Committee Reports::Report No. 13 - Comhlucht SiÚicre Éireann, Teoranta::16 December, 1980::Appendix

The Company is a State sponsored company, principally engaged in the manufacture of sugar. Other areas of activity include food processing; agricultural engineering; animal feedstuffs manufacture; limestone quarrying; molasses trading; fertilizer trading; agrochemical trading and sugar distribution.

The Company has share capital holdings in eleven subsidiary companies (five of which are non-trading) and five associated companies (two of which are non-trading). Details of these companies are given below.

The Company’s turnover in the year ended 30th September, 1979 was £126.3 million. Trading profit, before tax, amounted to £1.17 million.

The Company was established, in 1933, under the terms of the Sugar Manufacture Act, 1933 (No. 31 of that year). Subsequent amending Acts were passed in 1962 and 1973. The Company was incorporated under the Companies Acts 1908-1924 on 22nd September, 1933, following the approval of its Memorandum and Articles of Association by the Minister for Finance.

The Minister for Finance is the sole equity shareholder. Statutory arrangements are at present being made to transfer Ministerial responsibility for the Company to the Minister for Agriculture.

2 DIRECTORS AND SENIOR MANAGEMENT

2.1 BOARD

The Board of Comhlucht Siúicre Éireann, Teoranta is appointed by the Minister for Finance. The Company is a designated Company under the terms of the Worker Participation (State Enterprises) Act, 1977.

D. Coakley, Chairman

M. C. Sheehy, Managing Director

J. Brennan

J. Twomey

E. Bulfin

J. Connern

B. Gilligan

J. J. Hayes

J. M. Lepere

R. Murphy

N. O’Brien

R. Roberts

Meetings of the Board are normally held monthly at the Company’s Head Office in Dublin.

The Company’s Auditors are Coopers and Lybrand, Chartered Accountants, Dublin.

2.2 WORKER DIRECTORS

The Company was designated under the terms of the Worker Participation (State Enterprises) Act, 1977 and the first election of worker directors was scheduled for 2nd—5th April, 1979. Due to the postal dispute the election count did not take place until 25th July, 1979.

Eleven candidates contested the election for four seats on the Board and the main details of the election were as follows:—

The extremely high poll in the election reflected the degree of interest throughout the workforce in the implementation of the worker participation legislation. The existence within the Company, over many years, of a system of elected Works Committees at all factories has provided a foundation for consultation and participation procedures which can ensure the lasting success of the worker director experiment. This fact has been recognised by management and trade unions and initial discussions are taking place throughout the Company about the appropriate shape of participatory structures in the future. The rapid expansion of the Company and the complexity of its operations mean that such developments should have high priority in the period ahead.

2.3 SENIOR MANAGEMENT

The Group Management Committee comprises the following senior company executives:—

The Group Management Committee meets weekly to review progress within the broad lines of policy laid down by the Board and to co-ordinate Company operations.

There are active boards or advisory committees, which include members of the C.S.E.T. Board and senior Company executives, with responsibility for the general direction of the following subsidiary or associated activities within the policy guidelines of the C.S.E.T. Board:—

In the case of Sugar Distributors, Fastnet Co-Op. and Heinz-Erin the boards are representative of external share-holding interests as well as those of C.S.E.T.

3 HISTORICAL OUTLINE

The Company was established in 1933 as a national, State-owned sugar manufacturing enterprise following an earlier Government-sponsored private undertaking which opened at Carlow in 1926. The Carlow operation had clearly proved the feasibility of sugar production in Ireland from native raw material but it had been commercially unsuccessful mainly for reasons of scale. The Government decided in 1933 to create a national sugar industry capable of meeting the country’s total requirements from domestic output.

The legal and administrative arrangements for the establishment of the Company and the planning, location and erection of the three new sugar factories were all carried out within a single year in 1933-34. The Company was awarded a legal monopoly status in respect of the Irish market for sugar. The factories were regionally located by Government decision at Carlow, Mallow, Thurles and Tuam. In the 1934 production campaign more than 44,000 acres of sugar beet were sown and approximately half-a-million tonnes of beet were processed.

The subsequent growth and development of the industry is briefly summarised in the following table:—

The sugar manufacturing operations of the Company have been added to over the years by a growing range of diversified activities all of which have a close basic relationship to the main product line.

The major by-products of the sugar process—pulp and molasses—have been utilised in the development of processed animal feeds which have been marketed widely. These include livestock, pig and bloodstock feeds. Allied to this activity has been the development of boglands in the West for the production of grassmeal.

The need to secure the highest quality of sugar beet as raw material has led to the creation of four important diversified activities:—

—fertilizer trading, including provision of specially blended compounds for beet cultivation;

—agrochemical trading, based on the complex chemical treatment needs of the sugar beet crop;

—limestone quarrying and distribution based on the need to correct soil acidity; and

—agricultural machinery design and manufacture, arising from the necessity of increased crop mechanisation.

Each of these activities has been developed as an operational and marketing division of the Company and each has built upon its fundamental crop service orientation to become a commercial undertaking of considerable scale and contribution.

The Company, in 1975, obtained a 51 per cent shareholding in the major sugar distribution firm in the country to ensure reasonable control of the marketing of its product in Ireland.

