Dairy Crest has announced the loss of its Tesco milk contract but says this bears no relation to new plans to close two dairies, as it cuts costs to sustain profitability in an 'extremely challenging' liquid milk market.
Yesterday Tesco informed Dairy Crest that it would not renew its current contract to supply liquid milk when it comes to an end in July 2012, and the dairy processor said that this represented around 3% of liquid milk sales in 2011/12.
Dairy Crest CEO Mark Allen said: "The challenges in the liquid milk industry are further underlined by the disappointing loss of the Tesco liquid milk supply contract.
"However it represents just 3% of our total liquid milk volumes and has not driven the restructuring decisions which we are announcing. Tesco remains a large and important customer for our key UK brands Cathedral City, Country Life, Clover and Frijj."
The firm has earmarked sites in Aintree (Liverpool) and Fenstanston (Cambridgeshire) for closure later this year - at an estimated cost of ₤15m in 2012/13 - and said it was consulting with employees and unions on the proposals. Trade union USDAW said the move could mean up to 470 job losses.
Dairy Crest said the move had been "facilitated" by an ongoing ₤75m (€90.8m) investment programme that had driven efficiencies and increased capacity at its other three polybottle dairies at Severnside, Gloucestershire, Chadwell Heath, London and Foston, Derbyshire.
Analyst hails 'encouraging' news
Damien McNeela, analyst, Panmure Gordon, said in a note that he welcomed the proposed closures as an attempt to restore profitability within a dairies business hit by rising fuel costs, higher plastic costs and lower bulk cream prices.
"Today's announcement is part of a series of actions being undertaken by management and we can expect further announcements to be made. [The] news is encouraging but we maintain our 'hold' recommendation until we have further visibility on plans for the dairies business," he said.
He added that the Tesco contract loss (circa. 50m litres of milk) was "negative for sentiment but only represents circa. 3% of group production"; while it was unclear to what extent Aintree or Fenstanton were loss making.
The latter's closure would reduce Dairy Crest's exposure to the lower margin 'middle ground' market, McNeela said: sales beyond the major multiples to caterers, the public sector, wholesalers and independents.
DairyReporter.com understands that Dairy Crest's other UK major retail customers for liquid milk are Sainsbury's (210m litres per year) Morrisons (210m), Waitrose (70m), M&S (50m) and the Co-operative Food (25m).
But total group volume sales to the large retailers (565m litres per year) are low compared with rivals Robert Wiseman (1.11bn litres) and Arla (1.31bn). Instead, Dairy Crest sells higher volumes (780m litres) via the middle ground, and is the only UK dairy processor within the 'Big 3' to sell liquid milk (300m litres) via (milk&more) a doorstep delivery service.
Glass bottling overcapacity
Aintree is predominantly a glass-bottling dairy (and McNeela highlighted the firm's over-capacity in glass bottling) and Dairy Crest linked its potential closure to a slump in overall residential sales, as customers increasingly opted for plastic bottles and milk bags.
The company said it would continue to supply residential customers with milk in glass bottles from its Hanworth dairy in London should Aintree close.
Despite Fenstanton being a polybottle (high density polyethylene or HDPE) site, Dairy Crest said that most of the volumes there could be transferred to its other, more highly invested dairies.
Allen said: "Dairy Crest is a broadly based business which has delivered against our strategy despite challenging trading conditions. Our Foods business has performed strongly and sales of our five key brands continue to grow.
"However, along with the rest of the sector, our dairies business is under sustained pressure and we have to continue to act decisively to protect its future.
"With lower net debts at the year end [around 5% lower] than we anticipated, the group has positioned itself well to absorb the cash costs associated with these closures," Dairy Crest's CEO added.
Panmure's profit forecasts for the dairies business were unchanged, McNeela added: "We expect the dairies business to generate circa. £9m of operating profit in FY 2013E, slightly below our £10.4m forecast for FY 2011E, which includes £4.6m of property sales. The company announced that it expects net debt to be c£340m for FY 2011E, lower than our forecast of £348m."
The firm will report its preliminary results for the year ending March 31 on May 24 2012.