! "# "# $% &"
Overview 1. Background to Expansion 2. Dairygold s Post Quota Plan 3. Funding 4. Communication & Implementation 5. Summary 2
Background Removal of quotas creating a huge opportunity; for both Milk Suppliers and the Society. There are long term implications in decisions being made now and we must ensure we create a sustainable plan. Significant work has been completed both internally in Dairygold and externally. Extensive consultative process entered into with our Committee structure. Completed an assessment of funding models in farmer owned International Co-Ops. Our Investment and Funding strategy has been reviewed by Independent Corporate Financiers. 3
Dairygold today The current business is doing well: Strong Operational Performance (Cost, Efficiency, Quality) Substantial re-structuring complete (e.g. Reox) Significant Investment made c. 80m in 4 years 2009 to 2012 Good quality plants / assets with expansion options Benefitting from Good Product Mix & Strong Dairy Market Returns Delivering both a competitive Milk Price and improved Earnings A Stronger Balance Sheet with Net Debt under control But there are many challenges! 4
Dairygold Product Portfolio 2012 Danone SM/ Butter 9% Casein /Butter 32% Cheese 40% WMP 11% SMP Milk /Butter Sales 5% 5% 5
Developing Routes to Market Dairygold currently sells through four primary sales channels. We will continue to develop each of these routes to market, to maximise returns. 6
Overview 1. Background to expansion 2. Dairygold post quota plan 3. Funding 4. Implementation & communication 5. On-farm challenges 6. Summary 7
8
Dairygold s Objectives Ensure a Sustainable and Growing Dairygold Deliver the required infrastructure and optimal processing capacity Ensure a sustainable financial plan: keeps Bank Debt at a level not putting the processing business or milk price competiveness at risk prevents undue strain on financing future expansion. Supports share redemption for retiring members Retain Farmer control over the setting of milk price. Develop the processing plan that is flexible & minimises risk. 9
Supplier Surveys Dairygold s projected Milk Volumes are based on: Surveys in 2007, 2009, 2010 and 2011. ICBF Database cross reference. Full Members Survey 2012. 10
Projected Volume and Capacity Required Million Litres 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Growth Projected volume 940 932 932 1,000 1,150 1,291 1,349 1,410 1,473 1,540 +600 M. Projected annual growth n/a 0% 7.30% 15.0% 12.25% 4.50% 4.50% 4.50% 4.50% Projected Cumulative Growth -1.0% -1.0% 6.3% 22.2% 37.2% 43.4% 49.8% 56.5% 63.5% 63.5 % Peak week volume 30.0 30.0 31.6 33.0 37.0 40.5 42.3 44.2 46.2 48.3 Further capacity required 1.6 3.0 7.0 10.5 12.3 14.2 16.2 18.3 +18.3M Litres per Week 11
Demand Outlook Population Growth Urbanisation Rising per Capita incomes Westernisation of eating habits Government Promotion Source: Rabobank 12
Focus of Investment 2013-2020 Focus Target Markets % Milk Volume Incremental Increase in Cheddar volume Cheddar & Speciality Cheese The associated Demin Whey Powder. UK, Mainland EU, MENA, Japan, Russia. Ireland, EU and China 30% Increasing Drying Capability WMP / FFMP / IMF Base / IMF Standard SMP The associated butter IMF ingredients (SMC) The associated butter EU, Middle East, North Africa, Latin America, China and the Far East and Baby Food sector IDB Markets Ireland IDB Markets 62% 8% Total 100% 13
Dairygold Co-operative Commitment Dairygold committed to process all milk from its members in the post quota era subject to all Milk producing members entering into a Milk Supply Agreement 14
Processing Locations Mitchelstown Mogeely Mallow Cheese Demin Whey Powder and other Drying Capability Speciality Cheese Full Suite of Drying Capability 15 15
Processing Expansion 2015-2020 2011 to 2014 - Additional Capacity 15% or 4.3 M/L per week Adding 18.5 million litres weekly capacity by 2020 16
Mallow Expansion 17 17
Overview 1. Background to expansion 2. Dairygold post quota plan 3. Funding 4. Implementation & Communication 5. Summary 18
Funding Expansion Many funding options considered. Extensive consultative process entered into; significant feedback received. Carried out an assessment of International Funding models. Independent review of investment and funding strategy, Ensure that Bank Debt is kept at a level that does not put either the processing business or milk price competiveness at risk. The appropriate level of Member Funding required is in the order of 50m, based on projected Investment, Profitability, Debt Levels and advice. 19
