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Overview
1. Background to Expansion
2. Dairygold’s Post Quota Plan
3. Funding
2
4. Communication & Implementation
5. Summary
Background
• Removal of quotas creating a huge opportunity; for both Milk Suppliersand the Society.
• There are long term implications in decisions being made now and wemust ensure we create a sustainable plan.
• Significant work has been completed both internally in Dairygold andexternally.
• Extensive consultative process entered into with our Committeestructure.
• Completed an assessment of funding models in farmer ownedInternational Co-Ops.
• Our Investment and Funding strategy has been reviewed byIndependent 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
Casein/Butter
32%
Cheese
Danone SM/
Butter9%
5
WMP11%
SMP/Butter
5%MilkSales5%
Cheese40%
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.
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Overview
1. Background to expansion
2. Dairygold post quota plan
3. Funding
7
4. Implementation & communication
5. On-farm challenges
6. Summary
8
Dairygold’s Objectives
• Deliver the required infrastructure and optimal processing capacity
• Ensure a sustainable financial plan:– keeps Bank Debt at a level not putting the processing business
Ensure a Sustainable and Growing Dairygold
– keeps Bank Debt at a level not putting the processing businessor 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.
99
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
– 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.
Projectedannual growth
n/a 0% 7.30% 15.0% 12.25% 4.50% 4.50% 4.50% 4.50%
11
ProjectedCumulative 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
Demand Outlook
UrbanisationUrbanisation
Population Population GrowthGrowth
Government Government PromotionPromotion
Rising per Rising per Capita incomesCapita incomes
Westernisation Westernisation of eating habitsof eating habits
Source: Rabobank
12
Focus of Investment 2013 - 2020
Focus Target Markets% MilkVolume
Incremental Increase in Cheddar volumeCheddar & Speciality Cheese
The associated Demin Whey Powder.
UK, Mainland EU, MENA, Japan, Russia.
Ireland, EU and China
30%
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Increasing Drying Capability WMP / FFMP / IMF Base /
IMF Standard SMP
The associated butter
EU, Middle East, North Africa, Latin America, China and the Far East and
Baby Food sector
IDB Markets
62%
IMF ingredients (SMC)
The associated butter
Ireland
IDB Markets
8%
Total 100%
Dairygold Co-operative Commitment
Dairygold Dairygold committed committed to to process process all all milk milk from from its members in its members in the post the post
quota quota era subject to all Milk era subject to all Milk
14
quota quota era subject to all Milk era subject to all Milk producing members entering into a producing members entering into a
“Milk Supply Agreement”“Milk Supply Agreement”
Processing Locations
Cheese
Mitchelstown MallowMogeely
15
Cheese
Demin Whey Powder
and other Drying Capability
Full Suite of Drying Capability
Speciality Cheese
15
Processing Expansion 2015-2020
2011 to 2014 - Additional Capacity 15% or 4.3 M/L per week
16
Adding 18.5 million litres weekly capacity by 2020
Mallow Expansion
1717
Overview
1. Background to expansion
2. Dairygold post quota plan
3. Funding
18
4. Implementation & Communication
5. Summary
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,
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• Independent review of investment and funding strategy,
• Ensure that Bank Debt is kept at a level that does not put either theprocessing 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.
2020
Rationale for Member Funding
• 100% Bank Funding, not appropriate as it would put significantconstraints on Dairygold.
• Members contribution to Funding Improves Availability, Reduces theCost of Banking Finance and improves our negotiating position.
• Reduces Cost of Funds - Saving of c. 0.5% on interest margin acrossthe Society full bank debt, amounting to a saving of circ. �6 million bythe Society full bank debt, amounting to a saving of circ. �6 million by2020 (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 (potentiality �12m).– Provides scope for milk price support & farmer contingencies.– Society can consider other opportunities for growth.
2121
Dairygold’s Member Funding Plan
TOTAL CAPITAL INVESTMENTS = �225 M
FUNDED BY MEMBERS �50 M / BANK �175 M
22
• 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?
Loan Note (Voluntary)
Loan Note (Voluntary) – Commences in January 2013
• 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.
23
Loan Note - Example2013 2014 2015 2016 2017 2018 2019 2020
Principal paid in
Principal +interest repaid
23
• 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
Revolving Fund
Revolving Fund - commencing 1st January 2013
• Interest will be accrued at a rate of 3 Month Euribor + 2½% and will be repaidwith 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 0.5cents per litre on all milk supplied in the month when the Dairygold quoted milkprice is at 27 cent (including VAT) or greater.
