Dairy Crest has picked up a new 50m litre milk supply contract with Tesco but reported a 24% drop in operating profit in its dairies division to £10.9m on the back of higher input costs and competitive pressures.
The dairy giant, which posted a 6% rise in group pre-tax profit to £36.1m on sales down 3% to £776.9m in the six months to September 30, said solid sales of milk to the supermarkets and strong growth in Cathedral City, Clover and St Hubert Omega-3 had been offset by lower sales of milk to the doorstep and middle ground market.
However, it had secured new volumes from Tesco and continued to increase distribution of its patented milk jug ‘Jugit’: “We have been successful in gaining a share of Tesco’s fresh milk business, with supply commencing in December 2010.
“We now have agreements to supply fresh milk in polybottles to six out of the seven major UK retailers, reflecting the improvements we have made to our quality, service and cost base.
“However, increased national milk supply in the period has resulted in a more difficult middle ground sector and we have reduced sales in this area as customer profitability has declined.”
Cheese profits sharply up, spreads up marginally
Profits in the cheese division, by contrast, surged by £4.6m to £12.5m driven by strong sales of Cathedral City and higher whey prices.
Profits from the spreads business were “marginally higher, up £0.2m to £27.2m, as we have succeeded in reducing our cost base and recovering inflation across cream and vegetable oils in the marketplace”, said the firm.
Sales in spreads were “broadly stable” with strong performances from Clover, St Hubert Omega-3 and Country Life offset by a weaker performance from Utterly Butterly.
Chief executive Mark Allen said: “With operational efficiencies and selling price increases in certain categories limiting the impact of higher input costs, we are confident that we can continue to deliver profits in line with our expectations.”
Investec Securities analyst Nicola Mallard said the figures were "a shade ahead of expectations", adding: "The contract win with Tesco - albeit with relatively modest volumes of 50m litres which needs to be segregated through the production process - will help to offset the loss of some Sainsbury volume to Arla following this retailer's earlier supplier review."
Panmure Gordon analyst Damian McNeela said the contract win had “removed one of the key risks to the business”, but that he remained “sceptical about the ability of the dairies business to deliver the necessary returns on investment although the company remains of the belief that this is achievable."
Strong competition from Unilever in spreads was also a worry, he added: “We continue to see the threat of tougher competition from Unilever in Spreads, particularly in Europe as a concern.”