Corporate Strategies in the Global Market Place

AHDB Outlook Conference

February 3rd 2009

Richard Brown
01323 870 144 rbrown.gira@btinternet.com

Gira 2009

Giras key multi-client projects ... in meat, now focused on areas of change Stage of Project Development CONCEPT High Potential / Priority
5th Quarter Valorisation
Global impact of Bio-Fuels
China Meat Markets Meat in Catering: EU27 FP Poultry markets EU Sustainability in Meat Meat Packaging Coop Strategies Organic

PROPOSAL

PRODN

COMPLETE

S.American Meat Company Panorama meat SWOT EU27 Processed in Europe Meat Markets Romania: Pigmeat Ops World Meat Markets Long term GMC 08-09 long term trends Global meat markets Meat in Retail EU25 after the crash Russia Meat
Opportunities
Top 25 EU Red meat Processors. Global - Differentiation FPPoultry markets. BSE 01.& 96 Italian Beef Imp. EU Pigmeat. Poultry Ingredients
Gira 2009

Medium
n.b. only includes key current projects

Agenda

1. Global meat market background for 2009 2. European meat industry developments 3. Global industry context 4. Concluding points on UK

Gira 2009

Global economic slump dominates the 2009 variables for the meat sector
Economic downturn and credit crunch dwarfs the impact of other variables and forces a pause in long term global developments

S/T Demand downturn, liquidity problems in everything!, Pilgrims/USA, stronger USD, commodity price/cost downturn, pause in meatco M&A

Feed & energy cost volatility Trade obstruction from domestic lobbies

EU for Brazil in BF (poor precedent for PK); Russia blocking imports Russia resumes historic norms, Thailand, War on Terror knock-on, AR, US elections but new push on WTO to avert period of protectionism S/T: drought SE Australia, NZ, Middle East, AR, western US PPRS/China; BTV/EU FMD and HPAI restrictions easing (for now) Melamine, e-coli dioxin
Gira 2009

Disruptive political developments

Climate change: major impact on SH trade, and limits BF

Disease: less disruptive than normal

Food safety and standards: expensive & disruptive

Worldwide retailer power: Price pressure on suppliers

4

2008 was a year of two parts, with 4Q08 hiatus stretching into a steep global downturn in 09
Global markets overheated in 1-3Q07
Commodity price boom included meats until:

4Q08 credit crisis, with dramatic reversal for meat sector demand hit by current economic meltdown & volatility Trade volume decline (and blockages): with price impact dramatic changes to global competitiveness: currency, feed cost etc.
2009 demand downturn: trading down in quality and/or volume with lower price impact (HD growth) but coinciding with production fall for many meats (but not in all countries), which should help to restore supply:demand balance, and underpin prices and producer profitability

PK: big production decreases in US, EU, BR in response to 08 losses: but uncertainty about producer profit optimism from falling feed prices BF: small production fall in most global regions due to general desire to re-build herds coinciding with short term decline in cattle price SH: desire to re-stock after drought in NZ/Au. Demand and trade decline PY: careful growth after the 2007/08 boom in many countries (in spite of the steep fall in feed costs) Weak stlg underpins UK producer prices
Gira 2009

 so only tiny increase in global meat consumption forecast for 2009 (negative if CN excluded)
Developments in World Meat Consumption 2004-2009
260,000 240,000 220,000 200,000 180,000 ('000 t cwe) 160,000 140,000 120,000 100,000 80,000 60,000 40,000 20,000 0 2004 2005 2006 2007 2008 2009 Source: Gira Poultrymeat Pigmeat Sheepmeat Beef & Veal

Gira 2009

Global trading in meat will decline in 09, partly in reaction to the strong growth in 08
Developments in Meat & Live Trade 2004-2009
28,000 26,000 24,000 22,000 20,000 18,000 ('000 t cwe) 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 2004 2005 2006 2007 2008 2009 Poultry Pigmeat Sheepmeat Beef & Veal

