1. dairy crest’s strategy mark allen 3 delivering a clear and consistent strategy… build market...
TRANSCRIPT
1
Analysts’ visit to Nuneaton17 September 2009
Presentations
1. Strategy Mark Allen Chief Executive
2. Milk Flows Alastair Murray Finance Director
3. milk&more Mike Sheldon Managing Director, Household
4. Cheese Supply Chain Martyn Wilks Executive Managing Director, Foods
Analysts’ visit to Nuneaton17 September 2009
Presentations
1. Strategy Mark Allen Chief Executive
2. Milk Flows Alastair Murray Finance Director
3. milk&more Mike Sheldon Managing Director, Household
4. Cheese Supply Chain Martyn Wilks Executive Managing Director, Foods
Dairy Crest’s Strategy
Mark Allen
3
Delivering a clear and consistent strategy…
Build market leading positions in branded and added value markets
Over 80% of Foods Division sales are now branded with 10% from products developed in last 3 years
Clear focus on five key brands
Focus on cost reduction and efficiency improvements
15 factories closed or disposed since 2001
Production now consolidated at 14 locations
Improve quality of earnings and reduce commodity risk
Dedicated milk pools for 4 major retailers
milk&more on doorstep
Ingredients turnover less than 5% of group
Generate growth and focus the business through acquisitions and disposals
Six major acquisitions in last 15 years have transformed group
4
Core Brand MarketBrand growth over
5 years*Brand growth to March 09**
UK cheese 178% 22%
UK dairy spreads 28% 33%
UK spreadable butter 274% 48%
French non-butter spreads
274% 9%
UK flavoured milk 47% 23%
Build market leading positions in branded and added value markets
*AC Nielsen or IRI or TNS value growth**Dairy Crest sales growth by value
5
Added Value Milk PoolsA modern doorstep proposition
Own-label flavoured milk
Build market leading positions in branded and added value markets
6
Focus on cost reduction and efficiency improvements
• 2006 Closed Birmingham dairy
• 2007Closed final salary pension scheme to new employees
• 2008Closed Totnes dairy Regional Distribution Centres
for Dairies
• 2009Sold Stilton and speciality cheese
Head office restructure
Closed Nottingham dairy
Contracted out milk collection
• 2010On-going Household depot rationalisation
Review of final salary pension scheme for existing employees
7
Reducing commodity risk and improving quality of earnings
• 2003Closure of ingredients operation at Chard and disposal of own label chilled juice business
• 2006 Disposal of retailer branded cheese operations to First Milk
• 2009 Disposal of Stilton and speciality cheese business
• 2009 Disposal of YDC
• 2010 Minimise milk through ingredients
8
Generate growth and focus the business through acquisitions
• 1995 Mendip Foods (Cathedral City)
• 2000 Unigate’s Dairy and Cheese Business
• 2002 St Ivel Spreads
• 2004 Country Life
• 2005 Starcross Foods and Midlands Coop Dairies
• 2006 Express Dairies
• 2007 St Hubert
• 2009 Fayrefield Foodtec
9
The strategy is delivering results
1,7181,637
1,3781,230
06 07 08 09
109.0112.2
87.1
76.3
06 07 08 09
45.0
51.7
41.236.9
06 07 08 09
79.874.4
57.9
29.4
06 07 08 09
Revenue(£m)
Profit on operations(£m)
Adjusted earningsper share (pence)
Operating cash flow(£m)
Consistent top line growth
Increasing operating profits and eps organically and through acquisition
Strong cash flow
10
A compelling investment proposition
Brand building
Innovation
Chilled distribution
UK and Continental retailers
Cost management
Milk buying
Corporate activity
Underpinned by strong competencies
Well defined strategy
Sound, balanced customer base for both Liquid Products and Foods
5 key brands with good growth record and further potential
Direct access to 1.3 million customers
14 operational sites (7 Dairies and 7 Foods)
Sound finances and strong cash generation
Confirmed commitment to a progressive dividend policy
Experienced, well-motivated management team
11
Delivering a clear and consistent strategy
Build market leading positions in branded and added value markets
Invest in advertising and promotions
Focus on innovation
Convenience, Health, Taste
Focus on cost reduction and efficiency improvements
Pension scheme
Exit Maelor cheese packing
Efficiency gains
Continued investment in industry leading facilities
Improve quality of earnings and reduce commodity risk
Continue to minimise ingredients risk
Improve middle-ground profitability
Generate growth and focus the business through acquisitions and disposals
Short term focus is oncash generation
Medium term return to acquisitions
Dairy Crest Milk Flows
Alastair Murray
13
Introduction
This presentation covers
Background to milk supply
Dairy Crest milk flows
Dairy Crest’s Ingredients business
14
Background
