agriculture quarterly update q2 2019 - mnp llp finance/mnp… · q2 2016 q3 2016 q4 2016 q1 2017 q2...

QUARTERLY UPDATE Q2 2019

AGRICULTURE

INDUSTRY OVERVIEWM&A TRANSACTIONS AND INDUSTRY OVERVIEW

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20

40

60

80

100

120

Q32015

Q42015

Q12016

Q22016

Q32016

Q42016

Q12017

Q22017

Q32017

Q42017

Q12018

Q22018

Q32018

Q42018

Q12019

Q22019

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5

10

15

20

Tran

sact

ion

Volu

me

(Num

ber o

f Dea

ls)

Tran

sact

ion

Valu

e ($

Billi

ons)

Transaction Value Transaction Volume

Source 1: Capital IQ. Deals announced, closed or effective. Q2 cut-off of June 30, 2019. Capital IQ report run July 18, 2019.Source 2: Statistics Canada – 2016 Census of AgricultureSource 3: https://www.fcc-fac.ca/content/dam/fcc/knowledge/ag-economist/outlook-agribusiness-jan-2019-e.pdf

• Intense industry consolidation is still occurring. Agricultural firms continue to enhance theirpositions in the Canadian market with acquisitions of terminals and processing facilities, anddivestitures of non-core assets. There is active competition for deals.

• Continued investment in agricultural infrastructure in the Prairies is energizing transactionactivity. Trade wars are impacting Canadian producers and may drive transaction activity asindustry players look to diversify offerings.

• The decline in independent input providers continues due to industry consolidation.• Input costs continue to trend upward while commodity prices have seen volatility over the

last four years.

• 2018 farm cash receipts are estimated to have declined 1%.3 As a leading indicator toconsumer spending, slowdowns in farm cash receipts could be compounded by excess usedinventory supply in the marketplace.

• Continued consolidation and interest of remaining independent dealerships. A shrinkingbuyer pool may balance out valuation multiples in line with historical averages.

• Increased consolidation in Canadian farming – the number of farms decreased 6% between2011 and 2016, with 7% growth in the number of large farms over this same period2.

• Succession issues with family farms and large corporate farms have fuelled consolidationamongst primary producers, while demand for quality land has never been higher.

NORTH AMERICAN AGRICULTURE AND FOOD PRODUCTSPUBLICLY AVAILABLE M&A1

Number of publicly-disclosed M&A in Canada in Q2 2019 in agriculture and food products.117

Industry and Infrastructure

Inputs and Commodity

Markets

Primary Producers

Ag Equipment Manufacturers

and Dealerships

Canada’s Beef and Pork ProducersTensions with China.

INDUSTRY & INFRASTRUCTURECURRENT HIGHLIGHTS

China’s suspension of meat imports from Canada as a result of fabricatedexport shipment certificates has contributed to concerns amongstproducers.1 The halt has raised significant concerns within the meat andlivestock industry, since China ranks third in Canadian pork exportdestinations and fifth in Canadian beef export destinations.

Canada’s pork exports to China in 2018 totalled $502 million, and beefexports totalled $97 million.2

China suspends Canadian meat imports

New Processing PlantContinued Investment in the Prairies.

New processing plant planned near Winnipeg

Source 1: https://www.ft.com/content/dde968a0-a40e-11e9-a282-2df48f366f7dSource 2: https://www.theglobeandmail.com/canada/british-columbia/article-china-halts-meat-exports-from-canada/Source 3: https://www.bloomberg.com/news/articles/2019-07-15/pea-craze-lures-second-processor-to-manitoba-to-open-in-2020

A $65 million processing plant is in the works to be built near Winnipeg,with a targeted opening in mid-2020. The 20,000 tonne processing plantwill be able to alternate between producing pea and canola protein. Theplant will be “the only commercial canola protein production facility in theworld.”3

Increased investment in plant proteins in Canada’s Prairies suggestscontinued M&A activity ahead as larger companies look to secure afoothold in the quickly-expanding alternative proteins global market.

24%

6%

3%

3%

21%

0% 5% 10% 15% 20% 25% 30%

Nutrien Ltd.

Archer Daniels Midland

Bunge Limited

The Andersons, Inc.

The Mosaic Company

NTM EBITDA MARGIN

20%

5%

4%

4%

22%

0% 5% 10% 15% 20% 25% 30%

Nutrien Ltd.


Bunge Limited

The Andersons, Inc.

