Brewers need malt, but do they need maltsters?

Strictly confidential 1NeoFocus - Future of the malting industry – 20130909

NeoFocus white paper

The future of the malting industry:Brewers need malt, but do they need maltsters?

Paris, 09th September 2013

Strictly confidential

Disclaimer

2NeoFocus - Future of the malting industry – 20130909

This document is specifically intended for NeoFocus. Under no circumstances whatsoever this document, or any part of this document, should be communicated to third parties or copied without the prior consent of NeoFocus.

The concepts and tools presented in this document are derived from our expertise and are proprietary to NeoFocus. We require our clients to commit to keep them strictly confidential. The acceptance of this document is an explicit commitment to maintain such level of confidentiality.

The examples and data presented in this document are from public sources, interviews, or strictly illustrative. Although they have been collected with all the necessary professional care, they represent the best of our knowledge: in particular NeoFocus does not guarantee the accuracy or exhaustiveness of its estimates.

The actions and deliverables presented should be adapted to the specificities of each project. This document is intended as a support for presentation and should not be used without the corresponding oral comments.


Agenda Page

1. Key questions the leading maltsters must address 3

2. NeoFocus Overview 13



NeoFocus has found that leading maltsters are confronted with six central questions which they must address to successfully compete in the sector going forward


Questions that leading maltsters should have an answer to

1. How do we get ourselves ready for future beer industry consolidation?

2. Should we participate in malting industry consolidation?

3. How can we secure raw material supplies? And can we secure extra margin through increased involvement in origination?

4. Which competitive advantages and profitable growth drivers can we leverage in mature markets?

5. In emerging markets, where should we export – and where should we build local plants?

6. How will we fix underperforming assets?


Key question #1: How do we get ourselves ready for future beer industry consolidation?


Questions that leading maltsters should have an answer to: #1 of 6

Source: Barth Report, Annual Reports, NeoFocus analysis

• What are our relationships with leading brewing groups? What are our key assets in these relationships?

• To what extent can some of our largest customers further centralize procurement and unify terms and conditions?

• What would be our exposure to a mega-merger, e.g. AB InBev + SabMiller, which is heavily rumored in the industry (again…) and would represent a combined 35% market share?

• Are our customers asking for larger capacity plants to guarantee consistency and quality of supply, even in emerging markets?

• What would be our financial risk if one of our large regional customers was to be acquired by a larger brewing group? Do we have a plan to mitigate that risk?

Industry trend: brewer consolidation Key questions

2008 2014

In 2008 the top 4 brewers accounted for 42% of global beer industry volumes

By 2014 the same 4 brewers grew through consolidation to account for~52% of global beer industry volumes(1), and are continuously on the lookout for acquisition opportunities, particularly in emerging markets

What will the brewing industry look like by 2018?

Note (1) 2012 volume estimates for top 4 brewers assume most recent wave of consolidation is approved by regulators, including ABI acquisition of remaining share of Modelo, Heineken acquisition of APB, etc.

% of industry volumes

AB-InBev

SABMiller

Heineken

Carlsberg

Others

AB-InBev

SABMiller

Heineken

Carlsberg

Others

201842% 52%

?


Key question #2: Should we participate in malting industry consolidation?



Source: Rahr Malting Report, Annual Reports, NeoFocus analysis

• What is our strategic rationale for participation?

• How: as an acquirer or as a target?

• Are there potential acquisition or partnership targets we should be exploring?

• Do we wish to join a larger maltster? How do we negotiate our role in the consolidated entity?

• What would be the value of our business, as a whole or in parts, for some of our current competitors?

• Do we need scale for better negotiating leverage with brewers?

• Would scale enable us to rationalize capacity in multiple plants?

• Would increased geographic presence help us spread risks in the event of a barley shortfall?

• Would increased consolidation provide us with additional risk mitigation?

Industry trend: maltster consolidation Key questions

2008

In 2008 the top 6 maltsters accounted for 38% of global malting volumesBy 2012(1) the top 6 maltsters accounted for 49% of global malting volumes, still considerably behind the consolidation of the top 4 global brewersWhat will the malting industry look like by 2018?

“I think within 5-10 years you will see consolidation within the malting industry that starts to mirror the level of consolidation of the brewers. In my opinion this evolution is inevitable and is essentially driven by the brewers as they have really taken the upper hand in purchasing behavior.” Malt industry executive

Malteurop

Soufflet

CargillUMH

SupertimeBoortmalt

Others

% of industry volumes2018

?38%

201451%


Key question #3: How can we secure raw material supplies? And can we secure extra margin through increased involvement in origination?



