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TRANSCRIPT
Opportunities and Challenges in the Food Chain
The quest for value
Business Analysis
Pio De GregorioHead
Anna TugnoloSenior Analyst
Brescia, 12 June 2015
Sales (millions of euro) 2012 2013 2014 2015F
Manufacture of food products 106,834 107,091 105,216 107,468
% annual change 0.2% -1.8% 2.1%
Total Manufacturing 906,168 875,817 873,847 870,169
% annual change -3.3% -0.2% -0.4%
Sales of Manufacture of food product as %
of Sales of Total Manufacturing 11.8% 12.2% 12.0% 12.4%
The Italian Food IndustrySales and employment
2Business Analysis
of Sales of Total Manufacturing 11.8% 12.2% 12.0% 12.4%
Source: Business Analysis - UBI Banca on ISTAT data
Number of employees in the Italian Food Industry:
10%
of Total Manufacturing Industry
The Italian Food IndustryIndustrial production and exports
10.000
15.000
20.000
25.000
mil
lio
n o
f e
uro
Italian exports of food products
CAGR = 5.86%80
85
90
95
100
105
110
ind
ex
es
reb
ase
d o
n 1
00
Industrial production indexes
3Business Analysis
0
5.000
10.000
+2.2%
60
65
70
75
Ge
n-2
00
7
Giu
-20
07
No
v-2
00
7
Ap
r-2
00
8
Se
t-2
00
8
Fe
b-2
00
9
Lu
g-2
00
9
Dic
-20
09
Ma
g-2
01
0
Ott
-20
10
Ma
r-2
01
1
Ag
o-2
01
1
Ge
n-2
01
2
Giu
-20
12
No
v-2
01
2
Ap
r-2
01
3
Se
t-2
01
3
Fe
b-2
01
4
Lu
g-2
01
4
Dic
-20
14
ind
ex
es
reb
ase
d o
n 1
00
Manufacturing Manufacture of food products
Source: Business Analysis - UBI Banca on ISTAT data
The Italian Food IndustryNumber of companies and breakdown by sector
2012 (latest available)Number of
companies% of total
Processing and preserving of meat and production of meat products 3555 6.5%
Processing and preserving of fish, crustaceans and molluscs 387 0.7%
Processing and preserving of fruit and vegetables 1738 3.2%
Manufacture of vegetable and animal oils and fats 3311 6.0%
Manufacture of dairy products 3469 6.3%
Manufacture of grain mill products, starches and starch products 1011 1.8%
Manufacture of bakery and farinaceous products 35765 64.9%
4Business Analysis
The companies operating in the Italian food industry are 55,100, of which more than half are small bakeries.If these are excluded, then the number of companies falls to around 25,000.
Manufacture of bakery and farinaceous products 35765 64.9%
10.71 - Manufacture of bread; manufacture of fresh pastry goods and cakes 29897 54.3%
Manufacture of other food products 5340 9.7%
Manufacture of prepared animal feeds 524 1.0%
Manufacture of food products 55100 100.0%
Total excluding bakeries 25203
Source: Business Analysis - UBI Banca on ISTAT data
The Italian Food IndustrySelected sample of small-medium enterprises: key data
The sample is made of 1,003 companies selected according to the following criteria:
Companies classified as operating in the Food Industry by ISTAT – Italian
National Statistical Office
Company accounts available from 2008 through 2013
1
2
5Business Analysis
Detailed company accounts available
Sales in 2013 included in the range €10 million - €500 m illion
3
4
The sample of selected companies is closed.
Source: Business Analysis - UBI Banca
Selected Sample of SME Companies in the Italian Food Ind ustrySales
Aggregated sales (million euro) Aggregated sales – % annual change
2,0%
4,0%
6,0%
8,0%
10,0%
12,0%
20.000
25.000
30.000
35.000
40.000
45.000
50.000
mil
ion
i d
i e
uro
6Business Analysis
In the last four years the aggregated sales of sample co mpanies have increased costantly.
