e-commerce-driven growth. Conditions have improved in June and into July as we see lockdowns ease. We're seeing good growth in China and Japan and recovery in areas such as the U.K. and Oceania. We are, of course, cautious in relation to the continued evolution of COVID-19 but are confident that we will exit 2020 and with a clear and focused approach to drive future growth in selected key international markets. Direct-to-consumer at 7% of GPN revenue is a relatively small business segment but is an important capability for Glanbia. Revenue declined in the half year as the COVID-related gym closures in our largest market in Benelux impacted demand. The strategic initiative to drive our D2C capability remains on track with the team continuing to extend the technology reach across 10 countries from a base in Holland. Trends in the business improved again through June and July, and we expect this improving trend to continue into the second half. Turning to Glanbia Nutritionals. Overall, Glanbia Nutritionals delivered a very resilient performance for the half year. Revenue up 12% and profits broadly in line with the prior year. Nutritional Solutions revenue increased in the first half of 2020 by 2.9%. Volume growth in essential micronutrients as well as dairy solutions, was good in the period as a result of good end-market demand with core volumes growing mid-single digits. Q2 volumes declined in Nutritional Solutions as COVID-19 reduced demand for certain low-margin contract business in the food-to-go space. Price decrease related to reduced dairy ingredient pricing year-on-year. Demand for Nutritional Solutions core solutions, which make up the majority of our dairy and nondairy ingredient portfolios, remains good across the end markets into July. Our Asia demand was robust in the second quarter after having been somewhat impacted by COVID in Q1. Quarter 2 saw a destocking in the early part of the quarter with, as I mentioned, some softness in food-to-go, but strong demand for our immune-enhancing products across both dairy and nondairy. Overall, margins remained robust, 12.4%, but were down due to adverse product mix. Nutritional Solutions continues to drive momentum across its solutions capability, where the business has market-leading positions in essential micronutrients and value-adding protein ingredients. Again, leaning into the key consumer trends of health and wellness, Nutritional Solutions continues to drive forward its strategic agenda in the area of healthy snacking and clean functional ingredients. And as I've referenced, a particular demand for immunity solutions. The business continues to work closely with a range of customers collaborating on products ranging from straight ingredients to full, consumer-ready solutions. The Watson acquisition acquired in early '19 is performing very well with all commercial and financial integration to be completed this year. While consumer restrictions continue to challenge the food-to-go space, we believe that the breadth and depth of the Nutritional Solutions portfolio will position the business well for the second half of the year. The group has a strong balance sheet and is well positioned to make selective complementary acquisitions that meet our financial and strategic criteria. After the period end, we have entered into an agreement to buy Foodarom, a Canadian flavors business, for CAD 60 million plus contingent consideration. Foodarom has strong flavor formulation capability and is focused on segments very complementary to nutritional solutions. With manufacturing and applications facilities in Canada, the U.S. and Europe, this acquisition is on strategy, is scalable and will enable the further development of our flavor solutions to Nutritional Solutions customers. We expect the transaction to complete in the second half, subject to customary closing, and will be earnings accretive from 2021. U.S. Cheese revenue increased in the first half of 2020 by over 16%, with positive volume and price. Volume was primarily related to elevated demand from customers with end -- with retail end-market exposure. Pricing was volatile and averaged ahead of the prior year due to strong demand dynamics. U.S. Cheese operates a pass-through pricing model, which helps negate most of the impact of significant price volatility in the period. Profit and margins increased in U.S. Cheese, driven by that volume growth. End-market demand has remained good as the period ended, with further price volatility expected given the dynamics of retail and foodservice demand as lockdowns ease in the U.S. Our joint ventures revenue decreased by 1.4% in the period. Volume in Glanbia Ireland and Glanbia Cheese U.K. was broadly in line with the prior year. Pricing reflected lower year-on-year dairy markets in Europe as a result of volatility related to the COVID-19 pandemic. Glanbia's share of joint ventures profit grew to EUR 31.8 million as a result of improved performance across all our joint ventures when compared with the prior year. I will now pass to our Finance Director, Mark Garvey, who will talk through the financials.

