Analysts’
Analysts’ visit to Nuneaton
17
17 September
September 2009
Presentations
Presentations
1.
1. Strategy
Strategy
Mark Allen
Chief Executive
2.
2. Milk
Milk Flows
Flows
Alastair Murray
Finance Director
3.
3. milk&more
milk&more
Mike Sheldon
Managing Director, Household
Household
4.
4. Cheese
Cheese Supply
Supply Chain
Chain
Martyn Wilks
Executive Managing Director,
Director, Foods
Foods
1
Dairy Crest’s Strategy
Mark Allen
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
Improve quality of earnings and
reduce commodity risk
Generate growth and focus the
business through acquisitions
and disposals
15 factories closed or disposed since 2001
Production now consolidated at 14
locations
Dedicated milk pools for 4 major retailers
milk&more on doorstep
Ingredients turnover less than 5% of group
Six major acquisitions in last 15 years
have transformed group
3
Build market leading positions in branded and added
value markets
Market
Brand 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%
Core Brand
*AC Nielsen or IRI or TNS value growth
**Dairy Crest sales growth by value
4
Build market leading positions in branded and added
value markets
Added Value Milk Pools
A modern doorstep
proposition
Own-label flavoured milk
5
Focus on cost reduction and efficiency improvements
• 2006
Closed Birmingham dairy
• 2007
Closed final salary pension
scheme to new employees
• 2008
Closed Totnes dairy
Regional Distribution Centres
for Dairies
Sold Stilton and speciality cheese
Closed Nottingham dairy
Head office restructure
Contracted out milk collection
On-going Household depot
rationalisation
Review of final salary pension scheme
for existing employees
• 2009
• 2010
6
Reducing commodity risk and improving quality of
earnings
• 2003
Closure 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
7
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
8
The strategy is delivering results
Revenue
(£m)
Profit on operations
(£m)
112.2
1,637
109.0
1,718
Adjusted earnings
per share (pence)
51.7
41.2
76.3
1,230
74.4
79.8
45.0
87.1
1,378
Operating cash flow
(£m)
57.9
36.9
29.4
06
07
08
09
06
07
08
09
06
07
08
09
06
07
08
09
Consistent top line growth
Increasing operating profits and eps organically and through acquisition
Strong cash flow
9
A compelling investment proposition
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
Underpinned by strong competencies
Brand building
Innovation
Chilled distribution
UK and Continental retailers
Cost management
Milk buying
Corporate activity
10
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
Pension scheme
Focus on cost reduction and
efficiency improvements
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
Generate growth and focus the
business through acquisitions
and disposals
Short term focus is on
cash generation
Improve middle-ground profitability
Medium term return to acquisitions
11
Dairy Crest Milk Flows
Alastair Murray
Introduction
This presentation covers
Background to milk supply
Dairy Crest milk flows
Dairy Crest’s Ingredients business
13
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
14
World milk supply
World milk supply is around 540 billion litres
82
USA
41
India
32
China
31
Russia
27
Germany
25
Brazil
France
23
15
New Zealand
14
UK
12
Ukraine
Source DairyCo
UK is 9th largest milk producing country with 14 billion
litres in 2007
15
UK milk supply
DairyCo provisionally estimates milk available for
UK consumption in 2008 to be 13.1 billion litres
billion litres
Used for liquid
6.7
Used for cheese
3.5
Other (mostly
milk powders)
2.9
Total
13.1
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
16
Dairy Crest milk flows
Directs
Raw milk intake
Other
1.35 bn litres
2.1 bn litres
0.75 bn litres
17
Dairy Crest milk flows
Directs
Raw milk intake
Other
1.35 bn litres
2.1 bn litres
0.75 bn litres
Milk volume
Trough Balancing
Demand
Annual cycle
18
Dairy Crest milk flows
Directs
Raw milk intake
Other
1.35 bn litres
2.1 bn litres
0.75 bn litres
Milk volume
Trough Balancing
Demand
Peak Balancing
Annual cycle
19
Dairy Crest milk flows
Directs
Raw milk intake
Other
1.35 bn litres
2.1 bn litres
0.75 bn litres
20
Dairy Crest milk flows
Directs
Raw milk intake
Other
1.35 bn litres
2.1 bn litres
0.75 bn litres
DAIRIES
NRC Liquids
NRC
Household
Liquid milk
processing
1.7 bn litres
Cream
Glass
Household
Organic
NRC & Glass
Frijj
Flavoured
milk
21
Dairy Crest milk flows
Directs
Raw milk intake
Other
1.35 bn litres
2.1 bn litres
0.75 bn litres
FOODS
DAIRIES
NRC Liquids
NRC
Household
Liquid milk
processing
1.7 bn litres
Cheese
manufacture
400 ml litres
Cream
Cheese
Water
Glass
Household
Whey
powder
Organic
NRC & Glass
Whey
butter
Frijj
Flavoured
milk
22
Dairy Crest milk flows
Directs
Raw milk intake
Other
1.35 bn litres
2.1 bn litres
0.75 bn litres
FOODS
DAIRIES
NRC Liquids
NRC
Household
Liquid milk
processing
1.7 bn litres
Cheese
manufacture
400 ml litres
Cream
MARKET
TRANSFER
PRICE
Butter
making
(Crudgington)
Glass
Household
Organic
NRC & Glass
Frijj
Buttermilk
Cheese
Water
Retail butter
Whey
powder
Spreads
manufacture
Whey
butter
Packet
spreads
Vegetable
oil
Flavoured
milk
23
Dairy Crest milk flows
Directs
Raw milk intake
Other
1.35 bn litres
2.1 bn litres
