inghams group - macquarie...macquarie wealth management inghams group 21 december 2016 4 strong...

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AUSTRALIA

ING AU Outperform

Price (at 05:10, 19 Dec 2016 GMT) A$3.06

Valuation A$ 3.37-3.96 - EV/EBITA

12-month target A$ 3.65

12-month TSR % +25.1

Volatility Index Low/Medium

GICS sector Food, Beverage & Tobacco

Market cap A$m 1,165

30-day avg turnover A$m 2.5

Number shares on issue m 380.7

Investment fundamentals Year end 30 Jun 2017E 2018E 2019E 2020E

Revenue m 2,375.0 2,422.0 2,467.6 2,508.8 EBIT m 147.9 158.6 165.9 170.2 Reported profit m 45.3 106.4 112.0 115.9 Adjusted profit m 98.9 106.4 112.0 115.9 Gross cashflow m 141.1 156.4 165.6 170.6

CFPS ¢ 37.1 41.1 43.6 44.9 CFPS growth % nmf 10.8 5.9 3.0 PGCFPS x 8.2 7.4 7.0 6.8 EPS adj ¢ 26.0 28.0 29.5 30.5 EPS adj growth % nmf 7.6 5.2 3.5 PER adj x 11.8 10.9 10.4 10.0

Total DPS ¢ 11.5 19.0 20.0 20.7 Total div yield % 3.8 6.2 6.5 6.8 Franking % 100 100 100 100 ROA % 14.8 15.8 16.2 16.3 ROE % 59.7 57.5 50.2 44.5 EV/EBITDA x 6.1 5.6 5.3 5.2 Net debt/equity % 238.9 185.8 150.5 121.9

P/BV x 7.0 5.7 4.8 4.2

Source: FactSet, Macquarie Research, December 2016

(all figures in AUD unless noted)

21 December 2016 Macquarie Securities (Australia) Limited

Inghams Group Ruling the roost We initiate coverage on Inghams Group with an Outperform recommendation and a

target price of $3.65 per share.

Ingham’s is the Australian market leader and #2 in NZ

Ingham’s is the market leader in the Australian chicken market with a 40% share (by

value). It is the #2 player in the NZ market (34% share) and Ingham’s is the only dual

Australian and NZ chicken producer. Australia and NZ are both highly regulated

markets, which limits the extent of imports. Ingham’s has a vertically integrated

operation across the poultry supply chain along with a stockfeed business (13% of

sales). Ingham’s has long-term customer relationships and multi-year contracts with

major retailers and Quick Service Restaurants (QSRs).

Ingham’s provides exposure to ANZ poultry consumption which has grown at 4.1%

and 5.1% CAGR respectively between 1990 and 2015 (OECD). Solid growth in

consumption is expected to continue driven by chicken’s cheap relative cost

compared to other meat categories and health and wellness considerations.

Positive earnings momentum

Strong volume growth and benefits from Ingham’s cost out and efficiency program

(Project Accelerate) are the key drivers of forecast 13.5% EBITDA growth in FY17e.

This follows 46% EBITDA growth in FY16. Ingham’s 8.0% EBITDA margin (FY17e) is

substantially below closest comp Tegel. We see the potential for this gap to narrow

over time notwithstanding that NZ is a structurally more profitable market than

Australia.

Strong cash flow generation and solid dividend in prospect

Ingham’s is a highly cash flow generative business. We estimate 103% of average

cash flow conversion (adjusted proforma) between 2014 and 2016 and with 101%

conversion expected in FY17e. Ingham’s has a target dividend payout range of 65-

70% of NPAT and FY17e dividend is expected to be franked.

Target price of $3.65 per share

Our price target of $3.65 per share is at the midpoint of our A$3.37-$3.96 equity

valuation range for Ingham’s based on an EV/EBIT methodology. The low end of our

FY17e EV/EBIT range of 11.5x-13.0x is broadly in line with the peer group and c10%

above Tegel. Implied FY17e PE range is 13.0x-15.2x. In our view, a premium to

Tegel is justified for a range of reasons. These include: 1) Ingham’s relative scale

advantage, including exposure to the larger Australian market, 2) potential to narrow

margin differential, and 3) a lower reliance on export markets for future growth.

Key risks

Key risks include customer concentration with Ingham’s Top 5 customers, which represent

55-60% of sales (FY16a) and risk that cost save benefits from Project Accelerate are

competed away over time. There is risk of disease which if eventuated could significantly

impact Ingham’s supply chain and production, although this risk is mitigated by strict

quarantine procedures and import restrictions. Ingham’s business is highly integrated and

small changes or variances in upstream areas of the business such as breeder eggs,

hatcheries and broiler farms can have a compound effect down the chain. Ingham’s has

highlighted price competition in the wholesale market which could persist for longer than

expected coupled with its major Australian competitor being unlisted.

http://www.macquarie.com/research/disclosures

Macquarie Wealth Management Inghams Group

21 December 2016 2

Inside

Investment summary 3

Executive summary 6

Valuation 16

Growth opportunities 22

Risks 27

Financials 30

Company Overview 49

Market structure & channel 69

ANZ poultry industry overview 74

Appendix: Global poultry industry 84

Summary of Peer Companies 87

Inghams Group Company profile

Ingham’s is the largest vertically integrated chicken and turkey producer

across Australia and New Zealand, with approximately 8,200 employees and

sales of A$2.3bn in FY16. Ingham’s holds the #1 and #2 positions amongst

chicken producers in Australia and New Zealand with 40% and 34%

estimated chicken market share, respectively, and is a key supplier to major

retailers, QSR operators, foodservice distributors and wholesalers in both of

those markets.

In addition to chicken, Ingham’s holds strong market positions across

Australian turkey, the Australian stockfeed and the New Zealand dairy feed

industries

Fig 1 Ingham’s operations overview

Source: Ingham’s company data, Macquarie Research, December 2016


21 December 2016 3

Investment summary Consistent growth in poultry consumption over time

Australian & New Zealand poultry consumption has grown around 4.1% and 5.1% CAGR

respectively between 1990 and 2015 (OECD).

This has been driven by the cheap relative cost compared to other meat categories, health

& wellness considerations as well as population growth. We see solid growth in chicken

consumption continuing and Ingham’s provides positive leverage to this theme.

Favourable market structure

Ingham’s is the market leader in the Australian chicken market with a 40% share by value

(Ingham’s estimate). It is the #2 player in the NZ market (34% share by value) and

Ingham’s is the only dual Australian and NZ chicken producer. These markets are

relatively well consolidated, with the top two players in Australia having a combined 73%

market share. The top two players in NZ have a combined 82% share.

Long-term customer relationships and multi-year contracts

Ingham’s has a long established track record supplying large customers including two of its

largest customers for 48 and 55 years. In our view, Ingham’s has the scale and breadth of

operations to deliver high-quality, reliable supply to the large retailers and QSRs. Over the

last 18 months, Ingham’s has been focused on entering into contracts with key customers;

these are typically for 2-3 years and in a number of cases a percentage of customer

volumes are secured. The contracts contain various degrees of pass-through provisions

including for feed costs and mechanisms for cost review.

Highly regulated markets

We note there are significant import restrictions in the Australian/New Zealand market with

no imports of live birds or fresh product (exports of latter now possible from NZ into

Australia under strict guidelines). In contrast, we note that European and United States

markets are typically free to import and export poultry. Australian regulations have recently

changed to allow uncooked poultry imports from NZ. We think that shelf life and logistics

considerations along with much lower retail poultry prices in Australia relative to NZ, are

likely to limit the extent of NZ imports although there may be opportunities for imports of

partially cooked and frozen product. As the only major poultry producer with production

facilities in both markets, Ingham’s believes it is well placed to benefit from any

opportunities arising from this change.

Vertically integrated operation

Ingham’s has a highly integrated supply chain with control of breeder farms, egg

hatcheries, a strong contract grower base and downstream processing. In our view, there

are significant lead times involved in increasing chicken production and Ingham’s

effectively controls this process along with flexibility to adjust to market conditions (e.g.

adjusting broiler holding period and egg inventories). This large scale, integrated position

gives Ingham’s a cost advantage over smaller and more regional suppliers.

Stockfeed business provides security of supply with external sales adding scale

Ingham’s estimates it is the second largest stockfeed manufacturer in Australia by volume

with around 10% market share. Ingham’s stockfeed business (13% of group FY16 sales)

provides security of feed supply for the poultry business and currently meets ~85% of

internal feed demand requirements. This also allows Ingham’s to control the composition

and quality of its feed which is key to minimising its feed to conversion ratio. Internal sales

account for approximately 60% of overall stockfeed production volume with 40% external.

External sales provide the business with additional scale and network utilisation which

delivers cost and efficiency benefits for the overall stockfeed operation.

There are significant

import restrictions

in Australian/New

Zealand market

Ingham’s large

scale, integrated

position provides a

cost advantage over

smaller and more

regional suppliers.


21 December 2016 4

Strong management with relevant experience

CEO Mick McMahon has been at Ingham’s for the last 18 months and has overseen the

operational turnaround. Mr McMahon joined Ingham’s in January 2015 as Executive

Chairman and was appointed CEO in February 2016. He has extensive public market

experience (CEO of Skilled Group between 2010 and 2014) and was also COO of Coles

Supermarkets Australia from 2007-2009 (we view this retail experience as valuable given

the importance of the retail customer base). This followed a 19-year career at Shell.

CFO Ian Brannan joined Ingham’s in May 2015. Most recently Mr Brannan was CFO of

GWA Group Limited and prior to that Carter Holt Building Supplies Group. Ian has had

extensive senior management experience in Australia, USA and UK including in the FMCG

sector (Arnotts, Sara Lee).

Shift to greater value add products over time

Ingham’s has capitalised on market trends and driven growth in free range and value-

enhanced products. Free range and value enhanced products have increased from 1%

and 15% respectively of Ingham’s FY05 chicken sales to 12% and 22%, respectively, of

FY16 sales. Correspondingly, further processed sales have reduced from 34% to 28% of

chicken sales and primary processed from 50% to 38% of chicken sales. Free-range and

value-enhanced products attract a price premium hence there is a positive mix effect.

Greater corporate focus and move to a national based model

Ingham’s has invested more than $900m in the last decade to enhance its production and

processing network across Australia and New Zealand. We note that this was partly

realised with the recent sale and leaseback initiative. In the last two years under TPG

ownership, Ingham’s has been in transition from a family-owned business to a more

corporate-focused entity. As part of this, it has moved to a national-based model from prior

state based approach as well as making changes to operational footprint. This has seen

Ingham’s focus on South Australia and Queensland as its prime processing manufacturing

locations and closure of the Cardiff plant in NSW. Ingham’s has increased capacity in

SA/QLD along with significant investment in automation. This has seen substantial scale

and efficiency benefits accrue.

Significant cost out and efficiency program

Ingham’s state that it is part way through a significant cost out program (“Project

Accelerate”) driven by reduced overheads, greater automation and improved labour

productivity and efficiencies. Ingham’s expects Project Accelerate to deliver $160-200m of

gross benefits over the five years commencing in FY16 with around half of the benefits

expected to accrue beyond FY17. Hence, whilst Accelerate is a key earnings driver in

FY17, management expect that additional cost savings will contribute to profit growth

beyond this period.

Potential to narrow margin gap to Tegel over time

Ingham’s achieved EBITDA margins of 7.3% in FY16 which is expected to increase to

8.0% in FY17. This is below Tegel’s 12.9% and 13.7% EBITDA margins in FY16a and

FY17e respectively (Tegel PDS forecast). In our view this difference largely relates to a

more favourable industry structure in New Zealand (NZ) and lower cost base (NZ is 86% of

Tegel’s FY15 revenue compared to 15% of Ingham’s revenue). We see the potential for

Ingham’s to narrow this gap over time. Delivery of targeted cost saves and ongoing strong

poultry demand growth are key to this.

Strong earnings growth forecast to continue in FY17

Resolution of a number of internal and external factors that impacted poultry product

volumes and severely impacted margins in FY15, together with early benefits of Project

Accelerate benefits, saw Ingham’s bounce back with 46.3% EBITDA growth in FY16.

EBITDA growth of 13.5% is forecast in FY17 driven by a further ramp-up in Project

Accelerate savings along with strong forecast volume poultry growth of 7.7%.

Ingham’s is part way

through a

significant cost out

program driven by

reduced overheads,

greater automation

and improved

labour productivity

and efficiencies.


21 December 2016 5

Strong cash flow generation and solid franked dividend in prospect

In our view, Ingham’s is a highly cash-flow-generative business with 103% of average cash

flow conversion (adjusted proforma) between 2014 and 2016 and with 101% conversion

expected in FY17. Ingham’s has a target dividend payout range of 65-70% of NPAT. The

first dividend to shareholders will be determined in respect of period from completion to 24

December 2016 and will become payable in March 2017. Ingham’s expects to be in a

position to frank dividends.

Key Risks

Inability to pass on feed costs

Ingham’s has a good track record in recovering feed costs and a number of Ingham’s

major customer contracts have provisions that allow for feed rise and fall recovery.

However there is risk of a lack of recovery in the event of volatile movements in feed costs

which would compress margins. We note that spot A$ wheat prices are 21% below the

five-year average and A$ spot soy prices are 2% below the five-year average.

Retail concentration

Retail and QSRs account for 59% and 14% of Australian poultry industry sales

respectively. Ingham’s Top 5 customers represent 55-60% of group sales (FY16a). This

represents a relatively concentrated customer base. There is a risk of volume losses or

margin pressure as contracts come up for renewal in what is a competitive industry.

Risk that Ingham’s cost saves are competed away over time

In our view, Coles and Woolworths continue to impose significant pressure on the

consumer supply chain. Poultry is not immune from this but the risk is mitigated by the

importance of poultry in driving volume growth in the overall “fresh” category which in turn

is a broader traffic driver for the major retailers. A lack of integrated producers, Ingham’s

superior scale and very limited imports (regulatory driven) are also mitigating factors. In our

view, realisation of ongoing cost savings represents an earnings buffer against further

potential price erosion.

Agricultural and disease risk

There is risk of disease which if eventuated could significantly impact Ingham’s supply

chain and production. We note there has been very limited incidence of this and this risk is

mitigated by strict quarantine procedures and import restrictions.

Supply chain interruption

Ingham’s business is highly integrated and small changes or variances in upstream areas

of the business such as breeder eggs, hatcheries and broiler farms can have a compound

effect down the chain. Ingham’s has an ability to mitigate this via adjusting broiler holding

period and egg inventories for example.

Competition risks

We note that in both Australia and New Zealand there are also a number of smaller market

participants with potential ability to pressure industry pricing. Ingham’s largest competitor in

Australia is Baiada. Baiada is a private company hence there is less pressure to deliver

short-term results.

Benefits from transformation projects may be delayed or less than expected

Management has estimated the quantum and timing of Project Accelerate benefits as well

as the capital investment required. Cost overruns, a failure to complete the transformation

program or delays may impact implementation of Project Accelerate and actual cost

savings and efficiencies achieved may differ from forecasts.

A slowdown in poultry consumption growth rates

The poultry industry is subject to changing consumer trends, demands and preferences,

including changing tastes and dietary habits of consumers and general economic

conditions. There is a risk that poultry consumption growth rates could slow down over

time.

Ingham’s Top 5

customers

represent 55-60% of

sales (FY16a). This

represents a

relatively

concentrated

customer base


21 December 2016 6

Executive summary

Fig 2 ANZ poultry consumption Fig 3 Aust & NZ poultry consumption has had a 3.6% CAGR over last 10 years

Source: OECD, December 2016 Source: OECD, December 2016

Fig 4 …and Australia’s biggest share of meat plate… Fig 5 …having outpaced other categories


Fig 6 Poultry wins on relative affordability (Australia) Fig 7 ….and is a cheap source of protein

Source: ABS, December 2016 Source: Macquarie analysis of retail pricing, g protein/100g sourced from

Food Standards Australia New Zealand, December 2016

1,144kt

194kt

0

200

400

600

800

1,000

1,200

1,400

1,600

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020f

Australia New Zealand

2015 ANZ Total: 1,339kt

kt

3.1%

4.8%

4.0%

2.0%

6.8%

5.8%

1.8% 1.8%

3.6%

4.9%

3.6%

2.0%

0%

1%

2%

3%

4%

5%

6%

7%

8%

1995 2005 2015 2024f

Australia NZ ANZ

10yr CAGR to...

Poultry, 1,144kt, 42%

Beef, 781kt, 28%

Pork, 622kt, 23%

Lamb, 202kt, 7%

2.8mt meat consumed

in 2015

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Poultry Beef Pork Lamb

0%

50%

100%

150%

200%

250%

300%

350%

1980 1985 1990 1995 2000 2005 2010 2015

Poultry Pork Beef Lamb

$6.54

$13.56

$16.67

$19.16

2.9¢

6.1¢ 6.1¢

8.8¢

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

$0

$5

$10

$15

$20

$25

$30

Chicken Pork Beef Lamb

¢ / protein gram (RHS)$/kg


21 December 2016 7

Fig 8 Poultry accounted for 87% of FY16a revenues Fig 9 Australia the largest end market with 83% of FY16a revenues

Source: Ingham’s company data, December 2016 Source: Ingham’s company data, December 2016

Fig 10 Ingham’s has an extensive integrated network

Facilities / farms1 Australia NZ Total

Quarantine 1 0 1

Feedmill 8 2 10

Breeding farms 60 14 74

Hatchery 10 1 11

Broiler farms

2,3 188 37 225

Primary processing3 6 1 7

Further processing 5 2 7

Distribution centre 7 2 9

Protein conversion plant 1 0 1

Total 286 59 345

1. Includes Turkey and 4 contracted NZ breeder farms. Does not account for breeder and hatchery expansion projects approved or underway. Excludes Leppington R&D facility, non-operational sites and offices. Farming areas shown for illustrative purposes only. 2. Includes contracted growers and company owned farms 3. Excludes Cardiff primary processing plant and associated contracted growers


Poultry, A$2,013.7m

, 87%

Stockfeed, A$293.1m,

13%

Other , A$1.9m, 0%

FY16aRevenue:

A$2,308.7m

Australia, 83%

NZ, 15%

Exports, 2%

FY16aRevenue:

A$2,308.7m


21 December 2016 8

Fig 11 Australia market structure and comparison vs. Baiada. Top 2 players have a 73% share.

Ingham’s Baiada

Market share (value) 40% 33%

Key poultry brands Ingham’s Steggles

Lilydale

Footprint Nation wide Nation wide

Product range Chicken Chicken

(external sales) Turkey Turkey

Stockfeed Stockfeed

Ingredients Ingredients

Vertical integration

Quarantine facility Yes No

Internal feed operations Yes Yes

Breeder farms Yes Yes

Hatcheries Yes Yes

Primary Processing Yes Yes

Further Processing Yes Yes

Smallgoods Yes Yes

Source: Ingham’s company data, December 2016

Fig 12 NZ market structure and comparison vs. Tegel. Top 2 players have an 82% share.

Tegel Ingham’s


Key poultry brands Tegel Ingham’s

Top Hat Waitoa

Tegel Free Range

Rangitikei

Footprint North Island North Island

South Island


(external sales) Stockfeed Stockfeed


Turkey




Hatcheries Yes Yes



Smallgoods Yes No


The Australian and New Zealand poultry markets are relatively consolidated, with Ingham’s

and Tegel accounting for combined 73% and 82% share of Australian and NZ market,

respectively. This combined Top 2 market share has remained relatively stable in each

market over the last five financial years.

Inghams40%

Baiada33%

Other27%

Australian Chicken Market Share (by value)

Tegel48%

Ingham's 34%

Other18%

NZ Chicken Market Share (by value)


21 December 2016 9

Fig 13 Retail dominates Australian chicken distribution channel

Fig 14 Chicken distribution channels – NZ


Fig 15 EBITDA margins of peer group

Source: Macquarie Research, Factset, Tegel PFI forecasts, December 2016

Our analysis shows Ingham’s margins are at a ~560bp discount to Tegel (FY16a) and are

similar to Scandi Standard and LDC and below Tyson Foods, Pilgrim’s Pride and

Sanderson. In relation to Tegel, this difference largely relates to a more favourable industry

structure in New Zealand (NZ) and a lower labour cost base (NZ is 86% of Tegel’s FY15

revenue and NZ is 15% of Ingham’s revenue), we see the potential for Ingham’s to narrow

this gap over time. Delivery of targeted cost saves and ongoing strong poultry demand

growth are key to this.

Retail59%Wholesale

20%

Foodservice7%

QSR14%

Estimated share of industry (%) based on revenue in FY16

Retail45%

Wholesale29%

Foodservice10%

QSR16%


7.3%8.0%

12.9% 13.4%

8.2% 8.5%7.3% 7.4%

14.7%

12.2%

14.7%

12.4%

7.2%

9.8%

0%

2%

4%

6%

8%

10%

12%

14%

16%

FY16a FY17e FY16a FY17e FY15a FY16e FY16a FY17e FY15a FY16e FY15a FY16e FY16a FY17e

Ingham's* Tegel Scandi Standard

LDC SA Pilgrim's Pride

SandersonFarms

Tyson Foods^

EBITDA margin

Ingham’s margins

are at a ~560bp

discount to Tegel.

We see the potential

for Ingham’s to

narrow this gap

over time.


21 December 2016 10

Fig 16 Strong cash conversion

Source: Macquarie Research, December 2016

Ingham’s generates strong operating and free cashflow conversion. The strong cashflows

support investment in the underlying asset base as well as targeted 65-70% dividend

payout ratio as a percentage of NPAT. Ingham’s expects to be in a position to frank

dividends.

Growth opportunities Ingham’s management sees growth opportunities in:

Capturing underlying market and category growth;

Driving innovation and premiumisation;

Selectively targeting export growth; and

Realising margin expansion opportunities through Project Accelerate

Ingham’s has invested more than $900m in the decade to enhance its production and

processing network across Australia and New Zealand. However, given expectation of

solid ongoing volume growth (7.7% poultry volume growth forecast in FY17), Ingham’s has

committed capital to increase capacity and improve efficiency in the feed milling, breeder

and hatchery networks. Investment has been allocated in the following areas:

Construction of a new feed mill in South Australia

Expansion of the breeder network in South Australia, Queensland and New Zealand;

Expansion of Murraylands hatchery in South Australia; and

Construction of a new hatchery in New Zealand

Fig 17 Investment in new capacity*

Network Region Description Estimated completion Status FY16A FY17F

Breeder SA New sheds, shed extensions and equipment upgrades to increase capacity FY17 Commenced Breeder SA Greenfield farms to increase capacity FY17 Commenced Breeder QLD Greenfield farms to increase capacity FY18-19 Board approved Hatchery SA Building and equipment to increase capacity FY17 Commissioned Feedmill SA Greenfield mill to increase capacity and replace third party supply FY18 Tender awarded Breeder NZ Greenfield farms to increase capacity FY17-18 Board approved Hatchery NZ Greenfield hatchery to increase capacity FY17 Board approved

Total $35m $95m


98.2%

121.7%

93.3%101.0%

73.6%

99.5%

51.3%56.3%

0%

20%

40%

60%

80%

100%

120%

140%

FY14a FY15a FY16a FY17e

%

Adjusted EBITDA operating cashflow conversion Adjusted free cashflow conversion

Ingham’s generates

strong operating

and free cashflow

conversion


21 December 2016 11

Fig 18 Ingham’s asset base is currently ~75% utilised across the value chain, with planned capital expansions and latent capacity available for future growth (~25%)

Type Existing facilities

Investments in capacity

Quarantine 1 n/a

Feedmill 10 Greenfield feedmill in SA

Breeding farms 74 3 new breeder systems

Hatchery 11 SA hatchery capacity expansion; Building greenfield facility in NZ

Broiler farms 225 Secured contracts equivalent to an additional

150 sheds nationally

Primary processing 7 Investments in automation

Further processing 7 Investments in automation

Distribution 9 n/a

Protein conversion plant 1 n/a


Significant cost out and efficiency program

Ingham’s commenced Project Accelerate in May 2015 and is currently focussed on the

following initiatives.

Investment in automation;

Labour and productivity improvements;

Procurement savings;

Network rationalisation;

Warehousing and logistics savings; and

Improvement in the turkey and smallgoods business.

Management are in the second year of a transformation program which is expected to

deliver $160-200m of gross benefits over the five years commencing in FY16. Around half

of Project Accelerate benefits are expected to accrue beyond FY17. Hence, whilst

Accelerate is a key earnings driver in FY17, management expect that additional cost

savings will contribute to profit growth beyond this period.

Strong earnings growth forecast to continue in FY17

Ingham’s delivered 46.3% EBITDA growth in FY16 driven by early benefits from Project

Accelerate along with solid volume growth (poultry volumes +4.5%) and normalisation of

genetic supply and operational planning issues encountered in FY15. Hence FY16 was

effectively a bounce-back year as Ingham’s resolved a number of internal issues together

with efficiency benefits and solid volume growth. EBITDA growth of 13.5% is expected in

FY17 driven by a further ramp-up in Project Accelerate savings along with strong forecast

volume poultry growth of 7.7%.

77%

98%

81%

96%

82%

69%

23%

2%

19%

4%

18%

31%

24%

24%

18%

16%

29%

25%

0% 20% 40% 60% 80% 100% 120% 140%

Feed

Breeder

Hatchery

Broiler

Primary plant

Further processing

Current utilisation Latent capacity Planned expansion Extended shifts

Management are in

the second year of a

transformation

program which is

expected to deliver

$160-200m of gross

benefits over the

five years


21 December 2016 12

Our retail supplier benchmarking shows Ingham’s margins are at the lower end of the range

Fig 19 Supplier EBIT margin FY14: 8.3% Avg Fig 20 Supplier EBIT margin FY15: 7.7% Avg

Source: Macquarie Research, Public company data and ASIC accounts, December 2016

Source: Macquarie Research, Public company data and ASIC accounts, December 2016

We have undertaken a benchmarking of margins for key suppliers to the Australian retail

sector. Ingham’s EBIT margins of 3.6% and 5.8% in FY15 and FY16 respectively compare

to our sample mean of 7.7% in FY15. We note that FY16 represents a more normal year

for Ingham’s, post resolution of some internal issues in FY15. Companies such as Asaleo,

Lion, Coca-Cola Amatil and Mars are at the upper end (>10% EBIT margins) which reflects

strong branded goods nature. We note that most of Ingham’s sales are unbranded.

Conversely dairy companies are at the bottom of the range.

The key point is that Ingham’s is not “over-earning” relative to other retail suppliers.

Hence in our view this creates a defendable margin scenario when negotiating key terms

re price / volume with major customers. This is also in the context of the importance of

poultry in the broader fresh category which is a major focus area for the retailers. Indeed

chicken products represent two of the top five fresh products sold by the four largest

Australian supermarkets by sales.

Importance of fresh category to retailers

We highlight the following comments from Wesfarmers/Coles and Woolworths over the last

year. This emphasises price investment being made in lowering chicken prices as well as

the importance of the overall fresh category (which includes poultry) in terms of driving

sales growth including number of customer visits and size of basket.

Wesfarmers/Coles:

February 2016 - “During the half, we backed up our focus on customer service with

continued investment in lowering prices. Chicken breasts and drumsticks went from

$13 and $5.30 a kilo to $9 and $3.50, respectively….roast chicken from $11 to $8”.

“There's still lots of fresh food opportunity, quite a number of our customers still buy their

fresh food products elsewhere.”

August 2016 – “We've been working closely with suppliers to improve the quality and

availability of our fresh food. Our customers have been noticing with our keep fresh metrics

of items per basket, basket size and transactions per week continue to grow in quarter

four. We also continue to lower the price of the fresh products our customers buy the most,

including whole chickens and chicken schnitzel.”

Woolworths:

February 2016 - “It’s important to work on our fresh side of the business or good for you

type of food products”

August 2016 – “The key thing you build your foundations on are the three parts of your

customer value proposition, which are around your prices, your service and fresh”.

0%

5%

10%

15%

20%

25%

30%

Fo

od in

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ments

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Mean Median

Supplier EBIT margin (FY14)

0%

2%

4%

6%8%

10%

12%

14%

16%

18%

20%

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Mean Median

Supplier EBIT margin (FY15)

Ingham’s is not

“over-earning”

relative to other

retail suppliers. In

our view this

creates a

defendable margin

scenario


21 December 2016 13

Shift to greater value add products over time drives positive mix effect

Free range and value enhanced products have increased from 1% and 15% respectively of

Ingham’s FY05 chicken sales to 12% and 22% respectively of FY16 chicken sales.

Correspondingly, further processed sales have reduced from 34% to 28% of sales and

primary processed from 50% to 38% of sales.

Fig 21 Ingham’s chicken net sales by category: Free range and value enhanced a bigger part of the mix


The primary processed category includes chilled chicken products such as whole birds or

primary cuts (e.g. breast, thigh, drumsticks). Value enhanced relates to chilled products

with additional flavouring including marinades and coatings (kebabs, peri chicken,

flavoured chicken pieces). Further processed includes products that are partially or fully

cooked such as chicken nuggets, chicken tenders and Chicken Kiev.

Price trends

Free-range and value-enhanced products attract a price premium hence there is a positive

mix effect which is shown below.

Fig 22 Premium pricing for Free Range & Organic chicken breast over primary processed breast

Fig 23 Further Processed products attract a varying premium over breast fillet depending on product

Source: Macquarie Research analysis of Grocery Cop data, December 2016


Our retail price benchmarking shows that free range and organic chicken breast generates

a 65% and 250% premium over primary processed chicken breast.

Primary processed, 50%


Free range, 1%Free range, 12%

Value enhanced, 15% Value enhanced, 22%

Further processing, 34%


0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

FY05a FY16a

$9.0

65%

250%

$0

$5

$10

$15

$20

$25

$30

Primary Processed Free Range

Organic

$/kg

$9.0

40%

120%

190%

$0

$5

$10

$15

$20

$25

$30

Primary Processed Breast

Ingham'sBreast Nuggets

Ingham's Breast Tenders

Ingham's Chicken Kiev

$/kg


21 December 2016 14

Ingham’s further processed products attract a substantial premium above primary

processed breast fillet. This reflects a branded premium as well as further processing in

the form of cooking, chopping, shaping and crumb coating (also includes gluten-free

product). We note the range of premium across categories varies significantly. Ingham’s

breast tenders and Chicken Kiev have a ~120% and 190% premium over chicken breast

fillet while chicken nuggets was only ~40%, however the quality of the contained meat is

likely lower.

Fig 24 Poultry absolute retail price change 2014 – 2016; weakness in primary but growth in value added

Fig 25 Ingham’s category-weighted retail price change 2014 - 2016



Our retail pricing analysis shows a ~8.5% decline in primary processed chicken prices from

January 2014 to August 2016, a ~6% increase in value-added products, and a ~3%

decline in further processed products. Hence pricing in the value add category has

increased in last two years whilst further processed category has held up relatively well.

We note that in FY15, Ingham’s highlighted an increase in average poultry pricing which

included a change in product mix towards higher-value products (value enhanced and

further processed).

Taking a weighted average of Ingham’s product categories (40% primary which includes

10% free range assumed as part of primary, 18% value added, 22% further processed),

results in a price decline of ~2.9% which compares with ABS CPI data that shows a

decline of ~4.5%.

