IBF - Session 2.1 - De Gregorio (Opportunities and ... · Brescia, 12 June 2015. Sales (millions of...

Opportunities and Challenges in the Food Chain

The quest for value

Business Analysis

Pio De GregorioHead

Anna TugnoloSenior Analyst

Brescia, 12 June 2015

Sales (millions of euro) 2012 2013 2014 2015F

Manufacture of food products 106,834 107,091 105,216 107,468

% annual change 0.2% -1.8% 2.1%

Total Manufacturing 906,168 875,817 873,847 870,169

% annual change -3.3% -0.2% -0.4%

Sales of Manufacture of food product as %

of Sales of Total Manufacturing 11.8% 12.2% 12.0% 12.4%

The Italian Food IndustrySales and employment

2Business Analysis

of Sales of Total Manufacturing 11.8% 12.2% 12.0% 12.4%

Source: Business Analysis - UBI Banca on ISTAT data

Number of employees in the Italian Food Industry:

10%

of Total Manufacturing Industry

The Italian Food IndustryIndustrial production and exports

10.000

15.000

20.000

25.000

mil

lio

n o

f e

uro

Italian exports of food products

CAGR = 5.86%80

85

90

95

100

105

110

ind

ex

es

reb

ase

d o

n 1

00

Industrial production indexes

3Business Analysis

0

5.000

10.000

+2.2%

60

65

70

75

Ge

n-2

00

7

Giu

-20

07

No

v-2

00

7

Ap

r-2

00

8

Se

t-2

00

8

Fe

b-2

00

9

Lu

g-2

00

9

Dic

-20

09

Ma

g-2

01

0

Ott

-20

10

Ma

r-2

01

1

Ag

o-2

01

1

Ge

n-2

01

2

Giu

-20

12

No

v-2

01

2

Ap

r-2

01

3

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01

3

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4

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g-2

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4

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-20

14

ind

ex

es

reb

ase

d o

n 1

00

Manufacturing Manufacture of food products


The Italian Food IndustryNumber of companies and breakdown by sector

2012 (latest available)Number of

companies% of total

Processing and preserving of meat and production of meat products 3555 6.5%

Processing and preserving of fish, crustaceans and molluscs 387 0.7%

Processing and preserving of fruit and vegetables 1738 3.2%

Manufacture of vegetable and animal oils and fats 3311 6.0%

Manufacture of dairy products 3469 6.3%

Manufacture of grain mill products, starches and starch products 1011 1.8%

Manufacture of bakery and farinaceous products 35765 64.9%

4Business Analysis

The companies operating in the Italian food industry are 55,100, of which more than half are small bakeries.If these are excluded, then the number of companies falls to around 25,000.

Manufacture of bakery and farinaceous products 35765 64.9%

10.71 - Manufacture of bread; manufacture of fresh pastry goods and cakes 29897 54.3%

Manufacture of other food products 5340 9.7%

Manufacture of prepared animal feeds 524 1.0%

Manufacture of food products 55100 100.0%

Total excluding bakeries 25203


The Italian Food IndustrySelected sample of small-medium enterprises: key data

The sample is made of 1,003 companies selected according to the following criteria:

Companies classified as operating in the Food Industry by ISTAT – Italian

National Statistical Office

Company accounts available from 2008 through 2013

1

2

5Business Analysis

Detailed company accounts available

Sales in 2013 included in the range €10 million - €500 m illion

3

4

The sample of selected companies is closed.

Source: Business Analysis - UBI Banca

Selected Sample of SME Companies in the Italian Food Ind ustrySales

Aggregated sales (million euro) Aggregated sales – % annual change

2,0%

4,0%

6,0%

8,0%

10,0%

12,0%

20.000

25.000

30.000

35.000

40.000

45.000

50.000

mil

ion

i d

i e

uro

6Business Analysis

In the last four years the aggregated sales of sample co mpanies have increased costantly.

-6,0%

-4,0%

-2,0%

0,0%

2009 2010 2011 2012 2013

0

5.000

10.000

15.000

2008 2009 2010 2011 2012 2013

mil

ion

i d

i e

uro

2008 2009 2010 2011 2012 2013

Ricavi (milioni di euro) 36.388 35.129 37.799 41.351 42.724 44.478

2009 2010 2011 2012 2013

Ricavi (var. % annua) -3,5% 7,6% 9,4% 3,3% 4,1%Sales (euro million) Sales (% change)


EBITDA Margin EBIT Margin

5,0%

5,5%

6,0%

6,5%

7,0%

7,5%

8,0%

8,5%

2008 2009 2010 2011 2012 2013

2,5%

2,7%

2,9%

3,1%

3,3%

3,5%

3,7%

3,9%

4,1%

4,3%

4,5%

2008 2009 2010 2011 2012 2013

Selected Sample of SME Companies in the Italian Food Ind ustryProfit margins

7Business Analysis

NOPAT Margin

The NOPAT margin of the sample companies

has declined as a result of the increase of

input prices and the pressure on selling

prices due to soft domestic demand.

