Glanbia plc (GL9) Earnings Call Transcript & Summary

Good morning and welcome to the Glanbia Q1 2023 Interim Management Statement Call and Webcast with Siobhan Talbot, Group Managing Director; and Mark Garvey, Group Finance Director. Today's conference is being recorded. At this time I'd like to turn the conference over to Liam Hennigan, Group Secretary and Head of Investor Relations. Please go ahead.

Thank you, operator. Good morning and welcome to the Glanbia first quarter 2023 interim management statement call. During today's call, the directors may make forward-looking statements; these statements have been made by the directors in good faith based upon the information available to them up to the time of their approval of this interim management statements. Due to 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 those statements. The directors undertake no obligation to update any forward looking statements made on today's call, whether as a result of new information, future events or otherwise. I'm now handing over to Siobhan Talbot, Group Managing Director, Glanbia Plc.

Thank you, Liam. Good morning everyone and welcome to our Q1 23 results call and presentation. On today's call I'll provide an overview of our performance for the first 3 months of the year. And I'm joined by my colleague Mark who will cover the financial results and outlook. At the end of the presentation we will be very happy to take your questions. So overall for Q1, our performance for the group was broadly in line with our expectations. Our core consumer trends that drive the business have continued to be resilient through the quarter. And while there are some timing factors in the first quarter volumes, we have increased confidence in the earnings potential of the group this year and are therefore upgrading our full year guidance for group adjusted EPS growth from 5% to 10% to 7% to 11% for the full year. This is really due to increased confidence in GPN margin and earnings for the second half of the year, which in fact will be the overall driver of group earnings for '23. In terms of the quarter, GPN was on track with full year revenue guidance, following our most recent price increase, which was just in Q4 of '22. We are seeing some elasticity on certain brands and products, but that's pretty much as expected with our largest billion dollar ON brand in fact performing better than expected. In Nutritional Solutions we have seen some supply chain rebalancing which has been a feature of Q1. And as we outlined in early March, the destocking that we saw in our proteins business in the latter part of '22 was now more evident in premix actually in the first quarter of '23. We expect this overall trend to be transitory and to normalize in the second half of the year. We've continued to progress our strategic agenda with the Glanbia Cheese JVs and Aseptic Solutions sales now complete. We completed the sale of our interesting Glanbia Cheese on the 28th of April and received EUR 179 million, which includes the repayment of some shareholder loans. As a result, we've increased and extended the buyback program from EUR 50 million to EUR 100 million. So turning down to Q1 revenue. Our performance overall, as I said, was broadly as expected. Pricing, as expected, was a key factor in driving revenue growth and that's reflecting the full year impact of the '22 pricing actions. As I said, Q1 revenue for GPN was on track with full year guidance with branded like-for-like revenue growth of 5%. Pricing was up 14.2%, offset somewhat by negative volumes of 9.2%, which was largely driven by SlimFast. As outlined at our full year results, the SlimFast brand refresh is in market, but is likely to be the second half or latter part indeed of '23 before we see that brand returning to growth. We'll speak more to brand performance later. We're very pleased with the very strong ON performance in the quarter, where we had both strong shipments and strong consumption with positive volumes. Pricing was positive across all brands following our series of pricing actions in '22. As I said the last one was just in the fourth quarter. In Nutritional Solutions, revenue decreased by 14.8% in the period. Pricing was positive by 1% with positive premix pricing offsetting negative dairy. Volumes overall declined by 17.4%, driven, as I said, product supply chain rebalancing across the business. Our Sterling Technology's acquisition continues to perform well with the net impact of acquisitions and disposals contributing 1.6% to revenue growth in the period. Turning then more specifically to GPN. As I've said, like-for-like revenue growth was 5%, representing 2.2% growth in Americas and 10.3% in international. Pricing, as I've said, was the key driver of growth, delivering 14.2%. And we've seen particularly resilient volume performance in our sports nutrition brand globally. We have stayed close to our consumers over the quarter, and we've continued to invest behind our brands, and this really has resulted in a resilient performance in the context of the pricing action we took last year. Consumption, as I said, continues to be good then across Performance Nutrition and indeed, healthy lifestyle portfolios. We have seen some elasticity, but overall below our expectations. As I mentioned, the volume was -- decline was really driven by SlimFast. In terms of margins, the structural margin of GPN is underpinned, as we've mentioned previously, by the transformation program. As we've said earlier, we are upgrading our GPN margin for '23 for -- between 12.5% and 13.5%, largely driven by the visibility we now have on input costs underpinned by the transformation program, but also coupled by the continued resilience of our consumer demand. In terms of the brand then, Optimal Nutrition, as you know, remains our largest brand, now 60% of GPN revenues in the quarter and continues its strong momentum. It has very strong shipment growth at almost 21% in the