In 1960, the Company launched its major diversification in the area of food processing. The Erin Foods division—formally set up in 1963 as a wholly-owned subsidiary marketing company although later reverting to the status of a division of the Sugar Company—entered the fields of dehydration, freezing and canning and specialised in the production of formulated foods such as soupmixes. From the beginning, the food division engaged in innovative work in food processing technology, especially in accelerated freeze-drying and in specialist applications of air-drying. The division has created its own marketing organisation and has developed markets in Ireland, the United Kingdom and Europe and in other parts of the world such as Australia and the Far East. While commercial success, in terms of sustained profitability, has not been achieved the Company’s food processing activities have generated a substantial level of turnover based on the output of eight production units throughout the country. The division has achieved a high and recognised level of technical expertise and product quality and is today the only major Irish controlled enterprise in the branded food processing sector.

For organisational and accounting purposes the Company’s activities are now arranged in three divisions:—Sugar; Food; Agricultural Trading (encompassing all other operations).

The impact of diversification on the pattern of the Company’s operations is summarised in the following figures which relate to the most recent years:—

The basic activity, sugar, is thus seen to represent, on average, just 50 per cent of turnover. The food processing activity has been declining as a contributor to overall sales while agricultural trading has consolidated its position as a major element in the Company’s business performance.

Of fundamental importance in the progress of the Company has been its capacity in the area of raw material procurement. The requirements of the sugar and food processing divisions necessarily involve the Company in contractual relationships with many thousands of farmers. Over the years these relationships have been developed through formal negotiations with the farmer’s representative organisations and through the activity of the Company’s agricultural advisory services. Substantial resources have been invested in the breeding of the most suitable seeds for both sugar beet and vegetables and in research in all areas related to the production of contract crops which will, at once, meet the industry’s needs and give the grower an attractive return. Research has also extended to the profitable utilisation of all the by-products of the crops. In these areas, the Company has established and sustained close working links with both national and international research organisations. In particular, the industry’s association with An Foras Talúntais has been of crucial importance.

4 CORPORATE OBJECTIVES

The Company’s basic objectives were laid down in the legislation which established it. The Sugar Manufacture Act, 1933, made provision for the formation and registration of a company to be known as Comhlucht Siúicre Éireann, Teo., with registered offices in Dublin, having for its principal objects the acquisition, erection and operation of sugar factories in Ireland. The subsequent Act of 1962 enabled the Company to establish and hold shares in a subsidiary company—Erin Foods Ltd.—and provided for the legal structure of that subsidiary.

Over the years, the objectives of the Company have widened to take into account changing circumstances and emerging opportunities, and to provide for necessary and desirable diversification. The development of corporate policy has always been seen within the framework of broad government policy and has taken place in consultation with the appropriate departments of state. Thus, the diversification into food processing in the early 1960’s followed directly upon the policy guidelines of the First Programme for Economic Expansion.

There is, at present, no formal statement of corporate objectives for the Company as a whole. Specific goals and strategies for the various operating divisions have been agreed and updated at various times as a basis for divisional planning and control. These have been discussed within the framework of general Board philosophy and in the context of understood constraints of public policy in relation to the role of the state sector. The main lines of the longterm policy pursued by the Board and reflected in the strategy of the operating divisions may be summarised in the following general terms.

The Company, as a State enterprise, will seek expansion and diversification as a manufacturing and trading organisation, primarily based on the agricultural and food processing sector. All of its operations will be carried on within the dictates of commercial viability, seeking a level of profitability adequate to finance corporate development.

The Company will seek to provide productive employment, in a modern and participative environment for its workforce. Employment levels will be maintained on a company-wide basis, and as far as possible at all locations by an appropriate mix of present activities. Expanded job opportunities will be sought by means of viable new activities.

The Company will seek to maintain its position as the sole production and primary distribution agency for sugar in the Irish market; foster sugar beet growing; and, with the EEC sugar regime, seek to maximise its production efficiency, refining capacity and marketing opportunities while providing the highest levels of quality and service to customers.

The Company will seek to achieve a realistic return on its investment in the food processing area by reduction of dependence on commodity selling and by the development of profitable new business in branded products on home and export markets. High levels of marketable technological excellence will be pursued in all areas of food processing involvement.

The Company will facilitate the procurement of raw materials by the development and expansion of its agricultural services and trading activities and should seek to maximise the commercial success of these activities. It will, at the same time, seek, organise for and introduce appropriate new activities of a commercial nature to promote profitable output and employment.

Within the past year an intensive project has been undertaken by Company staff, with the professional support of external consultants, to assist the Board and senior management in the definition of corporate objectives for the period ahead. A report on the outcome of this project is, at present, being considered at Board level in conjunction with an in-depth review of all operations and of corporate organisation. On the basis of this work a medium to long range corporate plan will be drawn up during 1980 which will provide the Company with a strategic framework for decision-making and management action in the period ahead. This exercise will also involve consideration of the overall financial and capital position of the Company and the most appropriate financial structuring of its operations in the future.

5 ORGANISATION STRUCTURE

The present organisation structure of the Company is set out in the charts which appear on the pages immediately following. These illustrate:—

These charts show the main functions and relationships within a complex organisation.

The Company now has three operating divisions; nine distinct operational activities; up to twenty separate operational locations; sixteen subsidiary or associated companies; and more than 3,600 employees. Over the years, and especially since 1960, the complexity of the Company’s activities has grown very rapidly as has the scale of its overall operations. The Irish Sugar Company Group is now one of the ten largest commercial undertakings in the country. These facts underline the importance of efficient organisation of the Company’s structures in terms of decision-making, control and information flow.

—the divisional operating arrangement which groups activities under three headings; sugar; food; agricultural services and trading;

The structure has developed over the years, from the original and simple model which was designed to meet the needs of sugar manufacture and sales. That model was adapted step by step to encompass new and rapidly-changing activities but, it has been recognised, without making adequate provision for their separate and specialised management and organisational needs.

