Dairy Crest Capital Markets Day. 19 September 2016

Transcription

1 Dairy Crest Capital Markets Day Mark Allen Chief Executive Tom Atherton Finance Director 19 September 2016

2 SEPTEMBER 2016 TRADING UPDATE Clover, Country Life and Frylight in volume growth Cathedral City Successful brand refresh supported by advertising campaign Chosen not to discount as heavily as some H1 margins up but volumes slightly down will improve in H2 Demineralised whey and GOS on track Strong cash generation Profit expectations unchanged for full year Inflation across dairy markets risks and opportunities 2

3 UK MILK PRODUCTION YEAR ON YEAR CHANGE

4 MILK COSTS AND DAIRY RETURNS

5 Welcome to Mike Barrington Supply Chain Director 20 September 2016

6 PRODUCTION SITES & INNOVATION CENTRE

7 DAVIDSTOW MANUFACTURING PLANT 65 YEARS OF HIGH QUALITY CHEESE MAKING 1951 Davidstow was established by Cow & Gate 2016 D90 and GOS investment completed First major site rebuild Milk Marketing Board buys Davidstow 2004 Dairy Crest invest in major new site build; 2010 Biomass boilers installed

8 SITE OVERVIEW Cheese process D90 process GOS process We process over 500ml milk per annum, and make over 50kT cheddar cheese We are an intensive operation: 365 days / 24 hour production 195 employees We now have capability for: ~29kT p.a. D90 whey powder ~13.5kT p.a. GOS syrup We respect our local environment: 1.7m litres per day of high quality water recovery Over 75% site steam usage from biomass

9 DAVIDSTOW: ONE SOURCE, ONE SITE, PREMIUM QUALITY One Source One dedicated, local milk pool One source of whey from Davidstow cheddar cheese Robust traceability from milk to whey One Site Premium Quality Davidstow 65 years All farms audited to cheese heritage Davidstow Farm Standards Dedicated, experienced Internationally recognised team site accreditations State of the art On site laboratory provides manufacturing equipment timely microbiological, and make over 50kT chemistry and GOS polymer cheddar cheese analysis Award winning cheese Excellent service delivery

10 Davidstow Milk Field The foundation of our business Alexandra Richards Milk Procurement Manager 20 September 2016

11 OUR DAVIDSTOW MILK POOL A sustainable supply of British milk is crucial to Dairy Crest c.500 million litres of British milk per annum Around 400 farmers in Devon and Cornwall, all within 80 miles of the Creamery diverse range of sizes Represents 60% of the milk in Cornwall supplying Davidstow This is the best place to produce milk in the United Kingdom exceptional pasture growth and climatic conditions Davidstow Milk pool

12 BUILDING LONG-TERM RELATIONSHIPS WITH OUR FARMERS Dairy Crest Direct (DCD) - UK s first Dairy Producer Organisation (DPO) Tailored support services from our Farm Business team Farm Business Centre Farm Business Manager Farm Connect (online) WhiteGold - independent practical on-farm advice free of charge Open days, meetings with Management - dialogue

13 THE VIRTUOUS CIRCLE LINKING OUR DAVIDSTOW FARMERS AND OUR CUSTOMERS High quality milk Leading milk prices to committed dairy farmers World class facilities Sustained marketing investment High quality Cheese and Whey Improved realisation Market competitive Brands

14 HOW THE MODEL WORKS FOR EVERYONE We pay a competitive, market-related milk price to our farmers strength of brands allows us to pay a premium Long-term security for both Dairy Crest and our farmers This allows us to make big capital investments in our business Provenance high quality West Country milk to go into our cheese Single type of cheese makes great whey for our new products and customers Traceability for our customers critical for Infant Formula markets Work together with our farmers to ensure quality assurance through world-leading standards Both parties are encouraged to think long-term and grow in partnership

15 Generating growth by building strong positions in infant formula ingredients Richard Jones Managing Director, Functional Ingredients 20 September 2016

16 WHAT IS INFANT FORMULA? Infant formula is made from a mixture of dairy and other ingredients and is designed to mimic human milk as closely as possible Although it is made to a common international codex, formulation ingredients vary Key common ingredients are: Water, Skim Milk Powder, Lactose, Vegetable Oils, Whey Protein and Galactooligosaccharide (GOS) Different brands, for example, Abbott Similac and Nestle NAN HA Gold 2 infant formula then have up to an additional 40 ingredients which together make up <2% of total ingredients 16

