Food Manufacturing Industry Report Q1 2018

Food Manufacturing Industry Report Q1 2018

North American Food Manufacturing Industry Q1 2018 Industry Performance and Trends Whitehorn Merchant Capital Inc.’s Food Manufacturing Industry Report includes companies that manufacture or process meats, seafood, dairy products, grain mill products, bread and bakery products, prepared and preserved foods, confectionery, organic foods, ethnic foods, and frozen food products within North America.

Average Gross Profit & EBITDA Margins 30.0% 25.0%

Gross Margin

20.0%

15.0%

24.8%

26.9%

23.2%

10.0%

10.8%

5.0%

11.7%

11.4%

24.8%

12.3%

25.9%

14.1%

EBITDA

0.0%

2014

2015

2016

2017

2018F Source: Capital IQ

Note: 2018 financial performance charts and data are based upon 2017 annual reported results plus analysts’ consensus estimates for companies Whitehorn tracks.

2018 food manufacturing gross margins are expected to be slightly higher compared to 2017 levels. The dairy products sector i s estimated to experience higher gross margins compared to the rest of the industry. EBITDA margins are also expected to increa se from 12.3% in 2017 to 14.1% in 2018 across all sectors. The amount of mergers and acquisitions (M&A) involving North American food manufacturing companies decreased from 43 in Q4 20 17 to 22 in Q1 2018 (see page 6 and 7 for additional M&A details). The revenue growth outlook for the industry as a whole remains relatively flat, slightly lower compared to 2017’s growth levels.

Average Industry Revenue Growth 4.0% 3.0%

2.0%

3.6%

1.0%

2.6%

1.8%

2017

2018F

0.0% -1.0% -2.0%

-3.1%

-3.1%

2015

2016

-3.0% -4.0%

2014

Source: Capital IQ

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North American Food Manufacturing Industry Sector Performance Updates and Outlooks

Average Revenue Growth

25%

22%

20% 15% 10%

12% 8%

8%

5%

5%

3% 4%

2% 3% 1%

6% 4%

6%

4% 4%

2%

2%

2%

1% 1%

1%

8%

7%

6%

2%

2% 2%

0%

0% -5% -10% -15%

-2%

-2%-3%

Bread Products

0% -6% -6%

-7%

-8% -10% Confectionery

-10%

Dairy Products

-6% -7%

Frozen Foods

Ethnic Foods

-2%

-3% -5%

-1%

-2%

-3% -4%

-5% Organic Foods

Meat Products

Grain Mill Products

0% -1%

Prepared and Preserved Foods

Seafood

'14 '15 '16 '17 '18F '14 '15 '16 '17 '18F '14 '15 '16 '17 '18F '14 '15 '16 '17 '18F '14 '15 '16 '17 '18F '14 '15 '16 '17 '18F '14 '15 '16 '17 '18F '14 '15 '16 '17 '18F '14 '15 '16 '17 '18F '14 '15 '16 '17 '18F Source: Capital IQ

Average EBITDA Margin 20% 18%

16% 14%

18% 18%

16% 16% 16% 15% 15% 14% 14% 13%

12%

17%

17% 16%

15%

14%

14% 12%

12%

11%11%

11% 9%

10%

11%

16% 15% 14%

13% 13%

11%

11%

15% 14% 14% 14%

14%14% 13%

13% 12%

11%11% 10%

9%

12%

12%

14%

12%

11% 11%

8%

8% 6% 4% 2%

0%

Bread Products

Dairy Products

Confectionery

Ethnic Foods

Frozen Foods

Grain Mill Products

Meat Products

Organic Foods


Seafood

'14 '15 '16 '17 '18F '14 '15 '16 '17 '18F '14 '15 '16 '17 '18F '14 '15 '16 '17 '18F '14 '15 '16 '17 '18F '14 '15 '16 '17 '18F '14 '15 '16 '17 '18F '14 '15 '16 '17 '18F '14 '15 '16 '17 '18F '14 '15 '16 '17 '18F Source: Capital IQ

Overview – Key Takeaways The Seafood sector is expected to outperform the other sectors slightly in terms of revenue growth in 2018. All other sectors are forecasted to experience relatively flat revenue growth in 2018. Average EBITDA Margins are forecasted to improve slightly from 2017 levels across all sectors.



