Nenagh-based co-op Arrabawn recorded a €1.6m loss for its 2019 financial year after the dairy co-op took an impairment charge of €1.4m on the sale of a decommissioned animal feed mill in Thurles.

Excluding this once-off charge, Arrabawn’s operating profits more than halved last year to just over €1m, as operating profit margins in the business fell from 0.9% in 2018 to a very slender 0.4% last year. Earnings (EBITDA), which is an important metric for the co-op, fell by 9% last year to €7.5m.

The impairment charge relates to Arrabawn’s 2006 purchase of the Greenvale animal feed mill in Thurles. The co-op subsequently decommissioned the site in 2013 and consolidated its entire animal feed business to its Dan O’Connell feed business in Limerick. The co-op had valued the decommissioned Greenvale site at €2.4m on its balance sheet.

However, after completing the sale of the decommissioned site last year for €1m, this forced Arrabawn to take a €1.4m impairment charge, which resulted in a net loss for the farmer co-op. The impairment charge also resulted in a weaker balance sheet for Arrabawn to just under €50m.

Animal feed

Overall, Arrabawn saw its sales fall by 2% last year to €265.6m. This was mostly down to a sharp fall (-13%) in turnover at its agri-trading division to €62.3m as sales of animal feed and fertiliser reverted to more normal levels in 2019 following the drought in 2018.

The co-op’s animal feed sales were back almost 35,000t to a more normalised level of 138,000t, while fertiliser sales were back to just under 25,000t.

Arrabawn’s dairy business saw its sales increase 2% last year to just over €203m thanks to a strong performance from its dairy ingredients division. Sales volumes of dairy ingredients grew by more than 11% last year, with a record 363m litres processed into dairy ingredients such as butter, whey, SMP and caseinates.

In contrast, Arrabawn’s liquid milk business endured a difficult 2019 following the loss of volume on some of its liquid milk contracts with retailers. The volume of milk processed into liquid milk last year by Arrabawn fell to less than 50m litres. However, the co-op says it has since regained the lost volume on these liquid milk contracts.

Arrabawn’s overall milk supply recorded some of the strongest growth in the country last year, with collections up almost 8% to 410m litres. For 2019, the co-op returned an average milk price of 32c/l (excluding VAT) to its farmer suppliers, slightly lower than the 33.8c/l average paid the previous year.

Capital expenditure

Arrabawn spent almost €20m in capital expenditure last year – a record for the dairy co-op. This brings its total capital spend over the last three years to almost €50m.

This heavy capital investment helped Arrabawn complete construction works on its new €30m acid casein processing plant, which will add 50% processing capacity to the co-op and allow it to shift more milk into higher-value casein products, which generally have a stronger return than a traditional butter and SMP mix.

The significant capital investments over recent years has left the co-op with net debts of €45m, which is significant relative to its EBIDTA performance. However, Arrabawn’s chief financial officer Mícheál O’Kelly says the co-op’s net debt has now peaked, with the most significant capital investments almost completed, and Arrabawn can begin to lower this number over the coming years rather than add to it.

Comment

Looking closely at the balance sheet of Arrabawn two things are clear. Firstly, the co-op’s profit margins are very thin, and secondly, its net debts at €45m are significant following the heavy capital investment programme since 2016.

The key challenge for Arrabawn senior management over the next five years will be paying down its net debt. We’ve already seen how a co-op can come unstuck by carrying too much debt and ultimately be dragged down by it. With such narrow margins in milk processing, there is little room for manoeuvre, particularly if dairy markets were to weaken dramatically in a given year.

However, Arrabawn says it has agreed flexible repayment terms with its lenders that will give it the breathing space it needs.

Arrabawn’s capital spend over recent years, particularly the €30m investment in the new acid casein plant, had to be made given the rapid expansion in milk production in its catchment area. The co-op continues to see some of the strongest milk supply growth in the country and welcomed over 25 new entrants last year.

Once fully commissioned and operational, the new casein plant will add a further 50% to Arrabawn’s processing capacity and allow it to comfortably handle the next decade of milk supply growth. The investment will also allow the co-op to move more milk into higher-value casein products, which should improve profit margins.

With the heavy lifting now completed for Arrabawn in terms of capacity building, reducing the risk of its current debts over the next five years will be absolutely critical for the future of the co-op.