2008: +1.6 mio tcwe (+7%); 2009: -1.4 mio tcwe (-6%)
Gira 2009

EU meat demand decline in 2009 except for pigmeat (due to price increase)
EU Meat Expenditure Index - 1997 - 2009
170
Beef & veal Pigmeat Poultry Sheep TOTAL

Expenditure index 1997

150

HPAI
AI in the NL FMD

130

110

90

BSE

70 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Note : wholesale prices for poultrymeat and producer prices for other meats Source: Gira
Gira 2009

2. European meat industry developments & strategies

Gira 2009

Strong forces for change on EU (and global) meat industry structures

CUSTOMER alignment, FORWARD & HORIZONTAL integration & COST pressure Retailer concentration & internationalisation WHOLE-CHAIN SECURITY Diseases & scandals: "Zero risk" attitude by retail & consumers Horizontal & vertical consolidation of slaughter groups COST reductions, re-organisation & strategic MARKETING Forces for Change on European meat producers & processors Retail driven supply chain rationalisation PRICE pressure, SEGMENTATION, & MARKETING

Meat in Hard Discount & Retail Branding catalysed by recession

Low growth, but more consumer segmentation convenience demand etc.

Political & pressures: CAP Reform, WTO Rising imports

NPD & marketing at ALL levels Rising feed, labour, fuel and regulatory costs: aggravated by currency Hedging & RISK MANAGEMENT Increased EFFICIENCY and higher PRICES needed L/T
10

Lower domestic VOLUMES, Fewer domestic SUPPLIERS Multi-sourcing with imports

2. Executive Summary Gira 2009

The top EU primary processors are very large and active but there is a (very) long industry tail
Top 10 EU 27 meat companies by meat production volume ('000 t cwe) 2005/06 (updated for subsequent M&A)
HK Scan (FI) Glon-Sanders (FR) LDC (FR) Doux Europe (FR) Veronesi (IT) Westfleisch (DE) Tnnies (DE) ABCS (FR) Danish Crown (DK) VION (incl. GCFG) (NL) 500 Source: Gira compilation and estimates
Gira 2009

1,000

1,500

2,000

2,500

3,000

Total meat production ('000 t cwe)

11

The EUs pig processing industry is concentrating, mainly nationally, quite quickly Vion forcing the pace
Others TiCan

VION M&A stream with need for subsequent restructuring to achieve scale economies
Danish Crown

Others Grampian Bowes of Norfolk George Adams and Sons Cranswick Country Foods

Others
Tnnies Others

Animex

DE: overcapacity & competitor reaction NL >60% of pig kill: efficient UK: GCFG restructure

Sokolow
VION

Tulip Source: Gira

Duda Lmeat Lukow

Danish Crown: live export, UK & Se/Po/Dk investment Increasing concentration within most countries (cf. FR)
Lower kill, cost pressure Selectively X-border

Gausepohl

Cooperl Socopa Others Glon Sanders

D&S

Westfleisch

Production by operator in the top 5 production countries ('000 t cwe) 2005/06

5000 4500 Net production ('000 t cwe) 4000 3500 3000 2500 2000 1500 1000 Other producers N producer 5 N producer 4 N producer 3 N producer 2 Leader

Cecab

ABCS

Primayor Others

Vall Companys Frimancha El Pozo Batalle - Juia Jorge

Latest M&A (change to 06 sitn)

VION acqd Grampian (UK) Tulip (DC) acqd Adams ABC (FR) : Socopa (FR) merger Primayor (ES) broken up Gira 2009 Groupe Smithfield / Campofrio

Source: Gira estimates 500 0 Germany Spain France Poland Denmark

12

Top 10 pigmeat companies hold 32% of EU production VION is now first

Top 10 pigmeat companies in volume ('000 t cwe) 2005/06
HK Scan (FI) Glon-Sanders (FR) D&S Fleisch (DE) Smithfield Europe (PL) Cooperl (FR) ABCS (FR) Westfleisch (DE) Tnnies (DE) Danish Crown (DK) VION (incl. Grampian) (NL) 500 Source: Gira compilation and estimates 1,000 1,500 2,000
Westfleisch ABCS