-6,0%
-4,0%
-2,0%
0,0%
2009 2010 2011 2012 2013
0
5.000
10.000
15.000
2008 2009 2010 2011 2012 2013
mil
ion
i d
i e
uro
2008 2009 2010 2011 2012 2013
Ricavi (milioni di euro) 36.388 35.129 37.799 41.351 42.724 44.478
2009 2010 2011 2012 2013
Ricavi (var. % annua) -3,5% 7,6% 9,4% 3,3% 4,1%Sales (euro million) Sales (% change)
Source: Business Analysis - UBI Banca
EBITDA Margin EBIT Margin
5,0%
5,5%
6,0%
6,5%
7,0%
7,5%
8,0%
8,5%
2008 2009 2010 2011 2012 2013
2,5%
2,7%
2,9%
3,1%
3,3%
3,5%
3,7%
3,9%
4,1%
4,3%
4,5%
2008 2009 2010 2011 2012 2013
Selected Sample of SME Companies in the Italian Food Ind ustryProfit margins
7Business Analysis
NOPAT Margin
The NOPAT margin of the sample companies
has declined as a result of the increase of
input prices and the pressure on selling
prices due to soft domestic demand.
1,0%
1,2%
1,4%
1,6%
1,8%
2,0%
2,2%
2,4%
2,6%
2,8%
3,0%
2009 2010 2011 2012 2013
Source: Business Analysis - UBI Banca
Fixed assets as % of sales Net operating working capital as % of sales
25,0%
27,0%
29,0%
31,0%
33,0%
35,0%
37,0%
2008 2009 2010 2011 2012 2013
12,0%
13,0%
14,0%
15,0%
16,0%
17,0%
18,0%
2009 2010 2011 2012 2013
Selected Sample of SME Companies in the Italian Food Ind ustryCapital turnover
8Business Analysis
Turnover of invested capital
Fixed assets have declined as % of sales
thanks to the growth of the latter, whereas the
net operating working capital as % of sales
has remained fairly stable. Hence the capital
turnover ratio (I.e. Sales / Invested capital)
has been stable just over 2x.
2,07
2,14
2,21
2,13
2,18
2,00
2,05
2,10
2,15
2,20
2,25
2009 2010 2011 2012 2013
Source: Business Analysis - UBI Banca
Indebitamento netto in valore assoluto Debito Netto / Patrimonio Netto
7.000
7.500
8.000
8.500
9.000
9.500
2008 2009 2010 2011 2012 2013
mil
ion
i d
i e
uro
0,60
0,65
0,70
0,75
0,80
0,85
0,90
0,95
2008 2009 2010 2011 2012 2013
Selected Sample of SME Companies in the Italian Food Ind ustryDebt
9Business Analysis
Debito Netto / EBITDA
The net debt of the sample companies has
trended down since 2011. As a result, the
financial structure looks quite strong.
0,60
1,10
1,60
2,10
2,60
3,10
3,60
4,10
2008 2009 2010 2011 2012 2013
Source: Business Analysis - UBI Banca
2,77%
2,46%
2,03% 1,93% 1,92%
0,00%
0,50%
1,00%
1,50%
2,00%
2,50%
3,00%
2009 2010 2011 2012 2013
Margine di Profitto
5,74%5,28%
4,49%4,12% 4,19%
4,00%
5,00%
6,00%
7,00%
Ritorno sul Capitale (ROI)
Selected Sample of SME Companies in the Italian Food Ind ustryROI – Return on Invested Capital
NOPAT margin
ROI – Return on Invested Capital
10Business Analysis
The Return on Invested Capital of samplecompanies has declined in the last years as aconsequence of the fall in the NOPAT margin,while the capital turnover ratio has remaindfairly constant.
