Operations review Ireland Group Managing Director's review

Operations review International

In 2008, revenue for the International division grew 6.1% to €1,489.2 million (2007: €1,403.2 million). Operating profit pre exceptional declined 3.2% to €82.5 million (2007: €85.2 million). Operating margin pre exceptional reduced 60 basis points to 5.5% (2007: 6.1%).

These results reflect the impact of a deterioration in the performance of Food Ingredients Ireland, particularly in the second half of the year, when the decline in global dairy markets and the resulting imbalance in milk cost and market pricing led to a significant reduction in profits and margins for this business unit.

Nutritionals

The Nutritionals business unit is a leading supplier of advanced technology whey proteins and fractions, flax and customised micro-nutrients, vitamin and mineral premixes. It comprises three separate businesses - Ingredient Technologies (business to business ingredient developer and distributor); Customised Solutions (business to business premix solutions provider) and Optimum (business to consumer, manufacturer and marketer of nutritional supplements) - serving the health and wellness, functional foods, sports nutrition, infant and clinical nutrition sectors.

Nutritionals employs 555 people at locations in the USA (Wisconsin, Idaho, Illinois, California, Missouri, Florida and South Carolina); Canada (Manitoba); Europe (Ireland, UK, Belgium and Germany) and Asia Pacific (China, Singapore and Malaysia).

Acquisition of Optimum

A highlight of 2008 was the acquisition in August of Optimum, a leading manufacturer of nutritional supplements for the sports sector, with some of sports nutrition's most trusted brands in the USA, including 'ON', 'Gold Standard 100% Whey' and 'ABB'. The total consideration was US$323.0 million (€217.9 million).

Optimum has a 22-year track record in the manufacture and supply of a range of whey-based, premium nutritional supplements to the US and global sports nutrition markets. The company is the largest US manufacturer of whey-proteinbased, sports nutrition products in powder, beverage, capsule and bar format.

This is an exciting acquisition for Glanbia as it gives the Group a leading position of scale in a fast growing segment of the nutrition market. It is also a close strategic fit with existing core areas of nutritional expertise in whey and sports nutrition and gives the Group a direct presence in valuable consumer markets.

A highlight of the year was the acquisition in August of Optimum, a leading US sports nutrition manufacturer.

2008 Performance

The global nutritional market exhibited strong growth in 2008 with an estimated value of US$244 billion per annum. Glanbia has approximately 9% of the US sports nutrition sector; 18% of the global premix market; 29% of Global Whey Protein Isolate (WPI) market; and 8% of global Whey Protein Concentrate (WPC) 80 market.

All areas in the whey business experienced growth in 2008 with volume and pricing in whey protein isolates and concentrates showing steady growth. Functionally advanced whey, servicing the bar and beverage sectors, in particular, showed significant growth.

Glanbia's position in the global premix market was strengthened in 2008 with the commissioning of a new wholly owned and operated plant in Suzhou near Shanghai, China. Investment continued in facilities in Canada, Germany and the UK to increase efficiency and capacity at those facilities and a new US premix plant in Missouri is expected to be commissioned in the second quarter 2009.

In 2008, further investment was made in developing internal science and technological capabilities in whey fractionation through research and development facilities in Ireland and the USA. This is creating real benefits as Nutritionals moves into higher value added solutions and formulations for the food, beverage and pharmaceutical industries.

Brand strength improved in 2008 with the addition of the ON and ABB brands. Other brands include Provon^® WPI, Avonlac™ WPC, Thermax^® whey proteins, Prolibra^® weight management solution, Meadowpure™, CFM^® WPI, Bioferrin^® lactoferrin, Salibra^® bioactive whey fraction, Trucal^® dairy calcium, Provon^® Revive a sports protein recovery solution; Barflex^® ; Barmax™, BarGain™, and BarPro™ bar solutions.

Nutritionals revenues, profits and margins grew for the year driven by strong organic volume growth, good value added whey markets, notably in the first half, and continued good performance in premix businesses. 2008 results reflect a first time contribution by Optimum, in line with expectations.

Provon Revive is the ultimate recovery solution and the choice of Irelands elite athletes. The vision for Nutritionals is to become one of the leading providers of science-based nutritional ingredients, solutions and sports supplements to the global nutrition industry.

Strategy

The strategy for this business is based on building a high margin business, with positions of scale in both dairy and non-dairy sectors; in particular:

• ingredient solutions in core health areas of sports and performance nutrition, weight management, health and wellness; and
• functional solutions in bars, beverages and processed foods.

Nutritionals strategic objective is to deliver new and innovative products and solutions that will afford Glanbia a point of difference in the market place and deliver value to customers.

2009 Outlook

A significant investment in and commitment to innovation and a full year contribution from Optimum is expected to contribute to growth in 2009. Nutritionals is well positioned for 2009 and has strong brands and capabilities to continue to develop a business of scale in both the business to business and business to consumer areas.

