Dairy Crest increased sales by more than £100m to £1.4bn for the full year ended 31 March. Pre-tax profits, however, slipped 41 per cent, including one-off payments and charges.
The group's mixed showing indicates that the blossoming trend towards added value products in the UK dairy sector is not yet strong enough to offset the intense margin pressure firms face from rising input costs and less profitable markets.
Dairy Crest increased sales thanks to growth across its branded portfolio, including omega-3 enriched milk and spread under the St Ivel brand, Cathedral City cheddar, Country Life Spreadable and Yoplait.
Branded products now account for 56 per cent of the group's operating profit, and Dairy Crest has been recognised by analysts over the last year as the leading domestic player in added value and brand innovation.
The firm improved that position early this year by launching its St Ivel Gold spread enriched with omega-3 fatty acids. The move built up Dairy Crest's functional products portfolio, following the launch of St Ivel Advance omega-3 milk last year.
Cathedral City cheddar, meanwhile, confirmed its position as Britons' favourite cheddar brand - increasing sales by 17 per cent in value and 11 per cent in volume. The group recently launched a mild version of the cheese.
Problems in own label milk, as well as rising costs and challenging commodity markets continued to undermine brand growth and blight Dairy Crest's profits, however.
The processor's milk sales to retailers dropped 17 per cent over the year, after it lost a supply contract with Tesco in April 2005.
The group said a deal with retailers to raise milk prices in January 2006 had helped to offset rising packaging and energy costs. But, it was too late to stop operating margins slipping by one per cent for the year.
Drummond Hall, Dairy Crest chief executive, said there was now a better balance of supply and demand across the UK fresh milk sector, although cuts to retail milk prices in March threatened more uncertainty.
The firm has also pursued a more rigorous cost-saving programme over the last year, which included closing the recently acquired Midlands Co-op Birmingham dairy at the end of February. Production was transferred to other dairies.
In its outlook, Dairy Crest predicted more of the same: Commodity markets would remain challenging, it said, but trading was in-line with expectations and branded product lines would continue to grow.