A sustainable supply of high quality milk is important to Dairy Crest
We sell packed milk across a broad spectrum of different customers
We also use a significant quantity of milk in our cheddar factory at Davidstow, Cornwall
Raw milk contains around 4% fat, but the most popular drinking milk is semi-skimmed with 1.6% fat
Cream, skimmed from packed liquid milk, is a major ingredient in our Spreads business
Milk is produced on a seasonal profile, with more in the Spring and less in the Autumn
Current milk purchase prices make it uneconomic to process milk into commodity ingredients
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World milk supply
82
41
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27
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15
14
12
25
Ukraine
UK
New Zealand
France
Brazil
Germany
Russia
China
India
USA
World milk supply is around 540 billion litres
Source DairyCo
UK is 9th largest milk producing country with 14 billion litres in 2007
16
UK milk supply
DairyCo provisionally estimates milk available for UK consumption in 2008 to be 13.1 billion litres
In addition UK imports around 4 billion litres of milk, mainly in the form of cheese, otherwise UK dairy balance sheet broadly neutral with imports matching exports
billion litres
Used for liquid 6.7
Used for cheese 3.5
Other (mostly milk powders)
2.9
Total 13.1
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Dairy Crest milk flows
Directs
1.35 bn litres
Other
0.75 bn litres
Raw milk intake
2.1 bn litres
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Dairy Crest milk flows
Directs
1.35 bn litres
Other
0.75 bn litres
Raw milk intake
2.1 bn litres
Annual cycle
Mil
k v
olu
me
Trough Balancing
Demand
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Dairy Crest milk flows
Directs
1.35 bn litres
Other
0.75 bn litres
Raw milk intake
2.1 bn litres
Annual cycle
Mil
k v
olu
me
Trough Balancing
Demand
Peak Balancing
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Dairy Crest milk flows
Directs
1.35 bn litres
Other
0.75 bn litres
Raw milk intake
2.1 bn litres
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DAIRIES
Dairy Crest milk flows
Directs
1.35 bn litres
Other
0.75 bn litres
NRC Liquids
NRCHousehold
GlassHousehold
OrganicNRC & Glass
Frijj
Flavoured milk
Liquid milkprocessing1.7 bn litres
Raw milk intake
2.1 bn litres
Cream
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DAIRIES
Dairy Crest milk flows
Directs
1.35 bn litres
Other
0.75 bn litres
FOODS
NRC Liquids
NRCHousehold
GlassHousehold
OrganicNRC & Glass
Frijj
Flavouredmilk
Liquid milkprocessing1.7 bn litres Cheese
Water
Wheypowder
Wheybutter
Cheesemanufacture400 ml litres
Raw milk intake
2.1 bn litres
Cream
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DAIRIES
Dairy Crest milk flows
Directs
1.35 bn litres
Other
0.75 bn litres
FOODS
NRC Liquids
NRC Household
GlassHousehold
OrganicNRC & Glass
Frijj
Flavouredmilk
Liquid milkprocessing1.7 bn litres Cheese
Water
Wheypowder
Wheybutter
Cheesemanufacture400 ml litres
Vegetableoil
Packetspreads
Retail butter
Raw milk intake
2.1 bn litres
Buttermilk
Buttermaking(Crudgington)
Cream
Spreadsmanufacture
MARKETTRANSFER
PRICE
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DAIRIES
Dairy Crest milk flows
Directs
1.35 bn litres
Other
0.75 bn litres
FOODS
NRC Liquids
NRCHousehold
GlassHousehold
OrganicNRC & Glass
Frijj
Flavouredmilk
Liquid milkprocessing1.7 bn litres
Bulkbutter
Potting/alcoholics
Other cream(WDP/HH)
Cheese
Water
Wheypowder
Wheybutter
Cheesemanufacture400 ml litres
Retail butter
Raw milk intake
2.1 bn litres
Buttermilk
Buttermaking(Crudgington)
Buttermaking(Severnside)
Spreadsmanufacture
Cream
Packetspreads
Vegetableoil
MARKETTRANSFER
PRICE
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DAIRIES
Dairy Crest milk flows
Directs
1.35 bn litres
Other
0.75 bn litres
FOODS
NRC Liquids
NRCHousehold
GlassHousehold
OrganicNRC & Glass
Frijj
Flavouredmilk
Liquid milkprocessing1.7 bn litres
SevernsideCreamery
Bulkbutter
Potting/alcoholics
Other cream(WDP/HH)
Severnsidedryer
Skimmed milkpowder(SMP)
Buttermilkpowder
Clover B’milkpowder(CBMP)
Cheese
Water
Wheypowder
Wheybutter
Cheesemanufacture400 ml litres
Retail butter
Clover Buttermilk
Buttermilk
Skim
MARKETTRANSFER
PRICE
Buttermilk
Buttermaking(Crudgington)
Buttermaking(Severnside)
Spreadsmanufacture
Cream
Vegetableoil
Packetspreads
Raw milk intake
2.1 bn litres
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Key points from milk flow chart
We have a broadly based dairy business which uses all fractions of the milk
Cream is an important internal commodity. Our principle competitors have a different model