2,07
2,14
2,21
2,13
2,18
2,00
2,05
2,10
2,15
2,20
2,25
2009 2010 2011 2012 2013
Rotazione del Capitale
0,00%
1,00%
2,00%
3,00%
4,00%
2009 2010 2011 2012 2013
Capital turnover
Source: Business Analysis - UBI Banca
The quest for valueWhat is the Economic Value Added?
Invested Capital
ROI WACC
11Business Analysis
CompanyCreates
shareholders’ value
ROI is lower than WACC
ROI WACC< >
Companydestroys
shareholders’ value
ROI is higher than WACC
ROI WACC
Source: Business Analysis - UBI Banca
WACC – Weighted Average Cost of Capital
Invested Capital
Equity
Cost of EquityCost of Equity Cost of Debt
Debt
12Business Analysis
Yield ofGovernment
Bond
Yield ofGovernment
Bond
MarketRisk
Premium
MarketRisk
Premium
Costof
Equity
Costof
Equity
BankInterest
Rate
CreditRisk
Premium
Costof
Debt
Source: Business Analysis - UBI Banca
Selected Sample of SME Companies in the Italian Food Ind ustryWACC – Weighted Average Cost of Capital
COST OF EQUITY
Government Bond Yield (normalised) 3.5%
Beta 1.07
Market Risk Premium 4.5%
Cost of Equity 8.3%
COST OF DEBT
Bank interest rate (normalised) 3.50%
Credit Risk Premium 1.50%
Tax Shield (1-Normalised Tax Rate) 0.73%
Cost of Debt 3.63%
13Business Analysis
WACC – Weighted Average Cost of Capital = 6,35%
WEIGHTED AVERAGE COST OF CAPITAL
Weight of Debt 42%
Weight of Equity 58%
Leverage ratio 72.4%
WACC - Weighted Average Cost of Capital 6.35%
Source: Business Analysis - UBI Banca
Economic Value AddedROI vs WACC
3,00%
4,00%
5,00%
6,00%
7,00%
-104.086
-189.345
-250.000
-200.000
-150.000
-100.000
-50.000
0
Selected Sample of SME Companies in the Italian Food Ind ustryEconomic Value Added
ROI
WACC
14Business Analysis
ROI Spread del valore economico
Spread del Valore Economico
Capitale Investito
0,00%
1,00%
2,00%
3,00%
2009 2010 2011 2012 2013
ROI Costo Medio Ponderato del Capitale Investito (WACC)
-348.412
-446.198 -439.663
-500.000
-450.000
-400.000
-350.000
-300.000
2009 2010 2011 2012 2013
As ROI has been lower than WACC, at the aggregated level sample companies have destroyedshareholders’ value.
Source: Business Analysis - UBI Banca
What factors are behind this negative result?
ROI is lower than WACC
The quest for value in the Italian Food IndustryWhy companies destroy value?
15Business Analysis
ROI is lower than WACC
Because the NOPAT margin is too low
Because the Capital Turnover is too low
Because both factors are too low
?
?
?
Source: Business Analysis - UBI Banca
8.3
8.7
10.7
10.3
6.1
5.1
24.2
24.1
15.2
15.8
16.5
16.5
19
19.5
2008
2011
The quest for value in the Italian Food IndustryThe value chain
Value of food products – Allocation among sectors in the va lue chain (2008 and 2011)
16Business Analysis
8.7 10.3 5.1 24.1 15.8 16.5 19.5
0 10 20 30 40 50 60 70 80 90 100
2011
Import of Final Food Products Value Added Food Industry Value Added Agri Industry Value Added Distribution
Value Added Other Sectors Import of Crops Tax
Given at 100 the price paid by final customers for food pr oducts, in 2011 the added value share of the food industry was only 10,3%, compared with an added value s hare of 24% for the distribution sector
(transport and retail).
