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US Consumer Staples
Introduction Food Processing Industry Analysis- Sharon Ø Rogers Sugar – Ira Ø ED Smith- Bunty Ø Smuckers- Steve Ø
Consumer Staples Pharmaceutical Household Products Consumer Staples Tobacco Food & Beverage
Food Processing Process of converting raw materials into food. Ø Over 10, 000 food processing facilities in the US. Ø In 2005, approximately 9. 9% ($894. 1 billion) of families and individuals disposable income was spent on food. Ø
Mergers & Acquisitions Industry stage: Consolidation as a result of a maturing domestic market. Ø 637 Mergers and Acquisitions in 2000 Ø • Ø Marked the highest number in mergers and acquisitions. 323 M&A in 2005 • Decline in M&A continued for fifth consecutive period.
Mergers & Acquisitions
Key Issues Competition Ø Consumer Health and Nutrition Ø Customer Loyalty and Marketing Ø The Retail Offer Ø Food Safety/Internationalization Ø
Competition Ø Brands under pressure due to, • • Rising costs Spread of private labels Cost increases are a result of rising energy, raw material and employee benefits costs. Ø Private label food offerings provide retailers and distributors with a point of differentiation from their competitors. Ø
Private Label Products Made by independent manufacturers according to specifications established by, and marketed under, trademarks that are usually owned by the retailer or distributor. Ø Consumers can purchase private label foods and beverages at a 21% discount compared to national brands. Ø For 2004, $38 billion in sales, which equals 16. 8% of total retail food and beverage sales. Ø
Consumer Health and Nutrition Impact of obesity and diabetes epidemics. Ø Consumers are more health conscious. Ø Consumers want nutritional and convenient foods. Ø Challenge for manufacturers is to provide nutritional products while marketing them in a convenient and attractive way. Ø
Customer Loyalty and Marketing Battle for shelf space. Ø Traditionally, promotion through: Ø • • Coupons In-Store Displays Trade Shows Heavy Expenditure in Advertising
Death of the Mass Market Ø In 1999, $7. 3 billion spent by food manufacturers on advertising, second only to the automobile industry. • Mass Marketing ▪ Ø Used to differentiate products and create brand loyalty. Now, trend by food producers is toward targeted marketing.
Death of the Mass Market Consumers are more demanding. They have much more varied tastes and desires and want products that are perfect for them. Ø They won’t compromise and will spend more to get what they want. Ø At the same time, manufacturers are capable in making smaller production runs at lower costs. Ø Also, more targeted media to get the message efficiently and effectively to the right consumers. Ø
‘Markaging’ The use of a creative packaging design with advanced packaging technology. Ø Packaging can be applied as critical point-of-sale advertising that can; Ø • • Increase brand awareness Grab consumer attention
Growth Opportunities in Food Processing 1. Organic Foods • • Sales totaled nearly $14 billion in 2005, a 35% increase from 2003 Sales are expected to reach $16 billion by the end of 2006 as strong growth for organic products continues. 2. Health and Wellness • • Emphasis on healthier eating Result of obesity and diabetes epidemic
Growth Opportunities in Food Processing 3. Age Awareness • Concerns children, teens and seniors 4. Ethnic Foods • • Consumer interest in new flavors and products continues to grow Potential in overseas markets
Growth Opportunities in Food Processing 5. Smaller Portions • Result of convenience and health food trends 6. Kosher/Halal • • Consumers demanding higher quality, better tasting, and safer cuts of meat. Food safety
Regulation Ø Overseeing agencies include, • Department of Health and Human Services’ ▪ • • Ø Food & Drug Administration Food Safety Inspection Service (USDA) Animal and Plant Health Inspection Service Companies are required to follow Current Good Manufacturing Practices in accordance to the Public Health Service Act.
