Ornua’s Approach to Managing Volatility

Making Risk Management Work for Farmers Seminar

4 May 2016

Today’s agenda

1. Our Business

2. Volatility in Dairy Markets 3. How is Ornua Managing Volatility

4. Looking Forward

2 2

We are a Global Business

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4

We are a Global Business

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AFGHANISTAN

ALGERIA

ANGOLA

AUSTRALIA

AUSTRIA

BAHAMAS

BAHRAIN

BARBADOS

BELGIUM

BERMUDA

BURKINA FASO

CANADA

CENTRAL AFRICAN REP.

CHAD

CHILE

CHINA

CONGO

COSTA RICA

CYPRUS

CZECH REP.

DENMARK

DOMINICAN REP.

EGYPT

EL SALVADOR

EQUATORIAL GUINEA

FRANCE

GABON

GAMBIA

GERMANY

GIBRALTAR

GREECE

GUINEA

HONG KONG

HUNGARY

INDIA

INDONESIA

IRAN IRAQ

ISRAEL

ITALY

IVORY COAST

JAPAN

JORDAN

KENYA

KOREA REP. OF

KUWAIT

LIBERIA

MADAGASCAR

MALAWI

MALAYSIA MALDIVES

MALI

MALTA

MAURITANIA

MAURITIUS

MEXICO

MOROCCO

MOZAMBIQUE

NETHERLANDS

GHANA

NORWAY

PAKISTAN

PERU

PHILIPPINES

POLAND

PORTUGAL

QATAR

ROMANIA

SAUDI ARABIA SENEGAL

SEYCHELLES & DEPENDENT SINGAPORE

SLOVAKIA

SOUTH AFRICA

SPAIN

SRI LANKA

SWEDEN

SWITZERLAND

TAIWAN

TANZANIA

THAILAND

TOGO

TRINIDAD & TOBAGO

TUNISIA TURKEY

USA

UAE

UK

VENEZUELA

VIETNAM

ZAMBIA

ZIMBABWE

ALBANIA

BANGLADESH

BENIN

BELIZE

BULGARIA

BRITISH VIRGIN ISLANDS

CAMEROON

CAYMAN ISLANDS

D.R.C

NIGERIA

GUINEA

GUYANA

ICELAND

IRELAND

JAMAICA

LATVIA

LEBANON

LITHUANIA

LIBYA

NEW ZEALAND

NIGER

SAO TOME & PRINCIPE

SIERRA LEONE

UZBEKISTAN

YEMEN

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Ornua’s job is to develop markets for Ireland’s extra milk

Continuing to Expand our Global Footprint

6 6

2020

Brand Growth

NPD

In-market

2012

Cap Ex

M & A

€200m

2015

Growth Strategy 2020

Dairy Trading

€300m

2016

It has enabled us to deliver to our members

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1. Delivery of strong product price returns and significant price support

2. Delivery of an annual Members’ Bonus - in 2015 a €29 million was declared including a €15 million special bonus

3. Funding of members’ working capital to free up cash flow for members – c€370 million in 2015

4. Delivery of volatility management mechanisms to members e.g. Fixed Term Contracts

5. Suspension of milk levy in response to difficult market situation

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Volatility in Global Dairy Markets

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Volatility has been increasing

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20.00

25.00

30.00

35.00

40.00

45.00

Dec

-90

No

v-9

1

Oct

-92

Sep

-93

Au

g-9

4

Jul-

95

Jun

-96

May

-97

Ap

r-9

8

Mar

-99

Feb

-00

Jan

-01

Dec

-01

No

v-0

2

Oct

-03

Sep

-04

Au

g-0

5

Jul-

06

Jun

-07

May

-08

Ap

r-0

9

Mar

-10

Feb

-11

Jan

-12

Dec

-12

No

v-1

3

Oct

-14

Irish Milk Prices 1990-2015

9

Max move: +/-10cpl

Max move: +/-24cpl

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Why are dairy markets more volatile?

• EU dairy has moved from a regulated market to free market

• As global demand grows areas more vulnerable to weather shocks are being used for milk production

• Trade policies impacting demand - Russia’s ban on EU food imports vs. free trade

agreement

• Stock policies impacting on price movements

• Data availability and speed

• Hedge funds, dairy auctions and futures

• Irish seasonality further exacerbates volatility

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11 11

Volatility Management at Ornua

How is Ornua managing volatility?

1. Fixed milk price systems

2. Growing our brands

3. Developing differentiated value added ingredients

4. Diversifying our markets through acquisitions

5. Strengthening supply chain partnerships

6. Investment in trading expertise

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1. Fixed milk price systems

• Ornua is the primary counter party for co-ops fixed milk price offers

• Ornua has been involved in fixed price milk schemes since 2011

• We have 227m litres of fixed price milk on our books

• Primarily allocated against:

- The brand in order to remove volatility from brand earnings

- Long term ingredient contracts with blue chip customers

• Important to note - it can be difficult to find willing counter parties

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• Approx. 33% of our volumes are through the brand

• Difficult to maintain this proportion given the increase in absolute terms

• Kerrygold’s retail sales reached a record c. €740 million

• Record sales volume in Germany – Kerrygold, the No.1 butter brand

• Record US Kerrygold sales volumes – No. 3 branded butter in US

• Record market share for Pilgrims Choice – No. 2 in the UK

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2. Growing our brands

Recent new products to market

Flavoured butters Germany

Milk shakes / Cheese dippers / Cheese pods Middle East

Dubliner Triangles USA / ME

Irish Cream Liqueur USA & Europe

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3. Developing differentiated added value ingredients

