This article first appeared in The Edge Malaysia Weekly on July 18, 2022 - July 24, 2022

WHILE stating that the worst is yet to come in terms of inflation, with no end in sight, Dutch Lady Milk Industries Bhd managing director Ramjeet Kaur Virik is “cautiously optimistic” that the company will be able to manage the shocks.

The timing of her taking office about a year ago could have been better in view of the challenges on the horizon. Ramjeet has her work cut out for her. On top of these looming challenges, the dairy product maker has embarked on a RM400 million expansion plan to build a new production facility at a time when commodity prices, including those of building materials, are escalating.

“This is unprecedented,” she tells The Edge, referring to the current economic scenario. “Nobody has ever seen this kind of global inflationary pressure before. The amount of inflation and the cost of doing business is a lot higher.

“So, we already know what is coming until the end of the year and, if I can say, the worst is yet to come; the third quarter is going to be the peak. We are hopeful, though. It seems to be levelling off, but it is not coming down. So, it is going to stay at the high.

“As long as it does not continue to increase, that is one hope we have, and one way we can manage it is to try to optimise cost everywhere,” Ramjeet says.

The global supply chain disruption had resulted in the dairy group’s opting to use air freight to bring in the raw materials needed to ensure production lines continued to run. Ramjeet did not disclose the impact of cost increase on the company.

“The supply chain disruption is very much related to the global container [shortage]; this has been happening since the pandemic started and I think made worse by the China lockdown. Fortunately, the Shanghai port is now open — it is one of the top ports in the world — but the [Russia-Ukraine] war is also not helping and continues to cause that disruption.”

Apart from the disruption in sourcing raw material, Ramjeet says logistics also experienced a disruption in the shipment of Dutch Lady products from Peninsular Malaysia to Sabah and Sarawak, but the company has managed to solve it.

“When you go to the supermarket and sometimes you may see empty shelves, it is a reflection of challenges on the retailers’ side, where they have to make sure that the products are available despite a disruption,” she says.

Dutch Lady has not managed to escape cost inflation, but the saving grace is perhaps that demand appears to be relatively inelastic despite several rounds of price hikes to cope with higher raw material costs.

According to the Global Dairy Trade website, the price of skim milk powder has increased 37% year on year to US$4,063 a tonne on July 5, while the price of whole milk powder has risen 6% in the same period to US$3,961 a tonne.

Dutch Lady’s annual profit margin swelled, however, to 21.87% as at Dec 31, 2021 (FY2021), mainly lifted by a one-off gain from land sales. For FY2020, its profit margin was 6.67%, on the back of a net profit of RM73.36 million and revenue of RM1.1 billion.

For the first quarter ended March 31, 2022 (1QFY2022), its net profit margin returned to single digits of 6.86%, given its net profit of RM20.57 million on revenue of RM299.87 million.

“What we focus on is to ensure we continue to supply, and as long as we can continue to secure a top line, I think we will manage our bottom line. That is how we have been managing the business in the last two years,” she says.

According to her, consumer demand has been encouraging for the past six months and the reopening of schools further helps drive demand and milk consumption.

“We are optimistic that demand will continue because of the awareness of the importance of nutrition. And we have a huge role to play in the country’s development for the future [in the nutritional standards of Malaysians]. So, that is where the optimism comes from.

“The cautiousness is the cost. So, we need to save money everywhere [by cost optimisation] and we cannot just raise the price; that is not how to drive penetration [of milk] because that is counterintuitive in a sense,” Ramjeet says.

She stresses that Dutch Lady has been reviewing its pricing strategy monthly while trying to ensure the affordability of its products.

The dairy company’s net profit for 1QFY2022 grew nearly 22% year on year (y-o-y) to RM20.57 million, from RM16.88 million, owing to a recovery in economic activities from the relaxation of the lockdown, high demand as well as price hikes to offset strong inflationary headwinds.

Quarterly revenue increased 16% y-o-y to RM299.87 million from RM258.64 million. Earnings per share expanded to 32.1 sen, from 26.4 sen previously.

The company recorded a good performance for its financial year ended Dec 31, 2021 (FY2021) as net profit soared 238% y-o-y to RM248 million from RM73.36 million. Its annual earnings were boosted by the one-off land sale gain of RM154.7 million before its relocation, along with 3% revenue growth to RM1.13 billion, from RM1.1 billion in FY2020.

“We [have seen] a good revenue increase, but that is also because of price increases that we had to do in the market. We are confident about driving the penetration of milk in Malaysia because we know milk is a nutritious product.

“As long the trend continues, I think the top line will be fine. We will be able to fulfil our ambitions. Profit is still a challenge, however, as the cost of doing business has increased,” Ramjeet says.

Ramjeet says the long awaited Industry 4.0 (IR4.0)-compliant factory in Bandar Enstek, Negeri Sembilan, to be built via internally generated funds, aims to run commercially in 2024, with a target to double its current manufacturing capacity by then.

The factory will be equipped with advanced technologies, including automation, big data, cloud computing and the Internet of Things to increase its production efficiency.

“IR4.0 would ensure there is no disruption in operations and, when your efficiency goes up, your conversion cost goes down; then your margins go up. That is the part that I am looking forward to.

“And it is about traceability. Because we are a food company, we want to know which product, line or source whose data we can use for the traceability of our product,” Ramjeet says.

With ongoing inflation, she says, the new factory has gone beyond its budgeted RM400 million, but it has locked in almost all of its tenders to keep the budget in check.

Its facility in Malaysia, which exports to Singapore and Brunei, has reached its maximum capacity.

“We have run out of space and capacity; we are looking forward to being a hub for the region and being in the halal hub. We know the global halal industry is set to continue to grow in the coming years, so we have earmarked it, and the location is also perfect as a hub for the region,” Ramjeet says.

According to Dutch Lady’s 2021 annual report, the new facility is situated in a 13.35ha industrial park, and is triple the size of its existing factory.Ramjeet says data has shown that the Malaysian halal dairy market is valued at RM4 billion and milk consumption per capita in the country is about 11 litres compared with 40 litres in developed countries such as in Europe.

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