Fig 26 Market feed and poultry CPI… Fig 27 …vs Ingham’s revenue

Source: ABS, Factset (Feed price indices include 65% wheat, 35% soymeal), December 2016

Source: Ingham’s company data, ABS, Factset (Feed price indices include 65% wheat, 35% soymeal), December 2016

(8.5%)

6.1%

(2.9%)

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

Primary processed Value added Furtherprocessed

(3.4%)

1.1%

(0.6%)

(2.9%)

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

Primary processed

(40%)

Value added (18%)

Furtherprocessed

(22%)

Ingham's product category weighted

price change

-6%

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

-35%

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

Aus feed price Australia Poultry CPI (RHS)

-10.1%-10.6%

0.5%

-3.2%

1.2%2.1%

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

Avg Feed Price Index Avg Poultry CPI Index Ingham's Aus Rev

FY15 FY16


21 December 2016 15

We note that part of the reduction in primary processed prices reflects lower feed costs

(including wheat and soymeal) which have declined ~25% since January 2014.

Ingham’s Australian revenue growth of 2.1% in FY16 outpaced poultry industry price

declines (ABS CPI data) due to strong volume growth of 5% driven in particular by BBQ

bird and chicken breast categories. Ingham’s Australian revenue was down 1% in FY15

due to genetics supply and planning issues which saw a 1.7% decline in poultry volumes.

We note that Ingham’s Australian pro forma revenue grew at 1.2% and 2.1% in FY15 and

FY16 respectively and is forecast to grow at 2.5% in FY17. Hence Ingham’s revenue

growth has been positive despite a 3-5% decline in Australian Poultry CPI over the last two

years. This differential reflects strong volume growth with a 5.1% increase in group

(Aust/NZ) poultry volumes in FY16 and 7.7% forecast volume growth in FY17.

Ingham’s revenue

growth has been

positive despite a 3-

5% decline in

Australian Poultry

CPI over the last two

years


21 December 2016 16

Valuation Our valuation range of $3.37 - $3.96 per share and price target of $3.65 are derived from

applying an EV/EBIT valuation methodology to FY17 forecasts with the price target at the

midpoint of our valuation range. Our earnings-based valuation has been cross-checked

with a DCF valuation of $3.90 per share.

Fig 28 Valuation range of $3.37 - $3.96 per share with $3.65 price target

$m Low High

Equity valuation based on FY17e EV/EBIT $3.37 $3.96 FY17e EV/EBIT 11.5x 13.0x FY17e EV/EBITDA 8.9x 10.1x FY17e PER 13.0x 15.2x Pro-forma Div yield @ 67.5% payout of NPAT 5.5% 4.2% DCF Equity Valuation $3.90 per share


In arriving at our valuation range we have compared Ingham’s to other Australian/New

Zealand listed primary food, aquaculture and other processed FMCG companies. We have

also assessed Ingham’s valuation range against a range of international listed poultry

producers. Among Aus/NZ companies considered, we have also looked to Ridley (RIC-

AU), the closest comp (and competitor) for Ingham’s external stockfeed business.

Tegel is the closest comparable, in our view, given the similarity of its operations and

overlap in the New Zealand market. There are a number of pure play poultry producers in

international markets. However different market structures and exposure to import

competition limit their usefulness in our view.

We have elected to value Ingham’s by applying an EV/EBIT methodology, in line with how

we value most other industrial companies in our emerging leader universe.

Fig 29 Selected peer EV/EBIT multiples

Source: Macquarie Research, Factset, December 2016

The midpoint of our FY17e EV/EBIT range of 11.5x -13.0x is in line with the broader peer

group and the low end is c15% above Tegel. In our view, a premium to Tegel is justified for

a range of reasons. These include:

Ingham’s relative scale advantage. Ingham’s provides exposure to the larger

Australian poultry market. Ingham’s scale advantage relative to Tegel is evident in

poultry volumes processed. Tegel processed 88kt of poultry in FY16, equating to

~20% of Ingham’s (440kt). We note that Return on Tangible Assets (ROTA) for both

Ingham’s and Tegel are similar, with Ingham’s having a higher asset turn but Tegel a

higher margin.

9.8

x

10.3

x

10.4

x

11.6

x

11.8

x

14.5

x

17.0

x

5.9

x

7.3

x

8.2

x

9.4

x

10.4

x

12.8

x

17.0

x

13.6

x

13.0

x

12.2x

10.1x

0x2x4x6x8x

10x12x14x16x18x Val range Group avg

FY

17f E

V/E

BIT

In arriving at our

valuation range we

have compared

Ingham’s to other

Aus/NZ listed

primary food,

aquaculture and

other processed

FMCG companies

Tegel is the closest comparable in our view given the similarity of its operations and overlap in the New Zealand market.


21 December 2016 17

Scope for a narrowing margin differential. At the group level, Ingham’s margins are

~560-570bp below Tegel’s. This gap is unlikely to completely converge given structural

differences between the Australian and NZ markets (industry structure, labour rates

and FCR partially offset by higher feed costs and lower scale advantages). In our view,

Project Accelerate should drive further cost savings and efficiencies beyond FY17 (half

of overall benefits expected beyond FY17), which combined with ongoing strong

chicken consumption should lead to incremental margin improvement.

Ingham’s has a lower reliance on export markets for future growth. About 17.5%

of Tegel’s FY16 revenues were generated from export markets. In contrast, exports

accounted for only ~2% of Ingham’s FY16 revenue. Reliance on export markets leaves

Tegel vulnerable to supply/demand imbalances across a range of poultry exporting

countries. We note recent changes in regulations which now allow uncooked poultry

imports from NZ to Australia. This may see additional exports from Tegel into Australia

although shelf life and logistics considerations along with substantially lower Australian

retail poultry prices vs NZ, are likely to limit the extent of this. These changes may also

provide opportunities for Ingham’s NZ manufacturing base.

Fig 30 Ingham’s vs Tegel

Ingham’s Tegel*

Group NZ Segment A$ NZ Segment NZ$ NZ$

FY17e Revenue $m 2375 371.7 388.4 625 FY17 Revenue growth* 2.9% 5.1% 1% 7.6% FY14-17e revenue CAGR 2.1% 3.2% 6.5% FY17e EBITDA $m 190.1 37 38.7 84 FY17 EBITDA growth 13.5% 7.6% 12.0% FY14-17e EBITDA CAGR 10.2% 17.3% FY17e EBITDA % 8.0% 10.0% 13.4% FY16 pro forma Net debt $418m $118m Gearing (FY16 Net debt /EBITDA) 2.5x 1.6x Gearing (FY16 Net debt /FY17e EBITDA)

2.2x 1.4x

FY16 ROA 15.3% 8.5% FY16 ROTA 15.3% 16.50%

Source: Ingham’s company data, Tegel company data based on PFI*, December 2016. All comparisons done on a 52-week basis

The low end of our EV/EBIT valuation range is also ahead of international poultry

providers. We believe this is justified given lower volatility of earnings and competition

compared to North American and European Suppliers.

The high-end of our valuation range is broadly consistent with Costa Group. We believe

this is appropriate given a similar reliance on the supermarket channel, market strength in

core basket categories and relatively low agricultural risk.

The high end of our valuation range is broadly in line with the All industrials ex-Financials

and LPTs.

It is also worth noting that our FY17e based valuation only captures around 50% of

Project Accelerate targeted savings ($160-200m gross).

Our EV/EBIT based valuation implies an EV/EBITDA multiple of 8.9x-10.1x and a PE

multiple of 13.0x-15.2x.

The lower end of our implied PE valuation range of 13.0x (FY17e) is similar to Tegel which

reflects Ingham’s greater gearing at 2.2x net debt to EBITDA (net debt to FY17e EBITDA)

vs Tegel’s 1.4x on same basis.

It is also worth

noting that our

FY17e based

valuation only

captures around

50% of Project

Accelerate targeted

savings ($160-200m

gross)


21 December 2016 18

Fig 31 Selected peer EV/EBITDA multiples Fig 32 Selected peer PE multiples

Source: Macquarie Research market multiples, Other data Factset consensus forecasts, December 2016

Source: Macquarie Research market multiples, Other data Factset consensus forecasts, December 2016

See Figure 35 below for Meat processing transaction multiples (domestic and global). We

note that there have been few relevant corporate transactions in recent years. JBS

acquired Primo Smallgoods for $1.45b in Australia in March 2015 (9.7x trailing EBITDA). In

June 2013, TPG acquired Ingham’s for a 4.8x trailing EBITDA in what was a subdued

period for market buy-out activity.

7.4

x

7.4

x

7.8

x

8.2

x

8.8

x

9.1

x

11.7

x

4.4

x

5.0

x

5.9

x

6.5

x

7.6

x 9.8

x

11.5

x

10.9

x

9.5

x

8.6x

7.3x

0x

2x

4x

6x

8x

10x

12x

14x Val range Group avg

FY

17f E

V/E

BIT

DA

13.1

x

13.9

x

13.9

x

15.5

x

15.6

x

19.0

x

19.7

x

9.9

x

10.6

x

10.7

x

12.9

x 19.3

x

20.4

x

17.5

x

16.7

x

15.8x14.0x

0x

5x

10x

15x

20x

25x Val range Group avg

FY

17f P

E r

atio

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6

19

Fig 33 Ingham’s valuation comparables

Fiscal period

Price Market value

Enterprise value

Net Debt/ EBITDA

PER EV/ EBITDA EV/EBIT Div Yield EBIT margin EBITDA margin ROA ROIC

FY0 FY1 FY2 FY1 FY2 FY1 FY2 FY1 FY1 FY2 FY1 FY2 FY0 FY0 Primary Comparables Ingham’s Limited 28/06/2016 3.08 1171 1582 2.5x 11.8x 11.0x 8.2x 7.4x 10.6x 9.8x 5.6% 6.2% 6.5% 8.0% 8.6% 16.2% 27.9% Tegel Group Holdings 10/23/2016 1.32 470 612 2.1x 13.1x 11.8x 7.4x 7.0x 9.8x 9.1x NA 9.5% 9.8% 12.6% 12.8% 2.9% 3.4% Costa Group Holdings 06/26/2016 3.33 1,128 1,233 1.3x 19.7x 17.4x 11.7x 10.5x 17.0x 15.6x 3.2% 7.5% 7.9% 10.4% 10.9% 4.5% 5.7% Asaleo Care 06/30/2016 1.56 861 1,154 2.0x 13.9x 12.9x 8.8x 8.3x 11.6x 10.8x 6.3% 15.6% 16.4% 20.6% 21.3% 8.8% 10.7% Tassal Group 06/30/2016 4.21 632 774 1.7x 13.9x 12.4x 7.8x 7.0x 10.4x 9.2x 3.8% 15.7% 16.4% 20.8% 21.6% 7.1% 10.1% Huon Aquaculture Group

06/30/2016 3.91 342 407 2.8x 19.0x 11.4x 8.2x 5.7x 14.5x 8.4x n.a. 9.7% 15.1% 17.1% 22.3% 0.8% 1.2%

Ridley 06/30/2016 1.32 407 450 0.8x 15.5x 13.9x 7.4x 6.4x 10.3x 8.8x 2.9% 4.5% 4.7% 6.2% 6.4% 5.6% 8.8% Select Harvests 06/30/2016 6.59 484 553 0.7x 15.6x 14.0x 9.1x 8.1x 11.8x 10.4x 6.8% 17.1% 18.3% 22.2% 23.4% 7.2% 9.6% Average 1.8x 15.8x 13.4x 8.6x 7.6x 12.2x 10.3x 4.6% 11.4% 12.7% 15.7% 17.0% 5.3% 7.1% International Comparables Tyson Foods 10/01/2016 90.00 31,819 39,990 1.6x 12.9x 12.6x 7.6x 7.6x 9.4x 9.4x 0.9% 8.1% 7.9% 10.0% 9.8% 7.8% 11.2% Pilgrim's Pride 09/25/2016 26.39 6,633 7,910 0.9x 9.9x 9.0x 5.9x 5.2x 7.3x 6.3x n.a. 9.4% 10.1% 11.6% 12.2% 13.7% 20.9% Sanderson Farms 10/31/2016 131.87 2,999 2,671 - 10.6x 11.7x 4.4x 4.5x 5.9x 6.3x 1.0% 9.5% 7.8% 12.6% 10.8% 14.1% NA Hormel Foods 07/24/2016 49.91 26,414 26,440 0.0x 20.4x 19.7x 11.5x 11.0x 12.8x 12.2x 1.5% 14.8% 14.8% 16.5% 16.4% 13.4% 18.9% JBS 09/30/2016 4.73 13,503 34,682 4.9x n.a. 6.8x 6.5x 4.9x 10.4x 6.9x 3.3% 4.3% 5.9% 6.9% 8.3% (0.5%) (0.8%) Scandi Standard 09/30/2016 8.52 512 759 3.3x 19.3x 14.2x 9.8x 8.2x 17.0x 13.1x 3.3% 4.6% 5.5% 8.0% 8.8% 4.8% 6.5% LDC SA 08/31/2016 141.03 2,357 2,146 -0.6x 10.7x 10.4x 5.0x 4.7x 8.2x 7.7x 1.5% 4.7% 4.7% 7.6% 7.7% 6.3% 13.0% Average 1.7x 14.0x 12.1x 7.3x 6.6x 10.1x 8.8x 1.9% 7.9% 8.1% 10.5% 10.6% 8.5% 11.6% Domestic Defensives Coca-Cola Amatil 07/01/2016 10.27 7,844 9,441 1.3x 18.0x 17.7x 9.1x 8.8x 12.7x 12.3x 4.7% 12.9% 12.9% 18.2% 18.2% 6.5% 10.7% DuluxGroup 09/30/2016 6.41 2,495 2,873 1.5x 17.5x 17.1x 11.3x 10.6x 13.1x 12.6x 3.6% 11.9% 11.9% 13.8% 14.1% 11.1% 17.6% Metcash 10/31/2016 2.32 2,262 2,495 0.9x 11.6x 10.6x 6.8x 6.0x 8.2x 7.4x n.a. 2.0% 2.0% 2.4% 2.5% 4.5% 9.6% Pact Group 06/30/2016 6.79 2,031 2,564 2.4x 17.7x 15.6x 10.2x 9.1x 13.6x 12.0x 3.5% 12.4% 12.8% 16.5% 16.8% 6.7% 9.8% Wesfarmers 06/30/2016 43.49 49,185 56,125 1.4x 16.9x 16.0x 9.6x 9.0x 12.4x 11.7x 4.6% 6.1% 6.2% 8.0% 8.1% 1.0% 1.4% Woolworths 06/26/2016 24.08 31,019 34,854 1.0x 19.1x 17.7x 9.4x 8.7x 13.3x 12.3x 3.7% 4.2% 4.4% 5.9% 6.1% 8.0% 14.9% Average 1.4x 16.8x 15.8x 9.4x 8.7x 12.2x 11.4x 4.0% 8.3% 8.4% 10.8% 11.0% 6.3% 10.7% Market All industrials ex-financials 2.7x 17.5x 16.2x 10.86x 10.13x 13.6x 12.6x 4.4% 9.5% 8.8% ASX ex-100 6.3x 16.7x 14.3x 9.5x 8.2x 13.0x 11.3x 3.3% 6.0% 6.4%

Source: Macquarie Research, Factset, Tegel company data from PFI, December 2016

Ma

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Fig 34 Meat processing transaction multiples (domestic and global)

EV / EBITDA EV / EBIT

Date announced

Date completed

Acquirer Country Target Country EV (A$m) Historical LTM Forward NTM Historical LTM Forward NTM

Meat processing - domestic

Nov-14 Mar-15 JBS SA Brazil Primo Smallgoods Australia 1,450 9.7x na na na na na na na Mar-13 Jun-13 TPG Capital USA Ingham Enterprises Australia 880 4.8x na na na na na na na Jan-11 May-11 Affinity Equity Partners Asia Tegel Foods Australia 466 7.6x na na na na na na na Dec-08 Jul-09 Baiada Australia Bartter Australia 250 5.3x na na na na na na na Mar-08 May-08 JBS Brazil Tasman Group Services Australia 161 9.2x na na na 14.1x na na na Dec-05 Apr-06 Pacific Equity Partners Australia Tegel Foods NZ 230 8.1x 8.1x na na 14.5x 14.5x na na na na ANZ Capital na Tegel Foods (26.7%) NZ - na na na na na na na na Aug-99 na Bartter Australia Steggles Australia 131 na na na na na na na na

Average 7.4x 8.1x na na 14.3x 14.5x na na Median 7.8x 8.1x na na 14.3x 14.5x na na

Meat processing - international Meat processing -

international

Jun-15 Sep-15 JBS SA Brazil Moy Park (Marfrig European poultry)

UK 1,930 11.3x na na na na na na na

Jul-14 Jun-15 Pilgrim's Pride Corp / JBS Foods

USA / Brazil Tyson Foods (Brazil and Mexico poultry)

Brazil / Mexico

611 na na na na na na na na

Jul-14 Aug-14 Tyson Foods, Inc. USA Hillshire Brands Co. USA 9,055 10.5x 10.5x 15.6x 15.6x na na 21.6x 21.6x Nov-13 Jun-14 Sigma Alimentos S.A. de C.V.; Mexico;

China,HK Campofrio Food Group SA Spain 1,674 7.9x 7.9x na na na na na na

May-13 Sep-13 WH Group Limited China, HK Smithfield Foods, Inc. USA 7,366 9.4x 9.4x 7.9x 7.9x 13.7x 13.7x 10.6x 10.6x Sep-10 Nov-10 HKScan Corporation Finland Rose Poultry A/S Denmark 92 na na na na 10.6x na na na Sep-09 Dec-09 JBS Brazil Pilgrim's Pride Corp (64%

stake) USA 3,204 na 8.2x 5.8x na na 26.0x 10.9x na

May-09 Jun-10 BRF Brasil Foods SA Brazil Sadia SA Brazil 5,015 6.8x na na na 11.4x na na na Mar-08 Oct-08 JBS Brazil Smithfield Beef Group USA 605 22.5x na na na 99.1x 20.5x 12.8x na Mar-08 Terminated JBS Brazil National Beef Packing USA 604 6.0x 6.7x na na 9.2x 11.3x na na Sep-06 May-07 Smithfield Foods USA Premium Standard Farms USA 1,072 5.5x 6.9x 7.1x na 9.4x 13.8x 19.4x na Sep-03 Apr-04 Maple Leaf Foods Canada Schneider Corp (Smithfields) Canada 562 9.1x na na na 12.9x na na na Jan-01 Sep-01 Tyson Foods USA IBP Inc USA 8,412 9.5x 9.5x na na 13.5x 13.5x na na

Average 9.9x 8.4x 9.1x 11.7x 22.5x 16.5x 15.1x 16.1x Median 9.2x 8.2x 7.5x 11.7x 12.1x 13.7x 12.8x 16.1x

Source: Mergermarket, press reports, company reports, IRESS, December 2016


21 December 2016 21

DCF Valuation and WACC assumptions

Our DCF valuation provides an equity value of $3.90 per share, which is an implied PER of

15.0x.

Fig 35 DCF valuation and implied ratios

Enterprise valuation 1,900.9 Proforma net debt 418.0 Equity valuation 1,482.9 Value per share $3.90 Implied FY17 ratios PE (x) 15.0 EV/EBIT (x) 12.9 EV/EBITDA (x) 10.0


Key assumptions to derive our WACC calculation

Risk free rate of 3.25% and an equity risk premium of 5.0%, consistent with our Australian

research team.

We assume an equity beta of 1.2x.

Pre-tax cost of debt of 4.5%. These assumptions drive our base case WACC of 7.83%.

Terminal growth rate (TGR) of 1.75%.

A sensitivity to WACC and TGR assumptions can be found below, as an example, a 50bps

increase in WACC would reduce our valuation by 9%.

Fig 36 Sensitivity of DCF to WACC and TGR

TGR\WACC 6.8% 7.3% 7.83% 8.3% 8.8%

0.8% 9% -2% -12% -19% -26% 1.3% 17% 5% -6% -14% -22%

1.8% 26% 12% 0% -9% -18%

2.3% 38% 21% 7% -3% -13%

2.8% 52% 33% 16% 4% -7%


Other key DCF assumptions

After assuming prospectus forecasts for FY17F, our discounted cash flow valuation is

based on explicit forecasts through to FY25F. A number of key long-term assumptions are

below.

Long-term average poultry volume growth of 3.5% and long-term average stockfeed

volume growth of 1.9%.

We explicitly model Phase 1 of Project Accelerate with the company targeting savings

of $160-200m. However, we assume that this will be substantially eroded by lower

average selling prices (-1.8% pa average) and cost inflation. We assume around 30%

retention of targeted savings.

We assume that Capital Expenditure will moderate following FY17 ($85m prospectus

forecast spend), but assume an uplift to similar level (adjusted for inflation) every ~4

years. We note that Ingham’s has indicated that the current capacity expansion

program will increase capacity by 16-29%. We estimate that this equates to 5-6 years

of 3-5% market growth.

We assume a working capital to sales ratio of ~11%, which is consistent with the FY16

pro-forma working capital to sales ratio of 11.1%. We note that working capital

includes biological assets, biological assets which are recognised at cost less

accumulated depreciation. They are reclassified to inventory once processed.

Biological assets totalled $115m in FY16.

Our DCF valuation

provides an equity

valuation of $3.90

per share, which is

an implied

PER of 15.0x.


21 December 2016 22

Growth opportunities Ingham’s management sees growth opportunities in:

Capturing underlying market and category growth;

Driving innovation and premiumisation;

Selectively targeting export growth; and

Realising margin expansion opportunities through Project Accelerate

Capturing underlying market and category growth

Chicken consumption in Australia and New Zealand has grown by ~4.1% and ~5.1% per

annum respectively between 1990 and 2015 (OECD). Underlying growth is expected to

continue over the medium term due to population growth, relative affordability and other

consumer trends (e.g. health and convenience). In our view, Ingham’s has a well-invested

asset base and has approved expansion projects to provide further capacity to capture

demand growth.

Well invested asset base

Over the last 10 years, Ingham’s has invested more than $900m to increase capacity and

enhance capability across the network. This included increasing processing capacity and

capability to enable production of value-enhanced, cooked and partially cooked products.

Major investments occurred in primary and further processing with the addition of two

further processing plants (Edinburgh Parks, South Australia and Auckland, New Zealand)

to Ingham’s network and the rebuild of Ingham’s primary processing plant at Somerville

following a fire in 2010. Ingham’s is also expanding capacity in farming and distribution

assets including two hatcheries, four breeder farms and one distribution centre.

Further investment for future growth

Ingham’s has committed capital to increase capacity and improve efficiency in the

feedmilling, breeder and hatchery networks. Investment has been allocated in the following

areas:

Construction of a new feed mill in South Australia

Expansion of the breeder network in South Australia, Queensland and New Zealand;

Expansion of Murraylands hatchery in South Australia; and

Construction of a new hatchery in New Zealand

The figure below summarises the key network capital projects and the capital expenditure

in FY16A and FY17F.

Fig 37 Investment in new capacity*

Network Region Description Estimated completion Status FY16A FY17F

Breeder SA New sheds, shed extensions and equipment upgrades to increase capacity FY17 Commenced Breeder SA Greenfield farms to increase capacity FY17 Commenced Breeder QLD Greenfield farms to increase capacity FY18-19 Board approved Hatchery SA Building and equipment to increase capacity FY17 Commissioned Feedmill SA Greenfield mill to increase capacity and replace third party supply FY18 Tender awarded Breeder NZ Greenfield farms to increase capacity FY17-18 Board approved Hatchery NZ Greenfield hatchery to increase capacity FY17 Board approved

Total $35m $95m


Ingham’s capital investment is supported by third parties, including lessors who generally

purchase land and invest in buildings, while Ingham’s invests in capital equipment.

If required, Ingham’s can increase production at its primary and further processing facilities

through extending the length of shifts.

Ingham’s has

committed capital to

increase capacity

and improve

efficiency in the

feedmilling, breeder

and hatchery

networks


21 December 2016 23

As a result of planned investment and the flexibility to move to extended shift patterns in

primary and further processing, Ingham’s management believes that the company has

sufficient capacity to cater for several years of measured growth. Over time,

additional investments may be required to remove bottlenecks and increase efficiency of

processing in some facilities.

Utilisation and available capacity varies by facility.

Fig 38 Ingham’s asset base is currently ~75% utilised across the value chain, with planned capital expansions and latent capacity available for future growth (~25%)


Driving innovation and premiumisation

Through its farming, primary processing and further processing facilities, Ingham’s is

focused on product and packaging innovation. Free range, value-enhanced and further

processed products, whose consumption has increased from 50% in FY05 to 62% in FY16

of net poultry sales, provide good examples of how consumer trends drive changes in

consumption patterns.

Consumer trends have driven growth in higher-priced chicken products. For example:

Consumers’ desire for foods that improve their health and wellbeing underpins the

development of ‘free-from’ products, such as gluten-free;

Demand for convenience drives packaging innovation and development of ‘ready-to-

cook’ products; and

Increased interest in animal welfare and food provenance underpins innovation in

animal welfare standards as well as opportunities to develop premium products such

as Waitoa range of free range products.

Ingham’s has invested in building capability across consumer insights, marketing, category

management and account management to better position itself to continue to be a leader

in product innovation and capture the benefits of premiumisation of chicken products.

Selectively targeting export growth

Ingham’s management believes it is well placed to capture targeted export opportunities

should Asian markets prove attractive for Australia and New Zealand poultry producers, as

it can:

Leverage its brands (“Ingham’s” and “Waitoa”) and reputation;

Export from the lowest cost country (of Australia and New Zealand);

Reduce any biosecurity risk by spreading supply of a full range of primary processed

and further processed products across two geographies; and

Leverage Australia and New Zealand’s global reputation for food safety and quality.

77%

98%

81%

96%

82%

69%

23%

2%

19%

4%

18%

31%

24%

24%

18%

16%

29%

25%

0% 20% 40% 60% 80% 100% 120% 140%

Feed

Breeder

Hatchery

Broiler

Primary plant

Further processing

Current utilisation Latent capacity Planned expansion Extended shifts

Ingham’s

management

believes that the

company has

sufficient capacity

to cater for several

years of measured

growth.


21 December 2016 24

Realising margin expansion opportunities

Following a review in 2015, management identified a number of opportunities to improve

efficiency in the business via ‘Project Accelerate’.

Project Accelerate comprises a number of initiatives to improve production efficiency

across the integrated operations, including investment in automation. Management is

targeting total gross benefits from Project Accelerate of $160 million - $200 million

over 5 years commencing in FY16.

Ingham’s commenced Project Accelerate in May 2015. Some benefits contributed to FY16

earnings. Approximately 50% of the benefits are expected to be realised post FY17. The

benefits from this program are designed to allow Ingham’s to remain competitive,

mitigate inflation in costs and contribute to profit growth.

Ingham’s is currently focussed on the following initiatives.

Investment in automation;

Labour and productivity improvements;

Procurement savings;

Network rationalisation;

Warehousing and logistics savings; and

Improvement in the turkey and smallgoods business.

Automation

Ingham’s identified automation opportunities with capital payback of less than two years.

These opportunities primarily relate to the purchase of specialised equipment to replace

manual handling and processing, thereby increasing efficiency and reducing cost.

Implementation of the first phase of automation commenced in October 2015 and was

completed in FY16. Over $12 million of capital was invested in automation during this

period, driven by investment in automated deboning equipment in primary processing

plants.

Fig 39 Automation case studies

Breast deboners Cutlet deboners Breast cap deboners Leg deboner

Installed in FY16 3 4 2 1 Payback period (mths) 15 3 9 9


Labour productivity

The company has identified opportunities to optimise labour productivity. The primary

opportunity identified was to improve labour planning (i.e. matching labour supply and

demand) by establishing a workforce planning team and implementing purpose-built labour

management tools and processes.

These labour productivity initiatives have begun to deliver benefits to Ingham’s primary

processing efficiency. Since March 2016, Ingham’s two largest facilities, Murarrie and

Bolivar, have delivered efficiency gains due to productivity initiatives. Management expects

further efficiency gains to be delivered through FY17 and beyond.

In July 2016, Ingham’s renegotiated the EBA associated with the Bolivar facility, extending

the term of the agreement through to December 2019. The new agreement provides

greater flexibility and allows Ingham’s to continue implementing its labour optimisation

initiatives on site. Ingham’s expects that similar flexibility will be achieved at other sites

through FY17.

Management is

targeting total gross

benefits from

Project Accelerate

of $160 million -

$200 million over

5 years

commencing in

FY16.


21 December 2016 25

Procurement

Historically, Ingham’s operated without any centralised general (non-feed) procurement

function and was reliant on individuals on site or at the head office to negotiate agreements

with over 6,000 suppliers across Australia and New Zealand, covering an addressable

spend of ~A$800m per annum. As part of Project Accelerate, Ingham’s has implemented a

centralised procurement function. Implementation of the first round of procurement

initiatives was completed in FY16. A second round of initiatives is under way.

Fig 40 Procurement case studies

From To

Labels

23 suppliers 2 suppliers

Personal protective equipment

12 suppliers 2 suppliers


Network Rationalisation

During 2015, an end-to-end network strategy was developed. This was informed by

Ingham’s decision to focus production at major plants in South Australia and Queensland

to take advantage of lower production costs and investments in automation.

The network strategy identified the need for investment of capacity in the feedmill, breeder

and hatchery networks and also identified rationalisation opportunities. In December 2015,

a production line was closed at the Cleveland further processing plant in QLD, resulting in

improved utilisation elsewhere in the further processing network.

The company also closed the Cardiff processing plant in NSW in August 2016. As a result

of this closure, processing volumes were increased through more automated and efficient

facilities in South Australia and Queensland, resulting in the following benefits:

Increased efficiencies in the broiler network;

Reduced processing costs;

Overhead cost savings; and

Reduction in overall maintenance costs.

The company will continue to assess the efficiency and strategic importance of all its

facilities to optimise its network and balance capital efficiency, quality and agricultural risk.

Warehousing and logistics

Warehousing and logistics covers the storing and transport of all products after the primary

processing stage of production. The company has identified supply chain savings in the

following areas:

Linehaul costs, including renegotiation with key suppliers across the network;

Transport efficiencies, including increasing pallet heights and improving route

scheduling; and

Warehouse labour management.


21 December 2016 26

Turkey and smallgoods

Ingham’s turkey and smallgoods operations have had a number of challenges in recent

years and recorded a loss in FY15. The key issue related to poor demand planning and

excess capacity in the farming and breeding operations, leading to oversupply of product

that needed to be frozen and sold down at negative margin.

The turkey and smallgoods operations delivered a positive EBITDA result in FY16.

Management expects this to further improve in FY17. Major restructuring projects are now

complete. These involved:

Improving supply and demand planning;

Reducing capacity, excess production and resulting in distressed sales; and

Improving operational efficiency.


21 December 2016 27

Risks Inability to pass on feed costs

Feed costs represent the largest component of Ingham’s cost of goods sold. The prices

and availability of these raw ingredients are influenced by Australian and global demand

and supply factors such as crop production, weather conditions, disease outbreak which

are generally outside of Ingham’s control. There is risk of a lack of recovery in the event of

volatile movements in feed costs that would compress margins.

Ingham’s has a good track record in tightly managing feed costs that have ranged from 23-

25% of total poultry revenues from FY14-FY16. Additionally, Ingham’s has been successful

in recovering feed costs and a number of Ingham’s major customer contracts have

provisions that allow for feed cost rise and fall recovery.

