The solid annual results posted by Glanbia this Tuesday stem from the group’s ability to navigate past this year’s immediate inflation spike. But the increasingly North American nutrition group has also got better at managing its longer-term move away from dairy processing into high-tech, branded nutrition products. Glanbia’s approach to these tactical and strategic challenges is sketched out in comments by group managing director Siobhán Talbot on a morning investor call and in a follow-up interview with The Currency.

“We’re focused on cash, cash conversion, capital allocation, and of course shareholder returns,” Talbot told analysts. This is where 2022 figures are strong – not so much in Glanbia’s record revenue of €5.6 billion, which was artificially boosted by the strong dollar exchange rate and the inflationary context, or in its profit margin, which actually decreased slightly to 6.2 per cent in Ebita terms. 

Despite increasing its working capital to boost stocks as prices of raw materials rose, the group grew its operating cash flow last year, converting over 85 per cent of Ebtida. Aside from a growing tax bill – a sign of a healthy company if there was any – Talbot’s team allocated the bulk of this to a €143 million reduction in net debt as interest rates increased. 

At 1.12, Glanbia’s net-debt-to-Ebitda ratio is now the lowest it has been in five years, back to where it was in the heyday of its share price records before 2018. This aggressive deleveraging left enough cash for the €54.5 million acquisition of the US-based immunity-boosting ingredients manufacturer Sterling Technologies last March; steady investment in existing business lines; and a massive €173.5 million share buy-back.

Glanbia’s share price experienced a bounce of over 6 per cent during the day, which could put it on course to catch up with the market for similar stocks after it slipped behind over the past year.

For several years now, Glanbia has been getting tighter, more disciplined and more financially efficient. Its headline profit margin may not look extraordinary, but what matters to invesotrs is the return on capital employed – their money – and this is where progress is showing. ROCE has now recovered to a level higher than 2019’s, the calamitous year when the wheels almost came off the Glanbia wagon.

The most direct challenge to Glanbia’s business last year was inflation. As a historic processor of milk into dairy protein products, it was exposed to increases in the price paid to its direct farmer suppliers in the US, or to suppliers of raw materials such as Tirlán, the group’s original Irish creamery business that completed its full separation from Glanbia last April. 

To counter “unprecedented input cost inflation”, Glanbia worked on its procurement and internal efficiency, but mostly increased its own prices sharply. Its performance nutrition portfolio, which includes brands such as the fitness foods leader Optimum Nutrition (ON), and its nutritional solutions division, which makes functional ingredients for other food manufacturers, both increased their prices by over 16 per cent last year. The group’s US cheese business pushed further, achieving a 23.4 per cent price increase.

The sharpest increases took place in the final quarter of last year, but Glanbia had spotted the trend in dairy markets in late 2021 and began to raise its prices back then. Throughout 2022, its marketing teams watched how the impact on demand. In the end, they went for high price increases, at a cost. The volumes sold fell both for nutritional ingredients and for branded performance nutrition products. In this case, however, the picture was more contrasted, with ON moving five per cent more products despite a 19 per cent price increase, while SlimFast sales fell back and dragged the entire division’s volume down.

The SlimFast deal in 2018 was the group’s largest acquisition and initially contributed strong profits. But following a drop in demand for dieting products during the pandemic, Glanbia is now investing to turn the brand around and attract consumers who may be interested in long-term management rather than once-off diets, Talbot said, with results not expected until the end of this year. 

Inflation and the price elasticity gamble

But how exactly did Glanbia move the dial between price increases and potential loss of sales? “Firstly, we upgraded our investment in marketing because we knew we were going to have to start a journey of pricing through 2022,” Talbot told The Currency “Then as we moved into '22, we took a series of measured price increases, because it's probably fair to say the inflation became more magnified than we thought even at the latter part of 2021.”

Having started early, Glanbia escaped having to implement huge once-off spikes in prices. “We did that in a measured way to test and see reaction as we went. Overall, we were pleased with how the consumer responded with the level of elasticity,” Talbot said. “We're not complacent about that, though, because clearly our last pricing was just at the end of 2022, so we expect to see some elasticity as we move into 2023.” 

Just like Kerry Group last month, Glanbia’s ability to pass on virtually all price increases while preserving its margins illustrates the benefit of having become a technology-heavy food business. When customers essentially pay for the intellectual property underpinning the claims of products intended to help consumers manage their fitness, health or weight, the impact of raw material prices becomes less relevant.

