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Dale Farm, the UK’s largest farmer-owned dairy co-op, recorded a 23% rise in operating profits to £12.1m for the year ending March 2018. Profit before tax increased from £7.9m to £10.1m. Earnings (EBITDA) rose 15% to £18.1m. Turnover grew by a record increase of 24% to £481m, delivering an operating margin of 2.5% for the year.
The solid result was driven by strong performance across all divisions, according to chief executive Nick Whelan. Having joined Dale Farm as CEO in 2016, he said his aim has been to “drive the business forward significantly in conjunction with its farmer members”. He has done this by paying “a leading milk price”, with the aim to stabilise the milk pool for the future longevity of the co-op.
For the first time ever, in 2017 Dale Farm moved to the top of the 12-month rolling milk price league in Northern Ireland. It’s also now paying the leading milk price on the island of Ireland for May, according to Whelan.
This is a major turnaround for the co-op, which has lost almost a third of its milk pool, or 300m litres, over the last 10 years. In 2017 it saw this trend reversed – it grew its milk supplies by 3.5% and processed 800m litres. It has done this by engaging with suppliers at farm level and delivering an improved milk price. It has also opened its doors for suppliers who left to return.
Whelan says the milk price performance was not delivered at the expense of profits or investment. Having invested £19m into its facilities and operations over the last three years, Dale Farm this year reported a 14.4% group return on capital employed – a figure he highlights as significant.
“We reinvest into every step of the production process to increase our operating efficiencies and, in doing so, have achieved a return on capital well above the industry average,” he says.
Driving performance
Whelan also notes improved risk management in cheese and volatility management as a key driver of performance. Cheese is one of the core products for Dale Farm, producing 50,000t from around 500m litres of its milk (63% of the pool). Following a decision a number of years ago to focus on mature cheeses which take 12-18 months to ripen, but are of higher value, it creates a challenge for the co-op to manage pricing given the extreme volatility over an 18-month cycle.
While this contributes to an increased working capital requirement, therefore inflating the net debt figure to £66m or 3.6 times earnings, banks are comfortable as the stock is liquid and mainly tied up in medium-term contracts. Term debt is £14.9m, which Whelan says leaves the co-op with plenty of capacity to borrow more.
Last week Dale Farm signed a major supply contract with retailer Lidl, which will see its cheddar cheese being sold in 8,000 stores across 22 countries. This deal, which is understood to be significant, will see the co-op supply cheese from its Cookstown factory to Lidl stores across the UK, Europe and the US. This is a big win for Dale Farm, as it secures a large volume of cheese over the coming years to a growing supermarket retailer. It also means it will be Lidl’s biggest cheddar supplier.
More milk needed
This deal along, with growing demand from other customers, is seeing a requirement for more milk. Whelan says he has a need for an additional 100m litres today and has the capacity to process it. Collecting milk from 1,250 suppliers, Whelan says he’s not looking for more milk to be the biggest, adding that it’s driven by a real demand that can deliver a leading milk price. Whelan says we have a very low peak-to-trough supply curve of 1.4:1 times, so there is plenty of scope. He is bullish on growth, but open to how that comes. The co-op has expressed an interest in a merger with Lacpatrick. However, it says it will only do so if it is value-enhancing to its members.
Other products
Butter, through its Dromona brand, is another key product for Dale Farm. The co-op produces around 10,000t of butter per year. Whelan noted that strong butter markets boosted returns during the year, but this was driven by “leading the way on pricing as markets rose”. The ice-cream business also had a solid year. It’s desert and yoghurts had a satisfactory year, according to Whelan, in what he termed as a “very competitive environment”.
During the year the co-op rolled out its first fixed milk price scheme. He said it was welcomed and 60% of suppliers partook in the scheme, which allowed them fix up to 60% of their milk.
Comment
Dale Farm’s business model presents the company with much room for growth, particularly in relation to Brexit, given its strength on the UK market. Given that it has de-risked the business significantly through its cheese pricing models and contracts with customers, it gives the co-op more visibility and certainty over milk pricing. This should provide greater consistency of milk price in volatile markets. The fact it has moved up the monthly milk league gives confidence to suppliers that the model is delivering.
Coming out of a year where markets have weakened obviously helps when a large share of the business is in consumer foods. The challenge for Whelan and his team will be to repeat this performance when markets turn the other way and driving prices on with its customers – something that he has achieved in 2017. The pricing model for customers such as Lidl should also secure performance.
It seems Dale Farm knows what it’s about and has a vision for what it wants to be in the future. Whelan says that at its core it is a farmer-owned co-op which aspires to pay a leading milk price. This gives certainty to shareholders, especially at a time of huge uncertainty in dairy markets and Brexit negotiations.
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