Saputo Presentation "Expand Abroad, Innovate at Home"

Expand Abroad, Innovate at home

Growth

2007 2008 2009 2010 20110%

5%

10%

15%

20%

25%

Year

Reve

nue

Gro

wth

11%

3 YEAR PLAN

CAGR

Global Exporters

Milk Quotas

EU Acquisition

China

Emerging Market

Wheyvolution

1 Billion People

83m Cows

Significant DemandSource: IFCN

Long Term GrowthCompany knowledge

Efficiency

Future Options

Saputo Investment Criteria

#1 Dairy foodservice market leader in the UK & Ireland

Lakeland Dairies

Acquisition

Revenue: $632m #2 Ireland’s second largest diary processing co-op

Source: Lakelands

Acquisition Cost:

$158m Average: 0.20x

Dansco Dairy (2007): 0.15xCost: $84m

SKDL (2006): 0.25xCost: $29.4m

Source: Case Study

How?Debt

Debt/Equity: 0.22

Cash Flows: $90mSource: Case Study

Dairy Farmer & Herd Historic Growth

1950 1960 1970 1980 1990 2000 2010 2011 20120

0.2

0.4

0.6

0.8

1

1.2

Dairy Farmers (1000's) Dairy Herd

Nor

mal

ised

Valu

es

Lower input

Source: EDA

Milk Production & Efficiency

1950 1960 1970 1980 1990 2000 2010 2011 20120

0.5

1

1.5

2

2.5

3

Milk/Cow/Year (kg) Milk Production (1000t)

Higher Output

Source: EDA

Why?Revenue Additions

Financial & Operating Systems

Post Merger Integration

Cost Synergies

Big PictureGrowing demand

Excess supply

How?1. EU Common Market

2. EU Regulation3. EU Trade Agreements

EU Common Market

EU Common Market

EU Common Market

Why?EU Regulation Changes

2015 - Lifting of Milk Production Quota

5 Year Supply Growth

Ireland: 1.5x

Austria:1.14x Spain: 1.12x

Holland:1.21x

Germany: 1.07x

Belgium: 1.12x

Source: Eurostat

5 Year Price Decline

Ireland: 10%

Spain: 13.2% UK: 4.7%

France: 10.9%

Germany: 11.9%

Belgium: 14.3%

Source: Eurostat

New Zealand: $0.35

USA: $0.42 Germany: $0.42

Poland: $0.40

Farm Price of Milk per litre

Argentina: $0.32

China: $0.61

Source: CLAL Dairy Consultancy

Projected Farm Price of Milk

2000 2003 2006 2009 2010 2011 2012 2013 2014 2015 2016 2017 20180

10

20

30

40

50

60

Argentina Germany Poland

Year

Farm

Pric

e of

Milk

($)

EU OutlookPositive

Overall

Price

SupplyOpportunity

EU Trade Agreements

EU – China Trade Agreement

Govt. Trading

PartnershipsLakeland’s Strategic

Relationships

410g/daySource: Global Dairy Sector: Status and Trends, UN FAO

101g/day

Source: Global Dairy Sector: Status and Trends, UN FAO

140g/day

Source: Milk and Dairy Market in China, KPMG, 2008

42g/day

Source: Milk and Dairy Market in China, KPMG, 2008

Chinese Dairy Market

“The largest opportunities may lie in simply importing milk products”.

KPMG Chinese Dairy Market Report 2008

Imported Dairy Market in China

2008-2012 : 3x Growth : $2.5bn market

Source: China’s Dairy Dilemma, IATP, 2014

2012-2016 : 3x Growth : $7.5bn market

Heavily Divided between New Zealand,

Germany and others


41%

33%

14%

9%

2%

Share of Chinese Import Dairy Market

NZGermanyFranceAustraliaOther

Imported Dairy Market in China

Target Demographic

Source: Mapping China’s Middle Class, McKinsey and Co., 2012;European Dairy Association