17 Role of GOS in Infant Formula GOS is a prebiotic i.e. non digestible fibres that stimulate the growth of specific, healthy bacteria in the digestive system Oligosaccharides are the third most prominent component in human breast milk GOS is added to infant formula to better match human breast milk Human Milk Composition 8% 1% 9% 30% 52% Lactose Fats Protein Oligosaccharisdes Health promoting benefits of GOS include: increases presence of good bacteria aids in intestinal health supports digestive comfort improves mineral absorption works synergistically with probiotics Cow Oligosaccharides: Less than 0.1% 26% 0% 6% 29% 39% Minerals 17

18 DEMINERALISED WHEY POWDER & GOS ARE BOTH PRIMARILY SOURCED FROM WHEY Whey Solids 6.6% Fat 0.1% Solids Non Fat 6.5% Protein 0.8% Lactose 4.8% Lactose is mixed with a proprietary enzyme to produce GOS Whole Milk Water 93.4% Minerals 0.9% Curds Cheese Demineralised whey powder contains lactose and whey protein 18

19 DAIRY CREST FUNCTIONAL INGREDIENTS PRODUCT CREDENTIALS Davidstow production facility capitalises on latest control systems and state of the art manufacturing equipment Production process delivers consistent functionality and quality including tight micro-biological limits Fully compliant with strict Chinese market specifications Dedicated quality milk pool ensures full end to end traceability and availability Fonterra Partnership 5 year contract with world s largest dairy exporter Actively engaged in EU, Asian and global markets to develop sales pipeline Fonterra markets and sells all product for human use Technical and regulatory support Commitment to take all demin production Agreed GOS growth plan Jointly develop human use applications and new products for these markets 19

20 DEMINERALISED WHEY (D90) The D90 plant has the capacity to process 80 tonnes of D90 per day incorporating high levels of care, consistent with production of infant formula The investment has delivered: A new demineralisation process Modifications to the existing sweet whey powder operations New packing facilities An upgraded waste water treatment plant A new laboratory Following successful food and infant formula quality audits the plant is now fully commissioned with full production underway since March 2016 All output and quality targets are being achieved in line with expectations 20

21 GALACTO-OLIGOSACCHARIDE (GOS) The current GOS plant will has the capacity to produce 13.5 k tonnes of infant formula GOS syrup per annum The modular build can grow capacity to 35k tonnes per annum The new plant produces GOS syrup at 57% polymer level which is the level required for use as an infant formula nutritional ingredient Demonstrated ability to increase polymer levels to meet customer specific requirements The plant is now fully commissioned with successful infant formula audits Quality and specification targets are being achieved 21

22 INFANT FORMULA MARKET OUTLOOK CONTINUED STRONG GROWTH $43bn 2.5mMT Fonterra Focus Geographies CAGR +13% $150bn 5.3mMT Paediatric market worth $50bn with strong global growth forecast 65% of total volume growth to come from China Fonterra well placed to support the areas of greatest expansion Europe + Australasia account for >75% of the volume of imports to China Source: Euromonitor Milk Formula Market updated to 2014 / is projected based on current 5 year forward CAGR s, value growth 22

23 RISING WHEY PRICES HAD LED TO AN INCREASE IN INVESTMENT WHICH HAS NOW SLOWED Demand: 2016 Market Share % Source: 3A Consulting and Giract Source: Rabobank Supply: 2016 Market Share % Leading industry players Arla, Nestle, Valio and Friesland Campina have all increased capacity The majority of cheese manufacturers have now fully invested in added value whey production, limiting the amount of remaining convertible capacity Source: Giract and DC Estimate 23

24 MILK PRODUCTION IS A KEY DRIVER OF DAIRY PRICES, WITH THE MARKETS RECOVERING IN 2016 Global dairy commodity markets were impacted by the record milk volumes being produced and prices were driven down As global milk production has slowed, the markets have begun to rebalance and dairy prices, including whey, have started to recover Indicative D90 Price Source: EU Milk Market Observatory Source: US Department Agriculture and ZuiveINL SWP prices have increased rapidly in recent months. However, demin price movements are tracking behind, particularly infant grade product due to higher stock levels. As levels reduce, prices should increase The intent is to establish a premium infant formula quality product this takes time and in the intervening period some production will be sold for alternative (lower value) uses e.g. food 24

