TEPAP Financial Strategiestepap.tamu.edu/wp-content/uploads/2020/01/Swayze-online.pdf · 2016....

1PAINE SCHWARTZ PARTNERS

TEPAPFinancial Strategies

Spencer Swayze, CFAManaging Director

Paine Schwartz Partners, LLC

January 2020


Objectives

Food & Agribusiness Sector Context

Understanding the drivers of value and managerial trade-offs

Profitability

Asset Efficiency

Leverage

Growth

Risk

Time

Discussion of sources of capital and types of securities


Food & Agribusiness Sector Context


Food & Agribusiness is a Large and Growing Industry

23.0%

13.6%

7.9%

6.7%6.0%

6.0%

5.0%

6.1%

4.3%

3.7%

3.0%

14.4%

6.4%

5.3%

4.4%

3.9%

3.5%

3.3%

3.1%

3.1%

3.1%

3.0%

2.5%

Wholesale & Retail Trade

Food & Agribusiness

Manufacturing

Construction

Real Estate

Public Sector

Transportation & Logistics

Financial Services

Tourism & Leisure

IT & Communication

Energy & Mining

2017 Total Global Gross Output

#3

#2

Food & Agribusiness comprises 7.9% ($12.9T) of total global gross output, growing faster than nearly all other sectors over the past decade

CAGR by Sector

Source: IHS Global Insight Industry Database (August 2018)Note: “Food & Agribusiness” includes (i) Agriculture, Forestry, and Fishing, (ii) manufacturing of food, beverages, and tobacco, (iii) manufacture of fertilizers and nitrogen compounds,(iv) manufacture of pesticides and other agrochemical products, (v) manufacture of agricultural and forestry machinery, and (vi) manufacture of machinery for food, beverage, andtobacco. CAGR represents data from 2006 to 2017

Wholesale & Retail Trade

Manufacturing

Food & Agribusiness

Construction

Public Sector

Energy & Mining

Financial Services

Real Estate

Transportation & Logistics

IT & Communication

Other

Tourism & Leisure


Global Food Chain | Farm to ForkAgribusiness spans across a complex global value chain that encompasses many crops, livestock, geographies, counterparts and shareholders – big & small

ANIM

AL P

RO

TEIN

S

GrainsRow crop

Specialty Crop

Permanent Crop

Infrastructure

IP / Genetics

Seed

Fertilizer

Water

Feed

Animal Health Products

CropProduction

Storage/Handling

Packing

Commodity Trading

Equipment

Food Ingredients

Contract Manufacturing

Branded &Private Label

ConsumerProducts

Distribution

Retail

Foodservice

Fruits & Vegetables

DairyTerrestrial Livestock

ProductionLivestock

Seafood Aquaculture, Wild

Geographies – OECD headquarters, international operations, derivative exposure to developing countries

Input Supply and

Distribution

Production (Crops and

Protein)Trade and Wholesale Processing

Consumer Goods and Distribution

Farmer Consumer

PSP Area of Focus

Services Research & Development Laboratory Consulting Testing, Inspection & Certification

Land Inputs


Global Food Chain | Multi-Sector CoverageThere is no global industry classification standard (GICS) code for “Food & Agribusiness”. Instead, some of the most important global food chain players span multiple industry groups

Industrials Consumer Staples

Financials

HealthcareMaterials

Representative food chain related GICS codes and household names

GICS Code: 15

GICS Code: 30GICS Code: 20

GICS Code: 40

GICS Code: 35

Constituent of S&P Global Ag Index

EnergyGICS Code: 10


CAGR

$12

$11

$10

$9

$8

$7

$6

$5

Uncorrelated Market Growth

Source: World Bank national accounts data, and OECD National Accounts data files; IHS Global Insight Industry Database

$30

$40

$50

$60

$70

$80

$90

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Glo

bal F

ood

& A

grib

usin

ess

(USD

$ T

)

Glo

bal G

DP

(USD

$ T

)

Global GDP

Global Food & Agribusiness

Food & Agribusiness Production and Global GDP Growth

In periods of downturn, global food & agribusiness has shown resiliency and insulation from broader market trends, as evidenced specifically in 2008-09 and 2014-15

Global GDP 12.6% 9.7% -5.2% 9.7% 11.1% 2.1% 2.8% 2.5% -5.5% 1.4% 6.8%Global Food & Ag 2.9% 3.0% 0.3% 4.2% 4.0% 2.6% 3.7% 2.6% 2.0% 2.2% 5.2%

3%CAGR

4%

Global food & ag industry demonstrated consistent growth across both the global financial crisis and 2014 GDP downturn

r = (1)

r = (1)


Note: The performance begins with a basis of 100%1. 5-year period comprised of last 60 months ended spanning January 2014 – January 21, 2019 Sources: S&P Indices portal, CBOT (corn & wheat), ICE (cotton), and CME (cattle and milk)

Agribusiness vs. Commodity Performance

5-Year Pricing Performance1

Commodity prices are widely flat to down since 2011-12 peaks with prices expected to deteriorate in the near-to-medium term given broader tariff and farm bill concerns. Conversely, the S&P Global Ag Index has generated a positive return over the same period, with a recent valley in December 2018 in-line with the US market. As of January 21st, the S&P Global Ag index is trading at $4.4K, a 112% return from January 2014

$0.0k

$0.5k

$1.0k

$1.5k

$2.0k

$2.5k

$3.0k

$3.5k

$4.0k

$4.5k

$5.0k

$5.5k

$-

$1

$2

$3

$4

$5

$6

$7

$8

Jan-14 Jun-14 Oct-14 Mar-15 Aug-15 Dec-15 May-16 Sep-16 Feb-17 Jul-17 Nov-17 Apr-18 Aug-18 Jan-19

S&P Global Ag Index

112%

Wheat

93%

Corn88%

Cattle

84%Cotton

86%Milk

61%

Com

mod

ity P

rices

S&P G

lobal Ag Index Performance


Sources: S&P Indices portal, Capital IQ (January 2019)1. 5-year period comprised of last 60 months ended spanning January 2014 – January 21, 2019