Retail concentration

Retail and QSRs account for 59% and 14% of Australian poultry industry sales,

respectively. Ingham’s Top 5 customers represent 55-60% of sales (FY16a). This

represents a relatively concentrated customer base. There is a risk of volume losses or

margin squeeze as contracts come up for renewal in what is a competitive industry which

could lead to a significant reduction in demand for Ingham’s poultry.

Ingham’s is the largest chicken supplier in Australia and second-largest in New Zealand

and has longstanding relationships with all of its key customers. It would be difficult for

major retail customer to quickly replace the large volume of chicken supplied by Ingham’s.

Risk that Ingham’s cost saves are competed away over time

Our research suggests Coles and Woolworths continue to impose significant pressure on

the consumer supply chain. Poultry is not immune from this but the risk is mitigated by the

importance of poultry in driving volume growth in the overall “fresh” category which in turn

is a broader volume driver. A lack of integrated producers, Ingham’s superior scale and

lack of imports (regulatory driven) are also mitigating factors. In our view, realisation of

ongoing cost savings represents an earnings buffer against further potential price erosion.

Agricultural and disease risk

Australia and New Zealand have strict biosecurity restrictions in place designed to prevent

the introduction of exotic avian diseases into these countries and to manage any outbreak

of exotic avian disease. However, if an outbreak of avian influenza or another avian

disease occurred in Ingham’s flock or in areas where Ingham’s operates, as a result of the

regulatory restrictions designed to manage the outbreak, Ingham’s may be required to

destroy poultry or be restricted from transporting poultry between facilities or products to

customers. If a disease outbreak occurred it would significantly impact Ingham’s production

capacity, supply chain, and operations.

We note there have been limited outbreaks of serious diseases in Australia. The risk is

mitigated by strict quarantine procedures and import restrictions.

Supply chain interruption

Ingham’s business is highly integrated and small changes or variances in upstream areas

of the business such as breeder eggs, hatcheries and broiler farms can have a compound

effect down the chain. A number of different parts of Ingham’s supply chain are provided

by third parties which exposes Ingham’s to potential disruptions which could be outside of

its control.

Ingham’s has a diversified business with operations across NSW, VIC, QLD, SA, WA, TAS

and NZ. The geographic location of the various facilities provides redundancy if there are

any issues at a particular breeding farm, broiler farm or processing plant.

Ingham’s has been

successful in

recovering feed

costs and a number

of major customer

contracts have feed

cost rise and fall

recovery

Realisation of

ongoing cost

savings represents

an earnings buffer

against further

potential price

erosion


21 December 2016 28

Changes to import restrictions

Australia and New Zealand operate strict quarantine regimes that restrict the importation of

most types of poultry meat. Any significant change to import conditions that allow further

access for imported poultry meat could have an impact on Ingham’s markets and revenue.

Australia recently announced a relaxation of poultry importation law for New Zealand

produce, provided certain conditions are met. While we expect little change in fresh

volumes the impact in other categories and implications for market share remain uncertain.

Competition risks

In our view, the Australian and New Zealand poultry industries are competitive markets.

Ingham’s has a large established competitor in Australia of similar size (Baiada). Baiada is

a private company hence there is less visibility into company operations and less pressure

to deliver short term results. Additionally, there are several smaller poultry producers of

sufficient scale to impact regional pricing at certain times. In New Zealand, Ingham’s is the

second-largest poultry producer and Tegel is its main competitor which listed on the NZX

in 2016.

Food Safety Risk

Poultry products are susceptible to contamination or damage throughout the supply chain.

If Ingham’s or a competitor’s products were to become unsafe or were perceived to be

unsafe for any reason this could result in reduced demand for Ingham’s products, which

could have a material adverse effect on Ingham’s financial and operating performance.

Material reduction in supply of parent stock

The volume of chicken and other poultry products produced by Ingham’s depends on the

volume and quality of Ingham’s parent stock which can be impacted by a number of factors

including a failure of a parent stock supplier, poor animal husbandry practices, poor feed

quality or an outbreak of disease. A significant reduction in parent stock would adversely

affect Ingham’s operating performance and profit.

Ingham’s has a diversified base of hatcheries and broiler farms located around Australia

which minimises the impact of disease or other potentially localised issues, in our view. In

2016, Ingham’s renewed its Australian supply contract with Aviagen for the next eight

years. It also has an uncontracted agreement with Cobb-Vantress, its alternate supplier.

Ingham’s suffers reputation or brand damage

Ingham’s reputation with its customers and consumers generally is an important asset of

the business. Ingham’s also sells products under different brands, including the “Ingham’s”

and “Waitoa” brands, which are of significant value to the business.

A material adverse impact to the reputation of Ingham’s or its brands could adversely affect

customer relationships resulting in loss of business and market share and have a material

adverse effect on Ingham’s financial and operating performance.

Material increase in labour costs

The majority of Ingham’s workforce is covered by Enterprise Workplace Agreements which

periodically require renegotiation. The six largest agreements cover around 60% of

Ingham’s employees. A breakdown of relations with the workforce and labour unions could

impact employment conditions and increase labour costs.

Significant changes in consumer trends, demands and preferences

The poultry industry is subject to changing consumer trends, demands and preferences,

including as a result of increased focus on animal welfare, changing tastes and dietary

habits of consumers and general economic conditions. Responding to new market trends

could require significant investment and Ingham’s devotes significant resources to product

development. A failure to effectively identify trends and develop suitable products could

result in lower sales volumes and discounted prices.

We note Ingham’s has been successful in recognising and responding to consumer trends,

with a significant shift occurring in the product mix between 2005 and 2016.

The Australian and

New Zealand poultry

industries are

competitive

markets.


21 December 2016 29

Benefits from transformation projects may be delayed or less than expected

Management has estimated the quantum and timing of Project Accelerate benefits as well

as the capital investment required. Cost overruns, a failure to complete the transformation

program or delays may impact implementation of Project Accelerate and actual cost

savings and efficiencies achieved may differ from forecasts.


21 December 2016 30

Financials Profit and loss account

Set out below are Macquarie forecast consolidated P&L for Ingham’s.

Fig 41 Profit & Loss – Macquarie Estimates

Profit & Loss 2016A 2017E 2018E 2019E

Revenue $m 2308.7 2375.0 2422.0 2467.6 Growth - 2.9% 2.0% 1.9% EBITDA $m 167.5 190.1 208.6 219.5 Depreciation $m 34.4 42.2 50.0 53.6 Amort (non-cash backed) $m 0.0 0.0 0.0 0.0 EBIT $m 133.1 147.9 158.6 165.9 Net interest expense $m 18.0 15.3 14.8 14.5 Pre-Tax Profit $m 115.1 132.6 143.8 151.3 Tax Expense $m 32.0 33.7 37.4 39.3 Net Profit $m 83.1 98.9 106.4 112.0 Outside equity interests $m 0.0 0.0 0.0 0.0 Net Abnormals/Extra. $m 0.0 -53.6 0.0 0.0 Reported Earnings $m 83.1 45.3 106.4 112.0 Adjusted Earnings $m 83.1 98.9 106.4 112.0 EPS (adj/diluted) c 21.9 26.0 28.0 29.5 EPS growth % - 19.1 7.6 5.2

Source: Company data, Macquarie Research, December 2016

Set out below are the pro-forma consolidated P&L and operating metrics for Ingham’s.

Fig 42 Summary P&L and Prospectus Forecast

Pro Forma Historical Proforma Forecast

$ millions FY14 FY15 FY16 FY17

Revenue 2,230.5 2,271.9 2,308.7 2,375.0 Cost of sales -1,851.2 -1,920.8 -1,886.3 -1,916.6 Gross profit 379.3 351.1 422.4 458.4 Other income 0.3 7 3.7 - Distribution expense -139.9 -139.9 -135.7 -144.2 Sales, general and administration expense

-98 -104.1 -123.4 -124.6

Share of net profit of JV 0.4 0.4 0.5 0.5 EBITDA 142.1 114.5 167.5 190.1 Depreciation and amortisation -40.2 -33.3 -34.4 -42.2 EBIT 101.9 81.2 133.1 147.9 Net finance costs -19.9 -19.2 -18 -15.4 Profit before tax 82 62 115.1 132.5 Income tax expense -25 -10.3 -32 -33.7 NPAT 57 51.7 83.1 98.8 Key operating metrics Poultry products volume (kt) 432.7 425.2 444.2 478.3 Poultry products volume growth % on pcp

-1.7% 4.50% 7.7%

Stockfeed volume (kt) 545.6 580.4 561.9 577.6 Stockfeed volume growth % on pcp 6.4% -3.2% 2.8% Key financial metrics Revenue growth % on pcp 1.9% 1.6% 2.9% Gross profit growth % on pcp -7.4% 20.3% 8.5% Gross profit margin 17.0% 15.5% 18.3% 19.3% EBITDA growth % on pcp -19.4% 46.3% 13.5% EBITDA margin 6.4% 5.0% 7.3% 8.0% EBIT growth % on pcp -20.3% 63.9% 11.1% EBIT margin 4.6% 3.6% 5.8% 6.2%

Source: Ingham’s company data, December 2016.


21 December 2016 31

Ingham’s has delivered modest revenue growth from F14-FY16 with solid EBITDA growth

driven by margin expansion. Margins improved into FY16 and are forecast to expand

further into FY17 driven by early benefits arising from Project Accelerate.

We expect given relatively steady consumer demand patterns throughout the year (with

the exception of the Turkey business) that Ingham’s has minimal revenue seasonality. The

accumulation of Project Accelerate initiatives throughout the year and timing of short

weeks is forecast by management to lead to a 2H weighting to earnings. 2H17e NPAT is

forecast by management to represent 52-55% of FY17 forecasts.

Revenues

Revenues are reported net of rebates and trade allowances. As discussed elsewhere the

key drivers of Ingham’s revenues are:

Consumer demand and preferences;

Key customer agreements and contracts; and,

Global grain commodity prices.

Feed costs represent a significant component of production costs and are a key driver of

ultimate selling price for both poultry products and stockfeed. As can be seen in the chart

below, Ingham’s has a good track record of managing feed cost volatility. Changes in feed

costs both up and down have typically been passed on to customers. Feed costs have

ranged from 23-25% of total poultry revenues from FY14-FY16.

Fig 43 Ingham’s long-term trend in feed costs and average selling prices


A number of Ingham’s major contracts have provisions that allow for pass-through of

variations in feed costs. Ingham’s also uses forward contracts to lock in feed prices up to

nine months in advance which reduces the impact of short-term price movements and

provides time to implement pricing adjustments.

Realisation of

Project Accelerate

savings throughout

the year and timing

of short weeks is

forecast by

management to lead

to a 2H weighting to

earnings


21 December 2016 32

Fig 44 Wheat well below long-term average levels, while Soy is broadly in line

Source: FactSet, December 2016 Source: FactSet, December 2016

Given the pass through nature of feed costs and their influence on revenues, we believe

volume growth and gross margin performance are arguably better indicators of

business performance. After some operational disruptions in FY15, Ingham’s delivered

4.5% growth in poultry product volumes in FY16 and forecasts this to accelerate to 7.7% in

FY17.

This above long-term average industry volume growth reflects strong growth in the retail

channel due to changes in pricing strategies adopted by the major retailers for the key

fresh chicken breast and BBQ bird categories.

Operating Expenses

Key categories include:

Cost of Goods Sold (COGS);

Distribution expense;

Selling, General and Administration; and,

Depreciation and amortisation

COGS includes feed costs, direct labour costs, husbandry fees, facilities costs and product

inputs and consumables.

Fig 45 FY16 cost base as a percent of sales


0

5

10

15

20

08-Dec-06 08-Dec-08 08-Dec-10 08-Dec-12 08-Dec-14 08-Dec-16

Soy (US$/bu) Wheat (US$/bu)

US$/bu

0

5

10

15

20

08-Dec-06 08-Dec-08 08-Dec-10 08-Dec-12 08-Dec-14 08-Dec-16

Soy (A$/bu) Wheat (A$/bu)

A$/bu

Feed Costs 27.8%

Labour costs in COGS

15.5%

Husbandry fees, Facility Costs,

Product inputs and consumables

38.4%

Distribution expense

5.9%

SGA5.3%

D & A1.5%

EBIT5.8%

COGS

A number of

Ingham’s major

contracts have

provisions which

allow for pass

through of

variations in feed

costs


21 December 2016 33

Feed costs are the largest component of COGS. They are variable in nature based on

volumes produced and sold. Over the longer term they are influenced by changes in the

feed conversion ratio. As discussed previously, while cost of feed is largely driven by

changes in global feed prices these have historically been largely offset as a percent of

sales by changes in market pricing. Feed costs including cost of feed sold externally

represented 34% of FY16 pro forma COGS.

Labour costs are incurred predominately during primary and further processing. They have

reduced per KG of product produced from FY14-FY16 with investment in automation and

improvements made to increase workforce flexibility and efficiency. Labour costs

represented approximately 19% of pro forma COGS in FY16.

Husbandry fees are paid to contract growers. These costs are variable in nature based on

the number of birds produced. They are impacted by changes in husbandry and farming

practices such as the number of pick-ups, the density of birds and litter control.

Facilities costs include rent, utilities, repairs and cleaning and waste management costs.

There was a step up in facilities cost in FY15 following the sale and leaseback program.

They are predominately fixed in nature although cleaning and waste management are

more variable.

Product inputs and consumables include packaging and labelling costs, other ingredients

and production consumables such as cooking oils. They are variable in nature driven by

production volumes

Distribution expense includes cost of moving products from processing facilities, to

distribution centres and ultimately the end customer. They include freight, labour and

facilities costs. Facility costs include both company-operated sites and third-party logistics

providers.

SGA represents the corporate overhead of the business. They have increased from FY14-

16 with investment in staff capability and IT infrastructure.

Depreciation is charged on a straight-line basis. This is forecast to increase into FY17

given the capital investment program.

Share of net profit of JV includes Ingham’s 50% share of AFB Internationals.

While cost of feed is

largely driven by

changes in global

feed prices these

have historically

been largely offset

as a percent of

sales by changes in

market pricing

New Zealand

operations are

operating at

significantly higher

margins than

Australia

Fig 1 Geographic Segments – Macquarie Estimates

Pro Forma Historical Macquarie Forecast Growth rates

$ millions FY14 FY15 FY16 FY17 FY18 FY19 FY16-FY17 FY17-FY18 FY18-FY19 Revenue Australia 1,892.3 1,914.9 1,955.2 2,003.3 2,043.4 2,084.2 2.5% 2.0% 2.0% New Zealand 338.2 357.0 353.5 371.7 378.6 383.4 5.1% 1.9% 1.3% Total revenue 2,230.5 2,271.9 2,308.7 2,375.0 2,422.0 2,467.6 2.9% 2.0% 1.9% EBITDA Australia 112.4 80.6 132.2 153.1 169.6 179.2 15.8% 10.8% 5.7% New Zealand 29.7 33.9 35.3 37.0 39.0 40.3 4.8% 5.4% 3.2% Total EBITDA 142.1 114.5 167.5 190.1 208.6 219.5 13.5% 9.7% 5.2% EBITDA margin Australia 5.9% 4.2% 6.8% 7.6% 8.3% 8.6% New Zealand 8.8% 9.5% 10.0% 10.0% 10.3% 10.5% Total EBITDA margin 6.4% 5.0% 7.3% 8.0% 8.6% 8.9% EBIT Australia 81.8 52.8 103.5 117.6 127.6 134.2 13.60% 96.00% 13.60% New Zealand 20.1 28.4 29.6 30.3 31.0 31.7 2.40% 4.20% 2.40% Total EBIT 101.9 81.2 133.1 147.9 158.6 165.9 11.10% 63.90% 11.10% EBIT margin Australia 4.3% 2.8% 5.3% 5.9% 6.2% 6.4% New Zealand 5.9% 8.0% 8.4% 8.2% 8.2% 8.3% Total EBIT margin 4.6% 3.6% 5.8% 6.2% 6.5% 6.7%


New Zealand


21 December 2016 34

Segment financials

Segments are provided on a geographic basis. Both segments include contribution from

poultry products and stockfeed. Given no corporate line is provided we expect the New

Zealand operations are charged a royalty to reflect corporate overhead and to take

account of intellectual property that sits in the Australian operations.

Fig 47 Geographic Segments – Macquarie Forecasts

Proforma Historical Macquarie Forecast Growth rates

$ millions FY14(a) FY15(a) FY16(a) FY17(e) FY18(e) FY19(e) FY16-17 FY17-18 FY18-19 Revenue Australia 1,892.3 1,914.9 1,955.2 2,003.3 2,043.4 2,084.2 2.5% 2.0% 2.0% New Zealand 338.2 357.0 353.5 371.7 378.6 383.4 5.1% 1.9% 1.3% Total revenue 2230.5 2271.9 2308.7 2375.0 2422.0 2467.6 2.9% 2.0% 1.9% EBITDA Australia 112.4 80.6 132.2 153.1 169.6 179.2 15.8% 10.8% 5.7% New Zealand 29.7 33.9 35.3 37.0 39.0 40.3 4.8% 5.4% 3.2% Total EBITDA 142.1 114.5 167.5 190.1 208.6 219.5 13.5% 9.7% 5.2% EBITDA margin Australia 5.9% 4.2% 6.8% 7.6% 8.3% 8.6% New Zealand 8.8% 9.5% 10.0% 10.0% 10.3% 10.5% Total EBITDA margin 6.3% 5.0% 7.1% 7.8% 8.5% 8.7% EBIT Australia 81.8 52.8 103.5 117.6 127.6 134.2 13.6% 8.5% 5.1% New Zealand 20.1 28.4 29.6 30.3 31.0 31.7 2.4% 2.3% 2.2% Total EBIT 101.9 81.2 133.1 147.9 158.6 165.9 11.1% 7.2% 4.6% EBIT margin Australia 4.3% 2.8% 5.3% 5.9% 6.2% 6.4% New Zealand 5.9% 8.0% 8.4% 8.2% 8.2% 8.3% Total EBIT margin 4.5% 3.5% 5.6% 6.1% 6.4% 6.6%

Source: Macquarie Research, Ingham’s company data, December 2016

Fig 48 Geographic Segments – Proforma forecast

Pro Forma Historical Pro Forma Forecast

Growth rates

$ millions FY14 FY15 FY16 FY17 FY14-15 FY15-16 FY16-17

Revenue

Australia 1,892.3 1,914.9 1,955.2 2,003.3 1.2% 2.1% 2.5% New Zealand 338.2 357.0 353.5 371.7 5.6% -1.0% 5.1% Total revenue 2,230.5 2,271.9 2,308.7 2,375.0 1.9% 1.6% 2.9% EBITDA Australia 112.4 80.6 132.2 153.1 -28.3% 64.0% 15.8% New Zealand 29.7 33.9 35.3 37.0 14.1% 4.1% 4.8% Total EBITDA 142.1 114.5 167.5 190.1 -19.4% 46.3% 13.5% EBITDA margin Australia 5.9% 4.2% 6.8% 7.6% New Zealand 8.8% 9.5% 10.0% 10.0% Total EBITDA margin 6.4% 5.0% 7.3% 8.0% EBIT Australia 81.8 52.8 103.5 117.6 -35.5% 96.0% 13.6% New Zealand 20.1 28.4 29.6 30.3 41.3% 4.2% 2.4% Total EBIT 101.9 81.2 133.1 147.9 -20.3% 63.9% 11.1% EBIT margin Australia 4.3% 2.8% 5.3% 5.9% New Zealand 5.9% 8.0% 8.4% 8.2% Total EBIT margin 4.6% 3.6% 5.8% 6.2%

Source: Ingham’s Company data, December 2016.


21 December 2016 35

As can be seen in the table above, the New Zealand operations are operating at

significantly higher margins than Australia. We believe this reflects the relatively more

favourable competitive dynamics in the NZ market as well as NZ’s lower labour and rental

costs. Feed costs are generally higher in New Zealand however FCRs are also better.

Fig 49 Revenue breakdown – Proforma forecasts

Pro Forma Historical Pro Forma Forecast

Growth rates

$ millions FY14 FY15 FY16 FY17 FY14-15 FY15-16 FY16-17

Revenue

Poultry products 1,939.8 1,957.6 2,013.7 2,081.2 0.9% 2.9% 3.4% Stockfeed 288.4 312.3 293.1 293.5 8.3% -6.1% 0.1% Sales revenue 2,228.2 2,269.9 2,306.8 2,374.7 1.9% 1.6% 2.9% Other revenue 2.3 2.0 1.9 0.3 -13.0% -5.0% -84.2% Total revenue 2,230.5 2,271.9 2,308.7 2,375.0 1.9% 1.6% 2.9%


The table above provides a breakdown of Ingham’s revenue by product. Stockfeed

comprises only external sales. Margins on external stockfeed revenues are not provided.

Based on industry peers we expect Stockfeed margins would be below Poultry margins.

Within Stockfeed we expect the branded and smaller portioned horse feed to be highest

margin and dairy feed to be the most volatile given less predictable demand patterns due

to milk price and weather influences.

FY15 compared to FY14

Fig 50 FY15 Pro Forma EBIT fell 20% compared to FY14


FY15 results were impacted by a number of internal and external factors that impacted

poultry product volumes and severely impacted gross margins. Key factors impacting FY15

results were:

Genetic supply issues resulting in short supply of breeder stock and quality eggs;

Operational planning issues resulting in processing inefficiencies;

Loss of Turkey volume and poor demand planning; and,

Increased costs associated with the need to upgrade grower facilities to meet RSPCA

standards.

101.9

81.2

17.8

23.9

6.4 6.9

69.6

6.1

0

20

40

60

80

100

120

140

160

FY14 EBIT

Poultry Revenue

Feed Revenue COGS Other Rev/Inc

SG&A D&A FY15 EBIT

$m

FY15 was adversely

impacted by a

number of internal

and external factors

that impacted

poultry product

volumes and

severely impacted

gross margins


21 December 2016 36

Fig 51 Lower poultry volumes and gross margins the key drivers of the earnings decline

Pro Forma Historical

FY14 FY15 Change %

Key operating metrics Poultry volume (kt) 432.7 425.2 -7.5 -1.7% Stockfeed volume (kt) 545.6 580.4 34.8 6.4% Key financial metrics Gross profit margin 17.0% 15.5% -1.5% n/a EBITDA margin 6.4% 5.0% -1.4% n/a EBIT margin 4.6% 3.6% -1.0% n/a


Stockfeed revenues increased 8.3% with increases in both volumes and feed prices.

Volume growth reflected growth in pig feed sales in WA and poultry and dairy feed

volumes in NZ.

Genetic supply issues impacted the Australian poultry operations in particular, which

together with loss of turkey volumes resulted in poultry volumes declining 1.7%.

During FY15 Ingham’s experienced a reduction in hatchability rates causing an increase in

mortality rates and thus costs per bird. The problems arose from genetics quality and

logistics issues which led to short supply of breeder stock and resulted in Ingham’s

needing to purchase eggs from third parties, set lower quality eggs and extend the life of

breeder stock.

In May 2016 Ingham’s established a new genetics supply agreement which has a

framework for testing and quality programs and offers Ingham’s preferential supply.

Loss of a customer and operational planning issues resulted in excess capacity in Turkey

breeding and farming operations which impacted Turkey volumes and margins.

Operational planning issues arising from a commitment to supply material incremental

volumes to a customer resulted in Ingham’s having to take birds from broiler farms earlier

than normal. This had a flow-on effect impacting bird availability in future months impacting

supply volumes and processing costs. Ingham’s have subsequently moved from a state-

based to a national operating model and introduced new national planning processes to

avoid a repeat of these types of issues.

Offsetting the lower volumes, average poultry prices increased as a result of mix shift

towards value enhanced and further products, a key customer adopting RSPCA welfare

standards and higher feed costs.

The adoption of RSPCA welfare standards by a major customer resulted in Ingham’s

increasing investment in facilities and incurring higher husbandry costs. These increased

costs were effectively passed through in the form of higher prices.

Other income included profit on sale of property.

SGA increased investment in capability of corporate functions.

Depreciation and amortisation reduced in FY15 following asset sales and impairments

booked in FY14.

Resolution of FY15 operational issues and early benefits of Project Accelerate drove a recovery in poultry volumes and strong rebound in FY16 gross and EBIT margins. Resolution of FY15 operational issues and early benefits of Project Accelerate drove a recovery in poultry volumes and strong rebound in FY16 gross and EBIT margins.


21 December 2016 37

Fig 52 FY16 EBIT bounced back, up 64% on FY15

Source: Ingham’s company data, Other Income also includes other revenue, December 2016

The resolution of operational issues that impacted FY15 volumes and margins, together

with early benefits of Project Accelerate drove a recovery in poultry volumes and strong

rebound in FY16 gross and EBIT margins.

Fig 53 Strong improvement in poultry volumes and margins

Pro Forma Historical

FY15 FY16 Change %

Key operating metrics Poultry volume (kt) 425.2 444.2 19.0 4.5% Stockfeed volume (kt) 580.4 561.9 -18.5 -3.2% Key financial metrics Gross profit margin 15.5% 18.3% 2.8% n/a EBITDA margin 5.0% 7.3% 2.3% n/a EBIT margin 3.6% 5.8% 2.2% n/a


Stockfeed revenues declined 6.1% driven by a reduction in both volumes and prices.

Lower dairy prices impacted demand from New Zealand dairy producers. Export volumes

also decreased.

Poultry product revenues increased 2.9%. Changes in retail pricing drove increased

demand for BBQ birds and chicken breast and thus volumes in the retail channel but also

resulted in lower average pricing. The increase in bird numbers to meet BBQ bird volumes

also resulted in increased surplus birds that did not meet the targeted weight range. These

birds (too large or small for the BBQ offer) were sold into the wholesale channel, creating a

surplus and depressing prices.

Management expect prices in the wholesale market to improve by end of FY17 as

producers and end users adjust their production and purchasing patterns to account for the

increased volume associated with the low price point BBQ birds.

Operational improvements associated with Project Accelerate initiatives drove a $6.6m

reduction in COGS in the Turkey business as well as other improvements in labour

efficiency, procurement and supply chain savings that positively impacted gross margins.

Distribution costs fell by $4.2m as a result of freight cost reductions, reduction of

distribution centre capacity and outside storage costs.

SGA increased with investment in capability, IT infrastructure and marketing costs.

81.2

133.156.1

34.5 4.2

0.119.2

3.4 19.3

1.1

0

20

40

60

80

100

120

140

160

180

FY15 EBIT

Poultry Revenue

Feed Revenue

COGS Other Rev/Inc

Distribution SG&A JV D&A FY16 EBIT

$m


21 December 2016 38

Fig 54 FY17 EBIT forecast to increase 11% on FY16

Source: Macquarie Research, December 2016.

Key assumptions underpinning FY17 forecasts are:

No new customer wins beyond those in place at end August;

Any contracts expiring assumed to be renewed based on the particular circumstances

of each customer. We note Ingham’s has its second-largest QSR customer contract up

for renewal in FY17;

Sales volumes forecast for each customer in each channel based upon current

volumes. These include an annualisation of the pickup in 2H16 volumes in the retail

channel associated in particular with the success of retailer pricing strategies in breast

meat and BBQ bird categories;

A gradual recovery in wholesale pricing from end-1Q17 back towards levels

experienced before 4Q16;

Oversupply of birds continuing to depress prices in the NZ market;

No significant changes to Stockfeed customer base, volumes in line with pcp and

continued subdued pricing in the NZ dairy feed market;

COGS % reductions reflecting Project Accelerate initiatives. FY17 is the second year

of the project Accelerate Transformation program. This program commenced in May

and is targeting $160-$200m of savings over five years. Approximately half of these

benefits are expected to be realised beyond the forecast period;

Higher depreciation and amortisation driven by an increase in capacity growth capex

and profit improvement capex;

25% effective tax rate reflecting weighting of its Australian and New Zealand effective

rates. The Australian effective rate is less than 30% due to certain items not being

assessable for Australian income tax purposes. Based on other Trans Tasman entities

we expect these largely relate to the royalty charged to the NZ operations; and,

Fx rate of 1AUD=1.045 NZD. This would result in NZ revenues receiving a $15.3m

translation benefit reflecting a stronger NZD.

133.1147.9

67.5 0.4 30.3

5.38.5

1.2 7.8

0

50

100

150

200

250

FY16 EBIT

Poultry Revenue

Feed Revenue

COGS OtherRev/Inc

Distribution SG&A D&A FY17 EBIT

$m


21 December 2016 39

Fig 55 Strong Poultry volume growth forecast to continue in FY17

Pro Forma

Historical Forecast FY16 FY17 Change %

52 weeks 52 weeks

Key operating metrics Poultry volume (kt) 444.2 478.3 34.1 7.7% Stockfeed volume (kt) 561.9 577.6 15.7 2.8% Key financial metrics Gross profit margin 18.3% 19.3% 1.0% n/a EBITDA margin 7.3% 8.0% 0.7% n/a EBIT margin 5.8% 6.2% 0.4% n/a

Source: Macquarie Research, December 2016.

Poultry products revenues are forecast by management to increase by 3.4%. This is

underpinned by a 7.7% increase in volumes. The volume growth forecast reflects the full

year impact of retailer pricing strategies implemented in 2H16, increase in other product

volumes (unrendered) offsetting lower volumes through the wholesale channel.

The higher volume growth is partially offset by lower pricing due to mix, NZ market supply

conditions and lower average prices in the wholesale channel despite the recovery

forecast throughout the year.

COGS are forecast by management to reduce by 100bp. This includes identified and

planned procurement savings and a reduction in labour costs with the annualisation of

FY16 project Accelerate initiatives and further benefits from FY17 programs. These offset

EBA changes, CPI and contracted husbandry price increases.

Distribution expense is forecast to increase with higher production volumes and increases

in labour and other fixed costs.

SGA is forecast to increase with higher wage costs, increased IT expenditure including a

technology refresh program across its core technologies and increased marketing. Partially

offset by reduction in consultancy fees.

Margin Analysis

The table below compares Ingham’s last actual and FY17 forecast EBITDA margins and

return on assets to Tegel and International poultry peers.

Fig 56 EBITDA margins of peer group


Margins and are impacted by product mix, differences in market structures, subsidisation

and level of import competition.

7.3%8.0%

12.9% 13.4%

8.2% 8.5%7.3% 7.4%

14.7%

12.2%

14.7%

12.4%

7.2%

9.8%

0%

2%

4%

6%

8%

10%

12%

14%

16%

FY16a FY17e FY16a FY17e FY15a FY16e FY16a FY17e FY15a FY16e FY15a FY16e FY16a FY17e


LDC SA Pilgrim's Pride

SandersonFarms

Tyson Foods^

EBITDA margin

Poultry products

revenues are

forecast by

management to

increase by 3.4%.

This is underpinned

by a 7.7% increase

in volumes.


21 December 2016 40

Fig 57 ROA (EBIT / Ave Assets)

Source: Macquarie Research, Factset,, December 2016

Our research suggests that USA producers are currently generating higher than long run

average margins and returns benefiting from the lower grain price.

Given the similarities in Australian and New Zealand markets and direct competition in

New Zealand, we view Tegel as the closest and most useful comparison from a revenue

and margin perspective.