1,0%

1,2%

1,4%

1,6%

1,8%

2,0%

2,2%

2,4%

2,6%

2,8%

3,0%

2009 2010 2011 2012 2013


Fixed assets as % of sales Net operating working capital as % of sales

25,0%

27,0%

29,0%

31,0%

33,0%

35,0%

37,0%

2008 2009 2010 2011 2012 2013

12,0%

13,0%

14,0%

15,0%

16,0%

17,0%

18,0%

2009 2010 2011 2012 2013

Selected Sample of SME Companies in the Italian Food Ind ustryCapital turnover

8Business Analysis

Turnover of invested capital

Fixed assets have declined as % of sales

thanks to the growth of the latter, whereas the

net operating working capital as % of sales

has remained fairly stable. Hence the capital

turnover ratio (I.e. Sales / Invested capital)

has been stable just over 2x.

2,07

2,14

2,21

2,13

2,18

2,00

2,05

2,10

2,15

2,20

2,25

2009 2010 2011 2012 2013


Indebitamento netto in valore assoluto Debito Netto / Patrimonio Netto

7.000

7.500

8.000

8.500

9.000

9.500

2008 2009 2010 2011 2012 2013

mil

ion

i d

i e

uro

0,60

0,65

0,70

0,75

0,80

0,85

0,90

0,95

2008 2009 2010 2011 2012 2013

Selected Sample of SME Companies in the Italian Food Ind ustryDebt

9Business Analysis

Debito Netto / EBITDA

The net debt of the sample companies has

trended down since 2011. As a result, the

financial structure looks quite strong.

0,60

1,10

1,60

2,10

2,60

3,10

3,60

4,10

2008 2009 2010 2011 2012 2013


2,77%

2,46%

2,03% 1,93% 1,92%

0,00%

0,50%

1,00%

1,50%

2,00%

2,50%

3,00%

2009 2010 2011 2012 2013

Margine di Profitto

5,74%5,28%

4,49%4,12% 4,19%

4,00%

5,00%

6,00%

7,00%

Ritorno sul Capitale (ROI)

Selected Sample of SME Companies in the Italian Food Ind ustryROI – Return on Invested Capital

NOPAT margin

ROI – Return on Invested Capital

10Business Analysis

The Return on Invested Capital of samplecompanies has declined in the last years as aconsequence of the fall in the NOPAT margin,while the capital turnover ratio has remaindfairly constant.

2,07

2,14

2,21

2,13

2,18

2,00

2,05

2,10

2,15

2,20

2,25

2009 2010 2011 2012 2013

Rotazione del Capitale

0,00%

1,00%

2,00%

3,00%

4,00%

2009 2010 2011 2012 2013

Capital turnover


The quest for valueWhat is the Economic Value Added?

Invested Capital

ROI WACC

11Business Analysis

CompanyCreates

shareholders’ value

ROI is lower than WACC

ROI WACC< >

Companydestroys

shareholders’ value

ROI is higher than WACC

ROI WACC


WACC – Weighted Average Cost of Capital

Invested Capital

Equity

Cost of EquityCost of Equity Cost of Debt

Debt

12Business Analysis

Yield ofGovernment

Bond

Yield ofGovernment

Bond

MarketRisk

Premium

MarketRisk

Premium

Costof

Equity

Costof

Equity

BankInterest

Rate

CreditRisk

Premium

Costof

Debt


Selected Sample of SME Companies in the Italian Food Ind ustryWACC – Weighted Average Cost of Capital

COST OF EQUITY

Government Bond Yield (normalised) 3.5%

Beta 1.07

Market Risk Premium 4.5%

Cost of Equity 8.3%

COST OF DEBT

Bank interest rate (normalised) 3.50%

Credit Risk Premium 1.50%

Tax Shield (1-Normalised Tax Rate) 0.73%

Cost of Debt 3.63%

13Business Analysis

WACC – Weighted Average Cost of Capital = 6,35%

WEIGHTED AVERAGE COST OF CAPITAL

Weight of Debt 42%

Weight of Equity 58%

Leverage ratio 72.4%

WACC - Weighted Average Cost of Capital 6.35%


Economic Value AddedROI vs WACC

3,00%

4,00%

5,00%

6,00%

7,00%

-104.086

-189.345

-250.000

-200.000

-150.000

-100.000

-50.000

0

Selected Sample of SME Companies in the Italian Food Ind ustryEconomic Value Added