International Comparisons and Key Messages Required to become a Member when supply begins (entrance contribution). Direct link between shareholding and milk supply. Cease being a member on exit from milk supply. Members required to invest in their business (ranging from min. 3 cpl to max. 20 cpl), in some cases up-front. Commitment to buy all shareholders milk, but rules apply. Combination of internal and external funding used in all cases. Deferred payment mechanisms to fund working capital requirements. Prevalence of volume forecasting (currently or planning to do so). Appropriate share redemption policies, based on a phased timeframe. 20 20
Rationale for Member Funding 100% Bank Funding, not appropriate as it would put significant constraints on Dairygold. Members contribution to Funding Improves Availability, Reduces the Cost of Banking Finance and improves our negotiating position. Reduces Cost of Funds - Saving of c. 0.5% on interest margin across the Society full bank debt, amounting to a saving of circ.6 million by 2020 (Leverage ratio determines interest margin applicable to Bank Debt). Banking demands for higher profitability are reduced. Reduces the level of profits required to service debt (potentiality12m). Provides scope for milk price support & farmer contingencies. Society can consider other opportunities for growth. 21 21
Dairygold s Member Funding Plan TOTAL CAPITAL INVESTMENTS = 225 M FUNDED BY MEMBERS 50 M / BANK 175 M 22
Loan Note (Voluntary) Loan Note (Voluntary) Commences in January 2013 A Voluntary scheme open to Members to subscribe. A five year loan note at 5 million per annum for the years 2013, 2014 and 2015 (capped at a total of 15 million or 3 years whichever comes first). Repaid from Year 6 Principal with Accumulated Interest. An interest rate of 3 month EURIBOR +4% is proposed. If under subscribed possible option to extend to employees or to third parties? A minimum contribution of 3,000, paid in during Quarter 1. Each Member will receive a letter outlining details of the Loan Note later this month. Loan Note - Example 2013 2014 2015 2016 2017 2018 2019 2020 Principal paid in Principal + interest repaid 23 23
Revolving Fund Revolving Fund - commencing 1st January 2013 A seven year cycle, commencing 1st January 2013. Repayments will be made annually commencing in 2020 A Dairygold Board Guarantee exists to repay the Revolving Fund Interest will be accrued at a rate of 3 Month Euribor + 2½% and will be repaid with the principal. The first 75,000 litres of milk supplied each year is exempt. The contribution is to be deducted from milk payments on a monthly basis at 0.5 cents per litre on all milk supplied in the month when the Dairygold quoted milk price is at 27 cent (including VAT) or greater. Capped at a max of 60 Society monthly deductions, equivalent to 5 years. 24 24
Minimum Shareholding Minimum Shareholding Requirement - Commences in January 2013 The current Milk Suppliers average shareholding is 5.0 cpl of actual milk supply Minimum Shareholding Requirement Each Milk Supplier will be required to achieve and maintain a shareholding equivalent to 4.0 cpl of milk supplied (4,000 Shares Per 100,000 Litres). Where a Milk Suppliers Shareholding is less than 4.0cpl at the end of any year, a contribution of 0.5 cpl will be deducted in the following year (deduction from the monthly milk payments). The 1st assessment at the end of 2012, with all suppliers receiving a statement of their individual position, deductions where required commencing in 2013. New Share Redemption Policy The cash available for redemption will be increased from 1.5m to 3.0m per annum. 25 25
Deferred Payment Fund (13 th Payment) Deferred Payment Commencing 1 May 2015 Introduce a Deferred Payment on Incremental Volumes (over Supplier Base Volumes) May to September inclusive. The Supplier Base Volume will be calculated by reference to the maximum monthly supply in any of the years 2010, 2011 and 2012. Upward adjustments will be made for suppliers who have supplied Less than 200,000 Litres per annum or Less than their annual quota. Better than the Society Average Peak Profile in the period 2010, 2011 and 2012. Payment of 20% of the value of the Incremental Volume supplied in each month during the months of May to September each year, will be deferred to the 22 nd March of the following year. The Dairygold declared Milk Price for particular month will apply. No interest will accrue on deferred amounts. 26 26
