Strictly confidential 1NeoFocus - Future of the malting industry – 20130909
NeoFocus white paper
The future of the malting industry:Brewers need malt, but do they need maltsters?
Paris, 09th September 2013
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Disclaimer
2NeoFocus - Future of the malting industry – 20130909
This document is specifically intended for NeoFocus. Under no circumstances whatsoever this document, or any part of this document, should be communicated to third parties or copied without the prior consent of NeoFocus.
The concepts and tools presented in this document are derived from our expertise and are proprietary to NeoFocus. We require our clients to commit to keep them strictly confidential. The acceptance of this document is an explicit commitment to maintain such level of confidentiality.
The examples and data presented in this document are from public sources, interviews, or strictly illustrative. Although they have been collected with all the necessary professional care, they represent the best of our knowledge: in particular NeoFocus does not guarantee the accuracy or exhaustiveness of its estimates.
The actions and deliverables presented should be adapted to the specificities of each project. This document is intended as a support for presentation and should not be used without the corresponding oral comments.
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Agenda Page
1. Key questions the leading maltsters must address 3
2. NeoFocus Overview 13
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NeoFocus has found that leading maltsters are confronted with six central questions which they must address to successfully compete in the sector going forward
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Questions that leading maltsters should have an answer to
1. How do we get ourselves ready for future beer industry consolidation?
2. Should we participate in malting industry consolidation?
3. How can we secure raw material supplies? And can we secure extra margin through increased involvement in origination?
4. Which competitive advantages and profitable growth drivers can we leverage in mature markets?
5. In emerging markets, where should we export – and where should we build local plants?
6. How will we fix underperforming assets?
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Key question #1: How do we get ourselves ready for future beer industry consolidation?
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Questions that leading maltsters should have an answer to: #1 of 6
Source: Barth Report, Annual Reports, NeoFocus analysis
• What are our relationships with leading brewing groups? What are our key assets in these relationships?
• To what extent can some of our largest customers further centralize procurement and unify terms and conditions?
• What would be our exposure to a mega-merger, e.g. AB InBev + SabMiller, which is heavily rumored in the industry (again…) and would represent a combined 35% market share?
• Are our customers asking for larger capacity plants to guarantee consistency and quality of supply, even in emerging markets?
• What would be our financial risk if one of our large regional customers was to be acquired by a larger brewing group? Do we have a plan to mitigate that risk?
Industry trend: brewer consolidation Key questions
2008 2014
In 2008 the top 4 brewers accounted for 42% of global beer industry volumes
By 2014 the same 4 brewers grew through consolidation to account for~52% of global beer industry volumes(1), and are continuously on the lookout for acquisition opportunities, particularly in emerging markets
What will the brewing industry look like by 2018?
Note (1) 2012 volume estimates for top 4 brewers assume most recent wave of consolidation is approved by regulators, including ABI acquisition of remaining share of Modelo, Heineken acquisition of APB, etc.
% of industry volumes
AB-InBev
SABMiller
Heineken
Carlsberg
Others
AB-InBev
SABMiller
Heineken
Carlsberg
Others
201842% 52%
?
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Key question #2: Should we participate in malting industry consolidation?
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Questions that leading maltsters should have an answer to: #2 of 6
Source: Rahr Malting Report, Annual Reports, NeoFocus analysis
• What is our strategic rationale for participation?
• How: as an acquirer or as a target?
• Are there potential acquisition or partnership targets we should be exploring?
• Do we wish to join a larger maltster? How do we negotiate our role in the consolidated entity?
• What would be the value of our business, as a whole or in parts, for some of our current competitors?
• Do we need scale for better negotiating leverage with brewers?
• Would scale enable us to rationalize capacity in multiple plants?
• Would increased geographic presence help us spread risks in the event of a barley shortfall?
• Would increased consolidation provide us with additional risk mitigation?
Industry trend: maltster consolidation Key questions
2008
In 2008 the top 6 maltsters accounted for 38% of global malting volumesBy 2012(1) the top 6 maltsters accounted for 49% of global malting volumes, still considerably behind the consolidation of the top 4 global brewersWhat will the malting industry look like by 2018?
“I think within 5-10 years you will see consolidation within the malting industry that starts to mirror the level of consolidation of the brewers. In my opinion this evolution is inevitable and is essentially driven by the brewers as they have really taken the upper hand in purchasing behavior.” Malt industry executive
Malteurop
Soufflet
CargillUMH
SupertimeBoortmalt
Others
% of industry volumes2018
?38%
201451%
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Key question #3: How can we secure raw material supplies? And can we secure extra margin through increased involvement in origination?
