Sugar Industry Primer

Sugar Industry Primer
Kevin Cheng
Ramiro Lauzan
Charlie Taylor
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December 21, 2006
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Table of contents
Working Draft - Last Modified 5/22/2007 4:32:52 PM
Introductionsugar basics
Global sugar industrycurrent situation and future outlook
Main implications for global players strategy formulation
Appendix
Profiles of key global players
Printed 18/12/2006 11:37:31 AM
Sources of information
Objectives of this document
Title
Objectives
Applications
Provide an introductory, up-to-date
Useful for
Identify evolving trends that will shape

the industry going forward, including
opportunities in the biofuels arena
alternative corporate strategies that

industry players can pursue given
such industry outlook
Bringing CSTs up to speed on the sugar

industry structure and dynamics
Establishing initial hypothesis on potential
opportunities and threats and structuring
the teams problem-solving accordingly
Developing an outside-in understanding
of the strategies that global sugar players
have been following
Printed 18/12/2006 11:37:31 AM
Stimulate a discussion around
perspective on the global sugar

industry
Not useful for

Gathering detailed/granular raw data at a
specific country levelnot a fact pack
Establishing a comprehensive
understanding of the operations and
economics of sugar players
Sugar: Basic facts
What it is
and where it comes from
Sugar is the common name for sucrose
Printed 18/12/2006 11:37:31 AM
a carbohydrate
Chemically, sucrose is a white, crystalline, solid
disaccharide made up of glucose and fructose
Sucrose is obtained predominantly from two
crops, namely sugarcane and sugar beets
All sugar products in the marketplace differ only in
(a) crystal size; and/or (b) molasses content,
which defines colourwhile sugar crystals are
naturally colourless, molasses is present both in
sugar beet and sugar cane and conveys a
brownish tonality
The two main product categories are raw sugar
and refined sugaralthough there are many
sub-categories within those
In addition to its traditional domestic use, sugar is
increasingly consumed by soft drink
manufacturers, bakeries, and other industrial
customers to alter the flavour and properties
(eg preservation, texture) of foods and beverages
3035% of total sugar produced comes

from sugar beet, which grows in cool
regionsthe EU and the US being the
largest producers
6570% of total sugar produced comes
from sugarcane, which is planted mostly
in tropical, warm climatesBrazil, India,
China and Australia are the most
representative countries in this case
Sugar: High-level production process
Plantation
Sugarcane requires a minimum
A shredder breaks apart the cane
Raw sugar crystals are dissolved
of 600mm of annual moisturea

stand of cane can be harvested
several times (at a decreasing
yield), and is harvested by hand
or mechanically
Once cut, sugarcane loses its
sugar content quicklyshould
be crushed at the mill within 24
hours
Depending on productivity
factors, plantations generate
5090 tonnes per hectare
and ruptures the juice cells

rollers are used to separate sugar
juice from the fibrous material,
called bagasse (used as a fuel
for the mill boiler furnaces)
Juice from the cane is then
purified before being
concentrated into a syrup
Syrup is sent to a rapidly
spinning centrifuge to remove
molasses and leave raw sugar
crystals, which are then dried
in hot water to form a sugar

liquor, which is then purified,
either by carbonation or
phosphatation processesthese
processes trap suspended
impurities in larger particles
which are easier to separate
from the sugar liquor
Sugar beet is a hardy biennial
After washing, beets are sliced
plantduring its first growing

season, it produces a large root
whose dry mass is 1520%
sucrose by weight; in most
temperate climates, beets are
planted in the spring and
harvested in the autumn
harvesting is now entirely
mechanical
and soaked in hot waterthe

liquid is filtered and concentrated
to a deep-brown, molasses-rich
syrup
The syrup is then allowed to cool
slightly before it is whirled in a
centrifuge, where most of the
molasses is spun away
Finally hot water is sprayed over
the light brown crystals to remove
the remaining molasses, leaving
raw sugar crystals, which are
then dried
This liquid is decolourised, and

concentrated by boiling in a
vacuum pan, yielding sugar
crystals and syrup
Printed 18/12/2006 11:37:31 AM
Beet
Refining
Cane
Milling
This mixture is processed

through a set of centrifugals
where the crystals are separated
from the syrup several times
Finally, the refined sugar crystals

are dried by tumbling them
through a stream of airthe
dried sugar is graded into the
required crystal sizes, ready for
packaging or delivery
Contents
Appendix
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SCP on the sugar industry

External
shocks
driven by high oil

prices and
environmental
concerns
stimulating
sugarcane demand
Deregulation in the
Technical advances
in irrigation and
genetically-modified
crops delivering
incremental
productivity
improvements
Strong consumption growth in emerging

economies (eg India, China), slowing
down in developed countries due to
dietary concerns (eg EU, US)
Supply shifting towards tropical, lowcost sugarcane-producing regions (eg