Deferred Payment Fund (13 th Payment) 000 s Litres 250,000 Blue = applicable volume - 20% incremental volume Deferred until March the following year 200,000 Dairygold milk price will apply No interest 150,000 100,000 50,000 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Base Volume Incremental Volume Incremental Volume Deferred 27
An Example - A supplier with 300,000 litres, 5cpl shareholding and projected growth of 63.5% by 2020. 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Annual Supply 300,000 297,000 297,000 318,900 366,600 411,600 430,200 449,400 469,500 490,500 Cumulative Growth -1.0% -1.0% 6.3% 22.2% 37.2% 43.4% 49.8% 56.5% 63.5% Year Milk Price CPL Revolving Fund uros CPL Shareholding uros CPL Updated S/holding Deferred Payment uros CPL 2013 30.0 1,220 0.38 0 0.00 5.05 0 0.00 2014 26.0 0 0.00 0 0.00 4.70 0 0.00 Total 6,326 4,398 Calculation of the Deferred Payment for 2015 2015 30.0 1,458 0.40 0 0.00 4.09 2,398 0.65 Annual Supply Litres 366,600 2016 26.0 0 0.00 Base 0 Volume 0.00 3.64 Litres 300,000 3,348 0.81 (assuming 2011 volume but likely to be higher) 2017 30.0 1,776 0.41 2,151 Incremental Volume 0.50 3.99 Litres 66,600 4,687 1.09 Element Deferred (60%) Litres 39,960 2018 30.0 1,872 0.42 2,247 0.50 4.32 5,378 1.20 Milk Price CPL 30.0 2019 26.0 0 0.00 0 0.00 4.13 5,085 1.08 Deferred Element (20%) CPL 6.0 Amount Deferred (39,960 Litres X 6 cpl) uro s 2,398 2020 30.0 0 0.00 0 0.00 3.95 6,858 1.40 28
Funding Summary Cannot be 100% Bank Funded (No 100% mortgages). As a farmer owned business the Society needs Members to assist. Bank Debt is kept at a level that does not put either the processing business or milk price competiveness at risk. Based on funding models of successful International Co- Operatives. Balanced and sustainable approach, recognising past loyalty. All the mechanisms proposed are forms of a deferred payment. All Member contributions required to fund expansion will be repaid 29 29
Overview 1. Background to expansion 2. Dairygold post quota plan 3. Funding 4. Implementation & Communication 5. Summary 30
Milk Supply Agreement Dairygold commits to process all milk from its shareholders in the post quota era, subject to all Milk Suppliers having entered into a Milk Supply Agreement Forecasting volumes is a fundamental element of the Milk Supply Agreement, to facilitate the optimum capital expenditure programme and to maximise the return to Milk Suppliers and Shareholders 31
Post Quota Plan Following Board approval Dairygold s new post quota plan was posted to all Members, July 2012. 32
Milk Supply Agreement Required to manage the expansion in the Members interests Necessary to highlight the two way commitment Certainty of supply is essential to underpin capital investment Milk volume forecasting, per supplier, to become a key requirement Standard Agreement for all Suppliers, personal to individual supplier Assignable in the event of the farm being transferred Member Funding requirements Shareholder redemption policy 33 33
Milk Supply & Purchasing Agreement Up to 31st March 2015 Milk Supply Agreement is secondary supply document From 1st April 2015 Milk Supply Agreement to be the principal supply document 34
MILK VOLUME FORECASTING PER SUPPLIER FOR 2014, 2015 & BEYOND ICBF Herd Data [Cow numbers, Calving Date etc.] Dairygold Data [Herd yield, Milk Quality, Quota etc.] Forecasting Tool - Developed With Teagasc - Generate Milk Forecast [Based on supplier history] Supplier Amendments Regenerate Milk Forecast [Based on supplier input] MEMBER FUNDING FINANCIAL PROJECTIONS PER SUPPLIER Calculate Deferred Payment [Starts in 2015] Calculate Shareholding Payment [Starts in 2013] Calculate Revolving Fund Payment [Starts in 2013] Agreed Milk Forecast for 2014 & 2015 35