Middle-Upper Class

Incomes: $16,960-$36,640

Population: 96.6m

Target Market

Imported Dairy Goods

2012 Growth: 19.5%

Volume: 946,000 tons

A need for quality

Poor local quality

Baby formula scandal

Preference for imported quality


Case Study:New Zealand

Milk Quality

Reputation

3-Year Growth: 128%


Exports to China: $564m

How Through acquired EU firm

Why Growing market & demand

What Sapato import to China

Summary

CEO

CFOCorpor

ate Accounting

Taxation

Treasury

CanadaSalesOperationsLogisticsAdmin/ HR

Quality Control

International

SalesOperationsLogisticsAdmin/ HR

Quality Control

USASalesOperationsLogisticsAdmin/ HR

Quality Control

BakerySalesOperationsLogisticsAdmin/ HR

Quality Control

IT Corporate HR

Management Structure

Pre-Expansion

CEO

CFOCorpor

ate Accounting

Taxation

Treasury


Quality Control

International


Quality Control


Quality Control

EUSalesOperationsLogisticsAdmin/ HR

Quality Control

IT Corporate HR

Management Structure

Post-Expansion

Innovate at home

Innovate at home

Untapped Value

IndustrialLow-margin High-margin

Retail

Residual Waste

Source: Euromonitor, April 2010

Wheyvolution$6.5bn Market


9-12% Growth

5% Share

Product Proliferation

Low Cost

Product Authenticity

Critical Success Factors

Limited Downside______

Private Equity

Exit Strategies

Strategic Buyer

What Whey Sports Nutrition Market

Summary

How Existing Company Resources

Why Profit Optimisation

Timeline

April

2014Purchase Lakeland

Dairies

2015

Aug

Supply Chain Optimisation

Design Whey Protein Product

May Dec

US Marketing Campaign

May

2015

Europe CAPEX

2015

Nov

Aug

Target Chinese Market

Jan

EU Milk Quotas Removed

Canada Marketing Campaign

Whey Protein Product Launch - US

Mar

April

2016New Production Facilities

OperationalSaputo positioned to

become Global Exporter

End of 3 Year Plan

Dec

Nov

Whey Protein Market Share 5.0% - North America

Feb

Whey Product Launch- Canada

Supply

EU

Demand

China

Exporters

Global

LEGENDDAIRYPotential

ANY QUESTIONS?

Expand Abroad, Innovate at home

Appendices

Added Details

Appendix 1: EU Acquisition

Growing Demand• According to the European Dairy

Association (EDA) the population of the world is increasing by 1bn people every 12 years

• Growing dairy demand from Emerging Market’s (IFCN)

• Requirement for increased production capacity worldwide– Additional 83m cows required to meet

demand (EDA)

Sapato Situation• Currently have limited international

operations• Restricted in regulated Canada• Must expand to obtain access to

increased supply of dairy


Investment Criteria • Long-term fundamentals of industry

– Continued growth

• Quality and know-how of employees• Ability to add value & efficiency• Future investment opportunities

EU Analysis• EU regulatory changes

– Future competitive pricing (Slide 69&70)– Increase in supply (Slide 71)

• EU Trade Agreements– Access to the demand

• EU Open Market • Production Efficiency (Slide 72)• Growing Farm Size (Slide 73)• Limited Waste

– Approx. 1/9th – India 75% waste– Brazil 33% waste

Appendix 1: EU AcquisitionTable: Farm Price of Milk for Selected Countries

Source: IFCN

Farm Price of Milk ($)

China Argentina New Zealand USA Germany Poland

2000 22 11 11 28 28 18

2003 22 13 19 30 37 19

2006 26 15 20 28 42 28

2009 39 24 35 39 49 41

2010 39 24 35 30 49 49

2011 45 26 35 40 42 47

2012 54 27 35 42 43 46

2013 61 28 35 43 42 40

Country Price Decrease

Ireland 10%

Belgium 14.30%

France 10.90%

Spain 13.20%

Germany 11.90%

UK 4.70%

Table: Estimated 5-year Milk Price DecreaseSource: EU

Appendix 1: EU AcquisitionProjected Farm Price of Milk

Source: EDA

2000 2003 2006 2009 2010 2011 2012 2013 2014 2015 2016 2017 20180

10

20

30

40

50

60

Argentina Germany Poland

Year

Farm

Pric

e of

Milk

($)