quarter. Pricing was a key factor, but we did have positive volumes for ON. Consumption continued again, very strong, over 36% for the 12 weeks to the end of Feb. This was underpinned by increasing velocities, distribution gains and indeed continued marketing activation. While the overall brand performance was good, Gold Standard Whey as a key SKU continues to do very well, growing both volume and price. Turning then to healthy lifestyle, which is made up of the Isopure, think! and Amazing Grass brands. This is 17% of the GPN revenue in the quarter. Like-for-like revenue declined by 1%, driven by some elasticity and some inventory customer reductions. Underlying trends remain very robust, again, consumption goods with 12 weeks to the end of February 15.4%. SlimFast brands now 12% of the GPN revenue in the quarter. This does continue to be challenged by the headwinds in the diet category and the continued decline of the Keto range. The trend was largely as expected, and as I said earlier, it will be the latter part of '23 before we regain brand's growth. We did see a decline in revenue in the quarter by 28%, and consumption does decline -- was declining currently. The brand refresh is in the market. We are supporting as well with new branding and pack design and new creation. It is really too early to provide any meaningful update, but we do remain very optimistic about the future of SlimFast. We know that weight management remains a key focus for consumers, particularly in our largest market in the U.S. We believe that we can grow the brand relevance and reach by broadening its reach to the weight-maintaining consumers. Turning then to the other growth platform, Nutritional Solutions. Revenue in NS declined by 14.8% in the period. As I've said, pricing increased by 1%, with positive pricing in premix. Volumes declined 17.4%, driven by the customer supply chain rebalancing. We have seen customers in our protein business reduce inventory in the second half of '22, and in Q1 of '23, we did see this trend across premix also. After a number of years of strong growth in NS, post the supply chain disruption of last year, and I think in the context of the current economic climate, inventory rebalancing is a trend we've seen across a number of our customers. We're having a lot of conversation with our customers. And based on those, we expect this destocking trend to be a continued feature of the first half, but that will normalize as we move through the year, particularly in the protein space. The net impact of acquisitions and disposals contributed 1.6% to revenue growth in the period. Sterling Technology, as I've said, acquired early in '22 continues to perform well. This was offset by the disposed revenue in relation to Aseptic Solutions, which was completed recently. EBITA margins in NS are also expected to grow in 2023. They will improve to '22 levels to between 12% and 13%. The year-on-year increase in margins will be driven by an improved mix in the value-added solutions, operating efficiencies. And of course, we'll have a mathematical accretion as dairy pricing declines as we move through '23. Looking broadly then at Nutritional Solutions in terms of its overall category reach. It continues to support customers across a broad range of markets, ultimately seeking to address from an ingredient perspective, that growing consumer health and wellness trends. We do this through our core strengths in premix solutions and our extensive capability in protein solutions. The business has evolved enormously over the past number of years. We've added a lot of really exciting capabilities through acquisitions and organically and a lot of innovation capability, as we've spoken to before in Nutritional Solutions. As we spoke to at our recent capital markets events, Nutritional Solutions now plays across a wide range of growing categories, and we're always increasing our relevance to our customers. One of the strengths of the business, in fact, is a very strong relationship with our customers. There's been no change to our customer base in the quarter, and our global and regional customer relationships remain a strength of the NS business. This provides us with insights on consumer demand and end-use markets. And as I said, our customers are telling us that an easing of supply chain constraints are allowing them to be comfortable with reduced inventories. They've largely not seen any change in underlying consumer demand in their end-use markets, apart from some softness in the vitamins and supplements category, where demand is -- looks like it's returning to a more normalized pre-COVID levels. We're very comfortable that we've not lost any share of wallet of our customers over the quarter, and our mid to long term growth ambition remains, as we've previously spoken to. We remain confident that our 3-year volume target for Nutritional Solutions of 3% to 5% for the period '23 to '25 remains valid. So ultimately, as outlined at our capital markets event as of last November, the purpose of Glanbia in delivering better nutrition, as you all know, is really at such a core key societal needs. The fundamental category trends that we're playing into remain very positive. We remain very well positioned across our ingredient solutions and brands, and we have very clear strategic priorities across the growth platforms, both of GPN and Nutritional Solutions. We remain very much on track to deliver our long-term sustainable growth. There remains plenty of courses to be navigated through the rest of '23. We do expect earnings momentum to improve as we move through the year. Overall, as I said, our '23 earnings growth will be driven by growth in GPN, and it is our increasing confidence in those margins and earnings that is giving us the confidence to upgrade our full year group earnings guidance to that growth rate of 7% to 11% constant currency. With that, I'll hand over to Mark, who will speak to some of the financial positions.

