Better financial results at First Milk

Dairy co-op First Milk made a pre-tax profit of £360,000 in the year to 31 March 2010, compared with a loss of almost £10m the previous year.

The bulk of the turnaround was accounted for by cash from the sale of one-third of the company’s shares in Robert Wiseman Dairies, which brought in £7.9m last November.

“This gave us flexibility in terms of the way we ran the business to the year end,” said chairman Bill Mustoe. This included being able to invest more than £8m to achieve greater operating efficiency. The group incurred £4m in one-off costs to deal with redundancies and the closure of two sites.

Against the background of global economic downturn and falling commodity markets, profitability improved even without the impact of the share sale.

Group turnover fell by 8% to £536m mainly because of a move away from low-margin cheese contracts. Efforts are now more concentrated on higher value, higher margin products with First Milk’s branded cheddars doing well.

Generating cash to improve producer milk prices and move up from the bottom of the milk price league table are the top priorities, said Mr Mustoe. Profits are ahead of target for the first quarter of this year and members will receive a trading update before the end of 2010 relating to business performance for the six months to 30 September.

“We’re still not where we would like to be in the milk price league table but we have made increases in the region of 2p/litre this year. We have made a commitment that every cash improvement, no matter how small, it will go straight onto the milk price.”

Despite 2009/10 being a turbulent year for the UK’s largest farmer-owned dairy business, it was now in a stronger financial position, with improved profitability, a sound balance sheet and reduced net debt, said Mr Mustoe.

During 2009/10, First Milk saw a wholesale restructuring of its board including the departure of the chairman and chief executive, costing the group £550,000 in compensation. Their replacements have since been recruited at salary rates 30% lower.

New contracts provide a maximum compensation of six months’ salary, with bonus payments geared to generating cash and moving the co-op up the milk price league table.

Three further farmer members will be appointed to the board this autumn.

In a move that has brought some accusations of bullying tactics, First Milk recently announced that members who have given notice to leave the group will no longer benefit from milk price rises applying in the 12-month notice period.

Mr Mustoe justified the change to terms and conditions on the grounds that it recognised the value of members who were committed to ongoing supply and that the company needed to know the future level of milk supply to fulfil contracts.

First Milk currently has 95 members under notice. “There was a rash of notices around the time that I joined in December. People were very unhappy with milk prices and the management of the company, but we now have quite a few rescinding their notice and coming back in.”

Over the past 12 months, around 100 members have left First Milk, but more than 400 producers joined in the same period, mainly from Dairy Farmers of Britain.

First Milk

• 2500 members
• Buys 1.6bn litres of milk a year – 16% of UK milk output
• £360,000 pre tax profit in year to 31 March 2010, against £9.987m loss previous year
• Turnover £536m, down 8%
• Net bank debt now £69m, a £10.7m drop compared with 2008/09