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Edited Transcript of GL9.I earnings conference call or presentation 31-Jul-19 8:00am GMT

Half Year 2019 Glanbia PLC Earnings Call

Kilkenny Aug 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Glanbia PLC earnings conference call or presentation Wednesday, July 31, 2019 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Liam Hennigan

Glanbia plc - Group Director of Strategic Planning & IR

* Mark A. Garvey

Glanbia plc - Group Finance Director & Executive Director

* Siobhán Talbot

Glanbia plc - Group MD & Executive Director

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Conference Call Participants

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* Cathal Kenny

Davy, Research Division - Senior Analyst of Food and Beverage

* Gerard Freddy Zaffran

Exane BNP Paribas, Research Division - Specialist Sales

* Graham Hunt

Morgan Stanley, Research Division - Equity Analyst

* James Targett

Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst

* Jason Molins

Goodbody Stockbrokers, Research Division - Analyst

* Karel Zoete

Kepler Cheuvreux, Research Division - Equity Research Analyst

* Martin John Deboo

Jefferies LLC, Research Division - Equity Analyst

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Presentation

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Operator [1]

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Good morning, and welcome to the Glanbia plc 2019 Half Year Results Call with Siobhán Talbot, Group Managing Director; and Mark Garvey, Group Finance Director. Today's conference is being recorded.

At this time, I will turn the conference over to Mr. Liam Hennigan, Group Director and Strategic Planning and Investor Relations. Please go ahead, sir.

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Liam Hennigan, Glanbia plc - Group Director of Strategic Planning & IR [2]

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Thank you. Good morning, and welcome to the Glanbia 2019 Half Year Results Call. During today's call, the directors may make forward-looking statements. These statements have been made by the directors in good faith based on the information available to them up to the time of their approval of this presentation. Due to the inherent uncertainties, including both economic and business risk factors underlying such forward-looking information, actual results may differ materially from those expressed or implied by these forward-looking statements. The directors undertake no obligation to update any forward-looking statements made on today's call, whether as a result of new information, future events or otherwise.

I'm now handing the call over to Siobhán Talbot, Group Managing Director, Glanbia plc.

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Siobhán Talbot, Glanbia plc - Group MD & Executive Director [3]

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Good morning. We have published our half year results this morning ahead of schedule. This is to give context to the amended full year guidance that we've issued today as part of this announcement. I'm joined by our Finance Director, Mark Garvey. I'll go through a review of the half year. Mark will speak to the finances and join me then for questions.

Overall, we had a disappointing half year for the group, with some very specific factors reducing organic revenue in GPN, which I'll discuss in detail later. In terms of total revenue perspective, we had good revenue growth at a group level, with wholly owned revenues up 12% on a constant currency basis versus the same time in the prior year. This was driven by strong performance from our Nutritional Solutions business and by recent acquisitions. The Nutritional Solutions business delivered 12% like-for-like volume growth, which highlights the strength of our model, where we had good growth across both our dairy and nondairy value-added ingredients as well as successfully commercializing expanded output of our joint ventures.

We are very pleased with the momentum of our recent acquisitions of SlimFast and Watson. SlimFast Innovation, in particular, continuing to resonate very well with consumers. As I noted earlier, Glanbia Performance Nutrition had a challenging first quarter. And while momentum improved in the second quarter, like-for-like revenue in GPN for the half year was behind the prior year. We expect improved momentum in GPN as we look through the second half, reflecting that seasonality factor.

While positive momentum continues across many parts of GPN, geopolitical and trade policy challenges in a number of our key GPN international markets has increased our caution for the second half. And as a result, we are updating our guidance for the group for the full year. While disappointing, we now expect to report adjusted earnings per share for 2019 in the range of EUR 0.88 to EUR 0.92. This would represent an adjusted earnings per share constant currency decline of between 3% and 7%. This reduction relative to prior guidance is attributed to the negative effect of those geopolitical and global trade disruption that I referenced in some key international markets of GPN, namely Latin America, Middle East and India. We remain very confident in the medium and long-term business opportunities for GPN and Glanbia in these regions despite the current disruption. Both GPN and Glanbia Group remain on track strategically, and we reaffirm our long-term strategic growth targets, including the targets that we will have average growth and adjusted earnings per share on a constant currency basis over the 5 years to 2022 of between 5% and 10%. Consistent with this -- with this strategic ambition and with prior years, we have increased our dividend by 10%, which reflects our target payout ratio of between 25% and 35%.

Turning then to the operational review, starting firstly with GPN. We have had many highlights but also clearly challenges in the period. In the first half, revenues increased by 13.4% to EUR 620 million. The driver of revenue growth was the SlimFast acquisition, which delivered 24.3% growth. This was offset by an organic volume decline of 8.2% and a price decline of 2.7%. EBITA performance were disappointing at minus 30%, and margins at 7.6%.

Overall, organic volumes declined by about 8.2%, with the majority of the declines across the international markets. For North America, while sell-in volume to customers was back on a year-to-date basis at the half year, this primarily relates to the challenging Q1, with the first quarter seasonality rebalancing in Q2 and volume growth returning in that quarter. From a consumption perspective, year-to-date consumption in North America is good. With the continued momentum in the growth challenges of e-commerce and FDMC, the food drug, mass and club, offsetting the ongoing channel -- challenges in the specialty channel, a channel that now represents just 17% of the GPN North American Sports Nutrition portfolio in the first half.

Performance of our North American Lifestyle portfolio, excluding the SlimFast brand, has been as expected. We have relaunched our think! brand in the U.S. in the ready-to-eat category. We've had positive trade reaction to date. We've stepped up our marketing activity and spend on this brand in support of the relaunch as is the U.S. market in the ready-to-eat category remains very competitive.

