Diesel and packaging costs no gas for Robert Wiseman
Profit before tax was £35.8m, substantially down on 2010 due to margin pressures, although revenues rose 3.5% to £917.5m.
Chairman Robert Wiseman said that RWD’s oil-based diesel and packaging requirements – coupled with increases in prices it paid to farmers for raw milk – meant the group had had to increase prices to customers.
RWD did so successfully, but Wiseman said: “Given the widely acknowledged challenges facing retailers, caused by the overall economic environment, this has proved to be a complicated and difficult process.”
Wiseman said higher input costs increased RWD’s cost base by £5m on an annualised basis as of the end of March, and that the cost of resin used to produce plastic bottles and fuel had risen 20% and 13% respectively since above average levels in the year to March 31.
“Whilst the longer-term outlook remains uncertain, were these to stay at their present levels through to March 2012, the annualised increase in our cost base for resin, fuel and other costs would now be in the order of £7.5m,” said Wiseman.
New business wins
However, with all major retailers putting their supply contracts out to tender within the last year, RWD hailed a 10% volume increase with largest customer Tesco, a new supply contract to supply The Co-Operative Group’s milk from August 2010 and a three-year extension to an existing Sainsbury’s contract, effective from October.
RWD has also increased capacity at Bridgwater to 500m litres per year, although it said it closed its Okehampton dairy and Cupar depot in March (with the loss of 137 jobs in all) because of “targeted cost savings”.
Despite significant capital expenditure in the past year, RWD also reduced net debt to £4.9m at the year’s end, down from £21.1m the year before.
Investec Securities analyst Nicola Mallard said in a note this morning that the year had been challenging for the dairy sector, “and this fed through in 2H [the second half of the year] in particular for RWD”.
Despite continued volume progress for the group on the back on new business wins and the Bridgwater expansion, she said some of the gains were offset by “pressure on selling prices, as retail contracts were put up for tender and the middle ground became more competitive.”
Wiseman explained that the convenience and wholesale sectors of the market had seen “heightened levels of competition to supply”.
“Although our margins have been impacted as a consequence, we are pleased with the outcome of the tenders in volume terms, as we have either grown or retained our business with all our key customers.”
Bulk cream boom
Although lower prices hit margins along with continued cost inflation, RWD was able to offset losses for most of the year due to higher bulk cream prices.
However, Mallard said that “towards the end of the year the costs took a step up again and the cream offset was no longer adequate.” Higher raw milk prices paid to farmers also fed through, which led RWD to increase prices.
Mallard predicted that over the next year RWD’s profits would decline again while costs continue to rise, although the group intended to recoup costs wherever possible, “perhaps on the back of another raw milk price increase”.
She added that raw milk prices had been expected to rise in mid-summer, “but the feeling is now that this might come later in the year”.