Current Good Manufacturing Practices (c. GMP) Implemented to update and enhance the regulation of manufacturing processes. Ø Deals with risks to public health because of manufacturing procedures and ensures that consistent product and process quality standards exist. Ø
c. GMP Process Ø Set standards of performance. • Includes regulations and other standards Reinforce standards throughout organization. Ø Audit: to ensure that adequate controls exist Ø • • • Ø Personal – Quality Assurance Department Internal – Required by GMP External – FDA Audit Modify/Change standards according to audit.
Important Acts Governing Food Processors 1962 – Consumer Bill of Rights Ø 1966 – Fair Packaging and Labeling Act Ø 1973 – Low acid food processing regulations issued Ø 1982 – Tamper resistant packaging regulations instated Ø 1988 – Food and Drug Administration Act Ø 1990 – Nutrition Labeling and Education Act Ø
Important Acts Governing Food Processors Ø Ø Ø 1992 – Nutrition facts, basic per-serving nutritional information required on labels 1996 – Food Quality Protection Act 1997 – FDA Modernization Act 2002 – Public Health Security and Bioterrorism Preparedness and Response Act 2003 – Food labels must include trans fat content 2004 – Food Allergy Labeling and Consumer Protection Act
Hazard Analysis and Critical Control Point Food safety addressed through the analysis of biological, chemical, and physical hazards from raw material production, procurement and handling, to manufacturing, distribution and consumption of the final product. Ø Established for juice, meat, poultry and seafood processing in order to prevent food borne illnesses Ø
Appeal to Investors Consumer staples are perceived as defensive stocks. Ø Defensive stocks remain stable during the various phases of the business cycle. Ø • • Tend to outperform the market during recessions Perform below the market during expansions
RSI. UN-T Last Trade: Nov 06, 2006 16: 23 EST Last: C$ 3. 790 Net Change: C$ 0. 180 % Change: 4. 99% Open 3. 800 Bid 3. 760 Ask 3. 790 High 3. 800 Low 3. 650 52 -Week High 4. 540 52 -Week Low 3. 250
RSI. UN-T EPS P/E Indicated Annual Div. Volume Yield Shares Outstanding : 2004 & 2005 -0. 70 0. 00 0. 42 185, 063 11. 63 2006 88, 788, 391 88, 779, 760
Canadian Sugar Industry World Shortage in sugar products Ø Canada produce 1. 2 m tonnes refined sugar annually, Rogers and Lantic own 70 – 80% market share Ø Canadian consumption decline by 0. 8% in 2005, compare to increase more than 3% in 2004 Ø Canadian production is expected to increase by 5% from 2005 to 2015 Ø
Canadian Sugar Industry (cont. )
Competitors Toronto - Redpath Sugar (Tate and Lyle North American Sugar Ltd. ) Ø HFCS producers Ø New Brunswick – Can. Sugar (Potential competitor) May 2005 – put into receivership under “Companies Creditor Agreement Act” seeking offers business as a whole – no success Ø
Corporate Profile - Rogers Ø leading sugar refiner in western Canada since 1890 Ø a cane sugar refinery in Vancouver Ø a sugar beet processing plant in Taber, Alberta
Management Team A. Stuart Belkin - Chairman CEO Belkorp Industries Inc. owns and operates a diverse group of companies (environmental service, real estate, merchant banking and investment management, pulp and paper) Ø Edward Makin - President & CEO Rogers Sugar Ltd. Join: October 24, 2005 – 30 yrs in sugar industry Ø
Business Strategy To be the leader in Canadian sugar industry (acquisition? ) Ø To Reduce cost Ø • • Further hedge commodity and energy price to reduce cost Invest in new projects
2001 – 2005 Figures 2001 2002 2003 (Restated) 2004 2005 (1, 213) 31, 869 32, 899 43, 145 (57, 249) 43 1332 25, 871 52, 666 35, 291 4, 453 12, 687 658, 068 663, 017 568, 068 218, 206 213, 454 209, 094 419, 146 428, 153 441, 283 Cost of Sales 320, 886 322, 925 340, 150 Gross Margin 98, 260 105, 228 101, 133 Net Earnings (loss) Cash Assets (CA, other Assets, Goodwill, Capital Assets) Capital Assets Revenue (770) 35, 065