25 PREBIOTICS MARKET: A RANGE OF GROWTH OPPORTUNITIES The Prebiotics Ingredients market growth is expected to continue at an annual rate of 9-12% to achieve c$5.5bn by 2020 Food and Beverage expected growth will be driven by trends in low calorie foods Growth in Infant Formula applications will drive growth in Health Supplements sector Animal feed prebiotics are expected to grow at c12% GOS is 2nd biggest segment accounting for 17% market volume with high growth expected due to its multiple product benefits Source: Grand View Research: Prebiotics by Ingredients Market Analysis

26 MARKET OPPORTUNITY: FUNCTIONAL FOODS & HEALTH SUPPLEMENTS IN SIGNIFICANT GROWTH The Global Nutraceuticals Market is expected to reach $263bn by 2020 Health supplements (incl sports nutrition); c 30% share Functional Food and Beverages (incl probiotic dairy): c70% share This market is estimated to be growing at an annual rate of 8% Consumers view of nutritional products as the key to managing health with a focus on preventative healthcare Shift in consumer preference from synthetic to natural and organic ingredients Growing clinical evidence of broad range of health benefits Wide range of new ingredient applications from fruit juices, hot beverages and sports drinks Prebiotics together with probiotics are key Nutraceutical ingredients which are well placed to benefit from growth Offer a broad range of health benefits from weight management and lower blood sugars to brain and gut health Low calorific count Processing stability Probiotic Supplements $4bn Probiotics $40.0bn Nutraceuticals $263bn Prebiotics $2.4bn Prebiotic Supplements 0.2bn Source: DC Internal Research 26

27 MARKET OPPORTUNITY: ANIMAL FEED & ADDITIVES REPRESENT HUGE GROWTH POTENTIAL The Global Animal Feed Additive market estimated to be worth $14-20bn increasing to $30bn by 2020 growing at 3%-5% CAGR Animal Growth Promoters Market is expected to grow at 5% CAGR Global Eubiotics Market (Microflora enhancing additives) is expected to grow at 7.9% CAGR Prebiotics accounts for less than 2% of the total Additives market but it is expected to grow at c12% CAGR - the fastest growing segment Animal Feed Additives $30bn Animal Growth Promoters $9.7bn Global Eubiotics $7.0bn A recent Feed International Survey on the use of alternatives to Antibiotics in poultry productions further suggests potential for growth with a relatively low awareness as to the effectiveness of prebiotics. Prebiotics in Animal Feed $0.5bn Source: DC Internal Research 27

28 GOS MARKET VOLUMES 2016 The Global market for GOS is currently estimated at 80k tonnes 3 key players have over 80% volume share: Friesland Campina dominate the market with Vivinal GOS Yakult is the 2nd largest manufacturer who use much of their production internally, but sell some product under their Oligomate brand There are some Asian manufacturers supplying local markets e.g. New Fransisco (King-Prebiotics) The market is estimated to be growing at c9% pa in volume terms Source: DC estimates 28

29 GOS STRATEGY UPDATE Acquisition of the remaining 50% share of Promovita Ingredients Ltd provides Dairy Crest control over direction and pace of development of the GOS business Initial focus remains on infant formula applications via Fonterra Other opportunities for human nutrition are in development A number of trials for animal feed applications are underway with encouraging results showing improvements to weight gain and feed conversion efficiency We will give specific updates in November

30 SUMMARY Significant investment completed and delivering to expectations High specification product being produced to consistently high quality standards Fonterra partnership provides ideal platform to unlock significant pediatric and nutritional market opportunities Demand growth opportunities driven by increasing spend on premium nutrition and increasing middle class disposable incomes Well placed to generate growth by building strong positions in added value markets in line with our strategy Increased control over pace and direction of GOS platform, research underway on new applications 30

31 Building a Sustainable Brand Portfolio Adam Braithwaite Group Commercial Director Will Hemmings Head of Marketing 20 September 2016

32 Branded Portfolio Half 1 Highlights Cathedral City new Master Brand introduced into the market Supported by new Rules of Cheese communication campaign Successful Spreadable launch Increased brand premium BSO portfolio well placed to meet consumer needs; Clover & Country Life gain market share Vitalite re-launched with improved packaging and product gaining share Frylight in strong growth 32

33 The consumer landscape is changing which presents both challenges and opportunities Consumption Population Fragmenting lifestyles impacting meal occasions 18 months of Food Price deflation Source: IGD, IRI, AC Nielsen, Kantar, Mundi 33

