Opportunities in Agri-Business: Moving up the Value Chain Alliance Grain Traders - Murad Al-Katib, President and CEO February 2014

Transcription

1 Opportunities in Agri-Business: Moving up the Value Chain Alliance Grain Traders - Murad Al-Katib, President and CEO February 2014

2 Forward Looking Statements Certain statements in this presentation are forward-looking statements. The reader is cautioned that assumptions used in the preparation of such information, although considered reasonable by AGT at the time of preparation, may prove to be incorrect. Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of AGT (including its operating subsidiaries) to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Such risks and uncertainties include, among others, the actual results of harvests, fluctuations in the price of lentils and other crops, failure of plant, equipment or processes to operate as anticipated, accidents or labour disputes, risks relating to the integration of acquisitions or to international operations, as well as those factors referred to in the section entitled Risk Factors in the Annual Information Form of AGT dated February 21, 2013 which is available on SEDAR at and which should be reviewed in conjunction with this document. Although AGT has attempted to identify important factors that could cause actual actions, events or results to differ materially from those described in forward-looking statements, there may be other factors that cause actions, events or results not to be as anticipated, estimated or intended. There can be no assurance that forward-looking statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements. Accordingly, readers should not place undue reliance on forward-looking statements. AGT expressly disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except in accordance with applicable securities laws. * Non-IFRS Financial Measures AGT provides some non-ifrs measures as supplementary information that Management believes may be useful to investors to explain AGT's financial results. These non-ifrs measures include EBITDA* (earnings before finance expense, income taxes, depreciation and amortization, and any effects of non-recurring costs and non-cash foreign exchange adjustment), Adjusted Net Earnings* (earnings before any effects of nonrecurring costs and non-cash foreign exchange adjustments), Net Debt* (bank indebtedness, short term financing and long term debt less cash) and Net Working Capital* (current assets less current liabilities). Management believes that these are important measures in evaluating performance and in determining whether to invest in AGT. However, EBITDA*, Adjusted Net Earnings*, Net Debt* and Net Working Capital* are not recognized measures under IFRS and do not have standardized meanings prescribed by IFRS. In addition, AGT may calculate these measures differently than other companies; therefore, such measures may not be comparable. Investors are cautioned that EBITDA*, Adjusted Net Earnings*, Net Debt* and Net Working Capital* should not be construed as an alternative to net earnings (loss) or cash flows as determined in accordance with IFRS as an indicator of AGT's performance or liquidity. For a reconciliation of net earnings (loss) determined in accordance with IFRS to EBITDA* and Adjusted Net Earnings*, see the table on page 36 in the management's discussion and analysis for the three and nine months ended September 30, 2013 available under AGT's profile on and on the AGT web site at 2

3 Alliance Grain Traders Inc. Highlights Company Overview Company Profile Global Company and Brands Global leader in pulse, staple food and food ingredient processing and distribution, with merchandising offices and value-added processing facilities in Canada, the U.S. Turkey, Australia, India, China and South Africa; European sales offices, Russian origination office and a global customer base TSX Listing : AGT Approximately 20 million fully diluted Shares Outstanding Market Cap approximately $300 million Current Dividend $0.60/share/year Headquarters Regina, SK, Canada 3

4 AGT Global Operations (38%) Number in parentheses represent crop sourcing by origin AGT sells to all countries shaded in red Russia (5%) (15%) (25%) (1%) 29 facilities in 6 key agricultural production origins on 5 continents with over 1.7 million mt of annual production European Sales offices Russian and India origination office (1%) (15%) 4

5 AGT Global Facilities and Offices 5

6 Key Products Category Product Pillar Highlight Lentils Chickpeas Beans AGT Diverse Product Offering Red, green, yellow Split, Football and whole Kabuli, B90, desi, split desi Navy, romano, pinto, faba, dark light red kidney, black #1 exporter in lentils globally, estimated 30% market share Largest red lentil splitter in the world and largest colour sorter of green lentils globally #1 exporter in Kabuli type chickpeas globally with a multiorigin chickpea program for the canning, packing and hummus processing sector Growing platform for multi-origin bean shipped globally with processing and origination in 10 countries Peas Yellow and Green Split and Whole World s largest peas splitter Focus on value-added peas rather than bulk shipment Milled Durum Wheat Pasta, semolina, bulgur Turkey: #3 domestic brand and #1 export brand for pasta 12% pasta market share in Turkey and 80 counties of export Rice Medium and long grain New rice processing mill in Turkey Food and Feed Ingredients Other Products flour, protein, starch, fibre, Popcorn, sunflower seeds, flax seeds, specialty crops New food ingredient facility located in Minot, North Dakota: largest US pulse ingredient factory Largest multi-origin popcorn importer and exporter in Turkey and South Africa Source: Management estimates 6

