Glanbia has a tough task to prove itself

It would be easy to be sucked into complacency about Glanbia's results. After all, the slump in operating profit, and substantial losses after the loss on the sale of operations, had been well flagged (that profit warning forced analysts to slash their forecasts last year). So armed with these alert signals, group managing director Mr Ned Sullivan was able to declare that Glanbia had delivered results for 1999 which "are in line with expectations".

But the bottom line is that the results are bad, indeed very bad. The fact that its two main divisions - consumer foods and food ingredients - had to contend with a contraction in both sales and operating profits was not a good omen. Also it has cut the size of its business following the sale of its British liquid milk business - at a substantial loss - and the sale of the fixed assets of the Irish beef operation. The scaling down of the business is very obvious from the following figures. Sales in 1997 were €3 billion, they are now down to €2.3 billion, on the continuing business. Operating profit was about €118 million in 1997, it is now €81 million. When Avonmore and Waterford Foods merged, the enlarged group, as the largest Irish food group, should have been the showcase for all that is good about Irish industry: forward-looking, acquisitive and ready to take on the best worldwide, as witnessed by the bubbling ethos in Irish business today. Instead, Glanbia has taken on the form of a rather sticky commodity.

The size of the group's borrowings is far larger than is immediately apparent from the accounts. The company noted that its borrowings had fallen, which is fair enough, but then it used the ratio of debt to capital employed instead of the usual ratio, debt to shareholders' funds. Its ratio includes non-equity minority interests in the capital and amounts to 123 per cent, a very high figure. But the minority interests include redeemable (in 2006) preference shares and should be treated as debt; this would bring the gearing to a whopping 450 per cent! And Moody's has warned it might have to downgrade the credit rating on these shares.

But what is important is the ability to service its borrowings. At only 2.7 times, the cover is pretty slim. Further, the cash flow covering debt has eroded significantly.

But now that the group has been slimmed down, does smaller mean better? Mr Sullivan, an ex-Grand Met marketing expert, in a positive and optimistic statement, said the strategic review had been completed, its future development was to "prioritise international cheese and nutrition for growth", and other business would be "strongly managed for enhanced performance". Also, he was confident that "we will deliver an improved performance in 2000".

Since Mr Sullivan took the reins, first as group managing director designate in March 1998, and then as managing director a year later, he has revamped the group. First, the group's name was changed from Avonmore Waterford Group to Glanbia; second, he complained about the unprecedented competition in the UK liquid milk operation and a month later sold that operation to Express Dairies (and also sold its red meat business in Ireland to Dawn Meats); third, there has been a major restructuring of the senior management, including the hiring of a number of new senior managers outside the group, as he put his own stamp on it.

His approach is to reshape the group "around businesses that have strong market positions and which offer real development potential" - his own words. The company's shares at €0.90 are less than a quarter of the high level of €4 in 1997. The company explains this away as a move away from food stocks, but the malaise is much deeper than that.

Nevertheless, Glanbia's profit slide seems to have been halted. Despite the problems last year it did invest £90 million in the business. The latest phase at the Gooding cheese facility in Idaho will be fully operational next week; it will boost US cheese output by 30 per cent and ingredient output by 21 per cent. While its balance sheet will not allow it to expand aggressively by acquisition, it is lining up alliances and joint ventures. And it is in the final year of a three-year contract to buy its suppliers' milk at 3p per gallon above the industry's average price, which should be worth around £7 million. Earnings (adjusted) per share could rise from 11.4 cents to 13 cents in 2000 and to 16 cents in 2001. That, however, would be well below the 23 cents earned in 1998. In 1997, Glanbia was nearly twice the size - in terms of sales - of Kerry Group. Now Kerry is about the same size and will be larger by the end of this year. Glanbia has lost in this league; it now has the tough task of proving that smaller is neater and better.