Glanbia, the Irish dairy and nutrition group, this week reported a jump in first-half profits and, notably, upped its forecast for annual earnings after growth across the business. However, questions remain over its domestic dairy operations and, in the longer term, the prospects for its nutrition business look stronger. Dean Best reports.

Glanbia’s operations span a number of different categories. It sells consumer dairy products in Ireland and cheese in the US. The company exports dairy ingredients to 50 markets around the world and has a nutrition business that spans from ingredients for infant formula and cereal makers to sports products for athletes. In the first half of 2011, Glanbia managed to get most of those parts of the business moving in the right direction.

Revenue and profits from the company’s Dairy Ireland division, which encompasses dairy ingredients, consumer products and an agribusiness unit, increased in the first six months of the year. Glanbia pointed to “strong global dairy markets” and “sustained demand” for dairy products in China, the Middle East and Russia for a boost to prices and volumes of dairy ingredients. This helped offset the continued challenging Irish grocery market, where the competitive environment and promotional activity meant profits and margins from Glanbia’s consumer products business fell.

Sales and earnings from Glanbia’s second key division, US Cheese and Global Nutritionals, also was also up. Improved cheese prices helped Glanbia’s cheese business, although volumes dipped. Volumes, however, from the company’s Global Nutritionals arm were “strong”. Product innovation helped the business, as did January’s acquisition of US performance nutrition firm BSN. However, margins from the “consumer-facing” part of the unit were under pressure due to rising raw material costs.

In all, however, MD John Moloney was content with the company’s first half of the year, which he described as “excellent”. He said the “overall trading environment” was positive and said there would only be a “modest softening” in dairy prices in the second half of the year.

Industry watchers welcomed the results. Liam Igoe, an analyst with Goodbody Stockbrokers, said the results were “very strong” and upgraded its rating on the company’s shares to ‘buy’. He said Glanbia’s international division, particularly its nutritional business had “powered ahead” but argued that the outlook for the company’s domestic dairy business was “mixed”.

Indeed, Glanbia’s dairy operations in Ireland have had a volatile couple of years. When the company published its results for the first half of 2009, it said profits had fallen 28%. Moloney said Glanbia would take an “aggressive” look at its domestic and commodity processing operations to see if costs could be brought down. Three months later, Glanbia announced it would cut 65 jobs from its dairy ingredients business in Ireland.

Glanbia’s annual profits pre-tax profits dropped 19% in 2009 as revenues and earnings from its domestic business fell. The downturn hit demand for dairy products and drove prices for dairy commodities downwards, trends that hit not just Glanbia’s business in Ireland but also its US cheese unit.

However, alongside the announcement of those results in March last year, Glanbia said it was in talks to sell its Irish dairy operations to its majority shareholder, the Glanbia Co-operative Society. In April, Glanbia and the co-op agreed a sale worth EUR343m but, just three weeks later, the farmer-members of the co-op rejected the deal.

Moloney admitted it was a “big disappointment” for the sale not to go through. A deal would, after all, have reduced Glanbia’s exposure to the volatility of the commodity markets and allowed it to focus on its higher-margin US cheese and global nutritionals operations.

Glanbia has ploughed on and even added to the Irish dairy division in January when it bought Kerry Group’s Limerick-based liquid milk business. And, of course, the division has had a robust first half of the year thanks to the increase in dairy prices. However, the ingredients unit does add volatility to Glanbia’s business on one hand, while operating in the Irish food retail sector is tough. Glanbia has already tried to sell the business once and could, in the course of time, look to do so again, especially with changes on the horizon in the EU dairy sector.

“Post the elimination of milk quotas in 2015, we expect to see some rationalisation within the Irish dairy industry, which could provide an opportunity for Glanbia to reduce its potential investment here,” Igoe said yesterday.

It appears, in the medium to long term, that the prospects for Glanbia’s US cheese and global nutritionals divisions are stronger.

Glanbia has built a global nutritionals business worth EUR600m in sales in just five years, notably through the acquisition three years ago of US sports nutrition firm Optimum Nutrition and January’s move for BSN. The deals have enabled Glanbia to build a consumer-facing performance nutrition unit but the company’s nutritionals business also includes the B2B ingredient technologies and customised pre-mix operations, where it supplies whey ingredients to food manufacturers.

According to Igoe, there is a “structural growth story” in what he now describes as Glanbia’s “core” nutritional business. What’s more, the analyst believes there is much more room for Glanbia to grow in the sector.

“As the largest global player in the performance nutrition market and number three within the global premix (B2B vitamin & mineral mixes operation) market, it still has substantial headroom for growth in what is a fragmented industry,” Igoe said. “In particular Glanbia has a more international thrust to its expansion objectives than much of the competition, which tends to be local suppliers. This applies to both its B2C performance ingredients products and the premix business.”

Igoe argued that Glanbia will focus on growing its premix operations through organic investment and pointed to the US$20m expansion of the company’s business in Germany. However, he believes the company could return to M&A to strengthen its consumer nutrition business. “We think further acquisitions in the US and Europe are on the cards over the next few years.”

Glanbia has achieved much – and battled a few problems – with different parts of its business in recent years. The company looks different to how it did only a few years ago. With its Irish dairy business battling volatility and a stagnant consumer market, and with the prospects for its nutritionals operations looking bright, more change could be in the pipeline.