7 Rural Renaissance a future in which agriculture provides societal solutions to energy supplies, health promotion and climate change. whatever producers and processors do, they must be done in innovative ways that resonate with their customers. 7

8 The Family Farm is Growing Western Canadian farm has changed over the years Average farm size is in Canada growing as farms consolidate to large operation or corporate farms: o o 2006: 1,450 acres (3.3% of farms over 3,250 acres) 2011: 1,668 acres (4% of farms over 3,250 acres) Median age of farm operators in Canada increasing: o o 2006: 52.6 years old 2011: 54.2 years old Agriculture, forestry, fishing and hunting makes up 11.4% of Saskatchewan s Real Gross Domestic Product (GDP) According to Statistics Canada's revised estimates, Saskatchewan posted a GDP at market prices of $57.5 billion (in 2007 chained dollars) in 2011 Source: Saskatchewan Agriculture and Food; StatsCan 2011 Census on Agriculture; Saskatchewan Government data 8

9 Agriculture Not just food anymore Agriculture not just hitting the breadbasket anymore Impact reaching far outside Agri-Food: o Health sector o Energy sector o Environment sector o Immigration sector o Economy overall 9

10 Agricultural Industry Growth Growth Traditional price conscious markets are becoming increasingly commoditized The agricultural and agri-food industry needs To leverage nutrition, health, energy, food security/safety and the environment profile to achieve sector growth Find new approaches to build on existing strengths in non-traditional markets and products To tap into the growth potential for feed in domestic and international markets Opportunity Food, Fibre, Feed and Fuel Pulses ingredients like flour, protein, starch and fibre as well as ingredient as well as premium pulses with market demand in consumption markets Durum wheat for production of pasta How to realize the potential: North America and non-traditional uses for grains and pulses like ingredients and industrial uses Move up the value-chain with packaged retail Increase Western Canadian milling capacity for pulses and durum The U.S. market is close in proximity and large in size Research partnerships with industry Focus on transportation and market development 10

11 Overview of Pulses Pulse crops include lentils, peas, chickpeas and beans, which produce edible seeds, called pulses Represent a non-gmo, gluten-free, low allergen, major source of protein and fibre, which developing nations particularly rely on (i.e. vegetable sources for their protein and energy requirements) Increasing consumption (both directly and as an input in other food products) in developed countries where pulses are increasingly viewed as healthy Composition of Pulses Crude Fibre 3-14% Sugars 3-8% Ash Fat 2-4% 2-4% Moisture 7-14% Protein 20-35% Starch 38-55% 11

12 6,000,000 5,000,000 4,000,000 3,000,000 2,000,000 1,000,000 - Canada Pulse Production and Exports Production (tonnes) Export Quantity (tonnes) Source: FAO

13 Traditional Markets South Asia Middle East and North Africa Growth Driver: Population and Global Demand for Food Global population expected to rise 30% Global food output will have to grow by 70% to feed the world Pulses are a sustainable source of protein, a key nutrient for large numbers of the world s populations Latin America Source: UN FAO 13

14 New Markets North America Growth Driver: Health, Nutrition and Sustainability High Protein and Fibre, Nutrient Dense, Low Fat, Gluten Free, non-gmo, Low Allergenicity Lower Energy Use, Reduce Greenhouse Gas Emissions, Improve Soil Health through Rotational Cropping, Increase Water Use Efficiency China Europe 14

15 Factors Driving Demand Overall Population Growth Emergence of the Middle Class Health and Wellness Trend Alternative Fuels Global population to rise from 7 billion to 9 billion (30%) by 2050 (U.N.) Population growth expected to be concentrated in developing nations where diets tend to consist of a greater proportion of pulses Overall food output to increase by over 70% due to urbanization and income growth (FAO) Protein is a key nutrient and pulses are a sustainable source of protein Lower energy use, reduced greenhouse gas emissions, improved soil health through rotational cropping, increased water use efficiency Consumer movement towards healthy lifestyles in non-traditional markets Pulses offer many benefits for nutrition, health and chronic disease prevention As a result, there has been increased interest from food companies in using pulses in product formulations, specifically of a non-gmo variety Pulses are a rotational crop for wheat and canola which are used in biodiesel and ethanol production Global price for protein is rising as corn is increasingly used in the production of ethanol 15

