8 June 2001

Dairy Crest profits up thanks to Unigate buy

By Robert Harris

DAIRY Crest has reported a big increase in profits following its acquisition of Unigates dairy and cheese business last year.

Pre-tax profits (before exceptional costs) hit £57m for the 12 months to March 31, 2001 – a rise of 29% compared with the previous year. Sales climbed 65% to £1.3bn.

The new business, bought for £250m last year, accounted for all of the extra profit.

"Dairy Crest is now a whole new company, transformed by the Unigate acquisition," says chief executive John Houliston. "The increase in profit before tax is ahead of market expectation, and should get a good reception."

In the nine months since it was included in the books, the Unigate business contributed £28m to a total operating profit of £73.8m. Ongoing Dairy Crest operations slipped by 3% to £45.8m.

Consumer Foods sales, which includes spreads, cheese, fresh dairy products and supermarket liquid milk, increased by 59% to £785m, and operating profit rose by a quarter to £40.8m.

Star performers were Cathedral City and Davidstow Cheddar cheeses, whose combined sales volume climbed by 20%.

Turnover in Food Services, including doorstep milk and commodity ingredients, increased by 74%, to £522m, and operating profit more than doubled to £33m.

Synergies from the Unigate acquisition, worth £11m in 2001/02, are on target, says Mr Houliston.

Earnings per share jumped sharply, up 22% to 35.4p, and directors recommended a final dividend of 9.6p, taking the total for the year to 14.1p, 8% higher than a year ago.

That means a farmer with a typical holding of 2500 shares will receive £240, taking the total dividend to £352 for the year.

But for a 700,000-litre producer, that represents just 0.05p/litre. Not surprisingly, many farmers have made it clear that a good milk price, rather than dividends, is vital to sustain their businesses.

Organisations recruiting farmers to co-ops reckon that 25-30% of the 1800 Dairy Crest direct suppliers have given notice to quit because of dissatisfaction with the companys raw milk pricing policy.

Mr Houliston dismisses the claims, saying most have an average notice period of 12 months, so only about 100 farmers could quit in the current financial year.

And at least 30 of those have already changed their mind and decided to stay, he says.

"I understand the political mood at this time. But we need to separate emotion and rhetoric coming from some camps from other, very canny farmers who are looking to the long term.

"They recognise the benefits of being part of a broad-based dairy company that can square up to the market place, with the financial width to invest in world-class plants and operations, and in a portfolio of brands that will return a proper price for their milk."

Dairy Crest does just that, says Mr Houliston, who describes allegations that the company tried to talk down raw milk price rises in April as "absolute nonsense". Aprils 1.5p/litre rise for farmers supplying the liquid milk sector will be matched on milk for cheese from July, he says.

"I am sick of hearing that other dairy companies have been driving the market. We drove the liquid milk price through February and March. And why is the cheese price firming? Why are we now able to offer a higher price to farmers?

"We return to farmers what we get from the various markets, and we will continue to do so. What we cant do is pay without recovering it first. 1p/litre would be £30m off Dairy Crests bottom line; 2.5p/litre would bankrupt the company."

Although milk output may fall short of quota again this year, Mr Houliston dismisses suggestions that recent tough negotiations with co-ops left it short of milk.

Dairy Crest will have enough to service all its major customers with key products, he says. Any shortfall would only affect lower value ingredients – butter/powder – which accounted for 600 million litres of milk last year, he adds. &#42