Town of Monaghan back in profit

30 June 07: Town of Monaghan came back into modest profit in 2006, after its losses the year before. The co-op made an operating profit of €1.0m on a turnover of €165m. It's the slimmest of profits but better than the previous year's €1.4m operating loss. The improvement mainly came about because the co-op purchased its raw materials - mostly milk - that bit cheaper (see Profit and Loss Account).

Town of Monaghan has been increasing milk intake and overall turnover steadily in recent years, thanks to the rising milk production in Northern Ireland. Throughput rose again in 2006 to 465 million litres (2005 - 450m litres) with most of the extra milk coming from north of the border. Despite this, additional milk turnover fell by over €3m or 1.8%, reflecting poorer dairy product prices particularly in the first half of 2006. Spending on raw materials, as shown by cost of sales, fell by nearly €7m or 4.5% putting gross profit at €27.8m.

This meant gross margin rose to 16.5%, up from 14.4%. How does this measure up? Arrabawn's operations are similar and it had a gross profit margin of 21.3% in 2006. Connacht Gold - more diverse - did 20.7%.

Tight hand

Co-op management kept a fairly tight hand on operating costs. These rose by €1m or 4% to €26.8m. Staff costs fell by 2% to €7.9m. Other operating charges, a large share of which would be energy for drying milk, rose by 7% to €16.6m. This left the co-op with an operating profit of €1.0m. That's a net profit margin of only about 0.6% (compares with 0.2% in Arrabawn last year and 1.0% in Connacht Gold). It is a basically unsustainable return that leaves little room for reinvestment.

Neither does it leave any room for safe borrowing from the banks and sensibly the co-op has little debt other than seasonal overdraft, etc. This left its bank interest charges for 2006 at just €239,000. Miscellaneous income of €368,000 from rent, share dividends, etc, left pre tax profit at €1.4m. The co-op's balance sheet is most notable for its freedom from debt and its cash pile of €7.4m in the bank at year end. The co-op's book value, as shown by shareholders' funds, increased to €35.4m in 2006. The blunt reality for the co-op's 1,200 shareholders is that at recent levels of profitability, the business operation itself wouldn't be worth even that on the open market. Food companies in these islands are valued at about 15 times their after tax earnings which would put a value of about €20 million on this operation.

That's the direct result of current low profitability in Irish milk processing. Chairman, Hugo Maguire, highlights this low profitability in the 2006 annual report and reminds us that the ethos there is to prioritise milk price for the 1,060 milk suppliers, not co-op profitability.

Obviously the rise in dairy product prices means 2007 will be a better year all round for both the milk suppliers and for their co-op business.

The co-op's board and management are meanwhile looking ahead and see milk supply increasing when milk quotas are dismantled. The co-op surveyed its suppliers and found a willingness to expand and it is now preparing to increase processing capacity. It will invest about €7m in upgrading its butter production facility in Monaghan and has been approved by Enterprise Ireland and the Department of Agriculture for €3.5m grant aid towards this. There will also be a €500,000 upgrading of the co-op's powder drying operation outside Strabane - obviously without grant aid. Currently Monaghan puts about one third of its butter output into retail packs and sells the remainder in bulk size. The investment will allow it put more into retail packs. Clearly, the co-op will have to come up with cash for these investments and the €7.4m cash on the balance sheet is presumably being gathered for that purpose. The co-op does not plan to take significant bank debt on board for these investments. In the words of chief executive Vincent Gilhawley "we can handle it''.

Town of Monaghan P&L (€000)

	2006	2005
Turnover:
Dairy products	161,594	164,793
Agri	3,765
Total	165,359	168,500
Cost of sales	(137,483)	(144,171)
Gross profit	27,876	24,329
Gross profit margin		14.4%
Operating costs	(26,828)	(25,783)
Operating profit (loss)	1,048	(1,454)
Net profit margin	0.6%	-0.8%
Other income	368	347
Pre tax profit (loss)	1,416	(1,107)

Butter will remain in the picture

ABOUT one-third of Town of Monaghan's milk intake is used for liquid skim supply to the Abbott factory at Cootehill under a long standing arrangement. This means that the co-op expects to remain a significant producer of butter. Of its 13,000 tonne production, about 4,500 tonne is sent out in retail pack, half under its own brand and half Kerrygold. The other 8,500 tonnes is sold in bulk packs through the IDB.

The co-op produces up to 25,000 tonnes of milk powders at its Artigarvan plant, generally breaking down as 18,000 tonnes of whole milk powder and 6,000 tonnes of skim powder. Some 15,000 tonnes of WMP is exported to African markets including Ghana, Ivory Coast and Senegal via local importers and under the co-op's Leckpatrick brand. Skim powder sells within the EU.

Vincent Gilhawley notes that it is currently possible to predict firm dairy product prices for the next six months with a degree of confidence, which is a welcome change. "There are no stocks. Supplies are tight, demand is strong.'' Dairy prices had fallen to unsustainable levels, he says and he believes that governments in Western Europe have not yet fully absorbed what's happening in the markets. Milk production is falling, weather is further impacting while global demand is rising. "Food inflation is only emerging.''

He notes that, with skim and WMP prices having risen to around €3,500 per tonne, affordability is becoming an issue in African markets.

And despite butter prices having crossed €3,000 per tonne and the EU cutting export refunds to zero, nonetheless the EU remains a surplus producer of butter.