Fig 58 Ingham’s comparison to Tegel

Ingham’s* Tegel

Group NZ Segment A$ NZ Segment NZ$ NZ$

FY17e Revenue $m 2375 371.7 388.4 625 FY17 Revenue growth* 2.9% 5.1% 1% 7.6% FY14-17e revenue CAGR 2.1% 3.2% 6.5% FY17e EBITDA $m 190.1 37 38.7 84 FY17 EBITDA growth 13.5% 7.6% 12.0% FY14-17e EBITDA CAGR 10.2% 17.3% FY17e EBITDA % 8.0% 10.0% 13.4% FY16 pro forma Net debt $418m $118m Gearing (FY16 Net debt /EBITDA) 2.5x 1.6x Gearing (FY16 Net debt /FY17e EBITDA)

2.2x 1.4x

FY16 ROA 15.3% 8.5% FY16 ROTA 15.3% 16.5%

Source: Macquarie Research, Tegel company data based on PFI forecasts, December 2016

All comparisons done on a 52-week basis

Tegel’s FY14-FY16 revenue growth has been ahead of Ingham’s at both the group and

NZ segment level. In our view, this appears to reflect relative growth rates in the NZ

market, currency translation and export growth. Looking at FY17 forecasts in NZ$,

Ingham’s management are forecasting ~1% revenue growth versus Tegel’s PDS which is

assuming 9% revenue growth. One of the key differences would appear to be around

pricing with Tegel assuming domestic price/mix to increase by 0.9% versus Ingham

commentary which suggests forecasts are predicated on price deflation in the NZ market

due to market supply conditions.

At the group level Ingham’s margins are ~560-570bp below Tegel’s. The key

difference in our view relates to the relative contribution from higher margin New Zealand

market. Tegel generated 82.5% of FY16 revenues from the NZ domestic market, with

17.5% of sales export. NZ represented 15% of Ingham’s FY16 sales.

15.3%

8.7%

16.5%

7.5% 8.5%10.3%

37.0%34.1%

0%

5%

10%

15%

20%

25%

30%

35%

40%

FY16a FY16a FY16a FY15a FY16a FY16a FY15a FY15a

Ingham's Tegel Tegel (ROTA)

ScandiStandard

LDC SA TysonFoods

Pilgrim'sPride

Sanderson Farms

At the group level,

Ingham’s margins

are ~560-570bp

below Tegel’s


21 December 2016 41

Our research suggests that New Zealand (NZ) has a more favourable industry structure

with the top two producers controlling a greater market share. Chicken producers are not

alone in generating higher margins from New Zealand relative to Australia. The retail end

market is generally more conducive for suppliers. While feed costs are typically higher, NZ

operations also benefit from lower labour rates, lower rental costs and higher FCR’s.

The table below provides a breakdown of the margin contribution. It shows Tegel had

higher gross margins and operating costs as a percent of sales in FY16. This is impacted

by differences in cost allocation between GM% and Distribution/SGA.

Fig 59 Ingham’s vs Tegel’s margin metrics

FY16 operating results (% of sales) Ingham’s Tegel*

Cost of Sales 81.7% 72.5% Gross Profit margin 18.3% 27.5% Distribution 6.1% 8.5% SG&A 4.5% 8.2% Distribution + SG&A 10.6% 16.7% EBITDA margin 7.3% 12.9% D&A 1.5% 2.8% EBIT margin 5.8% 10.1%

Source: Ingham’s company data, *Tegel company data from PFI, December 2016

The table below highlights that Ingham’s margins within the NZ segment remain below

Tegel’s. Corporate allocation and royalty charges muddy this analysis. Tegel’s margins on

a like for like basis logically benefit from greater scale given their market share and their

lower distribution costs with production undertaken on both the North and South Island.

Tegel has also already undergone a number of capital and operational initiatives under its

former private equity owners.

Fig 60 Ingham’s NZ segment compared to Tegel

FY16 (% of sales) Ingham’s (NZ segment) Tegel

EBITDA margin 10.0% 12.9% D&A 1.6% 2.8% EBIT margin 8.4% 10.1%

Source: Ingham’s company data, Tegel company data from PFI, December 2016

While Ingham’s NZ margins as reported are lower than Tegel’s, we expect it is the

Australian operations that have the most potential for margin improvement as a result of

Project Accelerate initiatives.

Tegel’s returns are diluted by its large intangibles balance versus Ingham’s with no

intangibles. Tegel’s balance sheet had $335m of intangible assets at end FY16. Tegel’s

return on tangible assets was 16.5% in FY16 versus Ingham’s at 15.3%. Ingham’s has a

higher asset turn (2.4x FY16) which helps to offset the lower margins relative to Tegel

(1.6x excluding intangibles).

We note that both Tegel and Ingham’s have undertaken sale and leaseback transactions in

recent years. Tegel’s Year one operating lease commitments are NZ$22.5m which

represents 27% of FY17e EBITDA. Ingham’s Year One operating lease commitments are

$72m which represents 38% of EBITDA. In isolation, this operating lease differential (as

a % of EBITDA) accounts for 90bp of Ingham’s lower EBITDA margin vs Tegel which

is a relatively small part of >500bp overall margin difference.


21 December 2016 42

Balance sheet

The pro forma and statutory balance sheets are detailed below.

Fig 61 Pro forma balance sheet as at 25- June 16

Statutory Impact of the Offer Pro Forma

$ millions 25 June 2016 and refinancing 25 June 2016

Current assets Cash and cash equivalents 75.3 (24.0) 51.3 Trade and other receivables 221.3 - 221.3 Biological assets 115.3 - 115.3 Inventories 159.6 - 159.6 Current tax assets - 3.4 3.4 Assets classified as held for sale 1.2 - 1.2 Total current assets 572.7 (20.6) 552.1 Non-current assets Investments accounted for using the equity method

1.6 - 1.6

Property, plant and equipment 372.0 - 372.0 Deferred tax assets - 0.7 0.7 Total non-current assets 373.6 0.7 374.3 Total assets 946.3 (19.9) 926.4 Current liabilities Trade and other payables (239.7) 4.5 (235.2) Borrowings (21.2) 21.2 - Current tax liabilities (5.0) 5.0 - Provisions (93.3) - (93.3) Derivative financial instruments (7.9) 5.7 (2.2) Total current liabilities (367.1) 36.4 (330.7) Non-current liabilities Trade and other payables (2.7) - (2.7) Borrowings (520.3) 102.1 (418.2) Provisions (44.1) - (44.1) Derivative financial instruments (6.5) 6.5 - Deferred tax liabilities (6.8) 6.8 - Total non-current liabilities (580.4) 115.4 (465.0) Total liabilities (947.5) 151.8 (795.7) Net (liabilities)/assets (1.2) 131.9 130.7 Equity Contributed equity 107.8 164.5 272.3 Reserves 33.4 13.0 46.4 (Accumulated losses)/Retained earnings (142.4) (45.6) (188.0) (Deficiency of equity)/Total equity (1.2) 131.9 130.7

Source: Ingham’s Company data, December 2016

Ingham’s asset base primarily consists of working capital and PPE. There are no intangible

assets. Ingham’s has a deficit in shareholder funds as a result of previous restructuring

and sale and leaseback activities. This included the sale of a portfolio of Ingham’s land and

buildings for $540m in FY15.

Ingham’s had pro forma net working capital investment of $254.7m. Working capital

includes $115.3m of biological assets which are recognised at cost less accumulated

depreciation. They are reclassified to inventory once processed.

Property plant and equipment totalled $372.0m. This includes 33 freehold properties. FY15

and FY16 other income included revenues from property asset sales.

Ingham’s asset base

primarily consists of

working capital and

PPE. There are no

intangible assets.


21 December 2016 43

Fig 62 Indebtedness

Statutory (pre-Completion)

Pro Forma (post

Completion)

Estimated net indebtedness

immediately prior to

Completion of the Offer

Estimated net indebtedness

immediately following

Completion of the Offer

$ millions 25 June 2016 25 June 2016 29 October

2016 11 November

2016 Current borrowings Bank loan 21.2 - 41.7 30.0 Current borrowings 21.2 - 41.7 30.0 Non-current borrowings Bankloan 480.3 418.2 480.3 418.2 Promissory note 40.0 - 41.3 - Non-current borrowings 520.3 418.2 521.6 418.2 Total borrowings 541.5 418.2 563.3 448.2 Cash and cash equivalents (75.3) (51.3) (50.3) (30.0) Net Debt 466.2 366.9 513.0 418.2 Net Debt/FY16 proforma EBITDA 2.2x 2.5x Net Debt/FY17 proforma EBITDA 1.9x 2.2x Pro forma FY16 EBITDA/ FY16 net finance costs 9.3x 9.3x Pro forma FY17 EBITDA/ FY17 net finance costs 12.3x 12.3x


In our view, Ingham’s balance sheet will be in a solid position from a gearing perspective.

Net debt in November 2016 is forecast to be $418.2m. The difference between gearing

levels from end of June 2016 to November 2016 are the cash outflows relating to the

Cardiff site closure in August 2016 ($15.0m), redundancy payments associated with head

office relocation ($10.5m) and short term incentive payments ($5.0m) partially offset by

operating cashflows. We note that end of September is generally the peak inventory period

for Ingham’s due to build-up of inventories of turkey for the Christmas trading period.

Net debt to pro forma EBITDA is 2.5x FY16 pro forma EBITDA, reducing to 2.2x FY17

pro forma EBITDA. Given the strong free cashflows forecast by management, we expect

net debt to FY17 EBITDA to reduce to around 2.0x by the end of FY17.

At end of FY16 Ingham’s had $72.4m of operating lease commitments for the year ahead.

Based on FY17 pro forma net interest expense we calculate a FY17 pro forma EBITDA

fixed charges cover of ~3.0x.

Banking facilities

Ingham’s will have access to syndicated financing facilities comprising:

$250m 3 year term loan facility A;

$170m 4 year term loan facility B; and,

$125m 3 year multi-option revolving working capital facility C.

The facilities are variable rate. Ingham’s policy is to maintain a significant portion of

borrowings at fixed rates using interest rate swaps.

At completion Ingham’s will have undrawn funds of $43m in the revolving facilities to fund

working capital, capex and other general corporate purposes. This is after $51m of

contingent liabilities as at 25 June 2016 which relates to bank guarantees to third parties

for supply of services to support normal business activities. The group self-insures for

workers’ comp.

The FY17 interest cost of $16.3m assumes facilities A and B are full drawn for the year

and Facility C is drawn to $30m at the start of the year with any cash equivalents above

$40m applied to reduce Facility C over the course of FY17. The net finance cost implies a

net interest rate (base rate plus margin) of 3.44% applied to the $420m drawn amount plus

the forecast drawdown on facility C.

Net debt to pro

forma EBITDA is

2.5x FY16 pro forma

EBITDA, reducing to

2.2x FY17 pro forma

EBITDA

Given the strong

free cashflows

forecast by

management, we

expect net debt to

FY17 EBITDA to

reduce to around

2.0x by the end of

FY17

Net debt to pro

forma EBITDA is

2.5x FY16 pro forma

EBITDA, reducing to

2.2x FY17 pro forma

EBITDA.

Given the strong

free cashflows

forecast by

management, we

expect net debt to

FY17 EBITDA to

reduce to around

2.0x by the end of

FY17.


21 December 2016 44

Covenants will be tested semi-annually. They include:

EBITDA net interest expense cover of not less than 3x.

Net debt to EBITDA not greater than 3.5x.

Fig 63 Gearing comparison (last reported net debt/last reported EBITDA)

Source: *Ingham’s company data (FY16), Factset, December 2016

The chart above compares Ingham’s gearing levels to a range of other ASX-listed food and

staple producers and International poultry peers. Ingham’s FY16 pro forma gearing levels

(2.5x) are at the upper end of the peer group although with its strong cash generation, we

forecast gearing to reduce more in line by end FY17 (2.0x).

Cashflow

Set out below is a summary of Ingham’s historical pro forma and pro forma and statutory

forecast cashflows.

Fig 64 Pro forma historical and forecast cash flow

Pro Forma Historical Pro Forma

Forecast $ millions FY14 FY15 FY16 FY17

52 weeks 52 weeks 52 weeks 52 weeks

EBITDA 142.1 114.5 167.5 190.1 Non-cash items 0.4 -6.0 -0.3 1.0 Changes in Adjusted Working Capital

-3.9 26.8 -11 2.9

Changes in provisions 1.0 4.1 - -2.0 Adjusted Operating Cash Flow 139.6 139.4 156.2 192 Capital Expenditure -37.2 -44.4 -76.8 -85 Proceeds from disposal of property, plant and equipment

2.2 2.0 0.1 -

Proceeds from sale of assets held for sale

- 16.9 6.5 -

Adjusted Free Cash Flow 104.6 113.9 86.0 107 Tax paid -7.5 Interest and finance charges paid -15.4 Net cash flow (before dividends) 84.1


0.0x

0.5x

1.0x

1.5x

2.0x

2.5x

3.0x

3.5x

4.0x

Ingham's Limited*

Tegel Group Holdings

Costa Group Holdings

Asaleo Care

Tassal Group

Huon Aquaculture

Group

Tyson Foods

Pilgrim's Pride

Scandi Standard


21 December 2016 45

Ingham’s had net working capital investment of $254.7m at end FY16. In our view, it is

relatively working capital intensive given the duration of the production process.

Ingham’s net working capital investment reduced FY14-FY16 with improvements in

inventory management and negotiation of extended supplier terms.

As can be seen in the chart below, Ingham’s appears to be broadly in line with peer group

from a net working capital efficiency perspective. Differences in market structures and

supply chain do muddy this analysis.

Fig 65 Net working capital analysis


In our view, Ingham’s generates both strong operating and free cashflow conversion.

Fig 66 Strong cash conversion


We expect the strong cashflows to support investment in the underlying asset base as well

as payment of dividends.

-100

-50

0

50

100

150


LDC SA TysonFoods

Pilgrim'sPride

SandersonFarms

Receivables Inventory Payables Net Working Capital Average NWC

Days working capital

98.2%

121.7%

93.3%101.0%

73.6%

99.5%

51.3%56.3%

0%

20%

40%

60%

80%

100%

120%

140%

FY14a FY15 FY16a FY17e

%

Adjusted EBITDA operating cashflow conversion Adjusted free cashflow conversion

Ingham’s appears

broadly in line with

peer group from a

net working capital

efficiency

perspective.

Ingham’s appears

broadly in line with

peer group from a

net working capital

efficiency

perspective.


21 December 2016 46

Fig 67 Pro forma capex

Source: Ingham’s company data , December 2016

The use of third-party growers and operators of upstream breeder farms reduces the

overall capital intensity of the production process from Ingham’s perspective. These parties

invest in their own shed infrastructure typically on the back of multiyear supply contracts.

Ingham’s has invested significant capex to increase capacity and drive production

efficiencies. Capacity growth capex from FY14-FY16 mainly related to expansion of

breeder farms and hatcheries. Profit improvement capex has largely been driven by

Project Accelerate initiatives.

In FY15 Ingham’s invested in expansion of its hatchery network, primary processing

equipment and new distribution centre fit-out.

FY16 spend included $14.7m to increase capacity and improve the breeder farm network,

$5.5m to expand primary processing capacity and a $5.0m investment in the hatchery

network.

FY17 forecast expenditure includes $12.6m investment in the breeder farm network

and a $6m investment in the hatchery network to increase capacity and improve

efficiency.

Profit improvement capex largely relates to investment in automation systems and

equipment. FY17 forecasts include a $19.1m investment in automation systems and

$11.0m investment in feed mill operations.

Stay in business or maintenance capex increased into FY16 and is forecast to remain at

around those levels into FY17 primarily due to upgrades and replacement of IT equipment,

software and telecommunication systems.

22.1 20.632.6 31.3

6.115.3

32.123.6

9

8.5

12.123.6

0

10

20

30

40

50

60

70

80

90

FY14a FY15 FY16a FY17e

$m

Maintenance Capacity growth Profit improvement

37.244.4

76.8 85.0

Capacity growth

capex from FY14-

FY16 mainly related

to expansion of

breeder farms and

hatcheries.


21 December 2016 47

Fig 68 Capex/sales for peer group


Ingham’s capex/sales has increased from 1.7% of revenues in FY14 to 3.6% forecast in

FY17 given the Project Accelerate investments. This is broadly in line with international

peer group. It is below Tegel’s recent investment on a percent of revenue basis (4.5% in

FY16) but at $77m versus $26.2m in FY16 is well above in absolute dollar terms.

Dividend policy

The Directors intend to pay out 65-70% of Ingham’s NPAT commencing in FY17, with

intention to pay out between 65-70% of Ingham’s pro forma NPAT in FY17. The first

dividend to shareholders will be determined in respect of period from completion to 24

December 2016 and will become payable in March 2017. Ingham’s expects to be in a

position to pay franked dividends.

Sensitivity Analysis

We note the limitations of the sensitivity analysis presented in the table below in that it

assumes all other variables remain unchanged.

Fig 69 Sensitivity analysis

FY17 pro forma NPAT Assumption Increase / Decrease Impact ($ million)

Average selling price +/- 1% +16.7 / (16.7) Sales volume +/- 1% +4.6 / (4.6) Feed cost +/- 5% (2.4) / +2.4 Interest rates +/- 50bps (1.1) / +1.1 EBITDA margin +/- 0.1ppt 1.7 / (1.7) AUD/NZD translation rate +/- 5 cents (2.3) / 2.5


Pro forma adjustments to the Adjusted Statutory Historical Results and Statutory Forecast

Results

The adjusted statutory historical results have had the depreciation and amortisation

removed from COGS and other certain line items to calculate EBITDA and EBIT.

The table below provides a reconciliation of revenue, EBITDA and NPAT from the Adjusted

Statutory Results and Forecast to the Pro Forma Results and Forecasts.

Key adjustments include the removal of:

53rd

week contribution in FY14 and FY17;

site closure and transformation costs in FY16;

sale and leaseback impacts on FY14 and FY15 results

0%

2%

4%

6%

8%

10%

12%

14%

1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Tegel Tyson Sandersons Pilgrim's Hormel LDC SA

The Directors intend

to pay out 65-70% of

Ingham’s NPAT

The Directors intend

to pay out 65-70% of

Ingham’s NPAT


21 December 2016 48

Fig 70 Pro forma adjustments to the Adjusted Statutory Results and Forecasts

Historical Forecast

$ millions FY14 FY15 FY16 FY17 53 weeks 52 weeks 52 weeks 53 weeks

Adjusted statutory revenue 2,277.4 2,273.8 2,308.7 2,419.3 Discontinued piggery business -5.7 -1.9 - - Removal of 53rd week -41.2 - - -44.3 Pro forma revenue 2,230.5 2,271.9 2,308.7 2,375.0 Adjusted statutory EBITDA 126.7 301.7 106.6 144.1 Discontinued piggery business 2.8 0.6 - - Removal of 53rd week -2.4 - - -4.3 Removal of site closure costs - 1.7 14.9 3.1 Removal of transformation costs - 13.1 19.3 3.3 Removal of relocation of head office costs

- - 25.4 -

Removal of advisory fee 3.0 3.1 3.1 1.0 Removal of TPG Entities acquisition costs

58.3 - - -

Removal of profit on sale and leaseback

- -188.9 - -

Inclusion of rental costs on sale and leaseback

-44.1 -14.6 - -

Removal of costs of the Offer - - 0.4 30.7 Inclusion of transaction costs -2.2 -2.2 -2.2 -0.6 Removal of existing LTI scheme - - - 4.5 Removal of transaction bonuses - - - 8.6 Inclusion of new LTI scheme - - - -0.3 Pro forma EBITDA 142.1 114.5 167.5 190.1 Adjusted statutory NPAT 0.1 146.9 25.2 45.3 Discontinued piggery business 2.0 0.4 - - Removal of 53rd week -0.8 - - -2.3 Removal of site closure costs - 1.2 10.5 2.2 Removal of transformation costs - 9.2 13.5 2.3 Removal of relocation of head office costs

- - 17.8 -

Removal of advisory fee 2.2 2.2 2.2 0.7 Removal of TPG Entities acquisition costs

55.7 - - -

Removal of profit on sale and leaseback

- -132.3 - -

Inclusion of rental costs on sale and leaseback

-27.9 -10.2 - -

Removal of costs of the Offer - - 0.3 21.6 Inclusion of corp. company costs -1.6 -1.6 -1.6 -0.5 Removal of existing LTI scheme - - - 4.5 Removal of transaction bonuses - - - 6.0 Inclusion of new LTI scheme - - -0.3 Removal of write-off of capitalised debt costs

- - - 5.0

Removal of debt break costs - - - 10.3 Change in capital structure 27.3 35.9 15.2 4.0 Pro forma NPAT 57.0 51.7 83.1 98.8



21 December 2016 49

Company Overview

Fig 71 Operations overview



21 December 2016 50

Ingham’s is the largest vertically integrated chicken and turkey producer across Australia

and New Zealand, with sales of A$2.3bn in FY16 and approximately 8,200 employees.

Ingham’s holds the #1 and #2 positions amongst chicken producers in Australia and New

Zealand with 40% and 34% estimated chicken market share, respectively, and is a key

supplier to major retailers, QSR operators, foodservice distributors and wholesalers in both

of those markets.

In addition to chicken, Ingham’s holds strong market positions across Australian turkey, the

Australian stockfeed and the New Zealand dairy feed industries.

From FY15 to FY16, Ingham’s pro forma EBITDA grew by 46% to $167.5m. This reflected

a low FY15 base due to a decline in gross profit. This reflected a combination of factors,

including loss a genetics supply issue, loss of a customer and operational planning issues.

Ingham’s forecasts that pro forma EBITDA will increase by 13.5% to $190.1m in FY2017.

Fig 72 Poultry accounted for 87% of FY16a revenues Fig 73 Australia the largest end market with 83% of FY16a revenues


Poultry

Fig 74 Ingham’s produced over 440kt of poultry in FY16…

Fig 75 …which is equivalent to 190m birds


Poultry, A$2,013.7m

, 87%

Stockfeed, A$293.1m,

13%

Other , A$1.9m, 0%

FY16aRevenue:

A$2,308.7m

Australia, 83%

NZ, 15%

Exports, 2%

FY16aRevenue:

A$2,308.7m

Australia, ~374kt,

84%

NZ, ~70kt, 16%

FY16aVolume:444.2kt

Australia, ~160m,

84%

NZ, ~30m, 16%

FY16aVolume:

~190m birds

Ingham’s is the largest vertically integrated chicken and turkey producer across Australia and New Zealand Ingham’s is the largest vertically integrated chicken and turkey producer across Australia and New Zealand


21 December 2016 51

Product overview

The table below provides a summary of the key poultry product categories as well as the

Stockfeed business.

Fig 76 Summary of Ingham’s product categories


Ingham’s continues to innovate its product portfolio in response to the following key

consumer trends that have driven recent growth in poultry consumption:

consumers’ desire for foods that improve their health and well-being;

demand for convenience; and

increasing interest in animal welfare and food provenance.

The growth of free range, value-enhanced and further processed products, whose share of

Ingham’s poultry revenue was increased from 50% in FY05 to 62% in FY16. Ingham’s

stated that this illustrates how consumer trends have driven recent changes in

consumption patterns.


21 December 2016 52

Fig 77 Ingham’s chicken net sales by category: Free range and value enhanced a bigger part of the mix


Ingham’s management believes that it is well positioned to benefit from these consumer

trends through the following:

a shift to higher animal welfare standards such as free-range and RSPCA-approved

chickens;

value-enhanced product production at its primary plants; and

producing partially cooked and fully cooked products at its further processing plants.

Ingham’s has responded to changing consumer preferences by introducing a range of new

products including free range, pre-packaged, further processed and celebrity chef-

endorsed products.

Ingham’s ability to respond to these changing consumer preferences, supported by its

recent investment in the capacity and capability of its network and its people, has

supported Ingham’s growth and position as a leading producer across the Australian and

New Zealand poultry markets in recent years.

Fig 78 Premium pricing for Free Range & Organic chicken breast over primary processed breast

Fig 79 Further Processed products attract a varying premium over breast fillet depending on product





Free range, 1%Free range, 12%

Value enhanced, 15% Value enhanced, 22%



0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

FY05a FY16a

$9.0

65%

250%

$0

$5

$10

$15

$20

$25

$30

Primary Processed Free Range

Organic

$/kg

$9.0

40%

120%

190%

$0

$5

$10

$15

$20

$25

$30

Primary Processed Breast

Ingham'sBreast Nuggets

Ingham's Breast Tenders

Ingham's Chicken Kiev

$/kg

Ingham’s believes it

is well positioned to

benefit from a shift

to higher animal

welfare standards

and convenience.


21 December 2016 53

However, we believe it is important to view demand growth and preference changes (as

well as any market share shifts in the context of “balancing the bird”. For example, the

recent spike in demand for BBQ birds through the retail channel (driven by retail price

discounting), is clearly favourable for chicken suppliers such as Ingham’s from a demand

perspective.

However, these birds are of a specific weight range, and Ingham’s needs to be able to sell

all other chicken (that falls outside of the desired size/weight) without significant

discounting or wastage. Without securing demand (and adequate operational planning) for

this “fall out”, chicken suppliers face the prospect a substantially eroding any benefit from

the initial demand spike.

As detailed in subsequent sections, the industry’s efforts to “balance the bird” following an

increase in the supply of BBQ birds resulted in wholesale market price pressure in the

fourth quarter for FY16.

Fig 80 ‘Balancing the bird’: Products and markets are required to utilise all the birds produced


It is worth noting that, chicken suppliers look to sell all of the bird (not just every bird), in

order to optimise profitability.

Fig 81 ‘Balancing the bird’: It is important to sell all of the bird

Source: Macquarie Research presentation of Cobb company data (Cobb 500), December 2016

0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0Target

Weight

FalloutFallout

Retail

BBQ birds

Frames (bones)19%

Raws (ex frames)25%

Wings8%

Drumstick9%

Thigh15%

Breast25%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

<Ingredients Dressed weight >

It is important to view demand growth and preference changes (as well as any market share shifts) in the context of “balancing the bird”. It is important to view demand growth and preference changes (as well as any market share shifts) in the context of “balancing the bird”.


21 December 2016 54

Supply chain and production process

Ingham’s Poultry operation is a large scale vertically integrated business spanning the

entire value chain, including 1 quarantine facility, 10 feedmills, 74 breeder farms,11

hatcheries, 225 broiler farms (predominantly contracted) as well as 7 primary processing

plants, 7 further processing plants, 1 protein conversion plant, and 9 distribution centres

across Australia and New Zealand. Ingham’s also operates a Stockfeed business, which

holds strong market positions in the Australian stockfeed and New Zealand dairy feed

industries.

Fig 82 Complex supply chain requires integrated planning and optimisation

Note: Time frames are indicative and relate to chicken. (1) Great Grand Parents; (2) Grand Parents; (3) The majority of Broiler farms are operated by contracted third party growers. Source: Ingham’s company data, December 2016

Fig 83 Ingham’s network

Facilities / farms1 Australia NZ Total

Quarantine 1 0 1

Feedmill 8 2 10

Breeding farms 60 14 74

Hatchery 10 1 11

Broiler farms

2,3 188 37 225

Primary processing3 6 1 7

Further processing 5 2 7

Distribution centre 7 2 9

Protein conversion plant 1 0 1

Total 286 59 345

1. Includes Turkey and 4 contracted NZ breeder farms. Does not account for breeder and hatchery expansion projects approved or underway. Excludes Leppington R&D facility, non-operational sites and offices. Farming areas shown for illustrative purposes only. 2. Includes contracted growers and company owned farms 3. Excludes Cardiff primary processing plant and associated contracted growers


Ingham’s owns all its operating plant and equipment, while its land and buildings are

managed either through leasehold or freehold arrangements. Ingham’s operate 79

leasehold properties, the majority of which are secured with 20 year terms with options to

extend (five further terms, with each term for 10 years). The three largest landlords hold

53% of all leases.

Ingham’s Poultry

operation is a large

scale vertically

integrated business

spanning the entire

value chain

Ingham’s Poultry

operation is a large

scale vertically

integrated business

spanning the entire

value chain

Ingham’s owns all its operating plant and equipment, while its land and buildings are managed either through leasehold or freehold arrangements. Ingham’s owns all its operating plant and equipment, while its land and buildings are managed either through


21 December 2016 55

Lease terms for the majority of Ingham’s breeder farms, hatcheries and feedmills are

subject to annual CPI linked indexation (including on commencement of options), capped

at 2.5% p.a. Processing plants are subject to annual CPI linked indexation, capped at 2.5-

3.0% p.a. for Australian processing plants, and are reviewed to market on

commencement of each option (market reviews are subject to a cap and collar of 110%

and 90% respectively for Australian processing plants).

Ingham’s also own 33 freehold properties, including the Bungonia quarantine station.

Ingham’s national scale and vertically integrated operations provide a number of benefits,

such as:

flexibility and greater resilience to respond to external market pressures;

ability to shift production between Australian states to meet changes in customer

demands;

maintaining quality assurance, while optimising cost efficiencies across the whole

value chain; and

ability to reduce operating or agricultural risks through geographic diversification.

Genetics overview and supply arrangements

The poultry production process begins with the importation of Great Grand Parent (“GGP”)

eggs by two global leaders in poultry genetics, Aviagen and Cobb-Vantress, Inc. Ingham’s

has a long-term supply agreement for its supply of parent stock.

In May 2016, Ingham’s renewed its Australian supply contract with Aviagen, its main

genetics supplier, and is uncontracted with Cobb-Vantress, its alternate supplier.

Poultry genetic suppliers develop birds capable of delivering best in class performance and

undertake breeding programs that support ongoing improvement in the feed conversion

ratio, robust breeder performance and other key characteristics. The long term cycle of

research and development provides multi-year visibility of improvements.

Ingham’s Bungonia quarantine facility in New South Wales is owned by Ingham’s and

managed by Aviagen. This facility is one of only two privately owned poultry quarantine

facilities in Australia.

Breeders

Fig 84 Breeder quality is critical to performance


Day Old Parents (“DOP”) are transferred from Ingham’s genetics suppliers to Ingham’s

parent breeder farms where they are reared and mated to produce eggs for the final

generation of meat chickens known as “broilers”.

A4 Paper Guide Line

A4 Paper Guide Line

Hatchability

Feed conversion ratio

Bird health

Day old parentquality and genetics

Biosecurity management

Feed quality

Optimal environmental conditions

Best-practice husbandry

Liveability

The poultry

production process

begins with the

importation of GGP

eggs by two global

leaders in poultry

genetics, Aviagen

and Cobb-Vantress,

Inc.

The poultry

production process

begins with the

importation of GGP

eggs by two global

leaders in poultry

genetics, Aviagen

and Cobb-Vantress,

Inc.

Ingham’s operates 74

chicken and turkey

breeder farms across

Australia and New

Zealand.


chicken and turkey

breeder farms across

Australia and New


21 December 2016 56

Parent breeder farms utilise technology and automation to minimise performance variation

spanning areas such as temperature, humidity, lighting, feeding, watering and egg

collection. Control and effective management of the breeder network is critical to

optimising business performance.

Ingham’s operates 74 chicken and turkey breeder farms across Australia and New

Zealand. Breeder operations are typically conducted in two stages: DOP are placed on a

rearing farm for ~22 weeks before being transferred to a production farm where they lay

eggs and remain for an additional 40-48 weeks . Production farms are equipped with nest

boxes and other equipment required for egg collection and transfer.