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Questions that leading maltsters should have an answer to: #3 of 6
Source: Industry reports, industry interviews, NeoFocus analysis
• Price and volume volatility, especially as barley becomes more of a niche crop in many geographies
• Shifts in traditional barley production areas; new barley production areas
• Potential for “out of location” malting plants relative to barley growing regions – inbound barley logistics flow issues
• Increased integration with grain companies for a secure source of supply
• Direct procurement organizations within malting companies – direct relationships with growers
• New contract practices (contract crops)
• Move towards new sources of starch, using local crops (cassava, sorghum, …); substitution risk for barley
• Move towards “new beers” using cocktails of barley and enzymes
Industry trend: raw material supplies Key questions
“Barley is becoming more and more of a specialty crop, and I can see the day when it is not at all treated like a commodity, but is purely a contract crop.” Malt industry executive
“The substitution risk is increasing: malt substitution in beer is more likely in countries with less “beer culture”, and these are precisely the fastest growing countries where brewers therefore install most of their new capacity.” Commercial director, malting company
CAGR-3,4%
Barley areas (000 ha), by select region
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Key question #4: Which competitive advantages and profitable growth drivers can we leverage in mature markets?
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Questions that leading maltsters should have an answer to: #4 of 6
Source: Company information, industry interviews, NeoFocus analysis
• Competitive advantage in origination?
• Lower total costs (including logistics)?
• High regional market share?
• Position in specialty malts?
• Unique selling proposition for craft brewers?
• Unique selling proposition for distillers?
• Others?
Industry trend: competitive advantage Key questions
“The largest malting companies, especially the likes of Malteurop, Soufflet and GrainCorp, have developed their own in-house barley procurement. And for the ones that are part of a larger cooperative or grain company, they are advantaged by the benefits from the relationships upstream.” Grain trader
Soufflet:Operates highly competitive, export-focused malting facility at Nogent-sur-Seine, with advantaged outbound logistics due to barge access on the SeineOwns majority of malting capacity in Central and Eastern Europe
Rahr Malting:Brewer’s Supply Group sells Rahr specialty malts as well as malts from other small, specialty maltsters, such as Weyermann, Schill, Gambrinus, Castle, Crisp to the fast-growing craft and micro brewing segments, commanding much higher margins
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Key question #5: In emerging markets, where should we export and where should we build local plants?
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Questions that leading maltsters should have an answer to: #5 of 6
Source: Annual Reports, press releases, industry interviews, NeoFocus analysis
• Partner with brewers to build new capacity to attend growing needs in developing markets?
• Develop competitive export base to effectively meet growing demand?
• Malting barley vs. malt changing international trade patterns?
Industry trend: serving emerging markets Key questions
“With the construction of the new malting plant in Passo Fundo, [AmBev] is introducing a new business model, which consists of taking the industry to the fields, contrary to the past model, when the malting house was receiving imported raw material and operated close to the brewery”
Marcelo Otto, Agro-industrial Director, AmBev, Dec 28, 2011
SABMiller local initiatives in Africa
New AmBev malting plant in Passo Fundo, RS
“Malt, at least in Africa, is one of a brewer’s biggest expenses, so we are definitely going into malting in order to better understand it, manage costs, control quality, etc. Brewers are making deals with the African governments in order to reduce excise rates on beer in exchange for promoting local barley industry.” Plant manager, global brewing group
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Key question #6: How will we fix underperforming assets?
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Questions that leading maltsters should have an answer to: #6 of 6
Source: Industry reports, industry interviews, NeoFocus analysis
• How do we improve our underperforming assets:̶ Rationalization?̶ Idling?̶ New investment?̶ Other?
• How do we deal with underperforming assets of our competitors (which are pushing down prices…)?
Industry trend: underperforming assets Key questions
“2 000kt [of excess capacity beyond Russia & China] are still “floating around”, pushing prices down and making it difficult for maltsters to be sufficiently profitable… Smaller and mid-sized maltsters are not closing as fast as expected and this is pushing prices down.” Barley / malt trader
Capacity utilization 2011
Graphite electrode cost curve
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500
1 000
1 500
2 000
2 500
3 000
3 500
4 000
0 100 200 300 400 500 600 700 800 900
Mal
t Pla
nt 1
Mal
t Pla
nt 2
Mal
t Pla
nt 3
Mal
t Pla
nt 4
Mal
t Pla
nt 5
Mal
t Pla
nt 6
Mal
t Pla
nt 7
Mal
t Pla
nt 8
Mal
t Pla
nt 9
Mal
t Pla
nt 1
0
Mal
t Pla
nt 1
1M
alt P
lant
12
Mal
t Pla
nt 1
3
Mal
t Pla
nt 1
4
Mal
t Pla
nt 1
5
Mal
t Pla
nt 1
6M
alt P
lant
17
Mal
t Pla
nt 1
8
Mal
t Pla
nt 1
9M
alt P
lant
20
Mal
t Pla
nt 2
2
Mal
t Pla
nt 2
3M
alt P
lant
24
Mal
t Pla
nt 2
5M
alt P
lant
26
Mal
t Pla
nt 2
1
100
75
50
25
($ / t) Malt production cost curveIllustrative
100%104%
99%97%
91%88% 87% 88% 90% 91% 92%
95%
100%
91%
87%
79%78% 77% 78% 79% 80% 80%
70%
75%
80%
85%
90%
95%
100%
105%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Excluding China
World
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NeoFocus has conducted projects along the entire value chain and across multiple categories in the agribusiness and food & beverage sectors
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Project examples
Types of projects across the industry value chain
Grain CompaniesSupply
BrewersProduction
MaltstersProcessing
Industry Value Chain