Country Supply Increase

Ireland 1.5x

Belgium 1.12x

Austria 1.14x

Germany 1.07x

Holland 1.21x

Spain 1.12x

Table: Estimated 5-year Milk Price IncreaseSource: EU

20%

17%

9%8%

8%

7%

31%

2011 European Production of Milk by Country

Source: Eurostat

GermanyFranceUnited KingdomPolandNetherlandsItalyOthers

Table: European Production of MilkSource: Eurostat

Appendix 1: EU AcquisitionMilk Production Efficiency

Source: EDA

1950 1960 1970 1980 1990 2000 2010 2011 20120

0.2

0.4

0.6

0.8

1

1.2

Dairy Farmer & Herd Historic Growth

Dairy Farmers (1000's) Dairy Herd

Nor

mal

ised

Valu

es

1950 1960 1970 1980 1990 2000 2010 2011 20120

0.5

1

1.5

2

2.5

3

Milk Efficiency & Production

Milk/Cow/Year (kg) Milk Production (1000t)

Nor

mal

ised

Valu

es


1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 20120

200400600800

100012001400160018002000

Poland Farm Size Change

Small Medium Large

Year

Cow

s per

her

d siz

e cla

ss 1

000'

s

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 20120

500100015002000250030003500

France Farm Size Change

Small Medium Large

YearCow

s pe

r her

d si

ze c

lass

100

0's

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 20120

100200300400500600700

Denmark Farm Size Change

Small Medium Large

YearCow

s pe

r her

d si

ze c

lass

100

0's

European Farm Size• Larger farms makes it easier and more

attractive from an organisation, efficiency and quality perspective

• Source: EDA


Lakeland Diaries Brief Overview• Ireland’s second largest dairy processing co-op• Manufacturer of superior quality dairy foodservice

products and functional food ingredients• Provides agri-business products to farms• Presence in 70 countries with 170 branded

products– Including EM’s such as China

• Dairy foodservice market leader in the United Kingdom and in Ireland

• Recognized high-tech food services division• Made significant CAPEX investments ahead of

2015 regulation change

P&L Account 2012 2011

Turnover 473 472

Operating Costs (462) (463)

Operating Profit 11 9

Net Interest Payable (0.7) (1.1)Other Financial Charges (2.1) (1.3)

Profit before Tax 8.0 6.9

Tax (1.2) (0.9)

Profit 6.8 6.0

Appendix 1: EU AcquisitionLakeland Diaries Acquisition• Highly valuable intangibles:

– Relationships with China– Position in EU

• Highly valuable tangibles– Additional revenues– Cost savings

• Average Saputo acquisition multiple: 0.20x revenue• Estimated cost of acquisition: $128m

Company (Year) Country Acquisition Price ($’m) Revenue ($’m) Revenue Multiple

SKDL (2006) Germany 7 28 0.25

Dansco Dairy Wales 12 80 0.15

Average 0.20

“[On the topic of milk prices] The jump in demand came as milk production in China and Russia has been declining, underpinning a surge in dairy imports. Chinese demand was exceptionally buoyant, said analysts.”

Financial Times February 6, 2014


Appendix 2: Emerging Markets


“China’s imports of dairy products have more than doubled in the past five years, reaching over US$1.9 billion in 2010.”

Agriculture and Agri-Food CanadaJanuary 2012


Consumption trends in

China

• The former Premier Wen Jiabao called for “one Jin” (c.500g) of milk consumed by every citizen per day in China.– Would push China to become the largest dairy

market in the world• Official government guidelines in 2009

recommended 300g/day of milk• With improved education and wealth more

and more Chinese are buying dairy and increasing dairy consumption – through cheese, packaged milk and yoghurts

Source: McKinsey; Reuters


Indian Dairy Market opportunity• World’s largest dairy market (E26bn)• Low levels of processed dairy, especially by the organized sector• Growth may lead to an increase in value added, milk based products such as cheese,

butter, sour milk and ice cream• Only 35% processed • 8% YoY growth since 2008• Imports needed during domestic production shortfalls

Source: Processed Food and Agribusiness: Opportunities for Investment in India, KPMG, 2007


