Dairy Crest will make demineralised whey powder at its Davidstow creamery – a key component of baby food, which had significant market potential – it claimed in an interim management statement.
Announcing performance for the three months to June 30, the company said the move would enable it to add value to the high quality whey it made at the plant in Cornwall.
The ingredient, stated the firm, was “a base ingredient for baby food – a rapidly growing market with significant potential”.
“We are currently finalising the necessary investment required to move this forward and are talking to several prospective partners.”
Referring to the decision, chief executive Mark Allen said: “We are also making good progress with new projects to increase the returns we get from whey and move into other added value products”.
In a note commenting on Dairy Crest’s statement, Panmure Gordon analyst and director Damian McNeela said: “We understand that this route, as opposed to whey protein concentrate, minimises the disruption to the cheddar process and provides the company with a more direct route to market and a greater number of customers.
“Previously the company has talked about a £40M investment with a pay back within eight years, although full financial details are not expected until September.”
Elsewhere, Dairy Crest said it was scaling back on promotions of its Frijj flavoured milk brand while it upgraded capacity and capability. “This will allow us to produce different formats and pack sizes and remove constraints on meeting promotional demands,” it stated.
The company reported overall sales of its four key brands were 4% lower than the same quarter last year, when it had reported sales up 15%. McNeela said the performance was “a slightly disappointing start to FY [full year] 2014”.
Increased sales of Cathedral City and Clover were offset by flat sales of Country Life Spreadable and plunging Country Life block sales as promotions were cut following recent cream price increases. McNeela noted average cream prices for April to June were 75% higher than in 2012 at £1,633/t.
Cost reduction efforts
Dairy Crest claimed the profitability of its dairies business continued to improve towards its 3% medium-term target, reflecting cost reduction efforts and higher returns from cream.
The business reported it was on target for cost reductions totalling £20M this year, with the reorganisation into a single structure, which was announced in February, going according to plan.
“Our key brands have stood up well in the first quarter against tough comparatives, our dairies business is improving and we are confident about our cost savings,” said Allen.
“All three of our product categories, cheese, spreads and dairies, are well positioned to generate medium-term growth.”
McNeela forecast full-year pre-tax profit for the company of £63.9M.