• Provides protection from commodity swings

• Typically difficult to achieve with members products (production push system)

• Need differentiated product offering which requires investment

• Ornua’s investment in cheese processing technology

Ingredient technologies – 5 core areas of focus

Core Dairy Range

Cultured Dairy

Functional Beverages

Functional Ingredient

Blends

Life Nutrition

Innovative Cheese

• Highly integrated collaborative research programme between Ornua & Teagasc

• Pioneering technology recombines dry milk ingredients to produce fresh white cheese

• Pilot kitchen built at Teagasc Moorepark in Ireland and shipped to Saudi Arabia

• Developing bespoke white cheeses for the bakery sector, retail deli & foodservice customers

• Innovation hub to help drive the creation of new products for MENA

4. Diversifying our markets through acquisitions

• Ornua UK – Retail, ingredients and foodservice presence in core dairy ingredients

• Ornua Germany and US – Retail branded presence through the Kerrygold brand

• Ornua US, UK and Spain – Added value processed cheese ingredient business

• Ornua Saudi Arabia – Recombined technology to service local requirements

• Ornua Africa and Ornua MENA – Investments in sales infrastructure to drive branded and ingredient sales

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‘Our feet on the street’ working alongside consumers, customers, distributors and local partners

Strengthening global infrastructure – China, Middle East & Africa

CHINA

Kerrygold powder packing facility in Nigeria

Acquisition of Ambrosia Dairy

Cheese manufacturing facility in Riyadh

SAUDI ARABIA

AFRICA

4. Diversifying our markets

5. Strengthening supply chain partnerships

• We build mutually beneficial relationships with strategic partners

• We understand our customer needs

• We provide excellent service

Excellent service builds customer loyalty which reduces volatility.

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6. Dairy Trading Strategies

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Trading Strategy

Predictive Models

Supply Chain / Procurement

Insights

Trading/Sales

Trading Limits/Policy

Identify Opportunities

& Risks

Hedging Tools

VTT Team Insights

Ornua’s volatility management is delivering

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0

10

20

30

40

50

60

70

80

90

100

110

120

130

140

150

160

170

Jan

-12

Feb

-12

Mar

-12

Ap

r-1

2

May

-12

Jun

-12

Jul-

12

Au

g-1

2

Sep

-12

Oct

-12

No

v-1

2

Dec

-12

Jan

-13

Feb

-13

Mar

-13

Ap

r-1

3

May

-13

Jun

-13

Jul-

13

Au

g-1

3

Sep

-13

Oct

-13

No

v-1

3

Dec

-13

Jan

-14

Feb

-14

Mar

-14

Ap

r-1

4

May

-14

Jun

-14

Jul-

14

Au

g-1

4

Sep

-14

Oct

-14

No

v-1

4

Dec

-14

Jan

-15

Feb

-15

Mar

-15

Ap

r-1

5

May

-15

Jun

-15

Jul-

15

Au

g-1

5

Sep

-15

Oct

-15

No

v-1

5

Dec

-15

Jan

-16

Feb

-16

Mar

-16

Ornua PPI vs. GDT WMP

Ornua PPI GDT WMP

Ornua’s volatility management is delivering

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0

10

20

30

40

50

60

70

80

90

100

110

120

130

140

150

Jun

-12

Jul-

12

Au

g-1

2

Sep

-12

Oct

-12

No

v-1

2

Dec

-12

Jan

-13

Feb

-13

Mar

-13

Ap

r-1

3

May

-13

Jun

-13

Jul-

13

Au

g-1

3

Sep

-13

Oct

-13

No

v-1

3

Dec

-13

Jan

-14

Feb

-14

Mar

-14

Ap

r-1

4

May

-14

Jun

-14

Jul-

14

Au

g-1

4

Sep

-14

Oct

-14

No

v-1

4

Dec

-14

Jan

-15

Feb

-15

Mar

-15

Ap

r-1

5

May

-15

Jun

-15

Jul-

15

Au

g-1

5

Sep

-15

Oct

-15

No

v-1

5

Dec

-15

Jan

-16

Feb

-16

Mar

-16

Ornua PPI Index vs Fonterra Price Index (Jan 2010 Milk Price=100)

Ornua PPI Fonterra

Measuring Delivery

1. Brand growth – today Kerrygold is retails at c. €740 million

1. Delivery of significant product support to members - coops are putting more

product through Ornua – purchases up 16% , a record 286,000mt

1. Delivery of an annual Members’ Bonus of €29 million in 2015 – 1cpl:

1. Record €14m Ornua trading bonus

2. €15m DPI bonus disbursement

2. Suspension of the milk levy, while remaining committed to same level of

investment in brand

3. Funding of members’ working capital to free up cash flow for members – c€370

million in 2015

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Looking Forward

Looking to the future

• Market volatility is a reality of competing in global markets

• A very difficult year ahead but the medium to long-term outlook remains positive

• Ornua has strategies in place to best manage volatility

• Ornua will continue to pay its Members a leading product price

• Our ambition for Irish dairy across global markets is great

We are building a robust and valuable diversified asset for the Irish dairy industry that delivers strong sustainable returns.

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Thank You

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