After leading a co-op with more than 10,000 members for 15 years, Aaron Forde’s departure from Aurivo late last year came as a surprise to many. Over his 15 years at the helm of the milk processor, Forde oversaw the doubling of the co-op’s milk pool and for six years also served as chair at Ornua.

Forde grew the northwest-based Aurivo by buying Donegal Creameries’ dairy and retail operations in 2011.

Following that, Forde spearheaded the company’s move into the trendy sports nutrition area with the acquisition of UK firm, My Goodness Shakes in 2015. Six years ago, the co-op was renamed from Connacht Gold to Aurivo.

Milk supply

Aurivo’s geographical reach is unlike most other co-ops operating in Ireland, collecting milk from more than 1,000 farmers spread across a vast area.

With a milk pool of around 450m litres, Aurivo processes 6% of the total Irish milk pool, collecting that supply from 14 counties across the west and northwest of the country.

Around 17% or 85m litres of this milk comes from Northern Ireland – product which may be at risk in the event of a hard Brexit. However, given that there is not enough capacity to process the milk produced in Northern Ireland within Northern Ireland, it is difficult to see how this milk will flow south in the future.

Another unique aspect of Aurivo’s supply is how heavily it is weighted toward liquid milk, which accounts for around 25% of its total pool.

In the last five years, since quotas were abolished Aurivo has seen its milk pool grow by 31%, or almost 100m litres. The majority of this growth has come from existing suppliers expanding, along with a small number of new entrants.

Milk supply continues to be strong, with Aurivo showing 8% growth in 2018 and its dairy farmer members are expecting to grow a further 25% over the coming three years. Dairy cow stocking rates are low in the region and offer potential for supply growth.

The business

Aurivo had a turnover of €444m and profits (operating) of €3m in 2018. Over the last five years it has averaged €3-4m in operating profits per year. These figures mean Aurivo is a business, with an extremely thin margin of less than 1%. A 0.5c/l change in the milk price could make the difference between the business being in the red or black for any given year.

In 2018, the KPMG /Irish Farmers Journal milk price review showed Aurivo paid just short of 33c/litre – within 0.5c/litre of neighbouring co-ops Arrabawn, Kerry, Lakeland and Tipperary.

In 2019 a quick review of the base monthly milk prices would suggest it continued to pay a solid milk price relative to neighbouring co-ops and even went ahead of the some of the bigger players.

At the time of the opening of a new drier in Ballaghaderreen in Co Roscommon last year, the co-op’s chair, Pat Duffy, promised the co-op would “continue to return a leading milk price”.

This is all very well, once it does not come at the detriment of investment in business operations and sustainable profit levels.

The business model

Aurivo does not make cheese and therefore does not have an attractive whey stream. It has a large liquid milk business that accounts for around 20% of the Irish market. It also has a 15,000t butter business, which is now manufactured in Kerrygold’s butter facility in Mitchelstown.

A key element of Aurivo’s growth strategy over recent years has been its focus on enriched milk powders targeted at north African markets.

The business has four main divisions. Chief among these is the dairy ingredients (including added value powders) sector which accounts for one third of Aurivo’s business, with sales of around €150m.

Its consumer foods division, which includes fresh milk brands Donegal Creameries and Connacht Gold along with its For Goodness Shakes brand, has a turnover of around €100m and accounts for 25% of the overall business.

Aurivo’s agribusiness division, which includes its chain of Homeland stores across the northwest and a feed mill along with feed and fertiliser sales, makes up a further 25% of the business with sales of €120m.

Aurivo is also unique in being the only remaining Irish dairy processor with a mart business. It operates four marts at Balla, Mohill, Ballymoate and Balinrobe and sells in excess of 100,000 cattle and 35,000 sheep annually. These activities account for around 15% of the company’s operations, or €70m turnover.