Similarly to North America, in certain international markets, the first caution with seasonality, we balanced to deliver volume growth in Q2. However, challenges continued in the region, in our European, Latin American and Middle East region, and I'll discuss this later.

In terms of pricing, the overall dynamics improved somewhat in Q2, and we have increased pricing in a number of regions, including North America, from July. Which -- we, therefore, expect this to be a positive pricing dynamic as we move into the second half. It's early to assess the demand elasticity, and we will continue to monitor closely the volume price dynamic, particularly in international markets.

As I've noted earlier, the performance of the SlimFast brand has been excellent, delivering growth on a like-for-like basis of 21% to EUR 150 million. This acquisition has provided us with a compelling consumer proposition in the ready-to-drink space. It has opened up a new growth category for us in weight management and provides the scale on which we can anchor our lifestyle business going forward.

Innovation was another highlight of the period, and we had successful launches in the energy and protein space across multiple formats of ready-to-mix, ready-to-drink and ready-to-eat. Overall, as I referenced GPN, EBITA declined significantly in the period as those lower volumes drove significant negative operating leverage in the first half. We had adverse pricing, which we'll rebalance, and we increased investment in our brands and infrastructure. In the second half, we expect significant recovery of earnings and margin in GPN. Margin recovery will be achieved by: firstly, significantly improved operating leverage as the seasonal nature of the business results in higher Half 2 revenue for our customers prepare for consumer initiatives in advance of a new year; secondly, we have improved pricing, already implemented; and finally, we will have the positive effect of lower trade and promotional spend and improving mix as we go through the year.

Turning then to the North America business of GPN, which in total represents 67% of the GPN business. We expect full year North America-branded revenue to be broadly in line with the prior year overall as low single-digit declines in Sports Nutrition are offset by growth in our Lifestyle brands.

Looking at the Sports Nutrition brands in North America. As I referenced, we have seen seasonality factors, particularly in the first quarter. They've been rebalancing through the second quarter. And overall, our consumption is very good with the challenges remaining in specialty. But overall, positive for the portfolio, particularly driven by very good momentum, as I referenced, in the food, drug, mass and club channels and online.

On the Lifestyle brands, the momentum of SlimFast continues to drive forward very well. We continue to expand that portfolio. The recent acquisition of SlimFast and the development of the Keto range resonating very well with our consumers. I also referenced the relaunch of think! in recent weeks.

Innovation continues to be focused on the launches that I referenced across the number of formats of ready-to-mix, ready-to-drink and ready-to-eat will be additive to our overall portfolio. While a relatively small part of the Lifestyle brands, we continue to have good revenue growth on the plant-based Amazing Grass portfolio.

Turning then to international. And in international, in this context, we mean non-U. S. markets. Our full year revenue is expected to decline by low double digits. Geopolitical and global trade disruption has posed challenges in regions, where in recent years we've had very strong growth, such as Latin America, Middle East and India. Two dynamics arise with those challenges. These are high-margin markets for Glanbia Performance Nutrition as we have relatively low fixed cost in the regions and therefore, the decline in revenue is magnified at an earnings level, and because of those same geopolitical factors that have increased tariffs in the region and dented consumer confidence, we've had margin compression.

In Latin America, we've seen headwinds in Brazil and Mexico and Argentina as a result of those weaker local market conditions caused by deteriorating economic environment in those countries. We service all our international regions, excluding Europe from the U.S., and the strength of the U.S. dollar is a hurdle for us in trading in these economies. We expect this to be a theme for the remainder of the year, obvious that there are various areas such as pricing, as we have rebalanced.

In the Middle East, we have worked through the supply chain changes that we referenced in the first quarter and seeing some recovery in the second quarter. We are, however, very conscious of the developing geopolitical tensions in the region, which is impacting volume. And we're also conscious of the investment needs, where we keep our brands relevant to consumers. So we are cautious on the outlook for the year for that region.

In many parts of Asia, we've had very strong growth, and we continue to be very optimistic about those regions. In India, we have implemented a change to optimize our supply chain, whereby Glanbia Performance Nutrition will directly import products rather than operating through a third-party. This is a great project for the long-term margin management of our business in India. It has taken longer than originally planned and impacted our sales in the period. But despite that time delay, this is a very effective project and will improve our supply chain efficiencies and effectiveness over the long term. Allied to this, India has seen some market disruption, particularly in the first half, around some regulatory changes and tariff increases. And while we expect volume pick up in the second half of the year, again we are cautious on the outlook for India, primarily in that instance due to margin contraction. Overall, as I referenced, we do see these regions as a long-term growth opportunity. We have had an instance in 2019, where a number of events are happening at the same time and therefore, resulting in the profit adjustments we're speaking to today.

In Europe, we have experienced a slowdown in our traditional distributor channel as consumers switch to online retail for Performance Nutrition products. We've seen this as a positive dynamic for our own direct-to-consumer Body & Fit business, and that will be positive as we look forward to the longer term, where we will plan to leverage that capability across the European markets.

So turning then to our focus in the context of those challenges across some, but by no means all, of our international growth markets. In terms of a revenue priority, a key focus is to reestablish growth. We actually believe that a lot of the headwinds are behind us in a number of markets because in many of those markets, distributors set change their inventories as consumer behavior became more challenged and so we see an element of one-offs within that.

In the EU, we are very pleased with the evolution, as I referenced, of our direct-to-consumer capability. We see this will be a key and significant platform for us for future growth in the region, and we will be working to ensure that we are optimizing the overall Glanbia Performance Nutrition performance in the region through the combination of that direct-to-consumer capability and the resources that we have on the ground.