Source: Industry reports, industry interviews, NeoFocus analysis

• Price and volume volatility, especially as barley becomes more of a niche crop in many geographies

• Shifts in traditional barley production areas; new barley production areas

• Potential for “out of location” malting plants relative to barley growing regions – inbound barley logistics flow issues

• Increased integration with grain companies for a secure source of supply

• Direct procurement organizations within malting companies – direct relationships with growers

• New contract practices (contract crops)

• Move towards new sources of starch, using local crops (cassava, sorghum, …); substitution risk for barley

• Move towards “new beers” using cocktails of barley and enzymes

Industry trend: raw material supplies Key questions

“Barley is becoming more and more of a specialty crop, and I can see the day when it is not at all treated like a commodity, but is purely a contract crop.” Malt industry executive

“The substitution risk is increasing: malt substitution in beer is more likely in countries with less “beer culture”, and these are precisely the fastest growing countries where brewers therefore install most of their new capacity.” Commercial director, malting company

CAGR-3,4%

Barley areas (000 ha), by select region


Key question #4: Which competitive advantages and profitable growth drivers can we leverage in mature markets?



Source: Company information, industry interviews, NeoFocus analysis

• Competitive advantage in origination?

• Lower total costs (including logistics)?

• High regional market share?

• Position in specialty malts?

• Unique selling proposition for craft brewers?

• Unique selling proposition for distillers?

• Others?

Industry trend: competitive advantage Key questions

“The largest malting companies, especially the likes of Malteurop, Soufflet and GrainCorp, have developed their own in-house barley procurement. And for the ones that are part of a larger cooperative or grain company, they are advantaged by the benefits from the relationships upstream.” Grain trader

Soufflet:Operates highly competitive, export-focused malting facility at Nogent-sur-Seine, with advantaged outbound logistics due to barge access on the SeineOwns majority of malting capacity in Central and Eastern Europe

Rahr Malting:Brewer’s Supply Group sells Rahr specialty malts as well as malts from other small, specialty maltsters, such as Weyermann, Schill, Gambrinus, Castle, Crisp to the fast-growing craft and micro brewing segments, commanding much higher margins


Key question #5: In emerging markets, where should we export and where should we build local plants?



Source: Annual Reports, press releases, industry interviews, NeoFocus analysis

• Partner with brewers to build new capacity to attend growing needs in developing markets?

• Develop competitive export base to effectively meet growing demand?

• Malting barley vs. malt changing international trade patterns?

Industry trend: serving emerging markets Key questions

“With the construction of the new malting plant in Passo Fundo, [AmBev] is introducing a new business model, which consists of taking the industry to the fields, contrary to the past model, when the malting house was receiving imported raw material and operated close to the brewery”

Marcelo Otto, Agro-industrial Director, AmBev, Dec 28, 2011

SABMiller local initiatives in Africa

New AmBev malting plant in Passo Fundo, RS

“Malt, at least in Africa, is one of a brewer’s biggest expenses, so we are definitely going into malting in order to better understand it, manage costs, control quality, etc. Brewers are making deals with the African governments in order to reduce excise rates on beer in exchange for promoting local barley industry.” Plant manager, global brewing group


Key question #6: How will we fix underperforming assets?



Source: Industry reports, industry interviews, NeoFocus analysis

• How do we improve our underperforming assets:̶ Rationalization?̶ Idling?̶ New investment?̶ Other?

• How do we deal with underperforming assets of our competitors (which are pushing down prices…)?

Industry trend: underperforming assets Key questions

“2 000kt [of excess capacity beyond Russia & China] are still “floating around”, pushing prices down and making it difficult for maltsters to be sufficiently profitable… Smaller and mid-sized maltsters are not closing as fast as expected and this is pushing prices down.” Barley / malt trader

Capacity utilization 2011

Graphite electrode cost curve

-

500

1 000

1 500

2 000

2 500

3 000

3 500

4 000

0 100 200 300 400 500 600 700 800 900

Mal

t Pla

nt 1

Mal

t Pla

nt 2

Mal

t Pla

nt 3

Mal

t Pla

nt 4

Mal

t Pla

nt 5

Mal

t Pla

nt 6

Mal

t Pla

nt 7

Mal

t Pla

nt 8

Mal

t Pla

nt 9

Mal

t Pla

nt 1

0

Mal

t Pla

nt 1

1M

alt P

lant

12

Mal

t Pla

nt 1

3

Mal

t Pla

nt 1

4

Mal

t Pla

nt 1

5

Mal

t Pla

nt 1

6M

alt P

lant

17

Mal

t Pla

nt 1

8

Mal

t Pla

nt 1

9M

alt P

lant

20

Mal

t Pla

nt 2

2

Mal

t Pla

nt 2

3M

alt P

lant

24

Mal

t Pla

nt 2

5M

alt P

lant

26

Mal

t Pla

nt 2

1

100

75

50

25

($ / t) Malt production cost curveIllustrative

100%104%

99%97%

91%88% 87% 88% 90% 91% 92%

95%

100%

91%

87%

79%78% 77% 78% 79% 80% 80%

70%

75%

80%

85%

90%

95%

100%

105%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Excluding China

World


NeoFocus has conducted projects along the entire value chain and across multiple categories in the agribusiness and food & beverage sectors


