Carbery hit by lower cheddar prices

By Paul Moone

Lower cheese prices on export markets resulted in a dip in turnover and profitability at Carbery Group last year. Provisional results for the company released this week showed turnover down by 2.5% to €176.5m. Core operating profit fell by €1.1m to €5.2m and net margin contracted sharply from 3.5% to 3.0%. Pre tax profit fell by €0.7m to €4.4m.

Carbery's fortunes are closely tied to cheese. It absorbs 90% of the Group's 77m gallons of milk with the bulk of the 33,000 tonnes produced being cheddar sold on the UK market. The price the Group got for cheddar in 2006 was down 7%, it says, hitting profits. The Group was not in a position to benefit from the rise in prices for skim and similar powders that emerged from mid-2006 onwards.

Returns from the market is one big element of profit, the other is what you pay for your raw material. Carbery says it paid a strong price to its four West Cork shareholders' for their milk, which also squeezed profits. Chief executive Dan McSweeney this week said that the West Cork co-ops would again perform well in the Farmers Journal/KPMG price audit. "The West Cork co-ops cut price last year by 4c per gallon average versus 5c to 6c by co-ops elsewhere.'' Nonetheless, the 2.5% drop in turnover shows that it was the markets that hurt most.

The Group's profits were also squeezed by higher energy costs. Processing of the Group's large whey output is energy demanding.

Energy bills have doubled in the past four years, equating to 4.6c per gallon of milk.

Looking ahead to 2007, Dan McSweeney believes that cheese prices will move up. "Skim and powders are at a historic high, cheese hasn't reacted. Cheese will have to catch up - otherwise milk will move away from cheese.'' There is likely to be a switch by some UK processors that have manufacturing flexibility away from cheese to powders, to avail of buoyant prices. Factors such as forward contracts mean it can take time to occur.

Cheese production increased across the EU in 2006 as manufacturers reacted to strong consumption trends of recent years.

With production and stocks high, EU export refunds to third countries will be important in 2007 for market balance. The refund on cheddar is €335 per tonne or about 12% of price. Any further weakening of the US dollar would tend to lower returns as exports to third countries are mostly denominated in dollars.

In addition to standard cheddar Carbery also manufactures the Dubliner Cheese brand with a rising volume being exported to the USA through the IDB.

It also manufacture curd for Kerry's successful Cheesestrings snack product.

CarberyProfile

Carbery operates in three divisions: dairy processing, ingredients and energy. Neither turnover or profitability are broken down by division in the accounts. The squeeze on the dairy division in 2006 is outlined above.

The ingredients division has two separate operations. One is manufacture of whey based ingredients in Ireland which are sold onto the food production sectors. The second is the Synergy business which manufacture flavour and taste products with manufacturing plants in Ireland, the US and the UK.

Overall, the division did not meet the company's expectations in 2006 with most of the shortfall on dairy ingredients, hit by energy. Carbery invested over €2m in energy efficiencies in 2006 with benefits expected from 2007. It also purchased the remaining 50% of its energy-based Joint Venture operation, C M Power, which operates a 5 megawatt Combined Heat and Power (CHP) plant at Ballineen, from Bord Gais Eireann. This will give the company more control over its energy costs.

Carbery purchased US flavour company Van Lab in November 2006 for a price believed to be over €25m. The acquisition is trading well, Dan McSweeney commented this week.

Carbery produces in excess of 10 million litres of alcohol annually which is sold into the beverage, industrial and bio-fuel sectors. It recently announced the signing of a licence agreement with US company Earthanol. The US company aims to use Carbery's novel technology to produce ethanol from whey in the US.