5-Year Performance of Major Indices1

Agribusiness vs. Broader Equities PerformanceIndices with Food & Agribusiness company holdings have considerably outperformed the S&P Global Natural Resources Index over the previous five years, though have lagged broader equity index run-ups

50.0%

75.0%

100.0%

125.0%

150.0%

175.0%

Jan-14 May-14 Oct-14 Mar-15 Jul-15 Dec-15 Apr-16 Sep-16 Feb-17 Jun-17 Nov-17 Mar-18 Aug-18 Jan-19

148% S&P 500

Memo: Index Total ReturnsMSCI World: 125%MSCI ACWI: 123%

118% iShares Global Ag

64% Bloomberg Commodity

94% S&P Global Natural Resources

112% S&P Global Ag

133% NASDAQBioTech


Global demand trends have consistently grown each year over the past two decades while annual production is – and has been – inherently volatile

Global Grain & Oilseed Production/Consumption Growth, 2000-2018

Source: USDA Foreign Agricultural Services (January 2019)

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

2000 2003 2006 2009 2012 2015 2018

Consumption Growth %

Production Growth %


Institutional Investor Context

ROUTE DESCRIPTION EXPOSURE & VALUE-ADD

Land • The asset class consists largely of agricultural land, undeveloped land and machinery

• Yield is similar to real estate in that it is bounded by macro trends such as decreasing arable land and increasing food demand

Commodity Futures • Contracted agreement to buy or sell a commodity at a specific price on an agreed-upon future date

• Largely used to mitigate risks associated with price fluctuations of an end-product

• Value is limited

Public Market • Investment into the public market through vehicles such as equities, ETFs or indices

• Public equities market is affected by many external factors, such as regulatory scrutiny, consumer spending and the global political landscape

Private Capital(Venture, Growth, Buyout)

• Venture: investment in start-up and early stage companies with long-term, high-growth potential

• Growth: investment providing companies with capital to fund revenue growth opportunities in exchange for an equity position

• Buyout: investment in which a firm acquires all or a significant amount of controlling equity in a business

• Investments in the private market offer the opportunity for diversified risks and returns unavailable in the public domain

• PSP is primarily focused on value-added and differentiated companies in the upstream portion of the Food & Agribusiness value chain, with select downstream opportunities considered


Industry Focus Healthcare Food & Agribusiness

Total Capital Raised $121.6B $14.9B

Fund Stage Focus

Buyout

Growth

Venture

Amount of Capital Raised by Food & Agribusiness Focused Firms Significantly Lags Other, Similar Sectors

Each dot represents an industry specific fund raised 2011-2017. Dot size indicates quantity of dollars raised

Selection Criteria: Growth equity and venture funds of $50M+ and buyout funds of $500M+ raised since 2012; excludes natural resources within Food & Agribusiness, beverage, debt, infrastructure and turnaround focused funds; excludes funds for which healthcare is not the first stated focus; excludes funds focused on Asia or Africa; excludes secondary and fund of funds. Illustrative, not exhaustiveSource: PitchBook (January 2019)


Limited Number of Focused, Dedicated Firms Investing in Food & Agribusiness

Note: The above is illustrative, and includes representative firms, not exhaustive. Buyout category includes only fund sizes greater than or equal to $500M; venture and growthincludes only fund sizes greater than or equal to $50MSource: Preqin

Food & Ag Focused

Generalist

Venture Growth Buyout

http://www.google.com/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0ahUKEwiVgcyyofTPAhXJKCYKHaE5CyoQjRwIBw&url=http://www.anterracapital.com/team/&psig=AFQjCNEVyeoMIQ-kQIeBRqKUsIhHTWZBTA&ust=1477426673445896

http://www.google.com/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0ahUKEwiB44z3qvvPAhWHVyYKHbiZAlUQjRwIBw&url=http://www.grosvenorestate.com/activity/wheatsheaf.aspx&psig=AFQjCNEc7L6ExbNojeznV4uTKiCLkyJlNw&ust=1477669743616508


Sector Complexity is a Barrier to Entry for Most Generalist Investors

Products/cropse.g., grains, dairy, fruit, poultry, …

Value chain

Investable countries

Food & Agribusiness is extremely complex with respect to geography, value chain and commodities, requiring a firm with a dedicated focus to successfully invest

ConsumerGoods &

Distribution

Trade andProcessingProductionInput Supply

& Distribution


Global Food Chain | Public Market Peer Set

Fruits & Vegetables

ANIM

AL P

RO

TEIN

S

Dairy

Livestock

Grains

Seafood

ConsumerFarmer

Row crop

Specialty Crop

Permanent Crop

Infrastructure

Land InputsInput Supply and Distribution

Production (Crops and Protein)

Trade and Wholesale

Processing & ingredients


Agribusiness spans across a complex global value chain that encompasses many crops, livestock, geographies, counterparts and shareholders – big & small. The cumulative market capitalization of the public company peer set documented below is in excess of $1.6T1

Note: Public company peer set as of 2017; certain companies in the above have since been de-listed (e.g., Monsanto and Syngenta). The metrics in the following pages take weighted statistics over the 2013 – 2017 time horizon, and, thus, those certain de-listed companies are included in the computations put forth herein. The metrics can be updated for 2018 upon release of the YE 2018 results 1. Market capitalization as of 12/31/2017


Financial metrics vary across the value chain with the most attractive margins occurring near the beginning and end, though further variation occurs within each sub-sector

Notes:1. Calculated as the 2016 revenue-weighted average of peer set company metrics averaged over 2013-2017; based on financials as reported, unadjusted2. Calculated as Total Assets / Revenue. Total Assets includes working capital3. Includes all input types (e.g. Animal Health Products, Equipment, Irrigation, Nutrition, Seed & Chem)4. Companies with limited-BU level reporting are excluded from aggregated financial metrics5. ROIC excluding Goodwill and Intangibles

Source: Corporate Performance Analytics by McKinsey and S&P Global, PSP and McKinsey team analysis