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Q1 2018 Key Highlights: NAFTA negotiations continued in Q1 2018, with gradual progress being made. The US has established a May 1 deadline for negotiations to be completed by. In response to the new steel and aluminum tariffs the Trump Administration recently instated, as well as new tariffs placed on USD $50 billion of Chinese goods, the Chinese government responded by warning of a global trade war. Chinese officials retaliated by indicating they might introduce their own tariffs on American goods, including pork and soybeans. Canada and 10 other countries agreed on a new Trans-Pacific Partnership (TPP) agreement in January 2018. The new agreement will benefit Canada’s agricultural sector, primarily beef and pork producers, which are now granted access to the once sheltered Japanese market. The new agreement provides the other member nations access to ~3.25% of Canada’s annual milk production, which may represent a $246 million hit annually on the Canadian dairy industry.

Ottawa’s Innovations Supercluster Initiative Digital Technology

Protein Industries

Ottawa announced it will spend $950 million over the next five years on its new Innovations Supercluster Initiative which was designed to encourage academia, not-for-profit, and companies of all sizes to work together on strategies to boost high-growth sectors in Canada. Funding will come from taxpayer dollars and the criticizers of the initiative have deemed it excessive government intervention and favouring Liberal -connected companies and institutions. The Innovations Supercluster Initiative website outlines stipulations for applicants and winners, which state both that a company can be headquartered anywhere in the world (as long as they are incorporated and active in Canada) and that the intellectual property that is created can leave the country.

Advanced Manufacturing

SCALE.AI Supercluster

Ocean Supercluster

Protein Supercluster Chosen out of 50 submissions from across the country to share in the Federal Supercluster Program and to represent the prairie provinces. Protein Industries Canada (PIC) is a group of 120 private-sector companies, academic institutions, and other stakeholders across Western Canada aimed at developing the potential of plant-based proteins from crops such as canola, pulses, grains, hemp, and flax. PIC’s work will focus on improvements and opportunities in four areas: crop breeding, crop production, value-added processing, and export development. Further focus will be on commodities coveted by markets such as China and India and fulfilling the need in North America and Europe for plant-based meat alternatives and new food products.

Participating Partners Include:



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Cannabis in Canada Retailer Type by Province

Canada is gearing up for July 1 legalization date. Most recent bill passed March 22. Edibles may still not be legally available by July 1, though consumers can make their own at home. Proposed minimum legal age for buying is 18, though provinces can raise age if they wish. Seven of Canada’s 10 provinces have come forward with frameworks for retail marijuana sale. There is reason to believe that marijuana products may be sold in government liquor stores and private beer and wine stores, as well as existing dispensaries and pharmacies.

BC

AB “Mi xed Model ” (Both Pri va te Pri va te a nd Reta ilers SK Government) Pri va te Reta ilers

QB Provi nci al PEI GovernmentON Provi nci al Provi nci al Owned Entities GovernmentGovernmentNB Owned Entities Owned Entities Provi nci al GovernmentOwned Entities

Top Four Canadian Cannabis Producers by Market Cap 40 35

3 7 3 % increase

30

Share Price ($)

25 20

2 2 1 % increase

15

1 7 8 % increase

10

3 4 8 % increase

5 0

Q2 2017

Canopy (TSX:WEED)

Q3 2017

Au rora (TSX:ACB)

Q4 2017

Aph ria (TSX:APH)

Q1 2018

Ca na dian firm Cronos Group Inc. beca me the first cannabis producer tra ded on the Nasdaq a t US$7.62 per s hare i n February 2018.

