Arrabawn co-op, based in Nenagh, saw its operating profits halve last year, falling by €2.3m to €2.1m. Earnings (EBITDA) also declined €2.3m to €6.4m. The average price paid for milk fell 8c/l to 30.4c/l (including VAT) as a direct result of falling commodity prices.

The €2.3m fall in profits was largely driven by the co-op supporting the price of milk to the tune of 1c/ litre on the approximately 311m litres supplied by the co-op’s 965 farmer suppliers. Arrabawn processed a total of 353m litres last year, 15% (46m litres) more than 2014. Of this, 20% came from processing arrangements with Lakeland Dairies and Town of Monaghan (now Lac Patrick).

While Arrabawn lost some suppliers over the year, it had a net gain of 32.

Overall revenues fell 4% to €205.1m, driven by the dairy division, which accounts for almost three quarters of the business. It recorded a 6% fall in sales to €149m, despite volumes increasing 15%. Sales prices fell 21% overall, driven by the fall in global commodity prices.

The trading division, which includes Dan O’Connor Feeds in Limerick, performed strongly. A 10% increase in feed sales drove the performance, while fertiliser volumes were back in line with the market. Revenues in agri-trading increased 2% overall to €56.1m. Gross profits remained flat at €48.7m, while profit before tax fell 65% to €1.4m.

Difficult year

Commenting on the results, Conor Ryan CEO, said 2015 was a difficult year in international markets. However, he was pleased with the overall performance of the co-op. He said: “It was a difficult year on the manufacturing side of the business, but liquid milk performed strongly.”

He added that while milk prices were weaker, they could have been a lot worse had it not been for the strong butter prices, which held up compared to powders.

On the powders side, he said that earlier in the autumn stocks had increased; however this was cleared by year end.

Costs overall increased 6%, driven by a combination of the extra direct costs associated with processing 15% more milk, and wages increased by 5% or about €700,000 to €14.6m.

This is not an additional cost to the business, as the co-op brought its engineering and maintenance back in house. This had previously been outsourced and was a cost elsewhere in the accounts. Salaries and benefits to key management employees came to €1.7m.

Gas connection

Despite processing the extra milk, fuel and power costs fell 9% (€0.7m) due to a combination of falling energy prices and the Nenagh site converting fully to gas last July.

The Nenagh plant accounts for 72% of the €7.5m energy and power cost. Last year, the co-op invested €1.3m in an overall project cost of €2m converting the plant from oil to gas, which will help it dry milk more efficiently at a lower cost.

General operating and distribution costs increased 15% (€2.4m), mainly due to the farmer contribution to milk collection being abolished last May. This amounted to an average benefit of 0.5c/l to the farmer.

Overall, operating margins were 1% last year , down from 2.1% the year previous. Ryan said: “This is a low-margin business, and the simple fact is we supported the milk price to the tune of €2m. Secondly, we are investing heavily in the co-op to process the extra milk that is flowing from our suppliers.”

Increased efficiency

He added that the investments being made will also help process the milk more efficiently into the future. He said: “We spent over €9m in 2015, investing in the future of the business.”

The co-op spent €3.5m on a new evaporator (project cost in excess of €4m) and building during the year at Nenagh. He said this was necessary, but that the majority of the investment is now done. He envisages investing a further €5m in 2016.

Liquid milk

Currently Arrabawn has 130 liquid-milk suppliers and it processes 55m litres of liquid milk at Kilconnell, Co Galway. Ryan expects to increase this from July 2016 and planned investments to improve packaging efficiencies may be brought forward.

While he wouldn’t comment on specific contracts, it is understood the winning of the Tesco contract (see page 11) is a significant step for the liquid-milk business.

Last year it invested €1.2m in new pasteurisers at Kilconell. Ryan said this is now a well-invested facility with plenty of free capacity, which could process up to 100m litres annually. He sees significant potential to expand the liquid-milk business, and is confident that farmers will want to supply. Last year, it paid a 12.5c/l bonus over the four winter months.

Net debt increased from €9.3m to €15.8m. This was driven by the increase in capital expenditure, where €9m was invested last year. Net debt is now 2.46 times earnings but is still manageable. With the majority of capital expenditure now completed, cap-ex should return to levels of €5m annually.

Debtors increased by €2m at year end however this was mainly due to greater volumes of feed sales.