Financial metrics1 by stage in the value chain

PSP Focus Area

Global Food Chain | Financial Metrics

21

39

4

1810

18 16 156

20 22

1.7

0.4 0.7 0.61.3

0.8

Capital intensity ratio(x)1,2,4

ROIC1,4,5

%

EBITDA1

%

EV/EBITDA multiple(x)1,4

127 9 11 14

10

Inputs3Input Supply and Distribution


Trade and Wholesale



Key takeaways

▪ Returns are concentrated in Inputs and Processing & Ingredients

▪ Capital intensity is highest in Inputs due to significant working capital requirements


Valuation multiples in the Inputs stage have been increasing over the past 5 years – in some cases driven by significant earnings degradation (e.g., equipment) and in others supported by growth (e.g., animal health)

EV/EBITDA(x) multiple1 over time

152013

8

14 16 2017

2

4

6

10

12

14

16

18

20

22

24

Inputs: Seed & Chem

Inputs: Animal Health Products

Inputs: Equipment

Input supply & distribution

Inputs: Nutrition

Production

Trade & Wholesale

Processing &ingredients

Consumer goods & distribution

Change in multiple, ‘13-17’Input type2

35%

101%

47%

24%

Notes:1. Calculated as the 2016 revenue-weighted average of peer set company metrics averaged over 2013-2017; based on financials as reported, unadjusted2. Irrigation peer set is comprised of BUs within larger organizations where EV/EBITDA(x) multiples are not reported; however, recent transactions indicate valuation

multiples are currently >10x


30%

4%

26%

36%

19%

Inputs Input Supply and Distribution


Trade and Wholesale



Global Food Chain | Valuation Trends

-42%

-48%

28%

70%

-35%

-22%

-8%

-1%

40%

Change in EBITDA, ‘13-17’


Over the last 5 years, relatively flat corn prices and positive market conditions have negative correlations

260

2012 1413

100

15 16 2017

20

40

60

80

120

140

160

180

200

220

240

Inputs: Seed & chem

Corn

Production


Inputs: Equipment

Inputs: Nutrition


Trade & wholesale

Processing &ingredients


S&P

Notes:1. Calculated as the annual market cap-weighted average of peer set company TRS. Companies with limited-BU level reporting are excluded from aggregated financial metrics

1.00

-0.61

0.72

-0.63

-0.36

-0.70

-0.75

-0.77

-0.78

-0.78

TRS1 and Corn price over time (index 2012=100)

Stage of value chainCorrelation coefficient

-0.81


Global Food Chain | Corn Correlation (1 / 2)


Since 2012, Monsanto share price performance has positively diverged from relatively flat corn prices

Notes:1. Monthly average price for corn, Monsanto, and S&P 500; end of month price for MSCI2. MSCI World Ag and Food Chain index comprised of Packaged foods and meats (69%), Agricultural products (12%), Food distributors (10%), Fertilizers and Agricultural chemicals (10%)


Global Food Chain | Corn Correlation (2 / 2)

0602 04 10

400

12

1,100

1,000

162000 202014

900

08 18

100

200

300

500

600

700

800

1,200

Security/commodity prices over time (index 2000=100) 1S&P 500 Corn

Monsanto MSCI World Agriculture & Food Chain Index

Corn benefitted from ramp-up corn ethanol mandate (2006-9)

Corn price post-2012 reflects steady-state favorable conditions

MON increase driven by new products and significant increase in farmers’ adoption of high value seed / chem

Correlation coefficients

MON

MON

1.00Corn

0.76

S&P 0.320.27

MSCI2 0.870.88

MSCI2 0.76-0.83

Stock/ index

MON 1.00-0.57

S&P 0.70-0.78

20002011

20122018

Date range

Multiple years of poor growing conditions

Bayer launches bid for MON in May 16

Earnings growth continued to be better than expected despite weaker corn price, but eventually disappointed; strong equity market helped

Key takeaways

Though the world’s leading “corn” company, MON’s performance has limited correlation to corn prices

Innovation in products (GM, traits, etc.) and favorable industry structure (few many) support MON’s separation


Over the past 5 years, public market peer set analysis has been much more closely correlated with the S&P 500 than corn (commodity) prices

Correlation with corn Correlation with S&P

1.00 (0.81)

(0.61) 0.89

(0.36) 0.46

0.72 (0.67)

(0.63) 0.79

(0.70) 0.51

(0.78) 0.94

(0.75) 0.49

(0.77) 0.97

(0.78) 0.95

(0.81) 1.00

Corn


Inputs: Equipment

Inputs: Nutrition

Inputs: Seed & chem


Production

Trade & wholesale



S&P

Global Food Chain | Broader Market Correlations


Within the Inputs stage, Animal Health Products and Seed & Chem companies have demonstrated the highest financial returns

Financial1 metrics by stage in the value chain

Inputs


Value Chain Analysis | Inputs

27

1323 23

17

31

13 9

25

1.40.9

2.11.5

19

8 914

Animal Health Products Equipment Nutrition Seed & Chem Irrigation

Capital intensity ratio(x)1,2,4

ROIC1,4

%

EBITDA1

%

EV/EBITDA multiple(x)1,4

Key takeaways

▪ Not all inputs are created equal

▪ Distribution models across inputs are notably similar, however

▪ PSP has made Fund IV platform investments in Animal Health (MS Biotec) and Seed & Chem (Verisem& AgBiTech), two of the strongest performing sub-segments within Inputs

Notes:1. Calculated as the 2016 revenue-weighted average of peer set company metrics averaged over 2013-2017; based on financials as reported, unadjusted2. Calculated as Total Assets / Revenue. Total Assets includes working capital3. Companies with limited-BU level reporting are excluded from aggregated financial metrics4. ROIC excluding Goodwill and Intangibles


Financial Strategy, Analysis, Managing Growth and Value Creation

23PAINE SCHWARTZ PARTNERS 23

Financial Strategy• The financial goal (recognizing there are other stakeholders) is to maximize

shareholder wealth.• This is accomplished by investing in projects that exceed the firm’s cost of

capital

• Cost of capital is a function of risk and opportunity costs

• Firms can create value by using its competitive advantage in:• Costs (power over suppliers, business model, OPEX control)

• Pricing (power over customers)

• Asset Utilization

• Access and Cost of Capital

• Growth (branding, distribution channels, advertising & Promo)

• Risk Management (hedging, diversification, leverage)


Financial Strategies

• All companies have similar financial goals – namely, to maximize shareholder wealth.

