Wiseman warns of £8.5m hit to profits

Published on Monday 12 May 2008 21:47

SHARES in the Scottish diary giant Robert Wiseman plummeted yesterday amid fears that milk processors are being caught in a squeeze between powerful supermarkets and the rising cost of raw materials.

The UK's second largest dairy group's stock took an 11 per cent fall in value after the company warned that profits could take a 8.5 million hit this year.

Although the share prices recovered slightly later yesterday – ending up down 9 per cent at 452.25p by end of trading – the fall was a clear signal of market fears over the profitability of the East Kilbride-based company.

The share price fell came despite Wiseman reporting profits and turnover up in 2007.

Rising costs of milk at the farm gate and raw materials such as diesel, combined with delays in negotiating higher prices from supermarkets, led the firm to give what was in effect a profit warning.

The company said yesterday that the price of milk farmers receive had gone up by 40 per cent, while rising oil prices had driven up the cost of running its 1,600 delivery vehicles and the cost of milk cartons.

In a further sign of increasing inflationary pressure, Wiseman announced yesterday it was increasing the price it paid farmers for milk by 0.5p per litre to 26.2p.

However, while cost pressures are clear, supermarkets, which account for two-thirds of Wiseman's customers, are reluctant to pay more for milk.

Chairman Alan Wiseman said yesterday that delays in negotiating prices with retailers has cost the company 3m this year already. While the firm was agreeing the first round of price increases with retailers, oil prices went up even further, adding a further 2m to Wiseman's earnings shortfall estimate. A further 3.5m reduction was down to a fall in returns on bulk cream sales, taking the total potential setback this year to 8.5m.

Market volatility and the strong euro have hit income from the cream that is removed to make semi-skimmed milk. In the past, Wiseman could have passed increased costs onto farmers, but concerns that inflation is in danger of putting more farmers out of business has led Wiseman to take the hit.

Graeme Jack, Wiseman's communications director, said: "We've been left in the situation where we have to absorb a lower cream price.

"Because supply of milk is tight, the last thing we want to do is to reduce our price to farmers. We want to give them confidence and incentivise them to produce more milk."

Jack called the 8.5m figure "prudent" and said he was hopeful some of the earnings shortfall may yet be recovered. If another round of price hike negotiations with retailers goes ahead in the autumn, the company could recover a proportion of the 2m, while the 3.5m estimated write-down could be "wiped out" if the value of bulk cream rose by 100 a tonne.

Wiseman yesterday said its 2007 operating profit was down 11 per cent. The company said this was a result of an exceptional 6.1m fine levied by the Office of Fair Trading, Wiseman's share in a 116m price-fixing settlement. Wiseman said underlying profits – reflecting the firm's true performance – rose 10 per cent to 38.4m on turnover up 20 per cent to 722m.

Wiseman also said the OFT had "provisionally decided to close down" another investigation into price-fixing in Scotland, involving Wiseman, Scottish Milk Dairies, Graham's, Renfrew, Ballantyne and Quothquan.

FARMING, PAGE 41