Chairman’s Statement

Our way matters...

Aaron Forde, Chairman

When it comes to industry milestones, 2015 will prove to be an important year in the annals of both the Irish dairy industry and of the Society. On 1 April 2015, after more than 30 years of constraint, EU milk quotas were removed. With the abolition of quotas comes the unprecedented opportunity to maximise Ireland’s potential as a leading global producer of high-quality and sustainable milk and dairy products, off a unique grass-based production system. In tandem with this, and on the eve of quota abolition, another important milestone for the Society was the agreement of shareholders to a new name, Ornua - The Home of Irish Dairy. This new identity marks the culmination of a programme of transformation over five years to prepare the business for the new realities of a quota free market. The new corporate identity reflects our new vision and ambition for the future, while retaining a link to our dairy heritage and the Kerrygold brand.

As Chairman, I am particularly pleased to report on another year of excellent financial and trading results. Critically, the Society is growing its third country business, building on our core competence in dairy trading and also investing strategically in brands and enhanced routes to market.

In recognition of this strong business performance, a total of €14 million is to be paid out in members’ bonuses from the 2015 results. These comprise of a cash element of €10 million and a €4 million allocation to the annual bonus fund for redemption in five years’ time. In addition, the Society is to distribute €15 million to supplier members by way of a separate cash bonus financed by the gain on the part disposal of our US distribution division DPI.

The divestiture of a majority stake in DPI at the end of 2015 was an important development during the year. Ornua acquired DPI at the end of 1989, partly to facilitate direct access for Kerrygold to the US. Over the last 26 years, both DPI and Kerrygold in the US have grown exponentially and the decision was taken by the Board in 2015 to divest of DPI and to invest the proceedings into the Society’s core dairy businesses for future growth. Ornua will maintain a minority stake in the DPI business.

Other key strategic highlights during the year were the acquisition of Ambrosia Dairy in China, strengthening Ornua’s branded footprint in that important market; the completion of a white cheese manufacturing facility by Ornua Saudi Arabia in Riyadh and a powder packing facility for Kerrygold by Ornua Africa in Nigeria; the strengthening of our global infrastructure in Africa, China and the Middle East and, closer to home in Co. Cork in Ireland, the commencement of the construction of Kerrygold Park, our new Centre of Excellence for Kerrygold butter.

Given the Board’s support in Ornua’s Business Transformation Strategy over the past number of years, it is very gratifying to see this strategic investment bearing fruit, not only in emerging markets but also in the excellent performances of the Kerrygold brand in Germany and North America. Ornua Ingredients also performed well in 2015, with particularly positive performances in our trading operation, in The Cheese Warehouse in the UK and in Ornua Ingredientes España, a business we acquired in 2014. As mentioned previously, Ornua divested the majority of its shareholding in DPI in the US at the end of 2015. This subsidiary had contributed positively to the Group’s overall performance during the year.

One of our key commitments to our members is to maximise market returns. We achieved this in 2015, not only through our strong product returns, but also through additional price support. The positive impact of this commitment is clearly evident in the performance of Ornua’s PPI, Ornua’s monthly indicator of market returns, relative to a base year (2010). While the PPI weakened from quarter two, in line with the global downturn in dairy markets, the extent of decline was significantly less than that generally experienced on commodity markets. This achievement, coupled with record purchases from members, is evidence yet again of the strength of the Society’s brands and of the route to market benefits of Ornua’s investments in market expansion, innovation and people.

Two years of global dairy expansion, coupled with limited growth in demand, led to a sharp rise in competitive pressures and a weakening of market prices globally in 2015. Compounding the growth in output, the renewal of the ban by Russia on imports of dairy products including from the EU, the build-up of stocks in China and the decline in purchasing power in oil producing countries, contributed to a decrease in non-EU demand for the first time since 2008. Import demand shifted from China and Russia, however returns from these other markets were lower. Stocks, as a consequence built over the year, including in the EU where intervention for SMP resumed for the first time since 2009.

In Ireland, on-farm post-quota investment, lower input costs and good weather conditions resulted in a 752 million litre increase in milk output in 2015, up over 13%. Dairy expansion helped compensate producers for the lower market returns, however net dairy margins were halved. Looking forward, while the rate of growth in milk output is declining across the globe, supply will continue to expand, putting continued pressure on market returns across all products. EU exporters, including Ornua, reported record export volumes in 2015. A similar export performance will be required in 2016 and while the euro is currently competitive, we face a number of export challenges, not least the economic situation in China, the purchasing power of oil-production countries, the continuation of the ban on dairy products into Russia, geopolitical instability and the stock situation in importing countries. Ultimately however, a supply side correction is required for market balance to be restored and prices to recover.

Turning to the Board, I would like to thank my fellow Board members for their support in re-electing me as Chairman and I especially thank the Vice-Chairman, Jim Russell, for his continued support. Two members retired from the Board in 2015, Bertie O’Leary and Donal Tobin. We thank them both for their support and for their contribution to the Society during their time on the Board. James Lynch and Dermot O’Leary joined the Board in 2015 and we wish them both well in their stewardship of Ornua. As part of the Board’s journey of governance review and improvement, I am pleased to welcome Denis Cregan as Ornua’s first Independent Non-Executive Director.

I thank Denis for coming on board and wish him well in his endeavours to support Ornua in growing its business. It goes without saying that the continued success of Ornua is due to its customers, its many stakeholders and its staff. I would like to thank the Irish Government, in particular Minister Coveney and his officials in the Department of Agriculture, Food and the Marine, as well as Bord Bia, Teagasc and the other state bodies and agencies, for their work in promoting and facilitating the export of Irish dairy products. I also extend, once again, my appreciation to Kevin Lane and his management team, and to all employees of the Ornua Group globally, for their efforts and dedication.

Finally I would also like to acknowledge the commitment of Ireland’s dairy farmers to Ornua. We are honoured to market their produce and commend them for their commitment to quality. We, in turn, are building a robust and valuable diversified asset for the Irish dairy industry that delivers strong sustainable returns for our members and ensures the long-term viability of our great industry.

Aaron Forde