Dairy Crest Trading Update for the six months ending 30 September 2015


Dairy Crest is issuing the following pre-close trading update for the six months ending 30 September 2015, ahead of announcing its Interim Results on 5 November 2015. 

Trading performance

In the first quarter total sales of our four key brands, Cathedral City, Clover, Country Life and Frylight, were in line with the first quarter of last year and we expect to report a similar position for the first half.  Cathedral City, the largest of the four, and Frylight have continued to perform strongly, growing sales and market share during the period.  Clover and Country Life sales have fallen in a butter and spreads market that remains challenging.  We have recently introduced a new recipe for Clover to meet changing consumer preferences.  It is now made with no artificial ingredients.  We expect this innovation along with a supporting media programme to improve the performance of Clover in the second half.

As previously reported we anticipate that the performance of our Cheese and Spreads and butters businesses will be weighted to the second half of the year ending 31 March 2016 and that first half profits in these businesses will be behind those of the first half of last year.  Dairy commodity markets have been deflationary during the first half and as a result our input costs have fallen.  On average our cheese is matured for around a year and therefore lower milk purchase prices will only be fully reflected in the cost of cheese sold in the second half of this year.  We continue to focus on our cost base and to drive efficiencies across the business.

Our expectations for the full year remain unchanged.  This reflects lower cheese costs and an improved performance from our Spreads and butters business in the second half.

Financial position

As usual we anticipate that Dairy Crest’s net debt will peak around the middle of the year. Although underlying cash generation has been robust we expect the usual stock build in the first half of the year reflecting the seasonality of milk production. This has been unusually high this year.  Additionally net debt at 30 September 2015 will reflect the capital expenditure at Davidstow on demineralised whey and galacto-oligosaccharide (GOS) and at Harper Adams University, the site of our new innovation centre.  Both these projects are nearing completion.

As the year progresses lower milk costs will make a significant difference to the carrying value of cheese stock and hence working capital.  Year end net debt should also benefit from the proceeds from the sale of our Dairies operations and from the sale of several previously closed sites, which we expect to complete in the second half.

Davidstow investment

The investment at our Davidstow creamery to manufacture demineralised whey powder and GOS is nearing completion.  This is another important stage of Dairy Crest’s clear growth strategy. These added value products give Dairy Crest access to new sales channels in fast growing global markets and are principally ingredients for infant formula, although we are also exploring additional applications for GOS.  Production commissioning is underway and we expect to start selling both these products in this financial year and receive a full-year benefit in the year ending 31 March 2017.

Sale of Dairy Crest’s Dairies operations on track to complete in 2015  

On 6 November 2014 Dairy Crest announced that it had agreed to sell the assets of its Dairies operations to Muller UK & Ireland Group LLP (“Müller”).  The sale has already received the approval of Dairy Crest shareholders but remains subject to the approval of the Competition and Markets Authority (“CMA”). 

On 10 August 2015 the CMA indicated that it proposed to accept undertakings offered by Müller which had the potential to address the CMA’s competition concerns.  The deadline for a decision is currently 19 October 2015 although the CMA has said that it may reach a final decision before that date. 

Dairy Crest continues to anticipate that the sale will complete before the end of 2015 should the CMA accept the undertakings and therefore expects to treat the Dairies operations which are being sold to Müller as ‘discontinued operations’ in the results for the six months ending 30 September 2015.

Mark Allen, Chief Executive, commented:

“The first half of the year has played out largely as we expected.  Cathedral City continues to go from strength to strength and has again grown sales and market share.  The strong performance of Cathedral City and of Frylight is particularly encouraging in markets that remain challenging.  Our cost base remains firmly under control. 

Lower cheese costs and an expected improved performance from our Spreads and butters business in the second half mean that our full year expectations remain unchanged.  Our investment to manufacture demineralised whey powder and GOS is almost complete and we look forward to accessing new sales channels in fast growing global markets in the second half of the year. 

 We have always believed the sale of our Dairies operations is good news for the whole UK dairy sector which is currently facing significant challenges arising from low dairy commodity returns.  It will deliver economies of scale and cost efficiencies that will underpin investment and help the UK compete more successfully in global markets.

We still expect to complete the sale in 2015 following the CMA’s indication in August that it was in favour of Müller’s undertakings and are hoping for positive news in the near future.  In the meantime we continue to do everything we can to support our farmers who are facing a particularly tough time at present.

“Dairy Crest is well positioned for long term profitable and sustainable growth with strong accompanying cash generation.”

Dairy Crest is hosting a visit for analysts and investors at its Davidstow creamery on Wednesday 23 September. 

The management team will make presentations on this trading update, Cathedral City, our demineralised whey and galacto-oligosacharide projects and cheese stock accounting.

These will be made available on Dairy Crest’s website at www.dairycrest.co.uk/investors

No material new information will be disclosed in these presentations.