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When you look behind the 2020 Ornua numbers, it reveals a value creation model that most Irish companies can only dream about.
Market forces driven by a unique 2020 consumer sales pattern forced Ornua into selling more product into the US and German supermarkets rather than food service.
US tariffs on Irish butter imposed by the previous US administration forced Ornua into selling butter at a higher shelf price.
It didn’t matter. The combination of more volume retailing at a higher margin has catapulted Ornua profits into a new space.
The numbers are off the radar compared to a short time ago. Earnings (EBITDA) were just over €40m in 2016 and were just shy of €110m in 2020. Operating profits have gone from mid €20ms in 2016 to over €80m in 2020.
And chief executive John Jordan wants more of the same.
Speaking to the Irish Farmers Journal, he said: “There are three things we want for the future.
“Firstly, focus – as a business we need to focus on what space we are working in.
We have started an acquisition project which will remain under wraps for the moment, but, it ties in with where we want to grow value
“Secondly, simplicity – we had a period of merger and acquisition in our business and now we need to simplify and do what we are good at.
“Finally, value growth is where our business is at – not volume growth.”
Tied into that, Jordan is confident Ornua can grow the value-added space and that, geographically, the company is clear on where it wants to grow.
“We have started an acquisition project which will remain under wraps for the moment, but, it ties in with where we want to grow value.
“We have the balance sheet to be able to back this statement up now.”
The numbers
Ornua (formerly known as the Irish Dairy Board), saw turnover reach €2.3bn in 2020 allowing earnings (EBIDTA) to reach €107.4m, up almost 50% on 2019.
Sales of the Kerrygold brand were up 13% in volume and the company says this means there are now 10m packets of butter and cheese sold each week.
These extra sales allowed Ornua deliver a 54% year-on-year increase in the brand premium and bonuses paid to co-op members, with €68.7m returned to co-op members in the Ornua Value Payment. That’s the payment on top of the commodity price for the higher margin Ornua gets for Kerrygold product in the market.
Co-op returns
Ornua members – that’s the co-ops that sell product to Ornua and subsequently get the privilege to sit around the Ornua table – are Dairygold, Glanbia, Arrabawn, Carbery, North Cork, Aurivo, Tipperary Co-op and Lakeland. They get a share of the Ornua profits.
In 2016 this was €30m, and in 2020 it was just shy of €70m – more than doubled in five years. That’s a compound annual growth rate of 23%.
Ornua also provided €550m in working capital facility which no doubt helps co-op balance sheets
Some co-ops pass it back to farmers as a separate Ornua bonus, while others put it into the overall milk price pot for dividing out.
On top of this, Ornua made a commitment to co-ops at the start of 2020 that it would purchase €1bn worth of product (366,000t) before even the farmers had the milk supplied. That’s a fair chunk of co-op sales before the milk lorry has picked the milk off the farm.
Ornua also provided €550m in working capital facility which no doubt helps co-op balance sheets.
Governance
Over the last 12 months, the governance at Ornua has been revamped. The board now comprises member organisation representatives, but critically they are not conflicted to the same extent as when the CEOs of the member organisations were sitting around the table.
However, the CEOs and Chairs that were previously on the board now sit on the advisory council and are still very much engaged in Ornua. We understand they still get monthly meetings on market updates and they still get quarterly updates on strategic decisions that Ornua is working on.
That’s an intensive work programme for any so-called advisory council. Jordan welcomed the commitment: “You have to appreciate the engagement given the experience around the board of the advisory council and how it can benefit Ornua.”
Give credit where it’s due, it was a big call for the previous board to essentially vote themselves off the board
He is also conscious that the Ornua board are crystal clear on their corporate responsibilities and fiduciary duties and dismissed any notion that the board are any way subservient to member organisations.
Jordan said: “Give credit where it’s due, it was a big call for the previous board to essentially vote themselves off the board. The new skillset of member organisations, new independence (three independent directors) around the board married with the existing farmer representatives can only serve Ornua better into the future.”
The long and short of this exceptional set of results from Ornua is rather than going into an unbranded, unloved, food service type offering, Ornua sold more product into branded Kerrygold sales.
The result is the business gets a higher margin. So while revenue for the business in 2020 was only marginally up, the profits rose significantly because the sales mix changed considerably.
The COVID-19 bounce in component purchasing helped
Think about it – during March, April and May last year, supermarket sales doubled and there was panic buying in places. Ornua had to pivot direction and move product to meet the demand.
They cut the product range and reduced the pricing options. The COVID-19 bounce in component purchasing helped. That’s the piece around confectionary sales up 20% such as chocolate, and base products such as butter and liquid milk up double digits.
This and exceptional Chinese demand underpinned global dairy sales. With Brexit sorted, the US and German market sales going up, US tariffs suspended and potentially removed and a strong brand – what more can Ornua do?
The company won’t get involved in primary processing in Ireland, according to Jordan, but the door is open to more volume. My guess is they will stay in the US and Germany that has worked, is working and increase further market share and value. If it’s not broke Ted don’t change it.
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