• Companies employ different strategies and tactics to achieve this goal.

• Some work off maximizing profit margins through differentiation or intellectual property (Software/ Pharmaceuticals)

• Some work off scale (Mass Merchandisers)

• Some work off efficient asset utilization (Airlines)

• Some work off leverage (Financial Services)

• Combinations are possible


Strategic Assessment: Porter’s Five Forces

Bargaining Power of Suppliers

Threat of Substitute Products

Threat of New Entrants Bargaining Power of Customers

Rivalry Amongst Existing Players


Value Drivers of a Business Profitability (Profit/Sales)

(Revenue – Expenses) driven by price, volume, product mix, cost control, Scaling, Productivity (Yield)

Asset Efficiency (Sales/Assets) Working Capital Management, Fixed Asset Utilization

Leverage (Assets/Equity) Capital Structure Policies - Use of Debt, Dividend Policy and Stock

Repurchases Growth (Y2/Y1 – 1)

Organic growth vs. Growth via Acquisition Risk (Uncertainty – Volatility)

Business and Financial Risk


Financial RatiosKey Areas of Performance Measurement

Performance in several key areas must be considered when evaluating a firm’s prospects for the future Operational analysis Resource management (Asset Utilization) Profitability and Productivity Investment returns Market indicators (public firms such as price/earnings ratio) Risk - Liquidity, leverage, and debt service coverage

Source: Helfert, Erich A., “Techniques of Financial Analysis: A Guide to Value Creation,” 10th Edition, Irwin McGraw Hill, Burr Ridge IL, 2000.


Key Financial Terms Liquidity – The ability of the company to meet maturing obligations. Current

Assets relative to Current Liabilities.

Leverage – Long-term solvency ratio. The amount of debt capital used relative to equity (shareholder) capital. Debt to Equity to Debt to Total Assets.

Coverage – The ability of the cash flow from operations to cover the annual debt service of the company. Cash Flow divided by annual debt service

Profitability – The return on each sales dollar. After the total costs of producing sales, how much money of left over. Measured by profit margins (profit/net sales).

Asset Turnover– Utilization (Asset Turnover) measurement. Sales divided by Total Assets

Rate of Return – some measure of profit divided by some measure of the investment. Return on Assets - Profit divided by Assets. Return on Equity – Profit divided by Owner’s Equity.

28


Financial Planning

Financial planning Analyzing the firm’s historical performance and recognizing patterns and

relationships of the key variables in the company

Trend analysis Common Sized Statements (the balance sheet expressed as a percent of total

assets and income statement as a percent of sales) can show increases and decreases in individual accounts. Catching problems early is the key to solving the problem.

Examining key financial ratios over time that measure risk factors such as liquidity, profitability and leverage.

Monitoring productivity and efficiency ratios

Benchmarking Comparing your firm against other firms in the industry

29


Financial Analysis Historical Performance is analyzed over three to five years using ratio

analysis.

Trend Analysis

Benchmarking against industry/competitors

This Historical Analysis is filtered through:

The current economic conditions

The industry

The competitive landscape

The company analysis Strengths, Weaknesses, Opportunities and Threats

It’s Business Model and Strategy


Financial Statement Analysis

Zoetis Inc. (NYSE:ZTS) discovers, develops, manufactures, and commercializes animal health medicines, vaccines, and diagnostic products in the United States and internationally. It commercializes products primarily across species, including livestock, such as cattle, swine, poultry, fish, and sheep; and companion animals comprising dogs, cats, and horses.

Comparable CompaniesElanco Animal Health Incorporated (NYSE:ELAN), an animal health company, develops, manufactures, and markets products for companion and food animals. The company offers companion animal disease prevention products, such as parasiticide products that protect pets from worms, fleas, and ticks; companion animal therapeutics for pain, osteoarthritis, ear infections, cardiovascular, and dermatology indications; vaccines, nutritional enzymes, and animal-only antibiotics; and a range of food animal products used in ruminant and swine production.

Phibro Animal Health Corporation (NasdaqGM:PAHC) manufactures and supplies a range of animal health and mineral nutrition products for livestock primarily in the United States. It operates through three segments: Animal Health, Mineral Nutrition, and Performance Products. The company develops, manufactures, and markets products for a range of food animals, including poultry, swine, beef and dairy cattle, and aquaculture.

31


Zoetis Financial RatiosRatios

For the Fiscal Period Ending 12 monthsDec-31-2017

12 monthsDec-31-2018

LTM12 months

Sep-30-2019Profitability Return on Assets % 13.4% 12.2% 11.7% Return on Capital % 17.1% 15.4% 14.2% Return on Equity % 52.5% 71.7% 60.9% Return on Common Equity % 53.1% 72.2% 60.9%

Margin Analysis Gross Margin % 66.7% 67.3% 68.7% SG&A Margin % 25.1% 25.4% 25.8% EBITDA Margin % 37.2% 37.4% 39.3% EBITA Margin % 34.6% 35.2% 36.9% EBIT Margin % 32.7% 32.5% 33.1% Earnings from Cont. Ops Margin % 16.2% 24.4% 23.8% Net Income Margin % 16.3% 24.5% 23.8% Net Income Avail. for Common Margin % 16.3% 24.5% 23.8% Normalized Net Income Margin % 18.4% 18.4% 18.8% Levered Free Cash Flow Margin % 18.9% 19.8% 17.6% Unlevered Free Cash Flow Margin % 21.0% 22.0% 19.9%

Asset Turnover Total Asset Turnover 0.7x 0.6x 0.6x Fixed Asset Turnover 3.8x 3.8x 3.5x Accounts Receivable Turnover 5.6x 5.7x 6.3x Inventory Turnover 1.2x 1.4x 1.3x


Zoetis Financial RatiosRatios

For the Fiscal Period Ending 12 monthsDec-31-2017

12 monthsDec-31-2018

LTM12 months

Sep-30-2019Short Term Liquidity Current Ratio 3.9x 3.6x 4.4x Quick Ratio 2.3x 2.2x 2.7x Cash from Ops. to Curr. Liab. 1.2x 1.5x 1.7x Avg. Days Sales Out. 65.7 63.7 58.1 Avg. Days Inventory Out. 302.3 270.2 272.9 Avg. Days Payable Out. 56.7 56.1 49.5 Avg. Cash Conversion Cycle 311.4 277.9 281.5