Brazil) for milling capacity, and towards
the Middle East for refining capacity
As a result, trade as proportion of total

consumption is gradually rising
Relatively high entry barriers due to

limited access to land/ plantations
access and governmental restrictions
on mill/ refineries licences
Most players prioritising plantation-mill,

vertically integrated operations with
even some back-end refining capability
to exploit productivity gains and energy
cost advantages from bagasse*
Global prices determined by traditional

commodity microeconomics, albeit
heavily distorted at the local level by
regulatory intervention (eg tariffs,
quotas) and non-traditional sugar
substitutes (ie Gur in India)
Conduct
Given limited pricing power,

most investments are
focused on attaining a costcompetitive manufacturing
position via acquiring assets
in low-cost regions and
enhancing productivity (farm
and mill yields, sucrose
content)
As part of this, some

consolidation is taking place
ABF acquired Illovo
(Africas biggest sugar
producer), in 2006
In parallel, some players

attempting diversification
into adjacent, value-added
categories, ie food
ingredients, sweeteners
Performance
Upstream activities
characterised by cyclical
returns, with operating
margins varying between
5% and 27% (based on the
point in the cycle)
Downstream operations
offering lower yet less
volatile profitability, with
refining margins around 9%
Main players have showed

strong recent performance,
with TRS growing at 18% pa
over the last 5 years
ROIC levels have improved

recently as well, from 11%
to 13%
Finally, new players are

entering the industry to
explore the ethanol-related
upside
* Bagasse is created as a by-product from sugarcane milling activities, and it can be used as fuel for the refining plants
Printed 18/12/2006 11:37:31 AM
EU affecting
historical sugar
trade patterns
Structure
Biofuels boom
Several drivers explain the emergence of the biofuels sector

1
Gas
Oil
11.7
1.1
2005
BIOETHANOL
CAGR
4.1
15%
30%
19.1
12%
1980
2005
2010
Market size
in 2005
~US$25b
2005
3 Technology advances
23.2
10.6
2000
Biodiesel
Bioethanol
Yield
gallons/bushel*
Energy
requirements
Index
2.5
100
2.7
+ 10%
Printed 18/12/2006 11:37:31 AM
800
700
600
500
400
300
200
100
0
1995
Biofuel consumption
Billion gallons pa
30
-70%
Environmental/social interests
Negative environmental impact of fossil fuels
Global effects (global warming due to CO2)
Local effects (air pollution, toxicity of MTBE,
leakage of toxic product during processing)
New source of income for local farmers
* Bushel corn equals 25.4 kg

Sources: CMAI; SRI; press clippings; team analysis
2 Volatile and high prices

of fossil feedstock
Index
Government support
Governments with commitment to decrease
dependency on foreign oil and reach Kyoto targets
Governments releasing biofuel targets or
mandates and supporting economics by subsidies
These drivers are all likely to favour rapid growth of the biofuels
industry over the medium-term
Crude oil prices expected to
required to reach Kyoto target and

to reduce dependency
on oil
Amount of subsidies could
decrease as many governments
are under financial pressure
stay above US$40 per barrel

Reserves are decreasing
Demand is growing with
increase of GDP
Continuous unstable political
situation in Middle East
Further support of biofuels
Printed 18/12/2006 11:37:31 AM
Environmental/social
interests important in future,
strength of trend might
even increase
Source: Team analysis
Advances of current technologies
still ongoing but reaching end of

s-curve
Further improvement expected to
come from new technologies as
R&D efforts have already been
made (eg cellulose to ethanol)
8
Announced EU reforms will actively shift trade balance towards

Europe at competitive prices
From
To
High domestic pricesup to 3 times
36% reduction in guaranteed minimum
Printed 18/12/2006 11:37:31 AM
sugar price
Reduction in EU production by 67
million tonnes (up to one third of current
output)
Temporary support for farmers
Compensation for loss of income
Restructuring fund to encourage
uncompetitive producers to exit
Cost of production to converge towards
400 /tonne
Completely open market to imports from
poorer countries from 2009
EU as a potential net importer
global prices due to import quotas and

subsidies
Over production leading to
Intervention buying of surplus
production by EU
Subsidised exports sold to the world
market
Uncompetitive production costs
above 700 /tonne
The same agricultural policy for the
last 40 years, which is incongruent
with the international Common
Agricultural Policy
EU as a net exporter
Sugar producers who are not competitive should get out now for their own benefit
as well as for the overall balance of the marketthat is the logic of our reform
EU Commissioner Fischer Boel, November 2006
Source: www.Europa.eu; F.O.Lichts World Sugar Statistics
Globally, demand for agricultural outputs will continue to rise as

population and real income increases
Actual
Agricultural output
Agricultural output
US$ Billions, 1990 prices
4,000
Forecast
R2 = 0.98
8,000
3,000
6,000
2,000
4,000
1,000
2,000
0
1980
0
83
86
89
92
95
98
01
04
Real GDP p/ cap
07
10
13
16
22
Agricultural output
10,000
Actual
4,000
Forecast
R2 = 0.99
8,000
3,000
6,000
4,000
2,000
2,000
1,000
0
86
89
92
95
98
01
04
07
10
13
16
Annual Agricultural output
Kcal per capita per day

Actual
3000
2500
2000
1500
1000
500
0
1980
Rationaleas real
GDP per capita
rises, consumers
eat more, and
diversify their diets
0
83
Kcal per capita per day
Dietary habits
2025
19
22
Annual agricultural output

