On March 15, before anything was known about its performance this year, Glanbia stock was trading at a near all-time high of €19. As the market closed in Dublin on Thursday, this had nearly halved to just under €10. Some €1.1 billion have been wiped off the stock market value of Glanbia plc in the past three months alone. 

On Thursday, Glanbia released quarterly results indicating that difficulties identified at the half-year mark in its flagship performance nutrition remain. The message hammered out by CEO Siobhán Talbot on that morning’s conference call with analysts was that management is “very focused on regaining momentum”. The immediate response from investors was to sell, sending the share price tumble by 9 per cent on the day. 

On July 31, Glanbia’s share price had already dropped 15 per cent in 24 hours, followed by further falls in the following days.

What has gone wrong at a company seen as the poster child of Ireland’s reach on global food markets?

The rout was initially triggered at the end of July by results for the first half of this year showing a 10 per cent fall in earnings (EBITA) – 15 per cent on a constant currency basis (Glanbia does the vast majority of its business in dollars, but reports in euros). The group’s margin before exceptional items fell by over 200 basis points, from 8.4 per cent one year earlier to 6.3 per cent.

Those half-year results came with a profit warning, downgrading the early year forecast for earnings per share of 95.5c-98.3c to 88c-92c. This was confirmed on Thursday.

The culprit is Glanbia’s performance nutrition division, the engine that had driven growth steadily for the previous decade. Within that division, constant-currency earnings fell by 30 per cent in the first half of 2019, while revenue was up more than 13 per cent as a result of external growth. 

The division’s resulting margin nearly halved, and the group warned at the time that it would end up being 250 to 300 basis points below last year’s level. So where are we now?

Overall revenues from performance nutrition in the past nine months are slightly better than reported in the first half – but this is skewed by the acquisition of SlimFast at the end of 2018. On a like-for-like basis, the division has not yet reined in the slide in sales volume observed since the start of the year (-7.9 per cent over nine months, compared with -8.2 per cent in the first half alone).

Things are improving on the price front, with hikes implemented in the US and more to come before the end of this year. Yet the prices extracted by the company out of fitness and health fanatics so far this year remain 1.4 per cent lower than last year. Overheads and investment, meanwhile, are increasing. Talbot said: “The margins are improving in the second half as expected, however with the recalibration of the volume expectation, we expect that negative operating leverage arising from that lower revenue and business mix will reduce full-year margin further by 50 basis points to the range we previously noted, so a reduction of 300 to 350 basis points for the full year 2019.”

“There is growth in the market and it is for us now to recalibrate our operating business model to position ourselves to go after that growth again.”

Siobhán Talbot, Glanbia group CEO

Under 12 per cent margin, performance nutrition, with its range of athlete’s protein shakes and weight loss products, is no longer the cyclist leading the break within Glanbia’s race to success, but rather an average-profitability rider in the middle of the group’s pack.

This has come as a surprise to investors. July figures were unexpected with one analyst saying there has been “no clear reason” for the division stalling, especially in Europe. He was hoping for good news this week on the back of a 3 per cent price increase in Glanbia’s performance nutrition products. He will have to wait longer. 

The issues flagged this week remain the same as in July. European consumers are moving their business online faster than Glanbia had anticipated. Economic conditions are deteriorating in Latin America, especially Brazil. Tariffs and exchange rates are hitting the competitiveness of the company’s performance nutrition products in India and the Middle East, and price cuts in those regions earlier this year failed to make up for this.

This is no longer a short-term blip. Siobhán Talbot said on Thursday that currency and trade challenges were forcing Glanbia to reconsider its model of using already profitable infrastructure in the US to export finished performance nutrition products to Brazil, the Middle East and India, which together account for 10 per cent of this business.

A journey into 2020

“Now we’re looking deeper at the total value chain. That may well include in-country manufacture,” she said. A decision has been made to manage imports more directly and begin production in India, while other regions remain under review. 

“Fundamentally, although these markets are more immature, more fragmented, there is growth in the market and it is for us now to recalibrate our operating business model to position ourselves to go after that growth again,” Talbot added. “We’re very positive about it – it’s just a journey, because so many of them have come up against us at the same time, of putting those actions in place and this will continue into 2020.” 

The fixes needed are deep and reach across supply chains, the brand portfolio and routes to market. “Some of those will take longer than we would have anticipated. We have done a lot of work looking down into the detail of the business model, how we best position ourselves for the next phase of growth,” Talbot said.

Meanwhile in the US, seasonality is changing in the so-called “club” channel of no-frill stores where consumers buy in bulk. While product sold there for traditional New Year promotions was in place before Christmas last year, this now looks set to shift to January or February and will not register in 2019 sales, Talbot warned – though she was positive about consumption outside these timing issues.

In any case, she vowed to return Glanbia performance nutrition to like-for-like growth next year, and to report on progress in the New Year.

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Last November’s $350 million SlimFast acquisition is the latest in a string of performance nutrition deals started in 2008 with the purchase of US-based Optimum Nutrition for a similar $315 milion. 