Long Term Solvency Total Debt/Equity 277.3% 295.3% 248.5% Total Debt/Capital 73.5% 74.7% 71.3% LT Debt/Equity 277.3% 294.9% 247.1% LT Debt/Capital 73.5% 74.6% 70.9% Total Liabilities/Total Assets 79.2% 79.7% 76.2%

EBIT / Interest Exp. 9.9x 9.2x 9.0x EBITDA / Interest Exp. 11.3x 10.6x 10.7x (EBITDA-CAPEX) / Interest Exp. 10.0x 8.9x 8.8x Total Debt/EBITDA 2.5x 3.0x 2.8x Net Debt/EBITDA 1.7x 2.2x 2.0x Total Debt/(EBITDA-CAPEX) 2.8x 3.5x 3.4x Net Debt/(EBITDA-CAPEX) 1.9x 2.6x 2.4x

Altman Z Score 4.71 4.79 5.45

Growth Over Prior Year Total Revenue 8.6% 9.8% 7.5% Gross Profit 9.2% 10.8% 8.3% EBITDA 16.3% 10.2% 8.3% EBITA 17.6% 11.7% 9.2% EBIT 18.4% 9.1% 3.8% Earnings from Cont. Ops. 5.3% 65.2% 26.1% Net Income 5.2% 65.3% 25.5% Normalized Net Income 20.8% 9.9% 4.5% Diluted EPS before Extra 6.1% 67.4% 27.1%


DuPont Analysis

Zoetis ROE DecompositionLTM

2014 2015 2016 2017 2018 2019ROE 43.6% 31.1% 54.8% 48.4% 65.4% 54.6%

Net Profit Margin 12.2% 7.1% 16.8% 16.3% 24.5% 23.8%x Asset Turnover 0.7x 0.6x 0.6x 0.6x 0.5x 0.5xx Leverage 4.9x 7.3x 5.1x 4.8x 4.9x 4.2x

Revenue Growth -0.4% 2.6% 8.6% 9.8% 7.5% 7.0%TEV/EBITDA 15.7x 19.0x 18.0x 19.7x 21.8x 25.5x


DuPont Analysis: Peer Comparison

35

Zoetis Peer Comparison (LTM 2019)

ZTS ELAN PAHCROE 54.6% 1.7% 25.3%

Net Profit Margin 23.8% 3.0% 6.6%x Asset Turnover 0.5x 0.3x 1.1xx Leverage 4.2x 1.6x 3.4x

Revenue Growth 7.0% 0.3% 1.0%TEV/EBITDA 25.5x 19.5x 11.7x


DuPont Analysis

Let’s compare some public companies in different sectors within Food & Agribusiness Agricultural Products – Archer Daniels Midland (NYSE: ADM) Agricultural Chemicals – Corteva (NYSE: CTVA) Animal Health – Zoetis (NYSE: ZTS) Protein – Tyson Foods (NYSE: TSN) Agricultural Equipment – Deere (NYSE: DE) Production – Calavo Growers (NasdaqGS: CGVW)

What would you expect the return on equity to be for each of these companies given the risk of their industry to be able to attract capital?

How do you think they generate their return? Through profit margins, asset efficiency or leverage

36


DuPont Analysis: Industry Comparison

37

Food & Agribusiness Industry ROE Decomposition (LTM 2019)

ADM CTVA ZTS TSN DE CGVWROE 6.3% 0.7% 54.6% 14.2% 19.8% 12.8%

Net Profit Margin 1.9% 3.8% 23.8% 4.8% 8.3% 3.1%x Asset Turnover 1.5x 0.3x 0.5x 1.3x 0.5x 3.1xx Leverage 2.2x 0.6x 4.2x 2.3x 4.4x 1.4x

Revenue Growth 0.8% 3.8% 7.0% 3.8% 6.2% 9.2%TEV/EBITDA 10.1x 20.3x 25.5x 10.7x 15.5x 26.0x


BenchmarkingCompany Comp SetCompany Name LTM Gross

Margin % LTM

EBITDA Margin %

LTM EBIT Margin %

LTM Net Income

Margin %

LTM Total Revenues,

1 Yr

LTM EBITDA, 1 Yr Growth

LTM EBIT, 1 Yr

Growth %

LTM Net Income, 1 Yr Growth

LTM Total Debt/EBIT

DA

5 Year Beta

Merck & Co., Inc. (NYSE:MRK) 71.7% 39.3% 31.6% 20.26% 10.16% 27.94% 53.69% 178.28% 1.5x 0.53 Phibro Animal Health Corporation (NasdaqGM:PAHC) 31.4% 12.7% 9.4% 5.00% (1.11%) (17.72%) (24.13%) (37.35%) 4.0x 0.83 Elanco Animal Health Incorporated (NYSE:ELAN) 53.5% 23.7% 13.8% 3.04% 2.04% 20.79% 44.04% - 3.3x -Benchmark Holdings plc (AIM:BMK) 50.5% 12.2% (4.4%) (11.71%) 4.96% 44.95% - - 4.7x 0.13 Vetoquinol SA (ENXTPA:VETO) 52.4% 15.5% 12.3% 8.95% 6.10% 6.69% 7.61% (7.77%) 0.2x 0.35 Virbac SA (ENXTPA:VIRP) 66.6% 15.1% 10.5% 3.80% 5.67% 21.81% 35.68% - 3.9x 1.24 Aratana Therapeutics, Inc. 67.7% (25.9%) (28.4%) (33.47%) 49.99% - - - NM -

Zoetis Inc. (NYSE:ZTS) 68.7% 39.3% 33.1% 23.76% 7.50% 8.34% 3.83% 25.52% 2.8x 0.78

