Glanbia Plc Ord

Good morning and welcome to the Glanvia PLC Half-Year 2020 Results Call with Siobhan Talbott, 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 Glanvia 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 Siobhan Talbot, Group Managing Director of Plan B at 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. 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 it 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 three 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 number one 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 127 million versus the prior year to bring our net debt to EBITDA ratio now below two times. 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, Glanby'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 two points to plus 54. And our household penetration of SlimFast in the US 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 brand 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 six 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 number one brand in performance nutrition and the number two brand in weight management puts us front of mind when retailers are making these choices. In our nutritional solutions ingredients business, we are the number two provider of essential micronutrients globally and the number one 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, US 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 drip 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 channels 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 our international business. I am also very confident on significant margin recovery in GPN for the second half. Our Glanby 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 two significant Greenfield JFE projects in Ireland and the US, 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 three areas of regaining growth in momentum in GPN, an organisational 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 as 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 improvement 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 prioritized ON and SlimFast, We have completed the streamlining of our product portfolio via the SKU rationalisation 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 optimisation are largely complete with new talent and new route to market partners in a number of key geographies. We have a significant supply chain project underway which will consolidate three of our North America 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 Glanby 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, Foodaram, 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 Glanby 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 Glanby 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 two platform brands in those categories making up 69% of GPN sales today. Our brands are outperforming in their categories in the key North America market, with slim fast 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 US 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 Glanby Nutritionals. On-the-go food consumption has clearly been a headwind as consumption is associated with mobility, transit and on-the-go consumption occasions. We do believe that 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 in 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 disrupted 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. EBITDA declined to 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 way 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 way 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 approving margins. We have completed the rationalization of 35% of our SKUs to make the portfolio more streamlined and the organization more agile around our two platform brands of ON and Slimfast. which now make up 69% of GPN sales. GPN is now reorganized around the four 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 will consolidate three production facilities into one in the US. The exit of our contract business in the US has helped 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 right-sizing 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 priorities in a post-COVID environment and will drive further optimization of our brand investment, 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 footprint to drive margin improvement. 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, the distributor 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 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 measure 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 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 on 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 right-sizing 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 UK and Oceania. We are of course cautious in relation to the continued evolution of COVID-19, but are confident that we will exit 2020 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 decreased related to reduced dairy ingredient pricing year-on-year. Demand for nutritional solutions, core solutions, which make up the majority of our dairy and non-dairy 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 two saw destocking in the early part of the quarter, with, as I've mentioned, some softness in food to go, but strong demand for our immune-enhancing products across both dairy and non-dairy. Overall, margins remained robust to 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 trend 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 saw 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 Foodaram, a Canadian flavours business, for 60 million Canadian plus contingent consideration. Foodaram has strong flavor formulation capability and is focused on segments very complementary to nutritional solutions. With manufacturing and applications facilities in Canada, the US, 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. US 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 retail end market exposure. Pricing was volatile and averaged ahead of the prior year due to strong demand dynamics. US cheese operates a pass-through pricing model which helped negate most of the impact of significant price volatility in the period. Profit and margins increased in US 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 food service demand as lockdowns ease in the US. Our joint ventures revenue decreased by 1.4% in the period. Volume in Glanbia Ireland and Glanbia Cheese UK 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 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.