During 1979 a major consultancy project has been undertaken, with the involvement of external consultants, to recommend an appropriate organisation structure directed towards the achievement of the Company’s longterm commercial goals and task.

A very detailed report has been received within recent weeks and is now being considered at top management level. This report has identified a number of problems which require solutions as a matter of priority. It proposes solutions based upon a set of clear principles which include:—

(a) definition of the divisional structure in terms of tasks and responsibility;

(b) a management structure with clear lines of responsibility and reporting centred upon a single Chief Executive;

Early action is intended to reshape the Company’s structure in the light of this report and of other relevant considerations.

Major emphasis is being placed on the need to streamline the Company’s management information systems on the foundation of the advanced computer system developed over recent years.

6 OPERATIONS

This section of the report deals briefly with the Company’s manufacturing and commercial operations, concerning the various areas of involvement, the nature of the business, the locations and the main problems and opportunities arising.

The Company’s diverse operations cover a wide range of production, trading and marketing activities. These are organised, as earlier indicated, under three broad division headings:—

—Agricultural Services and Trading, including manufacturing, blending, extraction, packaging, marketing and distribution.

The annual turnover of the Company, at £126.3 million, places it within the ten leading manufacturing enterprises in Ireland. At the same time, each of the divisions is a major business undertaking by Irish standards with a turnover breakdown as follows (in £ millions):—

The financial performance of the Company as a whole, and of the divisions, is dealt with in detail in Section 9 of this report. In general the Sugar and Agricultural Trading divisions have been regularly profitable over the years while substantial losses have been sustained in a number of years by the Food division. The overall profitability of the Company in recent years has been regarded as inadequate, having regard to the level of turnover and to the longterm financial commitment of the Company. The Chairman, in his 1978 report, commented as follows:

“Inflation in recent years, high wages, high operational costs, developmental expenditure, the procurement costs of raw materials, our capital investment programme, the difficulty in passing on quickly cost adjustments to customers, the increasing cost of distribution, together with our rapid growth, contribute to the check on higher profits”.

The divisional organisation of the Company for management purposes must be seen in the context of the essential inter-relationship of many activities carried on at the main locations. At each of the four sugar factory locations there have been established a number of ancilliary undertakings and major diversification operations such as food processing plants and agricultural engineering workshops. These four centres have a range of shared services and a major element of common infrastructure.

(a) production and raw materials: for example, the animal feeds activity is based upon sugar process by-products (pulp, molasses); agricultural engineering upon crop servicing requirements;

(b) common staff services such as accounting, computer services etc. which have been organised on a Company-wide basis; and common sales organisation in some areas such as fertilizers, animal feeds etc.;

(c) the previously mentioned common origin of many commercial activities in the need to facilitate and promote raw material procurement and provide service to growers both of sugar beet and vegetables.

Three aspects of the Company’s operations require mention before attention is turned to the divisions. These are Head Office, Agricultural Services and Research and Development.

The Company’s Head Office is situated in Dublin and is the location of the central group management and of group staff and functional services. The Head Office establishment contains the offices of the Managing Director, Group General Manager, Secretary and Divisional General Managers together with Personnel and Training, Agricultural Services, Financial Control, Computer Services, Marketing, Information, Internal Audit. Staff support to senior management, including Planning and Economic Services, and Business Development, is also located at Head Office.

Apart from normal commercial and administrative functions Head Office staff are largely responsible for a wide network of external contacts, ranging from work with government departments and State agencies to close involvement in the European and International trade and industry associations active in all the main areas of Company business. As a State enterprise, the Company recognises a special responsibility to contribute to the work of such organisations.

Agricultural Services, provided by a professional staff throughout the country are of the greatest importance given the crucial significance of an assured supply of high quality raw material off the farm. The nature of the raw material supply is the principal factor determining the cost effectiveness of the main company operations. The total acreage under contract, for both beet and vegetables, is currently in the region of 100,000 acres annually thus implying a rotation pattern involving 400,000-500,000 acres overall.

An important aspect of the work of the agricultural services staff relates to the promotion and sale of the main agricultural trading product lines (fertilisers, machinery, animal feeds etc.) and of beet seed. The advisory service fieldmen are the principal salesforce for these products at present. Staff in this service are specialised as between the sugar and food processing sides of the Company with personnel of appropriate professional training dealing with the particular needs of the growers both in relation to the annual crop and to longer-term tillage development.

The Company has devoted a large amount of resources—in terms of money and of highly skilled manpower—to Research and Development. In 1962 the Company’s Research and Development Centre was opened at Carlow. There is a specialist staff of some 30 scientists and technicians working on all aspects of research related to the many fields of Company activity. The research effort is also extended throughout the production factories where chemists and technicians work on problems and projects in situ and outside the Company through long-standing collaboration.

Particular emphasis in research work has been devoted to the development of new products and of new and improved processes. The Carlow centre works closely with the Company’s marketing staff in the evolution of new food products and on the achievement of improved customer service and product quality. Innovations in production methods and processes have included some major advances in the application of air-drying and freeze-drying technology. The question of product development on the sugar side to meet new and changing demands from industrial users receives a high priority.

In considering the Company’s operations the multiplicity of Company locations must be borne in mind. The Company has a nationwide network of factories, plants and offices which has grown steadily and, in particular, since the mid-1970s. The major company locations are:—

With so many factory and commercial sites around the country, and with marketing and distribution centres in the U.K., the Company has become the operator of one of the largest road transport fleets in Ireland and has built up a high-organised distribution and freight network. The total volume of raw materials and finished products moved in a single year is in the region of two million tons.