ROI

WACC

14Business Analysis

ROI Spread del valore economico

Spread del Valore Economico

Capitale Investito

0,00%

1,00%

2,00%

3,00%

2009 2010 2011 2012 2013

ROI Costo Medio Ponderato del Capitale Investito (WACC)

-348.412

-446.198 -439.663

-500.000

-450.000

-400.000

-350.000

-300.000

2009 2010 2011 2012 2013

As ROI has been lower than WACC, at the aggregated level sample companies have destroyedshareholders’ value.


What factors are behind this negative result?


The quest for value in the Italian Food IndustryWhy companies destroy value?

15Business Analysis


Because the NOPAT margin is too low

Because the Capital Turnover is too low

Because both factors are too low

?

?

?


8.3

8.7

10.7

10.3

6.1

5.1

24.2

24.1

15.2

15.8

16.5

16.5

19

19.5

2008

2011

The quest for value in the Italian Food IndustryThe value chain

Value of food products – Allocation among sectors in the va lue chain (2008 and 2011)

16Business Analysis

8.7 10.3 5.1 24.1 15.8 16.5 19.5

0 10 20 30 40 50 60 70 80 90 100

2011

Import of Final Food Products Value Added Food Industry Value Added Agri Industry Value Added Distribution

Value Added Other Sectors Import of Crops Tax

Given at 100 the price paid by final customers for food pr oducts, in 2011 the added value share of the food industry was only 10,3%, compared with an added value s hare of 24% for the distribution sector

(transport and retail).

Source: Business Analysis - UBI Banca on ISMEA/ISTAT data

5,3

5,3

1,9

1,6

2,9

3,0

3,1

2,7

2,4

2,0

1,1

0,7

2008

2011

2008

2011

The quest for value in the Italian Food IndustryThe value chain

Agricolture

FoodIndustry

10,3

10,6

6,1

5,0

The pre-tax profit margin of the Italian Food Industry ac cording to INPUT-OUTPUT estimates of Istat

17Business Analysis

10,3

10,6

5,7

6,1

3,1

3,3

2,7

2,8

10,9

10,2

6,8

6,8

0 5 10 15 20 25

2008

2011

2008

2011

Salari Ammortamenti Profitto economico

In 2011 the operating pre-tax profit margin of the Ital ian Food Industry was equal to only 2,0% of the total price paid by final customers.

Retail&

Transport

Othersectors

24,3

24,1

15,2

15,7

Wages Depreciation Operating pre-tax profit

Source: Business Analysis - UBI Banca on ISMEA/ISTAT data

2012 data

Sector Number of

companies

Sales (mln

euro) Employed

Company

average

sales (mln

euro)

Average

sales per

employee

(mln euro)

Manufacture of food products 55,100 106,834 309,977 1.94 0.34

Processing and preserving of meat and

production of meat products3,555 23,016 53,008 6.47 0.43

Processing and preserving of fish,

crustaceans and molluscs387 2,188 5,067 5.65 0.43

Processing and preserving of fruit and 1,738 9,032 26,455 5.20 0.34

The quest for value in the Italian Food IndustryAverage sales per company

18Business Analysis

Processing and preserving of fruit and

vegetables1,738 9,032 26,455 5.20 0.34

Manufacture of vegetable and animal oils

and fats3,311 6,670 7,057 2.01 0.95

Manufacture of dairy products 3,469 17,801 38,382 5.13 0.46

Manufacture of grain mill products, starches

and starch products1,011 6,311 7,033 6.24 0.90

Manufacture of bakery and farinaceous

products35,765 17,809 115,077 0.50 0.15

10.71 - Manufacture of bread;

manufacture of fresh pastry goods and

cakes

29,897 7,450 80,679 0.25 0.09

Manufacture of other food products 5,340 18,893 51,540 3.54 0.37

Manufacture of prepared animal feeds 524 5,113 6,358 9.76 0.80

Source: Business Analysis - UBI Banca on ISTAT, INSEE data

� The quest for value for the Italian Food Industry is connected to the companies’ dimensionalissue: because they are usually quite small, they have a very limite d negotiating powervis-à-vis other companies in the value chain , in particular with regard to the distributionsector (wholesale and retail companies).