Summary Statistics LTM Gross Margin %

LTM EBITDA

Margin %

LTM EBIT Margin %

LTM Net Income

Margin %

LTM Total Revenues,

1 Yr

LTM EBITDA, 1 Yr Growth

LTM EBIT, 1 Yr

Growth %

LTM Net Income, 1 Yr Growth

LTM Total Debt/EBIT

DA

5 Year Beta

High 71.7% 39.3% 31.6% 20.26% 49.99% 44.95% 53.69% 178.28% 4.7x 1.24 Low 31.4% (25.9%) (28.4%) (33.47%) (1.11%) (17.72%) (24.13%) (37.35%) 0.2x 0.13 Mean 56.3% 13.3% 6.4% (0.59%) 11.12% 17.41% 23.38% 44.39% 2.9x 0.62 Median 53.5% 15.1% 10.5% 3.80% 5.67% 21.30% 35.68% (7.77%) 3.6x 0.53


Valuation Benchmark

39

Company Comp SetCompany Name TEV/Total

Revenues LTM - Latest

TEV/EBITDA LTM - Latest

P/Diluted EPS Before Extra LTM - Latest

P/TangBV LTM - Latest

NTM TEV/Forward

Total Revenue (Capital IQ)

NTM TEV/Forward

EBITDA (Capital IQ)

NTM Forward P/E (Capital

IQ) Merck & Co., Inc. (NYSE:MRK) 5.4x 13.7x 25.1x NM 5.18x 12.18x 17.26xPhibro Animal Health Corporation (NasdaqGM:PAHC) 1.6x 12.8x 24.3x 13.1x 1.57x 10.81x 20.17xElanco Animal Health Incorporated (NYSE:ELAN) 4.2x 17.7x 114.8x 101.6x 4.16x 16.40x 25.05xBenchmark Holdings plc (AIM:BMK) 2.2x 18.1x NM 4.5x 2.17x 21.92x NMVetoquinol SA (ENXTPA:VETO) 1.9x 11.9x 21.8x 3.8x 1.71x 10.90x 19.07xVirbac SA (ENXTPA:VIRP) 2.6x 17.2x 54.3x NM 2.47x 14.83x 31.23xAratana Therapeutics, Inc. - - - - - - -

Zoetis Inc. (NYSE:ZTS) 10.8x 27.4x 42.6x NM 10.07x 23.70x 33.28x

Summary Statistics TEV/Total Revenues

LTM - LatestTEV/EBITDA LTM - Latest

P/Diluted EPS Before Extra LTM - Latest

P/TangBV LTM - Latest

NTM TEV/Forward

Total Revenue (Capital IQ)

NTM TEV/Forward

EBITDA (Capital IQ)

NTM Forward P/E (Capital

IQ) High 5.4x 18.1x 114.8x 101.6x 5.18x 21.92x 31.23xLow 1.6x 11.9x 21.8x 3.8x 1.57x 10.81x 17.26xMean 3.0x 15.2x 48.1x 30.7x 2.88x 14.51x 22.56xMedian 2.4x 15.5x 25.1x 8.8x 2.32x 13.51x 20.17x


Efficiency – Working Capital

Days Sales in Inventory

Days Sales Outstanding

DSI DSO

DPO

Days Payables

Outstanding

Purchase Inventory

on AccountPay

Payable

Sell Inventory

Collect Receivable

Cash Conversion

Cycle


Cash Conversion Cycle = DSO + DSI - DPO

CCC: Cash Conversion Cycle

A measure of how effectively a company is using its cash

DSO: Days Sales Outstanding

How many days, on average, does it take for customers to pay

DSI: Days Sales in Inventory

How many days, on average, does product sit in inventory, waiting to be sold

DPO: Days Payables Outstanding

How many days, on average, does a company wait before paying their supplies

DSO + DSI – DPO = CCCDSO= 39 DaysAvg Accts Receivable/Net Sales*365

DSI= 55 DaysAverage Inventory/COGS*365 DPO= 38

Avg Accounts Payable/COGS*365

39 + 55 – 38 = 56


Cash Conversion Cycle: ZTS Case Study

ZTS Summary FinancialsLTM

Income Statement 2014 2015 2016 2017 2018 2019 Total Revenue 4,785.0 4,765.0 4,888.0 5,307.0 5,825.0 6,150.0 Cost Of Goods Sold 1,685.0 1,681.0 1,647.0 1,768.0 1,903.0 1,926.0 Gross Profit 3,100.0 3,084.0 3,241.0 3,539.0 3,922.0 4,224.0 Gross Margin 65% 65% 66% 67% 67% 69%

Balance SheetAccounts Receivable 980.0 937.0 913.0 998.0 1,036.0 1,030.0 Inventory 1,289.0 1,467.0 1,502.0 1,427.0 1,391.0 1,439.0 Accounts Payable 290.0 293.0 265.0 261.0 313.0 284.0

DSO N/A 73 69 66 64 61 DSI N/A 299 329 302 270 268 DPO N/A 63 62 54 55 57 Cash Conversion Cycle 309 336 314 279 273


Cash Flow vs. Profitability

Cash pays the bills, not profits.

Profit is an accounting term. In finance, we discuss cash flows.

Cash Flow can be substantially different than profits, depending on the working capital management and capital intensive nature of the business

A positive cash conversion cycle means profits are being used to fund growth in receivables and inventory and thus are not “free” to return to the suppliers of capital.


Opportunity Cost

Opportunity cost is the return an investor could have made on a similar risky project that was sacrificed

Instead of accounting profits, we want to measure economic profits. Accountants do not pick up the opportunity cost of shareholders, including deferring dividends and reinvesting profits as well as the cost of equity capital

EVA (Economic Value Added) assesses a cost of capital against the operating profits of the firm and determines the economic profit instead of accounting profit


Economic Value Added (EVA)

Accountants report accounting profits on an accrual basis, but they do not measure all of the costs of a business and do not tell you if you created wealth. Economic profits measure the amount of wealth created

because they force the firm to recognize the opportunity costs of capital and time value of money. EVA is a value creation model created by the Stern

Stewart consulting firm where the accounting operating profits are assessed a cost of capital based on the amount and cost of capital employed to determine the value created by management.