16 Food Industry Statistics Category Estimated Market Value Annual Spending on Food (U.S.) $1.6 Trillion (E) Functional Foods and Nutraceuticals $50 Billion (E) Sports Nutrition and Weight Loss $15 Billion (E) Soy Products $5.5 Billion (E) Vegetarian Markets $2 Billion (E) Source: FDA; USDA; A.C. Nielsen; StatsCan; Ag Canada; CFIA; Figures based on industry reports and estimates 16

17 Top 5 Food Companies in the U.S. $133 Billion Combined Top 5 Food Companies Food Only Sales (USD $billions) 2012 Food Sales 2012 Total Sales Pepsico Inc. $37.6(E) $65.5 (E) Tyson Foods $31.6 (E) $33.3 (E) Nestle (U.S. and Canada) $27.2 (E) $101.0 (E) JBS USA $20.9 (E) $36.9 (E) Anheuser-Busch InBev $16.0 (E) $39.8 (E) Source: 2013 Food Processing Magazine Survey and Rankings 17

18 Top 5 Global Food Retailers $864.5 Billion Combined 2012 Sales Top Sales (USD $billions) Wal-Mart (U.S.) - U.S. Ranking #1 $469.2 (E) Tesco (U.K.) $102.7 (E) Carrefour (France) $98.7 (E) Costco (U.S.) - U.S. Ranking #2 $97.1 (E) Kroger (U.S.) - U.S. Ranking #3 $96.8 (E) Metro Group (Germany) $92.8 (E) Schwarz Group (Germany) $88.2 (E) (9) Target (U.S.) - U.S. Ranking #4 $73.3 (E) (20) Safeway (U.S./Canada) - U.S. Ranking #5 $44.2 (E) (24) Loblaw Cos. (Canada) Canada Ranking #1 $32.0 (E) Source: Supermarket News 2012 Rankings 18

19 Top Canadian Food Retailers $96.7 Billion Combined 2011 Sales Top Sales (CDN $billions) Loblaws (Weston Group) Wal-Mart Canada Sobeys (Empire Company) Costco Canada Metro Inc. Shoppers Drug Mart (Acquired by Loblaws) Safeway Canada (Acquired by Sobeys) Rexall (Katz Group) Overwaite (Pattison Group) $31.7 (E) $23.6 (E) $16.1 (E) $13.9 (E) $11.4 (E) $10.5 (E) $6.7 (E) $5.5 (E) $3.4 (E) Source: Industry Canada OCA Summer 2013 Report 19

20 Top Canadian Retail Pulses Brands National Retail Sales (MRG Only) 52 weeks ($ 000) Dry Pulses Wet Pulses Total TOTAL CATEGORY $ 35,415 $ 76, 219 $116,634 Private Label $ 12,887 $ 27,161 $ 40,048 NuPak $ 4,208 Not Available Not Available CLIC $ 2,462 $ 2,154 $ 4,616 Cedar (Phoenicia) $ 1,518 $ 7,029 $ 8,547 Ferma $ 803 $ 763 $ 1,566 Unico Not Available $ 20,063 $ 20,063 Source: Estimates based on reporting for Mass Retail Grocery only sales by A.C. Nielsen Data.2011 data trailing 52 weeks from October

21 Factors Influencing Pulse Demand Health Change in Consumers Nutrition Sustainability FOOD MANUFACTURERS FOOD SERVICE CONSUMERS 21

22 Pulses Enhance Everyday Foods Traditional Formulation: 100% Durum Semolina Pasta Reformulated: Pulse Inclusion 25% Lentil, 75% Durum 25% lower carbon footprint 100% increase in fibre 25% increase in protein Adapted from: Gan et al Unpublished results, Agriculture and Agri-Food Canada; U.S. Department of Agriculture, Agricultural Research Service USDA National Nutrient Database for Standard Reference. 22

23 Pulses and Sustainable Agriculture Pulses Produce Their Own Fertilizer by Fixing Nitrogen Pulses Use Less Non-Renewable Energy Relative to Other Crops Increased Water Use Efficiency 43 gallons of water to produce one pound of pulses 1,857 gallons of water to produce one pound of beef 1,857 Gallons/ lbs 756 Gallons/ lbs 70% of the non-renewable energy used in cropping systems in western Canada is attributable to fertilizers (Zentner et al. 2004) 469 Gallons/ lbs 43 Gallons/ lbs Pulses Source: Arjen Y. Hoekstra and Ashok Chapagain, Globalization of Water, U. of Twente, Waterfootprint.org National Geographic, April