Thanks, Siobhan, and good morning to everyone on the call. As I know on our last call, the group has changed its presentation currency and we'll be reporting results in U.S. dollars from '23 onwards. On the 31st of March, we issued restated financial information for fiscal years 2021 and 2022 as well as half year '22 to assist investors with comparatives. On April 28, the group completed the sale of its interest in Glanbia Cheese U.K. and Zambia Cheese EU to Leprino Foods. The group received funds of EUR 178.9 million associated with the transaction, including EUR 114 million of consideration and EUR 64.9 million related to the repayment of shareholder loans. In addition, there is EUR 25 million of contingent consideration dependent on the performance of the business over the next 3 years. The group expects an exceptional gain before contingent consideration, net of transaction costs, of over EUR 50 million related to this transaction. At quarter end and prior to the closing of the Glanbia Cheese transaction, the group's net debt was $604.8 million, with net debt to EBITA at 1.43x and all relevant metrics well within covenant levels. The group has $1.3 billion of committed debt facilities and has considerable resources from unutilized debt facilities for further investment activity in the GPN and Nutritional Solutions businesses. We continue to target an operating cash conversion level of over 80% for the year. We expect capital expenditure to be in the range of $75 million to $85 million for the year, which will include a number of IT implementation programs, additional manufacturing equipment and Nutritional Solutions and maintenance capital expenditure. In 2023, as of close of business yesterday, the group has spent approximately EUR 31.7 million of the EUR 50 million share buyback program announced on March 1. Purchasing 2.36 million shares at an average price of EUR 13.40. In addition, following the receipt of proceeds of the Glanbia Cheese transaction, we are increasing and extending the current EUR 50 million program to a EUR 100 million program. We expect these programs combined will be less than 1% accretive to adjusted earnings per share for the year. Finally, turning to our guidance for the year. As Siobhan has said, we are pleased to be upgrading our key guidance metrics for full year adjusted earnings per share growth as we get improved visibility and earnings momentum in GPN through the year. GPN revenues in the first quarter have been broadly tracking to plan a strong ON performance continuing, healthy lifestyle seeing some elasticity but within expectations, and weight management showing the most significant volume declines as we work through the brand refresh program. Having delivered 5% branded like-for-like revenue growth in the first quarter, we continue to expect 5% to 7% revenue growth for the full year driven by pricing. We expect strong earnings growth in GPN for the year and are now expecting our EBITA margin guidance to -- are now upgrading our EBITA margin guidance to 12.5% to 13.5% for the full year compared to GPN EBITA margins of 11.2% last year. In Nutritional Solutions, as Siobhan has outlined, we have seen destocking in our premix business in the first quarter following on from a similar trend in our protein business we saw in the second half last year. From our conversations with customers, we do expect some destocking activity will continue in Q2. But overall, we expect this to be transitory and to normalize in the second half of the year, particularly in protein solutions. We expect to see improving volume trends as the year progresses and now expect overall Nutritional Solutions volumes to be marginally down on last year. We expect 2023 Nutritional Solutions EBITA margins to be between 12% and 13%, an increase from 11.4% in 2022 as the reduction in dairy pricing will be an opposite factor to last year's dilutive effect of margin as well as ongoing efficiency focus and a portfolio mix benefit from the execution of recent acquisitions, such as Sterling Technologies and the sale of Aseptic Solutions. Sustaining our cash and returns focus, we are guiding operating cash flow conversion of over 80% for the year and a return on capital employed between 10% and 13%. To conclude then, our outlook for 2023 is positive. We will continue to monitor revenue trends closely, but have sufficient confidence in our earnings momentum to upgrade 2023 group adjusted earnings per share guidance from 5% to 10% to 7% to 11%, reflecting our increased confidence in GPN margins and earnings in the second half of the year. And with that, I will hand back to the operator for questions.