NOPAT (Net Operating Profit After Tax)

- Cost of Capital (WACC x Capital Employed)

= Economic Value Added (EVA)

Where;

NOPAT is the firm’s Earnings before Interest and Taxes (EBIT) adjusted for taxes by multiplying (1- tax rate).

Capital Employed = Interest Bearing Debt + Equit

WACC = Weighted Average Cost of Capital

))(

())(

)(1(ED

EkED

DTkWACC ed ++

+−=

rateTax TEquity EDebt D

equity ofcost debt ofcost ===

== ed kk



1) Assume a firm had revenues of $30 million and expenses of $28.5 million, thus earning $1.5 million in operating profit. The firm has a 33.3% tax rate.

2) Assume that the company has $20 million in capital employed in the business in which $15 million is debt and $5 million is equity. The WACC of the firm is 8%.

EBIT(1-T) = $1.5M x (1-.333) = $1.0M

- Cost of Capital = $20M x .08 = $1.6M

Economic Value Added ($0.6M)


Business Valuation


Valuation Methodologies

Publicly traded Comparable Companies

• “Public MarketValuation”

• Valuation basedon trading multiples of public firms.

• Can use trailing or forward perspective

• Does not includea control premium

Comparable Transactions

Analysis

DiscountedCash FlowAnalysis

Leveraged Buyout/Recap

AnalysisOther

• “Private MarketValuation”

• Valuation basedon multiples paidfor comparable firmsin sale transactions

• Includes a control premium.

• Includes a discountfor lack of market-ability if firm isprivately held.

• “Intrinsic” value of the business

• Present Value ofprojected free cashflow (APV, CCF &ECF models also)

• Sensitive to terminalvalue assumptions

• Risk in cash flowsand capital structure captured in the discount rate

• Value to a financial or LBO Buyer

• Valuation basedon debt repaymentand return on equitycapital.

• Backwards inductionmethod

• Estimate of the target capital structure required

• Valuation by Sumof the Parts

• Liquidation Analysis

• Break-up analysis

• Expected IPO valuation

• Dividend DiscountModel

• Ad-hoc Rules of Thumb (price per Subscriber, etc.)

ValuationMethodologies


The Valuation ProcessThe rendering of the final valuation recommendation is through triangulation using insight from each of the relevant valuation methodologies.

DiscountedCash Flow

Publicly TradedComparable Companies

LeveragedBuy Out

PrecedentAcquisition Transactions


Valuation

tt

0

FCFF(1 WACC)F

tV

∞

=

=+∑

The total value of a business (firm), VF, equals the present value of the firm’s free cash flows (FFCF) that the firm is expected to provide investors (both debt and equity), discounted by the firm’s weighted average cost of capital (WACC).

The free cash flows from the firm are calculated as follows:

Net Revenue- COGS & Operating Expenses

Earnings Before Interest, Taxes,Dep & Amort (EBITDA)

- Depreciation and AmortizationOp. Inc. (EBIT)

x (1 - Average Tax Rate)Net Operating Profit After Tax (NOPAT)

+ Depreciation and Amortization- Capital Expenditures- Additions to Net Working Capital

Free Cash Flows from the Firm (FCFF)

where:t is the period in which the

cash flow is received.


Valuation: FCF and Firm Value

The value of a firm or a project at time zero can be expressed by the Free Cash Flow Model

whereV0 = Value at time zeroFCFt = NOPAT + Depreciation – Chg in NWC - CAPEX

TVt = Terminal Value at period tr = Weighted Average Cost of Capital (WACC)

tt

rTV

rFCF

rFCF

rFCFV

)1(...

)1()1()1( 33

22

11

0 ++

++

++

+=

53PAINE SCHWARTZ PARTNERS Note: LTM EBITDA for Prevtec Microbia and Aratana were negative; LTM EBITDA for Agro BioSciences, Novartis Animal Health and Janssen Pharma Animal Health Division not disclosed

PUBLIC TRADING COMPS

PRECEDENT TRANSACTIONS

TEV / LTMAnnc'd Date Target Acquiror Target Description EV Sales EBITDA

Aug-19 Prevtec Microbia Elanco Develops vaccines that fight bacterial diseases in food animals $76 15.4x NM

Apr-19 Aratana ElancoPet therapeutics company focused on devleoping and commercializing therapeutics for dogs and cats $254 6.5x NM

May-17 Agro BioSciences Church & DwightMicrobial biotechnology company specializing in bacteria that improve animal and agricultural productivity $100 9.1x NA

Feb-16 Nutritional Physiology Chr. Hansen Leading supplier of probiotic products to commercial livestock $185 4.5x 18.5x

Nov-15 Pharmaq Zoetis Market leader in aquatic vaccines $765 9.6x 34.1x

Jan-15 Novartis Animal Health Eli Lilly / Elanco Commercializes treatments for diseases in pets, farm animals and farmed fish

$5,350 4.9x NA

Mar-13 Pharmaq Permira Market leader in aquatic vaccines € 250 3.8x 14.0x

Mar-11Janssen Pharma NV - Animal Health Division Eli Lilly / Elanco

Animal and livestock healthcare services, including swine and poultry $308 NA NA

Mean 7.7x 22.2x

Median 6.5x 18.5x

Public Trading and Precedent Acquisition Transaction Comps

(in US$MM, except per share) 10/24/2019 % of 52-Wk TEV / Revenue TEV / EBITDACompany Price High Market Cap Net Debt TEV (CIQ) GM % EBITDA % LTM CY2018 CY2019 LTM CY2018 CY2019Merck & Co., Inc. $82.58 94.5% $211,435.7 $20,483.0 $232,020.7 72.0% 39.3% 5.0x 5.5x 5.1x 12.8x 16.4x 12.3xZoetis Inc. 122.95 94.4% 58,715.7 4,870.0 63,585.7 68.2% 38.5% 10.5x 10.9x 10.2x 27.3x 29.2x 24.6xElanco Animal Health Incorporated 26.30 74.2% 9,809.8 2,106.1 11,915.9 53.0% 23.8% 3.9x 3.9x 3.8x 16.3x 18.4x 15.7xVirbac SA 238.02 89.7% 2,006.5 517.7 2,551.6 66.6% 15.1% 2.5x 2.6x 2.4x 16.4x 18.9x 14.9xVetoquinol SA 61.47 87.9% 727.9 (41.4) 687.9 52.4% 15.5% 1.6x 1.6x 1.6x 10.4x 10.0x 10.4x

Mean 4.7x 4.9x 4.6x 16.7x 18.6x 15.6xMedian 3.9x 3.9x 3.8x 16.3x 18.4x 14.9x


Zoetis Valuation Multiples• Comps - Relative Value can be established by comparing the valuation multiples of similar public

companies or merger and acquisition transactions.