Fig 85 Hatchability diminishes with the age of the parent

Source: Macquarie Research analysis of Aviagen company data, December 2016

Hatcheries

Eggs are transferred from breeder farms to hatcheries where they are incubated before

hatching. Precise matching of egg supply and demand is met through interstate egg

transfers that can be achieved at relatively low cost. Ingham’s operates 11 hatcheries

located throughout Australia and New Zealand, including 2 dedicated to turkey.

Ingham’s hatchery facilities are equipped with egg holding rooms which provide the

flexibility for chick production to be matched to fluctuations in demand. Facilities are also

equipped with automated setting systems that control the hatchery environment.

Fig 86 Overview of hatcheries as at 1 September 2016

Region Location Production type

Queensland Mt Alford Chicken New South Wales McKees Hill Chicken New South Wales Maldon Chicken New South Wales Tahmoor Turkey New South Wales Bargo Turkey Victoria Pakenham Chicken Victoria Mornington Chicken South Australia Murraylands Chicken Western Australia Wanneroo Chicken Tasmania Premaydena Chicken New Zealand Matamata Chicken


75%

77%

79%

81%

83%

85%

87%

89%

0

20

40

60

80

100

120

140

160

180

200

25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59 61 63

Hatchability (%) Egg/Bird Chick/Bird

Ingham’s operates

11 hatcheries

located throughout

Australia and New

Zealand, including 2

dedicated to turkey.

Ingham’s operates

11 hatcheries

located throughout

Australia and New

Zealand, including 2

dedicated to turkey.


21 December 2016 57

Broiler farms

Once hatched, Day Old Chicks (“DOC”) are transferred from hatcheries to broiler farms.

Ingham’s broiler farm network comprises 225 chicken and turkey broiler farms across

Australia and New Zealand, of which 97% are operated by third party operators (‘contract

growers’).

Contract growers operate under standardised contracts (tailored to each state and in New

Zealand) and receive a fixed price per live bird produced (subject to adjustment between

growers based on performance). Ingham’s maintains ownership of the chickens and

supplies the majority of their feed requirements.

After reaching an appropriate weight, live birds are collected from broiler farms and

transferred to primary processing plants for processing into end products.

Fig 87 Relatively similar performance metrics for Ross and Cobb

Source: Macquarie Research analysis of Aviagen and Cobb-Vantress company data, Macquarie Research, December 2016

By outsourcing broiler farming, Ingham’s is able to reduce the capital commitment required

for expansion while still generally retaining control of the integrated production process.

Although outsourced, Ingham’s is heavily involved in monitoring the standards maintained

by its network of contract growers. Ingham’s supplies husbandry and veterinary services

as required and regularly monitors contract growers to ensure compliance with Ingham’s

strict animal welfare, biosecurity and food safety standards.

All of Ingham’s chickens and turkeys are barn raised and cage free. All Ingham’s

Australian chicken broiler farms are accredited by the RSPCA. In addition, Ingham’s

Australian chicken broiler free range farms are also accredited by FREPA. Ingham’s New

Zealand free range chicken broiler farms are accredited by the RSPCA.

RSPCA requirements. We note that RSPCA requirements cover virtually all of the poultry

production process. This includes sourcing of chicks, housing, catching, transport and

slaughter. Key requirements in relation to broiler farms are stocking, lighting, litter,

ventilation and temperature requirements (Source: RSPCA). Further, the RSPCA sets

record keeping and monitoring standards.

Density requirement stipulate 28kg/m2 for natural ventilation systems and 34kt/m

2 for

mechanical ventilation systems (Source: RSPCA). This is 15% higher than chickens

grown outside of the RSPCA system (Source: Australian Chicken Meat Federation).

0.00

0.50

1.00

1.50

2.00

2.50

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

0 5 10 15 20 25 30 35 40 45 50 55 60

Ross bodyweight Cobb bodyweight Ross FCR Cobb FCR

Bodyweight (g) FCRsmall bird big bird

Ingham’s maintains

ownership of the

chickens and

supplies the

majority of their

feed requirements.

Ingham’s maintains

ownership of the

chickens and

supplies the

majority of their

feed requirements.

All of Ingham’s

chickens and

turkeys are barn

raised and cage

free.

All of Ingham’s

chickens and

turkeys are barn

raised and cage

free.

All Ingham’s

Australian chicken

broiler farms are

accredited by the

RSPCA.

All Ingham’s

Australian chicken

broiler farms are

accredited by the

RSPCA.


21 December 2016 58

Indoor maximum and minimum temperatures must be recorded daily (Source:

RSPCA). After 7 days of age, the lighting system in the shed must provide a minimum

period of 8 hours artificial lighting per day — unless birds have access to natural

daylight which provides at least the minimum required intensity — and a minimum

period of 4 hours continuous darkness (with all lights off) to be provided at night, in

every 24-hour period. From 1 January 2015, the light intensity between lighting periods

must be adjusted in a gradual manner (using dimmers or switching individual lights

on/off) over at least 15 minutes (Source: RSPCA).

Birds (except chicks on day of placement) must be observed at least three times in a

24-hour period to ensure that their appearance, vocalisations and behaviour are

normal and inspections must be increased during hot weather or disease outbreak.

We note that RSPCA approved farming program is independently audited.

All of the fresh chicken meat sold in Woolworths supermarkets is produced on RSPCA

approved (or equivalent) farms. Woolworths own-brand products in-store where chicken is

a defined visible ingredient (i.e. chicken pieces) will also use RSPCA (or equivalent)

standard by December 2018 (Source: Woolworths). All Coles Brand fresh chicken is

RSPCA approved.

Primary processing

Fig 88 Overview of primary processing plants as at 1 September 2016

Region Location Production type

Queensland Murarrie Chicken New South Wales Tahmoor Turkey Victoria Somerville Chicken South Australia Bolivar Chicken Western Australia Osborne Park Chicken Tasmania Sorrell Chicken New Zealand Te Aroha Chicken


After reaching an appropriate weight, live birds are collected from broiler farms and

transferred to primary processing plants for processing into end products. After arriving,

birds are processed, chilled and prepared as whole birds or meat cuts. Marinades, sauces,

spices and sprinkles can also be added to produce value-enhanced products. Processed

whole birds and meat cuts are then packaged and distributed to external customers or sent

for further processing.

Ingham’s operates 7 primary processing plants across Australia and New Zealand. All

processing plants are equipped with automated processing systems and employ

standardised procedures to manage yield and labour efficiency across the network.

Further processing

After primary processing, meat may be transferred from primary processing plants to

further processing plants for the manufacturing of a range of flash fried, fully cooked,

ready-to-eat and smallgoods products. Ingham’s currently produces approximately 240

further processed products in Australia and 80 in New Zealand, including products such as

schnitzel and nuggets as well as specific QSR menu items. The Ingleburn facility produces

all of Ingham’s smallgoods, with turkey smallgoods accounting for approximately 60% of

total production at Ingleburn with the remainder being chicken smallgoods.


primary processing

plants across

Australia and New

Zealand.


primary processing

plants across

Australia and New

Zealand.


21 December 2016 59

Fig 89 Component parts & chicken products by broiler part

Part of Chicken Product Example products

Whole chicken Whole Chicken BBQ rotisserie chicken, fresh whole chicken

Breast meat

Primary Poultry Value enhanced Further processed

Fresh breast fillet

Crumbed breast nuggets

Thigh Fresh thigh fillet

Marinated kebabs

Drumsticks Fresh bulk drumsticks

Peri peri drumsticks

Wings Fresh whole wings

Marinated wings

Ingredients

Other poultry products Bagged necks

Palatants Liquid palatant

Wet pet food ingredients Fresh livers

Rendered products Poultry meal


Ingham’s further processing network comprises 7 plants in Australia New Zealand.

Ingredients

During primary processing up to approximately 60% of the live bird weight is captured as

‘poultry raws’ (e.g. blood, feathers, livers, feet). Poultry raws can be utilised in a range of

products for human or animal consumption. The Ingredients division is responsible for

maximising the value of poultry raws, with the exception of products sold through the Retail

channel which are managed by Sales and Marketing. Currently, Ingham’s converts

approximately 200k tonnes of poultry raws per annum into ingredients.

The Figure below outlines the range of end products derived from poultry raws.

Fig 90 Ingredient products


Warehousing and distribution

Ingham’s distribution capabilities enable it to shift production throughout Australia while

maintaining an unbroken chilled or frozen supply chain. The logistics network is centrally

controlled through distribution requirements planning, ensuring that stock is replenished to

meet customer demand.

Ingham’s operates 9 distribution centres (“DCs”) across Australia and New Zealand as at 1

September 2016. Of these, 8 DCs undertake weigh price labelling of tray packed products.

A4 Paper Guide Line

A4 Paper Guide Line

Breast meat

Ingredients

Wings

Ingredients

Ingredients

Drumstick / Thigh


21 December 2016 60

Fig 91 Overview of warehousing and distribution network as at 1 September 2016

Region Location Capability

Queensland Hemmant Chilled and frozen

New South Wales Prestons Chilled and frozen

Victoria Lyndhurst Chilled and frozen

South Australia Dry Creek Chilled and frozen

Western Australia Hazelmere Chilled and frozen

Northern Territory Darwin Chilled only

Tasmania Sorell Chilled only

New Zealand Waharoa Chilled and frozen

New Zealand Cambridge Chilled and frozen


Once a customer order is confirmed, tray packed products are weighed, priced and

labelled accordingly and palletised with other components of the order. Outsourced freight

providers are used to transport products to customers. Outsourced line haul carriers are

used to balance stock between interstate DCs.

An overview of the warehousing and distribution operations is shown below.

Fig 92 Warehousing and distribution operations


Ingham’s distribution channel

Fig 93 Group revenue by channel over time


Ingham’s channel mix has been relatively stable over time as illustrated in Figure 89

above.

52% 52% 53%

18% 17% 17%

8% 8% 8%

6% 7% 7%

11% 12% 11%

5% 4% 4%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

FY14 FY15 FY16

Retail QSR Food Service Wholesale Stockfeed Other

FY

16

a R

ev

en

ue

: A$

2,3

09

m

FY

15

a R

eve

nu

e: A

$2,2

72

m

FY

14

a R

eve

nu

e: A

$2,2

31

m


21 December 2016 61

Fig 94 Chicken distribution channels - Australia Fig 95 Chicken distribution channels - NZ


Poultry is a critical fresh category for major Australian supermarket chains, with chicken

products representing two of the top five fresh products sold by the four major Australian

supermarket chains by sales. We note that Aldi does not currently offer BBQ chickens.

Ingham’s sells its products to a number of large customers, including major retailers and

QSR operators. During FY16, Ingham’s top 5 customers accounted for 55-60% of

Ingham’s sales revenue.

Fig 96 Long-term relationships with major customers


Ingham’s has many long-term customer relationships, as evidenced by its experience

servicing large customers for up to 55 years. Relationships with key customers are highly

collaborative and span sales, marketing, technical services, new product development,

planning and supply chain.

Ingham’s has historically supplied poultry to its customers on an uncontracted basis

including on the basis of either Ingham’s or the customer’s standard terms and conditions

of sale.

Over the last 18 months, Ingham’s management have focused on entering into contracts

with Ingham’s key customers. These contracts are for typically for 2 to 3 years and in a

number of cases a percentage of the customer’s volumes are secured. The contracts

contain various degrees of pass through provisions, including in relation to the cost

of feed and include mechanisms for cost review. Ingham’s management are continuing

to focus on entering into contracts with its customers.

Retail59%Wholesale

20%

Foodservice7%

QSR14%


Retail45%

Wholesale29%

Foodservice10%

QSR16%


55yrs

44yrs

30yrs

15yrs

48yrs

37yrs

26yrs

26yrs

26yrs

Major Retailer 1

Major Retailer 2

Major Retailer 3

Major Retailer 4

Major QSR 1

Major QSR 2

Major NZ Retailer 1

Major NZ Retailer 2

Major QSR

Australia

New Zealand

Since customer

market entry

(QSR1 & MR

3&4)

Since Ingham's

market entry

Years of uninterrupted supply...

Over the last 18

months, Ingham’s

management have

focused on entering

into contracts with

Ingham’s key

customers. These

contracts are for

typically for 2 to 3

years

Over the last 18

months, Ingham’s

management have


21 December 2016 62

Brand

Ingham’s has a long history of supplying Australia and New Zealand’s major retailers, QSR

operators, foodservice distributors and wholesalers. During this time Ingham’s has

developed a strong brand with a reputation for quality and service. Ingham’s brand

presence also includes “Waitoa”, New Zealand’s leading free range brand.

Ingham’s is a highly recognised brand with a reputation for quality and service. Ingham’s is

currently implementing an “Ingham’s” brand refresh focusing on enhancing Ingham’s brand

positioning. This includes improved packaging and a communications campaign

concentrating on the new tagline ‘Heart of the Table’. The refreshed branding reflects the

importance that Ingham’s core customers place on bringing the family together at meal

time and the growing significance of poultry in consumers’ diets. This is mirrored in

Ingham’s core purpose – ‘To be at the Heart of Every Table’.

Fig 97 Brand and packaging refresh


Within the Stockfeed business, Ingham’s brands include Mitavite, a premium horse feed

brand sold in over 20 countries, and Top Cow and Top Calf, leading dairy stockfeed

brands in New Zealand

Sales, Marketing and New Product Development

In Australia, sales for Ingham’s major poultry customers are managed at a national level,

with some smaller state-based customers managed regionally. Large customers have at

least one dedicated account manager and all New Zealand customers are managed

locally.

In the past two years, Ingham’s has further invested in marketing and consumer insight

capability, category management skills and New Product Development (“NPD”) resources.

The marketing and consumer insights function focuses on developing brand plans,

communication plans and NPD execution to drive brand growth and optimise mix. The

category management function establishes the long-term strategic growth plan for each

category, working with key customers to ensure pricing, promotion, ranging and in-store

execution support category growth drivers.

NPD is generated from consumer insights, identified market gaps and customer concepts.

Once a product idea is identified, Ingham’s food technologists work with its ingredients

suppliers to develop a formula that will meet customer or consumer expectations, refining

the key product characteristics such as taste, appearance, nutritional value, cost and

packaging.

A stage gate process determines which products are launched and includes consideration

of commercial viability, consumer and customer acceptance and broader market dynamics.

A4 Paper Guide Line

A4 Paper Guide Line

Brand Packaging Brand Packaging

From To


21 December 2016 63

Fig 98 Examples of Ingham’s new product development

Product Description Consumer trend

Created with Jamie range

(Launched May-2014 )

Value-enhanced products including a range of chicken

fillers, skewers and roasts

Health and wellness

Convenience

Premiumisation

Waitoa Gluten Free Range (Launched May-2015)

Identified opportunity to cater to coeliacs and others

who prefer a reduced gluten diet

First to market in New Zealand

Health and wellness

Premiumisation

Diced Chicken Breast (Launched July-2015)

Identified opportunity to provide a convenient, ready-

to-use diced product

Health and wellness

Convenience



21 December 2016 64

Feed milling The Australian and New Zealand stockfeed industry supplies feed to commercial livestock,

aquaculture producers and households. Australia utilises approximately 12.2 million tonnes

of stockfeed annually, which represents approximately 1.5% of total global production.

Stockfeed products are typically sold on a bulk basis.

Stockfeed manufacturers convert raw materials into finished feed for animals. Animal

nutritionists develop feed rations specifically formulated to meet the requirements of each

class of livestock and conduct research to continually improve formulations. The primary

raw materials in stockfeed are grains, legumes, vegetable and animal protein meals, and

nutritional additives including minerals and vitamins. Ingham’s is the second largest

stockfeed manufacturer in Australia by volume and accounts for approximately 10% of

commercial stockfeed volumes

Fig 99 Most stockfeed used for internal use, although a reasonable external sales component

Fig 100 Ingham’s the second largest player in a relatively fragmented Australian stockfeed market


As the primary input for livestock production, the demand for stockfeed is largely driven by

consumers’ demand for livestock, in particular poultry, beef, dairy and pork.

The demand for stockfeed from poultry and pork producers has historically been relatively

stable, as these producers have fewer alternative forms of feed. Demand for stockfeed

from dairy cattle producers has historically fluctuated depending on a number of factors,

including weather conditions and market pricing, as these producers may have more

options available to them (e.g. pasture, hay and silage).

The supply of stockfeed is dependent on the availability and price of component raw

materials, particularly wheat, barley, sorghum and soybean meal. Feed formulations may

be altered (e.g. ingredient substitution) to reflect changes in the availability and pricing of

raw materials. The price of raw materials for stockfeed fluctuates depending on

international commodity prices, the strength of the Australian dollar and local crop

production levels, amongst other things.

Ingham’s feed milling operations

Ingham’s owns and operates 10 feedmills throughout Australia and New Zealand.

Ingham’s prefers to control its own feed supply where possible, with approximately 85% of

Ingham’s demand produced internally in FY16 by the Stockfeed division. Ingham’s

Stockfeed division also sells a range of poultry, pig, horse and dairy stockfeed to external

customers.

One Australian feedmill is dedicated to the production of horse feed and one New Zealand

feedmill is dedicated to the production of dairy feed. Ingham’s has approved the building a

new feedmill in South Australia to replace the mill at Mile End and reduce Ingham’s

reliance on third-party supply.

Internal use, 870kt, 61%

External sales, 560kt,

39%

FY16aStock feed production volume:1.4mt

Ridley14%

Ingham's10%

Riverina6%

Other70%

Stockfeed Market Share (by volume)

~85% of Ingham’s

demand produced

internally in FY16 by

the Stockfeed

division


21 December 2016 65

Fig 101 An overview of Ingham’s feedmill capability*

Poultry Mill Location State Breeder Broiler Layer Turkey Other Poultry^ Pig Dairy

Hemmant QLD Cardiff NSW Berrima NSW Clyde VIC Mile End** SA Wanneroo WA Longford TAS Somersby NSW Mt Maunganui NZ Hamilton*** NZ

* Table summarises capability. Not all feedmills currently produce all feed types of which they are capable. ** To be replaced with greenfield feedmill in 2018 (capable of breeder, broiler feed production, other poultry and pig feed).*** Current production at Hamilton is solely dedicated to dairy feed. All feed produced at Hamilton contains no ruminant proteins. ^ Includes duck and quail. Source: Ingham’s company data, December 2016

This integrated feedmilling network allows Ingham’s to control the composition and quality

of its feed, a key factor in minimising its feed conversion ratio. It also provides Ingham’s

with greater resilience and flexibility in managing raw material costs, which is further

complemented by Ingham’s forward commodity purchasing programs.

Ingham’s Feed Procurement team work closely with schedulers who ensure raw materials

are delivered to meet weekly production requirements seven days in advance.

Fig 102 Ingham’s relies on external stockfeed for ~15% of requirement, however this should decline with planned SA feedmill investment


As well as supplying the majority of Ingham’s internal requirements, the Stockfeed division

sells products to external customers, which accounted for ~40% of mill production volumes

and 13% of total group sales in FY16. Ingham’s external stockfeed sales also allow

Ingham’s to reduce its costs of production by increasing ulilisation across the feedmill

network.

The Stockfeed division targets large commercial operators for its stockfeed products as

well as supplying the horse and dairy industry via retail and wholesale channels. The mill

at Hamilton in New Zealand predominantly produces dairy feed, while the mill at Somersby

in New South Wales only produces horse feed, including products sold under the Mitavite

brand.

85%

15%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

Internal

External

An integrated feedmilling network allows Ingham’s to control the composition and quality of its feed


21 December 2016 66

Fig 103 External stockfeed sales by end market category


Ingham’s Stockfeed division also serves certain export markets. This includes poultry feed

into Pacific Island markets and Mitavite horse feed, which is sold in over 20 countries, with

key markets including New Zealand, Singapore and Malaysia.

Turkey

Across both Australia and New Zealand, the turkey meat industry is relatively small

compared with the chicken meat industry. The Australian Turkey Federation estimate that

total turkey consumption per capita in Australia is 1.5-2kg per year versus approximately

43kg per year for chicken.

The majority of turkey sales in Australia and New Zealand are uncooked fresh or frozen

products. Turkey is a highly seasonal product with approximately 40% of turkey volume

sold and shipped within a 10 week period in the lead-up to Christmas in Australia. In

response to this seasonality, turkey producers have released new ranges of portioned,

value-enhanced, frozen meals and fresh products in an attempt to increase consumption of

turkey products throughout the year.

There are two major turkey producers in Australia (including Ingham’s) and three relatively

small scale producers in New Zealand.

Chicken, 63%

Other poultry, 6%

Horse, 12%

Pig, 9%

Dairy, 6%

Other, 4%

0% 20% 40% 60% 80% 100%

External feed

sales

Chicken Other poultry Horse Pig Dairy Other

There are two major

turkey producers in

Australia (including

Ingham’s) and three

relatively small

scale producers in

New Zealand.


21 December 2016 67

Ingham’s history

Fig 104 Ingham’s history


Ingham’s was founded as a family business in 1918 by Walter Ingham in Liverpool, New

South Wales. After their father’s death in 1953, Walter’s sons, Bob and Jack Ingham,

expanded the business through a combination of organic growth and acquisitions, to

become the largest integrated poultry producer in Australia and New Zealand.

The present-day operations date back to the 1960s when Ingham’s entered into supply

arrangements with major retail and QSR customers. In the late 1960s, Ingham’s started to

engage external farmers to rear broilers while still maintaining control of the poultry

production process to meet increasing consumer demand and ensure efficient utilisation of

capital. Ingham’s subsequently entered into the production of turkey and stockfeed, and

enhanced its further processing capabilities to cater to changing consumer preferences

towards value-enhanced poultry products.

In March 2013 Bob Ingham sold the business to funds advised and managed by TPG

Capital. Today Ingham’s operates a vertically integrated national network and continues to

build on Ingham’s proud history of quality and customer service.

In March 2013 Bob

Ingham sold the

business to funds

advised and

managed by TPG

Capital.


21 December 2016 68

Workforce management & Support functions

Ingham’s people and systems have undergone significant development since January

2015.

Fig 105 People and process capability

Capability Description

Sales and Marketing

A number of changes have been made to the Sales and Marketing function, including investment in category insights, marketing, category management and account management capabilities

National Planning

Ingham’s has nationalised and centralised its planning processes around an experienced team combined with integrated planning expertise from outside the business. The integrated business planning runs on a weekly cycle and has facilitated better decision making across the business.

Operational excellence

An Operational Excellence team has been established to oversee standardisation and continuous improvement in primary processing, further processing and farming operations. Operational Excellence covers asset management, business sustainability, national planning, farming optimisation and work health and safety. The Operational Excellence team is key to transitioning the former regional structure in Australia to a national network.

Asset management

The role of the central Asset Management team has been expanded to oversee repairs and maintenance, as well as capital works. Ingham’s is standardising processes and systems across its business to proactively care for its assets.

People & Performance

Ingham’s has significantly upskilled its human resources capability. Investments have been made to improve capability in core human resources functions areas including recruitment, performance management, people development, remuneration, talent management and succession planning.

Procurement A centralised procurement team is now in place, with dedicated category managers and analysts. This team is realising savings opportunities as well as implementing systems and processes to build a sustainable procurement function.

Strategy & Transformation

Ingham’s has established a Strategy and Transformation team to oversee Project Accelerate, develop Ingham’s ten-year network plan, and support the business in making strategic decisions.

Finance

Ingham’s has made progress towards improving the maturity of the finance function through: − commercial managers being appointed for commercial & trading, primary processing, farming, further processing, supply chain, and sales and marketing; − shared services (accounts payable, accounts receivable and payroll) being brought together under a single structure with a significant uplift in capability through a changeover of personnel; and − New Zealand now has its own dedicated structure and Chief Financial Officer.

IT

Ingham’s is part way through a technical infrastructure refresh which is due for completion in FY17. Once completed this will provide a robust and modern data centre and network platforms. The Ingham’s business systems landscape leverages several major tailored and bespoke systems and various minor applications serving discreet operational and back office functional needs


Workforce management

As at 30 June 2016, Ingham’s had over 8,200 employees, employed on a full-time, casual

or part-time basis. The casual workforce is designed to support variations in operational

volumes which are dependent on seasonality, product mix and operational flexibilities. The

capacity to flex the workforce with production variations has been central to Ingham’s

labour efficiency improvements.

Over 90% of Ingham’s workforce is directly employed, with small sections of the operation

contracted out (e.g. cleaning in the primary processing plants and collection of broilers

from broiler farms for transfer to primary processing plants). All wage employees and

contract workers are covered by enterprise agreements, individual employment

agreements, individual contracts or an award. Ingham’s has an audit and compliance

regime in place to monitor contractor compliance to legislated employment practices and

commissions independent audits and assessments.

Approximately 80% of Ingham’s employees are covered by Enterprise Agreements and

other workplace agreements, which require periodic renegotiation and renewal. Ingham’s

is currently party to 56 enterprise agreements across Australia and New Zealand. The six

largest agreements cover ~60% of employees covered by enterprise agreements.

Ingham’s is improving the management of its workforce with the aim of increasing flexibility

and better matching labour requirements to production levels through:

developing workforce planning capabilities;

rebalancing the number of full-time, part-time and casual employees; and

introducing greater flexibility into EBAs.

Ingham’s is

improving the

management of its

workforce with the

aim of increasing

flexibility and better

matching labour

requirements to

production levels


21 December 2016 69

Market structure & channel Market structure

Each of the Australian and New Zealand chicken markets have two large vertically

integrated producers, representing combined estimated chicken market shares of 73% and

82%, respectively. The remainder of the industry is comprised of a number of smaller,

privately owned producers in both markets. The estimated market shares of the two

leading producers in each market have remained relatively stable over the last five

financial years.

Ingham’s is the only chicken producer with production operations in both Australia and

New Zealand, with leading positions in Australia (#1 with 40% estimated chicken market

share) and New Zealand (#2 with 34% estimated chicken market share).

Fig 106 Australia market structure and comparison vs. Baiada

Ingham’s Baiada


Key poultry brands Ingham’s Steggles

Lilydale

Footprint Nation wide Nation wide


(external sales) Turkey Turkey

Stockfeed Stockfeed



Quarantine facility Yes No



Hatcheries Yes Yes



Smallgoods Yes Yes


Fig 107 NZ market structure and comparison vs. Tegel

Tegel Ingham’s


Key poultry brands Tegel Ingham’s

Top Hat Waitoa

Tegel Free Range

Rangitikei

Footprint North Island North Island

South Island


(external sales) Stockfeed Stockfeed


Turkey




Hatcheries Yes Yes



Smallgoods Yes No


Ingham's40%

Baiada33%

Other27%

Australian Poultry Market Share (by value)

Ingham's 34%

Tegel48%

Other18%

NZ Poultry Market Share (by value)

Ingham’s is the only

chicken producer

with production

operations in both

Australia and New

Zealand


21 December 2016 70

Poultry sales channels

Poultry in Australia and NZ reaches consumers principally through four major channels:

Retail – all major supermarkets;

QSR – major fast food chains;

Foodservice – large distributors; and

Wholesale – butchers, boners and secondary food processors.

Market distribution channel

In New Zealand, a number of major retailers take delivery of whole birds for cutup and

packing within their own operations. As a result, whole birds account for a greater share of

New Zealand retail volume and a greater proportion of primary cuts are sold through the

wholesale and foodservice channels.

Poultry is an important food category both in Australia and New Zealand. Chicken products

rank as top five supermarket fresh food items in terms of sales for the four major Australian

supermarkets. Leading poultry producers are critical suppliers to, and work closely with,

retailers, QSR operators and foodservice distributors to deliver key marketing initiatives to

grow the category and drive foot traffic through stores.

Imports and regulatory regime

Both Australia and New Zealand operate strict quarantine regimes that restrict the

importation of chicken meat and live chickens. The quarantine regimes are aimed at

protecting native birdlife and commercial operations from pathogens that commonly exist in

wild bird populations and commercial flocks elsewhere in the world.

In New Zealand, only retorted chicken products can be freely imported. Given New

Zealand’s low disease status, cooked chicken meat can be imported to Australia from New

Zealand.

In August 2016, the Australian Government announced that an agreement has been

reached allowing the export of raw poultry products from New Zealand to Australia

within the agreed access framework. These recently announced changes will allow

uncooked New Zealand chicken meat to be imported into Australia in the future, subject to

strict licensing conditions.

Previously, exports from NZ to Australia were limited to products that had been fully

cooked or retorted. We note this agreement followed work undertaken with the Ministry of

Primary Industries to secure changed access conditions given NZ’s high standards of bio

security and low disease prevalence. In FY16, Tegel exports accounted for ~1% (A$70m)

of the A$7.1bn Australian poultry market.

Ingham’s has noted that the importation of fresh chicken to Australia from New

Zealand is challenging from an economic, shelf life and supply chain perspective.

There may be opportunities for imports into Australia of partially cooked and frozen

products, as well as frozen raw chicken meat. Ingham’s management believes it is well

placed to benefit from any opportunities arising from this change, as the only major

poultry producer with production facilities in both markets. New Zealand suppliers will

need to comply with a number of regulations and conditions in Australia including gaining

an import permit, complying with Australian food standards and meeting Australian

labelling requirements. Ingham’s will apply for a permit to export from New Zealand to

Australia.

Live birds cannot be imported into Australia or New Zealand. As a result, genetics supply is

managed via the importation of fertilised eggs into a limited number of quarantine stations,

where they are hatched, grown out and then released by the quarantine service into

breeder farms.

Both Australia and

New Zealand

operate strict

quarantine regimes

that restrict the

importation of

chicken meat and

live chickens

In August 2016, the

Australian

Government

announced that an

agreement has been

reached allowing

the export of raw

poultry products

from NZ to Australia

Importation of fresh

chicken to Australia

from New Zealand is

challenging from an

economic, shelf life

and supply chain

perspective

Importation of fresh

chicken to Australia

from New Zealand is

challenging from an

economic, shelf life

and supply chain

perspective


21 December 2016 71

Turkey imports are subject to the same quarantine regime as chicken products in Australia.

The Australian Department of Agriculture and Water Resources released a draft review in

August 2016 which proposes that the importation of cooked turkey meat to Australia

from the United States of America be permitted, subject to biosecurity measures. As a

result cooked turkey products may be allowed into Australia in the future. Approximately

1% of Ingham’s poultry volumes are cooked turkey products.

In New Zealand, the importation of cooked and frozen turkey products is allowed but is

subject to strict biosecurity and food safety regulations. At present, no countries have met

these requirements, however negotiations are underway with trading partners.

Poultry exports

Approximately 3% of Australia’s annual chicken production is exported . The low level of

chicken exports is due to strong domestic demand for chicken products and the higher cost

base of Australian and New Zealand producers relative to producers in other export

markets. In 2013, over 95% of poultry exports from Australia were made up of frozen cuts

and other edible poultry products. In New Zealand approximately 8% of annual chicken

production is exported, with Australia being the primary export market.

While there may be opportunities to grow exports in the future, they currently make up a

small proportion of Ingham’s sales. Ingham’s poultry exports are focused on balancing

supply and demand, with the surplus supply exported to markets in the Asia Pacific region.

Ingham’s also exports poultry feed and poultry ingredients. Ingham’s has invested in key

supporting capabilities including consumer insights, marketing, category management and

new product development (NPD) that will position Ingham’s to capitalise on targeted export

opportunities when they arise.