Meanwhile, in February of this year, Glanbia spent $89 million on Watson, an American non-dairy ingredients manufacturer with technologies used in baking and tablet production – a good fit for use in Glanbia’s own performance nutrition products. Watson now sits in the group’s nutritionals division, which is focused on B2B ingredients and cheese.

The combined fall in margins, and €375.5 million in fresh debt raises to cover both all-cash acquisitions, has hit Glanbia’s debt ratios. From 1.22 times EBITDA in the first half of 2018, its net debt had risen to 2.14 times by the end of July this year. The company, however, stated that this remained “well within financing covenants”. Glanbia’s finance director Mark Garvey has now pledged to bring this ratio under 2 by year-end.

Glanbia’s group finance director Mark Garvey with performance nutrition products from the group’s Optimum Nutrition brand. Photo: Naoise Culhane

Meanwhile, the performance nutrition market is moving. Glanbia and its competitors used to focus on the easily identifiable target of fitness enthusiasts shopping at specialist stores or at their gym, and on the clear weight loss objective of people on a diet. They are now facing  multi-faceted demands for individualised achievements, preferences and lifestyles.

Sector analyst Matthew Oster from Euromonitor expects the 8 per cent compound annual growth rate observed in recent years on the sports nutrition market to continue through 2023. He wrote earlier this year in the industry journal Nutritional Outlook that fitness and health claims by an increasing array of food producers jumping on the protein and other nutrient-enriched bandwagons was increasingly blurring the lines for players in the sector. 

“Leading sports nutrition companies are extending their portfolios to new users without having to reorient the muscle-focused pitch. Acquisitions are a major factor on this front.”

Matthew Oster, Euromonitor

Consumers, too, are eating more and more of these products as a healthy snack rather than in pursuit of athletic or weight loss performance. “Newer consumers to the category have broader demands for sports nutrition: weight loss, fighting age-related ailments like sarcopenia, or, for vegans and vegetarians, supplementing their diet,” Oster wrote. And they shop for it at a wider range of retail points including convenience stores and service stations – a trend he has observed across the US, UK and Australia.

“Sports nutrition companies are already benefiting from this reconceptualization and have landed distribution deals in these channels, reinforcing these products’ emergence as a viable substitute to traditional snacking,” Oster wrote.

“Leading sports nutrition companies are extending their portfolios to new users without having to reorient the muscle-focused pitch. Acquisitions are a major factor on this front. For instance, Glanbia has led this effort through its acquisitions of the energy bar ThinkThin in 2015 and both the protein supplement Amazing Grass and the active nutrition protein portfolio of Body & Fit in 2017.”

Amazing Grass serves those who want plant-based, GMO-free and organic supplements. Other brands among the nine owned by Glanbia performance nutrition following successive acquisitions cater for similar niches: Isopure promises clean-label products without artificial additives; Scandinavian-based Nutramino specialises in delivering its offering inside gyms. 

A world where everyone looks under 30 and incredibly trim

Body & Fit, meanwhile, illustrates the shift to online retail. To visit its website is to enter a world where everyone looks under 30, incredibly trim and is either eating, drinking or working out without showing a drop of sweat. The online store offers multiple shopping pathways, including by dietary preference (vegan, organic, gluten-free…) and by “occasion” (pre-, intra- or post-workout, breakfast or overnight…).

Since agreeing to pay €56 million for Dutch-based Body & Fit in 2017, Glanbia performance nutrition has been drawing from the company to develop its own direct-to-consumer platform outside the US. Code-named Hybris after the e-commerce software used for its development, the project is the main item in the group’s €50 million-plus line for strategic investment this year. It is on track to be delivered by the end of this year and is touted as a major overhaul of Body & Fit, complete with more advanced consumer analytics. There are no public plans yet to use the Hybris platform for other brands.

From its home market of Benelux countries and Germany, Body & Fit launched in the UK last year and will continue to roll out to other European countries next year. Talbot also sees it as a growth driver in Asia, where direct online sales are a good way of capturing disparate growth that other channels can’t get to. It turns out consumers already shop online a lot more for their creatine and their amino acid capsules than for their milk and yogurt – e-commerce accounted for 28 per cent of Glanbia performance nutrition’s revenues last year.

In the meantime, Talbot acknowledged that the current development phase has a cost: “When we bought Body and Fit we were very clear that this was a whole new capability for the Glanbia performance nutrition organisation and that  we would invest behind that. It is therefore, as you would expect, margin dilutive to Glanbia performance nutrition in total, and I would expect that to continue into 2020 in terms of the investment profile.”

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Glanbia’s stated ambition is to deliver 13-15 per cent average EBITA margin between now and 2022. This looks unlikely to happen this year. Performance nutrition accounts for half of the group’s wholly-owned business, and it is now forecast to return a margin between 11.7 and 12.3 per cent.

Talbot said the ingredients-focused nutritional solutions division would also see its margin fall to the bottom of the 13-15 per cent target range. She added that this was the area where Glanbia would continue to evaluate acquisition opportunities, following the Watson merger this year.