The Sugar Division is the centre and basis of the Company’s overall operations, its sales representing, on average, 52 per cent of turnover during the past ten years. The profitability of the Division is crucial to the total financial performance of the Company and this is reflected in the figures for the Sugar and Agricultural Trading Divisions (p. 206).

These figures indicate the importance of sugar in the Company’s affairs and the fact that in recent years the proportion of total sales generated by the Division has risen to an average 55 per cent (over the past four years). This reflects certain sugar marketing gains, and the relative failure of the Food Division to maintain its growth momentum.

Total sugar sales have reached approximately 200,000 tonnes with a reasonable rate of growth over the years. Present projections are for a relatively stable market situation in the years immediately ahead with overall sales in the Home and Northern Ireland markets showing little overall growth and with some fluctuations in Export Sales in accordance with market opportunities.

The Company has a virtual de facto monopoly of the sugar market in the Republic (although the market is open to imports under EEC rules) and has obtained a very substantial share of the Northern Ireland market through a concerted marketing effort since entry to EEC. Export sales opportunities are of a periodic nature with some regular activity in the U.K. market.

—little growth in the total tonnage of sales projected for all markets taken together;

—a continuing decline in direct sugar purchases by households, which is a general characteristic of the European market;

—buoyancy in the new Northern Ireland market which has given the company a satisfactory current share and the hope of a secure future;

Sugar beet acreage has been rising steadily in recent years, with a notable decline in the number of growers reflecting greater specialisation on the farm. Yield and sugar contents have fluctuated considerably, mainly for climatic reasons, with obvious consequences in terms of the tonnage of white sugar produced—these facts are set out in tabular form as follows:—

The value of the sugar beet crop to Irish farmers has grown very remarkably in recent years—from £11.2 million in 1973/4 to just £35.5 million in 1978/9. An independent survey of the profitability of farm enterprise in Ireland has very clearly indicated that sugar beet production continues to be the most profitable, easily beating all other tillage crops and all milk and livestock farming. Present projections suggest, however, that the currently high acreage under sugar beet will level out at about 88-90,000 acres in the years immediately ahead, reflecting the overall balance in the tillage sector of Irish farming. Government policy, as outlined in the White Paper on a Programme for National Development, will encourage tillage activity in particular in the grain sector in order to reduce dependence on imported feedstuffs.

The future development of the EEC sugar regime will be of crucial importance for all aspects of the CSET operation. To-date the working of the regime has been to the overall advantage of the industry in Ireland. The pricing system has provided a reasonable return while the relationship between the Company and its growers has been stabilised within a mutually-acceptable framework. Production has been raised to a point just in line with the country’s basic quota of 182,000 tonnes and this level should be maintained in coming years.

EEC quotas are due to be fixed during 1980 for the period ahead. Proposals made by the Commission envisage an overall cutback in production quotas with the objective of reducing surplus output and resultant costs to the Community budget. The proposals would reduce the Irish quotas to 164,000 tonnes. Such a reduction would pose great problems for the industry in this country and would lead to severe financial difficulties. The Government has publicly stated its determination to resist the Commission proposals and to secure the maintenance of the present quota so as to ensure the future of the beet industry.

The overall situation within the EEC sugar market represents a challenge to the Irish industry in the period ahead. This point was dealt with in the 1978 Annual Report which referred to the necessity of ensuring “the competitiveness of our industry against the most sophisticated sugar processors in the world who are now our EEC partners and, as such, fully entitled to compete against us anywhere. Our growers are conscious of this fact and grower and processors must ensure, through efficiency and cost-consciousness—at field and factory level—that Irish sugar will not be priced out of the marketplace. The stream-lining of our factories is but one factor; the ability of our partners in the industry to optimise campaign periods, to maximise on the use of by-products, to enthusiastically pursue through research even better standards of husbandry, all remain vital to the overall goal of even greater efficiency”. That statement indicates a number of areas of particular concern in the years ahead.

—the need to improve the company’s marketing performance in all areas, not alone in respect of more consumer sales but also in the area of specialty products and specific needs of manufacturing customers;

—the necessity of containing cost increases at all stages of the production process in particular by enhanced productivity in field and factory;

—the importance of harmonious relationships, within the industry and with farmer suppliers;

—the significance, for the future, of expanding the Irish sugar goods industry by new enterprise and investment.

In addition to the manufacture of sugar from beet the Company annually refines 30,000 tonnes of raw cane sugar which is imported under the terms of the Lomé Convention. This refining takes place at the Carlow factory which has been specially equipped to deal with raw sugar processing.

The Company has committed substantial resources in recent years to the improvement of its technical performance in an industry of high technological content.

Since 1970 a total of over £24 million has been spent on factory modernisation. This has raised average daily factory capacity by over 20 per cent—from 11,600 tonnes to 14,500—and has permitted the Company to handle economically the produce of a beet acreage almost fifty per cent above the level of the early seventies. In addition the facilities for efficient beet reception, on the one hand, and for acceptable customer service on the other, have been markedly improved.

The Company has now embarked upon a five-year capital programme which will involve the expenditure of £30 million and which will add significantly to the productivity, efficiency and profitability of all the Company’s factories. This programme is to be financed by the proceeds of a ten-year term loan negotiated with banking interests in Dublin. The following table illustrates the results of the capital programme.

Thus the 1970-1983 capital programme involves an increase in daily throughput of just under 50 per cent. It will achieve, among other aims, a reduction of the average length of the processing campaign to just one hundred days which should have appreciable results in terms of sugar recovery and growers’ satisfaction. It will also cater effectively for more stringent legislation in the areas of effluent treatment and will increase general standards of quality and hygiene.