VION and Danish Crown lead the way but with Tnnies & Westfleisch growing faster in DE

Big volumes much bigger than BF and PY More forward integration More international
Leaders need to achieve lowest cost status After the top 4 players, there is a long tail Coops still important Smithfield also active in separate primary and further processing ventures
Top 10 pigmeat companies in share in EU 25 production (%) 2005/06
VION Danish Crown Tnnies

Pigmeat production ('000 t cwe)

Cooperl Smithfield Europe D&S Fleisch

Glon-Sanders Other EU-25 HK Scan

Source: Gira compilation and estimates

5.3 Production etc. - Pigmeat

Gira 2009

13

The leading beef processors are pulling away from the long tail of this traditionally fragmented industry
fragmented, nationally oriented industry, with no genuinely multi-national players except JBS's stake in Inalca VION M&A in DE catalyses concentration and reaction, and now UK (GCFG) France has concentrated BF&V sector with the new EU leader, ABCS Long way to go in ES and IT Industrial case ready, declining cattle supply, imports & HD are the hot topics
Leaders' market share in the top 5 production countries ('000 t cwe) 2005/06
1800
Other producers

AIBP Others Grampian Foyle Dawn Woodhead Bros.

Others VION Westfleisch Gausepohl Frber

Mller Fleisch

Others ABCS

Kermn Terrena Socopa

Net production ('000 t cwe)

1600 1400 1200 1000 800 600 400 200 0

N producer 5 N producer 4 N producer 3 N producer 2 Leader

SVA Others Inalca Unipeg Colomberotto F.lli Schellino Bugin

NorteosGypisa SAT Fribin El Encinar de Humienta MercaCarne Vials Soler

Others

Gira 2009

France
Source: Gira estimates

Germany

Italy

United Kingdom

Spain

14

Europes top 10 beef & veal processors hold 27% of EU production: ABCS (FR) is now first
Top 10 beef & veal companies in volume ('000 t cwe) 2005/06
Unipeg (IT) W estfleisch (DE) Terrena (FR) SVA (Intermarch) (FR) Inalca (Cremonini/JBS) (IT) Van Drie Group (NL) Dawn Group (IE) AIBP Group (IE) VION (incl. Grampian) (NL) ABCS (FR) 100 Source: Gira compilation and estimates 200 300 400 500 600 700

ABCS is new leader on French market (Alliance, Bigard and Charal - ABC) and Socopa. It owns the only real fresh red meat brands in France. VION major player in DE & UK, + NL

entry threat of Tnnies in beef.

Mixture of private and coop ownership

Irish with EU market interests

very long tail ... with overcapacity
Top 10 beef & veal companies in share in EU 25 production (%) 2005/06
ABCS VION AIBP Group Dawn Group Van Drie Group

Beef & veal production ('000 t cwe)

Inalca (50:50 Cremonini:JBS) SVA (Intermarche) Terrena Westfleisch

Unipeg

Other EU-25

Source: Gira compilation and estimates

5.2 Production etc. - Beef

Gira 2009

15

Poultry industry concentration generally high within each national market

Moy Park Others

Grampian

Bernard Matthews Faccenda

2 Sisters
Others PHW

concentrated industry but on a national basis In FR, IT and DE, the top 5 companies hold more than of production No multi-nationals present

Latest M&A (change to 06 sitn (data))

VION acqd Grampian (UK) Mafrig acqd Moy Park (UK, Fr) Terrena (FR) acqd Unicopa (FR)
Production by operator in the top 5 production countries ('000 t cwe) 2005/06
2000

Heidemark

Rothktter

Stolle Velisco

Others

LDC

Glon

Terrena Unicopa

Doux

Others Agricola Berica

1800 GIP production ('000 t cwe)

Aia (Veronesi)