Forecast
R2 = 0.97
2025
4,000
3,000
2,000
1,000
Rationaleshifts
in consumer
preferences
towards a higher
energy density
diet requiring
higher agricultural
output
0
83
86
89
92
95
98
Source: UN FAOSTAT database; WMM; WIM; team analysis
01
04
07
10
13
16
19
22
2025
10
Printed 18/12/2006 11:37:31 AM
GDP per capita
19
Agricultural output
Real GDP per capita

US$, 2000
1980
Rationale
increase in global
population driving
growing demand
for agricultural
products
Population
Population
Number of people
Millions
10,000
Consumption is already concentrated in developing economies,

and it should continue to expand as India and China converge to
average per capita consumption levels
Top 10 consumption markets, 2005
Annual consumption
Thousand tonnes
European Union
39.4
17,525
China
11,700
Brazil
9.6
57.3
10,800
United States
29.7
9,260
44.9
8,550
Mexico
53.3
5,482
Pakistan
3,850
Indonesia
3,800
2,539
24.8
Although India and

China are already
among the largest
sugar markets in the
world, their per
capita consumption
is still low compared
to other developing
countries, which
suggests significant
growth potential
16.3
34.1
Average 32.8
Source: USDA World Sugar report
11
Printed 18/12/2006 11:37:31 AM
Russia and Ukraine
Egypt
18.2
19,800
India
Per capita consumption

Kilos pa
Reduction of EU quotas will shift supply to Latin America and

Asia-Pacific production centres
Top 10 producers, 2005
Annual production
Thousand tonnes
Net trade
Thousand tonnes
28,700
European Union
21,233
India
China
United States
18,430
10,500
Thailand
4,330
Russia and Ukraine
4,080
-2,336
243
6,000
5,200
Brazil is the largest
NM
-1,190
6,888
Australia
Rest of World
4,873
4,230
2,700
sugar producer
and exporter in the
world
Tropical countries
in Latin America
and Asia-Pacific
are likely to
concentrate
production going
forward
-4,390
13,385
6,520*
Total
118,700
* Other major exporters include Guatemala, South Africa, Argentina, Colombia and Cuba
Total
29,000
12
Printed 18/12/2006 11:37:31 AM
Mexico
18,250
Brazil
The disappearance of the EU as a major net exporter should be

the most critical change in terms of future trade flows
2005
Imports
Thousand tonnes of sugar
4,390
2,336
1,800
1,392
1,340
1,323
1,230
1,200
1,190
1,190
-0.9
-1.7
1.4
-1.2
0.9
1.3
2.0
1.7
1.3
2.0
Net
exporters
Brazil
European Union
Australia
Thailand
Guatemala
South Africa
Colombia
Cuba
Argentina
Mexico
18,250
4,873
4,230
2,700
1,391
1,050
920
732
520
243
Export growth forecast

200515 CAGR, Percent
2.0
NA
1.5
7.8
0.9
4.2
4.4
3.2
1.7
5.2
13
Printed 18/12/2006 11:37:31 AM
Exports
Thousand tonnes of sugar
Although imports
from the largest net
importers (eg Russia
and United States)
will gradually slow
down, change in EU
legislation will allow
exporting countries
to experience
accelerated
growth rates
Net
importers
Russia and Ukraine

United States
Indonesia
Japan
South Korea
Canada
Egypt
Algeria
China
Malaysia
Import growth forecast

200515 CAGR, Percent
Productivity varies widely across markets, and remains a key

operational improvement opportunity
There is wide productivity variance
between countries ...
... which allows operational improvement along 3 dimensions
Sugarcane tonnes/plantation hectares
Thailand example
12.4
Guatemala
10.4
9.1
Mexico
7.8
South Africa
Argentina
7.5
China
7.2
6.6
Colombia
6.6
Thailand
5.5
Indonesia
5.3
Brazil
5.2
India
4.0
Pakistan
3.3
Cuba
3.1
Sucrose
per sugar
cane
12.2%
Sucrose
per
hectare
6.2
Sugar per
sucrose
Sugar per
hectare
Printed 18/12/2006 11:37:31 AM
Malaysia
Sugar
cane per
hectare
50.6
Australia
Farm yield optimised through climate and

soil conditions, water supply, GM crop
technology, labour and capital efficiency, root
disease and long-term cane monoculture
5.5
89%
Sucrose content
optimised through
GM crop technology
and matching crop
variety with
geographic latitude
Mill extraction optimised through level

of automation, equipment efficiency
and number of times the cane is
filtered and molasses is crushed
Average 6.7
Source: USDA World Sugar Statistics; McKinsey
14
However, productivity is not the most important factor

determining a countrys position on the global cost curve
ESTIMATES
11.5
US
10
11.2
Due to lower labour, electricity

and capital costs, Brazil has a
cost advantage vis--vis
Australia, despite having much
lower productivity levels
Cents/ 12
lb*
11
Mexico
Selected countries, 2004
10.2
8.6
7.7 7.9
8
7
6.0
6.7
6.5
China
Colombia
Thailand
South Africa
India
Australia
Brazil
Printed 18/12/2006 11:37:31 AM
Guatemala
4.8
0
0
Overall
productivity
10
15
5.2
20
25
30
35
12.4 10.4
40
45
4.0
* Cash costs ex-factory for raw sugar

