Double-digit group operating profit, debt free, a record milk price, more milk processed than ever before and all ancillary businesses in growth –Aurivo co-op hasn’t had a year like it for a long time, if ever.
If you had to write a script, you couldn’t make it more positive. Of course, there is work to do, investment to make and there are real headwinds for 2022. However, management are comfortable in budgeting for higher costs as long as dairy markets are good. Maybe we are already becoming acclimatised to higher costs of production at farm level and processing level, but, like fertiliser for farmers, the big unknown for 2022 is energy costs for milk processors. It’s the fuel for doing business and making products.
Energy costs
Aurivo chief executive Donal Tierney is projecting energy costs for the drying milk component of the business will increase 40-50% for 2022. For processors, dryers and evaporators that create heat to take the water out of milk they need an energy source, and for most it’s gas. For Aurivo, it’s a mix of liquid natural gas (LNG), biomass and heavy oil (diesel).
The biomass burner in Aurivo started in 2016 and uses kiln-dried woodchips. It accounts for about 33% of the energy needs at its main processing site at Ballaghaderreen, or Shannonside as the locals call it. The objective of investing in biomass was to reduce emissions and to try and reduce the volatility in input costs. The woodchips come from the east coast. Unlike other processors, the piped gas line doesn’t go to the plant. The liquid gas is tankered in and stored on-site. On-site storage volumes are relatively small but availability isn’t high on the risk radar just yet.
The new spray dryer on the Aurivo Ballaghadereen site was officially opened in 2019. The energy used on this site is a mix of biomass, diesel and liquid gas. Costs for drying milk are expected to rise 40 to 50% this year as energy costs spiral.
The biomass has been a success story. While it’s limited in terms of flexibility (once you turn it on it stays on), it works well as part of the mix for Aurivo from the end of March to August when milk volumes are high.
While energy costs are projected to increase in 2022 for Aurivo, it’s the dairy ingredients business that is the heavy user and the dairy commodity business is going well so right now it can carry the cost.
Liquid milk processing needs energy also but not as much. The retail stores need energy but labour and rent are probably bigger costs there.
Would the Aurivo boss hedge now against rising energy costs? “Not at the moment. We were hedged until March this year, but to hedge now at market price would cost us big time. We keep it under constant review.”
Numbers
The balance sheet has never been as good for Aurivo. On top of this the milk price paid probably has never been as good. Turnover in 2021 was up to €570m from €488m. Milk volumes were up, and price paid out is up. The milk pool now is 502m litres, up from 477m litres last year. Operating profit hit €12.6m, up from €8.5m. Group EBIDTA is up to €19.4m from €15.1m in 2020.
Aurivo's new dryer was opened in 2019.
For as long as Tierney has been in Aurivo, debt has always been a part of the mix. However, for the first time the company finished 2021 with no debt. However, investment in evaporators at Shannonside is required and already under way. Limited evaporating capacity means Aurivo will be under pressure for capacity at peak this year so while the drying capacity is good, evaporating capacity will limit what milk they can process this year.
Aurivo chair Raymond Barlow thanks suppliers for completing the 2021 survey which sets out a significant increase in forecasted milk supply growth in both the Republic and Northern Ireland up to 615m litres by 2025 on the premise of no restrictions to growth. He suggests this has helped form the basis for the capital expenditure plans for processing capacity.
Milk price
Aurivo quotes a price paid of 40.9 c/l including VAT to suppliers. This is the money paid out on milk price averaged for all suppliers. Aurivo suggests 2020 price was 35.6c/l. About 111m litres (22% of the pool) were processed as liquid at its plant in Killygordon. That cohort of suppliers rightly get a liquid milk premium over and above manufacturing price for producing milk all year round. This brings the average milk price paid out up and not attaninable to all Aurivo suppliers.
Leaving that aside, it is fair to say that the Aurivo base manufacturing milk price is a lot higher than where it was in the past.