1600 1400 1200 1000 800 600 400 200 0

Other producers N producer 5 N producer 4 N producer 3 N producer 2 Leader

Fileni Simar
Others Sada

Arena Fresh
COREN Pavo y Derivados Uve

Amadori

Doux

Gira 2009

France Source: Gira estimates

United Kingdom

Germany

Italy

Spain

16

Top 10 poultrymeat companies hold 30% of EU 25 production Doux is still the leader
Top 10 poultrymeat companies in volume ('000 t cwe) 2005/06
VION (incl. Grampian) (NL) Two Sisters (UK) Gebr. Stolle (DE) Amadori (IT) Moy Park (Marfrig) (UK) Grupo Sada (Nutreco) (ES) PHW Gruppe (DE) LDC (FR)
Doux Europe Veronesi Group

PY much more backward integrated than the other species (but similar concentration)

Problems in Further Processing

Mainly private very few coops, linked to feed Doux Europe, is retrenching in Europe, but expanding in Brazil, Doux Frangosul, (ca. 50% of group volume) in PY & PK
Top 10 poultrymeat companies in share in EU 25 production (%) 2005/06

Veronesi Group (IT) Doux Europe (FR) 100 Source: Gira compilation and estimates 200 300 400 500 600

LDC PHW Gruppe Grupo Sada PA SA (Nutreco)

Poultrymeat production ('000 t cwe)

Moy Park (Marfrig) Amadori

Gebr. Stolle Two Sisters VION Other EU-25

Source: Gira compilation and estimates

5.4 Production etc. - Poultrymeat

Gira 2009

17

More EU meat industry concentration in the future, but contradictory developments in vertical integration

Future EU meat value chains

Pigmeat Beef & Lamb Broilers Feed ingredients Breeding Feed compounding Farming Slaughter & cutting Further processing / Retail packing Retail / Foodservice
Gira 2009

Turkey

18

Much of the consolidation is to achieve better scale and better capacity utilisation
'Optimal' primary processing plant size
per week Broilers Turkeys Pigs Cattle Lambs
Source: Gira estimates

carcass Vol t.p.a. Many contradictions to the 'rule' wt kg 1,000,000 50,000,000 2 100,000 Faccenda 2x this size, recent Sun Valley acq'n 1/4 100,000 5,000,000 15 75,000 Depends of bird breed, sex etc. 20,000 1,000,000 80 80,000 DC Horsens 4x, no Belgian plant 2,000 100,000 325 32,500 Tonnies new plant 5x, ABP 'model' 1/2 30,000 1,500,000 20 30,000 Many smaller

p.a

The objective of size is scale economies in everything: Many different answers to optimal size, depending on: Processing: depends on automation / technology, labour cost, standardisation Marketing: meat: depends on customer demands. 5th Qtr: gains Purchasing: depends on proximity & availability of livestock: reactions of others & intensity of local competition Degree of forward integration UK and European plants are much smaller than US
Gira 2009

19

Structural change : a new model in EU supply chains, making retail more accessible to imports Traditional : Disassembly for farmers
Kill & Cut & some Retail
Pack

Very different models Different motivations The UK model is unusual in EU today but is spreading: AH in NL ICA in Sw Tesco in Irl, Pol ..

PUSH to broad market & customer portfolio

UK - New : Assembly for retailers

K&C K&C K&C K&C

Farmers PUSH

Hard discounters Knock-on effect to competing retailers in these countries Opens more retail markets to S.Americans than the prior reliance on catering
20

Secondary cut & retail pack

Farmers

Retail PULL

Source: Gira Meat in Retail: Winners & Losers report

Gira 2009

UK red meat sector has emerged as a series of (almost) mutually exclusive chains UK red meat chain model
K&C
Farmers