In terms of margin, a significant margin recovery will happen in the second half of the year as the negative operating leverage of the first half will rebase. As I've noted, we have implemented price increases in both our key markets in North America and in many other markets internationally. We will continue to focus on pricing and the effectiveness of our trade spend across the geographies. Already, we have implemented a number of supply chain solutions, where we consider, in many of the regions, the opportunity to manufacture locally. I've mentioned the project in India, and we will evaluate whether similar projects would be enhancing for the performance of our international business. We will continue to optimize our operating model. We have great teams across these regions. And one of the reasons why the regions are so profitable for performance attrition is that strategically, we leverage the great capability that we have in North America. We will focus on ensuring that, that operating model is rightsized to drive growth across the regions, focusing on our resources on the regions where we see the most growth potential.

And ultimately, we will continue to invest to drive long-term sustainable growth. We've referenced over many periods our investment in people, in technology, in building out that direct-to-consumer capability while currently focused in Europe. It is potentially very exciting for us as we think longer term across other international regions. And we will continue to build out our people infrastructure to support our growth agenda.

Turning then to the full year outlook for GPN. From a revenue perspective, we expect branded like-for-like revenue to decline low to mid-single digits. We expect revenue growth that will be driven by acquisitions.

As I referenced, in our very important key markets, our core consumption is very good. We have had in 2019, slightly out-of-sync relationship between our sell-in and net consumption, with that positive consumption across all channels with the exception of specialty is very positive for our business. Our overall momentum within Sports Nutrition will improve significantly in the second half. We referenced many times the seasonality of our business. Our customers and consumers will be preparing for events in the new year and that would drive a second half (inaudible) performance. I've referenced our Lifestyle brand portfolio. We have great brands in that space, and we have a lot of forward growth potential.

Innovation will continue to be a key focus of the business. We exceeded our internal targets in the first half, and we will continue driving forward in innovation across all our prime portfolio such that over 15% of our sales from projects in any year will have come from launches in the last 3. Clearly, our margins were reduced in the first half. We will have significant margin recovery, as I referenced, in the second half. Operational leverage that was painful in the first half will naturally rebalance and price increases have been put through as a reference in our key markets.

We have a strong portfolio of brands in performance nutrition, and we have very strong capabilities across multiple geographies. Our international markets represent a compelling avenue for long-term structural growth in our categories. And we are very committed to them as part of the overall strategy of GPN, notwithstanding the volatility that we have experienced this year.

Given the strength of our portfolio and the fact that we have many of the above actions commenced or already in place in terms of margin recovery, we reiterate our long-term strategic growth ambitions today for the Glanbia Performance Nutrition business, and that ambition remaining very much intact.

Turning then to our Glanbia Nutritionals business. Overall, we had good revenue momentum in the period. Volume growth was strong at 12%, with growth across both the dairy and nondairy platforms. And our growth was broadly based across geographies. In particular, in our Nutritional Solutions business, we continue to have strong momentum in our Bar Solutions business and in our Dairy Specialty Ingredients. Nutritional Solutions margins of 13.7% were well within our long-term guidance range. They are back on the prior periods. Prior period was relatively high due to a number of timing factors, but also factors such as product mix and again, tariff costs that we absorbed in the business, drove some debt reduction in margins.

Overall, our Watson acquisition is very much performing to plan, and we're very pleased with the capabilities that, that will bring to our Nutritional Solutions business. On the Cheese side, the growth was driven by the capacity expansion. As you know, the capacity expansions of our joint ventures are commercialized by our Glanbia Nutritionals team. So overall, Glanbia Nutritionals is in good shape. We expect to deliver full year earnings growth in Nutritional Solutions, driving forward in the highest margin component of the business, top line and earnings growth. On the U.S. Cheese side, we expect our earnings to be broadly in line with the prior year.

We've spoken previously about the ambitions of Nutritional Solutions for the future. We worked extremely well with customers across a wide variety of sectors where we have developed capability from the delivery of everything from straight ingredients to full consumer-ready solutions across ready-to-eat snacks, beverages, ready-to-mix products in a format such as capsules, tablets and gummies. The acquisition of Watson will enhance that capability and enhance our relevance to our customers. We are growing the business internationally. A number of our customers that are brand owners on a global scale work with Glanbia to ensure that we are a strong partner as they develop our brands globally. So as we look forward, as we've spoken to at our Capital Markets Day previously, similarly to GPN, we remain very ambitious and focused on driving the growth, in particular, of Nutritional Solutions for the future periods.

I will now turn to Mark, who will speak to the financial review.

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Mark A. Garvey, Glanbia plc - Group Finance Director & Executive Director [4]

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Thanks, Siobhán, and good morning to everyone on the call. Today, we are reporting adjusted earnings per share of EUR 0.3669. This represents a decrease of 10.8% on a constant currency basis and 5.5% on a reported basis for the first 6 months of 2019. The average U.S. dollar-euro rate for the first half of 2019 was 113 (sic) [$1.130] compared to 121 (sic) [$1.211] for the same period in 2018, with a stronger dollar resulting in approximate 500 basis point difference between the reported and the constant currency result. Should the euro-dollar rates stay at the current level for the remainder of the year, we would expect a 4% translational tailwind between the constant currency and the reported full year results.

Turning to our summary income statement. Here, you can see revenues in our wholly owned business were EUR 1.758 billion for the first half, an increase of 12% constant currency on last year and up 19% on a reported basis. There was good revenue growth in both Glanbia Performance Nutrition and Glanbia Nutritionals, with acquisitions contributing to both segments. Wholly owned EBITA was EUR 111.4 million for the half year, a decrease of 15.3% constant currency and 9.9% reported. Glanbia Nutritionals EBITA at EUR 64.5 million was in line with prior year on a constant currency basis, whereas Glanbia Performance Nutritional reported EBITA of EUR 46.9 million, a decrease of 30% in constant currency.