The Mosaic Company

LTM EBITDA MARGIN

3%

2%

0%

0%

1%

-1% 0% 1% 2% 3% 4%

Nutrien Ltd.


Bunge Limited

The Andersons, Inc.

The Mosaic Company

NTM REVENUE GROWTH

0%

4%

-1%

26%

23%

-5% 0% 5% 10% 15% 20% 25% 30%

Nutrien Ltd.


Bunge Limited

The Andersons, Inc.

The Mosaic Company

LTM REVENUE GROWTH*

Source: Capital IQ Note 1: Nutrien Ltd. LTM Revenue Growth removed for presentation as growth incorporates recent M&A with Potash Corp. and Agrium merging into Nutrien.Note 2: The Andersons, Inc. NTM Revenue Growth has been removed for presentation purposes as forecasted growth incorporates addition of recently completed merger and acquisition deals. Figures above are based on median peer group metrics.

INDUSTRY & INFRASTRUCTUREPUBLIC COMPANY PERFORMANCE

Avg: 1.1%

Forecasted Improvements in Revenue Growth and EBITDA Margin for Public CompaniesThe median last twelve month (LTM) revenue growth for the highlighted companies was 13.3% (1.1% – Q1 2019) and isforecast to show improvements with expected next twelve month (NTM) revenue growth of 1.1% (3.3% – Q1 2019).

The median NTM EBITDA margin for these companies is expected to reach 11.3% (10.5% – Q1 2019), while the expectedenterprise value (EV) over EBITDA multiples are forecast to decrease to 8.8x (8.4x – Q1 2019) over the NTM.

Note: AGT Food and Ingredients is now a private company, and had been included in this section in previous quarterlyupdates when the company was public.

NTM REVENUE GROWTH2

LTM EBITDA MARGIN NTM EBITDA MARGIN

LTM REVENUE GROWTH1

Avg: 11.0% Avg: 11.3%

N/A – see note.

Avg: 13.3%

N/A – see note.

10.8x

10.1x

9.3x

14.1x

6.9x

0.0x 5.0x 10.0x 15.0x 20.0x 25.0x

Nutrien Ltd.


Bunge Limited

The Andersons, Inc.

The Mosaic Company

LTM EV/EBITDA

8.6x

8.9x

9.9x

9.5x

6.8x

0.0x 5.0x 10.0x 15.0x 20.0x 25.0x

Nutrien Ltd.


Bunge Limited

The Andersons, Inc.

The Mosaic Company

NTM EV/EBITDA

Source: Capital IQ

INDUSTRY & INFRASTRUCTUREPUBLIC COMPANY PERFORMANCE

Avg: 10.2x Avg: 8.8x

Trading Multiples & Operating Statistics

LTM EV/EBITDA NTM EV/EBITDA

(Figures In $CAD Millions, except percentages and ratios)

CompanyMarket

CapitalizationEnterprise

Value RevenueRevenue

Growth EBITDAEBITDA Margin

Nutrien Ltd. $41,651 $55,542 $25,173 190.2% $5,143 20.4%Archer-Daniels-Midland Company $29,896 $42,754 $85,699 4.5% $4,329 5.1%Bunge Limited $10,309 $20,041 $60,199 -0.6% $2,191 3.6%The Andersons, Inc. $1,150 $3,226 $5,863 26.4% $234 4.0%The Mosaic Company $12,631 $18,924 $12,769 23.0% $2,803 22.0%Median $12,631 $20,041 $25,173 23.0% $2,803 5.1%Mean $19,127 $28,097 $37,940 48.7% $2,940 11.0%

LTM Operating Figures

(Figures In $CAD Millions, except percentages and ratios)

CompanyRevenue

GrowthEBITDA Margin

NTM EV/EBITDA

LTM EV/EBITDA

LTM EV/REV

Nutrien Ltd. 2.9% 23.9% 8.6x 10.8x 2.2xArcher-Daniels-Midland (ADM) Company 1.9% 5.5% 8.9x 10.1x .5xBunge Limited -0.5% 3.4% 9.9x 9.3x .3xThe Andersons, Inc. 105.1% 2.8% 9.5x 14.1x .6xThe Mosaic Company 1.1% 20.9% 6.8x 6.9x 1.5xMedian 1.9% 5.5% 8.9x 10.1x .6xMean 22.1% 11.3% 8.8x 10.2x 1.0x

NTM Consensus Estimates Valuation

INPUTS & COMMODITY MARKETSPRICE CHANGES

Chart Source : Farm product prices, crops and livestock – Stats Canada.