The supply-restricted global dairy commodity price revolution has really helped Aurivo, where powders and butter are key products. In 2021, the co-op also built on its milk price stability fund of €3m with another €4m set-aside, to make it a €7m pot if or when milk price turns sour.
Balance sheet
The Aurivo balance sheet is strong. A share standard of 3c/l is in play for all shareholders. This means if you are supplying 500,000 litres you need 15,000 shares and the cost of this is deducted at a rate of 0.5 c/l until the required share standard threshold is reached.
A 2% dividend has traditionally been paid out on shares owned, but is not guaranteed. The same share standard is there for new entrants at the moment.
Why the gap between Aurivo payout and the Ornua PPI for most of 2021?
“These results show why there is a difference. The €4m in the stability fund is part of it – maybe close to 1c/l of the difference. The operating profit on the books is also part of it. At 2.2% operating profit before interest and tax, that’s real money that the Ornua PPI doesn’t account for.”
Are the efficiencies of extra volume not helping reduce processing costs?
“Most are variable costs – transport, energy and packaging all go up if you handle more milk. Depreciation and staff costs are probably the two that are some way fixed and benefit by dilution if volumes processed increase.”
How do you manage the Ornua payment to Aurivo milk suppliers?
“Ornua don’t give a dividend but do give a value payment depending on the volume of product traded with them. The exact amount depends on the premium for the product they get from the market. We put this into the pot of funds available to pay out for milk price. We also have a 7% shareholding in Kerrygold Park and supply cream and butter to it.
Is organic milk a growth market for Aurivo?
“Flat, I’d say as far as our brand ‘Organic for us’ is concerned. We do some private label organic also.”
Headwinds for 2022?
“The energy cost piece we have discussed. Outside of that the retail business will be challenged. Cost inflation is eating into margins and this impacts in our liquid milk business, retail business and in the UK for our ‘For Goodness Shakes’ business which had a very strong post COVID recovery in 2021.”
Double-digit group operating profit, debt free, a record milk price, more milk processed than ever before and all ancillary businesses in growth –Aurivo co-op hasn’t had a year like it for a long time, if ever.
If you had to write a script, you couldn’t make it more positive. Of course, there is work to do, investment to make and there are real headwinds for 2022. However, management are comfortable in budgeting for higher costs as long as dairy markets are good. Maybe we are already becoming acclimatised to higher costs of production at farm level and processing level, but, like fertiliser for farmers, the big unknown for 2022 is energy costs for milk processors. It’s the fuel for doing business and making products.
Energy costs
Aurivo chief executive Donal Tierney is projecting energy costs for the drying milk component of the business will increase 40-50% for 2022. For processors, dryers and evaporators that create heat to take the water out of milk they need an energy source, and for most it’s gas. For Aurivo, it’s a mix of liquid natural gas (LNG), biomass and heavy oil (diesel).
The biomass burner in Aurivo started in 2016 and uses kiln-dried woodchips. It accounts for about 33% of the energy needs at its main processing site at Ballaghaderreen, or Shannonside as the locals call it. The objective of investing in biomass was to reduce emissions and to try and reduce the volatility in input costs. The woodchips come from the east coast. Unlike other processors, the piped gas line doesn’t go to the plant. The liquid gas is tankered in and stored on-site. On-site storage volumes are relatively small but availability isn’t high on the risk radar just yet.
The new spray dryer on the Aurivo Ballaghadereen site was officially opened in 2019. The energy used on this site is a mix of biomass, diesel and liquid gas. Costs for drying milk are expected to rise 40 to 50% this year as energy costs spiral.
The biomass has been a success story. While it’s limited in terms of flexibility (once you turn it on it stays on), it works well as part of the mix for Aurivo from the end of March to August when milk volumes are high.
While energy costs are projected to increase in 2022 for Aurivo, it’s the dairy ingredients business that is the heavy user and the dairy commodity business is going well so right now it can carry the cost.
