Dairy Crest warns of higher milk and oil costs
The UK dairy processor said in a trading update that profit before tax for the three quarters ending 31 December was in line with its expectations despite the difficult economic environment.
It added that overall group sales over the same period were broadly similar to last year, excluding the impact of the sale of its stake in Wexford Creamery Limited.
Growth areas
The focus on key brands continued to deliver as Cathedral City, Country Life, St Hubert Omega 3, Clover and Frijj collectively delivered sales growth of 11 per cent.
However, only 2 per cent of this growth came from higher volumes – the rest from price increases. In an investor note, Panmure analyst Damian McNeela warned that higher prices could hamper future efforts to grow sales.
“Although pricing in the quarter (Q3) looks strong we are cautious about the impact this is likely to have on further volume growth for the remainder of CY2011.”
Dairy Crest said another area of success over the past year has been its Milk&More delivery service. Supported by an improved internet platform and a TV ad campaign, weekly sales are currently close to £1 million compared to just under £800,000 in September 2010.
Business with major retailers was an additional growth area over the course of 2010 – Dairy Crest began supplying fresh milk to Tesco during the year. The corollary of this was that the processor lost sales in the competitive smaller retail market where contracts are switched more quickly.
Future cost warning
Looking to the coming year, Dairy Crest warned that the economic environment remains difficult and higher input costs are now coming into the equation as well. The company said it is experiencing higher milk, vegetable oil and other oil-related costs.
Mark Allen, CEO of Dairy Crest said the company is adopting a cautious outlook.
“We remain cautious about the economic environment for next year but we are well positioned to meet the challenges. Our strong range of products and broad customer base will help with this. In addition we will continue to innovate, control our costs and support our brands.”
Although Panmure maintained its ‘sell’ evaluation on Dairy Crest stock, McNeela said the company is taking some positive steps to improve its cost position.
McNeela said: “The cost environment remains challenging and Dairy Crest should benefit from cost savings of £20m from improved efficiencies in its dairies business but has also recently undertaken a number of initiatives to reduce costs such as internet tenders.”