• Below are valuation multiples of ZTS as of 12/20/19. Enterprise value (EV) is the market capitalization + long term debt – cash. Price is market cap (# shares x price/share).

54

Multiples Detail In Millions of the reported currency, except per share items.

For Quarter Ending Dec-31-2018 Mar-29-2019 Jun-28-2019 Sep-30-2019 Dec-19-2019TEV/LTM Total Revenue Average 8.42x 8.39x 9.34x 10.43x 10.43x

Close 8.07x 9.09x 10.00x 10.65x 10.75x

TEV/LTM EBITDA Average 21.63x 22.00x 25.21x 27.55x 26.82xClose 20.68x 24.33x 27.11x 27.66x 27.37x

TEV/NTM EBITDA Average 19.77x 19.53x 21.54x 24.16x 23.63xClose 18.91x 20.66x 23.24x 24.60x 23.70x

P/LTM EPS Average 38.52x 34.33x 36.32x 42.49x 42.13xClose 36.01x 34.36x 39.68x 44.03x 42.63x

P/NTM EPS Average 27.47x 26.75x 29.93x 33.26x 32.58xClose 25.77x 29.07x 32.24x 33.61x 33.28x

P/LTM Normalized EPS Average 40.03x 40.71x 48.10x 53.70x 52.51xClose 37.80x 45.69x 52.44x 54.17x 53.82x

P/BV Average 21.04x 20.25x 22.10x 24.30x 23.14xClose 19.43x 22.09x 23.46x 24.69x 22.92x


Valuation Summary• The Value Drivers of a Firm are:

• Amount and Timing of the Cash Flows (Operating Decisions)• Operating Profits (Revenues less Expenses)

• Tax Rate

• Depreciation (Non-Cash, Recovery of CAPEX)

• The Utilization of Assets (Investment Decisions)• Cash Conversion Cycle

• Fixed Asset Utilization (CAPEX)

• Capital Structure and Dividend Policy (Financing Decisions)• Weighted Average Cost of Capital (Discount rate) that

considers opportunity cost

• Terminal Value Assumptions• Perpetuity growth rate


Summary

There is a close relation between accounting measures of performance and shareholder value

Shareholder value can be improved by managing both the income statement (profitability) and the balance sheet (efficiency and leverage)

Initiatives that improve performance will almost always involve trade-offs among profitability, efficiency and leverage.

• Managers must trade off growth and profitability as well


Summary

Summary

• Shareholder value depends on

• Return on Equity

• Growth

• Risk & Opportunity Costs (Cost of Capital)

• Return on Equity depends

• Profitability

• Efficiency

• Leverage


Capital Sources for Growth and Exit


Capital Sources

Where to go for capital depends on your industry, company and owner characteristics. To answer “what is the best source of capital?”, you need

to answer a few questions: Where is the company in the company’s lifecycle?

Start-up, growth, mature or declining.

How much money is needed, how is it going to be used, and how long is the money needed?

What is the track record of the business? How scalable is the business?

Who is the management and what is their track record? What are the owner’s personal resources?


Financing Options & Stage of Business


Sources of Capital Creditor’s Money (Can you show debt repayment? Can you secure the loan? What

is your credit history?) Vendors (joint checks) Customers (advance payment) Asset-based lenders Factoring companies Banks Leasing companies Government-backed loans and grants Merchant banks Capcos (Subordinated, Convertible Debt)

Owner’s Money (Willing to share the risk, but can you offer fast growth and high returns? What is your exit strategy?) Founder’s capital The 3 “F”s – friends, family and fools Retained earnings Private placements and business angels Institutional venture capitalists Strategic Investors (Customers, Vendors, Competitors) Private Equity Groups


Investment Vehicles

Types of Debt Instruments Senior Debt (Secured)

Credit Enhanced (Guarantor)

Subordinated Debt (with Equity Kickers?) High interest rate 8%-12% cash pay and 5-7% PIK

May include warrants or options to purchase stock at low price

Convertible Debt (Convertible to equity ownership)

Types of Equity Instruments

Preferred Stock (convertible, cumulative, participating) Anti-Dilution Provisions and Liquidation Preferences

Common Stock (Voting, Non-Voting)

Vesting Schedules

Incentive Stock Options and Phantom Stock


Term Sheets Negotiating Items for the Bank include:

Amount of loan Interest rate, fixed or floating Maturity Loan Covenants Guarantees

Major negotiating points with the Private Equity or Venture Capitalist will be: Amount of capital needed The valuation of the business Number and composition of the Board of Directors Liquidation preferences Anti-dilution provisions Milestones Amount of Option Pool and Vesting Schedule Founder stock vesting Conversion rights, Redemption rights and Take Along rights Registration and Piggyback rights


Why Terms Matter

• Liquidation preferences:

• When a company has multiple rounds of financing (Series Seed, A, B, C. etc.) each of these offerings may have a preference in payment over the other rounds. They payout is called a waterfall.

• A convertible participating preferred stock that has a 1x liquidation preference means that the investor gets their initial investment back first before everyone starts splitting up the pie.

• Let’s assume I invest $5 million in your company for 30% ownership. Several years later we then sell the company for $10 million. When I convert my preferred stock to common, I get my $5 million back off the top, then participate and get 30% of the remaining $5 million. Thus, I get $6.5 million of the $10 million (much more than my 30% ownership).

• If it was non-participating preferred, then I have to choose to get my $5 million or convert and get 30%, but not both. Since 30% of $10 million is less than my investment, I would exercise my 1x liquidation preference instead of converting to common and only get my $5 million back.


Case Studies


Three Subsector Case Studies for Discussion


Thank you!

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