Glanbia plc (GL9) Earnings Call Transcript & Summary

Good day and thank you for standing by. Welcome to the Glanbia Q1 2024 Interim Management Statement Webcast. [Operator Instructions] Please be advised that today's conference is being recorded. I will now hand over to Liam Hennigan, Group Secretary and Head of Investor Relations, to open the presentation. Please go ahead, sir.

Thank you, operator. Good morning and welcome to the Glanbia First Quarter 2024 Interim Management Statements 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 their time of their approval of the 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 forward-looking 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 the CEO of Glanbia plc, Hugh McGuire.

Thank you, Liam. Good morning, everybody, and welcome to our results call. On today's call, I will provide an overview of our performance for the first 3 months of the year, and I'm joined by my colleague, Mark Garvey, who will cover the financials and outlook. At the end of the presentation, we'll be happy to take your questions. I'm pleased to say that the first quarter performance for the group was in line with our expectations, with the core consumer trends such as the demand for protein, immunity enhancement and overall health and wellness, continuing to underpin consumer and customer demand for our Better Nutrition brands and ingredients. This drove positive volume at the group level of 1.5%. Pricing was negative by 6.9%, but this was expected and was primarily as a result of lower year-on-year dairy prices. In GPN, Optimum Nutrition continues to strengthen its leadership position and delivered strong volume growth in the quarter, building on a strong performance in the fourth quarter of 2023. Our healthy lifestyle portfolio also delivered strong volume growth driven by the continuing demand for the protein growth brands of Isopure and think!. In Nutritional Solutions, we continued to see volume trends improve, with volume growth of 3.8% in the quarter driven by a strong performance in our premix solutions business, which was somewhat offset by reduced volumes in dairy solutions due to the timing of customer offtakes. We continued to evolve our strategic agenda with the acquisition of Flavor Producers, which closed last Friday. This acquisition represents a strong addition to the Glanbia portfolio, building on our existing flavors capability and expertise, position us well to capture long-term growth opportunities in the organic and natural flavor segments, and I will speak to more on that shortly. Based on the current market environment and expectations for the remainder of the year, we reiterate our full year guidance of 5% to 8% growth in adjusted earnings per share, which will be driven by a strong operating performance across both GPN and Nutritional Solutions. Turning to GPN. We are pleased with the volume growth of 1.4%, driven by our performance in healthy lifestyle nutrition brands, offsetting a headwind from SlimFast. Like-for-like revenue was down 1.9%, with a pricing decline of 3.3%, which was largely driven by our planned promotional activity and some tactical pricing initiatives. From a regional perspective, Americas was down 5.1% and international grew 4.7%, or worth noting, the SlimFast drag is entirely impacting the Americas performance. Our international business delivered broad-based growth in the quarter, supported by marketing investment and the continued development of in-market capabilities. Optimum Nutrition, at over 60% of GPN revenues, continues its strong momentum, delivering like-for-like growth of 5.6% and strong volume growth. The brand continues to strengthen its leadership position supported by increased brand investment and marketing activation, including the Unlock More You campaign in March and new brand partnerships such as recent announcements from McLaren Formula 1, Spartan and Sky Sports. From a consumption perspective, our consumption is in line with the prior year. This is a very strong comparative period to deliver consumption of over 30% last year. As highlighted in our full year '23 results call, we're seeing some softness in the specialty channels but good performance in the other channels with good consumption growth underpinned by increased velocities, distribution gains and marketing activation. Our healthy lifestyle portfolio of Isopure and think! and Amazing Grass brands delivered strong like-for-like revenue growth of 11.1% and consumption growth of 7.5%. Our newest innovation from think!, think! MINIS, are shipping this month, the perfect size for snacking. A 100-calorie bar with 6 grams of protein, 3 grams of fiber and 7 flavors, including three co-branded with Girl Scout Cookie inspired flavors: S'mores, Chocolate Peanut Butter and Adventurefuls. SlimFast in the diet category continues to be challenged as underlying consumer diet behavior remains depressed, and retailers have reduced shelf space, but is now only 7% of our business. As a result, we maintain our expectations for GPN in 2024 to deliver 4% to 7% revenue growth. Turning then to our second growth platform of Nutritional Solutions. Revenue declined by 2.3% in the period on a pro forma basis. This was driven by a 3.8% increase in volume, a 5.5% decrease in price and a decrease of 0.6% from the net impact of acquisitions and disposals. The strong volume performance in the quarter was driven by good growth in the premix solutions business, which was somewhat offset by protein solutions. The trends in the premix business continued to improve, supported by the continued customer demand for vitamin and mineral fortification. While the underlying consumer demand for protein solutions also remained strong, the performance in the quarter was impacted by the timing of customer offtake in the fourth quarter of 2023. The integration of the dairy bioactives business continues to progress well with strong customer demand for our portfolio. The price decline in Nutritional Solutions was largely driven by the year-over-year decline in dairy market pricing. In terms of guidance, we are also reiterating our guidance of 3% to 5% volume growth in 2024. I'm delighted to welcome Flavor Producers to the Glanbia portfolio. Flavor Producers is a leading flavor platform in the U.S., providing flavors and extracts to the food and beverage industry. The business focuses on organic and natural ingredients and has a strong track record of innovation and proprietary ingredients with best-in-class formulation capabilities. The business is a diverse customer base ranging from large corporates to high-growth emerging brands. In terms of strategic rationale, the business is a really strong fit and consistent with our strategy of acquiring complementary businesses to grow our Better Nutrition platforms. It is a unique opportunity to acquire complementary capabilities and significantly expanding our flavors offering focused on natural and organic flavors. We believe this is an attractive segment of the $20 billion global flavor market growing at approximately mid-single digits and aligned with long-term consumer trends. The business will ultimately be integrated with Foodarom. And together, our flavors platform will have an excess of $120 million of revenue largely from the North American markets. This gives us real scale in flavor technologies with a strong innovation capability, the combined businesses having more than 20% of employees working in research and development. Having successfully integrated a number of acquisitions in Nutritional Solutions in recent years, we see a clear path to integration with identified synergies. The acquisition provides us with a far more extensive flavor library and additional capabilities. And there's very little customer overlap between Flavor Producers and our existing businesses. So we see a good opportunity to not only drive cost synergies but see good customer opportunities also. From a margin perspective, the business will be margin accretive to Nutritional Solutions EBITDA margins. Overall, I'm very pleased to have acquired such a high-quality business, and I look forward to welcoming the Flavor Producers team into the Glanbia organization. And with that, I will hand over to Mark.