• Strategy formulation
• Competitive analysis
• Market entry
• Internationalization
• Portfolio optimization
• Target screening
• Strategic due diligence
• JV/Partner review
• Capabilities assessment
• Operations benchmarking
• Logistics optimization
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NeoFocus specifically has significant project experience supporting organic or external growth in the malting sector
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Selected malting sector project examples
Define sustainable, profitable external growth strategy in malting sector
Client assignment ResultNeoFocus assistance
• Business model evaluation• Strategic Business Plan design• Development scenarios validated and
quantified• Target screening and ranking by accessibility
• Integrated Business Plan into long term planning
• Pursued acquisition scenario
Perform strategic due diligence of ADM Malting assets
• Market environment analysis• Business Plan validation• Synergy calculations• Integration planning
• Pursued target successfully• Moved profitably from #3 to #1
industry position
Perform strategic due diligence of UMH malting assets
• Market environment analysis• Business Plan validation• Synergy calculations
• Presented bid for a discrete portion of the assets as price for entire portfolio viewed to be untenable
Conduct external due diligence of Joe White Malting assets
• Market environment analysis• Competitive assessment• Operational assessment• Strategy / SWOT analysis
• Factored findings into long term planning
• Received Board approval to pursue acquisition
Review value chain from upstream (grain) through malting to downstream (brewing) for competitive landscape and market dynamics
• Competitive assessment• Market dynamics analysis• Capabilities assessment
• Utilized findings to inform long term planning
• Developed strategic scenarios to address malting industry’s competitive dynamics
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Agenda Page
1. Key questions the leading maltsters must address 3
2. NeoFocus Overview 13
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NeoFocus assists its clients in all aspects of their growth initiatives: we provide professional services to imagine, design, execute and protect their successful development
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Our practices
Strategy
Organic growthExternal growth
Profitability growthPortfolio management
Corporate finance
M&AJoint venturesPartnershipsRestructuring
Innovation
Business BoosterTraining
Client experience
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NeoFocus is organized to provide professional services to support our customers’ growth initiatives
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Our professional practices
Organic growth
External growth
Portfoliomanagement
Profitability expansion
Sustainable and profitable growth
Strategy practice .
• Strategic Advisory
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Innovation practice .
• Business Booster
• Training
• Client experience
Our customers’growth projects
Our assistanceCorporate finance
practice
• M&A
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Local teams Experts
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Our international network allows us to conduct worldwide projects with integrated local teams
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Our international network of local professionals
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Inside accessto international markets
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NeoFocus has a strong international reach that is reinforced by local market experts as well as a large network of industry experts with considerable strategy consulting experience
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Our differentiation
• Sectorial expertise• Strategy and specialized practices
• Senior, highly experienced consultants• Partners are directly involved in each assignment• Local teams in each country• Over 250 customers and 850 projects over 10 years
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Our customers’ growth initiatives benefit from NeoFocus’ assistance: results achieved are improved, and costs and risks incurred are reduced
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Some benefits of NeoFocus’ assistance
• Improved transparency• Improved predictability• Proven NeoFocus
methodologies
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projects• Increased understanding and
support from the organization
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More growth
Less risks
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NeoFocus relies on an international network of experienced local teams to deal with local research and analyses – Illustration: France
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France
Jérôme Kelber
Managing PartnerParis / France
Jerome Kelber has over 15 years of consulting experience in Europe, the US, Brazil and North Africa. He has extensive industry knowledge in a broad range of industrial sectors, including agribusiness, mining, materials, aerospace and defense, electronics, clean techs and biotech, but also service industries, such as IT, B-to-B services, telecom, specialized retail and private equity.
Jerome Kelber has advised multiple leading European corporations on organic growth strategies, new business development, international expansion, M&A operations and post-merger integration.
Prior to setting up his own practice, Jerome Kelber was a senior project manager at Roland Berger & Partners, a global management strategy consultancy.
Prior to working in strategy consulting, Jerome Kelber acquired extensive M&A experience for over 6 years with Morgan Stanley and Calyon, mainly in cross-border M&A transactions. He also developed a strong experience in innovation and high‐tech engineering consulting, with global leader in R&D outsourcing Altran, mainly in the telecom network operators.
Jerome Kelber graduated from Ecole Centrale de Paris (Engineering and Economics) and holds a master in Economics & Finance from University of Paris I La Sorbonne.
Jerome Kelber has been a private pilot since 2001 and holds an instrument rating (IR-ME) since 2011.
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