Balancing milk requires us to put some milk into ingredients…albeit we presently lose money on every litre
We are working hard to reduce our exposure to ingredients in the current year
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Adapting to a changed environment
Until the boom in commodity prices in 2007 farmgate milk prices generally tracked in line with AMPE
Although dairy commodity prices have fallen back, farmgate milk prices have only fallen slightly, leaving them significantly higher than AMPE and making the production of dairy commodities unattractive
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2003 2004 2005 2006 2007 2008 2009
penc
e pe
r litr
e
Farmgate Milk Prices AMPE
Farmgate prices v ingredients returns 2003-2009
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Minimising risk and exposure to commodity markets – Action taken
AMPE remains below farmgate prices so focus has been based on minimising the volume of milk into Ingredients
Milk Purchasing strategy moved from trough balancing to peak balancing
Alternative uses for surplus milk include additional cheese production, marginal middle ground liquid business, spot milk sales
Ensure ingredients product quality is optimised to guarantee access to blue-chip customers
29
Summary
Our ‘broadly based dairy’ strategy allows us to maximise the value we get from our milk supply while mitigating market risk
The primary role of our Ingredients business is to sell by-products. Our real focus is on consumer products….
milk&more
Mike Sheldon
31
milk&more – a unique opportunity
We have 1.3 million doorstep customers, a large number of whom are young and affluent and have children at home
We know that our customers like what we do
– Milkmen
– Glass bottles
– Electric vehicles
– Regular deliveries – to keep the fridge full
But many also want to be able to operate their account with us in a more convenient and flexible way
Many of our customers are used to shopping on-line and over 65% have broadband access
We have taken the opportunity to retain the good, but to modernise and make our service more relevant to current and new customers
32
Healthy futures
Offline = 13%
Online = 26%
Wealthy heartland
Offline = 28%
Online = 39%
Golden years
Offline = 21%
Online = 16%
An affluent customer base with great potential
Tight budget pensioners
Offline = 16%
Online = 5%
33
milk&more – a compelling proposition
All the daily top-up essentials our customers need, delivered to their door by a friendly, local milkman with no delivery charge
Between 3 and 6 deliveries a week, most before 8am
The product range encompasses milk, other essentials such as bread and eggs, Dairy Crest brands and heavy products such as bottled water and pet food
Customers sign up onto a dedicated website and from then on can amend their orders 24/7
The software accumulates orders to be loaded onto milk floats and electronic handsets enable milkmen to see changes and adjust delivery
Payment is made by credit card or direct debit, more convenient for customers and safer and easier for milkmen
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milk&more – impossible to replicate
Adding to order from product range possible with shopping list to hand
Product range online 24/7 at the click of a mouse
Use standing order for milk & products
Customer chooses between standing orders, one-off or both
Pay milkman by cheque, cash or paper direct debit
Pay by Direct Debit or auto debit/credit card – all online
Communicating promotions and news to customers via leaflets
Both traditional and digital marketing techniques to talk to our customers
Offline Online
Order online up to 9pm the night before
next delivery
Change order with note/shopping list – if milkman carrying item
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A well-planned national roll-out
5 depot pilot (June 2007 – June 2008)
Keep it simple
Regular deliveries
No delivery charge
30 depot extension (July 2008 – May 2009)
Online customers spend 48% more
Opportunity for online marketing
Simplicity is key for sign-up
National roll out (July – September 2009)
New user-friendly, robust internet solution
Fully integrated with depot systems
Available to all 1.3 million existing customers
Marketing campaign to generate new customers (October 2009 – )
Strong marketing campaign planned to attract new customers and build sales
36
milk&more now has 100,000 registered customers
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Cu
mu
lati
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Re
gis
tra
tio
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Roll out 2009Marketing investment 200830 depots launching 2008
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milk&more customers spend more with us
