Dairy Crest is preparing to close two dairy facilities and cut its farmgate milk price as it looks to rein in costs amid “challenging” market conditions.
The UK dairy group has set out plans to close a glass bottling dairy in Hanworth in west London and a cream potting facility in Chard in Somerset.
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The proposal to end production at Hanworth, which employs around 200 people, follows a review of the company’s residential delivery service. The move is “necessary to protect the long-term future of this business” as demand for milk in glass bottles has waned, the company added.
The proportion of milk put into glass bottles has fallen from 94% in 1975 to just 4% in 2012 and Dairy Crest now plans to change its delivery service to plastic bottles. Dairy Crest expects to close the facility in two years when production has been increased at its plastic bottling factories to compensate.
Dairy Crest intends to close the facility in Chard, where 60 people are employed, in the second half of fiscal 2015. “The business has considered many options to improve the economic viability of this site…without success,” the company said.
Dairy Crest has targeted annual cost savings at its dairies business of GBP20m (US$32.7m) and the company said it continues to reduce costs in line with this target. The company will book exceptional costs associated with the closures of around GBP15m over the next two years.
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By GlobalDataAs previously announced, Dairy Crest plans to shut its Crudgington butter and spreads factory in the second half of this year.
In a separate trading update, Dairy Crest revealed its dairies division continued to be loss-making in the first half of its financial year, despite higher earnings from the sale of properties. The company said downward pressure on fresh milk selling prices were hitting margins while a “steep” drop returns from dairy commodity markets was also weighing on the result.
“As a consequence we have regrettably cut the prices we pay to our farmers for their milk in line with the rest of the market,” the company said.
In spite of these challenges, Dairy Crest said it expects its performance in the six months to 30 September to be “broadly in line” with the prior year period.
Sales of its key brands – Cathedral City, Country Life, Clover and Frijj – were up 4% in the first quarter and the group said it anticipates this growth trajectory to continue throughout the half. In particular, the UK dairy manufacturer stressed Cathedral City had won market share in the six-month period.
“This is a strong performance in an environment where consumer expenditure on food is falling,” the company said.
Dairy Crest is also making progress on its plans to develop a production stream of demineralised whey powder and galacto-oligosaccharide to tap into growing global demand for infant forumula. However, this investment and one-off costs associated with efforts to streamline production will result in higher net debt, the company revealed.
Shares in Dairy Crest were down 3.17% in morning trade today, sliding to 396.5p at 11:00 BST.
Shore Capital analyst Darren Shirley said he was “disappointed” at the additional restructuring expenses but noted management expects further property disposals to more than offset the cost.
“Despite the challenging backdrop, the investment and cost-savings initiatives in dairies, the consolidation of spreads production and the potential from whey investment from FY2016 onwards provide for more resilient profit streams and cash flows, so supporting the FY2015F 5.5% dividend yield,” Shirley said.