Source: USDA World Sugar Report; LMC InternationalGlobal Sugar to 2015; McKinsey
50
55
60
7.8 5.5 6.6
65
7.2
70
75
9.1
80
85
NA
15
Global sugar industry is still moderately concentrated around

long-established European companies
Non-sugar
Sugar
US$ Millions, 2005
Pure sugar plays concentrating in low-cost,

tropical countries
Old European players diversifying

away from sugar
11.000
10.000
9.000
8.000
7.000
Printed 18/12/2006 11:37:31 AM
6.000
5.000
4.000
3.000
2.000
1.000
0
Sudzucker Tate & Lyle ABF (UK)
(Germany) (UK)
Tereos
(France)
Nordzucker Danisco
Cosan
(Germany) (Denmark) (Brazil)
American
CSR
(Australia) Crystal
(US)
* Acquired by ABF in 2006

Source: Company annual reports and announcements; Thompson; Press; McKinsey analysis
Imperial
Illovo
Sugar (US) (South
Africa)
TongaatHulett
(South
Africa)
Mitr Phol Khon Kaen

(Thailand) (Thailand)
16
Global sugar price has tripled over the last 2 years, largely
correlated to rising oil prices
Price of raw sugar
USc/lb
Price of crude oil

US$/bbl
20
80
70
CAGR
67%
16
60
14
CAGR
~0%
12
50
10
40
30
6
20
4
10
2
0
1999
0
2000
01
02
Source: FO LightsWorld Sugar Statistics, 2006
03
04
05
06
17
Printed 18/12/2006 11:37:31 AM
After 5 years of a
rather typical cycle with
no real price increases,
global sugar prices
have tripled between
200406,
predominantly due to
surging fuel prices
driving ethanol
production, and to a
lesser extent, drought
conditions in India
and Pakistan
18
Sugar industry has attractive margins and returns with more

variability in upstream than downstream businesses
Average operating margins
TRS of major global sugar players
EBITDA as percentage of revenues
Index
ESTIMATE
9.0%**
Sugar
Majors*
250
200
150
S&P 500
100
Printed 18/12/2006 11:37:31 AM
50
Upstream milling characterised by higher, yet more

volatile operating margins than downstream refining
(where players are typically able to pass through
price fluctuations)
2006
2005
0
2004
612
2003
527
2002
Refining
2001
Range
Milling
Global sugar majors have outperformed

S&P500 index17.9% CAGR vs. 6.2% CAGR
over last 5 years
* 20012005 data for sample including ABF, Balrampur, Danisco, and Tate & Lyle
** 2004 data from disguised client exampleconsidered an average peer
Source: USDA World Sugar report; Compustat; McKinsey
300
10.5%*
18
Sugar deals are increasing in size, and slowly extending outside of

Europe
1996 2007
Deal size is increasing
with flow of funds from Europe to other

continents
Percent
US Million
Acquirer origin
US$ 17.9 bn
14,859
Europe
1996-2001
46
Number of
deals
Source:
Deal logic
12,051
0
International
1,195
North America
546
Africa
482
Middle East
468
187
Asia Pacific
324
372
South Africa
35
905
3,189
1,205
Printed 18/12/2006 11:37:31 AM
2002-2007
54
45
Target origin
100% = 280 deals
55
Deal value
19
Details of top ten sugar deals

1996 2007, US Million
Name of acquirer
Name of target
Compagnie Nationale a Portefeuille
Saint Louis Sucre (53.1%)
Suedzucker
Saint Louis Sucre
Danisco
Cultor Oyj
Ebro Puleva
Panzani
Ferruzzi Finanziara
American Maize-Products
CSM NV
Unilever (European Bakery

Supplies)
640
Associated British Foods
Illovo Sugar Ltd (51%)
616
August 2006
Electricite de France SA
Montedison (14.13%)
613
May 2001
Greencore Group
Hazlewood Foods
10
CSM NV
Leaf Group
1,528
1,351
1,182
847
756
March 2000
May 2002
May 1999
April 2005
November 1995
July 2000
501
January 2001
446
June 1999
Printed 18/12/2006 11:37:31 AM
Deal logic
Date of completion
Source:
Deal size
20
Contents
Appendix
Printed 18/12/2006 11:37:31 AM
21
The sugar industry outlook suggests different alternatives

for corporate strategy formulation
Upstream
focus
Logic
Key challenges
Secure access to competitive cane supply in terms
Availability of productive land/plantations
of cost and volume
advantages, ie preventing economic profits

to be competed away in an industry
segment with low entry barriers
ethanol demand
Diversify revenue pool across different industries
Explore higher value-add opportunities (eg sugar-based
sweeteners), limit exposure to commodity markets

Capture upside/growth potential from emerging food
ingredients segment (eg flavours, enzymes)
Capture option value of R&D-driven innovation, eg
GM sugarcane
Printed 18/12/2006 11:37:31 AM
Availability of productive land/plantations
controlling access to limiting factor, eg feedstock
Stimulate growth by getting exposure to booming
Diversification
into adjacent
value chains
Development of sustainable competitive
branded sugar)
Limit exposure to volatile commodity cycles
Exploit logistical arbitrage opportunities between raw
and refined sugar markets
Enhance competitive position and profitability by

Ethanol focus
forced to pass them through to farmers
knowledge, and GM technology