• Capped at a max of 60 Society monthly deductions, equivalent to 5 years.
2424
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
Minimum Shareholding
Minimum Shareholding Requirement - Commences in January 2013
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.
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• 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.
Deferred Payment Fund (13th Payment)
Deferred Payment – Commencing 1 May 2015
• 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 22nd March of the following year.
• The Dairygold declared Milk Price for particular month will apply.
• No interest will accrue on deferred amounts.
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Blue = applicable volume - 20% incremental volume
Deferred until March the following year
Dairygold milk price will apply
No interest
150,000
200,000
250,000000’s Litres
Deferred Payment Fund (13th Payment)
27
0
50,000
100,000
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Base Volume Incremental Volume Incremental Volume Deferred
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%
YearMilk Price
CPLRevolving Fund�uros CPL
Shareholding�uros CPL
UpdatedS/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
An Example - A supplier with 300,000 litres, 5cpl shareholding and projected growth of 63.5% by 2020.
Calculation of the Deferred Payment for 2015
Total 6,326 4,398
28
2015 30.0 1,458 0.40 0 0.00 4.09 2,398 0.65
2016 26.0 0 0.00 0 0.00 3.64 3,348 0.81
2017 30.0 1,776 0.41 2,151 0.50 3.99 4,687 1.09
2018 30.0 1,872 0.42 2,247 0.50 4.32 5,378 1.20
2019 26.0 0 0.00 0 0.00 4.13 5,085 1.08
2020 30.0 0 0.00 0 0.00 3.95 6,858 1.40
Calculation of the Deferred Payment for 2015
Annual Supply Litres 366,600
Base Volume(assuming 2011 volume but likely to be higher)
Litres 300,000
Incremental Volume Litres 66,600
Element Deferred (60%) Litres 39,960
Milk Price CPL 30.0
Deferred Element (20%) CPL 6.0
Amount Deferred (39,960 Litres X 6 cpl) �uro’s �2,398
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-
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• 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
Overview
1. Background to expansion
2. Dairygold post quota plan
3. Funding
30
4. Implementation & Communication
5. Summary
Milk Supply Agreement
Dairygold Dairygold commits commits to to process process all all milk milk from from its its shareholders in the post quota shareholders in the post quota era, subject era, subject
to all Milk Suppliers having entered into a to all Milk Suppliers having entered into a “Milk Supply Agreement”“Milk Supply Agreement”“Milk Supply Agreement”“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
33
• 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
Milk Supply & Purchasing
Agreement
• Up to 31st March 2015 ‘Milk
Supply Agreement’ is secondary
supply document
34
• From 1st April 2015 ‘Milk Supply
Agreement’ to be the principal
supply document
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]
MILK VOLUME FORECASTING PER SUPPLIER FOR 2014, 2015 & BEYOND
Agreed Milk Forecast for 2014 & 2015
Calculate Revolving Fund
Payment [Starts in 2013]
Calculate Shareholding
Payment [Starts in 2013]
Calculate Deferred Payment
[Starts in 2015]
MEMBER FUNDING FINANCIAL PROJECTIONS PER SUPPLIER
35
Communication schedule
Steps to New Milk Supplier Relationship1 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 ����
36
5 Signed Milk Supply & Purchase Agreement December 2012 ����
6 Inform all Milk Suppliers of Shareholding versus 2012 Milk Supply
January 2013 ����
7 Electronic Fund Transfer details set up for all remaining Milk Suppliers
January 2013 ����
8 Meet all Milk Suppliers re - Volume Forecasting (Early calving areas will be completed first)
January to March 2013 ����
9 Milk Volume Forecast in place per Supplier March 2013 ����
Overview
1. Background to expansion
2. Dairygold post quota plan
3. Funding
37
4. Implementation & communication
5. Summary
Summary
• Dairygold’s financial position has strengthened considerably over the past threeyears. We cannot be complacent and it is critical we take the right options, to protectthe Society and Members’ future.
• Significant work has been done and Dairygold is fit and ready for the challenge ofthe Post Quota Era
• Dairygold intends to process all the milk that its Members produce in line with theMilk Supply Agreement. Planning / Forecasting of milk supplies will be a core
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Milk Supply Agreement. Planning / Forecasting of milk supplies will be a corefeature of future Dairying.