Vancouver Plant Imported raw sugar from Australia and Central America Ø Contains about 98. 7% sucrose Ø Ø Up to 240, 000 tonnes/year Ø Need: Natural gas Hedge: $7. 6 m, fair value $12 m
Taber Plant Ø Locally grown sugar beets Ø 400 producers (@45, 000 acres) depend on weather and environment condition Ø Up to 150, 000 tonnes/yr
Taber Plant (cont. ) Other Income: Ø Dried pulp pellets (highly nutritious portion of many animal food diets) Ø sold throughout Western Canada and several export markets Ø Small amount of the pressed pulp is sold directly without drying to local animal feeders
Corporate Profile - Lantic March 2002 - Acquired Ø Operates a world-scale refinery in eastern Canada Ø over 75% of the company's sales are to industrial users including confectioners, bakeries and dairies Both Lantic and Rogers supply white sugar, as well as value-added specialty products Ø
Montreal Plant Cane sugar imported from Australia, Central America and South America Ø July 2000: closed St. John Plant Ø Enlargement (Dec 2000) : 440, 000 – 600, 000 tonnes/yr Ø Toronto distribution centre Ø
The Fund Open ended mutual fund Ø Owns the common shares of Rogers Sugar Ltd. and Lantic Sugar Ltd. and Roger’s subordinated notes Ø Monthly distributions to unit holders (dividend and interest income) Ø Lantic Sugar Ltd. - the fund manager Ø Board members - the trustees of the fund Ø
Raw Sugar Ø Based on world raw sugar market Ø Traded on New York Board of Trade parent company of the Coffee, Sugar and Cocoa Exchange (NY #11 Settlement) September 2005 – 21. 2 m short, 32. 4 m fair value Ø June 2006, Hedge – short position of $74. 9 m, fair value $86. 2 m Ø
Raw Sugar Prices
Financial Statements Ø Annual: • • Annual report 2005 Annual report 2004 Annual report 2003 Annual report 2002 10 Q – 2006 Ø Distributions to unit holders Ø
2003 – 2005 Figures
Revenue & Volume Price increases
2006 Outlook Some of the cash – pay beet growers at 1 st. Q Ø Feb 2006: Refinancing into lower interest bond Ø $3 m Annualized operating cost saving from ion exchange project Ø CITT extends anti-dumping and countervailing duties for certain sugar import Ø Consumption trend: will grow at minimal growth Ø 10 Q
Conclusion Given the world production less than world consumption in sugar products attractive Ø BUT most of the countries limit the sugar trade e. g. US and EU few exports, unless there is a trade liberalization Ø The domestic market does not seem to grow or it grows with a minimal growth rate Ø
Philip Fisher Analysis Management – new CEO Ø Buy and hold – maybe (speculative) Ø BUT he does not like speculation Ø Therefore…
Company Snapshot Ticker: JAM. UN TSX Price: $7. 410 CDN EPS: 0. 30 P/E: 24. 70 Yield: 14. 55 Units Outstanding: 21, 181, 622 Indicated Annual Dividend: $1. 03 Market Cap: $156, 955, 819
Unit Issue Initial issue July/05 11, 050, 000 for $10 totaled $110, 050, 000 Ø May/06 7, 500, 000 for $8 totaled $60, 000 Ø
1 -Year E. D. Smith
1 -year vs. S&P Consumer Staples
Company History Incorporated in 1882 by E. D. Smith Ø Sons took over business in later years Ø Sold to Imperial Capital in 2001 Ø IPOed July/05 as Income Fund Ø
Products Ø Ø Produce Jam, Ketchup, Pie Fillings, Salad Dressings, and Syrups Private Label and Branded Products 1450 Stock Unit Products 10 Product Categories
Management Team Ø Ø Ø CEO, President, & Board Member: Michael Burrows joined in Sept/02 – 25 years related experience CFO, Newly appointed Oct/06 Executive Vice President, and CFO Bruce Smith, CA -13 yrs in the foodservice industry Executive VP Sales and Business Development, Mark Barr is the former President & Co-Chairman of Seaforth Creamery Inc. He graduated from the University of Western Ontario, BA, Economics.
