I thank the committee for the opportunity to appear before it today. The Chairman has introduced my colleagues. Marius Martin is the group director of corporate strategy in Greencore.
The committee invited me to outline the rationale for our recent decisions about sugar production in Ireland. Those decisions represent a massive commitment by our group to the future of sugar production. We are confident and optimistic about that future. The decisions we have made represent the only way forward consistent with the industry's survival in this country. I am happy to share with the committee the basis for our rationalisation decision and the decision to concentrate production in one factory in Mallow and, regrettably, to close the Carlow factory.
Three key issues underline these decisions. One is impending sugar regime reform, the second is the competitiveness of our business versus the business of our major European competitors and the third is market and customer behaviour, particularly since the July 2004 proposals for sugar regime reform which were announced by the European Commission. Impending sugar regime reform and the lack of competitiveness versus our EU competitors go to the heart of the reason we need one factory, rather than two, in this country. However, the third issue — market and customer behaviour since the July 2004 proposals by the EU were published — goes to the heart of the need to advance that decision and its timing. I will deal with the three issues in turn.
Members of the committee may or may not agree with this and many might not be aware of it but the certainty of impending sugar regime reform and its effect on supply and demand for sugar in the EU necessarily meant that Ireland would always have to rationalise production on to one efficient site. That fact has been the subject of speculation for years and well before the July 2004 proposals were published. That reform is certain. There is no doubt that it will involve sharp cuts in both sugar quota and sugar price in Ireland and throughout the EU. The reason is that the EBA treaty, which is already in force, and the opening position of the EU in Doha make the outcome of both quota cut and sugar price cut inevitable. There is still much for which to negotiate. Successful negotiation is critical to achieving survival of the sugar industry. However, it would be reckless to pretend that life post-sugar regime reform in 2006 will even resemble what life has been like for all of the participants in the industry to date. The future will look nothing like the past.
The consequent increased competitiveness of the EU sugar regime and marketplace will see an enormous volume of the sugar previously exported by Europe swilling around the marketplace in Europe. This means sugar production in Ireland will have to radically alter its unit cost to compete with the ever increasing flows of imported sugar from its competitors. Those competitors have significant scale advantages over Irish Sugar, which in EU production terms is puny. It has 1.15% of total EU quota and is the smallest sugar company in Europe.
The Irish industry as currently configured, with its factories in Carlow and Mallow, would no longer be competitive in the rapidly changing world it must confront. Factory throughputs would not compete with those of our best competitors, whose throughputs and therefore efficiency levels are almost double ours, as the industry is currently configured. The Irish industry's campaign length, which is a significant factor for our growers, has become too short at 85 days, and with quota cuts would become considerably shorter. To become efficient, we must work our capital for more than 85 days. Greencore has significant capital invested in its sugar processing businesses but it works that capital for a mere 85 out of 365 days. If Greencore did not do what it has decided to do, any incremental capital it spent in a two-factory scenario would be increasingly thinly spread over two sites rather than focused on the creation of one world class sugar refinery with a much more competitive scale than at present.
I wish to focus on campaign length, which is a controversial issue. Our average campaign length is approximately 85 days. Our nearest and largest competitor, British Sugar, had an average campaign length last year, over all of its factories, of 154 days. Its longest campaign was 166 days at one factory. UK beet growers have been able to accommodate themselves to campaigns more than twice as long as our current campaign, and in excess of 60% longer than our proposed campaign length under the new one-factory regime.
What this means is simple. British Sugar, our nearest and largest competitor, has operated with just half of the sugar factories per tonne of output than Greencore has traditionally operated with. Put another way, the substantial fixed cost base of the British Sugar business per unit of output is just half our fixed cost base per unit of output, yet — it is important to remember this — the price Greencore and British Sugar receive for outputs will be identical in a single EU sugar market. Therefore, large-scale rationalisation of the Irish sugar industry has been inevitable for some time and has been planned by the business for some time, as our necessary response to likely regime change and the competitiveness issues which this is likely to bring.
However, to be fair, we thought this was somewhat down the track and would perhaps take place in the next two years. We did not envisage the immediate impact of the July 2004 EU proposals on our customers and competitors. Both groups, customers and competitors, have moved in advance of any final proposals from the European Commission. Both groups have already anticipated the outcome of sugar regime reform and have begun to reshape their businesses to better position themselves for the post-reform era. The lesson for Greencore and others is that markets and customers do not wait for regulators or final decisions; they move in expectation and anticipation of what the regulators will deliver. If Greencore's competitors and customers are completely reconfiguring their businesses to cope with the post-reform era, Greencore must do exactly the same to survive.