Approximately 3%

to 5% of Australia’s

annual chicken

production is

exported


21 December 2016 72

Board and Senior management Fig 108 Board Overview

Director Biographical information

Peter Bush

Chairman

BComm, CA

Peter had a long career in fast-moving consumer goods, holding senior roles with SC Johnson, Reckitt & Coleman, Ampol/Caltex and Arnotts and was CEO of AGB McNair and Schwarzkopf. He then ran his own strategic consultancy business for six years with clients including Qantas, Telstra, George Patterson Bates, John Singleton Advertising and McDonald’s Australia. In 2003 he became the CEO of McDonald’s Australia. Peter is Chairman of Mantra Group Holdings Limited (since 2014) and Executive Chairman of Southern Cross Media Group Limited (since 2015) and was previously Chairman of Pacific Brands Limited, Nine Entertainment Co and NEC Holdings Pty Limited, and a director of Insurance Australia Group Limited.

Mick McMahon

Chief Executive Officer

BEcon

Mick joined Ingham’s in January 2015 as Executive Chairman and was subsequently appointed CEO in February 2016. Mick has more than 30 years’ operational management experience. He is the former Managing Director, CEO and a board member of the Skilled Group. He served as COO at Coles from 2007 to 2009 and Managing Director of Coles Express from 2005 to 2009. Prior to Coles, he spent 19 years with the Shell Group both in Australia and overseas. Mick is also Chairman of Red Rock Leisure, a private Australian tourism and entertainment venue operator.

Simon Harle

Non-Executive Director

BComm, CA

Simon is a Partner of TPG based in Melbourne. Prior to joining TPG in 2006, he worked for Credit Suisse in the Investment Banking Division, where he advised on numerous Australian and New Zealand mergers, acquisitions and debt and equity financings. Prior to that, he was with Arthur Andersen Corporate Finance based in Melbourne and London, where he qualified as a chartered accountant. He has played a key role in a number of TPG investments, including Healthscope, Alinta and the recent Cushman & Wakefield transactions.

Ricky Lau


BComm (Hons), CFA, EMBA

Ricky Lau is a Partner of TPG based in Hong Kong. Since joining TPG in 1998, Mr. Lau has played a key role in TPG’s investments in China and has served or serves on the Boards of Directors of Shenzhen Development Bank, China Grand Automotive Services Co. Ltd., Daphne International and Phoenix Satellite Television. Prior to joining TPG, he was responsible for the corporate and project finance division of Hopewell Holdings, a regional infrastructure project developer. Mr. Lau received an Executive Master of Business Administration from Kellogg-HKUST and an undergraduate degree from the University of British Columbia. Mr. Lau is also a CFA charter holder.

Linda Bardo Nicholls, AO


BComm, BA (Econ), MBA, FCID

Linda has more than 30 years’ experience as a senior executive and director in banking, insurance and funds management in Australia, New Zealand and the United States. She is a Chairman of Japara Healthcare and a Director of Fairfax Media, Medibank Private, and the Olivia Newton John Cancer Research Institute. Linda was previously Chairman of Healthscope, Chairman of Australia Post, Chairman of Keolis Downer (trading as Yarra Trams) and a Director of Pacific Brands, Sigma Pharmaceuticals and St George Bank.



21 December 2016 73

Fig 109 Senior Management Overview

Executive Biographical information

Mick McMahon

Chief Executive Officer

See Board Overview section above.

Ian Brannan

Chief Financial Officer

ACMA, MBA

Ian joined Ingham’s in May 2015 as Chief Financial Officer. Ian has 25 years’ senior management experience in public and private companies in Australia, the US and UK. He has held senior financial roles with Sara lee Bakery, Arnott’s Biscuits and Campbell Soup and most recently was CFO for GWA Group Limited and prior to that Carter Holt Harvey Building Supplies Group. Ian also serves as secretary and director on a number of Ingham’s companies.

Philip J. Wilkinson OBE

Senior Advisor

Philip joined Ingham’s as Senior Advisor in August 2015. He has more than 30 years’ experience in strategic leadership of large international agriculture businesses. He is Executive Director of the UK’s leading chicken business, 2 Sisters Food Group and the former Managing Director of Integrated Chicken at Grampian Country Food Group, also in the UK. He received an Order of the British Empire (OBE) for his services to the dairy industry in 2004 and was awarded Colonel in the USA for global services to the food industry in 2010. He is a board member of the British Poultry Council, Vice President of AVEC (the European Poultry Council), board member of Assured Food Standards (Red Tractor) and Chairman of Edinburgh based-Greengage Lighting Ltd.

Dr Beth Krushinskie

Technical Services

BSc, DVM, PhD

Beth joined Ingham’s in November 2015 as Technical Services Director. She has more than 20 years’ technical and operational experience developed in the US across food safety, animal welfare and regulatory areas, as well as poultry health, laboratory services and sales and marketing. Beth has held senior roles in technical services at Perdue Farms, Wampler Foods and Pilgrim’s Pride. She has also worked for the US Poultry & Egg Association and the US Agency for International Development. Most recently Beth was the Director of Quality Assurance & Food Safety at Mountaire Farms in Delaware.

Jonathan Hutchings

Strategy & Business Development

BEng, MBA

Jonathan joined Ingham’s in December 2014 as Strategy and Business Development Director and has 20 years’ experience in business strategy, transformation and general management in Australia, the UK, France and Asia for the FMCG and media sector. Before Ingham’s, Jonathan led Peters Ice Cream through its transformation under private equity ownership and has assisted a large number of companies in strategy development and profit improvement programs. Jonathan has been instrumental in helping to transform Ingham’s from a successful family owned company to one which is focused on performance and customer service. Jonathan also oversees procurement and Ingham’s turkey business.

Jonathan Gray

Sales and Marketing

MBA

Jonathan joined Ingham’s in 2008 as Retail Sales Manager for Ingham’s Enterprises NZ before moving into the National Sales Manager position in 2010. In October 2015, he was promoted to executive leader of the sales division based in Sydney and in February 2016 also took over the marketing division. Jonathan has extensive experience in retail sales in the UK, NZ and Australia and has held senior positions with Countdown Supermarkets and Marks and Spencer.

Mike Rozen

Primary Processing & Farming Operations

DipAg

Mike joined Ingham’s in 1992 as Plant Manager at Te Aroha, New Zealand. Mike is responsible for Ingham’s Australian primary processing and chicken farming operations. Prior to this role he was executive leader for Ingham’s poultry operations in Queensland and New South Wales (including the turkey business), following nine years as Executive General Manager of Ingham’s New Zealand operations.

Janelle Cashin

Supply Chain & Further Processing

GAICD, AssocDip AppSc, GradDip SafertySc

Janelle joined Ingham’s in 2004 following its acquisition of Chickadee Foods. Janelle has been a member of the executive leadership team since 2008 and in 2014 assumed responsibility for Ingham’s Supply Chain Division, including responsibility for inventory, warehouse facilities, planning, weigh price labelling operations and management of third party logistics providers. In April 2016, Janelle’s role expanded to include the financial and operational performance of Ingham’s further processing facilities.

Quinton Hildebrand

Operations Excellence

BSc AgEcon, MBA

Quinton joined Ingham’s in November 2015 as Operations Excellence Director. Quinton brings 23 years commercial experience in grower relations, manufacturing operations, commodity trading and marketing from South Africa, Europe and Australia. He was most recently CEO of Mackay Sugar. Quinton’s role is focused on driving commercial improvements within the operations of the Ingham’s business.

Graeme Dillon

Commercial & Trading

DipAgSci

Graeme joined Golden Poultry in 1980 – a company then jointly owned by Ingham’s and Coca-Cola Amatil as Production Manager at the Clyde feedmill. He was appointed Cardiff Mill Manager for Ingham’s in 1981, then National Stockfeed Manager in 2004. In 2011, Graeme was appointed Group Executive General Manager – Stockfeed and in 2015 named executive leader of the commercial and trading division. In this role, Graeme is responsible for raw material procurement and nutrition for Ingham’s 10 feedmills across Australia and New Zealand, external stockfeed sales, Mitavite horse feed sales and the ingredient business.

Adrian Revell

New Zealand

DipBM, NZCE

Adrian joined Ingham’s in 2002. Since June 2011 he has been executive leader of the New Zealand operations, bringing 19 years’ experience across the business including engineering and plant management expertise. Adrian is current Chairman of the New Zealand Poultry Industry Association.

Brad Moore

People & Performance

BCom, MSc

Brad joined Ingham’s in September 2015. He has more than 20 years’ experience in industrial relations, human resources and operations in the airline, resource and FMCG sectors both in Australia, New Zealand, Europe and North America. Prior to Ingham’s, Brad was Group Executive – Operations at Mirvac. Brad has brought diverse operational experience and change management expertise to Ingham’s to support its strategy and people development agenda. Brads oversees Human Resources, Industrial Relations and Labour Planning and Management and has been central to the development and implementation of the group labour strategy.



21 December 2016 74

ANZ poultry industry overview

Fig 110 ANZ poultry consumption Fig 111 Poultry consumption growth in both Aus & NZ expected to moderate


Australia consumed 1,140kt of poultry in CY15, having grown at a CAGR of 4.0% over the

prior 10 years, based on OECD data. NZ consumption is 194kt, having grown at a CAGR

of 1.8% over this period. In both countries, poultry consumption has outpaced beef, pork

and lamb (the key alternative meat categories).

Fig 112 OECD expects yoy poultry growth to moderate in ANZ

Source: OECD, December 2016

The OECD anticipates ANZ poultry consumption will increase by 2.0% per annum over the

10 years to 2024 (CAGR), within this Australian poultry consumption is expected to grow at

2.0%, while NZ consumption is expected to growth at a 1.8% CAGR over the forecast

period. Growth is expected to drop from ~ 4% in 2015 and 2016f to ~2% in 2017f and

remain broadly steady over the remainder of the forecast period based on OECD

estimates.

1,144kt

194kt

0

200

400

600

800

1,000

1,200

1,400

1,600

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020f

Australia New Zealand

2015 ANZ Total: 1,339kt

kt

3.1%

4.8%

4.0%

2.0%

6.8%

5.8%

1.8% 1.8%

3.6%

4.9%

3.6%

2.0%

0%

1%

2%

3%

4%

5%

6%

7%

8%

1995 2005 2015 2024f

Australia NZ ANZ

10yr CAGR to...

4%

4%

2%2% 1%

2%

4%4%

1%1%

1%2%

4%

4%

2%1% 1%

2%

0%

1%

2%

3%

4%

5%

2015

2016f

2017f

2018f

2019f

2020f

2015

2016f

2017f

2018f

2019f

2020f

2015

2016f

2017f

2018f

2019f

2020f

Australia New Zealand Total ANZ

Australian poultry

consumption has

grown at a CAGR of

4.0% over the last

10 yrs

Australian poultry

consumption has

grown at a CAGR of

4.0% over the last

10 yrs


21 December 2016 75

Fig 113 Consumption Fig 114 Per capita consumption


ANZ poultry consumption is dwarfed by a range of both developed and developing

countries. However, on a per capita basis, Australia and New Zealand poultry consumption

appears relatively mature.

As a basis for comparison, US consumption of 48kg per capita (2015) compares with 42kg

per capita in Australia (12% below the US) and 38kg per capita in New Zealand (21%

below the US). On the other hand, European poultry consumption is 22.7kg/capita (40%

below NZ and 46% below Australia).

Fig 115 Australian per capita consumption Fig 116 NZ per capita consumption


Based on OECD data, Australia poultry per capita has increased at a CAGR of 2% over

the last five and 10 years. On the same basis, NZ poultry per capital consumption has

increase by 5% and 1% respectively.

Fig 117 Australian population growth was 1.4% in Dec15 quarter (vs LT average of 1.4%)

Fig 118 NZ population growth was 2% in December 2015 quarter (vs LT average of 1.2%)

Source: ABS data, December 2016 Source: Statistics NZ data, December 2016

194 529 812 1,144 1,395 1,799 1,937 1,961 2,5373,798 4,301

9,297

13,036

17,41418,166

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

NZL ISR KOR AUS CAN ARG IDN JPN IND MEX RUS BRA EU28 USA CHN

kt

1.76.6

11.6 13.6 14.2

22.726.3 26.4

34.236.5 37.8 39.4

42.0

47.6

57.7

0

10

20

30

40

50

60

70

IND IDN CHN JPN KOR EU28 MEX RUS CAN ARG NZL BRA AUS USA ISR

kg/capita

0

5

10

15

20

25

30

35

40

45

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

kg/capita

0

5

10

15

20

25

30

35

40

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

kg/capita


21 December 2016 76

To provide context, the Australian population growth was 1.4% in December 2015, which is

in line with the LT average. NZ population growth was 2% in December 2015, which

compares with a LT average of 1.2%. 10yr average increases in per capita consumption

suggest Poultry consumption growth of about 1-2% ahead of population growth. This

implies poultry consumption growth of 2-4%.

Poultry consumption driven by population and per capita consumption growth

Fig 119 Australia annual poultry consumption growth = growth (kg/capita + population growth)

Fig 120 New Zealand annual poultry consumption growth = growth (kg/capita + population growth)

Source: OECD and World Bank data, December 2016 Source: OECD and World Bank data, December 2016

The annual growth in poultry consumption is primarily a combination of growth in per capita

consumption and population growth. Comparing these two growth factors to the actual

growth in total annual poultry consumption results in little variance, as shown below.

If the growth of per capita poultry consumption slows there is still population growth adding

to total poultry consumption. The latest government population forecasts expect Australia

to grow at 1.7% pa from 2014 to 2018 and New Zealand to grow at 1.2% pa from 2014 to

2018.

Poultry vs. other products – Australia

Fig 121 Australian meat consumption Fig 122 Australian meat consumption growth


Poultry consumption in Australia has outpaced other meat categories. Over the 10 years to

2015 (CAGR), Poultry consumption has grown by 4.0% while Pork has grown by 2.5%,

beef has been broadly steady and Lamb consumption declined by 3.0%. Despite some

deceleration, the OECD forecasts poultry consumption will continue to outpace other meat

categories.

-10%

-5%

0%

5%

10%

15%

20%

1971 1975 1979 1983 1987 1991 1995 1999 2003 2007 2011 2015

Annual growth kg/capita Annual growth population

Annual growth actual

-20%

-10%

0%

10%

20%

30%

40%

50%

1971 1975 1979 1983 1987 1991 1995 1999 2003 2007 2011 2015

Annual growth kg/capita Annual growth population

Annual growth actual

1,144kt

781kt

622kt

202kt0

200

400

600

800

1,000

1,200

1,400

1,600

1980 1985 1990 1995 2000 2005 2010 2015 2020f


kt

3.1%

4.8%

4.0%

2.0%

0.2%

1.7%

0.0%

0.8%

3.1% 3.0%2.5%

1.6%

-2.2%

-1.2%

-3.0%

-0.4%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

1995 2005 2015 2024f


10yr CAGR to...

Poultry

consumption in

Australia has

outpaced other meat

categories.


21 December 2016 77

Fig 123 Australian meat share of plate… Fig 124 …having outpaced other categories


Total meat consumption in Australia was 2,700kt in 2015 (OECD). Chicken held the largest

share of plate with 42%, while beef and pork had 28% and 23% share of plate respectively.

Lamb share was 7%.

Fig 125 Australian meat production by volume Fig 126 Australian meat production by value

Source: ABS, December 2016 Source: ABS, December 2016

Based on ABS data, Australia produced 1,100kt of poultry in 2015, which compares with

2,500mt of Beef, 710kt of lamb and 370kt of pork. Since 1980, poultry production (by

volume) has growth by 4% per annum. Over the last five years, poultry production’s CAGR

was also 4%. By value, A$2.6bn of poultry was produced according the ABS data. This

compares to A$11.5bn worth of Beef, A$3.3bn of Lamb and A$1.1bn of pork. By value,

poultry production has grown by 6% per annum since 1980 and 8% per annum over the

last five years.

Exports likely to remain relatively modest

According to the Department of Primary Industries (DPI), very little Australian poultry meat

is exported with export volumes expected to remain around 4-5% of total production. DPI

attributed this to the lower cost base and government subsidies in other exporting

countries (especially Brazil and the USA). DPI believes that exports will comprise primarily

low-value cuts, offal and feathers for which there is little domestic demand. [Source: DPI

NSW poultry meat industry overview]

While we believe there is scope to augment low-value exports with high-end exports driven

by views around quality advantages of ANZ produce (animal welfare and provenance).

However, an export program that extends beyond a “barbell strategy” (very high and low

value poultry exports) is unlikely as major exporting countries like Brazil and the US benefit

from lower labour costs, scale advantages and government subsidies in some instances.

Poultry, 1,144kt, 42%

Beef, 781kt, 28%

Pork, 622kt, 23%

Lamb, 202kt, 7%

2.8mt meat consumed

in 2015

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015


1,117kt

2,514kt

374kt

710kt

0

500

1,000

1,500

2,000

2,500

3,000

1980 1985 1990 1995 2000 2005 2010 2015


kt

$2.6bn

$11.5bn

$1.1bn

$3.3bn

$0.0

$2.0

$4.0

$6.0

$8.0

$10.0

$12.0

$14.0

1980 1985 1990 1995 2000 2005 2010 2015


$bn

Chicken held the largest share of plate

with 42% in 2015


21 December 2016 78

Poultry vs. other products – New Zealand

Fig 127 NZ meat consumption Fig 128 NZ meat consumption growth


While poultry remains the largest meat category in New Zealand, growth of 1.8% over the

10 years to 2015 (CAGR) was below the Pork, which grew by 2.8%. The weaker rate

reflected Chicken Consumption declines in 2005-10, a period through which pork

consumption was broadly steady. Over the 10 years to 2015 beef consumption was

broadly flat, while lamb declined by 14% (most notably during the GFC).

Fig 129 NZ volume growth driven by fresh

Source: Statistics NZ, December 2016

Growth in NZ poultry consumption has been entirely driven by the fresh category. In

contrast, the frozen poultry category has been relatively stable since 1980. Over this

period, fresh processed volumes have grown at a CAGR of 7.7%, while frozen increased

at 1.7% per year (CAGR).

Fig 130 NZ meat share of plate Fig 131 Share of plate by category


Total meat consumption in NZ was 416kt in 2015 (OECD). Chicken held the largest share

of plate with 47%, while beef and pork had 23% and 25% share of plate respectively. Lamb

share was 5%.

194kt

94kt

105kt

22kt

0

50

100

150

200

250

1980 1985 1990 1995 2000 2005 2010 2015 2020f


kt

6.8%5.8%

1.8% 1.8%

0.4%

-4.5%

0.1% 0.1%

1.7%

3.1% 2.8%1.9%

-3.4%-2.3%

-13.8%

-0.4%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

1995 2005 2015 2024f


10yr CAGR to...

162kt

40kt

202kt

0

50

100

150

200

250

1981 1986 1991 1996 2001 2006 2011

Processed Poultry Volumes kt

Fresh Frozen Total

Poultry, 194kt, 47%

Beef, 94kt, 23%

Pork, 105kt, 25%

Lamb, 22kt, 5%

416kt meat consumed

in 2015

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015


While poultry is the

largest meat

category in New

Zealand


21 December 2016 79

What has driven growth in Poultry’s share of plate?

We highlight three key drivers of chicken’s increasing share of plate relative to other key

meat categories. This include: 1) Affordability; 2) efficiency; and 3) health & wellness

Affordability

Fig 132 Chicken relative affordability - Australia Fig 133 Supermarket prices

Source: ABS, December 2016 Source: Macquarie analysis of retail pricing, g protein/100g sourced from

Food Standards Australia New Zealand, December 2016

Chicken has experienced lower price inflation relative to competing meat categories.

Australia’s consumer price index for poultry has increased at a CAGR of 1.3% since 1981.

This compares with 2.5% for pork, 2.8% for beef and 3.2% for lamb. Since 2010, poultry

has actually decreased at a CAGR of 0.5%, compared to an increase of 0.7% for lamb,

1.7% for pork, and 3.4% for beef.

In Figure 129 above we have collated supermarket prices for a range of products within

each meat category. On average, chicken product are priced 50-60% below pork, beef and

lamb products. After adjusting for protein content (which sees beef improve its affordability

relative to pork for example), chicken remains the most affordable category.

Fig 134 Australian meat production by value per kilo

Source: ABS, December 2016

The chart above shows the value of poultry (ex broiler farm) compared to other meat

categories. Once again, the data demonstrates the relative affordability of chicken.

0%

50%

100%

150%

200%

250%

300%

350%

1980 1985 1990 1995 2000 2005 2010 2015


$6.54

$13.56

$16.67

$19.16

2.9¢

6.1¢ 6.1¢

8.8¢

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

$0

$5

$10

$15

$20

$25

$30


¢ / protein gram (RHS)$/kg

$2.34/kg

$4.59/kg

$3.07/kg

$4.64/kg

$0.0

$1.0

$2.0

$3.0

$4.0

$5.0

$6.0

1980 1985 1990 1995 2000 2005 2010 2015


$bn

Drivers of chicken

share growth

include affordability,

efficiency and

health & wellness


21 December 2016 80

Fig 135 Chicken relative affordability - New Zealand Fig 136 NZ Supermarket prices

Source: NZ Stats, December 2016 Source: Macquarie analysis of Tegel retail pricing data and Food Standards Australia New Zealand data, December 2016

Similar to Australia, poultry price inflation in NZ has been lower than alternative meat

categories. NZ’s consumer price index for poultry has increased at a CAGR of 2.2% since

1981. This compares with 3.4% for pork, and 4.5% for both beef and lamb. Since 2011,

poultry has actually decreased at a CAGR of 1.8%, lamb decreased 3.4%, pork decreased

0.6% while beef increased 2.6%.

In Figure 132 above we have collated supermarket prices for a range of products within

each meat category. On average, chicken products are 17% below pork and 40-45%

below beef and lamb products. After adjusting for protein content (which sees beef improve

its affordability relative to pork for example), chicken and pork are the most affordable

categories.

Efficiency

Fig 137 Chicken requires less feed per kg of meat produced

Fig 138 Poultry production efficiency rapidly improving

Source: Review of Nutrient Efficiency in different breeds of livestock – DEFRA UK, December 2016

Source: ACMF, December 2016

In our view, the relative affordability versus other proteins is largely driven by the continual

advancement in production efficiency of poultry. A key industry measure of efficiency is the

‘feed conversion ratio’ (FCR = kg of feed required to produce a kg of meat). On this basis,

chicken compares favourably to other meat categories.

Importantly, chicken’s FCR has exhibited a steady decline. In 1975, the FCR was 2.5x, and

has declined by 28% since then. Increased sophistication with regards to genetics, feed

formulation and chicken husbandry more generally have likely driven improved FCR ratios.

0%

50%

100%

150%

200%

250%

300%

350%

400%

450%

500%

1981 1985 1988 1992 1996 2000 2003 2007 2011 2015


NZ$10.96NZ$13.28

NZ$18.33 NZ$19.294.9¢ 4.9¢

8.6¢ 8.4¢

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

$0

$5

$10

$15

$20

$25

$30

$35


NZ¢ / protein gram (RHS)NZ$/kg

1.6 - 1.82.3 - 2.8

5.3 - 9.5

9.2 - 13.8

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0


kg meat/kg feed

6457

4843 41 39 37 35 34

2.52.4

2.3 2.22.1 2.0 2.0

1.9 1.8

0.0

0.5

1.0

1.5

2.0

2.5

3.0

0

10

20

30

40

50

60

70

80

90

100

1975 1980 1985 1990 1995 2000 2005 2010 2015

Age at 2kg liveweight Feed Conversion Ratio (RHS)

Days kg feed/kg meat

Poultry price

inflation in NZ has

been lower than

alternative meat

categories

Relative affordability

versus other

proteins is largely

driven by the

continual

advancement in

production

efficiency of poultry.

Relative affordability

versus other

proteins is largely

driven by the

continual

advancement in

production

efficiency of poultry.


21 December 2016 81

Fig 139 Chicken has relatively high retention of energy and protein

Fig 140 …and also edible yield

Source: Marine Harvest, Global Salmon initiative, December 2016 Source: Marine Harvest, Global Salmon initiative, December 2016

While not as stark, chicken compares relatively favourably to other meat source with

regards to protein retention (21%) and edible yield (46%). We note that retention rates

refer to protein/energy of edible meat versus protein/energy in feed. Yield refers to edible

meat portion of the total body weight.

Fig 141 Feed conversion based on edible yield of animal

Note: beef has a range due to varying types of feed used

Source: Macquarie Research analysis of data from Marine Harvest, Global Salmon initiative & Review of Nutrient Efficiency in different breeds of livestock – DEFRA UK, December 2016

Given favourable yield (second to pork among meat categories) and a more favourable

FCR, it is clear that chicken has a relatively high feed efficiency even after adjusting for the

animal’s edible yield.

Health & wellness

Consumers are increasingly aware of the importance of nutrition in improving their overall

health and wellbeing. A growing focus on active lifestyles and a greater understanding of

the link between diet, exercise and health is driving strong demand for healthier products.

Poultry is generally seen as a lean and healthy protein option, which delivers consistent

quality and is therefore a beneficiary from these trends.

According to the American heart association, red meats (beef, pork and lamb) generally

have more cholesterol and saturated fat than chicken, fish and vegetable proteins such as

beans. Cholesterol and saturated fat can raise your blood cholesterol and make heart

disease worse. Chicken and fish have less saturated fat than most red meat.

10%

14%

5%

27%

21%

18%

5%

15%

0%

5%

10%

15%

20%

25%

30%

Chicken Pork Lamb Beef

Energy retention Protein retention

46%

52%

35%

41%

0%

10%

20%

30%

40%

50%

60%

Chicken Pork Lamb Beef

3.5 - 3.84.5 - 5.3

13.0 - 23.2

26.3 - 39.4

0

5

10

15

20

25

30

35

40

45


x


21 December 2016 82

Chicken’s protein content is 6% lower than Beef, Pork and Lamb (average). However, fat

content was 51% lower. Within this, saturated fat content was 56% lower. If we exclude

lamb (which has relatively low protein and high fat), chicken has 10% lower protein

content, but 26% lower total fat content and 33% lower saturated fat content.

Fig 142 Protein content Fig 143 Fat content

Beef: stir-fry strips, separable lean, raw; Lamb: stir-fry cuts, fully-trimmed, raw; Pork: strips, as purchased, raw; Chicken, breast, lean, raw

Source: Food Standards Australia New Zealand, December 2016

Beef: stir-fry strips, separable lean, raw; Lamb: stir-fry cuts, fully-trimmed, raw; Pork: strips, as purchased, raw; Chicken, breast, lean, raw

Source: Food Standards Australia New Zealand, December 2016

Other drivers of chickens share of plate

Beyond measurable traits discussed thus far, chicken is broadly seen as a relatively

versatile and convenient meat option. Paradoxically, chicken’s versatility is a function of a

relatively bland flavour which makes it more adaptable to a variety of ingredients and

flavours. Chicken also has broader cultural acceptance relative to the other categories

(particularly Beef and Pork). Convenience is primarily driven by value-added products

which include seasoned, marinated, crumbed and battered chicken cuts (i.e. “ready to

cook”).

Provenance and animal welfare. Consumers are increasingly conscious of ensuring the

food products they consume come from known, trusted and safe sources. Furthermore,

consumers are becoming increasingly interested in the welfare of animals. Animal welfare

standards, such as those provided by the RSPCA and free range accreditation, play an

important part in communicating the standards applied during the life of the animal. In

response to consumer interest in animal welfare, the poultry industry has increased

production and promotion of higher-priced free range products for which there continues to

be strong demand.

All of Ingham’s chickens and turkeys are barn raised and cage free. All Ingham’s

Australian chicken broiler farms are accredited by the RSPCA. In addition, Ingham’s

Australian chicken broiler free range farms are also accredited by FREPA. Ingham’s New

Zealand free range chicken broiler farms are accredited by the SPCA.

In addition, the Australian and New Zealand poultry industries are subject to robust

regulation, relating to, among other things, product quality, food safety and animal welfare.

A better environmental footprint. Chicken’s carbon footprint is lower than other meat categories at 3.4kg of CO2 per kg of edible meat. Water usage (4,300 litres of water per kg of edible meat) also compares favourably to pork and beef.

22.3g

27.2g

22.4g 21.7g

0.0g

5.0g

10.0g

15.0g

20.0g

25.0g

30.0g

Chicken Beef Pork Lamb

grams / 100g serve

1.6g2.0g

2.3g

5.4g

0.5g 0.7g 0.8g

1.9g

0.0g

1.0g

2.0g

3.0g

4.0g

5.0g

6.0g

Chicken Beef Pork Lamb

Fat Saturated fat

grams / 100g serve


21 December 2016 83

Fig 144 Chicken has a relatively low CO2 footprint Fig 145 …and consumes less water

Source: Marine Harvest, December 2016 Source: Marine Harvest, December 2016

Australia vs. NZ – key differences

Fig 146 Australia vs. NZ chicken pricing Fig 147 Labour cost differences

Source: Macquarie Research Online shopping survey (Woolworths, Coles, New World (NZ) Countdown (NZ)), December 2016

Source: ABS, StatsNZ, Macquarie Research, December 2016

Thus far, we have discussed common drivers of poultry consumption across Australia and

New Zealand. However, it is worth highlighting one key difference, which translates to

differences in profitability of chicken production.

This is evident given Tegel’s FY16 EBITDA margin of 12.9%, versus Ingham’s at 7.3%.

While there is scope for this to narrow, factors preventing complete convergence are

higher poultry end prices and lower labour costs in New Zealand relative to Australia.

As illustrated above, we assess a variety of chicken products in both countries. On

average, NZ prices are at a 76% premium relative to Australian prices. For the economy

generally, Australian labour costs are 70% higher than NZ. However, it is worth noting that

the Australian chicken industry is a beneficiary of better scale economics relative to NZ

and is not as reliant on imported feed. These two factors provide a partial offset.

3.4

5.9

30

0

5

10

15

20

25

30

35

Chicken Pork Beef

kg CO2/kg of edible meat

4,300

6,000

15,400

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

Chicken Pork Beef

litres of water per kg of

edible meat

$9.0$8.3

$4.0 $4.0

$11.8 $12.1

$7.5 $7.2

$0

$2

$4

$6

$8

$10

$12

$14

Breast boneless Thigh cutlets Drumsticks Whole fresh roast chicken

Aus prices (A$/kg) NZ prices (A$/kg)

A$/kg

0

10

20

30

40

50

60

70

80

90

0

10

20

30

40

50

60

70

80

90

1994 1998 2002 2006 2010 2014

Australia New Zealand (in A$) New Zealand (in NZ$)

Labour costs: Australia vs New Zealand(annual average weekly full-time earnings)

$ '000 $ '000


21 December 2016 84

Appendix: Global poultry industry Meat category growth

The world continues to require more food and protein to feed the ever-growing population

and meet changes to consumption trends. The United Nations forecasts that the world’s

population will increase by 32% by 2050 to 9.5bn under its base case scenario, meaning

an additional 2.4bn mouths to feed. The majority of the population growth is expected in

Asia and Africa, representing 1.3bn and 0.9bn of population growth in the next 35 years.

Over this period, the world is expected to become more urbanised, increasing from the

current level of around 55% in 2015 to 66% in 2050 (UN projections). This shift in

urbanisation means that the entirety of the population growth over the forecast period adds

incrementally to urban centres.