Thank you, Siobhán., and good morning to everyone on the call. I'll walk through the results of the first half 2020. Overall, the group had a resilient performance in what was a challenging second quarter as we navigated the impact of the COVID-19 pandemic. The group was focused on protecting our people, continuing the supply of food and maintaining our strong financial position. Wholly-owned revenue growth of 2.3%, constant currency, was driven by Glanbia Nutritionals as both Nutritional Solutions and U.S. Cheese had top line growth, offset by second quarter revenue declines in Glanbia Performance Nutrition, primarily due to the COVID impacts in non-U.S. markets as well as the distributor and specialty channels in the U.S. Adjusted earnings per share was EUR 0.3105, down 17.2% constant currency in the half, following a good first quarter. Again, COVID disruption in Q2 was the cause of the reduced EPS result as short-term negative operating leverage of the GPN international business impacted performance. The average euro-dollar rate for the first half was $1.10 compared to $1.13 for the same period last year, leading to an approximate 2% tailwind in reported results compared to constant currency. Should the current U.S. dollar-euro exchange rate of approximately $1.17 continue for the remainder of the year, this tailwind would reverse to become a full year 2% headwind. The group managed cash and debt tightly during the period, resulting in good operating cash flow performance and ended the half with a net debt-to-EBITDA ratio below 2x. The group confirmed and paid the 2019 final dividend in the second quarter, and the Board has approved the payment of an interim dividend of EUR 0.1068, which is at the same level as the 2019 interim dividend and in line with the group's dividend payout policy. The interim dividend represents a payout of 34% of the first half adjusted earnings per share. As the second quarter progressed and to date into Q3, the GPN segment is seeing improving trading conditions in North America, while certain international markets are recovering more slowly and our strategic initiatives remain on track. The Glanbia Nutritionals segment and the joint ventures continue to be resilient into Q3. However, the uncertain evolution of the COVID-19 pandemic makes it difficult to estimate the impact on our markets for the remainder of the year. And as such, guidance continues to be withdrawn for the year. Looking at the group income statement for the half year. Wholly-owned revenues were EUR 1.8 billion, up 2.3%, constant currency. Wholly-owned EBITA was EUR 85 million, down from EUR 111 million in 2019. Wholly-owned margins were 4.6%, a decrease of 170 basis points, primarily due to the negative operating leverage impacting the GPN business. The net finance costs were EUR 11.5 million compared to EUR 13.3 million in the prior year, reflecting lower average net debt levels and lower average interest rates. The group share of joint ventures profit after tax was EUR 31.8 million compared to EUR 26.8 million last year, with each joint venture reporting results ahead of last year. The effective tax rate was 11.4%, and we expect the full year tax rate to be between 11% and 12%. Adjusted earnings per share was EUR 0.3105 and basic earnings per share, post exceptional items, was EUR 0.1873. In the first half, the group had exceptional items of EUR 14.6 million net of tax, which are primarily related to the transformation program ongoing in Glanbia Performance Nutrition. In the second half of 2019, the group performed a comprehensive review of GPN across brand strategy, geographic footprint and operating model. In February, we announced the reorganization of the segment into 4 key businesses: North American Performance Nutrition, North American Lifestyle, International and Direct-to-consumer; a prioritization of investments in the Optimum Nutrition and SlimFast brands; and a streamlining of our product portfolio, enabling a simplification of business operations. At the time, we rationalized 35% of SKUs in the business, and this has served the business well in the first half following the onset of COVID. As the program continues, there are EUR 15 million in costs incurred in the first half related to redundancy, lease exits, route-to-market contract resets and consulting. We anticipate an additional EUR 10 million to EUR 15 million in cost will be incurred in the second half related to this transformation program. By the end of 2020, overall FTEs in the GPN business would have been reduced by over 10% since the end of 2019 and a number of office locations would have been closed or consolidated across our markets. Additionally, on the supply chain front, we are moving forward with the consolidation of our U.S. manufacturing footprint from 3 locations down to 1. This has been enabled by the SKU rationalization program and the exit from the majority of the contract business and is expected to be completed by the end of 2021. The capital cost of this consolidation would be approximately $45 million, which will be incurred beginning in the second half of 2020 and through '21. These GPN initiatives are important components of achieving the margin improvement ambition of 12% to 13% by 2022. There were also specific COVID-19-related incremental charges of EUR 4.7 million incurred by the joint ventures and the wholly-owned company related to setting up production facilities to be COVID-19-safe, PPE as well as incremental payments to certain frontline employees at the height of the pandemic during the second quarter. And there was a one-off benefit of EUR 3.5 million from a legal settlement, which also occurred during the second quarter. The group continues to focus on strong cash flow management. Operating cash flow was EUR 47 million in the half year, an increase of EUR 28 million due to improved working capital outflows compared to last year, which offset the shortfall in EBITDA. As in prior years, we're targeting a conversion of over 80% of EBITDA into operating cash flow for the full year. Free cash flow for the half was EUR 43 million, an improvement of EUR 16 million over prior year due to the higher operating cash flow as well as the benefit of tax refunds in respect of prior years received during the period. As I mentioned, the joint ventures have been performing well, and the group received JV dividends of EUR 18 million in the first half, an increase of EUR 2 million over last year. We have managed capital expenditure well and had a total half year spend of EUR 29 million compared to EUR 37 million in the prior year. Strategic CapEx was EUR 20 million and spent primarily in expansion of the Body & Fit infrastructure and additional filling technology for Nutritional Solutions. For the full year, we expect total capital expenditure to be in the range of EUR 65 million to EUR 75 million, which is about EUR 10 million lower than our original guidance at the beginning of the year. Group will pay an interim dividend of EUR 0.1068, representing a payout of 34% of adjusted earnings per share. At the Annual General Meeting, the group received shareholder approval to implement a share buyback program as 56% of the independent shareholders voted in favor of the group -- of the share buyback program. We followed up with a shareholder consultation process in May and June. Following the completion of this consultation, however, a variety of views were provided and particularly, in light of the current uncertain trading environment, the Board has decided not to commence a buyback program at this time, but will revisit the matter later this year. The group has ended the half with a strong balance sheet. Net debt was EUR 651 million compared to EUR 778 million at the same time last year. We are well within our banking covenants with net debt EBITDA of 1.95x at the end of the half year and interest cover of 9.4x for the half year period. Subsequent to period end, the group closed on an additional $175 million of senior promissory notes with a coupon of 2.75%, which will be drawn down on the 15th of December 2020 and will mature on 15th of December 2031. This facility will effectively replace the $156 million private placement debt, which is coming due in the first half of 2021. The group currently has committed facilities of over EUR 1.1 billion. The group's pension liabilities reduced from EUR 46 million at the end of 2019 to EUR 25 million at the half year-end as a result of a conservative investment strategy. And as Siobhán mentioned, the group has agreed to acquire Foodarom, a Canadian flavors business, for CAD 60 million initial payment, which is expected to close in the third quarter. And with that, let me hand it back to Siobhán to conclude.