Business Strategy Ø Ø Ø Become the leading North American manufacturer and marketer of wholesome and convenient premium-quality “flavor enhancers” in the categories and the markets in which it participates. Generate sustainable cash flows Find opportunities for continued growth with low capital expenditure requirements. Continuous product innovation and diversification Seek future acquisitions that are strategic and have a history and future expectation of strong revenue and cash flow.
Competitive Strengths Track record of sustained growth Ø Diverse and strong customer relationships Ø Leading market position Ø Superior product quality Ø Flexible and efficient production facilities Ø Continuous product innovation Ø Longstanding supplier relationships Ø Experienced management team Ø
ED Smith as a Brand
Distribution Ø Ø Traditional grocery stores, mass merchandisers, club stores, dollar stores, and foodservice distributors and restaurants Canada (65%) and the U. S (35%) 10 largest customers accounted for approx. 63% of the Company’s sales 2 largest customers accounting for approximately 39% of such sales.
Production Facilities Ø Ø 2 Facilities Winona, Ontario and Northeast Pennsylvania Winona 300, 000 sq feet Northeast 121, 000 sq feet Very flexible production facilities PEACH Program to cut costs in facilities relates to restructuring costs on Financials
Growth Strategy Ø Ø Ø Grow Canadian Private Label Business Through New Innovative Products Grow Canadian Retail Branded Business Through the Re-Stage of the E. D. Smith Brand Increase Penetration of U. S. Customers with Expanded Product Offerings Grow Canadian Foodservice Business Through New Custom Sauces Seek Strategic Accretive Acquisitions
Strategic Acquisitions Potential acquisitions must be add to cash flow and should enable the Fund to dominate the respective market segment and/or product category. Ø February 2005 North Coast Ø April 2006 Seaforth $95. 2 million Ø • Ø Funded by unit issue May 2006 Golden Value
North Coast’s Value
North Coast’s Value
Cash Distributions Ø Ø $0. 0854 paid 15 th of each month Have paid sinception
Financials 2 nd Quarter 2006 Financial Statements Ø 1 st Quarter 2006 Financial Statements Ø 4 th Quarter 2005 Financial Statements Ø 3 rd Quarter 2005 Financial Statements Ø 2 nd Quarter 2005 Financial Statements Ø
Income Comparison 3 months ended 7/1/2006 Revenue Net Earnings (loss) for Period Deficit, beginning of period Distributions declared to unit holders Deficit end of period 3 months ended 4/1/2006 6 months ended 12/1/2005 3 months ended 10/1/2005 58294 42844 113640 49175 4614 1483 3924 2248 (6, 367) (4, 173) 4214 3677 0 8097 (5, 967) (6, 367) (4, 173) Bank Credit 4 th Qtr 2005 47, 000 Bank Credit 2 nd Qtr 2006 85, 000 30 days ended 7/01/200 5 14902 (317)
Concluding Remarks (Fisher model) Ø Ø Ø Ø Ø too early to tell unit payments financed by debt not by operations always highlighting EBITDA paying out more than it earns original owner and history are gone executives have not been with the company for long market does not expect payments to last – stock price continually falling if in growth strategy why are they not committing all of earnings to growth there may be growth in future if company is ‘in fact’ strong, right now it would be a speculative buy and we are looking for a solid investment
"With a name like Smucker's, it has to be good"
1 year – daily
5 year monthly
Company History Ø The J. M. Smucker Company was founded in 1897 when the Company's namesake and founder sold his first product -- apple butter -- from the back of a horse-drawn wagon. Today, over a century later, the Company is the market leader in fruit spreads, peanut butter, shortening and oils, ice cream toppings, and health and natural foods beverages in North America Ø For over 109 years, The J. M. Smucker Company has been headquartered in Orrville, Ohio, and has been family run for four generations.