K&C K&C K&C

2 cut & RP
Hilton, St Merryn, Tulip

TESCO PULL
SAINSBURY

Similar for all retailers Short chain Dedicated plants

Only limited overlap Corporate alliances Vertical control

Farmers

K&C K&C K&C K&C K&C K&C K&C K&C K&C

2 cut & RP
ABP, Dungannon, Crans

PULL ASDA PULL

MORRISONS

Farmers

2 cut & RP
ABP, Dawn, WCF, GCF

Dominated by retail
Secondary cutting is almost like tollprocessing for retail

Farmers

2 cut & RP
Woodhead, WCF, GCF

PULL
SOMERFIELD

Farmers

K&C K&C K&C

2 cut & RP
ABP, RWM, Dawn, Tulip

PULL
Gira 2009

Easy import access

21

European further processing industry structure is also fragmented but is slowly concentrating
The fragmented FP industry is explained by regional consumption variations Restructuring has started, but is still slow: family businesses local operators providing added-value regional products New ownership Top 2 Some forward integration Impact of new raw material sourcing strategies PK might repeat PY experience
6. Suppliers' strategies Industry structure

PM production of the main European producers 2007

(in volume and in % of total EU-9 industrial production)
V ion (NL) Campofrio Food Group (ES) Danish Crown (DK) Zur Mhlen G ruppe (DE) Tonnies (DE) Zwanenberg (NL) Animex (PL) Nestl-Herta (CH) Kerry Foods (UK) Edeka plants (DE) Westfleish (DE) Kemper (DE) Sokolow (PL) El Pozo (ES) Intermarche (FR) Cranswick (UK) Fiorucci (IT) Grandi Salumifi ci Italiani (IT) Madrange (FR) Bell (CH)

0 Source: Gira estimates

50

100

150

200

250 300 350 400 450 PM production ('000 tpw)

500

Gira 2009

22

UK is the largest EU importer of processed meat (largely bacon). German labour cost advantage over neighbours 9 Top EU countries FP trade balance - 2007
DE
500

ES

IT Exports

PL

UK

BE

NL

DK

400 300 200

Trade ('000 tpw)

100 0 -100 -200 -300 -400 -500 -600

- Imports

Export - Import Net trade

Note: the product coverage may differ for each country explaining differences between trade expressed in country balance tables and in the Eurostat analysis Gira 2009

Note: Poultrymeat based PM & salted fats included Source: Gira from country reports ba lance tables

2. Market overview - Trade

23

3. Global meat industry perspectives

Gira 2009

24

US meat industry is much more integrated, vertical & horizontal, driven by scale and they are internationalising

US meat value chains

Pigmeat Feed ingredients Breeding Feed compounding Farming Slaughter & cutting Further processing / Retail packing Retail / Foodservice
Gira 2009

Beef

Broilers

Turkey

25

Cargill well adapted to grow in positive long term demand conditions, with managed risk, globally CARGILL global, strategic, agribiz. strength Geographic roll out Other names to watch: US Global Tyson-IBP, NAFTA
Complimentary sectors
Trading

Ve Farm supplies rt i ca Milling & crushing li Meats Animal feed nt Pk, Bf, Ch, Tu eg Slaughter ra tio Industrial farms Biofuels n
Grains
Retail packing

Slow outreach

Smithfield: integrate
EU Br & Bf exit

Financial services Steel

Branding

Sadia, Perdigao JBS and other Brazilians Vion Danish Crown

Rapid recent expansion of these large-corporates to exploit scale & global opportunities forcing reaction from incumbents
Gira 2009

26

Large corporate investment has been to exploit L/T global demand growth and globalisation Meat consumption by species - 2005/2015
'000 t cwe 350 000 +7 982 300 000 259 780 250 000 +21 415 +24 426 +2 147 315 153