This also means that Glanbia’s own involvement in the upstream dairy business has changed. “The essence of the evolution of Glanbia has been to move away from commodity processing to the higher margin growing added value there areas of nutrition,” Talbot said. “Our core today is the provision of consumer-focused, differentiated functional nutritional products across a range of science-based ingredients solutions and those leading brands.”

Having completed its separation from Tirlán last year, Glanbia announced on the occasion of today’s results that it was now selling its 50 per cent stake in Glanbia Cheese to US-based Leprino Foods, its existing partner in the UK and Ireland mozzarella-making joint venture. Leprino will pay at least €160 million for Glanbia’s share (including repayment of shareholder loans) and another €25 million will fall due depending on performance in the next three years.

Glanbia Cheese has factories in Llangefni in Wales, Magheralin in Northern Ireland and Portlaoise, Ireland. The disposal marks the end of manufacturing by Glanbia in Ireland, Talbot confirmed to The Currency. 

Glanbia says goodbye to Irish manufacturing – and to the euro

From this year, Glanbia will report in US dollars, which makes sense for a company that mostly sources, manufactures and sells in North America. The group generated over 80 per cent of its revenue in the US alone last year, aided by the strong dollar exchange rate, but still ten times more than its entire European business. 

Reporting in euros skews the perception of Glanbia’s performance, forcing it to disclose parallel constant-currency figures every year. In 2022, for example, reported revenue grew by 34.4 per cent, but the more realistic constant-currency increase was 21.2 per cent, with the difference due to the appreciation of the dollar.

After the sale of its 40 per cent interest in Tirlán last year, the disposal of Glanbia’s half share in the recent Portlaoise cheese factory (pictured above) announced today leaves the group with only a corporate head office and shared services centre in Ireland. The new farmer-owned Tirlán remains Glanbia’s largest shareholder with a stake of over 27 per cent, however.

Does this all mean the group might consider leaving its Kilkenny head office and its Dublin and London listings for a new home in the US? “There’s no plans to alter that at all,” Talbot told The Currency, assuring that the purpose of the dollar move is purely to avoid confusion around currency movements.

Another factor plays in favour of Glanbia’s historic Irish domicile. Its effective tax rate was aligned with Ireland’s corporate rate at 12.5 per cent last year, and it is expected to rise to between 12.5 and 14.5 per cent this year as more profits arise outside this country. A US-headquartered group without an Irish presence would pay a lot more. 

Glanbia continues to invest heavily in its milk and cheese processing plants in the US, either on its own or in joint venture partners. The latest example is the mammoth MWC plant in Michigan where the Irish group owns a 50 per cent stake and US farmers’ co-ops hold the other half. The plant opened in 2021 and was in full swing last year, boosting the group’s figures.

How different is the US cheese business from those Glanbia has been exiting in Europe, such as Tirlán and Glanbia Cheese? “They were very much standalone businesses with two joint venture partners, they had the full gambit of capability from operations to supply chain to commercial,” Talbot told The Currency. “Our joint ventures are different in the US. We have great partners who are essentially suppliers of the milk for our large-scale facilities in Clovis and in Michigan. And then the Glanbia organisation, in truth, does everything else.” 

This means Glanbia runs the plants and commercialises their products, including by selling raw materials to other divisions of the Glanbia group. While this ensures security of supply, this is all done at market prices, Talbot said. 

“In North America, our expansions in the joint ventures have been all independently financed.”

Siobhán Talbot

Cheese is an end product in itself, and the group is the largest producer of American cheddar, but Glanbia has a particular interest in its byproduct, the protein-rich whey used as feedstock for its nutritional solutions and performance nutrition industries. “In North America, our expansions in the joint ventures have been all independently financed and separate from the PLC. So it’s a very nice model for us, actually. Then we're really about deploying our capital to nutritional solutions and Glanbia performance nutrition.”

As part of its annual results, Glanbia has increased its climate ambition to cut so-called scope one and two greenhouse gas emissions by half between 2018 and 2030 (that’s the gases directly released by its operations and the generation of energy it purchases, but not its wider supply chain). I asked Talbot whether this was enabled by the group’s evolution away from the heavy industry of primary dairy processing, and in turn whether disposals such as those of Tirlán and Glanbia Cheese UK and EU were encouraged by climate targets.

Instead, she said that Glanbia’s concentration on dairy processing in the US allows better climate efficiency thanks to scale. “The nature of our operations now in the US is such that we have very large scale facilities, and a number of our facilities, for example in the joint ventures, are relatively new. The technologies are very good, so that allows us actually be clear on what we can do with scope one and two,” she said. “We're now clear that we can go to a 50 per cent reduction by 2030 – not a massive investment for us, actually. We believe that they'd be largely returning investments that we can do to do that.”