Carbery Group double profits to €7.6m

By Liam O'Neill

Carbery Group, the west Cork based international food, ingredients and flavours business, doubled their profits on sales of €222.3m for the year ended 31 December 2007.

Operating profits increased from €5.3m to €10m, and sales increased by 26%. Strong dairy markets and the inclusion of Van Lab Inc., acquired at the end of 2006, resulted in a strong overall performance. After tax, profit doubled to €7.6m for the year. The Group reported a significant increase in profits from its joint ventures and associates, which rose by 253% to €201,000.

The Carbery Group is owned by the four west Cork co-ops: Bandon, Barryroe, Drinagh and Lisavaird. These co-ops are consistently high performers on milk price. Carbery exports value-added ingredients to over 25 countries worldwide. Gross profit margins slipped by 2.55% to 26.04%. The strong price paid for milk and whey products depressed margins.

The slow price increase for cheese during the year also impacted on margins, with significant price rises not materialising until the second half of 2007.

Carbery managed its other operating costs well. Distribution and administration costs as a percentage of sales fell by 4% to 22%. This resulted in improved operating margins, which rose from 2.97% in 2006 to 4.5% in 2007.No dividend was paid in line with group policy of the previous year, as profits were reinvested in the business.

Carbery commissioned a specialist drying plant in April 2008 at a total cost of €7.7m, which was part-funded under the Dairy Investment Fund. Further capital investment is planned. Commenting on the results, Carbery's CEO, Dan MacSweeney, noted that 2007 was a very volatile year, and dairy prices increased rapidly from the first quarter. "This volatility increased as the year progressed, and it was possible to increase milk prices by almost 50% over that period,'' he said.

Table 1 summarises some of the key financial highlights and ratios.

Performance

Sales increased from €176.5m to €222.3m. The Group increased sales in its dairy business by 25%, and dairy ingredients by 33%. Strong markets for dairy commodities and a full year of sales from its recent US acquisition underpinned the strong overall performance of the Group.

Sales from the Group's joint ventures and associates amounted to €3.9m, which showed a drop of 5% on the previous year. However, in June 2006 the Group purchased the remaining 50% of CM Power, which resulted in this company being fully consolidated from July 2006 onwards and it was no longer shown under joint ventures.

The company operates a five-megawatt combined heat and power plant at Ballineen. Finance costs increased by €1.1m to €2.2m, mainly due to higher interest rates and increased borrowings at the end of 2006 to finance the acquisitions.

From a balance sheet perspective, the Group's net debt was reduced by €5m during the year to €27.7m at 31 December 2007. The Group's capital and reserves increased by 6% to €95.5m at the year's end. However, its reserves were reduced by €2.2m on translation of its investments in Britain and the US at year's end. The Group generated a free cashflow of €2.5m compared with €10.3m in the previous year. It opted to finance its capital investment programme and its working capital costs from cash generated. At the year's end, cash held at bank was €5m, up €316,000 on the previous year.

Division performance

• Dairy division: The division performed well.

It is predominantly made up of its cheese business, which includes Dubliner Cheese.

• Ingredients division: This includes Carbery's ingredients and Synergy business. It reported satisfactory results. Dairy ingredients benefited from an increased demand across all markets, and its continued investment in research and development.
• Synergy, it's sweet and flavours business, benefited from a full year's results of Van Lab. The company is a specialist vanilla flavours business based in New York. Its integration with its existing operations in Chicago progressed well. The purchase has had a positive impact on opening new markets and further opportunities for the Group in the flavours business.

Performance of associates and joint ventures

The Group associate is Carbery Cheese Services Limited, which provides consultancy services to the Group. Its joint venture is Barbery Limited, in which it holds a 50% interest. It is involved in whey processing and is based in Somerset, England.

Overall profits increased from €56,777 to €200,879. Increased throughput, better plant utilisation and improved market returns in 2007 raised the Group's share of profits.

The future

Commenting on the prospects for 2008, Carbery CEO Dan MacSweeney said that dairy markets have continued their volatile trends, but in a downward direction.

"While markets are flat currently, one has to take comfort from the absence of stocks and the high feed price that will keep a floor under the cost of production in the many parts of the world where milk is not produced from grass. The relative advantage of producing milk from grass is now significant.

"The current weakness in the dollar and Sterling in relation to the euro has implications for 2008 returns,'' MacSweeney added. Again, the global mismatch between supply and demand will determine 2008 prospects for the dairy industry, as was the case in 2007.

The underlying fundaments are solid on a long-term basis. The removal of EU supports, adverse currency movements against the euro and increased energy costs will also play their part in global markets in 2008, with US exports benefiting from a weak dollar. Volatility in the markets will lead to pricing issues.

Obtaining the best prices at both processing and farm gate is key to minimising margin erosion and sustaining a competitive dairy industry.

Table 1: Finanical highlights and ratios

	2007 €,000	2006 €,000	% change
Revenue	222,281	176,475	26%
Gross Profit	57,883	50,455	15%
Operating profit	10,000	5,246	91%
Profits from joint ventures and associates	201	57	253%
Profit after tax	7,577	3,792	100%
Dividend	0	0	0%
Net debt	27,716	32,763	-15%
Capital and reserves	95,449	89,978	6%
Free cash flow	2,531	10,290	-75%
	2007	2006	2005
Gross Profit margin (Group)	26.04%	28.59%	27.92%
Operating profit margin (Group)	4.50%	2.97%	3.49%
Distribution and Administration as a % of sales	21.62%	25.71%	23.84%