Operating profits at Lakeland Dairies increased 22% to €15.5m last year, driven primarily by a combination of greater volumes, new products and efficiencies coming from recent investments.

Turnover was back 6% to €588.5m, as a result in the fall-off in dairy markets, despite a 13% increase in volumes to a record 900m litres. Earnings (EBITDA) were €25.7m in 2015, up from €21.5m in 2014. Operating margins were 2.6%, up from 2% in 2014. Profit before tax increased 10% to €12.8m. Lakeland paid a milk price of 30.1c/litre during the year. Shareholders’ funds increased €16m to €109m at year end.

Net debt increased €10m to €48m at year end, reflecting the ongoing investment. Year end net debt end was 1.9 times earnings, putting it in a strong financial position.

During the year the co-op invested €43m in capital investments. The new 7t/hour drier at Bailieborough, which is a €40m project, accounted for a large part of this.

Total capacity when complete will be 19t/hour, making it the largest powder manufacturing site in Europe. Some €10m was invested in the global logistics centre at Newtownards, along with smaller investments throughout the business.

Taste trends

During the year Lakeland Dairies acquired Taste Trends, a frozen yoghurt company in the UK, for a total consideration of €2.8m.

Total compensation of eight key management personnel in the year amounted to €1.65m. The board of Lakeland do not receive directors’ fees.

Hanley on business

“These are difficult times for dairy farmers, our priority is to maximise milk price and to minimise future volatility for our milk producers”

“The goal of our investments is to underpin the milk price while retaining capacity to re-invest in the business”

“We are currently finalising a fixed milk price scheme, based on back to back business with customers which will be offered at around 5-10% of last year’s volumes”

“Dairy markets look challenged for the next 12 months with surplus supply, lack of a Russian market, weak oil and weak Chinese demand”

“Since August 2014, Russia has reduced its purchases of European dairy products by 400,000t. This is not the fault of European farmers, but of EU policy. Brussels should not be found wanting in order to support farmers. There are mechanisms, for example the super levy could be suspended.”

Milk supply

Last year 450 suppliers in the North and 1,700 suppliers in the Republic provided 900m litres to the co-op. Some 60% of this came from Southern suppliers. Farmers have indicated they will supply an extra 7-8% in 2016, bringing volumes close to 970m litres. With the announcement of the Fane Valley deal this week, a further 250m litres will be added to the Lakeland pool, bringing it close to 1.2bn litres.

By division

Food service

This division, which accounts for one third of the business and is the market leader in dairy food service in the UK and Ireland, saw its revenues increase 6% to €201.7m during the year. The performance was bolstered by the increase in volumes along with new products such as the innovative milk stick, which continues to perform according to Hanley. He noted that the performance benefitted from gradual improvement in consumer sentiment. He said that even though dairy market prices are continuing to trend down, there is a time lag in food service and this benefitted the business last year.

He said the Russian ban had a very small impact on the business, even though they had been selling UHT products into the country. He said because Lakeland is selling to 77 countries in the world, it is not exposed to a single country or region.

Food ingredients

This division, which accounts for about a half of the business, saw its revenues decrease 14%, reflecting the lower global commodity prices for dairy products. The division produced record volumes, with 107,000t of milk powders exported, including caseins and over 31,000t of butter.

Performance was boosted by the additional volumes of milk processed along with greater efficiencies from the driers. Hanley noted they are working closely with infant formula companies to develop new products into the future.

Agribusiness

This division, which accounts for 10% of the business, saw its revenues increase 8% to €62.5m last year based mainly on an increase in sales volumes of feed and fertiliser. The co-op saw sales of feed increase to 162,000t last year, driven by an increase in market share and increasing feed use following the abolition of quotas. Fertiliser sales were 25,000t.

Comment

Lakeland makes about 2c/litre from its operations. Debt is low and manageable. But every 1c/litre extra paid for milk costs €9m. This is a tight business. With almost an even split of milk supply from the North and the Republic, it can straddle and hedge currency fluctuations.

Nevertheless, Lakeland in itself is an impressive business. It has invested close to €100m in the last five years and doesn’t operate any revolving funds or share up arrangements. While member funding in other co-ops is part of the overall funding strategy to support the business growth ambitions, Lakeland didn’t ask farmers to invest any of their money to build capacity or fund bolt-on businesses. In other co-ops, a proportion of funds came from farmers, either by way of optional loan notes or through revolving funds where up to 0.5c/litre is deducted each year for five years and then returned with interest in the future (above a minimum milk price). While these are investments and will be returned with interest, they do tie up farmers’ cash at a time when it may be needed to cope with low milk prices. In some instances almost 1c/litre is now tied up in these funds.

Lakeland’s expansion model is much simpler. The farmer invests inside his farm gate with his money. The co-op invests inside its gate by running a business that returns the highest price possible to farmers, by being profitable in its operations, and leaves enough for re-investment in the business. No doubt it is more difficult for management to secure funding, but if the business is profitable, finance from banks at competitive rates should not be a problem.