� However, a small increase in profitability for the Food Industry at the expense of thecompanies in other sectors of the value chain (with particular regard for those in the distributionsector) would be sufficient to make it possibile for them to create sh areholders’ value .

The quest for value in the Italian Food IndustryThe dimensional hurdle

19Business Analysis

� Hence, we have simulated a scenario whereby in the next four years th e NOPAT margin ofthe sample companies increases by 1% of sales, rising gradua lly from 1,9% in 2013 to2,9% in 2018.

This increase in the NOPAT margin is large enough to let sa mple companies to createShareholders’ value in 2018, when as a result ROI is hig her than WACC.


2,77%

2,46%

2,03% 1,93% 1,92%2,08%

2,33%2,49%

2,65%2,89%

0,00%

0,50%

1,00%

1,50%

2,00%

2,50%

3,00%

3,50%

2009 2010 2011 2012 2013 2014F 2015F 2016F 2017F 2018F

Margine di Profitto

5,74%5,28%

4,49%4,12% 4,19%

4,53%5,11%

5,55%6,00%

6,65%

4,00%

5,00%

6,00%

7,00%

Ritorno sul Capitale (ROI)

The quest for value in the Italian Food IndustryScenario with increase in NOPAT margin – Projection for R OI

Forecast

Forecast

NOPAT margin

ROI – Return on Invested Capital

20Business Analysis

0,00%

1,00%

2,00%

3,00%

4,00%

2009 2010 2011 2012 2013 2014F 2015F 2016F 2017F 2018F

2,07

2,14

2,21

2,13

2,18 2,182,20

2,232,26

2,30

1,95

2,00

2,05

2,10

2,15

2,20

2,25

2,30

2,35

2009 2010 2011 2012 2013 2014F 2015F 2016F 2017F 2018F

Rotazione del Capitale

The rise in the NOPAT margin leads to an

increase in ROI such that in the last forecast

year it is higher than WACC and therefore

sample companies create shareholders’ value.

Forecast

Capital turnover


The quest for value in the Italian Food IndustryScenario with increase in NOPAT margin – Projection for e conomic value added

Economic Value AddedROI vs WACC

4,00%

5,00%

6,00%

7,00%

-104.086

-189.345

-167.189

-75.257

66.526

-200.000

-100.000

0

100.000

WACC

ROI

21Business Analysis

ROI Spread del valore economico

Valore Economico aggiunto/ distrutto

0,00%

1,00%

2,00%

3,00%

2009 2010 2011 2012 2013 2014F 2015F 2016F 2017F 2018F

ROI Costo Medio Ponderato del Capitale Investito (WACC)

-189.345

-348.412

-446.198-439.663

-364.903

-254.489

-500.000

-400.000

-300.000

-200.000

2009 2010 2011 2012 2013 2014F 2015F 2016F 2017F 2018F

Forecast

Forecast

In 2018 the ROI in above the level of WACC and therefore the sam ple companies create shareholders’value. Hence, a small increase in the operating profitabili ty of sample companies is sufficient to make itpossible for them to create shareholders’ value.


The quest for value in the Italian Food IndustryQuality as competitive key factor for value creation

89% 90%

50%

60%

70%

80%

90%

100%

% s

ul

tota

le a

zie

nd

e d

el

sett

ore

Industrie Alimentari e delle Bevande - Principali punti di forza competitiva delle imprese per attività

economica (in % del totale aziende) - Anno 2011

Prezzo

Qualità

Flessibilità produttiva

Main competitive factors (in % of total companies – 2011 )

Price

Quality

Production flexibility

22Business Analysis

30%

38%

24%

29%

20% 20%

0%

10%

20%

30%

40%

Industrie alimentari Industria delle bevande

% s

ul

tota

le a

zie

nd

e d

el

sett

ore

Flessibilità produttiva

Diversificazione Produttiva

According to the last ISTAT Census on Italian companies, qua lity represents the key competitive factor forthe Food Industry. Price is far less relevant and production flexibility and product diversification are evenless important.