Thank you. In conclusion, globally, consumers are navigating an unprecedented health crisis. The Glanbia portfolio is well positioned to regain growth momentum when consumers emerge from these current restrictions. Our leading positions across brands and ingredients that address core health and wellness concerns for consumers will be a strategic advantage. We have delivered against the priorities we've set ourselves at the onset of this pandemic, namely to protect our people, to continue the supply of food to customers and consumers and to maintain our strong financial position. We had a good start to the year, and while significant elements of our portfolio continue to be very resilient through the pandemic, we have faced challenges in Q2. Trends across the business have improved as we move into Q3 on both revenue and margin. And while we remain cautious on the evolution of the pandemic and its influence on consumer behavior, we will continue to focus both on navigating the near term while strategically positioning our business for growth. We have been prudent in our financial management, aggressively managing costs and benefiting from a strong balance sheet and good liquidity. We set out a clear strategy to regain growth momentum in February, and we have continued to execute against that plan. Our core platform brands have performed well in our key North America market. We have also assessed the impact of the new environment and recalibrated our strategy where needed, to ensure that it is fully aligned to key trends that have accelerated in recent months. The strategic focus remains to regain momentum in GPN through the implementation of the transformation program that will drive both revenue and margin progression and to continue to evolve the Nutritional Solutions capability, both organically and by acquisition of new capabilities, such as the flavor acquisition announced today. With that, I will move to questions. Thank you.

[Operator Instructions] We will now take our first question from James Targett from Berenberg.