Aurivo has made some big acquisitions over the past decade. In 2011, in a major move it paid €21m for Donegal Creameries’ milk and retail businesses, which had a turnover of €70m and was generating profits of between €1-2m annually. This saw 280 suppliers and 120m litres of milk join Aurivo.

Then in 2014, it made its biggest acquisition to date, paying €40m for London-based sports nutrition company, My Goodness Ltd. At the time My Goodness Ltd, which sells a range of dairy based protein drinks through supermarkets and specialist sports shops, had sales of €10m, with profits believed to be around €1-2m at the time – indicating a price tag of 20-30 times earnings.

Last year Aurivo expressed an interest in merging with LacPatrick but lost out to Lakeland in the end.

The business has also seen significant transformation in its operations, including the closure of its Sligo butter plant, with production moving to Kerrygold Park in Cork. There was also the closure of its Barnashrahy milk processing plant in Sligo, consolidating operations to the former Donegal Creameries site.

In 2016, Aurivo disposed of its 66.67% shareholding in Earrai Coillte Chonnacht Teoranta for a cash consideration of almost €20m, giving rise to a profit on disposal of €8m and enabling Aurivo to fund the purchase of My Goodness Shakes Ltd.

While it has been busy paying for these acquisitions, Aurivo has also invested significantly in its own operations.

Last year, the co-op invested in a new €26m dryer at its Ballaghaderreen, Co Roscommon site as part of a €48m investment programme. This drier – the largest capital investment made in the history of Aurivo – will see capacity increase by 55% to 60,000t and is required to process the anticipated growth in milk, according to the company.

Aurvio also invested €6m in its Killygordan milk plant in Co Donegal, which will double processing capacity at the site. At the time the co-op said this will “solidify and enhance” the co-op’s position as the second largest liquid milk producer in Ireland.

According to the latest available set of accounts, Aurivo’s balance sheet had a value of €62m at the end of 2018. However, it is important to understand how the make-up of Aurivo’s balance sheet has changed over the last five years.

At year end 2014, Aurivo’s balance sheet recorded goodwill of €9m. The following year it purchased My Goodness Shakes Ltd UK for €40m. This company had €17m of brand value and €2.5m in relationships (goodwill). Aurivo recorded €22m goodwill (and other intangibles) relating to the acquisition.

At the end of 2018, goodwill at Aurivo was valued at €37m or almost half of total assets, with the other half in buildings, machinery and plant.

The business had net debt of just under €8m at year end 2018, which is 1.8 times earnings.

Aurivo is half way through a five-year strategy where the co-op aims to process 500m litres of milk, achieve 2% profit margins and deliver a 45% uplift in shareholders’ funds.

At this level of production Aurivo is targeting profits of close to €10m – more than three times current levels.

There is little visibility on how Aurivo intends to do this, but ultimately the litre of milk will have to deliver.

With a higher operating cost due to its large collection area, a mart and agribusiness sector that provides a service to farmers, but little in terms of margin or profit, milk is Aurivo’s main means of growth.

The liquid milk market is extremely competitive market thanks to overcapacity across the country. Efficiency and scale would seem to be the name of the game in this market. Aurivo’s debt is relatively low, but earnings are equally low and a slight change in the milk price could impact borrowing capacity.

Aurivo’s big bet was on For Goodness Shakes Ltd to deliver superior margins and support the milk price. However, this does not seem to be the case, though it is difficult to say as the company does not break out performance in this business.

Goodwill makes up a significant part of Aurivo’s balance sheet. If the business is not performing the auditors may force the co-op to take a write down on For Goodness Shakes Ltd. This could have serious consequences for the balance sheet and the co-op’s ability to borrow.

An announcement is expected in the coming week on who will take over the reins at Aurivo. This will see almost a complete change in the senior management team over the last two years.

The future management at Aurivo will be expected to underpin the financial stability and grow the Aurivo business for shareholders. That will involve getting financial return on all parts of the Aurivo business, which may involve on going consolidation, streamlining and operational efficiency improvements.