In a note issued today (September 22), directly after Dairy Crest posted the update for the six months to September 30, Shore Capital analyst Darren Shirley said: “In a very challenging UK grocery market, characterised by low inflation/deflation, flat to declining volumes and increasing price competition, Dairy Crest delivered a solid performance from the four key brands …”
He estimated that it had grown sales of its Frijj flavoured milk drink brand by 15-20%, sales of Cathedral City cheese by 5-7% and sales of Country Life butter and spreads by 5-10%.
In addition, while sales of its Clover spreads brand were down by mid-high single digits, Shirley said he expected full-year profits to improve.
£32M profit hit
That said, he believed Dairy Crest would take a £32M profit hit from cream prices down 40p a litre across global markets, with the company currently producing 80M litres of cream annually.
And the company’s disclosure of proposals to close plants at Hanworth, West London, and Chard in Somerset, endangering 260 jobs looks set to overshadow its ability to weather stormy markets.
However, Shirley stressed some of that impact would be softened by the fact that the price drop would benefit its spreads business, which relies on cream.
Dairy Crest’s 4.1p a litre cut to the price it pays for milk, plus strong Frijj sales, would deliver savings of £55M-£60M, boosting profits, he said.
Investment
Dairy Crest said its demineralised whey and galacto-oligosaccharide projects, which would deliver infant formula products for the global market, would boost profits in the year ending 2015/16. However, it said investment in these capabilities would initially result in net debt.
“I am pleased that in the current challenging trading environment overall we continue to perform in line with our expectations,” said Dairy Crest ceo Mark Allen.
“Taken together our key brands have performed strongly and the improvements we have made to our dairies operations in recent years have made them more resilient. We continue to take the difficult decisions that are necessary to drive the business forward.”