34 Cathedral City

35 The overall cheese category continues to expand, with recent volume growth driven by increased frequency, consumption and deflation Penetration 98.6% FLAT Average Volume 0.44 kgs +1.2% Frequency Average Price 36x 6.33/kg +2.2% -4.9% Cheese has consistently shown volume growth over the last 5 years, despite 99% penetration However, price deflation has removed 137M from category value in the last 52 w/e Source: Kantar 52 we

36 Consumers are switching into more convenient formats Sliced, Grated & Snacks are all showing good growth A broad and deep range of Cathedral City products, supported by a well developed innovation pipeline, means we are well placed for long term share growth Source: IRI 52 we

37 Cathedral City remains the #1 cheese brand with significant headroom to grow across the category 16 th biggest UK brand and 7 th largest online brand #1 Cathedral City has over 12% of total pre-packed cheese market This equates to 25% of branded cheese and 28% of total block cheese Opportunities to grow across the category Source: IRI 52 we Grocer Top 100 Brands 2016 & Checkout Smart

38 And we have continued to invest in the brand Cathedral City had become an inconsistent range of sub-brands with diluted consumer impact. During H1 we moved from this... 38

39 To this Cathedral City has a new Master Brand identity to simplify our brand and improve visibility In 2016, a new Master Brand design rolled out across 80 SKU s supported by significant investment. The new design simplifies and strengthens our range, allowing us to build equity across all subsectors of the growing cheese category 39

40 The relaunch was supported by a new and highly effective ATL campaign 40

41 And we successfully launched a new Spreadable range We launched a superior tasting Spreadable cheese range in May 16 Initial results are strong; Repeat rate at 28%, penetration growing at 115 vs YA, Extra Mature and Mature ranked #2 and #3 rate of sale in market ahead of ATL support 41

42 In a deflating category and as category leader, Cathedral City has built a price and profit premium against branded and retailer own label competition Average Price / Kg Everyday Cheese % Average Everyday Cheese price decreased by -9% over the last two years, led by Own Label Over this period, Cathedral City has improved its price premium vs Own Label and competitors We have carefully balanced volume and profit during H1 Source: IRI 52 we

43 Looking forward Cathedral City is well placed to grow long term share and profit Cathedral City continues to benefit from a world class efficient supply chain Our brand is well positioned to grow due to its new Master Brand identity supported by a highly effective communications campaign Our brand equity remains very strong and we can stretch into new and growing segments of the market via an exciting innovation pipeline 43

44 Butter, Spreads & Oils

45 Unlike Cheese, the BSO category is in volume decline, with lower consumer usage driven by changing consumption trends Spreads in decline Growth in Dairy Free -3% Category Decline Butter in vol growth But Value decline Spreads Butter Category growth drivers include making products more natural, more healthy and driving usage with food Source: IRI SIG & Kantar Discount / Bargain Stores 52 we

46 However, we have a portfolio of leading spreads & butter brands aligned to consumer trends and gaining share Spreads Butter Volume Share +0.1% Volume Share +1.4% Volume Share +0.5% Source: IRI SIG & Kantar Discount / Bargain Stores 52 we

47 FryLight also continues to grow strongly supported by consumer communication, innovation and increased awareness Market and performance update Oil market has grown +4.2% in value to 331m* Frylight growth well ahead of the market No 1 brand and has a highest ever market share of 8.4% Rapeseed and Coconut NPD launched successfully New Frylight relaunch later in 2016/17 with No Artificial packaging and new advertising * Source: Kantar 52 weeks ending 17 July

48 However, input costs are inflating rapidly and our priority is to protect profitability in H2 Butter cost prices have doubled since May, driven by the rapidly falling milk volumes which has in turn reduced the availability of cream. This year has seen an increase in prices across the entire oil complex, but a key driver has been Palm Oils. Driven by reduction in supply. 48

49 Looking forward Growth will be hard to sustain in the short term, but the portfolio is well positioned against the longer term consumer drivers Continued focus on positioning and supporting the brands against key consumer drivers Taste & Health Frylight will benefit from further investment in H2 Inflation is flowing into the supply chain managing our cost base and profit protection are key priorities for H2 Source: IRI 52 we

50 In summary Cathedral City new Master Brand introduced with new packaging, communication and innovation well placed for continued long term growth H2 focus on balancing input cost inflation, market share and profit Butter & Spreads portfolio aligned to consumer trends and gaining share Prioritising significant input cost inflation recovery ahead of short term share Frylight continues to win in a growing market Focus on driving value, share and innovation in H2 50