Executives Name Age Years @ SMJ Position Since Timothy P. Smucker 62 37 Chairman and Co-Chief Executive Officer 1973 Richard K. Smucker 58 33 President and Co-Chief Executive Officer 1974 Mark R. Belgya 45 21 Vice President, Chief Financial Officer and Treasurer 1997 Vincent C. Byrd 51 29 Senior Vice President, Consumer Market 1988 John W. Denman 49 27 Vice President and Controller 2005 Barry C. Dunaway 43 19 Vice President, Corporate Development 2001 Fred A. Duncan 60 28 Senior Vice President, Special Markets 1984 Robert E. Ellis 59 28 Vice President, Human Resources 1996 M. Ann Harlan 46 7 Vice President, General Counsel and Secretary 2002 Donald D. Hurrle, Sr. 57 29 Vice President, Sales, Grocery Market 2001 John F. Mayer 50 14 Vice President, Customer Development 2004 John D. Milliken 60 32 Vice President, Logistics and Fruit Processing 1981 Steven Oakland 45 23 Vice President and General Manager, Consumer Oils and Baking 1999 Andy G. Platt 50 23 Vice President, Information Services and Chief Information Officer 2004 Christopher R. Resweber 44 18 Vice President, Marketing Services 2004 Mark T. Smucker 36 10 Vice President International Market and Managing Director, Canada 2001 Richard F. Troyak 58 27 Vice President, Operations 1998 Paul Smucker Wagstaff 36 10 Vice President and General Manager, Foodservice and Beverage Markets 2001
Core Values/Basic Beliefs Ø Quality Ø People Ø Ethics Ø Growth Ø Independence
Business Strategy Ø Own and Market #1 food brands, found in the center of the store, with key emphasis on North America.
Center of the Store
Products * Jam, Jelly, & Preserves o Fruit Butter o Jam o Jelly o Low Sugar o Preserves o Simply Fruit o Sugar Free * Peanut Butter o Goober PB&J o Jif o Nat. Peanut Butter * Sandwiches o Grape PB&J o Strawberry PB&J o Grilled Cheese o Uncrustables * Ice Cream Toppings o Magic Shell o Microwaveable Ice Cream Topping o Specialty Ice Cream Topping o Spoonable Ice Cream Topping o Sugar Free Ice Cream Topping o Sundae Syrups * Specialty Items o Fruit Syrup o Plate Scapers Dessert Topping o Specialty Items * Oils and shortening o Crisco * Flour and baking mixes o Hungry Jack o Martha White o Pillsbury (General Mills licensee) * Juices, beverages, & sauces (Natural and Organic) o After the Fall o Natural Brew (Real Brew in Canada) o R. W. Knudsen Family (apple butter and cranberry sauce) o Santa Cruz Organic (peanut butter, chocolate & caramel sauce, & applesauces)
Sealed Crustless Sandwich Ø In December 1999, two independent inventors, Len Kretchman and David Geske, were granted a U. S. patent, US 6004596, "Sealed Crustless Sandwich" for an improved peanut butter sandwich that would have a long shelf life. The J. M. Smucker Co. bought the patent from the inventors and developed a commercial product based on the patent called Uncrustables. Smuckers then made a US$17 million dollar investment in a new factory to produce the product. By 2005, sales of the product grew to $60 million a year with a 20% per year growth rate. Ø Smuckers attempted to enforce their patent rights by sending out cease and desist letters to competitors, and by expanding their intellectual property coverage via the patenting of a machine to produce Uncrustables sandwiches in high volume (US 6874409: Method and apparatus for making commercial crustless sandwiches and the crustless sandwich made thereby). The U. S. Court of Appeals for the Federal Circuit, however, rejected the viability of the patent citing its similarity to existing processes such as that of fashioning ravioli or a pie crust. Ø http: //www. msnbc. msn. com/id/7432980/ Ø http: //www. answers. com/topic/sealed-crustless-sandwich
Sealed Crustless Sandwich
Free Cash Flow Summary
Share Buyback Ø Ø The Company currently has authorized a total of approximately 2. 7 million shares available for repurchase. There is no guarantee as to the exact number of shares that will be repurchased under the share repurchase program. Repurchased shares would be returned to the status of authorized, but unissued common shares.
