A SEVERE squeeze on its milk operations and the adverse affect of the BSE crisis in Britain has hit Waterford Foods' margins hard in the first half of the year, with profits to the end of June down just over 4 per cent to £10.6 million.
At the operating level, Waterford suffered a severe squeeze, with a 53.3 per cent rise in turnover largely due to the inclusion of The Cheese Company - accompanied by only a 26 per cent increase in operating profits.
Waterford's margins fell sharply from 5.1 per cent to 4.2 per cent and the indications are that the group's milk suppliers face a severe cut in milk prices when the peak production season resumes next spring.
A company spokesman would not comment yesterday on the likely 1997 milk price, but given recent comments by the Irish Dairy Board and the urgent need to restore margins to a level more in keeping with world dairy prices a cut in the milk price from Waterford's current 105p per gallon to below loop seems likely. "We will see a moderation in milk prices, it's already happening in the UK and Northern Ireland," said the spokesman.
The results from Waterford were broadly in line with forecasts, but analysts cut their 1996 full year forecasts sharply. Goodbody analyst, Mr Liam Igoe, has cut his 1996 profits forecast from £27.3 million to £23.3 million and his earnings forecast from 9.5p to 8.2p. Mr Igoe, however, maintained his 1997 forecasts of £30.8 million pre tax profits and 10.7p per share.
While Waterford executives took comfort from the group's operating margins being still higher than most of its competitors, Waterford has suffered a fall in profits while close competitors Avon more and Kerry increased their half year profits by 13 per cent and 21 per cent respectively.
In the first half of the year, Waterford suffered from a combination of high milk prices and the BSE scare, just as the group was integrating its £125 million acquisition of The Cheese Company. The results of the BSE scare are outside Waterford's control. But the squeeze in the group's Irish dairy margins are a result of the continued inability of the Irish dairy industry - not just Waterford to adjust milk prices quickly to reflect product prices on world markets.
The acquisition of The Cheese Company has shifted the group's fundamental business towards added value consumer products. These now account for 51 per cent of total sales in the first half of £540 million, compared to 40 per cent of first half 1995 sales of £353 million. The 4 per cent fall in pre tax profits to £10.6 million reflects the margin squeeze and an almost doubling in interest payments to almost £10 million, reflecting The Cheese Company acquisition.
Despite the squeeze on margins, Waterford maintained its share of the Irish liquid milk market. In Britain, it expanded its milk pool with the acquisition of MD Foods' doorstep and semi retail operations in the north of England.
Waterford's half year balance sheet reflects the cost of The Cheese Company acquisition with gearing of 105 per cent (50 per cent in first half 1995) and interest cover of 2.3 times (23.4 times). Waterford has raised its first half dividend by a modest 4 per cent to 1.36 per share.
Chief executive, Mr Malt Walsh, has said Waterford will look at various rationalisation options mergers, partnerships or strategic alliances.
The half year results did not contain any update on Waterford's stated wish to see a rationalisation within the industry. They were largely in line with expectations, but shares rose 4p to 88p. That was the price of stock at the Dublin market's close.