Fig 148 World population expected to hit 9.7b by 2050…

Fig 149 …with around 66% being urbanised

Source: United Nations (Forecast beyond 2016), December 2016 Source: United Nations, December 2016

Urbanisation of population trends to have a positive impact on GDP per capita, average

household incomes and lifestyle and consumption patterns. In relation to food

consumption, urban diets tend to have a higher level of protein and fat consumption, with

these factors showing a reasonable relationship with GDP per capita.

Fig 150 Urbanisation tends to drive income, which in turn increases consumption of proteins and fats

Fig 151 Population and increased consumption per capita could see protein demand increase 65% by 2050

Source: United Nations, December 2016 Source: United Nations, December 2016

0

2

4

6

8

10

12

19

50

19

54

19

58

19

62

19

66

19

70

19

74

19

78

19

82

19

86

19

90

19

94

19

98

20

02

20

06

20

10

20

14

20

18

20

22

20

26

20

30

20

34

20

38

20

42

20

46

20

50

World population,

billions

Less developed regions More developed regions

(f)

0%

10%

20%

30%

40%

50%

60%

70%

0

1

2

3

4

5

6

7

19

50

19

55

19

60

19

65

19

70

19

75

19

80

19

85

19

90

19

95

20

00

20

05

20

10

20

15

20

20

20

25

20

30

20

35

20

40

20

45

20

50

Hu

nd

reds

Population, billions

Urban % (RHS) Urban Rural

(f)

0

20

40

60

80

100

120

140

160

180

200

0 20,000 40,000 60,000 80,000 100,000 120,000

Grams per capita per day

US$ GDP per capita

Protein consumption Fat consumption

206

339

0

50

100

150

200

250

300

350

19

70

Po

pu

lation

Co

nsu

mp

tion

20

11

Po

pu

lation

Co

ns

um

ptio

n

(40

yr

CA

GR

)

20

50

Million tonnes per annum

+65%

The world continues

to require more food

and protein to feed

the ever-growing

population

The world continues

to require more food

and protein to feed

the ever-growing

population


21 December 2016 85

Combining the forecast population growth and increased per capita consumption of protein

at 75% of the 40-year CAGR, implies the world needs to increase protein output by 65% by

2050.

Fig 152 Meat represents 17% of world protein consumption

Source: FAO, December 2016

Diets continue to evolve with a significant shift seen in the last fifty years to 2011. Total

protein consumption per capita has increased from around 61.5g/capita per day in 1961 to

80.5g in 2011 (last reported data, Source: FAO).

The amount of vegetal protein has increased from 41.8g to 48.7g over this period, but as a

proportion of diets this category has decreased from 45% to 40%. Correspondingly, animal

protein (ex fish and seafood) has increased from 24% to 28%.

Chicken is taking share of plate

Fig 153 Global meat consumption Fig 154 10 year growth by meat category


Poultry consumption globally has outpaced other meat categories. Over the 10 years to

2015 (CAGR), Poultry consumption has grown by 3.1% while Pork has grown by 1.8%,

lamb has increased by 1.6% and beef by 1.0%. Despite some deceleration, the OECD

forecasts poultry consumption will continue to outpace other meat categories.

0 10 20 30 40 50 60 70 80 90

1961

2011

World protein consumption g/capita/day

Cereals Starchy roots Fruit & vegetables Other vegetal

Meat Milk Other land animal Fish and seafood

While total vegetal protein consumption has increased, as a proportion of daily protein intake it has decreased from

68% to 60.5%

Animal protein share increased from 27.6%

to 33%

13%

17%

111,108kt

118,230kt

67,567kt

14,416kt

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

1995 2000 2005 2010 2015 2020


kt

3.9%

3.1%

2.0%

1.0% 1.0% 1.0%

2.3%

1.8%

0.9%

1.7% 1.6%1.9%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

2005 2015 2024f


10yr CAGR to...


21 December 2016 86

Fig 155 Global meat share of plate Fig 156 Share of plate over time


Total meat consumption in was 311mt in 2015 (OECD). Pork held the largest share of

plate with 38%, with chicken at 36%. In 2015, Beef accounted for 22% with Lamb’s share

at 4%. It is worth noting that Poultry is expected to overtake Pork as the most consumed

meat over the next 10 years.

Poultry, 111,108k, 36%

Beef, 67,567k, 22%

Pork, 118,230k, 38%

Lamb, 14,416k, 4%

311mt meat consumed in 2015

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%



21 December 2016 87

Summary of Peer Companies International Poultry Companies

Fig 157 Comparison of international comparables

Ingham’s Tegel Tyson Foods chicken

segment

Pilgrim's Pride

Sanderson Farms

Scandi Standard

FY15 revenue A$2.3b NZ$484m US$41.4b / US$11.4b

Chicken

US$8.2b US$2.8b SEK5.4b

Annual production (kt) 433 80 4,100 3,500 1,500 175 Vertically integrated Yes Yes Yes Yes Yes Yes Quarantine Facility 1 0 - - - - Processing Plants 7 3 44 30 10 4 Prepared Food Plants 7 1 32 6 1 2 Breeder Farms 74 40 414 - 49 ? Hatcheries 11 3 62 40 9 2 Contract Growers 225 93 6,000+ 4,100+ 632 ? Feed Mills 10 3 32 35 8 ? Distribution Centres 9 3 12 23 11 ? Rendering 1 1 9 8 - ? Pet Food Plants - - 1 3 - 1 Employees 8,200 2,300 113,000 39,000 13,000 1,700

Source: Ingham’s company data, Public company financial statements and presentations, December 2016

Profitability

Fig 158 International comps EBITDA margins

Source: Factset, USA average comprises (Tyson Foods, Sanderson Farms & Pilgrim’s Pride), December 2016

USA producers have shown greater margin volatility than European peers.

The USA poultry industry has been impacted by Avian Influenza and high commodity

prices at different times over the last decade. The USA exported around 20% of total

domestic production in 2015 and during Avian Influenza outbreaks, most export markets

are closed, resulting in significant disruption to domestic poultry producers.

Poultry producers typically have benefitted from the decline in commodity prices since

2012 with USA poultry margins currently at record highs. Commentary suggests US poultry

producers sell at short term or spot pricing which would allow for faster transfer of feed

costs into pricing, as opposed to Ingham’s and Tegel which use hedging and longer term

contracts to smooth out commodity price volatility. We understand Ingham’s is trying to

introduce feed pass through clauses into some of its contracts.

Ingham’s operates in Australia and New Zealand which are lower risk for outbreaks of

Avian Influenza and other avian diseases.

-5%

0%

5%

10%

15%

20%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

USA Europe (LDC SA) NZ (Tegel) Australia (Ingham's)


21 December 2016 88

International Poultry Industry

Industry characteristics and trends across the USA and European poultry markets typically

share many similarities to Australia and New Zealand poultry markets.

Large poultry producers are vertically integrated, controlling the entire process

from feed milling through to distribution except for the growing stage, which poultry

producers typically contract out.

One to two large poultry producers with significant market share typically

dominate each poultry market. These large scale producers generate significant

proportions of their revenue from key retailers, which creates key customer risks but

also makes it difficult for a retailer to quickly change suppliers. (e.g. Wal-Mart

accounted for 17% of Tyson’s FY15 revenue of US$41b).

Many international poultry producers have made acquisitions to consolidate the

industry and to access other markets while more recent acquisitions appear to be

aimed at entering or expanding capability into higher margin value-added and

processed foods segments. Tyson Foods acquired The Hillshire Brands Company in

2014, a manufacturer and retail marketer of packages and prepared foods for ~US$8b;

and Scandi Standard acquired organic chicken producer Bosarpkyckling also in 2014.

Commentary suggests that international producers often don’t have feed cost pass

through mechanisms in supply contracts, but instead rely upon regular contract pricing

negotiations.

Most poultry producers are:

Centralising facilities and expanding operation size, with ongoing investment in further

automation and efficiency projects

Continuing to use develop improved genetics and nutritional feed blends to improve

efficiency and lower the feed conversion ratio

Increasing new product innovation, particularly into the value added and further

processed categories, to drive additional sales in higher margin categories

Offering healthier, ethically approved chicken which includes products such as free

range, organic, and antibiotic free chicken. Large QSR’s in the USA including

McDonald’s, Chipotle Mexican Grill, and Subway have recently announced plans of

varying degrees to move away from animals fed with antibiotics

Trying to increase the volume of own branded product sales

Key Differences on Biosecurity

The European and United States markets are typically free to import and export poultry.

Due to low production costs in the US (scale, R&D, and labour costs), imported poultry

volumes are negligible and accounted for around 0.3% of domestic poultry consumption in

2006 to 2012.

Australia and New Zealand have strict protocols in place for the importation of chicken

meat that limits competition from international imports, particularly in fresh poultry that

accounts for the majority of the Australian and New Zealand markets.

Large poultry

producers are

vertically integrated

Large poultry

producers are

vertically integrated

One to two large

poultry producers

with significant

market share

typically dominate

each poultry market.

One to two large

poultry producers

with significant

market share

typically dominate

each poultry market.


21 December 2016 89

Fig 159 Capex/Sales for international comps Fig 160 US poultry producers Capex/Sales shows periods of increased investment

Source: Factset, December 2016 Source: Factset, December 2016

The long run average capex/sales for poultry producers is usually between 2% to 4% with

spikes during periods of significant investment. Tegel’s average capex/sales rate over the

past four years was 5.5% following upgrades to its processes and facilities.

Figure 156 shows US poultry producer Sanderson Farms’ increased capex after building

new poultry production complexes in 2005, 2007, 2010 and 2014. It is likely the other

producers have expanded at a slower rate or executed a more progressive approach to

adding capacity with smaller spikes in capex.

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

USA Average LDC (France) Tegel

0%

2%

4%

6%

8%

10%

12%

14%

Tyson Sandersons Pilgrim's Hormel


21 December 2016 90

New Zealand

Tegel (TGH: NZSE)

Tegel is New Zealand’s largest poultry producer. It processed 80,000 tonnes of poultry in

FY15 generating sales of NZ$484m and has an estimated market share of around 48%.

Domestic sales accounted for 84% of total sales in FY2015 while its growing export

business made up the remaining 14%. Tegel began operations in 1961 and listed on the

New Zealand stock exchange in 2016.

Fig 161 Tegel’s operations

Source: Tegel company data, December 2016

Tegel has three full vertically integrated production operations located in Auckland, New

Plymouth and Christchurch that allows the business to service the three main population

centres. Each region has ~25m birds per annum production capacity and contain a

hatchery, a feedmill, breeder farms, grower farms, a processing facility and a distribution

centre that can operate independently and can provide flexibility in case of any disruption

to a region.

Fig 162 TGH (NZ) vs S&P NZX

Source: Factset, December 2016

60%

70%

80%

90%

100%

110%

120%

May-16 Jul-16 Sep-16 Nov-16

TGH (NZ) S&P/NZX All

Tegel is New

Zealand’s largest

poultry producer

Tegel is New

Zealand’s largest

poultry producer


21 December 2016 91

Fig 163 Tegel revenue profile Fig 164 Tegel delivered strong uplift in FY16 margins

Source: Tegel Company data, December 2016 Source: Tegel Company data and Prospectus forecast, December 2016

Operations

Tegel reported revenue growth of 8.9% and 3.4% in FY15 and FY16 respectively with

EBITDA margins rising to 10.8% and 12.9% in the same periods. Tegel attributed the

improved margin performance to its business investment program and improved volumes

however lower feed costs also likely helped improve margins.

From FY13 to FY16 Tegel has invested over $70m in growth and productivity capital

expenditure across its integrated supply chain and processing facilities, as noted in Tegel’s

prospective financial information.

Tegel’s Product Disclosure Statement (PDS, March 2016) defines its growth strategy:

New product development and initiatives aimed at growing the overall volume and

value of poultry consumption;

Increased production of value added products to deliver solutions for evolving

consumer preferences;

Expanding into new channels, growing volumes and expanding the product range to

new and existing export customers; and

Identifying and entering new and growing export markets with a five year target for

exports to generate 25% of total revenue, compared to ~18% in FY16.

Brand refresh is currently underway aiming to increase consumers’ preference for

Tegel’s products and increase domestic poultry consumption, particularly in newly

developed products. The estimated cost of the refresh is ~NZ$5m and it was 12 years

since Tegel’s last major refresh.

1H17 Results Update

Tegel last week reported 1H17 results with total poultry volumes +6.9% and revenue up

4% on pcp. Within this domestic poultry volumes were +8.4% on pcp and export volumes

flat on pcp.

Whilst volumes and sales were strong, against a backdrop of soft domestic pricing,

underlying EBITDA was down 4% vs pcp to NZ$35.1m. Tegel noted that soft domestic

pricing has continued for longer than anticipated due to excess volumes in the market.

However in the longer term, Tegel expects that the domestic (NZ) market will return to

more rational volume levels. Indeed Tegel’s 1H17 results presentation noted an anticipated

pricing improvement in 2H due to “better market conditions”. Higher inter-island freight

costs due to the Kaikoura earthquake are a negative factor in 2H whilst 2H receives a full

six month positive impact of new contracts won in 1H17.

355 367 396 408 442

6387

88102

10567

6379

7278

0

100

200

300

400

500

600

700

FY13(a) FY14(a) FY15(a) FY16(a) FY17(e)

Domestic poulty Export poulty Other revenue

485

582563

517

$NZm

625

51.0 52.2

61.0

74.9

84.0

10.7%10.1%

10.8%

12.9%

13.4%

6%

8%

10%

12%

14%

16%

18%

0

10

20

30

40

50

60

70

80

90

FY13(a) FY14(a) FY15(a) FY16(a) FY17(e)

EBITDA margin

NZ$m

Tegel reported

revenue growth of

8.9% and 3.4% in

FY15 and FY16

respectively with

EBITDA margins

rising to 10.8% and

12.9% in the same

period

Tegel reported

revenue growth of

8.9% and 3.4% in

FY15 and FY16

respectively with

EBITDA margins

rising to 10.8% and

12.9% in the same

period


21 December 2016 92

Based on the current market conditions impacting FY17, underlying EBITDA is expected to

be between $75m and $85m, with NPAT between $33m and $41m. This compares to

Tegel’s PDS forecast in FY17 of $87m EBITDA (proforma, 53 weeks) and NPAT of $45.6m

(proforma, 53 weeks).

We note that proforma EBITDA was $74.7m in FY16 (52 weeks) and NPAT $36.8m.

Hence at the lower end of revised EBITDA guidance, FY17 would be flat on pcp whilst an

outcome at the mid-point of Tegel’s FY17 NPAT guidance would be similar to pcp. We

note Ingham’s New Zealand segment revenue is expected to be up 1% in NZ terms and

flattish in EBITDA terms vs pcp.

Tegel also noted the recent announcement permitting a wider range of products to be

exported to Australia will allow the company to accelerate export sales over the next few

years. Growth will be achieved through a considered approach with respect to identifying

product gaps and sustainability of margins. Tegel anticipates its first raw poultry sales into

Australia in the second half of this financial year.

Fig 165 Tegel FY15 revenue by product category Fig 166 Tegel FY15 revenue channels

Source: Tegel Company data, December 2016 Source:, Tegel Company data, December 2016

Products

Fresh poultry is Tegel’s core product and generated 42% of group sales in FY15 however

its value-added poultry range is growing and accounted for 37% of FY15 sales. Tegel’s

PDS forecasts further growth in value-added products capitalising on consumers who are

more health-conscious with busy lifestyles that make convenient, nutritious meals

desirable.

Domestic Market

NZ retail is Tegel’s primary distribution channel and generated 42% of FY15 revenues,

followed by NZ food service (20%), NZ QSR (8%) and NZ other (14%).

Tegel sells its products through a combination of supply contracts with its customers and

supply based on purchase orders placed by customers as and when they require product.

Tegel generates approximately 40-50% of total domestic poultry and smallgoods sales

from contracted supply (Tegel PDS).

Export Markets

Tegel generated 16% of FY15 sales through its export markets with Australia accounting

for around 60% of export volume. The export markets of Papua New Guinea, Fiji and

Vanuatu generate around 30% of volumes and Tegel has recently started sales into Hong

Kong and the United Arab Emirates. Additionally, Tegel is exploring opportunities to export

into the Philippines, Japan, Singapore, South Korea, Taiwan and Bahrain.

Fresh42%

Value Added37%

Frozen12%

Smallgoods5%

Other Poultry4%

NZ Retail42%

NZ Food Service

20%

NZ QSR8%

NZ Other14%

Australia13%

Other Export3%

Tegel generated

16% of FY15 sales

through its export

markets with

Australia

accounting for

around 60% of

export volume


21 December 2016 93

Recently announced changes now allow fresh poultry to be imported into Australia from

New Zealand only. This is the first time fresh poultry has been approved for import and

requires a valid import permit and compliance with an extensive list of requirements. The

potential increase in export poultry volumes from NZ to Australia due to this change is

unknown. We note that retail poultry prices are significantly higher in NZ (around 40% to

90% for fresh poultry depending on cut), shipping is a further additional cost, and the

additional days in transit may make fresh poultry unsuitable to export from NZ to Australia.

Fig 167 Feed is the largest component of Tegel's COGS

Fig 168 Tegel has a track record of effective feed cost management

Source: Tegel FY15 company data, December 2016 Source: Tegel Company data, December 2016

Input costs

Tegel’s largest input costs are raw materials that make up chicken feed (typically corn,

wheat, soy and barley). Tegel notes that it typically secures its input costs for ~12 months

in advance by hedging its exposure to US$ exposed commodities and foreign exchange

risks which allow it to effectively manage input prices for up to two years in advance at

fixed prices. This strategy has been successful with feed costs as a percentage of revenue

from FY10 to FY16 kept within a range of 22.6% to 24.6%.

Tegel sources feed from both domestic and international suppliers to procure the lowest

cost ingredients available. Tegel is able to alter its feed ratio and substitute amongst the

different grains to reflect any changes in the availability and pricing of the ingredients.

Additionally, Tegel’s feed mills have storage capacity for approximately four months of raw

ingredient requirements at current production levels.

Europe

The European poultry industries are typically more competitive due to European Union

trade laws which make importing and exporting poultry between the EU countries easier

and often with no tariffs imposed. Scandi Standard (SCST: ST) and LDC SA (LOUP: PA)

benefit from scale as the largest poultry producers in their respective markets and have

EBITDA margins of around 9% and 7% respectively.

Scandi Standard (SCST: ST)

Overview

Scandi Standard is Scandinavia’s largest poultry producer with operations in Denmark,

Sweden, Norway and a smaller Finish operation acquired in 2015. The company is

vertically integrated and owns its own hatchery that supplies stock to contracted breeders.

The company listed on the NASDAQ OMX Stockholm in 2014.

Feed32%

Manufacturing labour

24%

Other growing22%

Other direct22%

23.6% 23.1%22.7%

22.6%

24.6%

23.8%

16%

18%

20%

22%

24%

26%

28%

30%

$0

$100

$200

$300

$400

$500

$600

FY10 FY11 FY12 FY13 FY14 FY15

Revenue Feed Costs Feed Costs as % of Revenue

NZ$m

Recently announced

changes now allow

fresh poultry to be

imported into

Australia from New

Zealand only.

Recently announced

changes now allow

fresh poultry to be

imported into

Australia from New

Zealand only.

The European

poultry industries

are typically more

competitive due to

European Union

trade laws


21 December 2016 94

Fig 169 SCST (OME) vs FTSE World Europe


Scandi Standard produced around 174kt of poultry products in FY15 worth SEK5.4b

(~A$850m) and had an estimated market share for poultry of ~46% in Sweden, ~25% in

Norway, and ~40% in Denmark. Scandi notes that the Nordic market for poultry products

has grown around 4% (CAGR) over the last decade with the trend expected to continue, as

the per capita consumption of chicken in the Nordic region is significantly lower than in

other parts of Europe and the developed world.

Fig 170 Scandi Standard’s FY15 product mix Fig 171 Despite being a key player, margins are relatively low and highlight EU import competition

Source: Scandi company data, December 2016 Source: Scandi Standard company data, December 2016

Operations & Customers

Scandi’s FY15 results were impacted by the loss of a major contract in Norway and a drop

in market demand following extensive media coverage regarding bacteria in chicken,

according to the company. Sweden and Denmark increased operating income 41% and

38% to SEK160m and SEK144m respectively, while Norway declined 50% to SEK60m.

Scandi’s goal is to exceed a 10%+ EBITDA margin over the medium term.

Competition from other imports has increased in Sweden and Denmark while Norway

currently has restrictive quotas in place that provide more protection. Changes to these

different laws and regulations could have a large impact on Scandi’s operating results.

Poultry producer concentration seems to be similar to ANZ, with a few large leading

players in each market and numerous smaller businesses making the rest of the market:

-%

20%

40%

60%

80%

100%

120%

140%

160%

Jun-14 Oct-14 Feb-15 Jun-15 Oct-15 Feb-16 Jun-16

SCST (OME) FTSE World Europe

Frozen 45%

Fresh/Chilled43%

Egg6%

Other6%

5,202 5,2675,423

479 472 450

9.2%9.0%

8.3%

0%

2%

4%

6%

8%

10%

12%

14%

0

1,000

2,000

3,000

4,000

5,000

6,000

2013 2014 2015

Sales EBITDA margin

KRm


21 December 2016 95

Sweden: Scandi has ~45% market share with 2 large operators (Guldfageln &

Familjen Lagerbergs Kyckling) also supplying the market, as well as several smaller

and typically family run businesses.

Denmark: Scandi has ~42% market share and the market is futher supplied by two

relatively large competitors Rose Poultry & A Frost.

Norway: Scandi has ~22% market share behind 2 larger operators Nortura with ~45%

and Rema with ~29% market share.

Retailer concentration is high in Scandinavia, with the top four retailers accounting for 94%

of the Swedish market, the top two holding 70% of the Danish market, while the top four

control 96% of the Norwegian market.

The company notes it has limited contractual possibilities to pass feed price increases on

to its customers, with changes needing to be separately discussed and negotiated.

Products

Scandi continues to develop and release new products such as free-range chicken, ready

to cook and eat products, and various other processed foods. The Group has a product

development plan covering the next 18-36 months with major releases two to three times

per year in each country.

Scandi Standard estimates that fresh chilled products comprise around 75-80% of the

Danish and Norwegian retail markets while in Sweden frozen chicken dominates and

accounts for around 63% of sales. According to the company, the long-term trend is

towards an increasing demand for chilled products, which are gaining market share from

frozen products.

Own brand sales and private label sales were around 56% which is significantly higher

than Australia, while private label made up a smaller 39% of total sales in 2015,.

Acquisitions

Since listing Scandi Standard has made a few targeted acquisitions including:

Bosarpkyckling (Sweden, 2014) is the leading producer of organic chicken in Sweden

and will help increase penetration into the premium segment. At the time of

acquisition Bosarpkyckling reported growth of 12% CAGR since 2010.

Huttulan (Finland, 2015) is small chicken producer operating in Finland that is currently

processing around 1.4m chickens per annum, but reportedly had capacity for up to

10m. Scandi entered Finland as it has similar market characteristics to its existing

operations.

L.D.C. S.A. (LOUP: PA)

Overview

LDC is a poultry producer but also produces a small amount of pork, cattle and rabbit. It

operates through its poultry and catering divisions and operates in every large French

poultry production region including Burgundy, Brittany, Normandy and Aquitaine. The

group has grown via numerous acquisitions of production facilities and existing brands.

LDC was founded in 1968 and is listed on the Euronext NV, although it is largely owned by

five families with free float around 16%.


21 December 2016 96

Fig 172 LOUP (PAR) vs FTSE World Europe


LDC produced around 680kt of poultry products in FY15 worth €2.7m. According to LDC,

its French poultry division has been successful in developing its large national brands while

acquiring regional labels with strong brand power and good reputations to cater to the

French market. The convenience division offers a wide range of processed products such

as ready meals, pizzas, pancakes and sandwiches.

Fig 173 Poultry generates ~83% of LDC’s group sales Fig 174 LDC’s poultry segment has delivered solid growth and stable margins for ~10 years (note: Feb year end, have used FY16 as comparable FY15)

Source: LDC company data, December 2016 Source: Factset, December 2016

LDC announced an alliance with agricultural group Sofiproteol in 2014 to provide it with

access to feed production facilities and poultry production sites. LDC also acquired the

processed product manufacturer AGRIAL in 2015 which included two processing facilities

and a distribution business. AGRIAL had revenues of around €85m for FY15.

-%

50%

100%

150%

200%

250%

300%

350%

400%

1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

LOUP (PAR) FTSE World Europe

Poultry76%

Catering/Smallgoods

17%

International Poultry

7%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

0

500

1,000

1,500

2,000

2,500

3,000

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Sales EBITDA margin

€m


21 December 2016 97

North & South America

Summary

The United States is the largest poultry producer and consumer in the world and produced

over 18,00kt of poultry in 2015. The US poultry industry is highly efficient and US imports

are negligible, accounting for around 0.3% of domestic consumption of poultry meat in

2006 to 2012. The efficiency and scale of the US industry make it difficult for foreign

exports to compete in the US.

Fig 175 US poultry consumption volumes

Source: USDA data, OECD data, December 2016

In 2012, US exports accounted for 34% of global broiler meat and turkey meat exports by

volume. Mexico, Canada, China/Hong Kong and Russia accounted for an average of 63%

of all US exports by volume in 2006 to 2012. However, the global export market has

become increasingly competitive. Brazil, which has become a highly efficient producer over

time, was the world’s largest poultry exporter for most of 2006 to 2012. Other major global

poultry exporters include the European Union, Thailand and China while Russia, Saudi

Arabia, Mexico and Japan are the world’s largest poultry net importers.

Fig 176 EBITDA margins similar across producers but impacted primarily by Avian Influenza and feed costs

Source: Macquarie analysis of Factset data (US Chicago Corn price index and company margins), Sanderson Farms presentation, December 2016

The USA poultry industry was affected by Avian Influenza and high commodity prices at

different times over the last decade. The USA currently exports around 20% of total

production and during Avian Influenza outbreaks most export markets are closed.

15

20

25

30

35

40

45

50

55

60

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

US poultry consumption US poultry consumption (kg/capita)

kt kg/capita

1.9 2.0 2.2 2.3 2.5 2.0 2.5 3.5 4.9 3.5 4.0 6.6 6.9 5.9 4.0 3.7$0

$2

$4

$6

$8

$10

$12

$14

$16

$18

$20

-15%

-10%

-5%

0%

5%

10%

15%

20%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

US Corn Price - yearly average (US$/bushel) Tyson foods - Poultry

Sanderson Farms Pilgrim's Pride

Average of Tyson, Sanderson & Pilgrim's Pride

Avian Influenza

Drought induced high grain prices, chicken oversupply

$8 corn, recession

The efficiency and

scale of the US

industry make it

difficult for foreign

exports to compete

in the US.

The efficiency and

scale of the US

industry make it

difficult for foreign

exports to compete

in the US.

US exports

accounted for 34%

of global broiler

meat and turkey

meat exports by

volume

US exports

accounted for 34%

of global broiler

meat and turkey

meat exports by

volume


21 December 2016 98

Tyson Foods (TSN: NYSE)

Overview

Tyson Foods is the largest US poultry producer and operates a vertically integrated

chicken production process including breeding stock, contract growers, feed production,

processing, further-processing, marketing and transportation. Tyson also owns Cobb-

Vantress, Inc. (Cobb), one of the leading global poultry breeding stock suppliers. Tyson

Foods was incorporated in 1947 as Tyson’s Feed and Hatchery.

Fig 177 TSN (US) vs S&P500


Tyson reported group sales of US$40.6b in FY15. The poultry segment processed around

4,000kt of poultry in FY15, which is an average of 35m chickens per week through its 44

processing facilities and generated US$11b of sales (~27% of group).

Tyson notes its aim is to transition from a pure protein producer with one brand to a

consumer focused packaged goods company with multiple brands. Tyson acquired

Hillshire Brands, a manufacturer and retail marketer of packaged meat and prepared

foods, in 2014. Tyson generated 12.5% of FY15 sales from products created in the

previous three years and expects further growth from its product development program.

Fig 178 Poultry accounts for ~27% group sales... Fig 179 ...and is delivering strong results aided by falling feed prices in the US

Source: Tyson company data, December 2016 Source: Factset, December 2016

-%

50%

100%

150%

200%

250%

300%

350%

400%

450%

500%

1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

TSN (US) S&P 500

Chicken27%

Beef41%

Pork11%

Processed Foods

19%

Other2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Group Sales EBITDA

Group EBITDA margin Chicken Segment EBITDA margin

US$m


21 December 2016 99


Tyson does not produce all of its poultry requirements and buys in the open market to

optimise their value added and processed volumes. Tyson estimates if it produced its

entire FY15 poultry requirements they would have ended up with an additional 4 million

pounds (1.8m kg) of leg quarters per week to sell.

Tyson’s poultry segment has reported solid results since 2012 with falling commodity

prices translating into substantially lower feed costs, which account for ~64% of their cost

to grow a chicken. Lower feed costs provided a direct benefit to the poultry segment of

~US$600m in FY14 and ~US$450m in FY15 respectively and the company expects a

further ~$100m benefit in FY16. Poultry segment EBITDA margins increased from 7.6% in

FY13 to 10.2% in FY14 and 14.4% in FY15 and are significantly above Tyson’s average of

~7% over the past ten years.

Tyson notes that is uses a variety of different pricing models for their supply contracts,

some with guaranteed volume and they look at pricing every 30, 60 or 90 days. Because

many of its sales contracts are formula based or shorter-term in nature, they are

typically able to offset rising input costs through pricing, however, there is a lag time

for price increases to take effect.

Acquisitions

In 2014, Tyson acquired Hillshire Brands – a manufacturer and retail marketer of packaged meat and prepared foods – for ~US$8b, which was a 70% premium to its closing price following a bidding war with JBS. Tyson expects synergies of US$300m and paid a 16.7x trailing 12 months adjusted EBITDA multiple or ~10.5x including synergies.

Pilgrim’s Pride (PPC: NASDAQ)

Overview

Pilgrim’s Pride Corporation (PPC) is the second largest US poultry producer and is

primarily engaged in the production, processing, marketing and distribution of fresh, frozen

and value-added chicken products to retailers, distributors and foodservice operators. JBS

S.A. owns ~77% of the company. PPC started in 1946 as a retail feed store and was

incorporated in Texas in 1968 and reincorporated in Delaware in 1986.

Fig 180 PPC (US) vs S&P500


PPC produced around 3,500kt of poultry in FY15 generating sales of US$8.2b. It has

grown by numerous acquisitions to become a vertically integrated poultry producer

operating in 12 US States, Puerto Rico and Mexico. PPC acquired Tyson Food’s poultry

operations in Mexico during 2015 for around US$400m. Exports accounted for around 5%

of FY15 chicken sales.

-%

100%

200%

300%

400%

500%

600%

700%

800%

1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

PPC (US) S&P 500


21 December 2016 100

Fig 181 Fresh chicken accounts for ~70% of Pilgrim’s Pride FY15 sales

Fig 182 Pilgrim's Pride operating performance

Source: PPC company data, December 2016 Source: Factset, December 2016


PPC’s recent results have benefitted from falling commodity prices. Global corn stocks and

soybean inventories remain at high levels, with corn and soybean meal accounting for

approximately 46% and 35% of PPC’s total feed costs in 2015.

