Operating profits at the northwest based co-op fell 22.5% to €3m last year. This is despite turnover increasing 4.1% to €443.8m in 2018. Margins weakened from 0.9% to a thin 0.7% last year. The main reason for weaker performance was a result of supporting milk prices during the year due to challenging dairy market dynamics and a challenging year for its mart business.

It was another record year for milk processing where Aurivo processed 7.8% more milk bringing total milk processed to 439m litres. Most of this growth was from existing suppliers expanding while there were 11 new entrants and five suppliers started second enterprises, according to Aurivo CEO Aaron Forde.

Commenting on the financial performance in 2018, Forde said on-farm milk prices were supported to the tune of 0.5c/litre or €2m during the year and that Aurivo delivered a satisfactory outturn for 2018 in the context of challenging global dairy markets.

He added that in a year marked by ongoing volatility in global dairy markets, financial performance for the year was robust and in line with expectations. He added that the uncertainties and implications of Brexit pose significant challenges to the sector.

Given that 17% of Aurivo’s milk pool is in Northern Ireland, a hard Brexit does pose a challenge for the co-op. Given that there is not enough processing capacity in the north, this milk will need to move south for processing.

Forde says they are looking at options around inward processing relief which would allow the milk come in effectively tariff-free once dairy powders were being re-exported.

Last year, Aurivo had expressed an interest in merging with LacPatrick. Forde said that the co-op was open to talks with other co-ops, whether that was merging, cooperations around processing or synergies on transport.

By division

Its dairy ingredients division, which accounts for 35% of the overall business, saw sales rise 7% to €153m. The co-op is heavily weighted towards liquid milk and processed 112m litres of liquid milk last year.

Turnover remained steady for the consumer business at €98.8m. The co-op’s For Goodness Shakes brand reported a strong year of growth with sales up 20%. It does not disclose profits for this business, which is based in the UK. However, Forde said it does contribute to the bottom line.

The co-op said its milk brands, Connacht Gold and Donegal Creameries, performed well.

Its agribusiness division recorded an 18% rise in sales to €120.7m. This was mainly driven by an increase in feed and fertiliser volumes. Homeland store sales were up 15% on the previous year while fertiliser volumes increased 16%.

It was an extremely challenging year for Aurivo’s livestock marts. Turnover fell 13% to €71m as less animals were put through its marts as a result of closing the marts for two weeks during storm Emma, along with an incident in Mohill which resulted in a substantial investment to facilitate enhanced safety at all its marts.

The business is budgeted to recover in 2019.

Operating expenses increased €4m mainly as a result of increased transport costs relating to the larger volumes of milk collected. Overall earnings (EBITDA) fell 12.3% to €7.9m. Net debt increased €9m to €14.6m. The business had a net debt 1.8 times its earnings at year end which is within a comfortable level.

The main reason for the increase in net debt was down to capital investments of €22m which was part of a new five-year €48m capital investment programme. The majority of this (€26m) is earmarked for a new dryer in Ballaghaderreen.

This will be the largest investment project undertaken by the co-op in its history. It will see production capacity at the site increase by 5t per hour.

The investment in this dryer will provide enough capacity for the next seven to eight years of growth, according to Forde. Total site capacity will now be 14t/hr. This dryer will mainly manufacture enriched milk powders. The business is also investing €6m at Killygordan to improve processing efficiency along with a €1.5m investment in its mill.

Aurivo suffered a paper loss of €8m on the value of its quoted investments (mainly Aryzta shares). This paper loss on its quoted shares saw the business record a pre-tax net loss of €5.8m.

Overall, shareholders equity on the balance sheet fell by €1.7m to €62m at year end compared to the prior year.

Aurivo suffered a paper loss of €8m on the value of its quoted investments (mainly Aryzta shares)

Total assets on the balance sheet amounted to €86m at year end. Intangibles such as goodwill, brand value and customer relationships make up €37m or 43%. Tangible assets (land, buildings, machinery and plant) accounts for €41m of assets or almost 50%. The co-op has €3.5m in investment properties.

During the year, there has been a deterioration in the working capital position on the balance sheet.

At year end, stock increased by a third to €23m. Despite the increase in turnover, debtors decreased €3m. Cash at hand reduced by €7m.

Creditors falling due within one year increased by €24m. Trade creditors increased €8m while the overdraft also increased €8m.

Bank loans relating to capex and falling due within one year increased €7m to €13m. However, a note in the accounts explains that the loan agreements relating to the year-end balance sheet were renegotiated on 4 January. This saw this €13m put out over the next five years with €2m relating to last year.

Overall this was a weaker set of results for Aurivo and the balance sheet has deteriorated over the year.

While there is a major capital investment programme taking place, margins are extremely thin in this business – a factor of milk price supports as a result of weaker markets during the year.

The deterioration in working capital on the balance sheet is a concern. However, earnings should increase in 2019 which would strengthen the balance sheet. Overall net debt is low relative to earnings.

With intangibles making up a large proportion of total assets on the balance sheet (relate mainly to the Donegal and For Goodness Shakes business), it is important that these businesses continue to generate profitability.

The latter end of the year was a challenge for processors last year when butter and bulk cream prices plummeted. Of course, being a co-op it did support the milk price last year to the tune of €2m or 0.5c/l.

However, the capacity to do this is limited over the longer period. It is encouraging to see Aurivo’s five-year plan which has the stated ambition to process 500m litres of milk, achieve 2% earnings before interest and tax and deliver a 45% uplift in shareholders’ funds.