The McLaren Formula One racing team was euphoric on Wednesday when its star driver, Lando Norris, set the pace for the field in the first day of preseason testing in Bahrain, before Melbourne hosts the initial grand prix of 2025 next month.
The mood wasn’t shared, however, by the owners of McLaren’s sports nutrition sponsor, protein powders business Optimum Nutrition.
Shares in Glanbia, which bought Optimum Nutrition in 2008 and turned it into a $1 billion-plus (€960 million) concern, went into sharp reverse the same day – slumping 23 per cent – as it warned that a surge in whey protein prices had caught its team off guard, and it went about getting rid of its problem SlimFast and Body & Fit businesses.
It has caused investors to seriously question the Kilkenny-based group’s ability to forecast the price of the key ingredient for its products – and its deal making.
Glanbia is the biggest producer of whey protein in the US through its cheese joint venture factories in Idaho, New Mexico and Michigan. But it is also the world’s main buyer of the commodity to stock the cupboards of gym-goers and dieters with protein powers and shakes.
Chief executive Hugh McGuire, who succeeded Siobhán Talbot at the helm a year ago, rattled investors in November when he signalled that high whey prices would weigh on margins in its biggest division, Performance Nutrition, where Optimum Nutrition accounts for two-thirds of sales.
He conceded this week that the scale and extent of the spike – with high-end whey prices currently 20 per cent above a previous peak in 2022 – was “beyond what we previously planned for”. It has prompted analysts to slash their earnings estimates for the next few years.
The company’s full-year earnings per share guidance of $1.24-$1.30 was above 11 per cent below what analysts, on average, had been estimating.
Chief financial officer Mark Garvey – who was last year granted a stock incentive award, worth €750,000 at the time, to remain with the company for at least two years as McGuire’s right-hand man – told analysts the elevated prices will be “transitory”. That’s because plans by cheese producers in the US to build new plants, following a pause in projects as a result of the Covid pandemic, will increase capacity by 15-20 per cent between late 2025 and through next year.
History suggests that increased capacity will push down prices, he said.
But ongoing weakness in the stock suggests the market is short on faith as the episode stokes up memories of an unfortunate series of profit warnings from the group in 2019.
“This is the second whey-driven downgrade in three to four months and, given the current trajectory of prices, we struggle to have conviction at this point on a moderation in prices,” said Deutsche Numis analyst Deirdre Mullaney.
Glanbia sees higher whey prices resulting in $200 million of additional costs this year. It aims to offset three-quarters of that, mainly by way of increasing prices and cutting its marketing budget.
It will be difficult to achieve, without hitting volumes.
Optimum Nutrition sales barely rose last year as Glanbia cut pricing to boost volumes in the face of heightened competition as the likes of Costco, the members-only warehouse club retailer, launched low-cost powders at a time of consumer caution – and habitual dieters opted for weight-loss drugs such as Ozempic in droves.
Still, Glanbia executives believe their protein powders should ultimately benefit from the GPL-1 revolution.
However, strong sales outside the US helped lift the brand’s total revenues by 7.5 per cent.
Glanbia’s decision to get rid of SlimFast shouldn’t surprise. Talbot purchased SlimFast for $350 million in late 2018 (a fraction of the $2.9 billion Unilever had spent on it in 2000) and managed a mini revival of a brand that had its heyday in the 1980s and 1990s, as it played into the low-carb keto diet craze.
The pandemic put paid to that fad. Ozempic hasn’t helped. Glanbia took a $91 impairment charge against the asset last year as it prepares it for sale.
Dutch-based Body & Fit, an online sales platform for protein bars, wraps and powders that Glanbia bought in 2017 for €181 million to open a new sales front to consumers, has also had its day. The explosive growth of Shopify Amazon since then means that running a specialist ecommerce platform is an expense Glanbia doesn’t need. The group took a $46 million charge against this asset last year as it put it on the block.
Analysts from Berenberg to Kepler Cheuvreux have welcomed management’s decision to hive off SlimFast and Body & Fit, as neither deal delivered what was hoped for. But it does raise questions about the group’s ability to identify attractive deals.
The general view from analysts is that the stock has been oversold this week.
“The loss on the share price seems excessive,” said Fatma-Agnes Hamdani, an analyst with Oddo BHF Securities. “Glanbia remains well positioned to take advantage of the strong trend on whey protein, while waiting for supply to normalise from the second half [of 2025] onward. We think that 2025 will be a transitional year.”
They point out that the group’s balance sheet remains strong, allowing it to buy back €102 million of shares last year and for the board to sign off on a further €148 million of stock repurchases going forward.
Goodbody Stockbrokers analyst Patrick Higgins said on Friday that Glanbia’s shares – changing hands at a little over €11 – are now trading at “a significantly greater than warranted discount” to peers.
But he is struggling to find a catalyst for a stock rally to his €16.50 price target.
A few quarters without any more nasty surprises might put it on the right track.