PPC has invested over US$1b in its business over the past 5 years to FY15 with plans for

an additional $190m investment during FY16.

Products

PPC are pushing into the antibiotic free chicken and other products, including a planned

near-term entry into organic chicken. Management note this represents an effort to better

resonate with new consumer trends for more natural products while adding further value to

their portfolio.

PPC notes that the jumbo bird (>7.75lbs) that is used predominately in the retail grocery

and food service industries continues to gain share in its markets.

Acquisitions

PPC acquired Tyson Food’s poultry operations in Mexico during 2015 for around

US$400m with the business expected to generate sales of around US$500m per year.

Fresh Chicken70%

Prepared Chicken

25%

Export & Other Chicken

5%

-5%

0%

5%

10%

15%

20%

25%

30%

-1,000

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Sales EBITDA Margin

US$m



Sanderson Farms (SAFM: NASDAQ)

Overview

Sanderson Farms is the third largest US poultry producer and is engaged in the

production, processing, marketing and distribution of fresh and frozen chicken and other

prepared food items. Sanderson Farms was founded in 1947 and completed an initial

public offering in 1987.

Fig 183 SAFM (US) vs S&P500


Sanderson Farms produced around 1,500kt of poultry in FY15 generating sales of

US$2.8b. Export markets generated around 7% of Sanderson’s FY15 gross sales with

Mexico, China and Central Asia the largest customers.

Fig 184 Value added products accounted for 92% of Sanderson Farms’ FY15 net sales

Fig 185 Sanderson Farms operating performance

Source: Sanderson Farms company data, December 2016 Source: Factset, December 2016


Sanderson Farms noted that its export markets were disrupted during FY15 by a number

of factors including avian influenza-related bans, a strong US dollar and international

political issues. Total US industry volume through October 2015 was lower by 15%

compared with 2014.

-%

200%

400%

600%

800%

1000%

1200%

1400%

1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

SAFM (US) S&P 500

Value Added92%

Non-Value Added

1%

Prepared Chicken

7%

-5%

0%

5%

10%

15%

20%

25%

30%

-500

0

500

1,000

1,500

2,000

2,500

3,000

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Sales EBITDA Margin

US$m



Sanderson opened a new poultry-processing complex in 2015 with capacity for 1.25m

chickens per week aimed at the big bird deboning market. The facility is currently operating

at ~50% capacity but is expected to ramp up to full capacity by the end of FY16.

Sanderson has also announced the selection of its next poultry complex site in North

Carolina with a further capacity for 1.25m chickens per week aimed at the big bird

deboning market. Sanderson Farms also built three major poultry processing facilities in

2005, 2007 and 2010.

The company changed its marketing strategy in 1997 to move away from the small bird

markets serving primarily the fast food industry to concentrate its production on the retail

and big bird deboning markets serving the retail grocery and food service industries. This

market shift resulted in larger average bird weights of the chickens processed by the

company (Fig 182 below).

Products

We note that Sanderson Farms’ definition of value added appears to be different to other

producers and it considers products “value added” by performing one or more processing

steps beyond the stage where the whole chicken is first saleable as a finished product.

However, the majority of its products are pre-packaged pieces of fresh chicken that align

more closely with the fresh poultry classification of other producers.

Average sale prices for poultry products decreased 11% in FY15 compared to FY14,

however this was offset by feed costs that were 16% lower than FY14. US farmers

produced good crops of corn and soybeans in 2015 and Sanderson Farms expect feed

costs in FY16 should be similar, if not slightly lower, than FY15.

Acquisitions

The company aims to have prepared foods sales account for ~10% of total sales (7% in

FY15) and the company states it may look to acquire additional businesses in the future to

bring this segments’ contribution back toward the target value.

Fig 186 The jumbo size bird is gaining market share.. Fig 187 ..and Sanderson Farms targets this market

Source: Pilgrim’s Pride investor presentation, December 2016 Source: Sanderson Farms investor presentation, December 2016

23% 24% 27% 26% 25% 26%

43% 41% 35% 35%32% 30%

19% 19% 19% 19%21% 22%

15% 16% 18% 19% 22% 22%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2011 2012 2013 2014 2015 2016

<1.9kg 1.9-2.8kg 2.8-3.5kg >3.5kg

2.6 2.6

3.6

2.7

2.3

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Tyson Foods Pilgrim's Pride Sanderson Farms

Perdue Foods Koch Foods

Average live weight (kg)

kg



Hormel Foods (HRL: NYSE)

Hormel Foods operates through five segments: Grocery Products, Refrigerated Goods,

Jennie-O Turkey Store, Specialty Foods, and International & Other. Hormel acquired

Jennie-O Foods, the largest privately owned US turkey producer at the time, in 1986 and

since then has completed numerous acquisitions. Hormel Foods was founded by George

A. Hormel in 1891 as Geo. A. Hormel & Co in Austin, Minnesota.

Fig 188 HRL (US) vs S&P500


Hormel’s turkey segment generated US$1.6b sales in FY15 (~18% of group sales) and

US$0.28b EBIT (~25% group EBIT). It is one of the largest turkey processors and

marketers in the world with over 1,500 products distributed across more than 20 countries.

Fig 189 Hormel’s Turkey segment accounted for ~18% of FY15 Group sales but ~25% of operating income

Fig 190 The Turkey segment results are more volatile than overall group margins

Source: Hormel company data, December 2016 Source: Factset, December 2016


Highly pathogenic avian influenza affected the back half of FY15 with around 20% of

Hormel’s turkey supply chain lost following the outbreak. Flocks lost earlier in the year

created large volume shortfalls in operations and sales. 4Q15 turkey sales and operating

income were down 18% and 23% respectively on pcp. Hormel expects 1H16 results will be

impacted while the supply chain is rebuilt but management expect results to normalise in

2H16.

-%

200%

400%

600%

800%

1000%

1200%

1400%

1600%

1800%

1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

HRL (US) S&P 500

Turkey18%

Refrigerated Products

47%

Grocery Products

17%

Specialty Foods

12%

International & Other

6%

0%

5%

10%

15%

20%

25%

30%

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Group Sales EBITDA

Group EBITDA margin Turkey Segment EBITDA margin

US$m



Hormel specialises in value added products and part of its strategy is on further product

innovation. The turkey segment has delivered strong margins and consistent profitability

when compared to the other US poultry producers over the same period.

JBS S.A. (JBSS3: BSP)

Overview

JBS SA is the largest protein processor and one of the largest global food companies and

operates out of Brazil. The company processes beef, pork, lamb, chicken and also

produces value added and convenience food products. JBS has more than 200 production

facilities worldwide across all divisions and has the capacity to process more than 14

million poultry birds per day.

Fig 191 JBS SA (BR) vs FTSE Brazil


JBS completed an initial public offering in 2007 and entered the poultry industry in 2009

with the acquisition of the predominately US-based Pilgrim’s Pride. JBS further expanded

its poultry operations in 2013 with the acquisition of Seara and rental of Tramonto

Alimentos’ poultry assets and entered Europe in 2015 with the acquisition of Moy Park,

one of Europe’s leading prepared foods and poultry producers. The recent acquisitions are

progressing JBS from a pure protein producer towards its goal of producing a larger

volume of value added products under brand names.

Fig 192 Poultry accounted for ~22% of FY15 sales Fig 193 JBS operating results 2010 - 2015

Source: JBS company data, December 2016 Source: Factset (no chicken segment data available for 2012/13),

December 2016

-%

50%

100%

150%

200%

250%

Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16

JBS SA FTSE Brazil

Poultry22%

Beef32%

Pork16%

Prepared & Other

30%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

2010 2011 2012 2013 2014 2015

Group Sales Group EBITDA

Group EBITDA margin Chicken segment EBITDA margin

R$m



Animal Feed Producers

Ridley (ASX: RIC)

Overview

Ridley Corp. Ltd. produces and markets stock feed and animal feed supplements. The

company also engages in the production of crude salt, salt refining and marketing. The

AgriProducts segment is a supplier of premium quality, high performance animal nutrition

solutions for most production animals including poultry, pigs, cattle and aquaculture. The

company was founded in 1987 and is headquartered in Melbourne, Australia.

Fig 194 RIC (AU) vs S&P/ASX Small Ords


Ridley produced 1,900kt of feed in FY15 generating A$910m revenue. Poultry feed

production was 1,000kt which is around 50% of total feed volumes.

Fig 195 Ridley feed volumes by market Fig 196 Ridley operating performance 1996 - 2015

Source: Ridley company data, December 2016 Source: Factset, December 2016


Ridley reported EBITDA margins ranging between 3.9% and 8.7%, with an average of

5.7%, between 1996 and 2015. The low margins would suggest that competition within the

feed industry is high and demand within some sectors can be impacted by climatic

conditions and availability of natural feed.

An Australian outbreak of Avian Influenza in November 2012 closed some of Ridley’s

export markets for its rendering segment. The Chinese and Indonesian export markets

(two of Ridley’s largest) were still closed when another detection occurred in October 2013.

-%

50%

100%

150%

200%

250%

1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

RIC (AU) S&P/ASX Small Ords

Poultry53%

Dairy15%

Rendering10%

Pig9%

Other13%

FY15 feed volume

-1%

1%

3%

5%

7%

9%

11%

13%

15%

0

200

400

600

800

1,000

1,200

1,400

1,600

1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

Sales EBITDA EBITDA Margin (%)

A$m

Ridley Corp. Ltd.

produces and

markets stock feed

and animal feed

supplements



Ridley has ongoing product development programs aimed at improving nutrition, biomass

conversion and economic performance for its customers and growers. Ridley is focused on

servicing the major poultry growth corridors of Victoria, South Australia and Queensland.

The company states it is in regular discussion with its major customers to secure volumes

necessary before new feed mill projects are approved.

Ridley paid $4.5m to acquire a long-term poultry feed supply agreement during 1H14. The

initial six year contract generated significant additional poultry feed volumes and allowed

the customer to close their urban-located feed mill.

Risks

Risks to Ridley’s feed business noted by the company include: Cyclical fluctuations,

influence of domestic harvest (variance of input prices), Influence of natural pasture on

supplementary feed decision making, impact on domestic and export markets in the event

of a disease outbreak, customer concentration and risk of regional consolidation, property

holdings and corporate risk.



Key customers - Australian Supermarkets - state of play Coles supermarket performance continues: Coles has continued to deliver strong

comparable store sales growth of 3.3% Easter adjusted in 4Q16, despite increasing

deflation of 2.4% over the 4Q16. This implies an underlying volume growth of 5.8% in the

4Q16. Management commented during the result call that transaction growth seen in FY16

was the strongest in two years, which matches with the output from our analysis in the Fig

below. While deflation and the increased competition in SA and WA has dampened Coles’

F&L EBIT margins by ~13bps in 2H16 the result is very strong compared to the rest of the

market.

WOW has delivered a sales result that appealed to the market. Comparable store

sales improved between 3Q16 and 4Q16 in Food (-1.3% to -1.1%), ahead of market

expectations. Furthermore, WOW noted comparable store sales growth improved further to

0.3% over the first eight weeks of FY17, in line with company expectations. While still at

the early stages of turning around the underperforming supermarkets divisions positive

signs can be seen, however, we are still cautious of timing given the continued

deterioration in sales per square metre.

The divergent performance, particularly around real growth (volumes) is clear from the two

sales decomposition charts below. From a volume and total sales growth perspective the

recent trends have been starkly in favour of Coles.

Fig 197 WOW F&L performance remains subdued Fig 198 Coles F&L volume growth remains strong

Source: Woolworths company Data, Macquarie Research, December 2016 Source: Coles company Data, Macquarie Research, December 2016

Since WES took over Coles and invested in the store network to drive productivity it has

outperformed WOW supermarkets on comp store basis. This outperformance over the last

7 years has increased Coles sales/sqm to a point where it now exceeds WOW.

Fig 199 Coles continues to significantly outperform Fig 200 Coles stores more productive than WOW

Source: Coles & Woolworths company Data, Macquarie Research, December 2016 Source: Coles & Woolworths company Data, Macquarie Research, December 2016

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

1Q

11

2Q

11

3Q

11

4Q

11

1Q

12

2Q

12

3Q

12

4Q

12

1Q

13

2Q

13

3Q

13

4Q

13

1Q

14

2Q

14

3Q

14

4Q

14

1Q

15

2Q

15

3Q

15

4Q

15

1Q

16

2Q

16

3Q

16

4Q

16

Woolworths CPI Real growth

Space/ new business Total

Contribution to Sales Growth (%)


-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

1Q

09

2Q

09

3Q

09

4Q

09

1Q

10

2Q

10

3Q

10

4Q

10

1Q

11

2Q

11

3Q

11

4Q

11

1Q

12

2Q

12

3Q

12

4Q

12

1Q

13

2Q

13

3Q

13

4Q

13

1Q

14

2Q

14

3Q

14

4Q

14

1Q

15

2Q

15

3Q

15

4Q

15

1Q

16

2Q

16

3Q

16

4Q

16

Coles CPI Real growth

Space/new business Total growth



-0.6%

3.3%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

Dec-0

4

Jun-0

5

Dec-0

5

Jun-0

6

Dec-0

6

Jun-0

7

Dec-0

7

Jun-0

8

Dec-0

8

Jun-0

9

Dec-0

9

Jun-1

0

Dec-1

0

Jun-1

1

Dec-1

1

Jun-1

2

Dec-1

2

Jun-1

3

Dec-1

3

Jun-1

4

Dec-1

4

Jun-1

5

Dec-1

5

Jun-1

6

% ChangeYoY WOW Food & Liquor Comparables

Coles Food & Liquor Comparables

7,000

9,000

11,000

13,000

15,000

17,000

19,000

FY

04

FY

05

FY

06

FY

07

FY

08

FY

09

FY

10

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16

FY

17e

FY

18e

Sales/sqm ($)

Coles F&L sales/sqm WOW F&L sales/sqm



Supermarkets “rationally competitive”?

Previously Coles’ management have defined the Australia supermarkets sector as

“rationally competitive”. While many in the market either simply do not agree, or remain

uncertain, there is no doubt that competition has stepped up in 2016.

Recently WOW re-established its price credentials in the important meat category, largely

neutralising out-of-the-market pricing across key value items (KVIs) such as mince and

chicken breast (Dec 2015), and establishing a strong value proposition in seasonally driven

lamb category.

The competitive response was predictably prompt, with Aldi moving below WOW’s pricing

in lamb and Coles using whole chickens as a new value proposition within Everyday.

However, it does demonstrate that WOW is warming up to the challenge of re-establishing

its value credentials.

This is just one of many skirmishes taking place in the marketplace and needs to be

followed by WOW with significant improvements in services standards in store and stock

availability if improved pricing is to lead to the sales and profit line. WOW had previously

admitted its key concern remains winning back the “value” and “premium” family

customers, and investing in the brands value proposition clearly indicates where it is doing

most of the work.

WOW’s shift to more proactive promotional tactics has required some readjustment from

the competition, but much of the investment to date has been on realigning WOW’s value

proposition back to market. Regardless, there has been a notable shift in competitive

response in June, which suggests that Coles’ promotional budget may need to see a

modest reallocation from proactive strategies to reactionary tactics.

Fig 201 Price investment has been driving

supermarket deflation and is expected to continue

Fig 202 Investing in prices lowered WOW’s F&L

margins significantly and are currently below Coles

Source: Coles & Woolworths company Data, Macquarie Research, December 2016

Source: Coles & Woolworths company Data, Macquarie Research, December 2016

We do not believe Coles is being unnecessarily dismissive of the competitive landscape,

particularly since a number of suppliers have noted its unilateral price increases in June: a

clear flag for profit management, which has traditionally been the domain of WOW under

previous management. What Coles may be contemplating, however, is WOW’s ability to

effectively compete, given the company’s balance sheet constraints.

-0.1%

-2.40%

-2.70%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

Sep

-04

Mar-

05

Sep

-05

Mar-

06

Sep

-06

Mar-

07

Sep

-07

Mar-

08

Sep

-08

Mar-

09

Sep

-09

Mar-

10

Sep

-10

Mar-

11

Sep

-11

Mar-

12

Sep

-12

Mar-

13

Sep

-13

Mar-

14

Sep

-14

Mar-

15

Sep

-15

Mar-

16

% ChangeQoQ ABS Food Inf lation

Coles food & Liquor Inf lation (avg. prices)

WOW avg price changes (new)

WOW avg price changes (old)

5.0%5.2%

2%

3%

4%

5%

6%

7%

8%

9%

10%

FY

04

FY

05

FY

06

FY

07

FY

08

FY

09

FY

10

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16

FY

17e

FY

18e

FY

19e

F&L EBIT margin

Woolworths

Coles



Inghams (ING:$3.08) 20-Dec-16

Interim results 2H/15A 1H/16A 2H/16A 1H/17E Profit & Loss 2016A 2017E 2018E 2019E

Revenue 2271.9 0.0 2308.7 1187.5 Revenue $m 2308.7 2375.0 2422.0 2467.6

EBITDA $m 114.5 0.0 167.5 91.2 EBITDA $m 167.5 190.1 208.6 219.5

Depreciation $m 33.3 0.0 34.4 20.2 Depreciation $m 34.4 42.2 50.0 53.6

Amortisation of goodwill $m 0.0 0.0 0.0 0.0 Amort (non-cash backed) $m 0.0 0.0 0.0 0.0

EBIT $m 81.2 0.0 133.1 71.0 EBIT $m 133.1 147.9 158.6 165.9

Net Interest expense $m 19.2 0.0 18.0 7.6 Net interest expense $m 18.0 15.3 14.8 14.5

Pre-Tax Profit $m 62.0 0.0 115.1 63.4 Pre-Tax Profit $m 115.1 132.6 143.8 151.3

Tax Expense $m 10.3 0.0 32.0 16.1 Tax Expense $m 32.0 33.7 37.4 39.3

Net Profit $m 51.7 0.0 83.1 47.3 Net Profit $m 83.1 98.9 106.4 112.0

Outside equity interests $m 0.0 0.0 0.0 0.0 Outside equity interests $m 0.0 0.0 0.0 0.0

Net Abn/Extra $m 0.0 0.0 0.0 0.0 Net Abnormals/Extra. $m 0.0 -53.6 0.0 0.0

Reported Earnings $m 51.7 0.0 83.1 47.3 Reported Earnings $m 83.1 45.3 106.4 112.0

Adjusted Earnings $m 51.7 0.0 83.1 47.3 Adjusted Earnings $m 83.1 98.9 106.4 112.0

Gross Cashflow $m 95.3 0.0 149.5 67.6 Gross Cashflow $m 149.5 167.3 160.1 167.6

EPS (Adj/dil) c 13.6 0.0 21.9 12.4 EPS (adj/diluted) c 21.9 26.0 28.0 29.5

EPS growth % -9.3 nmf 60.7 nmf EPS growth % 60.7 19.1 7.6 5.2

CFPS c 25.1 0.0 39.3 17.8 PE (adj) x 14.1 11.8 11.0 10.5

CFPS Growth % -22.0 nmf 56.9 nmf CFPS c 39.3 44.0 42.1 44.1

EBITDA/Sales % 5.0 nmf 7.3 7.7 CFPS Growth % 56.9 11.9 -4.3 4.7

EBIT/Sales % 3.6 nmf 5.8 6.0 PGCFPS x 7.8 7.0 7.3 7.0

Earnings Split % 100.0 0.0 100.0 47.8 DPS c 0.0 11.5 19.0 20.0

Revenue Growth % 1.9 nmf 1.6 nmf Yield % 0.0 3.7 6.2 6.5

EBIT Growth % -20.3 nmf 63.9 nmf Franking % nmf 100.0 100.0 100.0

Profit and Loss ratios 2016A 2017E 2018E 2019E Cashflow Analysis 2016A 2017E 2018E 2019E

Revenue Growth % 1.6 2.9 2.0 1.9

EBIT Growth % 63.9 11.1 7.2 4.6 Pre-tax Profit $m 115.1 132.6 143.8 151.3

EBITDA/Sales % 7.3 8.0 8.6 8.9 Depreciation & Amortisation $m 34.4 42.2 50.0 53.6

EBIT/Sales % 5.8 6.2 6.5 6.7 Tax Paid $m 0.0 -7.5 -33.7 -37.4

Effective tax rate % 27.8 25.4 26.0 26.0 Gross cashflow $m 149.5 167.3 160.1 167.6

Payout ratio % 0.0 0.4 0.7 0.7 Changes in working capital $m 0.0 -38.3 -3.5 -5.7

EV/EBIT x 11.6 10.6 9.8 9.3 Other $m 6.7 -63.0 -11.8 -11.0

EV/EBITDA x 9.2 8.2 7.4 7.0 Operating Cashflow $m 156.2 66.1 144.7 150.9

EV/Sales x 0.7 0.7 0.6 0.6 Acquisitions $m 0.0 0.0 0.0 0.0

Balance sheet ratios Capex - Plant & Equip. $m -76.8 -85.0 -60.0 -61.8

ROE % 127.2 66.7 57.5 50.2 Asset Sales $m 0.0 0.0 0.0 0.0

ROA % 19.4 16.2 16.6 17.0 Other $m 6.6 0.0 0.0 0.0

ROFE % 53.5 27.9 27.7 27.9 Investing cashflow $m -70.2 -85.0 -60.0 -61.8

Net Debt $m 366.9 396.0 379.3 364.4 Dividend (ordinary) $m 0.0 -10.3 -68.0 -74.1

Net Debt/Equity % 280.7 238.9 185.8 150.5 Equity raised $m 0.0 0.0 0.0 0.0

Interest Cover x 7.4 9.7 10.7 11.4 Other $m -86.0 0.0 0.0 0.0

ND/EBITDA x 2.5 2.1 1.8 1.7 Financing cashflow $m -86.0 -10.3 -68.0 -74.1

Price/NTA x 9.0 7.1 5.7 4.8

NTA per share $ 0.34 0.44 0.54 0.64 Net Change in cash/debt $m 0.0 -29.1 16.7 15.0

EFPOWA m 380.2 380.2 380.2 380.2

Historical performance* 2013A 2014A 2015A 2016A Balance Sheet 2016A 2017E 2018E 2019E

Cash $m 51.3 51.3 51.3 51.3

Revenue $m 0.0 2230.5 2271.9 2308.7 Receivables $m 221.3 239.9 242.2 246.8

EBITDA $m 0.0 142.1 114.5 167.5 Inventories $m 274.9 285.0 290.6 296.1

Depreciation/Amortisation $m 0.0 40.2 33.3 34.4 Investments $m 1.6 1.6 1.6 1.6

EBIT $m 0.0 101.9 81.2 133.1 Property, plant & equipment $m 372.0 414.8 424.9 433.0

Net interest expense $m 0.0 19.9 19.2 18.0 Intangibles $m 0.0 0.0 0.0 0.0

Pre-Tax Profit $m 0.0 82.0 62.0 115.1 Other Assets $m 5.3 5.3 5.3 5.3

Tax Expense $m 0.0 25.0 10.3 32.0 Total Assets $m 926.4 997.9 1015.9 1034.1

Net Profit $m 0.0 57.0 51.7 83.1 Payables $m 237.9 228.3 232.8 237.1

Net Abn/Extra $m 0.0 0.0 0.0 0.0 Short Term Debt $m 0.0 0.0 0.0 0.0

Long Term Debt $m 418.2 447.3 430.6 415.7

EPS (adj/dil) c nmf 15.0 13.6 21.9 Other Liabilities $m 139.6 156.5 148.3 139.3

EPS growth % nmf nmf -9.3 60.7 Total Liabilities $m 795.7 832.1 811.7 792.0

Ordinary DPS c 0.0 0.0 0.0 0.0 Shareholders Funds $m 130.7 165.8 204.2 242.1

EBITDA/Sales % nmf 6.4 5.0 7.3 Minority Interests $m 0.0 0.0 0.0 0.0

EBIT/Sales % nmf 4.6 3.6 5.8 Total Shareholders Equity $m 130.7 165.8 204.2 242.1

ROE % nmf nmf nmf 127.2

ROFE % nmf nmf nmf 53.5 Total Funds employed $m 926.4 997.9 1,015.9 1,034.1

EFPOWA m 0.0 380.2 380.2 380.2

Segments 2016A 2017E 2018E 2019E

Sales (A$)

Australia $m 1955.2 2003.3 2043.4 2084.2

NZ $m 353.5 371.7 378.6 383.4

Total 2308.7 2375.0 2422.0 2467.6

EBITDA (A$)

Australia $m 132.2 153.1 169.6 179.2

NZ $m 35.3 37.0 39.0 40.3

Total $m 167.5 190.1 208.6 219.5

EBITDA margin

Australia 6.8% 7.6% 8.3% 8.6%

New Zealand 10.0% 10.0% 10.3% 10.5%

Source: Macquarie Research EBITDA margin 7.3% 8.0% 8.6% 8.9%



Important disclosures:

Recommendation definitions

Macquarie - Australia/New Zealand Outperform – return >3% in excess of benchmark return Neutral – return within 3% of benchmark return Underperform – return >3% below benchmark return Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield

Macquarie – Asia/Europe Outperform – expected return >+10% Neutral – expected return from -10% to +10% Underperform – expected return <-10%

Macquarie – South Africa Outperform – expected return >+10% Neutral – expected return from -10% to +10% Underperform – expected return <-10%

Macquarie - Canada Outperform – return >5% in excess of benchmark return Neutral – return within 5% of benchmark return Underperform – return >5% below benchmark return

Macquarie - USA Outperform (Buy) – return >5% in excess of Russell 3000 index return Neutral (Hold) – return within 5% of Russell 3000 index return Underperform (Sell)– return >5% below Russell 3000 index return

Volatility index definition*

This is calculated from the volatility of historical price movements. Very high–highest risk – Stock should be expected to move up or down 60–100% in a year – investors should be aware this stock is highly speculative. High – stock should be expected to move up or down at least 40–60% in a year – investors should be aware this stock could be speculative. Medium – stock should be expected to move up or down at least 30–40% in a year. Low–medium – stock should be expected to

move up or down at least 25–30% in a year. Low – stock should be expected to move up or down at least 15–25% in a year. * Applicable to Asia/Australian/NZ/Canada stocks only

Recommendations – 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations

Financial definitions

All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards).

Recommendation proportions – For quarter ending 30 September 2016

AU/NZ Asia RSA USA CA EUR Outperform 47.26% 55.50% 38.46% 45.47% 59.09% 48.21% (for US coverage by MCUSA, 8.20% of stocks followed are investment banking clients)

Neutral 38.01% 29.31% 42.86% 48.77% 37.88% 36.79% (for US coverage by MCUSA, 8.25% of stocks followed are investment banking clients)

Underperform 14.73% 15.19% 18.68% 5.76% 3.03% 15.00% (for US coverage by MCUSA, 8.00% of stocks followed are investment banking clients)

ING AU vs Small Ordinaries, & rec history

(all figures in AUD currency unless noted)

Note: Recommendation timeline – if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period.

Source: FactSet, Macquarie Research, December 2016

12-month target price methodology

ING AU: A$3.65 based on a DCF methodology

Company-specific disclosures: ING AU: MACQUARIE CAPITAL (AUSTRALIA) LIMITED or one of its affiliates managed or co-managed a public offering of securities of Inghams Group Ltd in the past 12 months, for which it received compensation. MACQUARIE CAPITAL (AUSTRALIA) LIMITED or one of its affiliates managed or co-managed a public offering of securities of Inghams Group Ltd in the past 12 months, for which it received compensation. Macquarie and its affiliates collectively and beneficially own or control 1% or more of any class of Inghams Group Ltd's equity securities. Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/research/disclosures.

Date Stock Code (BBG code) Recommendation Target Price

Target price risk disclosures: ING AU: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include geographic mix and introduction of improved products or service offerings by competitors. The results of operations may be materially affected by global economic conditions generally, including conditions in financial markets. The company is exposed to market risks, such as changes in interest rates, foreign exchange rates and input prices. From time to time, the company will enter into transactions, including transactions in derivative instruments, to manage certain of these exposures.

Analyst certification: We hereby certify that all of the views expressed in this report accurately reflect our personal views about the subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. The Analysts responsible for preparing this report receive compensation from Macquarie that is based upon various factors including Macquarie Group Limited (MGL) total revenues, a portion of which are generated by Macquarie Group’s Investment Banking activities. General disclosure: This research has been issued by Macquarie Securities (Australia) Limited ABN 58 002 832 126, AFSL 238947, a Participant of the ASX and Chi-X Australia Pty Limited. This research is distributed in Australia by Macquarie Wealth Management, a division of Macquarie Equities Limited ABN 41 002 574 923 AFSL 237504 ("MEL"), a Participant of the ASX, and in New Zealand by Macquarie Equities New Zealand Limited (“MENZ”) an NZX Firm. Macquarie Private Wealth’s services in New Zealand are provided by MENZ. Macquarie Bank Limited (ABN 46 008 583 542,



AFSL No. 237502) (“MBL”) is a company incorporated in Australia and authorised under the Banking Act 1959 (Australia) to conduct banking business in Australia. None of MBL, MGL or MENZ is registered as a bank in New Zealand by the Reserve Bank of New Zealand under the Reserve Bank of New Zealand Act 1989. Apart from Macquarie Bank Limited ABN 46 008 583 542 (MBL), any MGL subsidiary noted in this research, , is not an authorised deposit-taking institution for the purposes of the Banking Act 1959 (Australia) and that subsidiary’s obligations do not represent deposits or other liabilities of MBL. MBL does not guarantee or otherwise provide assurance in respect of the obligations of that subsidiary, unless noted otherwise. This research contains general advice and does not take account of your objectives, financial situation or needs. Before acting on this general advice, you should consider the appropriateness of the advice having regard to your situation. We recommend you obtain financial, legal and taxation advice before making any financial investment decision. This research has been prepared for the use of the clients of the Macquarie Group and must not be copied, either in whole or in part, or distributed to any other person. If you are not the intended recipient, you must not use or disclose this research in any way. If you received it in error, please tell us immediately by return e-mail and delete the document. We do not guarantee the integrity of any e-mails or attached files and are not responsible for any changes made to them by any other person. Nothing in this research shall be construed as a solicitation to buy or sell any security or product, or to engage in or refrain from engaging in any transaction. This research is based on information obtained from sources believed to be reliable, but the Macquarie Group does not make any representation or warranty that it is accurate, complete or up to date. We accept no obligation to correct or update the information or opinions in it. Opinions expressed are subject to change without notice. The Macquarie Group accepts no liability whatsoever for any direct, indirect, consequential or other loss arising from any use of this research and/or further communication in relation to this research. The Macquarie Group produces a variety of research products, recommendations contained in one type of research product may differ from recommendations contained in other types of research. The Macquarie Group has established and implemented a conflicts policy at group level, which may be revised and updated from time to time, pursuant to regulatory requirements; which sets out how we must seek to identify and manage all material conflicts of interest. The Macquarie Group, its officers and employees may have conflicting roles in the financial products referred to in this research and, as such, may effect transactions which are not consistent with the recommendations (if any) in this research. The Macquarie Group may receive fees, brokerage or commissions for acting in those capacities and the reader should assume that this is the case. The Macquarie Group‘s employees or officers may provide oral or written opinions to its clients which are contrary to the opinions expressed in this research. Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/disclosures © Macquarie Group

This publication was disseminated on 20 December 2016 at 13:14 UTC.

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