24 Carbon Footprint Source: 24

25 Increased Focus on Sustainability Food Companies Pepsico o UK 50% reduction of carbon emissions/water use in 5 years Unilever o Source 100% of agricultural products sustainable by 2020 Heinz o 20% reduction in carbon emissions by 2015 Retailers Wal-Mart - #1 in World and U.S. o o o Locally sourced products Support 3 rd world farmers Track pesticides, fertilizer and water use Carrefour - France, #2 in world o o Carbon legislation Social welfare Tesco - UK, #3 in world o Carbon labeled products Loblaws - Canada, #24 in world o Initiatives to reduce carbon footprint and source locally and sustainably 25

26 Food With a Message Climate Neutral from Cow to Cone Raises awareness of climate change Promotes Climate Change College that Ben & Jerry helped establish Sun Chips Small Steps Sweepstakes Sun Chips plant in Modesto, CA, uses a field of solar concentrators for heat Frito Lay purchases renewable energy credits to offset 100% of electricity used in its U.S. facilities 26

27 Investment in Ingredient Platform Minot ND Production Facility Saskatoon SK R&D Centre Production facility commissioned in June 2013 for production of pulses flours, proteins, starches and fibre Second production line expansion announced adding 35,000 mt of capacity With expansion capacity of 70,000 mt/year. Potential for addition of third production line Expansions being considered in for Canada and Turkey Expanding retail business for canned, packaged and ingredient products Fully equipped 2,000 sq.ft Analytical, Application & Product Development Laboratory focused on: o Customer Service and Training o Collaborative Research o Commercialization & Innovation o Product Development o Quality Evaluation Programs o Strategic Pipeline Research o Technology Development 27

28 Ingredient Product Offering High Viscosity Pulse Flours o Yellow Pea Flour V-6000 TM o o Yellow Lentil Flour V-6000 TM Faba Bean Flour V-6000 TM Pulse Proteins o Pea Protein 75 (75% Protein) o o o Pea Protein 55 (55% Protein) Lentil Protein 55 (55% Protein) Faba Bean 60 (60% Protein) Pulse Brans o Pea Bran 85 (85% Fibre) o o o Pea Bran 55 (55% Fibre) Lentil Bran 85 (85% Fibre) Lentil Bran 55 (55% Fibre) Pulse Flours & Semolinas o o o o PulsePlus TM Products Yellow And Green Pea Red, Yellow And Green Lentil Chickpea Faba Bean, Navy Bean, Pinto Bean Bakery Beverages Dairy solutions Dips and sauces Egg replacement Energy bars and supplements Flour milling Gluten free concept Milk replacement Pasta & Asian noodles Processed meat and meat analogs Snacks and breakfast cereals Soy replacement Tea, coffee and cocoa Animal feed solutions Industrial & technical Applications 28

29 Increased Ingredient Use for Pulses Gluten free Good source of fibre (3 g fibre per serving) Low fat Foods Petfood/Animal Feed Aquaculture Approximately $19.85 Billion spent on pet food in the U.S. in 2011 Global Feed Markets in 2011 estimated at $257B Accounts for approximately 47% of the world s fish food production for human consumption INGREDIENTS: Bean Flour (Lentil, Garbanzo & Adzuki Beans), Potato and/or Pea Starch, Potato Fiber, Vegetable Oil (High Oleic Sunflower Oil and/or High Oleic Safflower Oil, and/or Non Gmo Expeller Pressed Canola Oil), Seasoning (Sea Salt, Cane Sugar, Black Pepper, Tapioca Maltodextrin, Onion Powder, Garlic Powder, Autolyzed Yeast Extract, Malic Acid, White Pepper, Expeller Pressed Canola Oil), Potassium Chloride Source: American Pet Products Association Report; Transparency Market Research; UN SOFIA report 29

30 More Production or Higher Value? AGT is proponent of origin-based processing keeping the value in secondary processing at the source vs. destination-based processing Need to guarantee quality and delivery so the end product is the same every time Create value for producers through marketing options and potentials for premiums as has been done on pulses Transportation advances are creating freight options that were not available before Transformational projects like the Global Transportation hub in Regina with tenants include CP Rail, CLS/Loblaws, Yanke Free-Trade Agreement with Europe and others will be a big opportunity for Canadian businesses 30

31 Tariffs / Free Trade Agreements Canada-E.U. Trade Partnership underway Colombia - FTA concluded Morocco FTA underway India FTA underway Turkey Discussions ongoing Japan/TTP/CETA, etc. Pulse industry is currently renewing bilateral FTA priorities in collaboration with other Canadian agriculture groups 31

32 Non-Tariff Trade Barriers Tariffs, duties and quotas used to be the trade barrier of choice Importing countries options have been limited by WTO negotiation rounds Export challenges increasingly include: SPS/food safety barriers Emerging markets with unpredictable regulatory and policy approaches Increased maximum residue limit (MRL) monitoring and enforcement For minor crops, importing companies often do not have MRLs in place higher trade risk 32