Julie Kolsen checking solids in a refiner tank in the Gooding whey facility. The Group's businesses in the USA have been accepted for membership to the Energy Star Programme, a national call to action to improve the energy efficiency of America's commercial and industrial sectors by 10% or more.

Food Ingredients USA

Food Ingredients USA processed 2.0 billion litres of milk into 205,000 tonnes of cheese and 50,000 tonnes of whey-based ingredients from facilities located in Idaho.

Food Ingredients Idaho plants, corporate head office and state-of-the-art research and development facility employs 640 people. The business purchases over onethird of the milk produced in Idaho. Idaho is the third largest milk producing state in the USA and is amongst the fastest growing states for milk production, up by approximately 7% in 2008.

2008 Performance

High cheese prices enabled Food Ingredients USA to post record revenues in 2008, with strong demand and pricing during the year. Positive market conditions and continued investment in production capabilities and efficiencies, underpinned margin improvement in 2008.

Glanbia added four additional medals to its trophy case in 2008 earning two gold medals and two silver medals in the World Cheese Championship contest held in Madison, Wisconsin. A record breaking eight medals were awarded, including two gold and four silver, in the US Cheese Championships in March 2009.

Strategy

The strategy for Food Ingredients USA is to continue to be the most relevant supplier of American-style cheddar cheese to key industrial customers, retain leading market positions, grow market share and continue to be an efficient, high-quality producer of whey-based ingredients to support Glanbia Nutritionals growth strategy.

2009 Outlook

Domestic demand for cheddar cheese is good. However, having reached historical highs during 2008, US cheese prices reduced significantly late in the year. For 2009, despite expected volatility, cheese prices are forecast to remain above historical averages, albeit lower than 2008 average prices. Whey prices are lower year-on-year and only a marginal recovery is expected during 2009. Therefore market conditions for Food Ingredients USA will be more challenging this year and as a result a lower performance is expected in 2009, following a strong set of results in 2008.

Food Ingredients Ireland

Food Ingredients Ireland is the largest dairy ingredients business in the country, assembling a milk pool of 1.4 billion litres annually and processing it into butter, cheese, milk proteins and whey derivatives. It markets over 190,000 tonnes of dairy products and ingredients on a business to business basis to customers in over 40 countries.

The cheddar cheese block line at our Ballyragget facility.

Food Ingredients Ireland employs over 440 people at two large processing facilities in Ballyragget, County Kilkenny and Virginia, County Cavan. It operates a joint venture with Corman SA, for the manufacture of butter fractions and dairy spreads in Ireland and has a sales and blending operation in Mexico.

The Ballyragget facility is the largest integrated dairy site in Europe, processing 20% of the Irish milk pool and 40% of the Irish whey pool. Food Ingredients Ireland is the pre-eminent Irish supplier of lactose and other whey proteins to the three largest infant formula manufacturers in the world. It is also Ireland's largest manufacturer of casein - another protein found in milk - and cheddar cheese.

The Virginia facility produces a range of fat-filled milk powders and fresh creams. It has exclusive responsibility for cream and casein procurement and supply to Baileys Irish Cream Liqueur following the renewal of a new five-year contract. It is also the main supplier of milk powder to Nutricima, the Group's joint venture with PZ Cussons plc in Nigeria. In addition to customers who have strong market positions in West Africa such as Senegal, Togo, Mali and Benin.

2008 Performance

2008 was a very challenging year for Food Ingredients Ireland. Global dairy markets were volatile and prices reached historic lows.

This decline in global dairy prices, particularly in the second half of the year, led to a sharp imbalance in the raw material input cost and market prices for products. As a result, while revenues remained robust, profits and margins were back significantly when compared with 2007.

The co-operation agreement with Dairygold, including the contract manufacture by Dairygold of cheese for Glanbia and by Glanbia of butter for Dairygold, operated well during the year.

Food Ingredients Ireland is the largest manufacturer of cheddar cheese
in Ireland.

The joint venture with Corman SA progressed satisfactorily throughout 2008 with the commissioning of a butter fractionation facility, which is the only such facility in Ireland.

In the fourth quarter of 2007 and into the first quarter of 2008, Food Ingredients Ireland carried out a complete replacement of its cheese facility in Ballyragget and increased capacity by 33%. A further investment in a Milk Protein Concentrate (MPC) facility enabled the production of MPC 80 and Milk Protein Isolate (MPI) which are targeted at nutritional and fresh dairy product markets.

Strategy

While recognising that a significant proportion of Food Ingredients Ireland's product base is commodity dairy products, the strategy for this business is to provide a growing and innovative offering of higher margin ingredient solutions to an expanding customer base.

2009 Outlook

The market outlook for Food Ingredients Ireland in 2009 is difficult, with global dairy markets at extremely low levels. While a realignment of raw material costs and market pricing is expected, given current conditions we expect this business to breakeven this year. We continue to drive efficiency and cost improvements in the business through a rationalisation programme and other initiatives.