Commodity Price Changes and Farm Input Price Index Costs

While overall average commodity prices have seenstability in recent years, a closer look at specificcommodities indicate drastic fluctuations – notablylentils and canola which have faced price pressureresulting from global oversupply and trade wars. TheStatistics Canada Farm Input Price Index (FIPI)estimates the change in price that farmers pay forinputs into their farming operation through time. TheFIPI indicates input costs to farmers have increased6.6% since the second quarter of 2017.

Largest Price Changes – May 2019

BarleyFlaxseed LentilsDry peasDurumSoybeansCanola

+9.3%+8.8%+1.5%-1.9% -5.1%-8.5%

-12.6%

Long-termΔ Since May 2017

Short-termΔ Since May 2018

+34.7%+7.2%

-29.5%-22.1%+8.9%

-12.4%-11.5%

104

106

108

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116

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May-17 Nov-17 May-18 Nov-18 May-19

Farm

Inpu

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CAD$

/met

ric to

nne

CROP COMMODITY PRICES2

Wheat - excl. durum Durum Barley Soybeans Grain corn Flaxseed Canola Lentils Dry peas Farm input price index

CROP COMMODITY PRICES

INPUTS & COMMODITY MARKETSMARKET PRESSURE, FUTURES AND EXPORTS

Source 1: https://www.canada.ca/en/global-affairs/news/2019/06/canada-backs-canadian-canola-farmers-and-exporters-with-150-million-in-insurance-supportSource 2: https://www.canada.ca/en/agriculture-agri-food/news/2019/05/government-of-canada-taking-action-for-canadas-canola-sector.htmlSource 3: Bloomberg – Ag Futures as of 10:30AM EST June 25, 2019.Source 4: http://www.agr.gc.ca/eng/industry-markets-and-trade/canadian-agri-food-sector-intelligence/crops/reports-and-statistics-data-for-canadian-principal-field-crops/canada-outlook-for-principal-field-crops-2019-06-14/?id=1560961994506

Canola Market Update

China’s restrictions on importation of Canadian canola has generated significant pressure on Canada’s primaryproducers. As a part of Canada’s response plan, Export Development Canada announced an additional $150 million incommercial insurance support to Canadian canola exporters. This support is intended to help canola exportersmitigate risks associated with pursuing market diversification opportunities as they explore new markets.1

Canada has also announced amendments to the Agricultural Marketing Programs Regulations to temporarily increaseloan limits under the Advance Payments Program, allowing advances of up to $1 million on all commodities, morethan doubling the previous limit of $400,000.2

Canada’s Principal Field Crops Exports4 (kilotonnes)

Total Grains and Oilseeds Total Pulses and Special Crops

2017 – 2018 2018 – 2019(f)

45,408

Updated forecast as of June 14, 2019. Forecast in Q1 update was as at April 16, 2019.

45,850(Up from forecast in Q1

update of 45,730)

FuturesFall 2019 Contracts3

Futures Summer 2019 Contracts*

FUTU

RES

CON

TRAC

TS

Note*: As included in MNPCF Quarterly Update –Agriculture – Q1 2019. These quotes on futures havebeen included for comparison purposes only.Note: Cattle costs are USD per hundredweight.

2019 – 2020(f)

44,7102017 – 2018 2018 – 2019(f)

5,365 5,611(Up from forecast in Q1

update of 5,491)

2019 – 2020(f)

5,510

Canola (July)Wheat (July)Soybean (July)Corn (July)Oats (July)Live Cattle (June)

457.20 CAD/MT448.25 USD/bu.894.25 USD/bu.367.25 USD/bu.278.25 USD/bu. 122.68 USD/lb.

Canola (November)Wheat (September)Soybean (November)Corn (December)Oats (December)Live Cattle (August)

462.90 CAD/MT547.50 USD/bu.935.25 USD/bu.462.75 USD/bu.276.75 USD/bu. 102.93 USD/lb.

PRIMARY PRODUCERSLAND VALUE TRENDS

Farm Cash Receipts (Canada)

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500

1,000

1,500

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3,000

3,500

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2%

4%

6%

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10%

12%

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16%

1984 1989 1994 1999 2004 2009 2014 2019

Valu

e ($/

acre

)

Prim

e Int

eres

t Rat

e (%

)

FARM VALUES VS. FARM CASH RECEIPTS & INTEREST RATES

Average prime interest rate Value per acre of farm land and buildings (Canada)

Note: Information for value per acre of farm land and buildings (above) has been updated to July 1, 2017. 2018 values expected for 2019 Q2 update.Source 1: https://www.ratehub.ca/prime-mortgage-rate-historySource 2: Stats Canada: Table 002-0003: Value per acre of farm land and buildings, at July 1.Source 3: https://www.fcc-fac.ca/en/ag-knowledge/ag-economics/top-economic-trends-of-2019-plateauing-net-farm-income.htmlSource 4: https://www.fcc-fac.ca/fcc/about-fcc/reports/2018-farmland-values-report-e.pdf

Key external drivers affecting agricultural industry performance in Canada include: commodity prices, interest rates,consumer preferences, growing season conditions and result and farm land values.

