16 November 2001

Growth helps Dairy Crest post sharp rise in half year profits

By Robert Harris

DAIRY Crests strategy to develop added-value products and cut production costs is proving popular with the City and farmers alike, says chief executive, John Houliston.

The share price, which languished around the 180p mark a year ago, challenged its October high of 374.5p this week after the UKs biggest milk buyer reported a 39% jump in adjusted pre-tax profits to £33.8m during the half year to Sept 30, 2001. Sales rose 24% to £691.6m.

The improvement was partly due to the full inclusion of Unigates dairy and cheese business in the latest results, with £11m of synergies helping to boost the bottom line. In the same period last year, the acquisition only contributed three months trading.

Adjusted earnings per share rose 34% to 20.6p, and the interim dividend rose 7% to 4.8p. The average farmer holding 2500 shares will receive a dividend of £120 next January.

"We believe the financial and commercial progress evidenced by these results gives confidence that Dairy Crest will continue to deliver the expected attractive financial performance necessary to continue to drive enhanced shareholder returns," said Mr Houliston.

Consumer Foods, which includes spreads, cheese, fresh dairy products and supermarket liquid milk, achieved an operating profit of £29m on sales of £423m (up 76% and 27% respectively), producing an operating margin of 6.9%.

The Food Services division, which includes doorstep milk deliveries and commodity ingredients, made an operating profit of £14.5m on sales of £269m (up 3.6% and 19% respectively). Operating margin slipped back to 5.4% as commodity prices dipped.

Dairy Crest has taken action to drive down costs and boost margins in the highly competitive retail liquid milk market by investing £54m in two "super dairies". The first of these, at Chadwell Heath, Essex, opened recently.

"Nobody will be making fortunes selling milk to supermarkets," said Mr Houliston. "But once you have made these sorts of investments, you are treated in a different way. It can only be helpful to the raw milk price."

Most milk contracts with farmers are due to run until next April, so Dairy Crests farm-gate prices will remain unchanged until then. Commodities, which account for 60% of sales and 40% of profits, may remain under pressure. But value-added brands – which Dairy Crest will continue to expand – will help maintain a "robust" milk price, said Mr Houliston.

"More and more farmers are realising the benefits of our strategy," he claimed, adding that talk of defections to co-ops by direct suppliers had "clearly stopped" following a series of producer meetings this year. "We are addressing our farmers more, and people are coming back into the fold." &#42

Crate stuff…Dairy Crests Chadwell Heath site will process 400m litres of milk a year, mainly for multiple retailers. It and Severnside, DCs second "super dairy" due to come on stream in autumn 2002, will replace several smaller sites.