The marketing side of the Division’s activity has been stepped up in the period since entry to the EEC when the previous situation of legal monopoly ended. The Company has secured a majority shareholding in Sugar Distributors Ltd., the largest undertaking in the Irish Sugar Distribution sector. The Company’s brand image on the domestic market has been strengthened by the introduction of the ‘Siúcra’ lable for all products. In Northern Ireland a special brand identification has been established. Intensive promotional activity for the Company as a total entity has been carried out. Scientific market research and research into consumer attitudes have been undertaken as a necessary back-up to sales activity. Special attention has been devoted to meeting the needs of the industry customers in the sugar goods sectors who represent a major outlet for the Company’s products and who constitute an important element of the overall Irish food industry.

The Food Division, which represents a substantial business at home and on export markets, is a major problem area for the Company. Despite returning small trading profits in 1976-1977 and 1977-78 the Division has been consistently loss-making and turnover has fallen in real terms in some recent years.

Thus, over ten years, total Food Division Sales have amounted to £136 million with cumulative trading losses of almost £5.0 million. As has been pointed out elsewhere in this report, the proportion of total sales represented by food products has declined—from 25.6 per cent in 1969 to 16.6 per cent in 1979.

The business of the Division is divided into a number of categories within the Home, U.K. and Other Export areas.

On the Home Market the Division markets a range of dried soups, sauce mixes, Hot Cup instant beverages, air-dried vegetables and potato flake on both retail and catering markets. This is a successful and growing business in which the Erin Brand has achieved significant brand share and consumer acceptance.

Under the Matterson label a range of canned and bottled products and some pastes and spreads is sold on the retail and catering markets. A considerable amount of ‘own label’ canning for retail outlets is done on contract. Mattersons are also engaged in the fresh meats sector, mainly producing sausages. Current improvements in plant facilities for both canning and meats are expected to improve product quality and to offer new business prospects.

The Division has acted since 1968 as sales agent in the Republic for Heinz products. Such lines as Baby Foods, Pasta, Canned Salads and Sandwich Spread have achieved a major share of the markets in which they are sold.

The Harvest Time range of catering pack frozen foods consists of vegetables produced at Midleton and products bought-in from outside sources. Sale volume and market share are low in a highly competitive market dominated by the major U.K. producers.

In the U.K. Market the main thrust of Erin business is in the industrial or bulk sales of air-dried vegetables; dried meats, chicken and prawns; and frozen peas. The principal customers for these products are dried soup manufacturers and catering trade packers. This is a highly competitive and low-margin business.

Heinz-Erin Ltd., a joint marketing company established by Erin Foods and the H. J. Heinz Co., sells a range of specially formulated catering products throughout the U.K., under the Erin lable and through the agency of the Heinz salesforce. Extreme levels of competition on the U.K. market have led to a decline in volume sales in this sector.

In the European Market the Division sells dehydrated vegetables and dried meats to the soup manufacturing and catering industries.

On Other Export Markets the majority of the Division’s business is in added value products, including retail and catering packs of soups, vegetables, Hot Cup, sauces and dessert. The main markets are in the Middle East, Iceland, Australia, Singapore, Hong Kong and the Philippines. Some dried vegetables are sold in bulk in the U.S.A. In general, this area of activity offers higher margins than are obtainable in the largely industrial markets in the U.K. and Europe and increased marketing attention has been devoted to this business.

The overall pattern of food business is unbalanced with too heavy dependence upon industrial or bulk sales which are uneconomical due to low margins and very severe competition. The future development of branded sales on all markets will be crucial for the Division’s viability. The level of production and other overheads chargeable to the Division cannot be covered by the present sales mix.

The Division is essentially a dehydrator of a narrow range of vegetables and a formulator of air-dried soup. The product range is unduly narrow and this situation affects the brand franchise with both the trade and the consumer. The main competitors on all markets—-companies such as C.P.C., Unilever and Nestles—are operating across broad product ranges and within a number of large market sectors. In the current year sales projections for the Division envisage a product breakdown as follows: Soup 47.5 per cent; Vegetables 49 per cent; Formulated Products 3.5 per cent.

The Food Division ranks as a major processor of dehydrated products by world standards. Erin sales account for approximately 30 per cent of total European dehydrate output. The market is highly competitive, being characterised by over-production, and with the major competition coming from Kenya and Israel. Competition has been further aggravated by the loss of traditional catering markets to frozen product. Because of the small home market and freight disadvantages the Division has not been successful in developing frozen product lines. Canning is equally disadvantaged.

The Division’s production is carried on at seven locations divided as follows between the Commodity and Branded areas:—

The potato processing plant at Tuam has been phased out of production but a new operation based on a co-operative form of organisation is being planned at present.

The Division faces serious problems because of excess factory capacity in the commodity area and consequent high levels of production overheads. The failure to establish profitable outlets for branded items has been a further adverse factor. Future planning is concentrated upon the need to reduce the impact of these elements in the situation.

The significance of the Company’s Research & Development Division for the overall development of the Food Division has been referred to elsewhere. Product innovation and improvement, together with process development, are of central importance and this fact is accorded priority in all Divisional planning.

The unifying element in the Division’s work is the direct or indirect connection with the sugar beet and vegetable crops either in terms of production inputs or aids, provision of necessary machinery, and utilisation of sugar-process by-products.

Total Agricultural Trading sales have risen from £5.4 million in 1969 to £39.0 million in 1979—from 23 per cent to 31 per cent of total Group turnover. This Division has taken over from Food as the second largest of the three Divisions.