Recent interest rate hikes have widespread impacts within the farming sector due to levels of debt financing. Increases ininterest rates result in larger interest payments on outstanding debt, which may impact farmland valuations. Continuedindustry consolidation and scarcity of available land may counteract any decreases in valuation resulting from increasinginterest rates.

Farm Credit Canada (FCC) Chief Agricultural Economist J.P. Gervais predicts potential plateauing of net income forproducers which could result in a slowdown in the growth of farmland values3. Purchasers are looking more closely atmargins and income.

The 2018 FCC Farmland Values Report, published April 29, 2019 indicates slowing growth in value, with a 6.6% increasefor farm land in Canada (8.4% - 2017), 7.4% in Saskatchewan (10.2% - 2017), 7.4% in Alberta (7.3% - 2017), and 3.7% inManitoba (5.0% - 2017).4

Since 2000, interest rates have decreased 4%,

while farm values per acre increased 240%*.

*Using Bank of Canada prime interest rate and information in graph above.

Farm Values Continue to Rise

1

2

-

500

1,000

1,500

2,000

2,500

3,000

0%

5%

10%

15%

20%

25%

1980 1985 1990 1995 2000 2005 2010 2015

Value ($/acre)Prime Interest Rate (%)

INTEREST RATES AND FARM VALUES

Average prime interest rate Value per acre of farm land and buildings (Canada)

-

10

20

30

40

50

60

70

Farm

Cash

Rece

ipts

Billio

ns

14

16

18

20

1,000

3,000

5,000

7,000

9,000

Q22014

Q42014

Q22015

Q42015

Q22016

Q42016

Q22017

Q42017

Q22018

Q42018

Q2f2019

RESULTS BY QUARTER

AGRICULTURAL EQUIPMENT MANUFACTURERS & DEALERSHIPS

Farm cash receipts display a defined pattern of drastic annual fluctuations as cash receipts are a lagging indicator ofagriculture equipment sales. Farm cash receipts have been relatively steady this past year, with the first quarter of2019 being just above 2018 levels. Q1 2019 was below Q1 2018 for both Cervus and Rocky Mountain Equipment.Cervus has declined by 6%, while Rocky Mountain Equipment had a more drastic decline of 19%.

Farm Cash Receipts and Agricultural Implement Sales

Source 1: Capital IQNote: John Deere has a fiscal year-end of October. John Deere quarterly results based on calendar months were used for presentation purposes to align results with other companies.

Data Table – Farm Cash Receipts and Ag Implement Sales

0

2

4

6

8

10

12

-

100

200

300

400

Q22014

Q42014

Q22015

Q42015

Q22016

Q42016

Q22017

Q42017

Q22018

Q42018

Q2f2019

Farm

Cas

h Re

ceip

ts

($ b

illio

ns)

Reve

nue

($ m

illio

ns)

Rocky Mountain Equipment (RME) Cervus Equipment - Agricultural Equipment (CE)

John Deere - Ag and Turf (DE) CNH Industrial (New Holland and Case IH) - Ag Equipment (CNHI)

Farm Cash Receipts (AB, SK, MB)

Farm Cash Receipts and Ag Implement Sales 2014 2014 2014 2015 2015 2015 2015 2016(Figures in $CAD Millions) Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1Rocky Mountain Equipment (RME) 242 231 294 220 213 256 286 189 Cervus Equipment - Agricultural Equipment (CE) 164 201 164 140 185 233 154 131 John Deere - Ag and Turf (DE) 7,608 6,986 5,196 6,997 6,933 6,100 5,077 7,215 CNH Industrial (New Holland and Case IH) - Ag Equipment (CNHI) 4,731 4,091 3,941 3,263 3,787 3,257 4,138 2,754 Farm Cash Receipts (FCR) 7,218 7,594 8,459 9,609 7,176 8,242 8,866 10,440

2016 2016 2016 2017 2017 2017 2017 2018 2018 2018 2018 2019 2019Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2f