Just a couple of questions from me. I mean firstly, on the volume momentum trends that you're seeing in GPN. Could you just talk a little bit about how you see inventory levels in the trade and to the extent to which the volume momentum you're seeing in sell-in is -- how that compares to sell-out volumes? Can I get an idea of how much is restocking and how much -- I mean how much inventory there is? And then secondly, on international. Could you just -- in terms of the declines, can you talk a little bit about the extent to which it's driven by distribution constraints related to COVID versus demand reduction? And then when you talk about this calibration -- recalibration of the international business, how big do you expect the international business to be eventually? I mean it's 21% of revenues now. How big are the -- is it going to be driven by 10 core markets which are going to be 90% of the revenues? Just trying to get an idea of how you see the size and the shape of that business to look post this recalibration.

Thank you for that, James. In terms of the trends, yes, we had, as you say, with significant reduction in shipments the second quarter across some of the key brands. Consumption actually didn't decline as much. So there was an element of destocking, I would say, at some of our retail partners. So we'll see how that evolves now through the rest of the year. I think, fundamentally, as we move through July, we're seeing demand pick up. And obviously, quite cautious about how COVID will evolve. But as I say, have seen the near-term trends improving, as you saw on the chart earlier, significantly from big shipments reduction in April and May. It's a great question, in truth, on the international, the distribution constraints versus demand. I mean in truth, I think, ultimately, it was about the markets essentially closing down, so consumers not being able to access their traditional routes to markets. The core demand, that's why we would believe the core demand is still there, and we remain very optimistic for that core demand as we think into the future, but you really had just markets shut down very dramatically, very quickly because a lot of our brands in a lot of our international markets are fundamentally distributed through specialty stores and distributors. We have an evolving and growing e-commerce capability, but it's still the smaller proportion of our route to market. So it was -- ultimately, it was that we didn't get the demand, but I think you're absolutely right. It was about the distribution and routes to market being essentially constrained. In terms of how large our international business will be going forward, what I would say is as we're recalibrating our focus, North America is our largest market by far. We are very strategically focused on continuing to grow our pillar brands in North America, and I expect that to continue. There can be periods if the international markets ease where you might get a faster pace of growth but is clearly off a lower base. So we haven't set a particular target of North America versus international at this point in time. Suffice it to say that we have recalibrated our approach. We will be more focused on growth opportunities. We have new talents, new partners in place. And I -- but our strategic focus, it is fair to say, is on the largest market of North America. And again, James, just to reference, as I said in the presentation, that when you think of the performance of the North America market in total for GPN, actually, it was quite resilient with margins improving in the first half.

Can I just follow-up on -- you mentioned most of your distribution in international is distributor and specialty. But your DTC channels in international declined mid-single digits, whereas your online channels in North America were up double digits. So I appreciate the DTC business in international is a less mature business than your operations in North America. But why is there -- why are you benefiting from the growth of the online channel in international to the same extent you are in the U.S.?

We are. It's just off a smaller base, James.

Okay. So should the DTC decline due to the -- in the...

Sorry. Say that again?

Your DTC growth was negative in the first half.

Oh, my apologies. Oh, yes. Sorry. Apologies. I misunderstood your question. Our D2C, yes, did decline. That was specifically the Body & Fit brand. I was answering a more broader question on the total of our international business. Yes, that was very specifically related to core markets. Body & Fit is a very strong brand in the Benelux region. Our consumers are very much in that younger age group. They go to gyms. They really engage with the Body & Fit brand. So when gyms closed in that region in -- through April, May, that business was just hit particularly hard in its largest market. We have seen that trend reverse actually at the latter part of the period and into July, and we are very optimistic actually that we will get growth in our D2C channel in the second half of the year. So I would say that particular piece around Body & Fit was related to that strongest market that it's in.

It appears we have lost James for the moment. We will now go to our next question from Patrick Higgins from Goodbody.

Siobhán and Mark, just a few questions, if possible. Firstly, just on GPN. Would it be possible just to get an idea of the monthly trajectory to Q2 and into Q3? Like subdivision for GPN, so international versus lifestyle and Performance Nutrition, et cetera? And then secondly, just on Nutritional Solutions, could you give us an idea of how much food-to-go customers contribute to sales for that division? And how much of the decline was attributed to those customers in Q2 versus maybe an unwind of the initial pantry loading that you saw just at the end of Q1?