I want to focus in detail on what has happened in our customer and competitor environments. Many of our competitors, in particular the French and Germans, are campaigning vigorously for a much more draconian reform of the sugar regime than is at present proposed, particularly with regard to price. Their vision — we in Ireland need to be conscious of this — is that European sugar production will concentrate in just four or five of the 25 EU member states. Their vision is for very large-scale production with lower raw material costs and their perception, right or wrong, is that they can compensate for lower sugar prices by dominating the entire EU sugar industry. In other words, all EU sugar production could concentrate in four or five countries. That is their vision and why they are campaigning for a much more draconian regime. They do not say it but they want to see sugar production wiped out in between 15 and 20 European countries.
Those competitors have already destroyed the Italian sugar industry though we have not yet seen a set of final proposals from the EU. They exported a vast quantity — 1.3 million tonnes — of sugar into the Italian market in recent months, based on the perceived weakness of the Italian sugar industry and the perception that it would not be around for much longer post-reform. Competitors are taking share in advance of clearly anticipated change; this is happening at present in Spain and Portugal, the industries of which are also perceived to have relatively weak production bases.
In Ireland, imports of sugar have grown from 5,000 tonnes to 40,000 tonnes. More recently, in the past six months, almost every single industrial customer of Greencore's business has been approached by one or more of its competitors with very price-competitive offers to supply imported sugar. Part of the sales pitch is of course that sugar production will not survive in Ireland following reform in 2006.
To consider the position of Greencore's customers, who are looking on, trying to work out what will happen, they have noted independent agricultural economists, even those reporting to the European Commission, unanimously reporting that Ireland, among the other countries to which I referred, will not be able to survive post-reform. Two former Irish Ministers responsible for agriculture said the same thing. Irish beet growers have stated on many occasions they could not even think of producing beet at the prices proposed in the July 2004 Commission proposals. Without beet, there will be no sugar.
Those three things are happening. In addition, all of our significant EU competitors are wandering around the sugar-using industry in Ireland confirming to it that the Irish sugar industry cannot survive after 2006. Many people are saying the same thing, for whatever reason. For those reasons, many of our industrial customers — I am not in a position to be in any way critical of any of them — have taken the only decision open to them, namely, to examine carefully their import alternatives for Irish sugar. That is the context in which we operate. We are not operating in a regulated world but in a free market, and this is what competitors and customers are doing.
What was Irish Sugar to do? It had few realistic options. It could have done nothing and waited for reform to become somewhat clearer. However, by waiting, Irish Sugar would have inevitably, as night follows day, lost further market share. By the time a decision was made on what kind of production structure was needed in this country, it would not have been needed because there would only be enough sugar sales to fill one factory, not the entire Irish sugar quota. The market would have gone from underneath us.
By doing nothing, we could not send a clearer message to our competitors and customers that we feared for the future of Irish sugar production. The alternative, however, was to send a confident commitment to our customers and competitors about our optimism in regard to the future of sugar production in Ireland. This commitment would be to invest in the industry and create a cost-efficient, world class manufacturing platform in Mallow which can compete with the best survivors of sugar regime reform and ensure that every euro of capital investment is focused on creating a world class capacity rather than spreading it too thinly over two production sites, neither of which could have been remotely competitive.
Irish Sugar had to take a decision whether to move now, later or not move at all and it decided to move now. It decided to put a clear line in the sand for competitors and to say that the Irish sugar industry is here for the long term and that competitors had better look elsewhere to pick up market share. It decided to say to our customers that we are investing in this business, that we are optimistic about the future of sugar production in Ireland in the long term and that in order to ensure that we can continue to supply their requirements at much lower prices than heretofore, we are making a big investment in the future of this business.
Regime change is a huge factor in this area, as is competitiveness. That drove the decision to go from two factories to one, which I think most people in the room probably knew in their heart of hearts was an inevitability. The timing however was driven by market forces, by our customers and our competitors. Generically, that is why the decision had to be made regarding Carlow. The three reasons include the operating efficiencies likely to be achieved in either plant, the efficiency of the supply chain for the future and the cost of investment, i.e. the cost of bringing one or other of the plants up to the sort of capacity and quality we need.