Diversify across regions to offset location-specific
supply/demand shocks
Explore higher value-add opportunities (eg premium
at attractive prices
Ability to retain economic rents and not be
at attractive prices
Dependence of government mandates
and subsidies
Oil/energy companies arguably the
natural owners of the ethanol space
Identify opportunities that are intrinsically
Maximise benefits of integrated plantation/mill

Enhance productivityleverage technical expertise,
Downstream
focus
Not relevant for purpose

of this document
attractive and have some tail wind

Develop distinctive set of non-traditional
organisational capabilities, eg R&D,
product innovation, marketing
22
Upstream focus: Criteria for identifying attractive opportunities
Low cost
position
Globally competitive cost factors (eg labour,
How will labour and capital costs change
capital)
Good productivity levels as function of

soil/weather conditions, farming practices, etc
Availability of substantial
land/sugarcane
Structurally
short market
Positive
regulatory and
political
environment
Is land reasonably priced?

What is the pressure for crop
substitutability?
Mill owners can secure a favourable share of

upstream profit pool (eg either own or control
plantations; sugarcane prices attractive for
mills)
High margins on domestic sales given

4
over time?
Is there room for any productivity uplifts?
Is plantation ownership allowed for
How will local demand/supply imbalances
import-parity pricing practices
Positive regulatory situation
Tariffs/quotas on sugar imports

No price ceilings on output (eg raw sugar)
Potential property rights and political issues
can be mitigated
multinational corporations?
If not, how to manage a typically large,
atomised, politically-active farmer base?
evolve? How much new capacity will

come online over the next 35 years?
Will price protection and import quotas be
sustained going forward?

Are professional local partners available?
23
Printed 18/12/2006 11:37:31 AM
Access/
influence over
sugarcane
producers
Typical issues
Sizeable
sugarcane
supply base
Details of criteria
Downstream focus: Criteria for identifying attractive opportunities
Strong demand
outlook
Under-served
domestic
market
opportunities
Steep domestic
cost curve
Competitive
access to raw
sugar
Large and growing consumption market
Are there any underlying shifts in consumer

preferences that could slow down
consumption growth (eg dietary concerns,
emergence of sugar substitutes)
Under-served latent demand for premium
How to secure long-term agreements with
products
the large consumers of premium sugar (eg

beverage companies)?
Whose refined sugar imports would be
displaced by local production, and is that
sustainable over time?
Significant refined sugar imports
Inefficient/high cost local refining capacity
Are the root causes of inefficient refining

operations structural or truly actionable?
What entry barriers prevent other players
from entering and exploiting those
arbitrage opportunities?
Domestic logistics arbitrage opportunities
Competitive supply of raw sugar in terms of
How to lock in raw sugar supply from
volume and price
overseas?
24
Printed 18/12/2006 11:37:31 AM
Typical issues
Details of criteria
Ethanol focus: Criteria for identifying attractive opportunities
Positive
regulatory
environment
Typical issues
Large domestic consumption potential
What initiatives are being implemented to
regional ethanol markets with low landed

costs (ie logistics, trade agreements)
Clear ethanol penetration mandates

Subsidies/tax exemptions for domestic
cultivated areas
Costyields, crop prices,
conversion costs
exemptions going forward?

What happens if/once oil prices
come down?
Printed 18/12/2006 11:37:31 AM
Access to
feedstock
How sustainable are subsidies and tax
production
Availability, ie type of crop, size of

3
overcome technical challenges of ethanol

distribution (eg pipelines, tanks corrosion)
Potential as export base into other
Strong demand
outlook
Details of criteria
Is land reasonably priced? What are
the pressures for crop substitutability?

How to overcome technical challenges
of growing new/alternative crops
(eg cassava/ tapioca)?
How resilient are the economics of
ethanol production to market-based
pricing (ie no government subsidies)?
25
Contents
Appendix
Printed 18/12/2006 11:37:31 AM
26
ABF overview (1/2)
Company highlights
Key financials
HeadquartersLondon, UK
Ownership-Wittington Investments Ltd 54.5%
Business mix (% total revenue, % total Op Profit)
AU$ Millions
Grocery 45%, 32%

Primary food & agriculture 27%, 32%
Ingredients 11%, 12%
Retail 17%, 24%
Geographic mix
UK 52%, 56%
Rest of Europe 12%, 13%
Americas 19%, 19%
Australia, Asia & Rest of World 17%, 12%
Value chain participationcomprehensive
01
03
05
Revenue
EBITDA
Net income
Assets
Equity
Debt
Market cap
10,912
1,218
600
9,673
6,891
1,966
8,834
12,125
1,388
805
11,634
8,161
2,626
10,462
13,886
1,769
823
14,358
9,129
4,256
16,230
EBITDA/sales
ROIC
Debt/equity ratio
P/E ratio
Market/book
ratio
11.2%
na
0.29
17.3
1.28
11.4%
na
0.32
18.1
1.28
12,7%
na
0.47
14.8
1.78
Strong revenue growth
and steady profitability

levels
Strong capital appreciation
Scope of sugar related operations
Poland4 beet
sugar factories
(~200kt sugar)
Printed 18/12/2006 11:37:31 AM
UK6 sugar factories (1.3Mt

sugar, >50 domestic market,
export to Hong Kong, Israel, etc)
China4 cane sugar
Factories (60% holding in 500kt
sugar), animal feeds operations
South Africa51% stake

