Dairygold announces significant drop in revenue and profit in 2023

Dairygold Co-operative Society Ltd announced financial results for 2023, which saw a 15.5% drop in turnover to €1.4bn and a 40.5% fall in operating profit to €23.9m.

Profit-after-tax at the dairy processor dropped to €3.5m, down from €19.7m in 2022. Interim CEO of Dairygold Michael Harte told the Irish Farmers Journal that the low profit-after-tax figure was due to a “conscious decision to ensure that milk suppliers and grain suppliers were someway protected [from the high-cost environment]”. He noted, however, that there was only so much the co-op could do, as every extra cent paid for a litre of milk increased Dairygold’s costs by over €14m.

Dairygold’s average quoted milk price of 38.4c/l for the year was 16.5c/l lower than in 2022.

By far the biggest driver of the fall in revenue in 2023 was the pullback in global prices for dairy products and grain from the highs seen in 2022. Harte noted that much of the hit to dairy prices in the year was driven by the Chinese market, where the expected uplift in demand following the relaxation of that country’s zero-Covid policy never materialised.

On milk supplies, Dairygold collected and processed 1.41bn litres of milk last year, a decrease of 70m litres (4.7%) on 2022. Harte said that due to the inclement weather so far in 2024, milk supplied in the first three months of this year is down 7% to 8%.

In recent weeks supply is back almost 5%. Dairygold chair Seán O’Brien said we are coming into key weeks for supply, with a 4% drop in April counting for a lot more milk than an 8% drop in January.

Performance

Looking at a divisional breakdown in performance, again the slowdown in dairy markets is obvious. Turnover at Dairy Ireland dropped by almost a quarter to €795m, with almost all of that fall again driven by pricing. Volumes of product sold at the division were 2.5% lower, at 229,000t.

Dairygold said it is continuing to leverage its strong relationship with Ornua and other strategic customers. Last year saw the unveiling of Ornua’s €40m development at its flagship butter plant in Mitchelstown, adjacent to Dairygold’s Castlefarm facility.

The Dairygold Agribusiness division also saw a difficult trading year, with turnover down €62m to €326m, with the drop mostly reflective of the fall in fertiliser prices during 2023, as well as a reduction in the volume of fertiliser and feed sold.

Dairy UK and Europe performed well, with turnover rising €4m to €214m as sales volumes increased. Last year saw the completion of an investment in the cheese operation in Crewe, UK, and upgrading of the soft cheese facility in Leeds. Harte said that potential acquisition opportunities are being explored to further grow the business. Acquisition was the major factor for Dairygold Health and Nutrition in 2023, with the purchase of a 59% share of Vita Actives for an initial consideration of €46.3m, with a further €11m due, subject to financial performance of the company for the financial year 2024.

More on this in the box on the opposite page.

Health and Nutrition continued to build out its distributor network in China for the Aerabo range of nutritional powder products, with further launches scheduled for the second quarter of this year.

Dairygold had €60.5m in commercial non-core assets at the end of 2023. The value of that portfolio increased by €4.9m during the year. The company is in the process of negotiating the sale of its Creamfields site on the Kinsale Road in Cork, which has permission for 606 residential units and a primary care centre. Harte said that Dairygold expects the property to be sold in 2024.

Outlook

On the dairy market, Harte said there remain a lot of challenges for global demand. He said that without a pick up in demand, there is not much to point to a major uplift in global prices.

“I’d like to be a lot more confident, but at the moment it is a really thin market, with buyers stepping back from the market. It may take a major event [on global supply] for demand to really pick up.

“Ideally, we’d love to see milk prices at 40c/l with costs at 30c/l, but with inflation that’s not where we are.”

Harte said that Dairygold’s strategy will keep dairy processing as the core business for the society, but they do want to generate additional revenue and margin through diversification.

“We want to be able to support the core business through times of challenges, with more earnings from other activities that allow us to, in turn, support our active members.

“Utilising the scale of the organisation to be able to drive other businesses is something we see as being very, very important.”

This does not mean Dairygold is losing interest in milk, with Harte admitting while they are comfortable with current volumes arriving for processing, the future supply is seen as a key risk for the business.

“Where it is at the moment versus the capacity we have, we’re in a comfortable place. There is some flexibility there. But we don’t want the situation where milk volumes continue to decline.”

Comment

Dairygold is the first of the major dairy co-ops to report 2023 earnings and it should come as little surprise considering the weather, inflation and global market conditions last year, that the company described it as “challenging”. We fully expect this to be a repeated theme over the coming month, as the rest of Ireland’s co-ops announce results. It is clear from the profit level reported by Dairygold that it had practically no room left to pay more for the milk it processed, so suppliers may get some small comfort from that. However, it is on its big diversification spend during the year – the purchase of the stake in Vita Actives – that members may have more questions. The €100m valuation seems very high for a company that is, to all intents and purposes, an ingredients wholesaler. The risk is that Dairygold bought Vita Actives based on earnings from a unique year. The average of the last five years of earnings at the company (including the bumper 2022) was €1.862m. At a €100m valuation, that would give a yield of less than 2%. Taking 2022 out of the picture pushes that number closer to 1%. When Dairygold bought Vita Actives, a 10-year Irish Government bond was paying a yield of more than 3%. The purchase of Vita Actives does seem like a lot of risk for very little reward.

In brief

The purchase of a 59% stake in Vita Actives by Dairygold was described by the society in its annual report as “one of the highlights for Dairygold in 2023”, adding that it sees it as a significant milestone on the journey to deliver the group’s 2030 strategy.

As per the terms of the agreement, Dairygold paid €46.3m at the time of purchase, with a further €11m due, subject to the financial performance of the company this year.

This puts the purchase valuation of Vita Actives at approximately €100m. Dairygold has the option to purchase the balance of the company after two years, and Vita Actives CEO and owner of the balance of the share Deepak Sharma has the option to sell.

Looking at the accounts for Vita Actives for recent years, it is clear that 2022 was a bumper year for the company, reporting a profit of €5.3m on turnover of €29m.

Looking back over previous years, 2022 certainly appears to be an outlier (see chart).

Dairygold chair Seán O’Brien said that the performance of Vita Actives since they purchased the majority shareholding has been positive: “At board level, we are very, very happy.”

Looking under the bonnet at what Dairygold has bought, and the price it paid, it’s clear that the purchase needs to perform to justify the lofty valuation.

Vita Actives is, fundamentally, a trader in ingredients. The value of the business, according to Dairygold interim CEO Michael Harte, is in the knowledge that exists within the company when it comes to understanding customer needs and being able to meet those needs.

However, there are risks around the company’s ability to continue to grow profits into the future. Vita Actives does not hold product patents or have exclusive long-term supply agreements with its customers.

This means Vita Actives has little protection from competition in the business area it operates.

Dairygold is confident that it understand the risks here.

“While there are lots of companies in this area, we believe we have found the company that can deliver for us,” Harte said. “They have the skillset, they have the capability and they are delivering.”