Tipperary Co-op is aiming to be the west Cork of Tipperary – a small, niche player in higher value-added dairy ingredients.

Currently, the core Tipperary co-op business is in cheese, butter and, increasingly, powder.

Cheese is becoming a smaller cog in the wheel for Tipperary and the powders it produces, like those that supply base commodity product to the infant formula sector, are growing. Tipperary has a long business relationship with French-based international giant Danone.

The core milk supply base for Tipperary Co-op is the 400 or so farmers in the south, west and north of Tipperary. The milk supply from its own suppliers in 2020 was 186m litres – making it equivalent in size to one of the west Cork co-ops.

However, an additional 100m litres was processed in 2020 (Figure 1).

Recent speed bumps to the co-op financials were a contamination incident in 2018, a delay in commissioning the new dryer and evaporator due to the insolvency of the equipment supplier and the commissioning of a new plant during COVID-19. All have negatively affected the co-op’s profits.

This is the first full year of a new stream of powder product from the recently commissioned dryer at Station Road in Tipperary town.

How will it benefit Tipperary Co-op in the short term? Primarily, it will improve product options and give flexibility to management to make better commercial decisions to match higher market prices.

The co-op invested over €37m in capital projects over the last three years – a new high-specification dryer/evaporator (€32.7m) and an enhanced waste facility (€4.2m). This means that, if required, the co-op has the capacity to process over 600m litres of milk annually – over twice the volume it currently processes.

Financials

The numbers from the 2020 annual report are not good. Sales were up in 2020 compared to 2019 (€245m v €229m) as volumes processed increased. However, the cost of doing that business increased even further, leaving the co-op with a trading loss of €3.1m compared to a trading profit of €3.1m in 2019.

Wages and salaries increased from €11.7m to €13.1m, the cost of gas increased from €2.1m to €2.7m and depreciation moved from €3.6m to €5m.

Given the investment on-site, increasing debt is a challenge for the co-op, with almost €21m in long-term loans, up from €15.25m in 2019. The projections are to reduce that debt to €2.8m by December 2027 and chief financial officer Eamon Doody is confident that can be achieved.

Base milk price has been poor through 2020 with Tipperary starting out at 29c/l, falling to 27c/l during peak.

Q&A: CEO John Daly

JK: What drove the poor financial performance in 2020?

JD: The cost base of two dryers with output of one dryer and the fact we had to sell out highly profitable milk that we couldn’t process.

What options do you have with this dryer that is potentially going to add value to milk?

We could have easily built a dryer for €10m. Instead, we have a high-specification dryer now that allows us options for inclusion of different ingredients to a base product at different stages. This may be vitamin-enriched milks or powders that have a dairy or non-dairy base. This year, for the first time, making cheese is an option for us.

Butter and skim is making the equivalent of 2c/l to 3c/l more so we make more of that product mix.

As CEO, where do you see money increasing to allow for potential milk price increase?

As debt reduces, the business will have more options. With improvements on growing the top line, there is more for milk price. That will come from product areas we are not in today. We have a huge amount of market sample work done on a pilot basis and now we are moving to pilot plant in house with three or four products.

Is 2021 milk up?

We have 5% growth year to date with a 15% growth in third-party whole milk. In total, we are up about 20% in tonnages of product generated to the end of July – primarily more butter and skim milk powder.

We are in September 2021 and you are just releasing 2020 financial results. You must have a good handle on 2021 at this stage?

Yes, and indications are positive. To the end of July 2021, our tally suggests net profit would be €5.4m compared to a loss of €0.8m for 2020 for the same period. This is despite the fact that total expenses are up €4.3m to the end of July.

Comment

Tipperary Co-op has placed a big bet on investing in a high-spec new drier. You have to admire the board’s courage and the management to deliver the project.

The success of new investment is very dependent on two things – taking in outside milk and adding value to product.

They are two risks that can also be viewed through the opportunity lens. It looks likely Tipperary Co-op will get milk, in the short term at least, from non-shareholders as planning permission delays other building projects.

Adding value to basic powders is a work in progress.

If you were to judge the project right now it would look poor from a shareholder’s return perspective. Base milk price in 2020 has been relatively poor, debt levels have increased and profitability has crashed, but that is as much about the stage of the investment. Capital developments are a 20-year plus investment.

In the early part of this journey, Tipperary hit two big speed bumps. Both episodes have added cost.

However, Tipperary Co-op has been here before. Go back 10 years and debt levels relative to profitability and volumes processed were much higher.

For me, the annual report published this week lacks any information on milk price delivery and guidance for dairy farmers.

Tipperary Co-op suppliers might have the processing capacity, but will restrictions outside the co-op gate limit capacity to utilise that investment? Will non-shareholder milk continue? Can the better 2021 performance be sustained as costs rise?

In brief

  • Very poor financial performance in 2020 compounded by delays to commissioning the new dryer during 2020 with huge additional costs.
  • Pathway for processing more product in view. Now it’s about adding value to product so milk price can be increased and ever increasing processing costs paid.