The Board of Dairy Crest is today announcing a proposal to consult on the closure of two dairies. This is part of its long term plan to reduce costs and sustain profitability in an extremely challenging market environment for its liquid milk business.
The Board is also reporting an improved year-end net debt position.
Separately the Board is announcing that its current contract to supply liquid milk to Tesco will not be renewed when it comes to an end in July 2012. Around 3% of Dairy Crest's liquid milk sales in 2011/12 were made to Tesco. Despite the loss of this contract, Tesco remains a large and important customer for our key UK brands.
On 29 March 2012 the Board issued a pre-close trading update in which it confirmed that overall trading for 2011/12 was in line with its expectations.
Strong performances from the Foods businesses compensated for more challenging trading in the Dairies division.
The announcements that Dairy Crest is making today reflect the ongoing competitive environment facing its Dairies business and the Group's determination to take proactive action in line with the overall strategy being pursued by the Board.
Proposal to close Aintree and Fenstanton dairies
The pre-close trading update indicated that Dairy Crest was looking at a range of options to restore its Dairies business to a satisfactory level of profitability. Today the Board is announcing that the Company is entering into consultation with employees and their representatives on proposals to close two of the Group's dairies at Aintree, Liverpool and Fenstanton, Cambridgeshire later this year.
The proposed closures of these dairies has been facilitated by the ongoing £75 million investment programme in the Dairies business. This has driven efficiencies and increased capacity at the Group's other three polybottle dairies at Severnside, Gloucestershire, Chadwell Heath, London and Foston, Derbyshire.
Aintree is predominantly a glass-bottling dairy. There has been a fall in the sales of milk in glass bottles as residential sales continue to decline overall and customers increasingly opt for plastic bottles and milk bags.
Dairy Crest will continue to supply residential customers with milk in glass bottles from its Hanworth dairy in London should Aintree close.
At Fenstanton Dairy Crest packs milk into polybottles. Most of the volume here can be transferred to other, more highly invested Dairy Crest dairies.
Dairy Crest anticipates that there will be cash exceptional costs associated with these closures of around £15 million, to be charged in 2012/13. It will review the March 2012 carrying value of assets at these sites and goodwill in its Dairies business in the light of these proposals. Dairy Crest expects to treat all these charges, together with any required impairment of goodwill, as exceptional items.
Over the fourth quarter, Dairy Crest's cash collection has been stronger than anticipated and its net debt at 31 March 2012 will be around 5% lower than market expectations.
Loss of Tesco liquid milk business
Separately, Dairy Crest was yesterday informed by Tesco that its current contract to supply liquid milk will not be renewed when it comes to an end in July 2012. Around 3% of Dairy Crest's liquid milk sales in 2011/12 were made to Tesco.
Whilst the loss of this supply contract is disappointing, it demonstrates the need for the Group's continuing strategy of investment in, and consolidation of, the Dairies business. The loss of this contract does not change the Group's wider and important relationship with Tesco across key UK brands Cathedral City, Country Life, Clover and Frijj and will not impact Dairy Crest's profit expectations for the year ending 31 March 2013
Mark Allen, Chief Executive of Dairy Crest, commented:
"Dairy Crest is a broadly based business which has delivered against our strategy despite challenging trading conditions.
Our Foods business has performed strongly and sales of our five key brands continue to grow.
However, along with the rest of the sector, our Dairies business is under sustained pressure and we have to continue to act decisively to protect its future.\
The decision to consult on the closure of our Aintree and Fenstanton facilities has not been taken lightly, but we believe that this proposed restructuring of our Dairies business is the right decision for the long-term. We will do all we can to help employees who may be affected by these proposals.
The proposals we are announcing today are part of a series of actions designed to restore our Dairies business to an acceptable level of profitability over the medium term.
With lower net debts at the year end than we anticipated, the Group has positioned itself well to absorb the cash costs associated with these closures.
The challenges in the liquid milk industry are further underlined by the disappointing loss of the Tesco liquid milk supply contract. However it represents just 3% of our total liquid milk volumes and has not driven the restructuring decisions which we are announcing. Tesco remains a large and important customer for our key UK brands Cathedral City, Country Life, Clover and Frijj."
Dairy Crest will announce preliminary results for the year ended 31 March 2012 on 24 May 2012.
For further information, please contact:
Dairy Crest Group plc
Arthur Reeves 01372 472236
Simon Sporborg 020 7404 5959