200 000 Gira is updating it's Long Term world meat forecasts in 2009 150 000
1

0.5 0
t ee f m ea ig m ea ltr y t

100 000

Sheepmeat Beef Pigmeat Poultry

Beef Sheepmeat 2015 Source: GIRA

he ep

50 000 2005 Poultry Pigmeat

Previous positive long term global GDP forecasts drive +20% consumption in 10 years great agribusiness opportunity, but straining feed and production resources .. But the global economic outlook has seriously deteriorated: meaning weaker short term meat demand growth (CN dependent)
Gira 2009

ou

27

The Brazilians have charged onto the world stage: armed with BR cost advantage, profit, new capital & ambition
Brazilian MeatCo Share Prices
33.0 30.0 Source: Bovespa Stock Market 2.4 2.1 1.8 1.5 1.2 15.0 12.0 9.0 6.0 3.0 0.0 0.3 0 0.9 0.6

21.0 18.0

Nov/06

Nov/07

Jul/06

Jul/07

Jan/06

Jan/07

May/06

May/07

Jan/08

JBS

SADIA

Perdigao

Marfrig

Minerva

Gira 2009

May/08

Sep/06

Sep/07

Mar/06

Mar/07

Mar/08

BRL/USD

Jul/08

BRL/USD

USD .

1. PY integrators lead by Sadia & Perdigao 24.0 2. JBS leading the BF processors

27.0

28

Significant recent M&A which makes the biggest firms bigger, more global, and more BR
Top Global Meat Company Primary Production Volume estimate '000t cwe
Next 10 Doux Perdigao Sadia Danish Crown Vion Smithfield Foods Pilgrims Pride Cargill Meat Solutions JBS Tyson Foods
Source: Gira estimates (LTM + Panorama, updated for M&A)

Bf Pk Py

2000

4000
Bf 25% 3%

6000

8000 10000 12000

Py 17% 1% TOTAL 16% 3%

Kill share of top 10 Kill share of 2nd 10

Pk 10% 5%

Gira 2009

29

Even agribusiness stocks have plummeted forcing a pause in strategic developments probably not for long

Pilgrim's Pride
$30 to $0.31

!!

Smithfield Foods
$32 to $7

Tyson
$19.50 to $7
Gira 2009

30

 and BR share prices have fallen very sharply as well since 3Q08 undermining investment potential
33.0 30.0 27.0 24.0

Source: Bovespa Stock Brazilian MeatCo Share Prices Market 2.7

2.4 2.1 1.8

USD .

15.0 12.0 9.0 6.0 3.0 0.0

1.2 0.9 0.6 0.3 0

May/06

May/07

May/08

Perdigao

Marfrig

JBS

SADIA

Minerva

Gira 2009

Sep-08

Sep/06

Sep/07

BRL/USD
31

Nov-08

Jul/06

Jul/07

Nov/06

Nov/07

Jan/06

Jan/07

Mar/06

Mar/07

Jan/08

Mar/08

Jul/08

BRL/USD

18.0

1.5

21.0

4. Some concluding points applied to UK

Gira 2009

32

The decline of the UK livestock industry presents a worrying precedent processors and for EU27 Self sufficiency ratios illustrate the decline of the UK meat sector Production fall facilitated by decoupling and low confidence Ease of import access:
NZ in lamb S.America and Ireland in beef Denmark & NL in pork
UK Self Sufficiency in Meat
120% GIP/Consumption cwe % 100% 80% 60% 40% 20% 0% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007f
Sheepmeat Poultry Beef Pigmeat

Source: GIRA Meat Club forecasts, Dec 06, based on Eurostat historic

Animal disease crises Regulatory burden Low investment and weak supply chain relationships Retail domination Precedent even for UK milk Precedent for EU27 but stlg decline hugely helps New leadership after 07/08 commodity boom? Sustainability?
Gira 2009

UK Raw Milk availability scenarios

16000 14000 Raw Milk (million litres) 12000 10000 8000 6000 4000 2000 0 2008f 2009f 2010f 2007e 2011f 2000 2001 2002 2003 2004 2005 2006
Source: Gira forecasts based on Defra historic

Production Optimistic Production Pessimistic Production Liquid Manufacture Optimistic Manufacture Pessimistic Manufacture Net exports

33