Last year, Glanbia Ingredients Ireland (GII), the milk processing joint venture between Glanbia Co-op (60%) and Glanbia PLC (40%) saw profits increase 10% on the back of extra volumes processed.

Revenues at GII fell 3.2% to €870.9m. Despite sales volumes increasing 18%, prices fell 21%, reflecting the weaker prices on global dairy commodity markets.

In a bid to maintain margins, GII adjusted its milk price downwards in line with the market. Cost of sales, which includes the purchasing of milk, fell 4.5%. Gross profits increased 13.5%.

Distribution costs increased 5% while administration costs also increased 33% as a result of greater volumes and the reclassification of some costs.

Margin increase

Operating profits increased 10.4% to €38.6m, and despite the fall in prices, operating margins increased 50 basis points to 4.4%.

This increase was primarily driven by a combination of falling farmgate milk prices, an increase in volumes and more product moving up the value chain into higher margin products.

More product went to the sports nutrition (WPI) and clinical nutrition (MPC) markets, along with an increase in volumes to enriched milk powders and infant formula ingredients, according to Jim Bergin, CEO of GII.

Once finance costs (€4.1m) were deducted and its share of results in joint ventures included, (a €149,000 loss was made at Corman Miloko) profit before tax increased 7.7% to €34.3m.

Earnings (EBITDA) increased 7.4% to €53.5m during the year. Stocks at year end increased 10% to €144.2m, mainly due to large milk supply surge at the back end of the year.

GII recently announced plans to expand the Wexford cheese plant. The proposed €35m investment will double peak milk processing capacity which will provide flexibility for GII, especially on the shoulders. Building works are due to commence in September 2016, ready for the 2017 supply season.

Supplies increased 18% to a record 2.03bn litres in 2015 and 22% in the first full 12 months since the lifting of quotas, outpacing the 13% growth in Irish supplies. Belview processed 311m litres, while the recently acquired Wexford plant produced a record 20,000t of cheese.

As two thirds of supply comes from farmers with less than 400,000 litres, and 85% of suppliers expanded during 2015, the €235m investment made over the last three years was necessary for the majority of its supply base.

During the year, Glanbia Co-op gained 645 new member suppliers and 98% of milk delivered to GII is now supplied by co-op shareholders, following the recent share transfer scheme.

Bergin is confident GII has sufficient capacity. In recent weeks, supplies are running at 9% up and he expects supplies to be up by 7% to 8% overall in 2016, with a further 5% increase in 2017. Overall plants are very full and there are high levels of co-operation across the industry in balancing daily or weekly spikes.

Bergin says that Belview may be wound down to a level late in 2016 but this really depends on the product mix and markets at that time. He added that as works are due to commence at Wexford plant in September, Belview may be used to a greater degree.

After the inevitable challenges of its commissioning season in 2015, Bergin said that Belview is performing extremely well this year.

During the year, GII paid an average milk price of 30.5c (including VAT). When supports from the co-op are included, the total Glanbia price was 31.8c/l in 2015. This is a lower support figure than other co-operatives at 2c/l, which points to a strong commercial performance driving the milk price. In total, during the year, the co-op supported the milk price to the tune of €26.1m.

During 2013, a €5m provision was made for a milk price stability fund. €2.4m of this was paid out during 2014 and the balance paid in 2015.

GII made an early payment of the majority of the once-off special Ornua dividend which related to the sale of the DPI business, in March. This amounted to €3m.

In March, it launched its innovative milk flex loan fund. Bergin says more than 1,200 suppliers have expressed interest, with finance available before the end of July.

Currently, GII has four fixed price milk schemes in operation, ranging in base prices of 31c to 29c (including vat plus constituents), with 12-15% of milk now in some sort of fixed-priced milk scheme.

Net debt increased to €56.8m

Net debt at year end increased €56.8m (33%) to €228.7m. To get a clearer picture of the debt figure, which sits at 4.5 times earnings, the components that make up net debt need to be broken out.

Of the total net debt, the majority is bank debt. However, €64m is now financed from the co-op, leaving external debt at 3.07 times earnings. As the co-op has cash reserves on its balance sheet, coming from the sale of the €68m worth of shares in the PLC last year, it makes financial sense for the co-op to make a return on this by lending to GII at a rate similar to bank fund rates.

In 2015, GII had an interest charge in its profit and loss account of €4.15m, and a further €5.2m interest was capitalised during the year in relation to the Belview construction.

Firstly, the group had capex during the year of €58m, which was mainly related to completion of the Belview site. Seventy-five million euro, or one-third of total net debt, relates to capital investments, which, considering the €235m invested in the past three years, is modest and manageable.

So with earnings (€53.5m) mainly covering the additional capex, the increase in net debt was driven by an increase in working capital requirement to fund the increase in milk volumes, seasonal effect of greater volumes of milk at the back end of the year and an increase in stocks at year end (€14m).

Secondly, €152m or two thirds of net debt relates to working capital. This has increased by some 33% (€46m) due to the greater volumes.

With one-third of total milk volumes going to cheese, working capital management will be key. As GII trades less than 25% of its total volumes with Ornua, it only has a similar percentage of finance available from this channel.

Bergin says it is sourcing funds at optimum costs and says it has the financial flexibility to grow. He says it is creating value for its shareholders (the PLC and the co-op) and the balance sheet retained earnings of GII now stands at €93.7m. GII grew the value of the company last year by 24%, which is significant by any standards.

During the year, staff numbers (including joint ventures) increased by 66 to 630.

The majority of this increase was in production. Total payroll costs increased 13.5% to €50.6m. Belview employs a total of 80 people.

Key management compensation including pension benefits amounted to €3.3m in 2015.

The 22 directors receive €1.1m in total, with members of the senior executive leadership team receiving the balance of €2.2m. There are no numbers disclosed of how many are on the senior executive team.

“In general many analysts are pessimistic about the outlook for 2016 and are more focused on the possibility of market recovery in 2017.”

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“The supply position in the Southern Hemisphere is weakening in Argentina (weather), Australia (weather and now price) and New Zealand (price and borrowings).”

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“Since we know what volumes we have from the European peak and what pricing is like for the third quarter in particular, therefore the next test for the market will be the price setting by New Zealand for their new season product. So far their activity on the ground is not very encouraging.”

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“For 2016, the market return remains below current milk prices which will result in further reductions across most jurisdictions.”

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“Intervention is setting a base for the market albeit at a very low level but ultimately it is effective currently by providing a market outlet.”