in Illovo; ~2Mt pa sugar
and extensive downstream
processing
Source: Hoovers, Onesource, Company Website, Analyst reports ; McKinsey analysis
Comments
Year
AustraliaGeorge
Weston Foods
Chullora bakery
27
ABF overview (2/2)
Historical developments
Current projects
2000acquired Rhm Enzyme
Perceived strategic focus
Increase the scale of
Enable the transfer of
international presence
through M&A driven
expansion
In anticipation of European
sugar reform, reduce
reliance upon the sugar
business and diversify into
other food businesses and
retail, eg Primark
Consolidate investment in
Primark and open new

stores
Fund investments in sugar
with Illovo and other
acquisitions
Western China and other

capacity increases at many
locations
Acquired a 51% interest in
Illovo Sugar for ~AU$800m
Attractiveness
Pros
Cons
Leading market positions in
Dependence on
M&A driven expansion

Transition from EU sugar
assets to other lower cost

regions
Continue business
diversification
several sub-categories give the

company a stronghold within
the food industry
Strong emphasis on advanced
research and technology with
the operation of several
research facilities at the group
level and for individual
subsidiaries
Diverse range of products
enables the company to spread
its risks
Printed 18/12/2006 11:37:31 AM
Future plans
expertise to support the

development of low cost
production in Southern
Africa, which will become
Illovos route to market
when exports have
unrestricted access to the
EU from 2009
Opening of a new factory in
(Germany), several animal feed

mills (UK) and Lonza polyols
(US)
2001several acquisitions
(including in China and Poland)
and disposal of Nelsons
200203 Acquired and
consolidated Mazola and
Ovaltine
2004integration of AB Mauri
around the world and Tones in
US
2005invested over 1.5b in
acquisitions and capital
expenditure
acquisitions to deliver
growth
Overdependence on the
European market means
that the company is highly
exposed local factors such
as changing regulations
and economic conditions
28
Tereos overview (1/2)
Company highlights
Key financials
AU$ Millions
Revenue
EBITDA
Net income
Assets
Equity
Debt
Market cap
EBITDA/sales
ROIC
Debt/equity ratio
P/E ratio
Market/book
ratio
01
03
05
1,333
2,870
2,917
232
102
3,524
1,068
2,457
na
Few relevant
financials
available
8.0%
na
2.30
na
na
Flat revenues, poor
profitability over last

recent years
Extremely high
gearing ratios
HeadquartersLille, France
Ownership75% Union Sucre Ethanol, 25% Union BS
Sizesales 1,757m, 3.24mtpa sugar, 600mlpa EtOH
Value chain participation
Beetinbound logistics, u/stream and d/stream
processing, outbound logistics, trading and marketing
Canemilling, outbound logistics, refining, marketing
Ethanolcereals, sugar and synthetic production,
marketing
Othermolasses, cereals, farm supplies and ag
product sales
Geographic mixFrance 62%, Brazil 29%, Czech Rep
6%, Mozambique 2% Romania 1%
Comments
Year

France11 beet mills, 5
beet distilleries, 3 cereal
distilleries, 1 Glucose plant,
2 cereals S&H facilities
Printed 18/12/2006 11:37:31 AM
CZ2 beet mills, 1

packaging plant, 1 distillery
Romania1 beet mill
Brazil5 mills (~1Mt pa

sugar); 6.4% stake in
Cosan 16 refineries,
3Mt pa, distillery
MZ1 cane mill

(80kt pa sugar)
French Reunion
1 cane mill (~100kt pa),
packaging plant, distillery
29
Tereos overview (2/2)
Current projects
2000FBA JV with Cosan

2002complex corporate
130m 300mlpa wheat ethanol

Consolidate to strengthen
position in EU
Strong push into Brazil
Grow Biofuels and
industrial alcohol
Growing Brazilian assets

Increasing exposure to cane
Reducing the threat of LDC*
access to EU through
consolidation in Austral Africa**,
Mauritius and retention of
Reunion assets
Grow cereals exposure
Focus on diversification
Origny, Fr
Construction of 4th Guarani mill
in Cardoso. 900ktpa crush
producing 77Mlpa EtOH
Acquisition of 5th mill (Tanabi)
from Petribu
build ethanol capacity
Explore further options

in Brazil
Attractiveness
Pros
Cons
Active presence in Brazil since
Complex cooperative
Focus on diversification
Diversify business,
primarily into ethanol
and wheat/ cereals
supply chain (S&H, food
ingredients, trading and
ag supplies)
Expand outside EU
2000 and experience on two

fronts (Cosan and Guarani)
Strong ethanol capability in EU
and Brazil
* Less Developed Countries

** Central East Atlantic Ocean area;
ownership
Unclear strategic
rationale/unproven success at
horizontal diversification
strategy
High exposure to EU markets,
both in terms of earnings flows
and assets
Lack of visible growth options
30
Printed 18/12/2006 11:37:31 AM
Future plans
plant in Lillebonne, Fr
90m 300mlpa beet distillery at
restructure and rebrand to