I will deal with each of those in turn. In terms of operating efficiency we had what we believe is the leading, albeit German, sugar engineering consultancy in the world evaluate both our plants over 30 separate metrics including plant condition, process efficiency, environmental efficiency and capital investment — a huge range of metrics. The results of the IPRO study showed that despite our investment of €120 million over the past ten years in both of our plants, substantial further investment was required in both factories in order for either one of them to become a leading edge cost competitive manufacturing plant. Measured quantifiably across that range of 30 metrics, Mallow came out to be 20% better and 20% more efficient than the Carlow plant.
In terms of the supply chain, the rationalisation of sugar processing on to one site, wherever it was, would clearly involve a re-routing of significant tonnages of beet and would also necessarily involve some beet travelling further than previously. That is axiomatic. Mallow is at an existing railhead. It already receives significant quantities of beet from Wexford through the Wellington Bridge beet reception depot. Moreover, rail is, by a distance, the most efficient way to transport beet over long distances and Carlow does not have that advantage.
In terms of beet supply, the committee may be interested to know that County Cork is responsible for 33% of the entire beet intake of Irish Sugar. While it is not necessarily a fair comparison, that compares with 8% of our total beet supply coming from County Carlow. I acknowledge the difficulty in getting beet from Carlow to Mallow but it pales into insignificance compared with the issues which would be raised by getting beet from Mallow to Carlow.
Irish Sugar is making a very significant net investment in excess of €25 million to upgrade and increase the capacity of the Mallow factory. Incidentally, in terms of redundancy and write-off costs we are also taking a €65 million hit in our profit and loss account this year. We are not doing it for the good of our health. It is not a pleasant thing for us to do. However, it is clear that the programme to upgrade Carlow would have cost an additional €28 million in order to get it to the same level of capacity and quality as what we plan in Mallow by 1 October of next year.
Regrettably, having regard to those three key factors, it was patently obvious to Irish Sugar what needed to be done in order to put its business on a footing with its competitors. While the decision to rationalise production on to one site in Mallow and to close Carlow was painful, it was nonetheless straightforward. It was quite clear what the business needed to do to create a really competitive sugar industry capable of competing with its best competitors in this country.
That is the rationale for the decision. We are perfectly aware that there are consequences to that decision, some of which are significant and on which I will speak. There is a whole array of consequences arising from our decision to focus all sugar production on to a single plant in Mallow. It is perhaps best to look at the key consequences, stakeholder by stakeholder. The first stakeholders are our employees, particularly at Carlow. The majority of those employees are longserving and will regrettably lose their jobs. We will continue to operate our sugar store — our sugar packaging operations — in Carlow. We will continue to operate and lead the business from an albeit much reduced head office function in Carlow, which will result in 63 jobs remaining in Carlow. Nevertheless, 189 full-time employees and 137 campaigners will lose their jobs.
Irish Sugar has put in place an attractive redundancy and early retirement package involving enhanced pensions for the relevant employees. The terms are well above the national average. In order to give the committee a perspective on them I will compare them to the recently agreed package put together in the case of Aer Lingus, a package which is commonly acknowledged to be reasonably attractive and fair. If the Aer Lingus deal were applied to our departing employees, of whom there are 326, including full-time and part-time, 316 would do better with our package and in many cases substantially better. That simply gives a perspective. Nevertheless, Irish Sugar is in a negotiation process with its employees on these terms. Three full days have already been spent at the Labour Relations Commission and the matter is now being referred to the Labour Court for an early hearing. It would not be appropriate for me to comment any further on that because the process is ongoing.
On top of that, the business is doing what one would expect it to do in terms of the provision of a very wide range of supports to our people, who need those supports as they move from one career to another. They are designed to help our people maximise their value in the marketplace and maximise the value of their financial packages. That is important.
For beet growers, there are a number of significant consequences arising from our decision. The first, not to be overlooked, is very positive, because this decision gives beet growers an opportunity to supply beet to an industry which has a reasonable chance of surviving post-reform. That would not have been the case but for this decision. There are also some negative consequences for beet growers. They will have to accept much less for their beet under a reformed sugar regime than they have traditionally received. Everybody acknowledges that and it will be a challenge for many beet growers.
There will be significant pressure on the Government and on the European Commission to improve the present compensation proposals for our growers. They will have their incomes reduced as a result of both quota and price cuts. However, compensation is at least on the table for beet growers who lose income in this way. I remind the committee that there is or will be no proposal to compensate the processing industry for the same impact of quota cut and price cut, nor is there any help available to build the kind of world class capacity at Mallow which we have decided to do and which will be in place by 1 October 2005.