EBITA margins for the wholly owned group were 6.3%, which is 210 basis points lower than prior year, primarily due to the impact of negative operating leverage as a result of lower year-on-year international revenues and investment focused on lifestyle brands and the direct-to-consumer platform within Glanbia Performance Nutrition and product mix and tariff headwinds in Nutritional Solutions. Amortization of intangibles was EUR 28.9 million, an increase of EUR 7.4 million from prior year driven by recent acquisitions.

Net finance costs were EUR 13.3 million, an increase of EUR 5.7 million from prior year due to the increase in net debt following the acquisitions of SlimFast in November last year and Watson in February this year. Our average interest rate for the first 6 months was 3.6% compared to 4% last year.

As expected, there was also a reduction in our income tax charge for the first half. Our effective tax rate for the first half was 13.3%, which compares to 15% last year, primarily due to lower U.S. corporate tax rates. For the full year, we expect our tax rate to be broadly in line with the half year rate and we will continue to monitor updates to tax legislation in the U.S. and other jurisdictions.

The share of results of joint ventures was EUR 26.8 million compared to EUR 17.8 million in 2018. We saw good performance in each of our joint ventures in the first half. And for the full year, we expect the joint venture result to be broadly in line with last year.

Profit after tax from continuing operations pre-exceptional items was EUR 86.8 million compared to EUR 98.2 million in 2018. For the half year, we reported exceptional costs before tax of EUR 4.3 million related to organization restructuring, acquisition integration and Brexit costs. The organization restructuring costs relate to our review of the operating models within Glanbia Performance Nutrition to ensure the structure is appropriate to support the current and future needs of the organization and the costs with respect to the integration of SlimFast and Watson. Total cost in the period amounts to EUR 3.2 million, with further costs expected to be incurred in the second half of the year. And at this point, we expect full year costs to be in the range of EUR 7 million to EUR 10 million. Brexit exceptional items relate to costs incurred to mitigate the potential impacts on our business of the United Kingdom leaving the EU, and we continue to monitor developments in this area.

Looking at the breakdown of revenue by segment. You can see that Glanbia Performance Nutrition reported revenues of EUR 620.1 million, a constant currency increase of 13.4% and Glanbia Nutritionals reported revenues of EUR 1.1 billion -- million, a constant currency increase of 11.2%. GPN's revenue growth in the first half was primarily driven by the acquisition of SlimFast, which performed strongly in the period. Organic volumes were down 8.2% and price was a negative 2.7%. Within Glanbia Nutritionals, Nutritional Solutions reported revenues of EUR 369.6 million, an increase of 27% constant currency. The business had good volume growth of 12%, and pricing was positive 3.5%, primarily due to higher dairy markets. The Watson acquisition contributed 11.5% to Nutritional Solutions revenues. U.S. Cheese reported revenues of EUR 768.7 million, an increase of 4.9% due to increased volumes, primarily resulting from the expansion of the Southwest Cheese business.

Operating cash flow for the first 6 months was EUR 18.9 million, which compares to EUR 59.8 million in the prior year. The reduction in operating cash flow for the first half was due to reduced EBITDA year-on-year and higher inventory levels driven by the impact of acquisitions, higher raw material values and some Brexit-related inventory build. We expect to convert over 80% of adjusted EBITDA into operating cash flow in 2019. The group received dividends of EUR 16.1 million from joint ventures in the period.

Capital expenditure was EUR 37 million year-to-date, of which EUR 30 million was strategic capital expenditure and the remainder for business sustaining. The key strategic capital expenditure project in the first half was the installation of a new e-commerce platform for our Body & Fit direct-to-consumer business. For the full year, we expect total capital expenditure to be between EUR 70 million and EUR 80 million, of which approximately EUR 20 million would be business sustained.

The Board has approved an interim dividend of EUR 0.1068 compared to EUR 0.0971 last year, an increase of 10%. The total 2019 dividend payout was planned to be between 25% and 35% of adjusted earnings per share, in line with our dividend policy.

The group continues to have a strong balance sheet and financing capabilities. At half year-end, net debt was EUR 778 million compared to EUR 402 million at the same time last year. The primary reason for the increase being the acquisition of SlimFast and Watson as well as investments in the Michigan and Glanbia Cheese European projects. Net debt-to-adjusted EBITDA was 2.1x compared to 1.2x this time last year. Interest cover was 10.5x. At year-end, we expect net debt-to-adjusted EBITDA will be approximately 1.7x. The group currently has EUR 1.1 billion of available banking facilities with an average maturity of over 3 years.

The net pension deficit at the half year amounts to EUR 36.8 million compared to EUR 38.7 million at half year 2018, and we expect return on capital employed to be within our target range of 10% to 13% for the full year 2019.

And with that, I will hand it back to Siobhán to review our outlook.

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Siobhán Talbot, Glanbia plc - Group MD & Executive Director [5]

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Thank you, Mark. So in terms of overall outlook, as I referenced earlier, while disappointing to be recalibrating our outlook, we are currently expecting full year adjusted earnings per share to be in the range of EUR 0.88 to EUR 0.92. We have had a challenging first half, but there are a number of particular reasons that sits behind us, and we are confident in positive momentum for the group for the second half of the year.

We have a strong position across a number of the international markets that we referenced in GPN, and we have very clear initiatives to address some of the challenges, particularly on the margin side.

Our long-term ambitions for the Glanbia Group to 2022 remain very much in place. We reiterate our ambition to have an average growth and adjusted earnings per share of between 5% and 10% over that period, to have an operating cash conversion of over 80%, to deliver return on capital employed of between 10% and 13% and to execute a dividend payout ratio of between 25% and 35%.

So maybe, ladies and gentlemen, what I will now do is turn to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll take our first question over the phone from Jason Molins from Goodbody.