MedReleaf Corp. (TSX:LEAF)

$62.5 mi l lion over the next five years has been promised toward the education of Ca nadians on the i mpact of cannabis use. The announcement comes considering the government's move toward l egalization of the s ubstance this coming Summer. A s imilar amount was s pent by Wa shington when cannabis was l egalized in the US.



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Food Manufacturing M&A Activity Whitehorn closely follows the M&A activity in the North American food manufacturing space. Sectors in this space include baked goods, meat and poultry, seafood, and premade/frozen meals etc.

Q1 2018 M&A Activity by Sector

Q1 2018 vs Q4 2017

Prepared and Preserved Foods 4.5%

9.1%

North American tracked deal volume decreased from 43 transactions in Q4 2017 to 22 transactions in Q1 2018.

Seafoods

Dairy Products 13.6%

45.5%

The Prepared and Preserved Food sector had 10 deals in Q1 2018 compared to 15 in Q4 2017. The Confectionary and the Grain Mill Products sector each had three deals in Q1 2018, followed by the Organic Foods and Dairy Products sectors with two each.

Confectionery

Grain Mill Products

13.6%

Meats

9.1%

Organic Foods

4.5%

Source: Capital IQ

2017 M&A Activity by Sector Prepared and Preserved Foods 3.4% 6.3%

Transaction Information

Bread and Bakery Products

7.5%

41% of the M&A deals tracked had disclosed valuations, with the Prepared and Preserved Food sector making up $16.5 billion of the $19.6 billion disclosed.

Meats

29.9%

Dairy Products

8.0%

Confectionery

9.2%

Q1 2018 had the lowest number of transactions in the first quarter of the year since 2013.

Frozen foods 14.4%

9.8%

Grain Mill Products

Seafoods

11.5%

Organic Foods Source: Capital IQ

Average EV/EBITDA 20.0x 15.0x

18x

13x

14x 13x

14x

15x 14x

16x

15x

11x

16x 14x14x

15x

14x

12x

14x14x

12x 11x

11x

15x 13x 12x

10x

10.0x

15x

16x

14x15x

13x

11x

11x

12x

11x

15x

11x

14x 12x13x

14x 13x13x 13x 11x

10x

12x 12x 11x

13x 9x

5.0x Confectionery

Dairy Products

Ethnic Foods

Frozen Foods

Grain Mill Products

Meat Products

Organic Foods


Seafood

'14 '15 '16 '17 '18F '14 '15 '16 '17 '18F '14 '15 '16 '17 '18F '14 '15 '16 '17 '18F '14 '15 '16 '17 '18F '14 '15 '16 '17 '18F '14 '15 '16 '17 '18F '14 '15 '16 '17 '18F '14 '15 '16 '17 '18F '14 '15 '16 '17 '18F

0.0x

Bread Products

Source: Capital IQ

There is a projected decline in 2018 EV/EBITDA multiples across all sectors, partially attributed towards the projected increase in earnings for food manufacturers in 2018.

The Seafood sector experienced a sharp decline, largely attributed towards Clearwater Seafoods Inc.’s (TSX:CLR) decline in sh are price and enterprise value as a result of the loss of its monopoly on the Arctic surf clam fishery. 270, 333 - 24th Ave SW | Calgary | Alberta | T2S 3E6 | 403.718.9860


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Recent Food Manufacturing Transactions Q1 2018 The table below summarizes a selection of recently announced and closed transactions in the food manufacturing sector involving companies in Canada and the United States that are active in mergers and acquisitions. Transactions this quarter include acquisitions to expand geographically and to acquire new product lines. Date

Buyer

Target/Seller Concord Premium Meats and the Meat Factory and Country Prime Meats and Frandon Seafood Inc.

Target Location

Mar 2018

Premium Brands Holdings Corporation (TSX:PBH)

Various locations in Canada

Pending

$225 million acquisition of meat and seafood products manufacturer with annual sales of $267 million.