Food Industry Beverage Industry

Production flexibility

Product diversification


The quest for value in the Italian Food IndustryGeo-traditional quality production (DOP, IGP e STG )

DOP IGP STG TOTAL

France 67 10 50 7 45 9 7 3 5 5 89 118 1 208

Germany 5 15 7 - 17 1 4 7 5 35 32 64 - 96

Greece 2 - 21 1 42 29 1 1 1 3 74 27 - 101

CountryFresh

meat

Meat

processingCheese

Other

animal

products

Fruit and

vegetable

Oil and

fat

Other

products

Bakery

products

Fish

productsOther

Food Quality Products

23Business Analysis

Italy has the highest number of recognised geo-tradition al food products with high quality standard.

Greece 2 - 21 1 42 29 1 1 1 3 74 27 - 101

Italy 5 37 47 4 101 43 8 9 5 3 158 101 2 261

Netherland - - 7 - 2 - - 1 - - 5 3 2 10

Portugal 30 36 12 11 25 6 1 2 - - 62 61 - 123

United Kigdom 11 4 15 1 6 - 4 1 9 3 22 30 2 54

Spain 15 16 28 4 55 29 7 16 3 - 92 77 4 173

Total EU 142 146 220 37 320 123 45 70 35 44 559 579 43 1,181

Rest of World 1 - - - 7 - 4 1 2 1 5 11 - 16

WORLD 143 146 220 37 327 123 49 71 37 68 587 590 43 1,220

% Italy 3.5% 25.3% 21.4% 10.8% 30.9% 35.0% 16.3% 12.7% 13.5% 4.4% 26.9% 17.1% 4.7% 21.4%

Source: Business Analysis - UBI Banca on ISMEA data

The quest for value in the Italian Food IndustryDirect supply contracts

The quality factor involves also the agriculture companies in the

making of integrated chain for the production of entirely ‘M ade in

Italy’ food products?

24Business Analysis

Indeed, in recent years new contracts have been developed to create

direct supply channels between farmers and food companies (so

called ‘Contratti di fornitura’).

The answer is ‘yes’ and it asks for the creation of direct s upply chains

between farmers and food processing companies.


The quest for value in the Italian Food IndustryThe advantages of direct supply contracts

� Safer income thanks to pre-defined supply price

� Higher income thanks to superior quality

� Better agriculture techniques thanks to collaboration wit h

food processing companies

For theFarmers

25Business Analysis

� Safer supply

� Reduction of transport costs

� Higher quality of supply

� ‘Made in Italy’ label

� Full trackability of products

� Less volatility for supply prices

For the Food Company


The quest for value in the Italian Food IndustryDirect supply contract – Durum wheat sector

Puglia, Campaniaaround 1000 farmers involved

Marche around 2000 farmers involved

Marche around 300 farmers involved

De Matteis – Grano Armando

Barilla – Granoduro.net

Pasta Zara – Furio Camillo

26Business Analysis

around 300 farmers involved

Puglia around 20 farmers involved

Toscana, Marche, Puglia around 15 farmers involved

Pasta Zara – Furio Camillo

Granoro – Dedicato

Barilla, De Cecco, Divella –

SIGRAD


The quest for value in the Italian Food IndustryDirect supply contract – Tomato sector

Framework Contract ‘Area Nord Italia’Tomato Supply

12 ProductionOrganisations

AIIPA – Associazione Italiana Industrie

Prodotti Alimentari

UnionAlimentariConfapindustria Emilia -

27Business Analysis

Confapindustria Emilia -Romagna


Conclusions

The Italian Food Industry is characterised by small compan ies whose negotiating poweris low with regard to companies operating in the distribu tion system of food products.

However, we have demonstrated than a small improvement in the profitability of SME sampledin the Italian Food Industry would be sufficient to make it p ossible for them tocreate shareholders’ value, i.e. to bring the level of R OI above that of WACC.

Many companies , even small , are trying to achieve this improvement in profitability by

28Business Analysis

Many companies , even small , are trying to achieve this improvement in profitability byincreasing the quality of their products. Indeed, quali ty is considered by the vast majority

of the Italian food companies as the most important compet itive factor.

Therefore, the ‘quest for value’ has become a ‘quest for quality’. In this respect, it is becomingincreasingly important the creation of direct supply chan nels between the agriculture companies

and the food processing companies. On one side, these c ontracts facilitate the realisation ofintegrated ‘Made in Italy’ supply chain to further elevat e the quality of products.

On the other side, these direct supply contracts allow bot h farmersand food processing companies to increase their profitab ility.


Oppurtunities and challenges in the Food Chain

29Business Analysis

ThanksFor Your Attention

Opportunities and Challenges in the Food Chain

The quest for value

IBF - Session 2.1 - De Gregorio (Opportunities and ... · Brescia, 12 June 2015. Sales (millions of...

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