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Jason Molins, Goodbody Stockbrokers, Research Division - Analyst [2]

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Just wondering if, firstly, if you can just clarify the size of your international markets in profit terms. I think you've said that in terms of revenues, but just in profit terms would be quite useful. And then in terms of the U.S., just wondering what your expectations are from a volume perspective in H2, bearing in mind the price increases you've put through? And can you clarify what sort of quantum of price increases you managed to put through from July? And I think, Siobhán, you mentioned that it's probably a bit too early to assess the sort of price elasticity, particularly in international markets. I'm just wondering have you any confidence around? Or what gives you confidence to pass on those price increases in the U.S.? Have you seen your competitors do something similar or just a bit more color on that?

And then a final question, if you don't mind. In terms of the seasonality in the business in GPN in the second half of the year, have you had discussions? Or what comfort have you had with your customers in terms of forward buying in Q4 that we've seen in the last couple of years that gives you a greater confidence that you won't see a weaker return given the guidance of sell-through that you saw in Q1 this year?

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Siobhán Talbot, Glanbia plc - Group MD & Executive Director [3]

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Thank you, Jason. In terms of the profit in our international business relative to the North America business, what I would say to you is that the lens that you should probably think of that through is that the -- we have relatively low fixed cost in a lot of markets. So essentially, what that means is that a lot of the contribution margin will be reflected in your final profit margin. We have a lot of our infrastructure in North America. So we have a lot of that cost within the North America business. A real strength, I think, of our strategic evolution has been our capability to leverage those same resources across a number of different geographies. And remembering that our international footprint, while we don't have a direct presence in many of them, but it spans a wide range of international markets of different scales. Lots of those markets, we will -- our primary route to market will be through distributors, but we will have augmented many with local end market resources. So for that reason, at a net EBITA level, as you can imagine, the regions are more profitable than the North America business, simply because it's the North American business bearing the cost of that infrastructure. That said, we'll have inflow.

In terms of our U.S. expectations, I would say that we -- as we mentioned, our like-for-like revenue in the U.S., we believe, will be back slightly for the full year. So while we have had consumption and sell-in become more aligned in the second quarter, you're absolutely right. We're very conscious that we have a big seasonal parked in Q3 and Q4. At this point in time, we expect good momentum to continue into Q3 and maybe rebalance a little from last year in Q4. And that's a strong part of our reasons to believe as we walk through the second part of the year. The business, as we've spoken to many times, have become quite seasonal. Our teams are at all times engaging with our key customers. You rightly, though, referenced a valid point around the visibility. We won't, of course, have entire visibility through the timing of our sell-out for the back end of the year. But we have a lot of confidence in that because our discussions would have been held to date and we can continue to update that as we go.

And in truth, Jason, what I would say to you is that, that's part of the range points around our guidance. We're very confident about our North America business. I think the key point to remember is that despite the current year anomaly, if one wants to call it that of sell-in, the timing versus consumption, our consumption statistics are good despite even the fact that specialty continues to decline. Again, I referenced that -- and we've referenced many times that we see the specialty channel as an important channel for our business. It can be a great channel in terms of innovation, but at this point in time, representing the pivot that the team has done because of those challenges, it is now just 17% of our North America Sports Nutrition business. We continue to grow well in our consumption in some of the key e-commerce platforms in North America. We continue to get very good momentum in both the mass channel and the club channel. So watching that core consumption statistics, I think, gives us a lot of positivity about our North America business.

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Jason Molins, Goodbody Stockbrokers, Research Division - Analyst [4]

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I'm sorry, just on price increases that you've put through in July and what your competition is there as well...

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Siobhán Talbot, Glanbia plc - Group MD & Executive Director [5]

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Yes. Sorry, Jason. Thank you. In terms of range, they range between 3% to 5%, probably overall about 3% in terms of the portfolio. At this point in time, it is early and we believe that we have factored in any potential elasticity into our outlook for the current year. They're in trades. We all know that there'll be manufacturers speaking to the need for pricing in a number of regions, not least, increased costs of areas like freight, labor, tariff obviously in international markets. So in that context, we believe that any downside elasticity for 2019, we factored into account.

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Operator [6]

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Our next question comes from Graham Hunt from Morgan Stanley.

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Graham Hunt, Morgan Stanley, Research Division - Equity Analyst [7]

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Just 2 questions from me, please. You previously expected 70 basis points decline in the GPN margins, I think, last time we're on the call, and now that's -- now we're talking about 250 to 300 basis points. Is that deterioration at all related to the deleveraging and mix effect of the international markets? Or is there some additional investment that you're putting in into the business, perhaps in -- in Body & Fit in the U.S. that perhaps you could talk about?

And then on the second question, a little bit more structural. Are we now seeing a further slowdown in the core powders categories across the all key markets? Just thinking about the guidance that you gave at the start of the year for the growth of the Performance Nutrition business and the weakness that we're talking about today, is that market still growing at the same rate? Or is it more that your competitors are becoming more aggressive?

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Siobhán Talbot, Glanbia plc - Group MD & Executive Director [8]

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Thank you. In terms of the margin movement, yes is the answer to your core question. That reduction in margin from the 70 basis points we spoke to previously to the 250 to 300 is indeed all attributable to the margins, both the operating leverage impact and the absolute margin decline in international markets. You referenced what I think is actually an important point that in the context of that and in some ways maybe despite that, we are continuing to invest behind our business. We are investing where we feel it is necessary in marketing. We're investing in people. We're investing absolutely, as you referenced, in our core technology platform and have implemented that new platform in our Body & Fit business. So as a team, because we are very focused on long-term sustainable growth and we're very disappointed that we have to speak to a call down in GPN margins for 2019, we do believe that, that will rebalance. We believe that elements, such as the negative operating leverage, when you have that top line pressure of '19, will come back as we look forward into future years and so therefore, sustaining our long-term margin range ambitions for GPN. And in some ways, this is a level set elements. Many elements of which I see as one-off. But of course, that gives you caution when you're in this space.