Project examples

Types of projects across the industry value chain

Grain CompaniesSupply

BrewersProduction

MaltstersProcessing

Industry Value Chain

• Strategy formulation

• Competitive analysis

• Market entry

• Internationalization

• Portfolio optimization

• Target screening

• Strategic due diligence

• JV/Partner review

• Capabilities assessment

• Operations benchmarking

• Logistics optimization


NeoFocus specifically has significant project experience supporting organic or external growth in the malting sector


Selected malting sector project examples

Define sustainable, profitable external growth strategy in malting sector

Client assignment ResultNeoFocus assistance

• Business model evaluation• Strategic Business Plan design• Development scenarios validated and

quantified• Target screening and ranking by accessibility

• Integrated Business Plan into long term planning

• Pursued acquisition scenario

Perform strategic due diligence of ADM Malting assets

• Market environment analysis• Business Plan validation• Synergy calculations• Integration planning

• Pursued target successfully• Moved profitably from #3 to #1

industry position

Perform strategic due diligence of UMH malting assets

• Market environment analysis• Business Plan validation• Synergy calculations

• Presented bid for a discrete portion of the assets as price for entire portfolio viewed to be untenable

Conduct external due diligence of Joe White Malting assets

• Market environment analysis• Competitive assessment• Operational assessment• Strategy / SWOT analysis

• Factored findings into long term planning

• Received Board approval to pursue acquisition

Review value chain from upstream (grain) through malting to downstream (brewing) for competitive landscape and market dynamics

• Competitive assessment• Market dynamics analysis• Capabilities assessment

• Utilized findings to inform long term planning

• Developed strategic scenarios to address malting industry’s competitive dynamics


Agenda Page

1. Key questions the leading maltsters must address 3

2. NeoFocus Overview 13



NeoFocus assists its clients in all aspects of their growth initiatives: we provide professional services to imagine, design, execute and protect their successful development

14NeoFocus Corporate Presentation – XXXX - 20150909

Our practices

Strategy

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Corporate finance

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Business BoosterTraining

Client experience


NeoFocus is organized to provide professional services to support our customers’ growth initiatives


Our professional practices

Organic growth

External growth

Portfoliomanagement

Profitability expansion

Sustainable and profitable growth

Strategy practice .

• Strategic Advisory

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Innovation practice .

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• Training

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Our customers’growth projects

Our assistanceCorporate finance

practice

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Local teams Experts


Our international network allows us to conduct worldwide projects with integrated local teams


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Our international network of local professionals

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Inside accessto international markets


NeoFocus has a strong international reach that is reinforced by local market experts as well as a large network of industry experts with considerable strategy consulting experience


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Our customers’ growth initiatives benefit from NeoFocus’ assistance: results achieved are improved, and costs and risks incurred are reduced


Some benefits of NeoFocus’ assistance

• Improved transparency• Improved predictability• Proven NeoFocus

methodologies

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projects• Increased understanding and

support from the organization

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France

Jérôme Kelber

Managing PartnerParis / France

Jerome Kelber has over 15 years of consulting experience in Europe, the US, Brazil and North Africa. He has extensive industry knowledge in a broad range of industrial sectors, including agribusiness, mining, materials, aerospace and defense, electronics, clean techs and biotech, but also service industries, such as IT, B-to-B services, telecom, specialized retail and private equity.

Jerome Kelber has advised multiple leading European corporations on organic growth strategies, new business development, international expansion, M&A operations and post-merger integration.

Prior to setting up his own practice, Jerome Kelber was a senior project manager at Roland Berger & Partners, a global management strategy consultancy.

Prior to working in strategy consulting, Jerome Kelber acquired extensive M&A experience for over 6 years with Morgan Stanley and Calyon, mainly in cross-border M&A transactions. He also developed a strong experience in innovation and high‐tech engineering consulting, with global leader in R&D outsourcing Altran, mainly in the telecom network operators.

Jerome Kelber graduated from Ecole Centrale de Paris (Engineering and Economics) and holds a master in Economics & Finance from University of Paris I La Sorbonne.

Jerome Kelber has been a private pilot since 2001 and holds an instrument rating (IR-ME) since 2011.

Strictly confidential 20NeoFocus - Future of the malting industry – 20130909

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