Thanks, Hugh, and good morning to everyone on the call. At the end of the quarter, the group's net debt was $289 million. As Hugh mentioned, subsequent to quarter end, we completed the acquisition of Flavor Producers for an initial consideration of $300 million. There's also a potential deferred consideration of up to $55 million, contingent on outperformance of the business in calendar year 2024, which is due -- will be payable in the first half next year. We continue to expect good cash flow performance this year. At year-end, we expect our net debt to EBITDA ratio will be below 1x. The group has committed debt facilities of over $1.3 billion. Capital expenditure for the year will be in the range of $75 million to $85 million, which approximately $25 million will be business-sustaining expenditure. As we announced last February, the group intends to return EUR 100 million to shareholders via share buyback programs this year. We are currently executing an initial EUR 50 million program. And as of last Friday, 1.7 million shares have been bought back and canceled at an average price of EUR 17.64 for a total of EUR 29.8 million. Now turning to our guidance for the year. Having performed in line with our expectations for the first quarter, we continue to expect adjusted earnings per share growth of 5% to 8% for the year. The addition of Flavor Producers for the remaining 8 months of the year will be broadly neutral to adjusted earnings per share in this fiscal year. In 2025, we expect this acquisition will be accretive to adjusted earnings per share. In GPN, we continue to expect revenue growth for the year to be between 4% and 7%, including the 53rd week. As indicated previously, we expect the growth will be volume-led with some negative price likely in the range of 2% to 3%, primarily due to planned promotional activity during the year. In GN and NS, volumes were somewhat better than anticipated in the first quarter, particularly in premix, and we expect volume growth for the half year will be broadly in line with the first quarter. For the full year, we expect GN and NS to report volume growth between 3% and 5%. Turning to EBITDA margins. We expect GPN and GN and NS EBITDA margins to be at least at a level achieved in 2023 on a pro forma basis. In GPN, first half EBITDA margins will be higher than the second half primarily due to lower input costs, albeit there will be some offset of increased marketing spend in the first half this year. In GN and NS, we expect first half EBITDA margins to be broadly in line with last year and second half margin somewhat benefiting from higher freight prices as well as the addition of Flavor Producers. As I noted earlier, we expect good cash flow generation this year, and we're on track to convert 80% plus of EBITDA into operating cash flow. And with that, I would like to hand it back to the operator, and we'll be happy to take your questions.