Mar 2018

Highline Produce Ltd.

Prairie Mushrooms (2010) Ltd.

Langley, BC

Acquisition of mushroom producer to strengthen Western Canadian operations and to improve growing capacity. Feb 2018

General Mills, Inc. (NYSE:GIS)

Blue Buffalo Pet Products Inc. (NASDAQGS:BUFF)

Wilton, CT

USD $7.8 billion acquisition of pet food manufacturer to diversify product offerings and enter new markets.

Feb 2018

Bonduelle SA (ENXTPA:BON)

Del Monte Processed Fruit & Vegetable Business in Canada

Pending

$43 million acquisition of frozen fruit and vegetables manufacturer with annual revenue of $60 million from Conagra Brands Inc. (NYSE:CAG).

Feb 2018

Cott Corp. (TSX:BCB)

Crystal Rock Holdings Inc.

Oshawa, ON

Watertown, CT

$20.7 million acquisition of producer and distributor of bottled water in eastern US by Canadian soft drink company. Feb 2018

Ocean Spray Cranberries Inc.

Atoka Cranberries Inc.

Pending

Acquisition of cranberry farming, processing and packaging services provider from Canneberges Bieler Inc.

Jan 2018

Bunge North America, Inc.

Minsa Corp.

Manseau, QC

Muleshoe, TX

USD $75 million acquisition of corn flour manufacturer and its assets with customers worldwide. Jan 2018

Keurig Green Mountain, Inc.

Dr. Pepper Snapple Group, Inc. (NYSE:DPS)

Pending

Acquisition of manufacturer and distributor of non-alcoholic beverages in the US in a reverse merger transaction.

Jan 2018

Ospraie Management, LLC; Pinnacle Asset Management, L.P.

JBS Five Rivers Cattle Feeding LLC

Plano, TX

Greenley, CO

USD $200 million acquisition of cattle feeding services provider with locations throughout Canada and the US.

Jan 2018

Ferrero International S.A.

U.S. Confectionary Business of Nestlé S.A.

Pending

USD $2.8 billion acquisition of units including the Butterfinger, Baby Ruth and Oh Henry! Brands.



Various in the US

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Whitehorn Merchant Capital Inc. is an independent corporate finance advisory firm that provides expert advice to owners and management teams contemplating milestone business transactions. Our Services

$ Sale of Business

Raising Capital & Financing

Mergers & Acquisitions

Management Buyout

Turnaround Advisory

Our Professionals

The Whitehorn Advantage

Whitehorn professionals hold the highest accreditations in the sector and have developed their careers at global and boutique accounting, investing and advisory firms.

Transaction Management Whitehorn manages your transaction from initiation to closing, freeing you to focus on what you do best: running your business.

We are passionate about what we do: helping business owners and management teams maximize value and meet their personal and professional goals.

Marketing and Presentation Whitehorn creates industry leading marketing materials. Our materials are comprehensive, helping buyers and financiers understand your business, your competitive advantages, growth potential and unique value proposition.

Our Network Whitehorn has developed an extensive network of strategic acquirers, lenders, and investors across North America and around the world. These relationships:

Offer superior access to financing sources Provide comprehensive market knowledge Position Whitehorn to achieve strong valuations and attractive deal terms

Professional Expertise Experience and expertise matter. Whitehorn’s senior professionals lead your transaction, significantly expediting the transaction process and mitigating execution risk.

Industry Focus Whitehorn knows your industry. We know which strategic and financial parties are active in the market today, the transactions they’ve done, what they want, and what they’re willing to do. Maximizing Value Maximizing your value maximizes our value. By presenting your company in the best way possible, to the best buyers and financiers, we expect to create competitive tension and add significant value to your transaction.

Contact Whitehorn today to discuss your company and how we can help you achieve your sale of business, financing and acquisition related objectives. 270, 333 - 24th Ave SW | Calgary | Alberta | T2S 3E6 | 403.718.9860


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