The Division has consistently contributed to the overall profitability of the closely inter-linked Sugar and Agricultural Trading Divisions.

The main features of the various activities are briefly summarised in the following paragraphs.

Agricultural Engineering, based upon the production and marketing of sugar beet harvesting equipment has expanded to encompass a wide range of specialist vegetable harvesting machines, seeding machines etc. together with bough-in sprayers and other equipment. Production is mainly centred at Carlow. The Armer-Salmon company which markets the range has depots in the U.K. and at four Irish centres.

This operation has encountered serious difficulties in the past year due to marketing setbacks and production cost problems related to the scale of output of several lines. The range of products is seen to be too wide when related to the scope of the rather specialised farming market in question. Research and Development input to improve the marketability and quality of the product range is currently given high priority. Rationalisation of all aspects of the operation is under-way.

Fertilizer sales are mainly concentrated on contracted sugar beet and vegetable growers. Compound fertilizers for the sugar beet crop are blended by Albatross Ltd. and Grassland Fertilizers Ltd. to the Company’s specifications and using ingredients supplied by C.S.E.T. Non-beet fertilizers are procured and delivered to the Company’s growers and, to an extent, to non-growers. Sprays are also sold to growers.

The Division’s share of the national fertilizer market has ranged between 7 per cent and 11 per cent over the last ten years.

In 1977, the Division acquired a blending plant at a suitable location in Waterford Harbour with a view to entering the growing blending market.

It has to-date, not proved possible to arrive at an acceptable arrangement for entry into this business due to objections by private interests and government directive and the site is currently used for other company purposes.

Further development in this area is dependent to a considerable extent on the trends in sugar beet and vegetable growing. The Division is well positioned to avail of marketing opportunities among the best tillage farmers and planning directed to maximisation of the Company’s strengths in this regard.

The Agricultural Chemical area represents a growing and profitable trading enterprise. Interchem Ltd. is the marketing company responsible for this activity.

A 20,000 sq. ft. central warehouse is located at Ballyfermot together with six rented depots strategically located throughout the country which provide a range of products to service customer needs in these locations.

Being a purely agency type business, it is heavily dependent on its principal providing exclusive products in the marketplace, thus ensuring a greater margin of profitability. Its continued development and profitability depends largely on an awareness and contact with developments in changing agrochemical product technology while retaining and consolidating the Company’s profitability in its existing trading activities. A diversification of product range into related Agricultural markets—e.g. animal health—is being considered.

An efficient packaging facility has been installed at Ballyfermot which will cater for the Company’s needs, and it is the intention to develop and expand a contract packaging facility to service the packaging requirements of the companies in the agrochemical business.

The Company has been involved in the Quarrying business since the early 1950’s.

The Company is involved in quarrying and selling Ground Limestone at six locations: Killough (Thurles); Ballybeg (Mallow); Mount Nugent and Kingscourt (Co. Cavan); Rathdowney (Co. Laois) and Goresbridge (Co. Kilkenny). The Cavan quarries are operated by Western Industries Ltd. a wholly owned subsidiary of C.S.E.T.

The objectives of the quarrying operations in the 50’s and early 60’s were:—

—To supply farmers, particularly beet growers, with lime at the lowest possible price. The quarries were to be operated as a back up to the beet crop.

—To deliver and spread the total output of the quarries. This led to the development of the Transporter Spreader service.

Western Industries was purchased in 1969 (with quarries at Boyle, Ballinascarry, Barley Hill and Killigally) in order to gain a market foothold in the high sales potential grassland areas of the North and East Midlands.

Up to the early 1970’s C.S.E.T. had been almost entirely involved in agricultural ground limestone production. Economic pressures led to the development of the By-product market in 1972. This development has increased steadily up to the present with all quarries involved in other stone products. Total sales from this source are now in excess of 300,000 tons.

The national market for Ground Limestone is now in the region of 2 million tons annually, of which the Company has a 35 per cent share, making it the largest distributor of the product. A reduction in the overall market—to 1.7 million tons—is anticipated in 1980 due to adverse farming conditions but the C.S.E.T. quarries will maintain market share.

The Company’s involvement in the Animal Feedstuffs market arises from the need to dispose profitably of the main by-products of the sugar manufacturing process, beet pulp and molasses. This activity is closely related to the beet procurement area since growers have a contractual entitlement to pulp under EEC regulations for which they must be compensated in order to give the Company control of a by-product which can be used to produce high quality animal feed.

The pulp product market has entered a new and difficult phase due to the balance between price, competing materials (e.g. barley) and demand. Costs of production are adversely affected by rising energy costs in a situation where drying is the central element of processing. Production last year totalled 130,000 tons.

—the vast majority of the molasses produced from beet goes into DMP (dried molassed pulp) which is sold as animal feed.

—molasses is sold directly to the feed compounding trade where it is used as a versatile and important component of many products. In recent years annual sales to compounders have been in excess of 30,000 tons and there are real opportunities of growth by the rise of technology permitting an increase in molasses inclusion rates.

—the Company exchanges beet molasses from its factories for cane molasses imported by Pfizers at Cork. Beet molasses is suitable for the chemical processes of the Pfizer plant.

Molasses trading has increased greatly in the recent past, and a serious effort is being made by the Division to consolidate a significant share of the market. The Company is seeking to establish a deep sea terminal, in conjunction with international molasses trading interests, to meet the long-term requirements of this market sector.

An expansion of activity into the General Engineering area has taken place within the last year with the opening of a new plant at Tuam which has commenced production, supplying mainly specialist engineering facilities for the Company’s capital programme.