Tereos. Included acquisition of
Guarani in Brazil
2004acquired SODES ethanol
business
2005 merger with Sucreries et
Distilleries des Hauts de France
2005swap 47.5% interest in
FBA for 8.8% share in Cosan
200550% stake in Marromeu
mill, Mozambique
Tate & Lyle overview (1/2)
Company highlights
Key financials
Headquarters London, England

Publicly traded
Business mix (% total revenue, % total Op Profit)
AU$ Millions
01
03
05
Revenue
EBITDA
Net income
Assets
Equity
Debt
Market cap
7,577
578
5,188
2,077
3,112
3,266
7,485
756
5,237
2,401
2,836
3,620
8,430
1,029
361
6,676
2,130
4,546
6,293
EBITDA/sales
ROIC
Debt/equity ratio
P/E ratio
Market/book
ratio
7.6%
8.2%
1.5
14.1
1.6
10.1%
12.3%
1.2
9.8
1.5
12.2%
12.1%
2.1
9.9
2.9
Steady revenue growth,

improving profitability
Increased leverage due to
upgrades/expansions of
assets and joint ventures
Strong capital
appreciation both in
absolute and relative
terms
Sucralose is expected to
account for >80% of EBIT
growth F200510

Norway (100%)
Sugar distribution
UK2 factories
sugar processing,
cereals, starches
Slovakia, Czech Republic,

Hungary (50% JV)5
factoriesclosing 2007 due
to EU sugar reform
f
Mexico (49%)3 sugar
cane mills linked to
refineries and distilleries
Portugal
sugar refining
Vietnam (60.7%)
cane sugar
plantation and mill
Brazilsugar and
citric acid trading
In total
65 production
facilities in
29 countries,
predominantly EU
Molasses
businesses
Barbados
Belgium
Brazil
France
Germany
Ireland
Italy
Mauritius
Mozambique
Netherlands
Portugal
South Africa
Slovakia
Spain
31
Printed 18/12/2006 11:37:31 AM
Canada
sugar refining
Food & Industrial Ingredients 53%, 50%

Sucralose 3%, 17%
Sugars 44%, 33%
Geographic mix UK 18%, Rest of Europe 23%,
Americas 40, Rest of the World 19%
One of the world's largest producers of white and raw
sugar, including brands Tate & Lyle (UK), Red path
(Canada), and Alcntara (Portugal). Also makes sugar
by-products such as molasses, citric acid, glutamate,
and starches used in foodstuffs and packaging
Comments
Year
Tate & Lyle overview (2/2)
Current projects
2002sold its French
Bio-PDOTM joint venture plant

Focus on selling
underperforming
businesses and partnering
to explore alternative
growth avenues
Investing 57m in Sagamore,
Indiana to increase capacity for

value added food starches used
in dairy, beverages, baking,
snacks and dressings
Investing 43m to produce value
added ingredients, ethanol, and
substrate in Loudon, Tennessee
Reduce EU exposure
Strong focus on Splenda
as key growth engine
Attractiveness
Pros
Cons
Strong market positionT&L is a
Its 2 divisions, food and
Grow value-added
products
Maintain commodity
interests to ensure low cost
manufacturing base
world leader in manufacturing

ingredients derived from
carbohydrates, including
sweeteners, starches and sugars.
It is the European Unions largest
cane sugar refiner, operating the
largest sugar refinery in the world
It has a strong R&D focus to
introduce innovative products and
technologies in the market
Splenda sucralose division has a
strong demand across all major
food, beverage and pharma
categories
industrial ingredients and

sugars showed weak
performance in Europe
during fiscal 2006
The groups total debt stood
at 1,230m at the end of
fiscal 2006 (an increase of
almost 44% year-on-year).
The companys debt burden
has increased sharply from
643m in 2003 to 1,230m in
fiscal 2006
32
Printed 18/12/2006 11:37:31 AM
Future plans
in Loudon, Tennessee will come

on stream this year
Building a new SPLENDA
Sucralose plant in Singapore
and have doubled capacity at
our existing plant in McIntosh,
Alabama
Closure of 5 sugar beet factories
in Eastern Europe
monosodium glutamate
production unit, Orsan to
Ajinomoto
2003T& L and Igene Biotech.
Inc. announced a 5050 joint
venture to produce Aquasta, a
natural form of the nutrient
astaxanthin
2005T& L and DuPont
announced a new US joint
venture to produce Bio-PDO
textile polymer ingredient from
renewable resources
Danisco overview (1/2)

Key financials
HeadquartersCopenhagen, Denmark
AU$ Millions
Ownershippublic
Revenue
EBITDA
Net income
Assets
Equity
Debt
Market cap
EBITDA/sales
ROIC
Debt/equity ratio
P/E ratio
Market/book
ratio
Sizemarket cap A$5.48b, 10,634 FTEs

