Dutch Lady Milk Industries Bhd’s historic decision to cease the production of condensed milk in late 2011 was not merely due to it being a low margin business but it was part of the group’s effort to offer a healthier portfolio of products to consumers.
“We made a commitment at end-2010, when we said we would reduce the total consumption of sugar by 40% and we would make at least 90% of our products either without added sugar or reduced sugar from the levels at that time,” said Rahul Colaco, managing director of Dutch Lady.
The dairy company achieved the goal within 18 months, ahead of the planned timeline of end-2013.
“This is a very important part of our strategy to offer healthier products and help improve the nutritional intake of Malaysians,” said Colaco.
In fact, it is part of the group’s global strategy to improve public health. In Southeast Asia, for example, the group, together with sister companies in the region, has undertaken a survey to study the nutritional profile and habits of 7,000 children. The group will use the data to work with various NGOs and government agencies to improve the nutritional habits of the children, who include Malaysians.
“It’s an important part of our corporate mission,” Colaco said.
Dutch Lady is 51% owned by Royal FrieslandCampina NV, a multinational dairy company wholly owned by a dairy cooperative which has 14,391 member dairy farms in the Netherlands, Germany and Belgium.
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| Colaco says the challenge is to get people to drink milk, especially in Malaysia where average milk consumption per capita is only two servings a week |
Based on this statistic, the opportunity for growth for Dutch Lady is phenomenal, he said. However, to get there, Colaco said the group needs to do two things: first, understand why consumers are not drinking milk and second, communicate to them the goodness of milk.
“No other beverage naturally has as much nutrition as milk, it’s really a magical cocktail of natural ingredients that are essential for people of all ages. There’s a misconception it is only for babies, but milk has essential nutrients that are beneficial to everyone,” Colaco said.
For Dutch Lady, the task ahead will be to create public awareness of its products. The group has embarked on various campaigns to promote the goodness of milk. For example, Dutch Lady held its first Milk Elections last year as part of the World Milk Day celebration. It also ran the Dutch Lady Kid and Dutch Lady School campaigns and was involved in the government’s 1Malaysia School Milk programme.
In fact, Dutch Lady’s mission to “help Malaysia move forward in life with trusted dairy nutrition” is in sync with its corporate social responsibility programme.
“CSR is a key part of our business mission. And one of the things we are fortunate to have is a product which is inherently healthy. Educating people about the goodness of milk, I would say that in itself is a CSR activity,” said Colaco.
Dutch Lady’s CSR activity is centred on women and children. Hence, aside from its work with children via various educational programmes in schools, Dutch Lady has established a Working Mothers Foundation as a platform for working mothers to discuss the challenges of balancing work and personal life. Furthermore, from January 2011, Dutch Lady increased maternity leave from 60 days to 90 days for its staff.
Apart from activities to drive milk consumption, Colaco said Dutch Lady will continue to focus on managing the volatility of rawmaterial prices by buying at the right time, along with its parent company, while continuing value improvement and cost optimisation without passing on the cost to consumers.
The cost of milk solids has seen steep increases over the last few years, but despite this Dutch Lady has shown rising profit. For the financial year ended Dec 31, 2011 (FY11), the company achieved its highest level of profit before tax in its history at RM141 million, 57% above the year before.
The company’s share price has risen 114% year-to-date, on the back of investor interest in defensive counters at a time of market uncertainty.
Dutch Lady does not have a stated dividend policy, but has been paying out steady dividends, adding to its appeal as a defensive stock.Based on its closing price of RM49 yesterday, its 12-month yield works out to 3.67%, according to Bloomberg data. For FY11, Dutch Lady paid out 80 sen gross dividend per share compared with 95 sen in 2010.
Colaco said while Dutch Lady has no fixed dividend policy, the company typically declares a single-tier interim dividend of 50 sen twice a year. In May this year, the company declared a special interim dividend of 80 sen.
He cautioned that dividends are not guaranteed, subject to the company’s cash requirements and financial performance.
“Our objective is to create shareholder value in terms of total shareholder returns, in terms of capital appreciation and dividends,” he said.
On the company’s challenges in the next 18 months, Colaco said amid the war for talent in Asia, attracting and retaining employees will be a constant uphill task for Dutch Lady.
“There is a shortage of skilled, experienced and ambitious people and that will continue to keep many CEOs awake at night. How do you attract and retain the best talent for your team?” he said.
Volatile raw material costs will be another challenge for the dairy company given the droughts in many parts of the world. This, coupled with growing demand for dairy products, especially in China, will result in further increases in raw material prices for milk.
“We see potential for increases in prices in the coming quarters, which will be a challenge for dairy players,” Colaco said.
Dutch Lady emerged as the best performing stock in the consumer products sector in The Edge Billion Ringgit Club 2012 for delivering 60.23% in returns to shareholders over three years.
Between 2009 and 2011, its share price increased significantly from RM11.60 to RM34.26.
Dutch Lady has its origins in sweetened condensed milk when it was incorporated in 1963 as Pacific Milk Industries (Malaya) Bhd, before expanding to producing UHT milk in the 1970s. In 1968, it was listed in Malaysia and Singapore.
In the 1980s, the company was delisted from the Singapore Stock Exchange in line with the government’s efforts to promote the Kuala Lumpur Stock Exchange.
Today, Dutch Lady is a leading dairy company in Malaysia, with 20% market share and a market capitalisation of over RM3 billion on Bursa Malaysia.
This article appeared in The Edge Financial Daily, Oct 21, 2012.
