The largest farmer-owned co-op in the country supported milk prices by €25m in what was a more challenging year for dairy markets.

Chief executive Jim Woulfe said it “was a year of two halves as far as dairy markets were concerned”, adding that “the first half saw continued volatility with declining market returns while the second half began to see a change in the market dynamic, with global milk output slowing across all regions except the USA”.

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Despite a 4.1% increase in milk volumes to 1.2bn litres, turnover decreased 3.7% to €756.1m during the year. Operating profit fell 8.8% to €17.5m, which represents a decrease of €1.7m driven by the increase in supports of €5m to €25m.

The co-op had a charge of €1.2m relating to restructuring the retail business during the year. Earnings (EBITDA) fell 5.3% to €39.0m. Operating margins remained solid and fell marginally from 2.4% to 2.3%.

Dairygold paid a milk price of 27.7c/l (including a 2c/l support) in 2016. From July 2016 onwards it implemented seven milk price increases.

Dairygold continued to invest in the business and a further €15m was invested in the year. This brought the total capital investment over the past six years to €200m across its dairy sites at Mallow and Mitchelstown. This has seen processing capacity increase by 55% in the same period.

At year end, the net asset value was down by almost €8m to €307.6m. Net debt was reduced by €7.5m to €88.7m at year end. Net debt to earnings at year end was a comfortable 2.3 times. The co-op recently enhanced its banking facilities for the next five years.

Since 2013, the co-op has received €11.2m in member funding. This is made up of €2.7m in loan notes, and €8.5m in the revolving fund. The revolving fund was suspended in 2016 due to low milk prices and meant that €7m was not collected from farmers.

Dairygold received a final distribution from the winding up of Reox of €411,000 during the year.

Remuneration for senior management, which is made up of eight people, was €2.3m.

Dairygold has a property portfolio valued at €48m which it revalued upwards by €3m in 2016. It also has a share portfolio of €34.5m, mainly made up of Aryzta, One51 and FBD shares. This was down €3.7m at year end primarily as a result of a €2.4m fall in Arzyta share value.

By division

Food Ingredients

Food ingredients, which accounts for 71% of the business, saw Irish turnover fall 1% to €418m. Almost half (46%) of sales were destined for the European market, with a further 40% going to international markets and the balance (14%) sold to companies operating in Ireland.

Woulfe said that phase one of Mallow is completed and up and running. It is currently investing in improving customer facilities at this site, which are due to be complete in 2017.

Production commenced at Kerrygold Park located at the Castlefarm site in Mitchelstown in 2016 and will see cream being delivered from Dairygold to manufacture butter on the site. It also extended an agreement to supply cream to Glanbia for the next three years.

Since 2014, Woulfe said that 65% of the extra milk has gone into powders. He said the business is now focusing on moving these into higher-value nutritional products.

During the year, Dairygold announced a plan to develop a new cheese production facility at Mogeely in partnership with Norway’s largest dairy processor, Tine. This will quadruple Tine’s current cheese output on the site. This arrangement will see Tine building and operating a new facility on the Mogeely site, with milk coming directly from Dairygold. While still at the planning stages, it is hoped that construction will start in 2018.

This will operate somewhat similarly to the Ornua investment in Kerrygold Park at the Mitchelstown site. Woulfe said these commercial partnerships with global food companies have been an avenue to add significant value to the business. He says they will continue to look for other strategic partnerships such as these in the future.

Overseas

Turnover in its overseas business, which includes its UK cheese ingredient business, fell 10% to €122m as a result of negative exchange rates and reduced selling prices, despite strong volume growth.

Agribusiness

Turnover in the agri-retail division, which accounts for 28% of turnover, was down 4% to €212m, driven by reduced selling prices and fertiliser volumes due to strong grass growth and favourable weather conditions. Retail sales increased in the year. During the year, it purchased 107,000t of grain, paying a market support.

Chair James Lynch said that the board felt it was important to support the long-term sustainability of the tillage sector, especially given the very difficult harvest.

Brexit

Woulfe said “tomorrow is going to be worse than today in a trading environment”, adding that “Brexit will have a profound impact on the Irish dairy industry and in particular cheese”.

If no free trade agreement is negotiated and it reverts to WTO rules, cheese sold into the UK will see the equivalent of 16c/l added to its cost.

He said: “Working with other cheese producers and with Government involvement we need collectively to address Brexit challenges for Ireland’s cheese exports of which 60% of Irish product is sold into the UK.”

He added: “We must continue to pursue strategies to diversify markets to minimise the impact of Brexit.”

Comment

Since 2009, Dairygold has seen milk volumes increase a massive 44% or almost 400m litres. In order to process this supply growth it invested €200m in stainless steel and associated infrastructure in its core business. In 2009 net debt was almost €80m.

Today, having refocussed on its core dairy processing business net debt is €88m with farmers contributing a further €11m. This expansion, particularly in the last two years was delivered against winds of volatility and weak dairy markets. It is a strong performance in light of the expansion in supply and that Dairygold has no wealthy parent meaning that supports must come directly from its profits.

Once the expansionary phase is completed, it should free up management to focus on creating more added value opportunities to bolster the milk price.