UK: Dairy Crest sees spreads under pressure
Dairy Crest owns spread brands including Clover
Dairy Crest has said it expects to deliver a "steady" first-half performance, although the UK dairy group conceded sales of its spreads brands came under pressure during the period.
In a trading update for the six months ended 30 September, Dairy Crest said branded sales are expected to be flat year-on-year as the group lapped a tough comparison. Strength in cheese will be offset by lower sales in the spreads business, the group revealed.
Dairy Crest added the underlying performance of its spreads business continued to progress towards the medium-term target of 3% return on sales.
The company reiterated its full-year outlook. Shore Capital analysts expect FY current pre-tax profit of GBP58m (US$80.2m) and EPS of 31.8p, down from GBP70m and 37.9p a share last year.
TRADING UPDATE FOR THE SIX MONTHS ENDING 30 SEPTEMBER 2013
Dairy Crest is issuing the following pre-close trading update for the six months ending 30 September 2013, ahead of announcing Interim Results on 7 November 2013.
In a challenging trading environment Dairy Crest will report a steady first half performance. As anticipated, results will benefit from a lower interest charge compared to the same period last year. Net debt at 30 September 2013 will be higher than at 31 March 2013 reflecting payments made to the pension fund and to redeem loan notes along with the usual first half outflow of working capital. Our profit expectations for the full year ending 31 March 2014 remain unchanged.
We continue to focus on the profitability of our key brands and our dairies business and cost reduction remains an important part of our strategy. Sales of our four key brands are together likely to be broadly the same as they were in the corresponding period last year when they grew by 11% compared to the six months ended 30 September 2011.
Our Cheese business has performed well in the first half and we expect sales of Cathedral City to have outperformed the market and increased in the first half compared to the same period last year. However the butters and spreads market has been difficult and profits in our Spreads business will be lower than last year. Clover sales are expected to be broadly unchanged as the brand continues to outperform the market but Country Life sales will be lower as a result of less promotional activity. We have also faced higher input costs in our Spreads business which has impacted profitability.
The underlying performance of our Dairies business continues to improve towards our medium-term target of 3% return on sales, although reported first half profits will be impacted by lower profits from property sales which this year will be weighted to the second half. Higher returns from cream have contributed to the improved underlying performance. They have also enabled us to pay farmers more for their milk across all our milk purchasing contracts. As expected, FRijj sales will be lower in the first half after we scaled back promotions during the upgrade of our production capacity and capability. This upgrade work is on track to be completed in October and we expect an improved performance in the second half. This business benefits most from the work we have done to reduce costs and we now expect to achieve annual cost savings across the Group of more than £20 million this year.
Looking forward, we have committed to investing around £45 million to add value to the whey produced as a by-product of the cheese we make at our creamery in Davidstow, Cornwall. At present we produce standard whey powder which is mostly sold to food manufacturers. The investment will allow us to remove minerals from the whey and produce demineralised whey powder, a base ingredient for baby food - a fast growing global market. We expect production to start in the first half of 2015 and anticipate that the project will enhance full year operating profits by over £5 million after additional depreciation charges of around £4 million, effectively providing a five year cash payback.
Mark Allen, Chief Executive, commented: 'We continue to perform in line with our expectations despite the challenging trading environment. The butters and spreads market has been particularly difficult. We have offset pressures there by growing our Cheese business, reducing our cost base and improving the underlying performance of Dairies. We are excited by our investment in whey which is in line with our strategy of growing added value sales and expect this to generate attractive returns for shareholders.'
Dairy Crest is hosting a visit for analysts and investors at its Head Office on the afternoon of Monday 23 September. The management team will make presentations on innovation, logistics and whey. These will be made available on Dairy Crest's website at www.dairycrest.co.uk/investors. No material new information will be disclosed in these presentations.
Original source: Diary Crest
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