In terms of your structural question, I don't see any particular change in the dynamics that we would have spoken to you previously. We have pivoted this business significantly from a channel basis that I've referenced earlier, in our core market of North America. And indeed, the international expansion has been a key part of that journey and I believe, will be an important part of the journey as we go forward. We've also developed our format capability, as we've referenced. Yes, a lot of our business remains in powders. We continue to innovate in that space. I would call out, for example, the relatively recent innovations in the energy space that have done really well for us, and we're developing more propositions on the ready-to-drink size and energy as well for the consumers that we speak to. So as we think forward, I think the evolution of our portfolio across both sports and lifestyle, and you can see that lifestyle is a significant element now of our North American portfolio, part of our pleasure of bringing in SlimFast into the family when we acquired that brand was the strong ready-to-drink capability that it has. So I would be very ambitious that you will continue to see within some of our core sports nutrition portfolio, that we do more in the ready-to-drink format, really playing into that consumer that's looking for convenience, looking for great quality, looking for great products in that space. So ultimately, we -- there's no new news in that in terms of structural piece and we continue to evolve our portfolio being very true to our core life consumers that like ready-to-mix products, but evolving them and growing and giving many more usage occasions across ready-to-eat, ready-to-drink and across the geographies.

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Operator [9]

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(Operator Instructions) We'll now take our next question from Karel Zoete from Kepler.

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Karel Zoete, Kepler Cheuvreux, Research Division - Equity Research Analyst [10]

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I have a couple. The first one is with regard to feasibility within GPN as the non-U. S. business because the tone on some of this international markets has changed quite materially compared to the last time we spoke, whereas a strong dollar and some trade [denters] are not, per se, new. So what visibility do you have on your business outside the U.S.?

The second thing is with regards to the contribution of SlimFast to profit in 2019. Are profit margins at SlimFast still in line with the levels of 10%, 11% when you acquired that business?

And then lastly, with regards to the longer-term margin outlook for GPN. Is that still where you guided on with regards to the 2022 outlook? Or should we think about that differently?

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Siobhán Talbot, Glanbia plc - Group MD & Executive Director [11]

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Thank you, Karel. You raise a very valid and important point in terms of the international markets. In a lot of those markets, we work through local distributors. So -- and it is very difficult, in truth, to access very robust consumption data, unlike, for example, the North American market that I referenced earlier. And so that feedback loop is not anything as quick as we would have, where we have direct relationships, for example, in North America or indeed in other regions like Oceania. I would say, as we start -- went through this first half public, particularly as we closed out June and into July, our caution increased when we saw that some of the regions, the rate of sell-out as the data started to come through, was less than we might have originally hoped as we thought that allowed some of the rebalancing of the first quarter would be coming back. So in a lot of instances, Karel, I think this will come back, but there's a piece of timing as we go through 2019 and into 2020.

So I believe that on a -- from a volume perspective, an amount of the issue that we've seen across some of these regions, we've actually seen in the first half. We have every reason to believe that, that momentum is going to improve as we look at the second half and probably into 2020. So you just -- but we're not going to recover as we might have previously thought we would, some of those issues that we have -- had in the first quarter. Again, I would reference to put some color on those, what we've had with some of the distributors across these geographies that I've referenced, because they've seen, over that period of time, some rebasing in consumer confidence. Because of course, you're right, the stronger dollar isn't relatively new. But the longer it continues, I think the more it dents consumer confidence. So what you've seen is a distributor reaction in some of these markets because they become ultimately more cautious about their sell-outs, then they've reduced their inventory levels. And therefore, we've seen that in our sell-in to them in the first half. But we do remain fundamentally optimistic as we think to the longer term. And I think a lot of that volume piece in that market is behind us.

The margin piece isn't behind us as much, and that's why we're calling down the overall margin for GPN because I think it will take a bit more time into 2020 to fully rebase those margins. We have -- again, they will improve for sure in the second half versus the first half because, I think, the volumes will improve versus the first half that we get a positive leverage effect. We will also see the effect of pricing. We are obviously as we would do in any event, continuing to evaluate our trade spend. And that always tends to be first half loaded in any event. So there's a natural improvement that we see there. But as I say, overall, we do believe that it will impact GPN margins for 2019.

That leads me then, and I'll come back to your SlimFast question, at least, which is our overall outlook. And yes, I think, is the answer to your question. We very much continue to have the ambition that the GPN margins will be in that 13% to 15% that we've spoken to previously. We will be clearly shy of that in the current year. But as we get that sell-in and consumption more rebalanced, I think the operating leverage will be to our advantage. We're continuing to work on innovations that are margin accretive, and I believe, you'll see that come back. But we will have a lot more visibility on the pacing and journey and timing of that when we come to the back end of 2019. And we will speak further to you about that at the back end of the year.

In terms of the SlimFast, we are really pleased with that. The overall top line momentum, as we've seen, is very good. Continue to invest behind the brands, investing in marketing, a lot of activity planned for SlimFast in the second half of the year. And yes, margins, I would say, very much in that range despite the increased investment that you referenced of 10% to 11%.

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Operator [12]

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We'll take our next question from Cathal Kenny from Davy Research.

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Cathal Kenny, Davy, Research Division - Senior Analyst of Food and Beverage [13]

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Three questions from my side, all GPN related. Firstly, just picking up on the international business, Siobhán, and in the context of the H1 performance. Does it make you rethink the whole distribution model? And is there a sense maybe that you need to put more sales force on the ground, I think?

Secondly, just in Europe, when we look at the acceleration away from say, again, distribution specialty to online, that looks to have obviously picked up considerably through the last couple of months. Does that mean that it will be difficult for you to hold share against that backdrop given the relative size of Body & Fit? I know that's growing, but the footprint is still relatively small.