Source: DC, 6 months to July ‘09
£0.00
£1.00
£2.00
£3.00
£4.00
£5.00
£6.00
£7.00
Traditional milk&more online
Milk Products
£4.54 £6.20W
eekl
y ex
pend
iture
38
2009/10 objectives
1. Drive acquisition to online service
– Switch traditional customers onto milk&more
– Recruit new customers
– £2.6 million marketing support
– 250k customers by 31 March 2010
2. Increase customer spend using targeted, data-base marketing
3. Reduce debt and cost of cash-handling
39
Summary
milk&more can reverse the long-term decline in doorstep sales as it lets us retain existing customers, attract new customers and sell more to both groups
The trials we carried out showed a real demand for the milkman from an affluent customer base but a need to modernise some aspects of our proposition
We have developed a user-friendly, robust internet-based solution
Roll out of milk&more is complete
We have a marketing campaign planned which will make sure everyone has heard of milk&more
Dairy Crest Cheese – a world class supply chain
Martyn Wilks
41
Dairy Crest cheese – a world class supply chain
Dedicated West Country milk pool
State of the art creamery creating high quality cheese for brands and premium retailer sub brands
Single site for cheese maturation, high speed cut and wrap and National Distribution Centre
A second, highly flexible facility where we cut, slice, grate and wrap
£100 million invested over the last 8 years
Together makes the UK’s favourite cheese brand
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Dairy Crest - creating a world class cheese supply chain
• 1995Purchased Mendip Foods and the Cathedral City brand – now has
£195 million retail sales and is bigger than next three brands together
• 1997Started recruiting direct milk suppliers – now have over 400 direct
suppliers in Cornwall and Devon
• 2000New National Distribution Centre at Nuneaton (Cost £37 million). Now
despatching 67 million cases / year
• 2003New Davidstow Creamery (Cost £55 million). The most modern and
largest mature cheddar factory in the world
• 2003 Launched first resealable packaging for Cathedral City
• 2010 New Cheese Packing Facility at Nuneaton (Cost £25 million)
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From farm to fridge
Davidstow
Retailers
NuneatonFarms
Frome
Nuneaton
Nuneaton & Frome
Davidstow
Consumers
44
West Country milk pool – dedicated to Davidstow
The Davidstow pool consists of:- 406 farms in Devon & Cornwall Supplying 515 ml pa of milk- Average farm milk production 1.27 ml
Daily collection volume:- 1.3ml from the milk field- 930,000 litres into creamery daily
Key partner: Gregory’s Distribution Ltd- 273 litres of milk collection per km travelled (industry average 150)- Also providing secondary haulage for finished goods
Suppliers well supported by Dairy Crest- Premium price v competitors (+1.3ppl v Milk Link)- Field support team + White Gold (on farm consultancy) funded by DC
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Redeveloped in 2003 for £55 millionCapacity > 50,000 tonnes
• Redeveloped in 2003 for £55m
• 100 employees
• Capacity > 50,000 tonnes cheese
• 09/10 42,000 tonnes cheese
• 65% Cathedral City and 35% Davidstow brand
• 25,000 tonnes whey
Davidstow - state of the art cheesemaking
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Nuneaton
Cheese maturation store
Opened 2000
£150 million of maturing cheddar
35,000 pallet spaces
Cut and Wrap
Opened in 2009
£25 million capital cost
72 employees
National Distribution Centre
Opened in 2000
£37 million capital cost
67 million cases per year
47
Nuneaton – Cut and Wrap
£25 million invested to allow us to zip and portion pack in house
– Reduced 1,500 outbound loads and 1,800 inbound loads
– Saves 324,000 road miles / year
3 new integrated packing lines using latest technology
– Automated in feed and out feed
– Fully automated deboxing and debagging
– 150 packs per minute
– Intelligent cutting halves off-cuts and giveaway
Annual capacity of 33,000 tonnes, possible to easily expand to 42,000 tonnes
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Cathedral City – the nation’s favourite cheddar
Retail sales £195 million
£27 million from ‘Lighter’
83% weighted distribution
The UK’s 21st biggest grocery brand
In every other fridge in UK
But still only 13% of total UK cheddar
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Looking forward……
Dairy Crest has a world class cheese supply chain
Making the nation’s favourite cheddar
Efficient production allows us to
– Pay a premium to our farmers
– Invest in advertising and promotion
– Innovate
– Invest in the future
Continually innovating to drive growth
– New TV advert
– New packaging