Strong year for Ireland’s largest dairy processor

Glanbia Ireland, the largest milk processor in the country, recorded pre-tax profits of just under €50m for its 2017 financial year – a 32% increase compared with the previous year. The largest driver of growth came from the acquisition of the agribusiness and consumer foods business from Glanbia plc last year. Glanbia Ireland is the joint venture company formed between Glanbia co-op and Glanbia plc, with the co-op owning 60% and the plc owning 40%.

The business made a profit after tax of €43.1m in 2017. This compares with €32.6m after-tax profit in 2016. Glanbia Ireland reported a 26% increase in operating profits to €59.9m, despite profit margins narrowing from 5.7% in 2016 to 4.3% last year. Glanbia said the growth in profits was a result of good market conditions for dairy ingredients throughout 2017, particularly when butter prices soared to record levels in the third quarter of last year.

Turnover

Turnover for the year increased by more than two-thirds (68%) to €1.4bn. On a like-for-like basis, which excludes the impact of the acquisition of the consumer foods and agribusiness units into the business, sales rose by 34% last year. The majority of sales (60%) are in Ireland, which also includes sales to Ornua. Some 8% of sales are based in the UK while 13% of sales are to the rest of Europe.

Glanbia said 9% of this growth was related to additional sales volumes, while 24% of the increase was due to higher prices for dairy commodities in 2017, particularly butterfat prices. Glanbia’s ingredients and consumer foods division had sales of €1.26bn, while sales of animal feed and fertiliser amounted to just under €146m.

During the year, net debt in Glanbia Ireland increased by €84m, or more than 40%, to stand at €287m at year end. With the business making €85m in earnings (EBITDA), Glanbia Ireland’s net debt to earnings ratio is 3.4 times. The net asset value of the business is €384m, up from €243m at year end 2016.

Milk and grain collections

Glanbia Ireland said milk collections increased by 7% in 2017 to reach a record 2.6bn litres, with almost three-quarters (74%) of farmer suppliers increasing output last year. The volume of milk processed at the Belview facility increased 15% last year to 529m litres.

Dairy farmer suppliers received a top-up payment from Glanbia Ireland of 1c/l for all milk supplied in the first half of 2017, while milk supplied in the second half of the year attracted a top-up payment of 1.1c/l.

Glanbia Ireland also purchased close to 190,000t of green grain from Irish farmers during last year’s harvest, with almost 40% of this grain attracting some level of premium or bonus. The company says this is worth almost €2m to contracted growers.

The business, which employs 1,800 people, has 11 production facilities and 53 agri-retail outlets and exports 60 countries. Wages amounted to €86m for the business.

The business must operate to a guaranteed minimum after-tax profit margin of 3.2%. Half of all profits will be kept in the business, with the other half returned to the co-op and plc to be split 60:40 respectively. In the year where the business made a profit after tax of €43m on €1.4bn of revenue, €21.5m or 50% of the profit is retained in the business to be reinvested. The other €21.5m is split between the shareholders, with the co-op receiving €12.9m and the other €8.6m returning to the plc (40% based on its ownership). The €13m that returns to the co-op is ring-fenced to be used by the co-op in the future for active farmers as the board so wish. This dividend works out at about 0.5c/l on the entire milk pool which will eventually flow back to farmers. That means it will use these funds to support active farmers in the future. In the past the co-op has supported both grain, fertiliser, feed and dairy suppliers through supports.

Over the last five years, Glanbia has processed 40% more milk or 740m litres more than in 2013. The Glanbia model has always been based on providing a fixed return to its parent shareholders.

While this may limit its flexibility on a month-to-month basis (especially when it comes to monthly milk pricing), the model is much improved. The new Glanbia Ireland evolves the previous model where a minimum 3.2% of profit after tax is targeted, with half of it returned to parents.

Given that a further €13m returns to farmers in the form of a dividend to the co-op, and eventually is paid in supports to active members, the margin effectively decreases to 2.1% in the case of 2017.

This evolution of what was there before sees that supports ultimately come from within Glanbia Ireland. It means that the profits made in Glanbia Ireland are kept in the business for future growth and also flow back to the farmer through additional supports in the future.

Dividend

The co-op separately receives a dividend from the plc and this is set to increase to around €20m next year. This should not be confused with the Glanbia Ireland support.

The co-op did not support the milk price in 2017.

While net debt is high at €287m or 3.4 times earnings, a large component of it is tied up in working capital. The business is well invested, with €353m invested in assets over the last five years. Last year it invested €70m.

No doubt the model is complex. However, even to the most analytically minded, it is reassuring as referred to last week that over the year Glanbia Ireland did perform in 2017 in terms of milk price (in the Irish Farmers Journal/KPMG milk price review) without supports from the co-op and managed to put aside €13m to the co-op for future supports.