0.75 bn litres
FOODS
DAIRIES
NRC Liquids
Liquid milk
processing
1.7 bn litres
Cheese
manufacture
400 ml litres
NRC
Household
Glass
Household
Organic
NRC & Glass
Frijj
Cream
Potting/
alcoholics
Butter
making
(Severnside)
Other cream
(WDP/HH)
Bulk
butter
MARKET
TRANSFER
PRICE
Butter
making
(Crudgington)
Buttermilk
Cheese
Water
Retail butter
Whey
powder
Spreads
manufacture
Whey
butter
Packet
spreads
Vegetable
oil
Flavoured
milk
24
Dairy Crest milk flows
Directs
Raw milk intake
Other
1.35 bn litres
2.1 bn litres
0.75 bn litres
FOODS
DAIRIES
NRC Liquids
Liquid milk
processing
1.7 bn litres
Skim
NRC
Household
Glass
Household
Organic
NRC & Glass
Potting/
alcoholics
Butter
making
(Severnside)
Other cream
(WDP/HH)
Bulk
butter
Buttermilk
Severnside
dryer
Skimmed milk
powder(SMP)
Buttermilk
powder
Cheese
manufacture
400 ml litres
MARKET
TRANSFER
PRICE
Cream
Frijj
Flavoured
milk
Severnside
Creamery
Butter
making
(Crudgington)
Buttermilk
Cheese
Water
Retail butter
Whey
powder
Spreads
manufacture
Whey
butter
Clover Buttermilk
Packet
spreads
Vegetable
oil
Clover B’milk
powder
(CBMP)
25
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
26
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
29
Farmgate prices v ingredients returns 2003-2009
pence per litre
27
25
23
21
19
17
15
2003
2004
2005
2006
Farmgate Milk Prices
2007
2008
2009
AMPE
27
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
28
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….
29
milk&more
Mike Sheldon
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
31
An affluent customer base with great potential
Offline = 13%
Offline = 28%
Online = 26%
Online = 39%
Healthy futures
Wealthy heartland
Offline = 21%
Offline = 16%
Online = 16%
Online = 5%
Golden years
Tight budget pensioners
32
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
33
milk&more – impossible to replicate
Offline
Online
Use standing order for
milk & products
Customer chooses between standing
orders, one-off or both
Adding to order from product range
possible with shopping list to hand
Product range online 24/7 at the click
of a mouse
Change order with note/shopping list
– if milkman carrying item
Order online up to 9pm the night before
next delivery
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
34
A well-planned national roll-out
5 depot pilot (June 2007 –
June 2008)
30 depot extension (July 2008 –
May 2009)
National roll out (July –
September 2009)
Marketing campaign to generate
new customers (October 2009 – )
Keep it simple
Regular deliveries
No delivery charge
Online customers spend 48% more
Opportunity for online marketing
Simplicity is key for sign-up
New user-friendly, robust internet
solution
Fully integrated with depot systems
Available to all 1.3 million existing
customers
Strong marketing campaign planned to
attract new customers and build sales
35
12/09/2009
29/08/2009
15/08/2009
01/08/2009
18/07/2009
04/07/2009
Marketing investment 2008
20/06/2009
06/06/2009
23/05/2009
09/05/2009
25/04/2009
11/04/2009
28/03/2009
14/03/2009
28/02/2009
14/02/2009
31/01/2009
17/01/2009
03/01/2009
30 depots launching 2008
20/12/2008
06/12/2008
22/11/2008
08/11/2008
25/10/2008
11/10/2008
27/09/2008
13/09/2008
30/08/2008
16/08/2008
02/08/2008
Cumulative Registrations
milk&more now has 100,000 registered customers
Roll out 2009
100,000
90,000
80,000
70,000
60,000
50,000
40,000
30,000
20,000
10,000
0
36
milk&more customers spend more with us
£4.54
£6.20
Weekly expenditure
£7.00
£6.00
£5.00
£4.00
£3.00
£2.00
£1.00
£0.00
Traditional
Milk
milk&more online
Products
Source: DC, 6 months to July ‘09
37
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
38
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
39
Dairy Crest Cheese – a
world class supply chain
Martyn Wilks
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
41
Dairy Crest - creating a world class cheese supply chain
• 1995
• 1997
• 2000
• 2003
Purchased Mendip Foods and the Cathedral City brand – now has
£195 million retail sales and is bigger than next three brands together
Started recruiting direct milk suppliers – now have over 400 direct
suppliers in Cornwall and Devon
New National Distribution Centre at Nuneaton (Cost £37 million). Now
despatching 67 million cases / year
New 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)
42
From farm to fridge
Farms
Davidstow
Nuneaton
Nuneaton
Consumers
Nuneaton & Frome
Retailers
Davidstow
Frome
43
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
44
Davidstow - state of the art cheesemaking
• Redeveloped in 2003 for £55m
• 100 employees
Redeveloped in 2003 for
• Capacity >£55
50,000
tonnes cheese
million
Capacity > 50,000 tonnes
• 09/10 42,000 tonnes cheese
• 65% Cathedral City and 35% Davidstow brand
• 25,000 tonnes whey
45
Nuneaton
Opened in 2000
National Distribution Centre
£37 million capital cost
67 million cases per year
Opened 2000
Cheese maturation store
£150 million of maturing cheddar
35,000 pallet spaces
Opened in 2009
Cut and Wrap
£25 million capital cost
72 employees
46
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
47
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
48
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
49