Source: Business Analysis - UBI Banca on ISMEA/ISTAT data
5,3
5,3
1,9
1,6
2,9
3,0
3,1
2,7
2,4
2,0
1,1
0,7
2008
2011
2008
2011
The quest for value in the Italian Food IndustryThe value chain
Agricolture
FoodIndustry
10,3
10,6
6,1
5,0
The pre-tax profit margin of the Italian Food Industry ac cording to INPUT-OUTPUT estimates of Istat
17Business Analysis
10,3
10,6
5,7
6,1
3,1
3,3
2,7
2,8
10,9
10,2
6,8
6,8
0 5 10 15 20 25
2008
2011
2008
2011
Salari Ammortamenti Profitto economico
In 2011 the operating pre-tax profit margin of the Ital ian Food Industry was equal to only 2,0% of the total price paid by final customers.
Retail&
Transport
Othersectors
24,3
24,1
15,2
15,7
Wages Depreciation Operating pre-tax profit
Source: Business Analysis - UBI Banca on ISMEA/ISTAT data
2012 data
Sector Number of
companies
Sales (mln
euro) Employed
Company
average
sales (mln
euro)
Average
sales per
employee
(mln euro)
Manufacture of food products 55,100 106,834 309,977 1.94 0.34
Processing and preserving of meat and
production of meat products3,555 23,016 53,008 6.47 0.43
Processing and preserving of fish,
crustaceans and molluscs387 2,188 5,067 5.65 0.43
Processing and preserving of fruit and 1,738 9,032 26,455 5.20 0.34
The quest for value in the Italian Food IndustryAverage sales per company
18Business Analysis
Processing and preserving of fruit and
vegetables1,738 9,032 26,455 5.20 0.34
Manufacture of vegetable and animal oils
and fats3,311 6,670 7,057 2.01 0.95
Manufacture of dairy products 3,469 17,801 38,382 5.13 0.46
Manufacture of grain mill products, starches
and starch products1,011 6,311 7,033 6.24 0.90
Manufacture of bakery and farinaceous
products35,765 17,809 115,077 0.50 0.15
10.71 - Manufacture of bread;
manufacture of fresh pastry goods and
cakes
29,897 7,450 80,679 0.25 0.09
Manufacture of other food products 5,340 18,893 51,540 3.54 0.37
Manufacture of prepared animal feeds 524 5,113 6,358 9.76 0.80
Source: Business Analysis - UBI Banca on ISTAT, INSEE data
� The quest for value for the Italian Food Industry is connected to the companies’ dimensionalissue: because they are usually quite small, they have a very limite d negotiating powervis-à-vis other companies in the value chain , in particular with regard to the distributionsector (wholesale and retail companies).
� However, a small increase in profitability for the Food Industry at the expense of thecompanies in other sectors of the value chain (with particular regard for those in the distributionsector) would be sufficient to make it possibile for them to create sh areholders’ value .
The quest for value in the Italian Food IndustryThe dimensional hurdle
19Business Analysis
� Hence, we have simulated a scenario whereby in the next four years th e NOPAT margin ofthe sample companies increases by 1% of sales, rising gradua lly from 1,9% in 2013 to2,9% in 2018.
This increase in the NOPAT margin is large enough to let sa mple companies to createShareholders’ value in 2018, when as a result ROI is hig her than WACC.
Source: Business Analysis - UBI Banca
2,77%
2,46%
2,03% 1,93% 1,92%2,08%
2,33%2,49%
2,65%2,89%
0,00%
0,50%
1,00%
1,50%
2,00%
2,50%
3,00%
3,50%
2009 2010 2011 2012 2013 2014F 2015F 2016F 2017F 2018F
Margine di Profitto
5,74%5,28%
4,49%4,12% 4,19%
4,53%5,11%
5,55%6,00%
6,65%
4,00%
5,00%
6,00%
7,00%
Ritorno sul Capitale (ROI)
The quest for value in the Italian Food IndustryScenario with increase in NOPAT margin – Projection for R OI
Forecast
Forecast
NOPAT margin
ROI – Return on Invested Capital
20Business Analysis
0,00%
1,00%
2,00%
3,00%
4,00%
2009 2010 2011 2012 2013 2014F 2015F 2016F 2017F 2018F
2,07
2,14
2,21
2,13
2,18 2,182,20
2,232,26
2,30
1,95
2,00
2,05
2,10
2,15
2,20
2,25
2,30
2,35
2009 2010 2011 2012 2013 2014F 2015F 2016F 2017F 2018F
Rotazione del Capitale
The rise in the NOPAT margin leads to an
increase in ROI such that in the last forecast
year it is higher than WACC and therefore
sample companies create shareholders’ value.