My final question then is just on the U.S. business. You've obviously decided to restructure in Sports Nutrition relative to lifestyle brands. I was just interested to know the logic behind that. And then just from a practical perspective, does that mean effectively you have 2 different teams running those respective brands?

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Siobhán Talbot, Glanbia plc - Group MD & Executive Director [14]

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Cathal, thanks for that. In terms of the international markets, I would say that we are always evaluating, in truth, our operating model. So that's not new to us. We have continued to evolve our operating model. And the main thing for us is that we ensure that the organization is rightsized for the opportunity in each particular market. And the example I would give, maybe again for color on that, is Oceania. We started in that region where we put a number of people on the ground. We started to build out the business. We were working to a particular distributor. Our ambition for scale started to exceed the capability of the distributor and so we purchased the distributor. And now that is part of our infrastructure in Oceania. In many regions, as you rightly referenced, we go into distributors solely. In some other regions, we will have both distributors and people on the ground. So we will, to your core point, absolutely continue to evolve and assess and rightsize that as we see fit.

I would probably say to you that at this point in time, it is more likely to be putting more resources, and you rightly referenced that, in some of these markets to make sure that we're harnessing the opportunities in every way we can. And so what I would say about the situation we're in currently is that I really do see adjusted amount of level setting. It is very disappointing that a number of events would come together at the same time. Of course, we've seen volatility before. We've seen volatility quite frankly in Latin America before. But other regions, as we're managing a total portfolio of regions, would come to that. We have the unfortunate situation in 2019, where a number of them are coming at the same time, but that doesn't, in any way, diminish either our ambition across the totality of geographies or indeed our willingness to invest wherever it's appropriate to do so. And that, again while unfortunate that we are rebasing our guidance, it is in the context of investing where we absolutely feel it's appropriate for that long-term sustainable growth.

In Europe, again, there's interesting dynamics playing out there. We're doing very well, for example, in the U.K., where there is a strong online presence. But again, we have a strong presence in bricks-and-mortar retailers in the U.K. that are doing well in the space. I think you're right and we are very conscious and indeed, it was a core pieces of our acquisition of Body & Fit that online as a channel is gaining share in Europe. I think it will take us a bit of time, to be honest, to build that capability. But I'm very, very pleased that we actually have that capability. So we're by no means starting with a blank page. We have brought some really good new resources into the group that will help us both build out the Body & Fit capability, but again, we are going through a program currently that will clear our lines on how we approach direct-to-consumer for the totality of the GPN portfolio. And that's just work in progress. So I think the European journey, Cathal, will take a little bit of time. That's not new news in terms of our discussions today. We would -- we will factor that into our plans. I'm fundamentally pleased, albeit it will take a bit of time on the evolution of Body & Fit.

Going back to the U.S. and your observation in terms of the restructuring. The way we've spoken previously that increasingly, you would speak us -- hear us speak to our business through the lens of Lifestyle Sports Nutrition and D2C. And again, that's probably part of an evolving operating markets that we would, quite frankly, continue to evolve. Where we stand today is that we -- from a Sports Nutrition perspective, we manage all of our brands within an overall sports nutrition infrastructure. For our Lifestyle brands, we have dedicated teams that are developing and promoting that brands and we've just currently brought in a presence in just the overall Lifestyle division. So no major structural change, maybe in case that, that was misunderstood from my earlier conversation. It's -- really for all, it's about making sure that we have the appropriate operating model, indeed whether it is the Lifestyle brand or the Sports Nutrition brands that make sure we have teams focused on not only the totality of either of those portfolios, but the individual brand performance as well. And what we have found works well is that when we have commercial teams, in particular, that are focused on driving, particularly the larger brands within both the Sports Nutrition and Lifestyle portfolio. So operating margin, Cathal, will be very much a business in usual -- as usual continued evaluation for us.

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Cathal Kenny, Davy, Research Division - Senior Analyst of Food and Beverage [15]

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And just the brands in Lifestyle, is that think!, SlimFast and Amazing Grass, just those 3?

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Siobhán Talbot, Glanbia plc - Group MD & Executive Director [16]

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Yes.

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Operator [17]

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Our next question comes from James Targett from Berenberg.

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James Targett, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [18]

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A couple of questions. Just firstly, coming back on the international GPN business. Apologies, if I missed it, but what were -- could you actually say what volumes were down in H1? Because just looking at your -- you say, you think some of, I guess, the worst of these issues are behind you or maybe already baked into the H1. But it does seem like the guidance implies obviously deceleration in second half of the year. So I'm just trying to get -- understand exactly your -- those things you mentioned like LATAM, India, Middle East Africa, which are the ones which are the redriving the majority of that deceleration in the second half of the year, and there's no other kind of international -- major international markets, which are also contributing?

And then secondly, sorry to come back on GPN margins, but it sounds like you're going to have to be doing a lot of investments when it comes from direct distribution in online platforms, as local manufacturing, you were sort of alluding to. I appreciate you've reiterated your 13% to 15% mid-term guidance for margins for GPN, but is it fair to say, it's more likely to be towards the bottom end of that range?

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Mark A. Garvey, Glanbia plc - Group Finance Director & Executive Director [19]

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James, it's Mark here. I'll just take your volume point. I mean we did discuss obviously during the opening here that international is a significant challenge for us in terms of volumes first half and will continue into second half in some respects. But the key markets that we look at will be LATAM, Middle East, and to some extent, that channel shift is going on obviously in Europe as well, which caused us some challenges in some of the particular markets, Northern Europe in particular. Outside of that, international, actually, is doing quite well. We're seeing some very good growth in Asia. India, we believe, will start to come back as we get towards the end of the year, as we sort of work through that supply chain transition that we've been talking about. So from that perspective, we would feel good as we head into 2020, and we just need to get this fully executed, and we're working hard on that right now. So the focus, from our perspective, of course, is on the Latin America and Middle East, the European channel shift in terms of as we work through into next year, et cetera, to make sure that we can build back. But there will be the volume declines that primarily impact international in the second half.

