With Aurivo declaring its interest in LacPatrick this week, the co-op’s latest set of results highlight the firepower behind the co-op should it wish to enter into talks with the cross-border co-op.

Operating profits increased 10% to €3.9m for 2017, driven by an increase in performance across all divisions. Turnover rose 9% to reach €426.4m.

The biggest increase came from its dairy ingredients division, which accounts for one-third of the business. This division reported a 41% increase in sales to €143.5m. This was driven by an 8% increase in milk volumes processed along with strong dairy markets over the year. It processed a record 420m litres in 2017.

Cashflows were strong in the period which saw net debt fall by €11m to less than €5.7m at year end.

Sales increased 12% to €99.1m in its consumer foods division which accounts for 23% of the business. This was on the back of greater volumes and increased prices.

The Connacht Gold brand continued to grow despite a very competitive market and rising butter prices throughout the year. For Goodness Shakes, its sports nutrition brand, sold more than 8m units, a significant increase on the 5m units it sold at the time of acquisition.

Aurivo launched a new brand of dairy enriched powder for the Nigerian market called Forto during the year. The powder is produced in its Ballaghaderreen factory and then exported and consumer-packed in Ornua’s facility in Nigeria.

The agribusiness division, which includes the retail stores, feed and fertiliser business, reported an increase in sales of 5% to €102.1m. This was boosted by an 18% increase in feed sales helped by the expansion into Donegal and Northern Ireland. Fertiliser sales finished the year up 13% on 2016. The co-op said it contributed to the bottom line.

Its four marts saw sales rise 4% to €81.6m during the year. Throughput of cattle traded increased 3% to 79,345, while sheep throughput increased 3% to 66,516. It has implemented new safety procedures and it is hopeful this will reduce insurance costs in the future.

The co-op is midway through a €5m investment in its dairy ingredients facility in Ballaghaderreen which it hopes to have completed in the next two years.

Expansion and growth

Following the solid year of performance, with less than €6m in net debt at year end, chief executive Aaron Forde believes the co-op has the scope to leverage its balance sheet, take on more debt and expand.

“Yes, we are interested in exploring options with LacPatrick” according to the chief executive. “But we will continue to grow our business with or without Lacpatrick”.

While it is early days in internal discussions, he believes the healthy balance sheet and solid performance place the co-op in a strong position to explore all options.

Based on conversations with their suppliers, he says there is at least another 70m litres of milk growth to come for Aurivo in the next few years. This would make it a 500m litre processor before it talks to any other processors.

He says the growth in supply is mainly coming from existing suppliers expanding production. He added that while there have been a small number of new entrants over the last number of years, these are usually larger herds. They have seen strong expansion in supply across Donegal, Mayo and Galway.

He says: “The necessary planning and development work has been put in place over the last number of years which provides the necessary foundation blocks to grow.” However, he warns that scale does not always deliver growth and increased profits and that expansion should be entered into carefully.

While the co-op paid a strong price of 37.2c/litre last year, he said markets have been weak since the last quarter of last year. He said they continue to support the price to the tune of around 3c/l and that milk prices today sit around a spot price of 27c. He said while butter prices are strong they aren’t strong enough to support weaker commodities. He said the overhang in intervention stocks continues to drag the market.

The African market, where Aurivo sells its dairy enriched powders, has performed well during the year, with demand and prices holding up. He said that ideally oil needs to be above $70/barrel to make a difference.

He warned that as milk supply growth continues around the world this year, it will be one with significant volatility. He also adds that Brexit is an uncertainty for the business and the wider sector. Deal

A deal with LacPatrick would appear a strategic fit for Aurivo. After all, it already collects some 75m litres from Northern Ireland suppliers. Following its acquisition of Donegal Creameries, this milk resides in proximity to LacPatrick’s two processing plants in Northern Ireland at Artigarvan and Ballyrashane.

LacPatrick’s successful LP milk powder brand along with its customer base which includes infant formula manufacturer, Abbott, would no doubt be also of interest.

A doubling of the Aurivo milk pool would bring logistical and processing synergies if a deal with LacPatrick could be made.

Outside of LacPatrick, Aurivo has spare capacity but given the expected supply growth further investment in drying capacity looks like it will be needed at the Ballaghaderreen site.

This would require significant investment and raise the question of how the co-op would fund it.

Based on Aurivo’s balance sheet and 2017 earnings (EBITDA) of €9m would indicate it could take on additional debt of around €15-20m.

Overall Aurivo’s net debt position of less than €6m at year end is impressive, given the level of acquisitions and investment in recent years.

Investment

It invested €4m last year, bringing total investment to almost €30m over the past seven years. It also paid €21m for Donegal Creameries business in 2012 and then paid €40m for the sports nutrition business My Goodness Shakes in 2015.

While overall operating margins are low at just under 1%, the marts and agribusiness account for almost half the turnover. While these are contributing to the bottom line they drag overall performance as they are low-margin businesses. However they are a valuable service to farmer members. There is no visibility of underlying performance in the sports nutrition business. While margins in this sector are high and peers are achieving low to -mid teen levels, it is becoming increasingly competitive.