Profits at Dairy Crest have tumbled on the back of a 17% drop in liquid milk sales to major retailers, according to the milk processor’s latest results.

For the year ended 31 March, 2006, pre-tax profits slumped 41% to £41.3m.

Much of this fall was due to £22m of exceptional costs that included a 9m impairment charge on a predicted decline in future profitability at the firm’s Stilton and speciality cheese business, said chief executive Drummond Hall.

However, revenue from liquid milk sales was hit hard by the loss in April 2005 of a 170m-litre contract with Tesco and spiralling energy and fuel costs.

Pre-tax profits at the firm’s Dairy division fell 52% to £16.8m, giving an operating margin of only 2.1% compared with almost 5% the year before.

But Mr Hall said the division’s performance picked up in the second half of the year after winning additional business with supermarket Morrisons and the acquisition of Midlands Co-op Dairies.

The company also achieved a price increase from retailers in January this year to offset increased energy costs, he added.

Pre-tax profits from Dairy Crest’s Foods division, which includes its spreads and cheese range, grew 13% to £64.2m before exceptional charges.

Sales of the firm’s key brands increased, with Cathedral City cheese up 17% by value and 11% by volume.

Country Life butter boosted sales by 9% despite a 3% decline in the packed butter market.

“We expect our brand portfolio, supported by marketing investment and further new product development, to continue to make good progress,” said Mr Hall.

Richard Workman, an analyst with Oriel Securities, said Dairy Crest’s results were in line with the City’s expectations and he expected this year’s profits to climb back over the £70m mark.

“It was tough last year and clearly the whole industry has taken a big hit on prices.”

andrew.shirley@rbi.co.uk