[Operator Instructions] OUR first question today comes from the line of Alex Sloane from Barclays.

I've got a few if that's okay. Maybe firstly, on GPN. I was wondering if you could, maybe help frame the scale of the expected gross margin benefits that you're expecting from the lower way input costs? And then maybe sort of what proportion of that you're assuming will be reinvested in marketing or promotion in your updated margin guidance? And then secondly, just on the inventory rebalancing, destocking in Nutritional Solutions. I wondered, is that primarily a North American phenomenon or are you seeing that internationally also? And as we look forward into Q2, is there any signs of that maybe reducing on the -- certainly on the protein side where maybe it started earlier? And then one final one, if I can, on SlimFast, is the pressure here still mainly related to the Keto range. And I wonder if you could update on how big that is now within the mix.

Thanks, Alex. Thank you for all those questions. I'll take the GPN maybe and the SlimFast one, and Mark -- I'll turn to Mark for Nutritional Solutions. Overall, for GPN, I'm not going to overly calibrate the gross margins for you. But suffice to say that there is obviously a benefit in gross margin. That's coming from a number of areas. Clearly, in the second half of the year, yes, absolutely lower whey cost is a factor that's going to improve margins. I would also say that as part of the transformation program, the business has become very focused on areas like revenue growth management, SKU managements, some margin optimization in general. That provides a fundamental underpin to margins, which we're very pleased about, and we believe will be sustainable into the future. But I would say to you, in terms of the marketing investment, yes, we do expect to increase our investment in '23. We have, in fact, increased it and plan to increase it in the first half. We're probably going to move from that high single digits into double-digit marketing spend this year. We will monitor that as we move through the second half of '23 with an ambition to set ourselves up well for '24. As you can imagine, we're getting good returns for the investment that we've done historically in Optimum Nutrition. You're seeing that in the consumption growth. So we'll continue to invest behind that brand across different markets. So overall, pleased with the visibility that we have now. Obviously, there's plenty to navigate, but that increasing visibility of the trajectory of margins is fundamental to upgrading GPN as we said, and on the group. Turning Alex to SlimFast, yes, it is fair to say absolutely that Keto remains still the biggest drag, for want of a better word, on that SlimFast performance. We have [indiscernible] listings in the Keto as clearly part of that reduction in consumption and shipments that we're seeing. And that's going to be a factor, as I said, through an amount of the year. SlimFast is [indiscernible] ever-reducing part of the portfolio, but there's a bit still to go in that, I think. Our focus now, as we said, is on the refresh. Our focus really is taking SlimFast back to its core, which is the high protein, low carb ready-to-drink. Working well with our retail partners in that. So we remain optimistic about the brand. All of the research that we're doing, and we're doing, as you would expect, significant amount of consumer research, would speak to positive brand awareness, positive comments around indeed elements of the refresh, but too early to give you may be much more insights beyond that at this point. And the next Mark?