[Operator Instructions] And your first question comes from the line of Patrick Higgins from Goodbody.

A couple of questions on my side, please. Firstly, just on GPN volumes. I guess I'm just trying to get to the underlying number. Obviously, there's a number of headwinds during the quarter, whether that's SlimFast, but also phasing of orders into Q4 from Q1, I guess, or -- yes. Could you just try and, I guess, give us a sense of what the underlying number is, maybe the exit run rate on volumes in March or current trading in Q2 today? That's the first question. Second question is just around pricing dynamics more generally in the market. How intensive has promotional activity been? Have you seen that kind of ease off into Q2?

In terms of volumes that you're asking about, I mean, if you think about Optimum Nutrition, we really look at that as being mid- to high single digits in terms of the trajectory we're seeing on a continuous basis. Healthy lifestyle, also doing very well. And you saw the numbers that Hugh talked about there, too, which is pretty consistent volume growth there as well. We did talk about SlimFast being a headwind for us for the quarter, about 5%. We'll be about 3.5% for the first half and about 2.5% for the full year. So you're going to see that as a headwind as you go through us. On the pricing side, we are seeing some promotional activity very much in line with what we had expected. There's some tactical pricing where we're seeing some commodities and some on our smaller brands, like creatine as an example there, that we have to take. But that is something we keep an eye on market-by-market, and we think about 2% to 3% negative for the year on the pricing side.

And your next question comes from the line of Alex Sloane from Barclays.

So first one on GPN, international growth looked strong in the quarter. As far as you can see it, has the strong like-for-like growth been matched by consumption there? And any markets, in particular, that you call out as behind that international strength? And the second one, just on inventory levels at customers actually be interested in both GPN and NS, how that's looking across core customers in different channels as we enter Q2?

Just to the GPN question first, good -- happy with the international performance as you saw the growth in quarter 1. It's broad-based. It's across many different markets. There's always ups and downs in different markets depending on promotional cadence, depending on competitors, depending on just various cycle of marketing activation as well. But I wouldn't call out a specific market. Generally happy with international performance, and we're seeing that continue into quarter 2 as well. In terms of inventory, on both sides of the business, happy with inventory levels. We've seen inventories normalize in GPN at quarter 1 as we expected. And we're not -- we're happy with inventory levels in Nutritional Solutions as well.

And your next question comes from the line of Rashad Kawan from Morgan Stanley.

A couple for me, please. One on GPN. So you've called out the specialty channel as weak again. I think you also called that out at the full year. Can you talk through the dynamics you're seeing there? Are you retaining those customers in other channels? Or are they going elsewhere? And then second question around the Flavor Producers deal. So obviously it's closed maybe a little earlier than expected. So why not upgrade your EPS guidance? I may have missed it, but are you implying that there's no earnings impact from the deal this year? Or is there an element of conservatism within the guide? And then just another on the deal, if I may. In terms of integrating the company into the business, is there a scenario where you leverage some of the capabilities into your GPN business as well? Or is it purely going to be a B2B within Nutritional Solutions?