Greencore plans to exit Irish sugar processing operations
The decision of the EU Council of Ministers on November 24, 2005 effectively spelled the end of sugar beet growing and processing in Ireland.
17/03/06 The Board of Greencore Group plc ("Greencore") announces that following an extensive review of the new EU Sugar regime and the EU sugar environment, its sugar division will not process sugar in 2006 (or in any subsequent year).
The decision of the EU Council of Ministers on November 24, 2005 effectively spelled the end of sugar beet growing and processing in Ireland. Greencore had hoped to be able to undertake 'one more campaign' in 2006/2007 but unfortunately, and despite considerable efforts on the part of many parties, it is not feasible to do so. Greencore would incur unacceptable losses if it processed sugar again. Such losses would be driven by:
- a sustained deterioration of EU industrial sugar markets
- payment of a EUR25 million restructuring levy (confirmed in the Regulation of February 22, 2006) in an environment where the recovery of this levy from sugar customers is uncertain
- reduced sales due to the EU-imposed temporary quota cut of 11.6% (agreed on March 3, 2006)
- significant operational risks associated with running 'one more campaign'
The continued uncertainty over the availability of a full beet supply could have exacerbated these losses further. Given all of these factors, Greencore will not process sugar again and as determined by the EU sugar regime reform mechanism, the Group intends to renounce its quota and present a restructuring plan to the Irish Government to secure the aid to which it is entitled.
It is envisaged that the sugar factory at Mallow will close in May. The employees of Greencore Sugar are being advised of the fact that there will be no further campaign at briefings this afternoon and Greencore Sugar will be engaging in the appropriate information and consultation process with its employee representatives in the coming weeks.
Greencore Sugar remains committed to serving its customers. It has sufficient stocks of sugar to fully service Irish industrial sugar and retail customers until November 2006 and is putting plans in place to supply these customers under the Siucra and McKinney brands thereafter.
Greencore generated operating profits of approximately EUR25 million from sugar processing in the year ended September 30, 2005. In the current financial year, operating profits from sugar processing activities are expected to reduce to approximately EUR15 million, reflecting the sustained deterioration in EU industrial sugar markets and the loss of profits generated from the sales of seed, chemicals and fertiliser associated with growing another crop.
The gross cost associated with an exit from sugar processing is expected to amount to approximately EUR168 million, comprising anticipated redundancy costs, site decommissioning and associated costs of approximately EUR61 million, and fixed asset impairment of approximately EUR107 million. Approximately one third of the estimated gross costs will be cash costs.
These exit costs will be partially offset by the receipt of compensation from the EU temporary restructuring fund. The total restructuring aid payable to Ireland amounts to EUR146 million. The final EU regulation (of February 22, 2006) sets out the process for confirming the allocation and payment of this compensation. In essence, the 'Member State' is charged with allocating the restructuring aid based on the restructuring plan submitted by Greencore and in accordance with the specific requirements of the regulation. Given the 'Member State' role in allocating the restructuring aid, there is some risk to the level of aid that Greencore will receive. However, the Greencore Board, having taken independent legal, economic and financial advice has determined that the Group is entitled to 90% (EUR131 million) of this restructuring fund, with the remaining 10% (EUR15 million) to be reserved for Irish beet growers and machinery contractors. On this basis, the Board will recognise a receivable of EUR124 million (the present value equivalent of EUR131 million) in its accounts for the half-year ended March 31, 2006. A net charge of EUR44 million will be reflected in the interim financial statements for the six months ended March 31, 2006.
Greencore has advised the Irish Government of its intention to cease processing and renounce quota. As required by the EU regulation, Greencore intends to submit a comprehensive restructuring plan. Under the regulation, a decision to approve or reject the Greencore restructuring plan is required from government by September 30, 2006. The restructuring aid is then to be paid in two tranches -- 40% in June 2007 and 60% in February 2008.
Sugar processing has flourished in Ireland for nearly 80 years. Greencore Sugar has a highly effective workforce, strong operational capability and a culture rooted in processing excellence. Its contribution to Irish agribusiness has been considerable. However, while unfortunate, this decision is not unexpected. EU sugar regime reform has always had the potential to threaten sugar industries of relatively small scale, especially where there is a reliance on sugar beet that for climatic and other reasons was uncompetitive in a EU context. Greencore has been reshaping its portfolio for some time (in part to diversify in advance of anticipated EU Sugar reform) and has built a high performing convenience food division. In 2005, this division grew to account for 62% of Group continuing profit, up from 25% in 2000, and it continues to perform well this year.
