Irish Dairy Board reports turnover of €2.1 billion

By Liam O'Neill

19 April 08 : The Irish Dairy Board reported sales of €2.1 billion for the year ended 31 December 2007, representing an increase of 2%. However, the company's profits were adversely affected by unfavourable exchange rates, fluctuating dairy market prices and a write-down in closing stock values, resulting in a retained surplus of €26.1m, down 31%.

The Board is responsible for the marketing and sale of Irish dairy products worldwide. It also owns the Kerrygold brand.

Noel Coakley, CEO, commented on 2007 as "a difficult year for the Irish Dairy Board, and it was characterised by price volatility from the beginning to the end of the year.''

Globally, sales of Kerrygold branded products increased by 1.8% in volume terms. Sales of ingredients and commodities increased from 23% to 29% of total sales, up 6% on 2006.

By destination, Britain and the USA remain the Board's most important markets, and accounted for 69% of sales in 2007. Purchases from member co-operatives also fell by 6%, and sales generated by produce originated in Ireland fell from €767m in 2006 to €657m in 2007.

The Board's operating margins fell due to "volatility'' in international dairy markets, with the gross margin falling from 14.5% in 2006 to 13.8% in 2007. The operating margin fell by 0.4% to 1.7%.

The amount spent on selling and distribution fell marginally by 1.4% in 2007 to €205.8m. As a percentage of sales, it fell from 10.1% of sales in 2006 to 9.7% in 2007. Some of the key financial highlights are set out in Table 1.

There were no acquisitions during the year. However, the board spent €21.6m on plant and equipment, and €10.9m on buildings. In Germany, the board relocated from Krefeld to Neukirchen Vluyn in August 2007. In Britain, it commenced the construction of a new cheese-packing operation in Staffordshire, which is due to be completed in 2008.

In terms of future acquisitions, CEO Noel Coakley confirmed that they are looking at a number of initiatives in relation to route to market. He confirmed that the Board are looking at a possible purchase of a consumer foods company in Europe: "There is something in the consumer foods side of the business, but it's at the early stages.'' He also added that the Board are currently opening a replica of the British business, Meadow Cheese, in the USA.

The Dairy Board paid €13.5m to its members during what it described as "a difficult trading environment,'' of which €6m relates to cash bonuses at year end, and €7.5m in redeemable loan stock.

In the previous year, the board paid a total of €18.5m. This represents a sharp drop of 27%.

Volatility in the dairy markets, coupled with the removal of EU exports and adverse currency movements, all impacted on results for the year.

The Board's level of stock at year end increased by €114.9m, representing a 36% increase over 31 December 2006.

The sharp fall in dairy commodity prices at the year end, in particular for butter and powders resulted in a stock write-down in the region of €6m, which had a negative impact on results. The Board had purchased products at higher prices and, by the year end, the market price of these products had fallen, resulting in the write-down in values. This will also impact on results in 2008.

Net borrowings also increased by 48% to €158.5m at the year end. These funds were required to cover the increased cost of purchasing stocks at higher prices, and the cost of holding stocks over the winter period.

The net asset value of the company increased by €2m to €396m.

The Board operates three main divisions: consumer foods, food ingredients and distribution.

Consumer Foods

The consumer foods division markets the output of the Irish dairy industry worldwide. In Britain, Belgium, France, Germany and the USA, it operates through wholly-owned subsidiaries. In other countries, it operates through locally based distributors.

Fluctuating raw material prices and lags in obtaining price increases due to market pressures resulted in reduced margins within the consumer foods division. The EU also removed export refunds, which further added to trading difficulties.

Kerrygold increased volume sales by 0.5% in Germany. However, price increases in the second half of 2007 impacted on overall sales for the year. In Britain, the Kerrygold range of branded butter products increased its market share.

Despite soaring prices for cheese, the division performed well in Britain. Operating profits in the Board's North Downs Dairy Company were ahead of the prior year. Pilgrims Choice retained its number two position in Britain's branded cheddar market.

The Board has two companies based in Belgium - Yoka fresh foods and Nikita.

Yoka is the largest pre-packer of cheese for the Belgian market.

Operating margins were affected by delays in recovering raw material price increases from the market.

Nikita is the second largest producer of a range of mayonnaise-based salads and sandwich spreads in Belgium. High raw material prices and changes in consumer dietary habits impacted on results. However, this was addressed by changing its product mix to include healthy options towards the year end. It also exported products to France and Holland in 2007.

The French market proved to be the most difficult market to obtain price increases during 2007, resulting in reduced margins.

Sales in the USA increased by 7%. Raw material price increases and weakening exchange rates resulted in price increases in the second half of 2007, which slowed volume increases.

In Eastern Europe, sales increased by 20%. The Board continued to develop its presence in China, and Kerrygold was also launched in Russia during the year.

Food Ingredients

The Board's food ingredients division reported an increase of 28% in sales to €611.7m. Price volatility impacted on its product mix, with a drop in cheese volumes. The division includes Dairy Ingredients (UK) Limited, which is responsible for exporting Irish butter to the British food manufacturing sector. Meadow Cheese supplies mainly cheese to the British food service sector, and Adams Food Ingredients provides functional dairy ingredients and customised solutions.

Distribution

The Board's distribution company, based in the USA, increased sales for the fifth consecutive year. The company is a leading speciality food distributor with six distribution centres in the USA. It has developed strong partnerships with USA retailers and other companies expanding into the USA, such as Tesco.

Its increased scale in the USA is a positive in terms of expanding the Kerrygold range of products in the US market.

Table 1

Financial highlights & ratios	2007	2006	% change
Turnover	2,111.1	2,074.2	1.8%
Gross surplus	291.1	299.8	-2.9%
Selling & distribution costs	205.8	208.8	-1.4%
Operating surplus	35.5	43.1	-17.6%
Retained surplus for year	26.1	37.8	-31.0%
Stock	437.8	322.9	35.6%
Net borrowings	158.5	107.4	47.6%
Net assets	396.0	394.0	0.5%
Total payments to members	13.5	18.5	-27.0%
Ratios	2007	2006	2005
Gross surplus margin	13.8%	14.5%	14.3%
Operating surplus margin	1.7%	2.1%	2.1%
Selling & distribution as % of sales	9.7%	10.1%	9.5%
Net borrowings as % of net assets	40.0%	27.3%	31.0%

Future outlook

Some of the key issues impacting upon performance in 2008 include adverse exchange rate movements against the euro. Sales in Britain accounted for 30% while North America accounted for 39% of group sales in 2007.

The USA is becoming a more important player in international markets and is now a net exporter of dairy products. Coupled with a weak currency, this will benefit US dairy companies in 2008. Negative consumer demand reaction to food product increases will impact on sales volumes. The Board will continue its focus on developing branded consumer products under the Kerrygold brand in USA, Britain and Germany.

The fundamentals of the dairy market are sound, but the market remains volatile.

Commenting on the future outlook, Noel Coakley said: "The removal of EU export refunds means that Ireland is no longer insulated from the varies of international dairy markets. In order to build for the future, we need to be more innovative and responsive.'' The Board has launched two newly developed products in Germany - extended shelf life cream and a yogurt/butter spread have been launched. In 2008, it also plans to launch Kerrygold Cheese in Russia and continue to increase its presence in China.