Forecast
Capital turnover
Source: Business Analysis - UBI Banca
The quest for value in the Italian Food IndustryScenario with increase in NOPAT margin – Projection for e conomic value added
Economic Value AddedROI vs WACC
4,00%
5,00%
6,00%
7,00%
-104.086
-189.345
-167.189
-75.257
66.526
-200.000
-100.000
0
100.000
WACC
ROI
21Business Analysis
ROI Spread del valore economico
Valore Economico aggiunto/ distrutto
0,00%
1,00%
2,00%
3,00%
2009 2010 2011 2012 2013 2014F 2015F 2016F 2017F 2018F
ROI Costo Medio Ponderato del Capitale Investito (WACC)
-189.345
-348.412
-446.198-439.663
-364.903
-254.489
-500.000
-400.000
-300.000
-200.000
2009 2010 2011 2012 2013 2014F 2015F 2016F 2017F 2018F
Forecast
Forecast
In 2018 the ROI in above the level of WACC and therefore the sam ple companies create shareholders’value. Hence, a small increase in the operating profitabili ty of sample companies is sufficient to make itpossible for them to create shareholders’ value.
Source: Business Analysis - UBI Banca
The quest for value in the Italian Food IndustryQuality as competitive key factor for value creation
89% 90%
50%
60%
70%
80%
90%
100%
% s
ul
tota
le a
zie
nd
e d
el
sett
ore
Industrie Alimentari e delle Bevande - Principali punti di forza competitiva delle imprese per attività
economica (in % del totale aziende) - Anno 2011
Prezzo
Qualità
Flessibilità produttiva
Main competitive factors (in % of total companies – 2011 )
Price
Quality
Production flexibility
22Business Analysis
30%
38%
24%
29%
20% 20%
0%
10%
20%
30%
40%
Industrie alimentari Industria delle bevande
% s
ul
tota
le a
zie
nd
e d
el
sett
ore
Flessibilità produttiva
Diversificazione Produttiva
According to the last ISTAT Census on Italian companies, qua lity represents the key competitive factor forthe Food Industry. Price is far less relevant and production flexibility and product diversification are evenless important.
Food Industry Beverage Industry
Production flexibility
Product diversification
Source: Business Analysis - UBI Banca on ISTAT data
The quest for value in the Italian Food IndustryGeo-traditional quality production (DOP, IGP e STG )
DOP IGP STG TOTAL
France 67 10 50 7 45 9 7 3 5 5 89 118 1 208
Germany 5 15 7 - 17 1 4 7 5 35 32 64 - 96
Greece 2 - 21 1 42 29 1 1 1 3 74 27 - 101
CountryFresh
meat
Meat
processingCheese
Other
animal
products
Fruit and
vegetable
Oil and
fat
Other
products
Bakery
products
Fish
productsOther
Food Quality Products
23Business Analysis
Italy has the highest number of recognised geo-tradition al food products with high quality standard.