Alex, on your question on destocking, yes, of course, this is a trend we've seen in ingredients category over the last number of months. Firstly, I would say, yes, it is primarily North American issue that we've seen in this. And little bit different in terms of timing that we're seeing on the protein side versus the premix side. So for example, we are seeing destocking in the protein solutions side as for the second half of last year, third or fourth quarter, see that again in the first quarter this year. Expected that to alleviate somewhat actually in the second quarter and obviously then improve into the second half. You'll see that trend, I think, in protein solutions. Premix for us was more of a sort of a destocking event really in the first quarter of this year, and that will continue into the second quarter, and we'd expect to see that improve in the second half of this year. Also, you probably know that the comps are more challenging for us at the beginning of this year versus last year with a very strong improvement in volumes coming through at the beginning of last year. That will, obviously, improve as well. So it will help you sort of understand how the volume trends will improve as the quarters go on this year.

The next question today comes from the line of Patrick Higgins from Goodbody.

I guess, firstly, could you just talk about, I guess, your market share performance in ON, just given the strength of the consumption data. I assume you're taking share and is that shelf space? Or is that true expansion into adjacent categories like RTD? And then my second question is, maybe could you just give us a bit more detail on your performance in GPN international. And I guess, an extension of that is direct-to-consumer business as well.

Thanks, Patrick. Yes, very pleased, I would say, with the evolution of ON across a number of areas, not least indeed market share. What we're seeing is continued growth in 2 of the big channels for us, which is online and FaDMC. We believe we're gaining share in those channels, and that's been a big focus for the brand, as you know. Particularly the FDMC space, actually, we're gaining shelf space. You might remember actually there's one of the comments I've made last year that, with the change in operating model that we've done in the Americas now, while we were, in fact, losing some Keto SlimFast distribution, we were gaining shelf space on ON. So again, that's one face to the customer in action really. So pleased with that overall. I would say in terms of [indiscernible] powders actually remains the strongest category. We're pleased with the evolution of the ready-to-drink launch in Optimum. That's going on to plan. But what we're seeing is a real resilience in the protein powders. I think that's playing to a number of factors, not least the affordability of the powders, but resonance with consumers in terms of the authenticity of ON overall. So very pleased with the evolution of that. International business continued to grow in the quarter, growing in our D2C business as well, particularly in areas like Asia, Central Europe, Oceania had a good quarter. Staying close to our consumers there as well. We did a lot of pricing in international. Are seeing some elasticity in some of the regions, but pleased with how it's all evolving. We'll never be complacent on that consumer piece or indeed on the elasticities. As I referenced, our last pricing of '22 was only in the fourth quarter. So that's why we'll always have an element of caution. But very pleased with it to date.

The next question today comes from the line of Rashad Kawan from Morgan Stanley.

A couple from me, please. On Nutritional Solutions volumes, I'd say what gives you the confidence that trends will improve over the year? And how do you think inventory levels are at the end of the quarter? And you're guiding to marginal declines in volumes year-over-year. Should we interpret that as something in kind of the low-single digit range? And then my second question around margins, how much of your input costs are hedged for the year now? Just trying to assess how firm that margin guidance is for GPN and if there's any room for more upside if way prices continue to come down here?

I would say we're reasonably confident actually in terms of our conversations with customers at this point. We're already seeing, I would say, the trends of protein solutions improve. We think, as Siobhan said earlier, obviously, customers are making decisions around their working capital and inventory, et cetera, and that's flowing through more in premix now, I would say, than the dairy -- protein solutions side. Again, our conversations with customers give us reasonable confidence that based on end market demand that we are going to see the trends evolve as we have talked to them. And to your point, yes, low single-digits is where we probably expect to end up in terms of volume declines by the end of the year. To your question on just margins, we have -- we've talked a lot of our procurement strategy, as you know, over the last number of calls. We have pretty much procured both significant amount of whey that we need now for the year. So we have fairly good confidence actually in terms of what our cost structure is going to look like quarter-by-quarter to the end of the year. So we feel we're in pretty good shape there.