Thanks, Patrick. What I would say to you in terms of the segmental piece, the biggest dip was seen in the international markets. We had, as you saw, 33% down overall. So that dipped quite significantly in April and May and then recovered through June and July. We saw it also in the North American performance Nutrition side, where we did have quite a dip in April and May, and again, improving, particularly in July, whereas the lifestyle portfolio actually was -- the shift wasn't as dramatic. We had a very good performance, as I mentioned, in SlimFast and Amazing Grass, some weakness in think!, but overall, not as dramatic as the other 2 segments. In terms of Nutritional Solutions, food-to-go, both those factors were relevant. I would say, in terms of the volume piece, there was particular low-margin contract business that we do. And so that reduced volumes in the second quarter. Yes, you're absolutely right. There was an element of pantry loading in March that recalibrated as we went through into April. We have a number of categories in the ready-to-eat space where Nutritional Solutions is an ingredient provider and we did see some softness there. But fundamentally, I would say our core portfolio across dairy and nondairy for Nutritional Solutions was very resilient, actually, through the piece. We saw very good growth, as I referenced, in the immunity-enhancing side. So that did counter. And again, we remain very positive that when restrictions ease and people get back to moving about, that food-to-go and ready-to-eat space will regain growth momentum.

Maybe just one follow-up question on Nutritional Solutions. Could you maybe just talk through the building blocks of the decline in the margin? I think you flagged a negative mix effect. Was that stronger growth in the dairy business and maybe less so in the premix? Or just how should we think about that decline?

Yes. It really was down to the different segments within Nutritional Solutions. As I said, we had good demand in areas like immunity. We had a slight weakness in the food-to-go, the dairy ready-to-eat space. And so within that overall portfolio, that pulled back margins somewhat in the first half. I would say, again, though, very resilient at over 12%.

We will now take our next question from Karel Zoete from Kepler Cheuvreux.

Yes. I have a follow-up question on the international business because you seemed to scale back your presence in some markets. How is the business, the international business, contributing to the P&L today? And how will that be going forward, assuming that you might also exit some markets with ON people? And the second thing would be on the cost savings in GPN. Can you say more on the supply chain savings you expect in relation to the consolidation of the 3 plants?

Karel, it's Mark. In terms of international, clearly, a very challenging second quarter for us in the international business, and it was the primary reason why we saw profitability decline in Performance Nutrition. So effectively, in the first half, we lost money in the international business, and that will reverse in the second half as we see these markets open up, as Siobhán talked to earlier. And clearly, we're focused on that. We put a lot of work, and we're now done with streamlining our route-to-market approach, we're streamlining our FTEs and we're consolidating a number of folks in different markets and different offices as well, which will help us in terms of having, I would say, more online access to those markets and a less costly overall infrastructure for international as well. So that will come back for us in the second half. On the supply chain point, referring to, of course, the consolidation of manufacturing facilities, an important part of that was the preview of the SKU rationalization, exiting contract business because it takes out a lot of shorter and more inefficient runs, for example. So as you can imagine, when I talk about a $45 million investment, we look at that with the same lens in terms of returns as any investment that we do, and we expect that to be significant and start returning for us as we get to the end of '21 into '22 and will be an important element of that margin uplift now to get to 12%, 13% by '22.

[Operator Instructions] We will now take our next question from Graham Hunt from Morgan Stanley.

Just 3 short questions from me, please. Just on -- first, starting on your D2C platform. Could you say how you see the profitability of that channel relative to your 12% to 13% target by 2022? Second question on international. I wonder if you could talk about, or maybe it's too early, but what you're seeing in terms of market share development, where you've addressed product price point and positioning and whether you're taking share with your new offerings? And then lastly, going back to North America facility consolidation. Are you able to quantify what impact that's going to have on your overall capacity in North America, just in terms of maybe putting some numbers around that, please?

Graham, in terms of the profitability of D2C, as we've said previously, the margin profile there we would expect to be below the overall target for the division of 12% to 13%. We are still in the investment phase in that business. We see it as a really good capability to have for the route to market itself, but also, the brief of the team, I think, as we've referenced before, is twofold. It is about evolving Body & Fit and the brand and growing the technology across different markets. But also, they will -- they're increasingly involved in the e-commerce strategy for the totality of the GPN portfolio. So I think both those pillars are really good and complementary to how we will continue to scale indeed across international markets, as I've referenced earlier. But margins, we would expect them to be below the overall, as I've referenced. In terms of international, COVID-19 really disrupted things, as I said, in the second quarter. But we have gotten good traction across a number of geographies, seeing particular recovery. And we have a good position in the U.K. market. We have a good position in China and parts of Asia in particular, so I think they will be key areas of focus for us as we think forward. So a core part of our strategy internationally is having changed our route-to-market partners where we're going through specialty or distributors and then building that e-commerce capability centrally that will allow us to optimize that opportunity very efficiently across a wide variety of geographies. On your North America capacity question, Graham, I wonder, would you mind repeating it? I think I may have just missed -- or actually, no, Mark's got the rest of it.