7 PERSONNEL

The Company is a large employer by Irish Industrial standards. Average annual employment over the period of the 1970’s has been about 3,600. The highest annual figure was in 1970/71—at 4,108—and the lowest in 1974/75 at 3,293. Total employment has risen by over 300 since 1975.

There is a very significant element of seasonal employment in the Company because of the particular nature of both sugar and vegetable processing and this is reflected in the following table.

The Company’s operations are located in a number of towns throughout the country and the regional spread of employment opportunity is a particularly important element of the economic impact of CSET.

The average number of employees at each location in five recent years is shown in the following table.

The following table gives details of the trends in factory employment, by category, in five recent years. The figures are averaged over the period October to April in each year.

Labour costs (wages and salaries paid) amounted to £16.9 million in the financial year 1978-79. This represents 15.9 per cent of turnover. The following table gives details of wage and salary costs in recent years.

The workforce of the Company is fully unionised with a number of Trade Unions organising in all company locations. For example, in Carlow the full-time workforce is organised as follows:—

Labour relations have been traditionally excellent with a major emphasis over the years on the location of responsibility for industrial relations in the local factory. There has been no serious industrial dispute within the Company for over thirty years.

A system of elected Works Committees exist at all Company locations and this has facilitated communications and consultation on a wide range of issues which lie outside the normal sphere of collective bargaining. The recent elections for Worker Directors have provided a basis for the extension of consultation and participation within the Company.

8 CAPITAL STRUCTURE

The Company faces a serious problem arising from its present Capital Structure. Projections for the period ahead indicate an aggravation of what is already a difficult position.

The precise nature of this problem is summed up in the following table covering the period 1976/77 to 1979/80 (budget projection).

(a) substantial growth in fixed assets, due to the Company’s large-scale capital programmes and in Current Assets due to the overall growth in business and, hence, of Working Capital Requirements.

(b) a stagnant situation in respect of Shareholder’s Funds, the trend of which is as follows:—

These figures reflect the very low level of Ordinary Shareholding in the Company and the impact on Reserves of reduced levels of profit and the budgeted move into a loss situation in 1980.

(c) a very rapid rise in Company Borrowing due both to the capital programme and increased Working Capital demands. The entire capital programme has been financed by borrowings, most notably by a £30 million arrangement with a consortium of banking interests in Dublin.

The Ordinary Share Capital of the Company permitted under the existing legislation is £10.0 million of which £6.5 million has been subscribed to date.

The increased reliance of the Company on borrowing leads to a number of serious considerations:—

—the existence of an unfavourable, and deteriorating, Debt/Equity Ratio which adversely affects the Company’s position on the capital market.

—the continuation of escalating interest rates has an especially harmful impact on the financial position. Interest charges have risen from £1.9 million in 1977-78 to £4.7 million in 1977-78 and will rise again to over £8 million in the current financial year. New short-term inter-bank finance is currently costing 20 per cent.

—seeking lower interest rates through external borrowing carries the serious risk of currency losses.

The whole question of Capital Structure must be considered as central to the Company’s future planning. While a return to overall profitability is essential to improve the situation there are fundamental issues arising from a situation of Debt/Equity ratios such as those indicated above. Capital restructuring must be considered if the future possibilities of borrowing for necessary capital works are not to be effectively precluded by adverse ratios. An injection of additional equity through a Rights Issue would, if the sums in question were adequate, ease the situation and provide the basis for a fully effective programme of modernisation and profit-improvement.

9 FINANCIAL PERFORMANCE

The Company’s financial situation has deteriorated in the past year and, for a number of reasons, the prospects for the immediate future are not at all encouraging. The Company will move into a loss situation in the current year.

—over a number of years, Company trading profits have been inadequate in the context of the scale of operations, due in large part to the inherent financial problems of the Food Division and to pricing difficulties on the sugar market;

—the impact of dramatic oil price rises on the profitability of the sugar manufacturing enterprise has been serious. The Company is one of the largest importers of fuel oil in the country;

—continuing high interest rates have penalised the Company to the extent of over £2.5 million in the past year and represents a major problem for the period immediately ahead;

—sugar profitability has been further squeezed by developments within the EEC, particularly by E.M.S. entry and restrictions on CAP price movements;

—recent wage increases, coupled with the rising level of general inflation have aggravated the overall financial difficulty given the price constraints mentioned above;

—market conditions in some areas, such as agricultural machinery, have been unfavourable and have led to unsatisfactory financial outcomes;

—fixed overheads represent a problem in relation to the current level of throughput in areas such as food and agricultural machinery.

While the Company has maintained a relatively strong financial position over many years the overall effect of the factors outlined above, and of the necessity of undertaking a massive sugar factory capital programme in order to improve competitiveness in the long-term, has been to weaken that position very considerably.

The following table summarises the main financial results of the Company over the most recent five-year period.

More detailed financial projections for the three-year period ahead are at present being prepared in connection with budgetary and planning exercise required by the Board of Directors. All aspects of the Company’s operations are being closely examined in this connection.

For the immediate future, the regular and sustained history of corporate profitability which has been a feature of the Company would appear to be at an end.

This further deterioration is serious. While it is brought about largely by the impact of oil price changes and high interest rates it reveals the present financial vulnerability of the Company:—

—the present marketing situation does not permit the ready recoupment of additional costs of the magnitude in question; existing profit levels are inadequate;

—the fall in cash flow is rendered particularly serious by the rate of increase in working capital requirements—up by nearly £3 million in 1978/79 and by nearly £5 million in the current year—and by the heavy capital expenditure programme;

—all capital expenditure must, in these circumstances, be borrowed at high interest rates, thus further affecting the debt/equity ratio and profitability.