India - favourable demographics• Population: 1.23 billion• Very young population

– 31,2% is under 15 years – 63,6% is 15-64 years

• Very low income– Raise of $4200 per capita expected during

the next decade

Source: CIA World Factbook


African Dairy Market Opportunity• Lowest consumption region relative to the world

– 37 litres/capita – 101 g/day

• Low income per capita• By 2020, market will grow by 50% from 15 bn litres to 25 bn litres (Tetra Pak)• Efficiency issues

– Majority small farms– Opportunity to enter market and implement best practices– Efficiency per cow is a fraction of EU (EDA)

• An entry mode of taking over large dairies may prove lucrative• Population is large and diverse

– Diversification possible

Source: Africa.com; CIA world factbook


Latin America Market Opportunity• High Dairy Consumption

– Diversified by market• Argentina : Net Exporter into the future

– Will produce 1.7% of world’s expected milk production– Most cost efficient production

• Brazil and Mexico will become large importers over time– Brazil produces 4,3% of worlds dairy– Mexico produces 1.4% of worlds dairy

• Some countries consume record amounts of dairy – Argentina, Costa Rica, Uruguay: over 150 kg/capita

Source: Global Dairy Outlook 2012, Global Dairy Farmers; UN FAO


CEO

CFOCorpor

ate Accounting

Taxation

Treasury


Quality Control

International


Quality Control


Quality Control

BakerySalesOperationsLogisticsAdmin/ HR

Quality Control

IT Corporate HR

Management StructurePre-Expansion

• Alter Management Structure to enable greater management of new geographic footprint

Appendix 3: Further Detailed Canadian/US Market

CEO

CFOCorpor

ate Accounting

Taxation

Treasury


Quality Control

International


Quality Control


Quality Control

EUSalesOperationsLogisticsAdmin/ HR

Quality Control

IT Corporate HR

Management StructurePost-Expansion• Result is greater accountability

in line with Saputo’s company ethos

Innovate at home

Innovate at home

Untapped ValueResidual Waste

IndustrialLow-margin High-margin

Retail


• Innovate in existing North American business by creating a whey protein brand for the sports nutrition market

• Use residual waste – Low Risk/ High Reward venture

Wheyvolution$6.5bn Market


9-12% Growth5% Share

• Innovate in existing North American business by creating a whey protein brand for the sports nutrition market

Product ProliferationLow Cost

Product Authenticity

Critical Success Factors

Consumers want the following in a sports nutrition product:


Limited Downside______

Private Equity

Exit Strategies

Strategic Buyer• If Saputo does not gain a 5% share of the combined US and Canadian whey protein sports

nutrition market, exit opportunities exist.• PE firms and pharma companies are buying and selling whey protein companies. Eg. Darwin

Capital sold Maximuscle to GlaxoSmithKline in 2012 for $162m

Source: Case Study

Appendix 4: DCF Analysis $'000 $'000 $'000 $'000 $'000 $'000 $'000DCF Analysis 0 0.5 1.5 2.5 3.5 4.5 2011 2012 2013 2014 2015 2016 TVRevenue 6,025,470 6,326,744 6,643,081 7,711,586 8,559,860 9,587,043 COS 5,200,000 5,460,000 5,733,000 6,306,300 6,936,930 7,630,623 Gross Profit 825,470 866,744 910,081 1,405,286 1,622,930 1,956,420 Less Operating Expenses 300,000 306,000 312,120 318,362 324,730 331,224 EBIT 525,470 560,744 597,961 1,086,923 1,298,200 1,625,196 Depreciation 20,000 20,400 20,808 21,224 21,649 22,082 Less Capital Expenditure 20,000 21,000 22,050 35,000 61,500 41,250

Less Inc in Working Capital 3,500 1,500 1,500 3,000 4,000 5,000 Less Taxes 70,000 70,000 70,000 70,000 70,000 70,000 EBITDA 451,970 488,644 525,219 1,000,147 1,184,349 1,531,027 10,717,192 WACC 7.5% NPV of Free Cash Flows 451,970 451,995 449,390 791,570 867,055 1,036,792 4,048,772 NPV of Terminal Value 7,257,544 Enterprise Value 11,306,316 Net Debt 599,578 Equity Value 10,706,738

Business

Saputo Presentation "Expand Abroad, Innovate at Home"