Liquid milk processing needs energy also but not as much. The retail stores need energy but labour and rent are probably bigger costs there.
Would the Aurivo boss hedge now against rising energy costs? “Not at the moment. We were hedged until March this year, but to hedge now at market price would cost us big time. We keep it under constant review.”
Numbers
The balance sheet has never been as good for Aurivo. On top of this the milk price paid probably has never been as good. Turnover in 2021 was up to €570m from €488m. Milk volumes were up, and price paid out is up. The milk pool now is 502m litres, up from 477m litres last year. Operating profit hit €12.6m, up from €8.5m. Group EBIDTA is up to €19.4m from €15.1m in 2020.
Aurivo's new dryer was opened in 2019.
For as long as Tierney has been in Aurivo, debt has always been a part of the mix. However, for the first time the company finished 2021 with no debt. However, investment in evaporators at Shannonside is required and already under way. Limited evaporating capacity means Aurivo will be under pressure for capacity at peak this year so while the drying capacity is good, evaporating capacity will limit what milk they can process this year.
Aurivo chair Raymond Barlow thanks suppliers for completing the 2021 survey which sets out a significant increase in forecasted milk supply growth in both the Republic and Northern Ireland up to 615m litres by 2025 on the premise of no restrictions to growth. He suggests this has helped form the basis for the capital expenditure plans for processing capacity.
Milk price
Aurivo quotes a price paid of 40.9 c/l including VAT to suppliers. This is the money paid out on milk price averaged for all suppliers. Aurivo suggests 2020 price was 35.6c/l. About 111m litres (22% of the pool) were processed as liquid at its plant in Killygordon. That cohort of suppliers rightly get a liquid milk premium over and above manufacturing price for producing milk all year round. This brings the average milk price paid out up and not attaninable to all Aurivo suppliers.
Leaving that aside, it is fair to say that the Aurivo base manufacturing milk price is a lot higher than where it was in the past.
The supply-restricted global dairy commodity price revolution has really helped Aurivo, where powders and butter are key products. In 2021, the co-op also built on its milk price stability fund of €3m with another €4m set-aside, to make it a €7m pot if or when milk price turns sour.
Balance sheet
The Aurivo balance sheet is strong. A share standard of 3c/l is in play for all shareholders. This means if you are supplying 500,000 litres you need 15,000 shares and the cost of this is deducted at a rate of 0.5 c/l until the required share standard threshold is reached.
A 2% dividend has traditionally been paid out on shares owned, but is not guaranteed. The same share standard is there for new entrants at the moment.
Why the gap between Aurivo payout and the Ornua PPI for most of 2021?
“These results show why there is a difference. The €4m in the stability fund is part of it – maybe close to 1c/l of the difference. The operating profit on the books is also part of it. At 2.2% operating profit before interest and tax, that’s real money that the Ornua PPI doesn’t account for.”
Are the efficiencies of extra volume not helping reduce processing costs?
“Most are variable costs – transport, energy and packaging all go up if you handle more milk. Depreciation and staff costs are probably the two that are some way fixed and benefit by dilution if volumes processed increase.”
How do you manage the Ornua payment to Aurivo milk suppliers?
“Ornua don’t give a dividend but do give a value payment depending on the volume of product traded with them. The exact amount depends on the premium for the product they get from the market. We put this into the pot of funds available to pay out for milk price. We also have a 7% shareholding in Kerrygold Park and supply cream and butter to it.
Is organic milk a growth market for Aurivo?
“Flat, I’d say as far as our brand ‘Organic for us’ is concerned. We do some private label organic also.”
Headwinds for 2022?
“The energy cost piece we have discussed. Outside of that the retail business will be challenged. Cost inflation is eating into margins and this impacts in our liquid milk business, retail business and in the UK for our ‘For Goodness Shakes’ business which had a very strong post COVID recovery in 2021.”
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