Many beet growers will in future have to transport their beet to our Mallow factory over longer distances than they have been used to. Some growers may ultimately choose to exit beet as a result of that. Some growers will encounter some sugar losses on a modest part of their total beet output as a result of the extension of the campaign in Mallow. Our plan is to extend the campaign to 120 days in 2005, which will reduce to about 100 days in 2006 and beyond. We acknowledge, as do our growers, that November and December are the optimum months in which to harvest beet. There is potential for sugar content to be reduced in beet which is not delivered until January.
All of those consequences are important to our growers. They are not as important, however, as the survival of the industry. Without the industry, they become irrelevant.
What are we going to do about the consequences to which I refer? The survival of this industry will be based on mutual respect between Irish Sugar and its growers. It will also be based on an agreement which will achieve a number of objectives for the industry and growers. The first of these is that Irish Sugar will cushion the blow of additional transport costs to its affected growers for a transitional period. The company is already committed to spend almost €5 million on a new beet reception depot and a railhead in the Carlow area. This investment has no function other than to reduce transport costs for our growers. In addition, the company is in negotiation with its growers with a view to helping them to defray, for a period at least, a significant proportion of the additional costs they will incur in transporting their beet over the additional distance.
Questions have been posed as to the viability of the transport plan. I will not deal with this in detail in this formal presentation but if members wish to ask me questions about it, that is fine. I will, however, leave the committee in no doubt that Irish Sugar will put in place an effective and efficient transport infrastructure to facilitate the transportation of beet to the Mallow factory.
The second objective is that Irish Sugar will recognise the possibility of sugar losses in January for its affected growers. That has always been an integral part of the pricing arrangements with our growers. We can argue about whether it is proper or full compensation, but the fact is that growers have always been compensated for delivery of beet in January. In the past and as many members will remember, there were campaigns — in Ireland, not the United Kingdom — which ran into February.
The third objective is that growers must recognise that the future of the industry is dependent on a cost-effective supply chain. Following the transition period to which I referred earlier, the sugar industry in Europe cannot afford to subsidise beet travelling long distances to any sugar factory because this takes away all the return. The traditional supply chain will, therefore, have to change and Irish Sugar will be obliged to enter into arrangements with its growers in order to enable the current beet model to be restructured and to allow, over time, beet to be grown closer to the Mallow factory. The latter is inevitable. Every business in the world is working on its supply chain and we can be no exception.
The fourth objective is that growers must recognise that they cannot be insulated from the dramatic reduction in market returns which has occurred during the past four years. Irish Sugar's profitability dropped by €14 million in that period. Market returns have fallen significantly at a time when payments to growers of beet have increased. We must recognise, whether we like it or not, that we are kept in business by our customers. Irish Sugar customers are paying less and growers will be obliged to accept less from the company as a result. Irish Sugar's record in cushioning growers against adverse market movements is outstanding. Growers will ultimately be obliged to acknowledge that a continuation of that approach would be inconsistent with even the medium-term survival of the business.
I cannot conclude my presentation without referring to our customers. They are the people on whom we are all reliant. Without them, we would have no business. Our customers can now be assured — to the best possible extent that we can provide such assurance — of a local source of high quality and, for the first time, cost-competitive domestic sugar. Our hope is that our ambitious plans for a highly cost-competitive Irish-based industry will help our customers to become confident and secure without the need to supplement their supplies with an ever increasing flow of sugar imports.
The communities in which we live will be impacted upon in many different ways by our decision. We hope Mallow will thrive as the home of a world-class sugar refiner, producing 100% of Ireland's quota. While Carlow will, on the other hand, retain almost all of the beet production to which it has been traditionally used, it will lose some of the significant contribution the factory has made to the local economy. Irish Sugar will work with the key interested parties in that local community in order to help support other forms of economic activity which could benefit the local economy and Irish Sugar.
Irish Sugar has taken a bold step to secure the future of the sugar processing and sugar beet growing industries in Ireland. It has put its money where its mouth is by committing to major investment in order to create a competitive business. The company will not be able to achieve its objectives by itself and will need the continued committed support of its employees and growers in an environment which will become much more constricted for everyone. The business has committed to dealing fairly with all of the stakeholders who were affected by the decision, which was regrettable but nonetheless necessary.
In no way have we underestimated the difficulties and discomfort caused by the requirement to radically change what has become a tradition in the Carlow area. The rationalisation decision, the investment and the commitment we announced on 12 January will not protect either the business or its growers from radically reduced returns and profitability in the future. They will, however, ensure that by becoming competitive we can survive. They will also ensure that the industry and its growers will make a much more modest but, nonetheless, reasonable return from their respective businesses in the long term.