Corrective action is being planned and implemented. For example, the conversion of factory installations to solid fuel is under way, but this demands further short-term borrowing with a longer pay-back period. Action in other areas will be taken but must be approached with due regard for the long-term interest of the enterprise as a whole. A number of key issues—such as interest rates—remain matters for conjecture in the light of the current economic climate.

Fundamental to the whole financial problem is the unbalanced debt/equity situation which makes remedial action and planned improvement most difficult due to growing constraints on borrowing power.

10 FUTURE PLANS AND PROSPECTS

The Company is not, at present, operating within a formal long-range plan. As is outlined elsewhere in this report work is at present underway for the preparation of a medium-term plan to deal with current problems and to build upon the fundamental strengths of the organisation.

This work has involved a review of each division with the object of identifying issues which require corrective action as well as opportunities for improved operating performance.

(a) analyse broadly the current state of the business located in each divisional structure, and,

(b) highlight major strategic issues requiring urgent Company attention e.g. the size and financing of the sugar capital programme, the critical significance of interest rates; the squeezing of margins in sugar; the difficulties in securing an adequate beet acreage in the future; the growth of labour and other costs; the future of the Tuam sugar factory; the continuing heavy losses in the food business (after charging interest on working capital) and the reality of excessive food factory capacity.

This work does not at its present stage constitute in any final sense a comprehensive strategy for the future of the Group although it is clearly pointing the direction of such a strategy. The final defination of strategy will depend upon an agreed formulation of Company objectives for the medium and long term; the defined attitude of the shareholders to general borrowing arrangements; the correct definition of the Company’s borrowing capacity and policy; and the availability and implementation of viable projects of diversification in areas where current Company capacity is excessive in terms of present and known future need.

The Board and senior management of the Company are working systematically towards a finalisation of this very important planning work. It is envisaged that the final adoption of a medium-term plan will be complemented by the introduction of new organisational structure at central and divisional levels.

The inherent strength and national contribution of the Sugar Company enterprises may be gauged by the fact that turnover has risen, in the period 1970-1979, by over 350 per cent—from £27 million to £1.30 million—and that profits have been reported in forty-three of the forty-six accounting years since 1933. The Company has invested heavily over the years in agricultural, horticultural and technological development and has created a substantial Irish controlled presence in a number of key market sectors. Export sales—at £17½ million in 1977/78 and £24 million in 1978/79—represent a sizeable contribution to the economy. Worthwhile employment opportunity has been offered at many locations throughout the country—with over 3,600 full-time employees and indirect employment creation for many thousands of others, on the farm and in industry and commerce.

The Company is seeking a long-term role in the development of its present range of operations on a sound economic base and in appropriate diversification. Very special emphasis is being placed on technological advance and on applied research and development work in all the main areas of involvement.

Serious problems face the Company at this juncture. These relate to the low level of profitability of key sectors which will result in an overall loss situation in the present year and to other financial difficulties outlined in the report. In the absence of major internal financial improvement and of significantly improved external circumstances (in particular in relation to interest rates) a loss situation can be anticipated for a number of years ahead. This will be in direct contrast with the Company’s long history of profitable operation and will have adverse effects on the Company’s standing in business circles and on internal morale. In particular the problems of matching price to cost trends in key markets and of achieving an acceptable debt-equity ratio are of major significance.

The Sugar operation which has had much success in marketing terms in recent years, is adversely influenced by cost escalation at a time of pricing problems arising from the EEC setting in which all aspects of the activity are caught up. General agricultural trends pose a serious challenge to the Company in terms of beet procurement policy in the period immediately ahead.

The Food operation has a longstanding financial problem which arises from over-dependence on low-margin activities in commodity markets and from the high level of production overheads created by the Company’s scale of factory capacity. A major project of market and product development and of greater production efficiency is being implemented to deal with these problems within existing constraints. Future planning in this area will demand a very determined approach to the elimination of major loss-making elements of the overall operation.

Agricultural Trading is closely related to the sugar business and is a diverse area of operation which has exhibited much growth in recent years. Marketing problems are evident in sectors such as agricultural machinery. Future development will depend upon the highest level of operating efficiency and on the maintenance of general dynamism in Irish agriculture.

As a State enterprise the Company is greatly dependent upon government policy. Recent policy statements have underlined the important future role of the various State-sponsored bodies and their potential contribution to national development. Of particular importance in this connection is the definition of policy in respect of those activities of State enterprises which are necessarily non-commercial to some extent. The impact of such activities on the financial situation of the companies in question is a matter of crucial significance at a time of general financial constraints.

The Company is at the present stage of development confronted with a number of serious problems and difficult challenges. These will require sound internal planning and action together with appropriate external support in some matters. Not least among the latter is the question of the Company’s capital structure which to-day imposes growing constraints on corporate policy. Any curtailment of the capital investment programme because of borrowing difficulties arising from the debt/equity ratio position would be a major blow to the Company’s prospects.

For almost fifty years the Irish Sugar Company has been built up into one of the major industrial enterprises in the economy. It is, at present, faced with a situation which will demand far-reaching policy decisions and full backing from its ultimate sponsors if it is to continue in its long-standing development role in key areas of the Irish agricultural and food processing sectors.

Investigations are continuing into suspected irregularities in certain trading transactions in the food division. The exact nature of this problem, and its implications for the Company’s financial and trading position, are not fully known at present.

APPENDIX 4

PRINCIPAL MEMORANDUM FROM COMHLUCHT SIÚICRE ÉIREANN, TEORANTA

1 GENERAL DESCRIPTION