On the margin side, I would say that, as Siobhán discussed, we have some work to do in terms of bringing the margin back from where it will end up this year. We'd expect to see that to come back into the range as we head into next year, with operating leverage to be important part of that. Also looking at our contribution margin by country and how we are structured by some of these countries as well will be important in terms of how we discuss with distributors and with the trade there. But our ambition is to be the 13% to 15% range. At this point, I wouldn't call what part of that range would be. I would expect, as you get into next year, you're probably more at the lower end, but obviously we're going to work hard to make sure we're in that range.

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Siobhán Talbot, Glanbia plc - Group MD & Executive Director [20]

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The other add-on maybe to that point, just to make the point again because you referenced distributors. Actually, the supply chain changes that we have done and indeed that we would continue to evaluate our ambition in doing exercises like that is -- they are margin-enhancing exercises that we had mentioned.

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Operator [21]

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We'll now take our next question over the phone from Martin Deboo from Jefferies.

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Martin John Deboo, Jefferies LLC, Research Division - Equity Analyst [22]

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Martin Deboo from Jefferies. A lot of good texture and a lot of questions on, so let me be selective in what I haven't heard about and it inevitably revolves around GPN. On the international markets, you've given a lot of good color. The two I've heard less about are LATAM and Middle East. LATAM, we've had generally improving mood music elsewhere in the space from the brewers and some of the HPC players. So the question I need to ask is why do you think LATAM is looking different for you? Is it country mix, more Argentina? Or is it that your import/export model rather than a local production model penalizes you somehow? And then Middle East geopolitics. I don't hear anything new there. What exactly is the problem there? And again, is that structural transient?

And then the broader question, which has been asked many times in many different ways, but I feel I need to go over again is GPN medium-term margin trajectory. I think in terms of the moving parts, you're saying that you would expect a good proportion of the 250 to 300 basis points downgrade this year to reverse as international markets come back. Tell me if I've understood that correctly? I suppose separate from that, the general question to ask is do you believe that sustaining a mid-single digit organic growth rate in GPN, which I think is what the market would want to see, do you think that is consistent with underlying margin expansion based on the experience of the last few years, just to understand how the medium-term trajectory builds up? Those are the 2 questions.

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Siobhán Talbot, Glanbia plc - Group MD & Executive Director [23]

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Thank you, Martin, and I will start maybe with some observations and then hand to Mark as well. I think in Latin America, probably where we would call out specifically some of the volume changes we've had this year will be Argentina and Mexico. They are probably 2 subregions. I think for our business, we have very good business within those regions and they're probably the 2, including obviously Brazil, but they're probably the 2 that were more new news in that region.

For the Middle East, we walked through distributor there. I -- we referenced actually that the supply chain changes -- change in the relationship with our distributor in the first quarter. So I think, so that impacted our first half. I think the momentum will come back for our business in the Middle East as we think through from a volume perspective. Obviously, we're managing a margin contraction within that, too. So there was an element of a one-off characterization on the Middle East just in terms of contractual discussions with our distributor that we referenced in the first quarter that continues a little bit into the second quarter as well.

And in terms of the margin. As we look forward strategically to your core question and maybe I'll comment on both the margin and the top line, we do see consistency between our continued ambition to have a mid-single digit top line growth and indeed the margin range that we've spoken to of 13% to 15%. When we spoke to both those dynamics, obviously acquisitions are part of the mix of the evolution of our portfolio. And we recognize and we have said at that time that as we acquire certain brands, the margin profile, at least in the short to medium term, can be a little bit different. But we do see those as 2 consistent statistics to your core question. This year, as we referenced for a number of regions -- for a number of reasons, we have sell-in getting a bit out of sync of that consumption, but I come back to what we're really watching, which is the core consumption number.

To the reversal of the 250 to 300, I think, yes. As we get that rebasing of top line, I think the operating leverage will improve. Terribly difficult, as Mark has rightly said, to be exactly prescriptive on the quarter that would happen. But structurally and fundamentally, from a portfolio opportunity perspective, we do see an amount of that coming back in 2019.

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Mark A. Garvey, Glanbia plc - Group Finance Director & Executive Director [24]

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Yes. I would concur. And obviously, we're ambitious for that. We've reaffirmed our long-term target there. I think as we see these channel shifts and markets change, we continue to evaluate our own structure to make sure that from a cost perspective, we are actually managing that as tightly as possible as well and yet investing behind where we know the growth is going to be delivered. So from a top line and margin perspective, we are ambitious for both of those going forward.

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Operator [25]

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(Operator Instructions) We'll now take our next question from Gerard Zaffran from Exane.

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Gerard Freddy Zaffran, Exane BNP Paribas, Research Division - Specialist Sales [26]

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I've got 2 questions, please, on the GPN pricing. My first question is, how much of your full year organic growth guidance in GPN is price?

And the second question is how much of the price increases that you're implementing in H2 are already agreed? You've said in the past that you would tactically promote if others do. So I'm wondering how much visibility you have into H2 price increase?

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Siobhán Talbot, Glanbia plc - Group MD & Executive Director [27]

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Good morning, Gerard, and thank you for that. Overall, we would see pricing [flattish] actually over the full year. So that is the benefit, as you rightly characterize the pricing coming through the second half. And actually, the price increases, that I've referenced, have all been agreed with trade.

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Operator [28]

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It appears there are no further questions at this time. I would now like to turn the conference back over to our hosts for any additional or closing remarks.

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Siobhán Talbot, Glanbia plc - Group MD & Executive Director [29]

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No. Just remains for me to thank you all for your time and attention this morning, and we will speak again soon. Thank you.

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Operator [30]

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Ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now disconnect.