Dairy Crest, the UK dairy group, may have had some good news in its half-year results but the company’s outlook spooked the market and its shares plunged. Ben Cooper looks at what the near future holds for the Country Life-to-Cathedral City maker.
Dairy Crest may have feared the worst when it was forced to issue a profit warning for the full year on Monday (10 November), so seeing its share price fall by 25% may have come as a blow but no surprise. In the current climate, bad news, especially if the company reporting it is heavily indebted, is unlikely to be greeted with calm reason. Panic, it appears, the market can do. Just ask Premier Foods.
While the market reaction may have told a different story, the UK-based dairy group felt it had some relatively good news to tell about the first half. CEO Mark Allen said it was a “robust performance”, with turnover up 6% to GBP808.2m (US$1.28bn), and underlying pre-tax profits rising by 4% to GBP38.5m.
Indeed, according to Nicola Mallard, food analyst at Investec, which downgraded its full-year profit forecast for Dairy Crest on the back of Monday’s announcement, “the first half wasn’t really the issue; it’s the outlook that they’re talking about. They’re saying the outlook is getting more uncertain”.
“The economic environment is becoming increasingly tough and more difficult to predict,” Allen said. “However we are actively addressing these difficulties by continuing to invest in our business, particularly in the form of marketing spend and in the development of our operating facilities. We will also maintain the ongoing focus on operating efficiencies and cost control. We believe that these initiatives will leave us well positioned for the future.”
Dairy Crest said the profit warning stemmed from three prime factors, including weaker returns from dairy ingredients and its decision to delay property disposals. Given the state of the UK property market, the latter decision would seem to be a wise, if not the only course of action.
The company’s determination to keep a lid on costs will have an impact on jobs at its Surrey head office, where up to 80 jobs will go. Dairy Crest told just-food it is looking to keep costs down in an effort to “help consumers through these difficult times” as the company navigates the economic turbulence seen in the UK.
The effect of the economic downturn on retail spending was naturally also cited as a factor when Dairy Crest issued its profit warning. While the company reported double-digit volume growth on its Cathedral City, Clover, Country Life Spreadable and Frubes brands, analysts have pointed out that while it may be able to sustain margins, the percentage being sold on promotion has been increasing.
The sectors Dairy Crest is involved in are already promotion-orientated and, according to Mallard, Dairy Crest is selling more on promotion now simply because in the current climate consumers are buying more on promotion. “People seem to be being more canny in terms of what they’re buying and shopping more on price, promotion etc which means it’s a margin impact rather than a sales impact,” Mallard tells just-food. “They’re still selling the product but they’ve got to promote more to sell it.”
According to Mallard, promotion sales account for between 20% and 30% of Dairy Crest’s spreads volumes, while she believes promotions are currently accounting for between 40% and 60% of the company’s cheese volumes. She also forecasts that Dairy Crest, along with other milk processors, will be looking to lower the prices they pay to their UK milk suppliers in the coming months.
The market reaction to Monday’s announcement goes some way to explaining why some food and consumer goods companies have been reluctant to lower their profit forecasts, in spite of fears that the downturn is going to have a negative impact on sales.
“It is difficult because companies are obviously aware of the market’s volatility at the moment and its sensitivity to bad news so you’re not going to be rushing out there to drop your numbers on the off chance that you might see a downturn in your profits,” Mallard tells just-food.
While Danone cut its 2009 growth outlook last week, other companies have been criticised by analysts for sticking with previously issued targets which are considered far too optimistic.
While Dairy Crest had a legal obligation to issue a warning because it definitely knew its profits would be hit, Mallard points out that the rapid throughput of the food sector means companies cannot predict accurately how things will go.
“It’s very difficult for these companies because there’s no order book visibility,” she says. “Food has a very short shelf life. You’ve got very little predictability. It’s not like you have an order book where you have some visibility over the next three to six months. It doesn’t happen. How can they give guidance on something they don’t know anything about? They’re all in the same boat in that respect.”
A number of food groups have deferred issuing forecasts until after the crucial Christmas trading period. For those companies, and for those like Dairy Crest that have downgraded their forecasts, this Christmas will be even more crucial than usual.