Business mix
63.5% revenues from food ingredients (cultures,
emulsifiers, enzymes, animal feed, biotech
ingredients)
36.5% from sugar, sweeteners
Value chain participationbeet milling, beet, cane

and barley sugar refining, distribution, and
manufacturing of consumer product
Customer types, ie snacks, confectionary, diary,

meat, beverages
Comments
Year
01
03
05
3,948
731
202
6,193
2,805
3,103
3,447
3,657
760
217
5,643
2,598
2,764
3,257
4,663
900
126
7,194
2,767
4,077
5,577
18.5%
20.8%
19.3%
1.11
12.85
1.23
1.06
13.92
1.25
1.47
Moderate top-line growth,

high profitability levels
Increased leverage rations

driven by M&A activity
Strong capital appreciation

both in absolute and
relative terms
2.02
Sweden
368,000 tonnes
Process 18,000
tonnes of beet daily
Printed 18/12/2006 11:37:31 AM
Finland
146,000 tonnes
Denmark
421,000 tonnes
Trialling refining of imported raw cane
Lithuania
82,000 tonnes
Consolidating from 3 to 2
factories in 2005
Germany
125,000 tonnes
Company highlights
33
Danisco overview (2/2)
Current projects
Rationalised business lines
Become a dominant global
ingredient player
Achieve scale economies
in established sugar
businesssecures 7% of
EU quota (4th largest
producer)
Focus on high value added

Innovating in new flavours,
capture scale economies

closed 3 plants (350 FTEs)
over last 12 months
Focus on high value added
links in the food producing

value chain
Strengthen and expand
food ingredients business
Attractiveness
and producing ethanol from

pulp paper
Announced intention to close
3 sugar mills (Denmark,
Finland, Sweden) due to EU
sugar reform
Awaiting EU approval for bioethanol production
biotechnology business
Consolidated operations to
links in the food producing

value chain
High margin ingredients
industry, particularly in
enzymes and
biotechnology
High growth corridors
(eg China)
Develop and capitalise proprietary technology and IP
Restructure (manage down)
sugar business
Pros
Cons
Leading player in the highly
Effectively phasing-out sugar
profitable food ingredients

business
Sophisticated/proven
capabilities (eg IP, innovation)
operations
Expanding sugar operation may

not be a management priority
Largely EU-centred sugar

operations, ie not particularly
attractive asset base to acquire
34
Printed 18/12/2006 11:37:31 AM
Future plans
Acquisition of Genecor
since 1995; divested oilseed,

frozen foods, packaging,
animal feed, and others
Multiple acquisitions in
ingredient and sugar/
sweetener business; flavours,
emulsifiers, cultures,
stabilisers, and others
Formed JV in China for Xylitol
and Xylose sweeteners
Contents
Appendix
Printed 18/12/2006 11:37:31 AM
35
Main sources of information on the global sugar industry
Figures and statistics

FO Lichts World Sugar Statistics
USDA Foreign Agricultural Service LMC International
Printed 18/12/2006 11:37:31 AM
Industry trends
USDA Foreign Agricultural Service
IBIS World
International Sugar Organisation
Fitch Ratings
36
CONFIDENTIAL
Sugar Industry Primer
Draft practice document

December 2006
This report is solely for the use of client personnel. No part of it may be
circulated, quoted, or reproduced for distribution outside the client
organization without prior written approval from McKinsey & Company.
This material was used by McKinsey & Company during an oral
presentation; it is not a complete record of the discussion.

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Sugar Industry Primer

This presentation contains an abstract. If

December 21, 2006

Working Draft - Last Modified 5/22/2007 4:32:52 PM

Printed 18/12/2006 11:37:31 AM

Objectives of this document

Provide an introductory, up-to-date

Identify evolving trends that will shape

alternative corporate strategies that

Bringing CSTs up to speed on the sugar

Printed 18/12/2006 11:37:31 AM

Stimulate a discussion around

Working Draft - Last Modified 5/22/2007 4:32:52 PM

perspective on the global sugar

Not useful for

Sugar: Basic facts

and where it comes from

Sugar is the common name for sucrose

Printed 18/12/2006 11:37:31 AM

Working Draft - Last Modified 5/22/2007 4:32:52 PM

3035% of total sugar produced comes

Sugar: High-level production process

Sugarcane requires a minimum

A shredder breaks apart the cane

Raw sugar crystals are dissolved

of 600mm of annual moisturea

and ruptures the juice cells

in hot water to form a sugar

Sugar beet is a hardy biennial

After washing, beets are sliced

plantduring its first growing

and soaked in hot waterthe

This liquid is decolourised, and

Printed 18/12/2006 11:37:31 AM

Working Draft - Last Modified 5/22/2007 4:32:52 PM

This mixture is processed

Finally, the refined sugar crystals

Working Draft - Last Modified 5/22/2007 4:32:52 PM

Printed 18/12/2006 11:37:31 AM

SCP on the sugar industry

driven by high oil

Strong consumption growth in emerging

Supply shifting towards tropical, lowcost sugarcane-producing regions (eg

As a result, trade as proportion of total

Relatively high entry barriers due to

Most players prioritising plantation-mill,

Global prices determined by traditional

Given limited pricing power,

As part of this, some

In parallel, some players

Main players have showed

ROIC levels have improved

Finally, new players are

Printed 18/12/2006 11:37:31 AM

Working Draft - Last Modified 5/22/2007 4:32:52 PM

Several drivers explain the emergence of the biofuels sector

Printed 18/12/2006 11:37:31 AM

* Bushel corn equals 25.4 kg

Working Draft - Last Modified 5/22/2007 4:32:52 PM

2 Volatile and high prices

required to reach Kyoto target and

Working Draft - Last Modified 5/22/2007 4:32:52 PM

stay above US$40 per barrel

Further support of biofuels