The last quarter of the Group’s direct revenues comes from US cheese production for the wholesale market, a business Glanbia runs both at its own milk processing plants in Idaho, and at joint ventures with American co-ops, Dairy Farmers of America and Select Milk Producers, in New Mexico and from next year at a new factory under construction in Michigan. 

Joint ventures performing well

While US cheese is a steady workhorse with an expanding footprint, it is a very low margin business – 1.8 per cent in the first half of this year and expected to remain steady. Although Glanbia claims to be the largest cheese manufacturer in the world, the key role of this process in the group’s business model is not to drive profit but to provide a source of whey, the key raw material for its protein performance nutrition products.

While detailing the ongoing soul-searching on Glanbia’s performance nutrition division, Talbot did not for a minute question its position at the heart of the group. Even if it wanted to, the company would face an enormous industrial challenge in re-balancing its business. A dairy processing plant can process milk into either cheese and whey, or butter and powder serving different markets. Once you have built one, you can’t just switch it to the other. 

The picture of wholly-owned divisions above leaves profits from joint ventures, including Glanbia Ireland, which brings together milk processing, trading and consumer products within this country. Along with cheese joint ventures in the UK, continental Europe and the US, these holdings are now Glanbia’s fastest-growing source of profit, expected to increase by 7.5 per cent this year. 

However they accounted for under one fifth of the overall group’s profit last year, and represent precisely the sort of business Glanbia has been putting at arm’s length over the years as it focused on transforming itself into a global high-tech nutrition powerhouse.

A lot of Glanbia’s stockholders are not typical. They are Irish farmers who have retained ownership under various forms since Avonmore and Waterford dairy co-ops floated in 1988 and merged into what would become Glanbia in 1997.

Glanbia is off its profitability target, its share price is at a six-year low and its management is asking for more time to turn it around. Does it matter?

For the typical equity investor, it does. Some are unimpressed – Capital Group, the Californian fund manager listed as Glanbia’s second largest investor with eight per cent of shares at the end of 2018, notified the stock exchange on September 5 that it had reduced its holding to 5.6 per cent.

But a lot of Glanbia’s stockholders are not typical. They are Irish farmers who have retained ownership under various forms since Avonmore and Waterford dairy co-ops floated in 1988 and merged into what would become Glanbia in 1997. Formally, the farmer-owned Glanbia co-op holds 31.5 per cent of the plc and retains half of the 16 seats on its board – though this is set to drop to six by 2022, following the latest shares spin-off two years ago. According to current rules, the co-op cannot own less than 28 per cent of the plc.

In addition, these farmers have received successive share distributions over the years. For example, the latest major share conversion associated with the creation of the Glanbia Ireland joint venture in 2017 saw 2 per cent of the plc shares, then held by the co-op, transferred directly to its individual members. A life-long member with experience on the co-op’s representative bodies reckons individual farmers currently hold between 20 and 30 percent of the plc.

This makes individual farmers and their co-op taken together a potential majority shareholder in Glanbia. They keep a notoriously critical eye on management, as illustrated by the 21 per cent vote at the April AGM against a non-binding resolution from the remuneration committee including endorsement of a salary increase past the €1 million mark for Talbot. A company statement two weeks ago revealed that the row was still brewing, with more engagement needed with shareholders even though “a number of meetings and calls were held with shareholders, as well as two major independent proxy advisory firms”. 

Yet farmer shareholders routinely approve major strategic decisions management puts to them and they are not organised in any formal way to influence the plc’s destiny. If they were, their objectives would be very different from those of fund managers. The stock’s trading value is of little interest to most of them, who mostly see plc shares as a life-long investment and a way of transferring wealth to the next generation. 

It may seem strange to the average stockbroker, but the key expectation of Glanbia’s largest group of shareholders is that the group pays as high a price as possible for one of its major inputs.

As for profits, their focus is on the dividends the co-op receives from both the plc and their Glanbia Ireland joint venture, forecast to total around €40 million this year. These are largely channelled into support payments to active farmers, such as milk price top-ups and trading bonuses for those buying and selling through the group. 

It may seem strange to the average stockbroker, but the key expectation of Glanbia’s largest group of shareholders is that the group pays as high a price as possible for one of its major inputs.

In their view, profitability in the US, where Glanbia does two thirds of its business, is very much important – not because they have their eye on quarterly results and share price, but because they know some of that wealth will be channelled back into their milk cheques. 

The good news for them is that Glanbia’s core American business is largely insulated from Donald Trump’s trade wars. The company and its joint ventures now process nearly twice as much milk within the US as they do in Ireland. The recent tariff hike decided by the White House on EU butter, cheese and cream liquor will only hit a tiny fraction of the group’s North American sales. 

This week’s US GDP growth figure, at 1.9 per cent annualised in the third quarter, shows that consumer spending is holding the American economy together – for now. Were this to change, Glanbia would be facing into a much more serious predicament than the one behind its share price nearly halving since March.