Profits at Arrabawn hit a record high in 2017 driven by a €50m increase in turnover. Turnover increased 25% to €249.1m at the Nenagh-based co-op in 2017, while operating profits increased marginally (1%) to €4.7m.

The increase in turnover was driven mainly by the dairy division. Sales increased 30% to €189m on the back of increased volumes and higher dairy commodity prices. The agri-trading division, which includes its retail, feed and fertiliser business, reported a 9% sales increase to €60m.

Milk supply increased 9% (30m litres) last year to reach 361m litres. Feed volumes increased 17% as the company sold more meal. Fertiliser volumes were up 9%. Arrabawn paid an average milk price of 37.45c/l last year.

Operating margins fell from 2.3% in 2016 to 1.9% in 2017. The fall in margins was a result of weaker performance in liquid milk. Earnings (EBITDA) increased by €0.5m to €10m.

During the year, operating and administration expenses increased 11% to €55m. Staff numbers increased by 22 to an average of 396 over the year.

Net debt increased €3.8m to €16.4m at year end. This was as a result of a €3m increase in (mainly manufacturing) stocks held for sale at year end. The reason for the 20% increase in stocks at year end was due mainly to larger volumes of output (up 10%).

Net debt has increased to the highest level in five years, increasing from €10m in 2013 to €16m at year end 2017. However, it remains low at 1.6 times earnings, significantly lower than the 2.5 times earnings at year end 2015.

Shareholders’ funds increased by €3m to reach €51m at year end. The co-op invested €10m in capital during the year, with €5.2m invested at Nenagh and €4m invested in Kilconnell.

Connor Ryan eyes growth

Commenting on the 2017 results, CEO Connor Ryan said while overall performance was strong and a “record year for the co-op”, “performance was weaker in the liquid milk side of the business”.

Despite increased dairy market prices, at retail level liquid milk prices did not increase.

Arrabawn processed 70m litres of liquid milk last year, a rise of 5m litres on the year previous. He said the co-op had 18 new entrants last year. On milk price, he said he didn’t see a recovery in the short term and the current market prices “indicate a milk price closer to 29c/l”. He expects volume growth to continue and the co-op is now finalising its plan to ensure “all extra milk is processed into higher-return milk proteins, while adding value to the whey stream”.

“This will, in turn, underpin our ability to pay a competitive price to our suppliers into the future,” Ryan said. He believes a further 7-8% could come over the next year followed by a steadier 3-4% annual growth over the next five years.

Comment: further investment to come at Arrabawn

Over the last five years, the co-op has invested €40m in capital which included upgrading processing assets and environmental handling facilities. This has given it the capability to process the 37% increase it has seen in milk supply. Arrabawn projects at least another 70m litres is set to come, bringing it close to processing 500m litres per annum.

Currently Kilconnell has significant spare capacity, with the potential to process up to 150m litres – over double existing levels. The CEO anticipates the Nenagh site will move to 500m litres capacity in the future once the capital programme has been finalised. Together, the two sites will have a capacity of 650m litres – future-proofing the co-op. With Arrabawn reaching capacity at peak and with milk volumes growing, further investment will be required.

Farmers would need to see the benefit of any investment through an improved milk price. What could this investment look like? It probably won’t look like a 7t drier. Could we see it move further into higher-returning casein/protein products?

Does it have the financial strength to invest? The balance sheet is healthy. The debt levels are low and it is generating strong cashflows. At up to three times earnings, the co-op could manage a debt level up to €30m – some €15m more than at year end 2017. This would allow it move up the value chain. It would then also generate higher cash returns which should be seen in the milk price.