I think I have some charts for Graham. Correct me if I'm incorrect, but yes, our expectation is by the time we get this consolidation done in 2022 that our effectively consolidated operations, they will be covering -- we'll be working over 80% capacity. And it will obviously give us the opportunity to have space for growth as well in terms of what we do, but that's what we expect in '22 at this point.

[Operator Instructions] We will now take our next question from Roland French from Davy.

I've got 3 questions, all relating to GPN. So firstly, we think about the international channel, I know you've referenced a more kind of selective approach to investing in certain markets, and you've called out the EU and Asia, and you've also referenced a bias for growth in e-commerce. Just wondering, that latter comment around the e-commerce, how that might change the model. And I know you've talked about partnership changes. But is -- stepping back at a high level, is the model and the approach to that channel changing, i.e., are you looking to drive more online and e-commerce vis-à-vis having assets on the ground in context of manufacturing? So that's my first question. And then secondly, on GPN margin. I think in the slides, it refers to the underlying margins being in line with the prior year before the impact of COVID. Just wondering, can you maybe provide some color around that and specifically around the North American margin performance in context of the lower volumes and the margin being ahead year-on-year. And then finally, maybe just around visibility on the order book for the autumn reset with the retailers and the Q4 New Year drive. I guess, how are retailers changing their order patterns in context of COVID and how is visibility more generally.

Thank you very much for those questions. In terms of the international business, yes, as you say, we will have a selective approach. And we are altering the model somewhat to address the e-commerce opportunity, as you say. Effectively, our ambition there will be to have central capability that we can leverage across particular geographies. We have already built capability in a number of areas. Clearly, we have the direct-to-consumer platform itself, but we also have capabilities in some of the regions. We have developed this capability in North America now for many years. And a number of our talent, actually, we've moved into some other markets to bring that capability to a more global level. I think you referenced, just in passing there, the manufacturing piece. I think that is slightly different. I think we will, from a route-to-market point of view, have a bias for e-commerce. We will still keep options on the table in terms of the most efficient fulfillment ways of doing that. So again, that remains to be finalized. But from a route-to-market, very much clear, good partners on the specialty side and then developing ourselves an e-commerce capability, hence, altering some of our resources to be aligned to that priority, as you've rightly referenced. In terms of North America, yes, as I said, margins overall, when you look at the total GPN portfolio up in North America in the period, we had very good cost control across all aspects of the business. We had good margin growth in the lifestyle component in the first half that negated some of the margin challenges that we had with the decline in specialty and distributor on the performance side. And that gives us the confidence, really, as we think about margins as we go through the second half of the year. The significant drag on margins in the first half was that negative operating leverage that we have in the international business. So you'll remember, from last year, that business, when revenue drops, it falls quite quickly and sharply to the P&L. So that is the core margin driver of the first half. And to the extent there were negative input costs that I've also referenced, we have very clear visibility that they, too, will reverse in the second half there. The pricing is locked and loaded now for the second half of the year. The visibility of the order book, it's still early. Obviously, we're sitting in August. There's a number of areas that we do have visibility on. In the lifestyle, for example, we know that one of our key retailers is moving some of their promotional activity that they would normally do in January, they're moving it into February. We are lapping significant pipeline sale, as I mentioned, in SlimFast in Q3. But on the positive side, we have sustained all that distribution. Now we're focused on productivity and making sure that we have all the right SKUs in those distribution points. On the sports side, it's early to have total visibility. As I say, at an overall level, really, I think our caution for the second half is really around how COVID evolves and how it impacts consumer behavior. We have definitely seen improving trends in July, but this pandemic, as we all know, is not behind us yet. So it is a measure of -- it is trying to best gauge how that will play through. But even in our most pessimistic view of the second half, we do, for example, get significant margin improvement.

As there are no further questions, I would now like to turn the call back to Siobhán Talbot for any additional or closing remarks.

No, again, just to wish you all well, do stay safe and stay well. And thank you for your time and attention.

Thank you. That will conclude today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.