Production Facilities Domestic Locations Products Produced Chico, California Shortening and oils Grandview, Washington Products Produced Fruit and vegetable juices, beverages Cincinnati, Ohio International Locations Grapes, red tart cherries, strawberries, cranberries, apples, boysenberries, blackberries, red raspberries, black raspberries, blueberries, and red currants Havre de Grace, Maryland Fruit and vegetable juices, beverages Lexington, Kentucky Fruit spreads, toppings, syrups New Bethlehem, Pennsylvania Peanut butter and Goober products Orrville, Ohio Strawberries Ripon, Wisconsin Uncrustables sandwiches Toledo, Ohio Uncrustables sandwiches Dunnville, Ontario Pickles and relish condiments Livingston, Scotland Industrial fruit products Montreal, Quebec (mill) Flour Montreal, Quebec Bakery mixes Pt. Colborne, Ontario Flour Ste. Marie, Quebec Fruit spreads, sweet spreads, industrial products Saskatoon, Saskatchewan Flour, oats, and bakery mixes Bakery mixes and frostings West Fargo, North Dakota Pickles Fruit spreads, toppings, syrups, condiments Scottsville, Kentucky Delhi Township, Ontario Fruit spreads, toppings, syrups Oxnard, California Bakery mixes Peanut butter Memphis, Tennessee Burlington, Ontario
Annual Report Ø http: //www. smuckers. com/fc/investor/default. asp
(Dollars in thousands, except per share data) 2006 Statements of Income: 2005 2004 2003 2002 2, 043, 877 1, 369, 556 1, 270, 098 649, 997 130, 460 111, 298 94, 212 29, 324 Discontinued operations 143, 354 Income from continuing operations 2, 154, 726 Net sales (1, 387) 52 2, 130 1, 527 143, 354 Net income Financial Position: 129, 073 111, 350 96, 342 30, 851 2, 635, 894 1, 684, 125 1, 615, 407 524, 892 431, 560 135, 000 1, 728, 059 Shareholders equity 428, 602 Long-term debt 2, 649, 744 Total assets 1, 690, 800 1, 210, 693 1, 124, 171 280, 144 Other Data: 63, 172 87, 576 97, 721 48, 083 22, 085 Weighted-average shares 57, 863, 270 57, 086, 734 49, 816, 926 47, 309, 257 23, 114, 494 Weighted-average shares assuming dilution 58, 425, 361 57, 748, 780 50, 395, 747 47, 764, 777 23, 493, 365 2. 48 2. 29 2. 23 1. 99 1. 27 (0. 03) 0. 01 0. 05 0. 06 Capital expenditures Earnings per common share: Income from continuing operations Discontinued operations Net income 2. 48 Dividends declared per common share 2. 26 1. 09 2. 24 1. 02 2. 04 0. 94 1. 33 0. 83 0. 68
BUY Smucker’s brand is a market leader with 40% of the US fruit spread market, with its closest competitor having 15% Ø Competitors (Con. Agra, Kraft, Frito-Lay, Unilever) have a more generalized product mix Ø Smucker’s is more specialized Ø Main competition from private label brands Ø Smucker’s competes in both Peanut Butter & Jelly Ø