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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

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Stimulate a discussion around

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

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

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

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

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Beet

Refining

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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

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

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

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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

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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

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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

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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
US$ Billions, 1990 prices

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


US$ Billions, 1990 prices

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

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

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

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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
Source: USDA World Sugar report

Total
29,000

12

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

Mexico

18,250

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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

Source: USDA World Sugar report

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Source:

Deal size

20

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

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

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

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

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

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

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

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

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

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

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

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

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

Comments

Year

AustraliaGeorge
Weston Foods
Chullora bakery

27

ABF overview (2/2)

Historical developments

Current projects

2000acquired Rhm Enzyme

Perceived strategic focus

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

Perceived strategic focus

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

Source: Hoovers, Onesource, Company Website, Analyst reports ; McKinsey analysis

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

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

(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

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

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

Scope of sugar related operations


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

Source: Hoovers, Onesource, Company Website, Analyst reports ; McKinsey analysis

29

Tereos overview (2/2)

Historical developments

Current projects

2000FBA JV with Cosan


2002complex corporate

130m 300mlpa wheat ethanol


Perceived strategic focus

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

Perceived strategic focus

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

Perceived strategic focus

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;
Source: Hoovers, Onesource, Company Website, Analyst reports ; McKinsey analysis

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

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

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

Scope of sugar related operations


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

Source: Hoovers, Onesource, Company Website, Analyst reports ; McKinsey analysis

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

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

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)

Historical developments

Current projects

2002sold its French

Bio-PDOTM joint venture plant


Perceived strategic focus

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

Perceived strategic focus

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

Perceived strategic focus

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

Source: Hoovers, Onesource, Company Website, Analyst reports ; McKinsey analysis

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

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

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

Scope of sugar related operations

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

Source: Hoovers, Onesource, Company Website, Analyst reports ; McKinsey analysis

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

Company highlights

33

Danisco overview (2/2)

Historical developments

Current projects

Rationalised business lines

Perceived strategic focus

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
Perceived strategic focus

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

Perceived strategic focus

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)

Source: Hoovers, Onesource, Company Website, Analyst reports ; McKinsey analysis

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

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

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

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

35

Main sources of information on the global sugar industry

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

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
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