Robert Wiseman forced to concede on margins

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A wave of contract renegotiations between Britain’s leading supermarket chains and milk suppliers hit margins and profits at Robert Wiseman Dairies.

The company, which supplies over 30 per cent of the fresh milk consumed in the UK each day, conceded it had been forced to concede on margins as all the major retailers put their milk supply contracts out for tender.

But Robert Wiseman, executive chairman of the company based just outside Glasgow, said he was “pleased with the outcome of tenders in volume terms, as we have retained our business with all our key customers”.

During the year, Robert Wiseman raised the price it pays farmers for milk by 2.4p to 26.72p a litre, reflecting the increased cost pressures facing the dairy farming sector. Meanwhile the company’s own margins were squeezed by increased costs of diesel and plastics.

Attempts to recover higher costs from its own retailing customers, signalled earlier this year, had proved to be a complicated and difficult process, said Mr Wiseman, but he said that the company had managed to secure the levels of price increases it had initially sought.

He added, though, that since the company had set about recovering costs from retail customers, its own oil-related costs had continued to rise.

Turnover at the company increased by 3 per cent from £886m to £917m in the year to April 2, but pre-tax profits fell from £49m to £34m. But the company said it would maintain a dividend of 18p, payable from earnings per share of 38.62p (49.2p).

Shares fell back 6¼p to 328¾p on Tuesday, leaving them around the same level they hit last September, when an admission that price competition among supermarkets and rivals’ additional capacity would dent Wiseman’s profits prompted a 32 per cent intraday fall to 330p.

Competition from Arla, its Danish-owned rival, which is opening “the world’s first billion-litre liquid milk dairy” near Aylesbury in south-east England, is expected to increase competition in the sector.

But during the year, Robert Wiseman agreed to increase the volume of milk supplied to Tesco by 10 per cent, had won a three-year extension to its Sainsbury’s contract from October last year, while it also struck a contract to supply all of the Co-op Group’s own label milk from August 2011.

It also increased capacity at its Bridgwater dairy plant by 500m litres a year, improving its position to win business with dairy farmers in the south west of England and improving its overall operating efficiency.

Broker Investec maintained its “buy” recommendation, though it is forecasting pre-tax profits, which came in on line with its own forecasts for 2011, to fall to £20m in the coming year.

Rival broker Peel Hunt maintained its “hold” stance as it too reduced its target price, reflecting caution on diary companies “given the significant pressure on margins from both input costs and the retailers.

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