Greece 2 - 21 1 42 29 1 1 1 3 74 27 - 101
Italy 5 37 47 4 101 43 8 9 5 3 158 101 2 261
Netherland - - 7 - 2 - - 1 - - 5 3 2 10
Portugal 30 36 12 11 25 6 1 2 - - 62 61 - 123
United Kigdom 11 4 15 1 6 - 4 1 9 3 22 30 2 54
Spain 15 16 28 4 55 29 7 16 3 - 92 77 4 173
Total EU 142 146 220 37 320 123 45 70 35 44 559 579 43 1,181
Rest of World 1 - - - 7 - 4 1 2 1 5 11 - 16
WORLD 143 146 220 37 327 123 49 71 37 68 587 590 43 1,220
% Italy 3.5% 25.3% 21.4% 10.8% 30.9% 35.0% 16.3% 12.7% 13.5% 4.4% 26.9% 17.1% 4.7% 21.4%
Source: Business Analysis - UBI Banca on ISMEA data
The quest for value in the Italian Food IndustryDirect supply contracts
The quality factor involves also the agriculture companies in the
making of integrated chain for the production of entirely ‘M ade in
Italy’ food products?
24Business Analysis
Indeed, in recent years new contracts have been developed to create
direct supply channels between farmers and food companies (so
called ‘Contratti di fornitura’).
The answer is ‘yes’ and it asks for the creation of direct s upply chains
between farmers and food processing companies.
Source: Business Analysis - UBI Banca
The quest for value in the Italian Food IndustryThe advantages of direct supply contracts
� Safer income thanks to pre-defined supply price
� Higher income thanks to superior quality
� Better agriculture techniques thanks to collaboration wit h
food processing companies
For theFarmers
25Business Analysis
� Safer supply
� Reduction of transport costs
� Higher quality of supply
� ‘Made in Italy’ label
� Full trackability of products
� Less volatility for supply prices
For the Food Company
Source: Business Analysis - UBI Banca
The quest for value in the Italian Food IndustryDirect supply contract – Durum wheat sector
Puglia, Campaniaaround 1000 farmers involved
Marche around 2000 farmers involved
Marche around 300 farmers involved
De Matteis – Grano Armando
Barilla – Granoduro.net
Pasta Zara – Furio Camillo
26Business Analysis
around 300 farmers involved
Puglia around 20 farmers involved
Toscana, Marche, Puglia around 15 farmers involved
Pasta Zara – Furio Camillo
Granoro – Dedicato
Barilla, De Cecco, Divella –
SIGRAD
Source: Business Analysis - UBI Banca
The quest for value in the Italian Food IndustryDirect supply contract – Tomato sector
Framework Contract ‘Area Nord Italia’Tomato Supply
12 ProductionOrganisations
AIIPA – Associazione Italiana Industrie
Prodotti Alimentari
UnionAlimentariConfapindustria Emilia -
27Business Analysis
Confapindustria Emilia -Romagna
Source: Business Analysis - UBI Banca
Conclusions
The Italian Food Industry is characterised by small compan ies whose negotiating poweris low with regard to companies operating in the distribu tion system of food products.
However, we have demonstrated than a small improvement in the profitability of SME sampledin the Italian Food Industry would be sufficient to make it p ossible for them tocreate shareholders’ value, i.e. to bring the level of R OI above that of WACC.
Many companies , even small , are trying to achieve this improvement in profitability by
28Business Analysis
Many companies , even small , are trying to achieve this improvement in profitability byincreasing the quality of their products. Indeed, quali ty is considered by the vast majority
of the Italian food companies as the most important compet itive factor.
Therefore, the ‘quest for value’ has become a ‘quest for quality’. In this respect, it is becomingincreasingly important the creation of direct supply chan nels between the agriculture companies
and the food processing companies. On one side, these c ontracts facilitate the realisation ofintegrated ‘Made in Italy’ supply chain to further elevat e the quality of products.
On the other side, these direct supply contracts allow bot h farmersand food processing companies to increase their profitab ility.
Source: Business Analysis - UBI Banca
Oppurtunities and challenges in the Food Chain
29Business Analysis
ThanksFor Your Attention
Opportunities and Challenges in the Food Chain
The quest for value