Communication schedule Steps to New Milk Supplier Relationship 1 25 Branch Milk Supplier meetings October 2012 2 Milk Supply & Purchase Agreement posted out October 2012 3 2013 Purchasing Terms & Conditions posted out October 2012 4 Details of Loan Note sent to all Members November 2012 5 Signed Milk Supply & Purchase Agreement December 2012 6 Inform all Milk Suppliers of Shareholding versus 2012 Milk Supply 7 Electronic Fund Transfer details set up for all remaining Milk Suppliers 8 Meet all Milk Suppliers re - Volume Forecasting (Early calving areas will be completed first) January 2013 January 2013 January to March 2013 9 Milk Volume Forecast in place per Supplier March 2013 36
Overview 1. Background to expansion 2. Dairygold post quota plan 3. Funding 4. Implementation & communication 5. Summary 37
Summary Dairygold s financial position has strengthened considerably over the past three years. We cannot be complacent and it is critical we take the right options, to protect the Society and Members future. Significant work has been done and Dairygold is fit and ready for the challenge of the Post Quota Era Dairygold intends to process all the milk that its Members produce in line with the Milk Supply Agreement. Planning / Forecasting of milk supplies will be a core feature of future Dairying. As a farmer owned business the Society needs its owners to assist in funding expansion/development. A milk supply agreement is a necessity for the future and is required to protect Members interests and the Society overall. We have been and will continue to evaluate wider industry options, but always bearing in mind the best interests of ALL Dairygold Members. 38 38
We will continue to work Together! THANK YOU
40
Milk Price 2007 to 2012 Quoted Milk Price (incl. VAT) @ 3.30% Protein and 3.60% Butter Fat 40.0 Dairygold Quoted Milk Price (incl. VAT) 2007 to 2012 2007 33.3 cpl 2008 33.4 cpl 2009 21.8 cpl 2010 29.4 cpl 2011 33.6 cpl 2012 30.4 cpl 3 Year Average 31.1 cpl (2010 to 2012) 35.0 30.0 25.0 20.0 15.0 10.0 6 Year Average 30.4 cpl (2007 to 2012) Jan -07 A p r-07 Ju l-07 O ct-07 Jan -08 A p r-08 Ju l-08 O ct-08 Jan -09 A p r-09 Ju l-09 O ct-09 Jan -10 A p r-10 Ju l-10 O ct-10 Jan -11 A p r-11 Ju l-11 O ct-11 Jan -12 A p r-12 Ju l-12 O ct-12 41 Dairy Markets
Cost of Investment Investing 120m, to increase the Weekly Processing Capacity by 18.5m Litres and the Annual Capacity by c. 630m Litres Based on Payback (Years) 12 m m Capital Cost 120.0 Niro 3 M town plus 2 x 7.5 tn per hour driers Mallow Working Capital 75.0... Fixed 50.0 50.0... Seasonal 25.0 Finance Cost 50.6 Avg Annual Debt of 105m @ 4% interest rate. Taxation 3.1 Analysis of 3.5cpl Cpl Total Investment 223.7 Cost per litre @ 100% utilisation cpl 3.0 Cost per litre on all milk cpl 3.5... based on utilisation of 85% Capital 1.9 Working Capital 0.8 Finance 0.8 42
Dairygold s Projected Member Funding For Expansion In addition to Retained Cash Flow and Bank Debt Cumulative Funds 2013 2014 2015 2016 2017 2018 2019 2020 Loan Note 5.0m 10.0m 15.0m 15.0m 15.0m 10.0m 5.0m - Revolving Fund of 0.5cpl Share Holding at 4.0 cpl allowing for Increased Redemption Deferred Payment on New Milk (20%) 3.9m 3.9m 8.5m 8.5m 14.2m 20.1m 20.1m 16.2m 0.9m 2.0m 3.3m 5.1m 7.1m 9.0m 10.5m 11.7m - - 3.9m 6.4m 9.7m 11.6m 11.4m 15.9m Total 9.8m 15.9m 30.7m 35.0m 46.0m 50.7m 47.0m 43.8m Note: Member Funding Required = 50 Million
KPMG Milk Price Report 2011 CO-OP Avg Price Rank 2011 Butter Fat Protein LISAVAIRD 34.32 1 3.94 3.40 BARRYRO E 34.06 2 3.91 3.38 DAIRYGO LD 33.90 3 3.93 3.43 DRINAGH 33.79 4 3.88 3.38 BANDO N 33.77 5 3.89 3.36 For 2011 Dairygold was In 3 rd position out of 13 participants, with a price of 33.90 cpl (after deducting Levies and excluding VAT) In the middle of the West Cork Co-op s Carbery (who account for c. 8% of milk pool) by on average c. 0.05 cpl, of which c. [0.30] cpl relates to benefit Carbery have from Winter Milk Payments. GLANBIA 33.40 6 3.88 3.38 ahead of Glanbia (6 th ) by 0.50 cpl, but Glanbia KERRY 33.21 7 3.84 3.36 also has the benefit c. [1.00] cpl from Winter Milk Payments. TIPPERARY 32.95 8 3.95 3.42 ahead of Kerry (7 th ) by 0.69cpl, Tipperary (8 th ) LAKELAND 32.80 9 3.93 3.31 by 0.95cpl and Lakelands (9 th ) by 1.10cpl, CO NNACHT GO LD 32.47 10 3.89 3.34 and paying in excess of Connacht Gold, ARRABAWN 32.27 11 3.91 3.36 Arrabawn, Wexford and Town of Monaghan WEXFO RD 31.72 12 0.00 0.00 by between 1.43 cpl and 2.20cpl. MO NAGHAN 31.70 13 4.02 3.45 NEWMARKET N/A N/A N/A N/A Dairygold paid 0.76 cpl over the weighted average (excluding Dairygold).