• As a farmer owned business the Society needs its owners to assist in fundingexpansion/development.
• A milk supply agreement is a necessity for the future and is required to protectMembers’ interests and the Society overall.
• We have been and will continue to evaluate wider industry options, but alwaysbearing in mind the best interests of ALL Dairygold Members.
38
We will continue to work We will continue to work We will continue to work We will continue to work Together !Together !
THANK THANK YOUYOU
40
Milk Price 2007 to 2012
Quoted Milk Price (incl. VAT)@ 3.30% Protein and 3.60%
Butter Fat
2007 33.3 cpl2008 33.4 cpl2009 21.8 cpl2010 29.4 cpl
30.0
35.0
40.0
Dairygold Quoted Milk Price (incl. VAT)2007 to 2012
2010 29.4 cpl2011 33.6 cpl2012 30.4 cpl
10.0
15.0
20.0
25.0Ja
n-0
7
Ap
r-07
Jul-
07
Oct
-07
Jan
-08
Ap
r-08
Jul-
08
Oct
-08
Jan
-09
Ap
r-09
Jul-
09
Oct
-09
Jan
-10
Ap
r-10
Jul-
10
Oct
-10
Jan
-11
Ap
r-11
Jul-
11
Oct
-11
Jan
-12
Ap
r-12
Jul-
12
Oct
-12
3 Year Average 31.1 cpl
(2010 to 2012)
6 Year Average 30.4 cpl
(2007 to 2012)
Dairy Markets
41
Cost of Investment
Based on Payback (Years) 12
�m �mCapital Cost 120.0
Working Capital 75.0
Investing �120m, to increase the Weekly Processing Capacity by 18.5m Litres and the Annual Capacity by c. 630m Litres
Niro 3 M’town plus 2 x 7.5 tn per hour driers Mallow
... Fixed 50.0 50.0
... Seasonal 25.0
Finance Cost 50.6
Taxation 3.1
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%
Avg Annual Debt of �105m @ 4% interest rate.
42
Analysis of 3.5cpl Cpl
Capital 1.9
Working Capital 0.8
Finance 0.8
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 �3.9m �3.9m �8.5m �8.5m �14.2m �20.1m �20.1m �16.2m
Share Holding at 4.0 cpl
Dairygold’s Projected Member Funding For ExpansionIn addition to Retained Cash Flow and Bank Debt
Share Holding at 4.0 cpl allowing for IncreasedRedemption
�0.9m �2.0m �3.3m �5.1m �7.1m �9.0m �10.5m �11.7m
Deferred Payment on New Milk (20%) - - �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
For 2011 Dairygold was• In 3rd position out of 13 participants, with a
price of 33.90 cpl (after deducting Levies andexcluding VAT)
• In the middle of the West Cork Co-op’s“Carbery” (who account for c. 8% of milkpool) by on average c. 0.05 cpl, of which c.[0.30] cpl relates to benefit Carbery have fromWinter Milk Payments.
• ahead of Glanbia (6th) by 0.50 cpl, but Glanbia
2011
CO-OPAvg
Price RankButter
Fat Protein LISAVAIRD 34.32 1 3.94 3.40
BARRYRO E 34.06 2 3.91 3.38
DAIRYGOLD 33.90 3 3.93 3.43
DRINAGH 33.79 4 3.88 3.38
BANDON 33.77 5 3.89 3.36
GLANBIA 33.40 6 3.88 3.38 • ahead of Glanbia (6th) by 0.50 cpl, but Glanbiaalso has the benefit c. [1.00] cpl from WinterMilk Payments.
• ahead of Kerry (7th) by 0.69cpl, Tipperary (8th)by 0.95cpl and Lakelands (9th ) by 1.10cpl,
• and paying in excess of Connacht Gold,Arrabawn, Wexford and Town of Monaghanby between 1.43 cpl and 2.20cpl.
• Dairygold paid 0.76 cpl over the weightedaverage (excluding Dairygold).
GLANBIA 33.40 6 3.88 3.38
KERRY 33.21 7 3.84 3.36
TIPPERARY 32.95 8 3.95 3.42
LAKELAND 32.80 9 3.93 3.31
CONNACHT GO LD 32.47 10 3.89 3.34
ARRABAWN 32.27 11 3.91 3.36
WEXFORD 31.72 12 0.00 0.00
MONAGHAN 31.70 13 4.02 3.45
NEWMARKET N/A N/A N/A N/A