33 Multimodal Business Canadian peas, lentils, beans and chickpeas move across Canada and 182 countries worldwide in: Hopper cars Box cars Intermodal vans Marine containers 33

34 Challenges Complex supply chain = many players optimizing their own performance without prioritizing the supply chain s performance Examples of problems: Over-ordering by shippers Challenges with container availability and vessel capacity Lack of predictability in rail car supply and transit times Extension of shipping windows sold Use of Grain and Feed Trade Association (GAFTA) contract extensions Inclusion of GAFTA contract penalties in cost calculations Poor reputability for consistency and reliability 34

35 Practical Solutions Proactive work to develop commercial solutions amongst supply chain stakeholders Cooperation with government to ensure the regulatory environment encourages commercial solutions e.g. Service Level Agreements (SLAs) Pulse industry is working with partners from all sectors to ensure legislation is in place that provides shippers with a right to a service level agreement with the railways and a process to establish one should negotiations break down. Balanced accountability leads to Predictability Predictability is central to the overall costs that companies incur in logistics and thus to their competitiveness in global supply chains. World Bank, Connecting to Compete 35

36 Saskatchewan Landscape Resource sector boom is real: many factors beyond our control ie: global demand for commodities, pace of growth in emerging markets, credit, liquidity and macroeconomic factors Economic growth in Saskatchewan is truly multi-dimensional: agriculture, mining, oil and gas, manufacturing, technology, services, education. We all feel pretty good right now Population up, economy doing relatively well Perception of the Province is high outside our borders Export dominated economy Seem to be doing it right! 36

37 Key Opportunities AGT is an example of how a Saskatchewan company can become globally successful reaching world markets from Saskatchewan Opportunity exists to leverage our raw material commodity base to create refinery/value added industries to capture the wealth creation here Key elements to this strategy: Quality inputs: we have it! Technology: available and R&D are key elements: SRC, PRC, U of S, U of R, CDC Innovation Talent: workforce available and productive Infrastructure: PPP, Gov t alone Enabling Environment from a policy perspective: labour legislation, tax policy, investment attraction, immigration policy and settlement, infrastructure, education and skills Cost competitive jurisdiction 37

38 Challenges What to Do Next? Are we as successful as we think? Pat on the back or is a good defense a strong offence? Elements of concern for me as a CEO: Cost competiveness: global environment is real: CDIA, neighboring jurisdictions Lets look at my case of Regina versus Minot: Land costs at GTH estimated at $12 million vs Minot AG Park: $0 State subsidized equipment and business loans: 1% interest for 5 years: $14 million State corporate income tax and payroll tax exception for 5 years Construction of buildings: constructed at $60 sq.ft in Minot versus $120 sq.ft in Regina BNSF Rail Terminal and a workforce to be drawn from high unemployment areas of the U.S. 38

39 Key Drivers of Success Market access and diversification of exports: strong advocate of the Government of Canada s Pro-Trade Plan Gateway Initiatives: Asia and Emerging markets will be the key drivers: BRIC; next ones CIVETS (Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa). Transportation is key: i.e. GTH, rail infrastructure, roads Innovation agenda and productivity gaps: we are losing ground SME s are the driver of our economy and Saskatchewan is export successful and diversified Access to talent: migration, immigration: what matters? Jobs, Education, Housing, Healthcare, Infrastructure, Leisure Access to capital ie. venture capital? Perception of business climate 39

40 40

41 Seize the Opportunity Build it! Skills shortage is real: engage the existing pool more effectively but recognize that we talk of skills shortage. We have a critical LABOUR SHORTAGE: Business windows KEY: SINP was good but??? We shall all be judged on how this Province looks 10 years and 20 years from now, not 10 to 20 weeks from now Meaningful change in the way we think of Government s role: private sector is the driver of many elements: PPP Balance of Urban and Rural interests: cities and adjacent areas need a coordinated approach to sustainable growth: lets not make the same mistakes that Alberta made and is making Up the Chain insulates you from the short term macro effects and makes you a seller of products not commodities 41

42

43 43

44 44

45 Conclusions Agriculture in in the midst of a renaissance impacting many sectors of the economy Opportunities as agri-production moves up the value-chain focused on food, fibre, feed and fuel as well as packaged and retail products and ingredients Global agri-products markets are strong with need for secure and stable food supplies Changes in Canada on grain marketing and grain companies have potential to strengthen agri-business sector overall and give producers options for marketing grains in Northern Plains states and Western Canada On-going research into not only varieties but new uses for pulses and grains in new forms for ingredient use is needed 45

46 (306)