233 223 286 210 237 239 273 220 303 233 295 178 269 188 240 179 146 235 271 182 159 277 286 205 155 N/A

6,141 5,950 4,726 7,937 6,657 7,009 5,240 9,084 8,236 7,360 6,218 9,814 N/A3,645 3,096 3,800 3,126 3,760 3,314 4,063 3,326 4,356 3,408 4,305 3,328 N/A6,832 7,655 8,744 10,515 7,738 8,134 8,371 9,678 7,889 7,790 8,773 9,993 N/A

-80

-30

20

70

120

170

Jul-2014 Jan-2015 Jul-2015 Jan-2016 Jul-2016 Jan-2017 Jul-2017 Jan-2018 Jul-2018 Jan-2019 Jul-2019

Chan

ge (%

)

SHARE PRICE & S&P/TSX INDEX CHANGES1

S&P/TSX Composite Index (^GSPTSE) - Index Value

Rocky Mountain Dealerships Inc. (TSX:RME) - Share Pricing

Cervus Equipment Corporation (TSX:CERV) - Share Pricing

CNH Industrial N.V. (NYSE:CNHI) - Share Pricing

Deere & Company (NYSE:DE) - Share Pricing

AGRICULTURAL EQUIPMENT MANUFACTURERS & DEALERSHIPS

Source 1: Capital IQSource 2: Deere & Company – News Release and Financials For the period from February 16, 2019 to May 17, 2019

Share Price Changes

Share price fluctuations have been increasingly volatile since 2017 with John Deere experiencing the largest fluctuationsin share price increasing over 123% since the third quarter of 2014. Cervus and Rocky Mountain share prices have movedgenerally in lockstep with one another, with Rocky Mountain slightly outperforming Cervus.

“Worldwide net sales and revenues increased 6%, to $11.342 billion, for the secondquarter of 2019 and rose 10%, to $19.326 billion, for six months. Net sales of theequipment operations were $10.273 billion for the quarter and $17.214 billion forsix months, compared with $9.747 billion and $15.721 billion last year.”2

Deere & Company(NYSE:DE)

Notable Quote

SHARE PRICE AND S&P/TSX INDEX CHANGES1

On 2019 second quarter earnings:

RECENT TRANSACTION HIGHLIGHTS

Source: Capital IQAll figures are in CAD unless otherwise indicated.

• Bonnefield is Canada’sforemost provider of land-leasefinancing for farmers,dedicated to preserving“farmland for farming” acrossCanada. Bonnefield and itsfarmland funds are 100%Canadian owned andcontrolled.

ClosedOctober 30, 2018

Industry Farming

• Founded in 1948, Redhead is alarge and comprehensive multi-line heavy equipment dealer inSaskatchewan.

• Norsask is a full-service Case IHfarm equipment dealershiplocated near North Battleford,Saskatchewan.

AnnouncedDecember 6, 2018

IndustryAgricultural and Farm Machinery

acquired

acquired land from

• Charoen Pokphand Foods Public Company Limitedagreed to acquire a 50.1% stake in HyLife Ltd. fromITOCHU Corporation.

• Charoen Pokphand Foods Public Company Limitedengages in the agro-industrial and integrated foodbusinesses in Thailand and internationally. It operatesthrough Livestock Business and Aquaculture Businesssegments. The company produces and sells swine,chicken, cattle, duck, shrimp and fish feeds.

• HyLife Ltd. produces and distributes pork products forcustomers worldwide. The company produces pigs andoffers breeding gilts through dealerships in Canada, theUnited States and China.

Announced April 22, 2019

Industry Food Products (Primary)

acquired

• Dawn Food Products, Inc. acquired Mix Facility and sweet goods business in Canada from Ardent Mills, LLC.

• Dawn Food Products, Inc. produces and distributes bakery products and is headquartered in Michigan with an additional office in the United Kingdom.

• Ardent Mills, LLC produces and supplies flours, mixes, blends and specialty products for bakeries and food manufacturing customers. It operates in the United States, Canada and Puerto Rico.

Closed June 21, 2019

Industry Packaged Foods

acquired

Exclusive financial advisor to Norsask Farm Equipment Ltd. in structuring and negotiating

this transaction.

Exclusive financial advisor to the Confidential Seller in

structuring and negotiating this transaction.

MNPCF – LEADERSHIP TEAM

DUE DILIGENCE LEADERSHIP

TRANSACTION LEADERSHIP

Aleem BandaliManaging Director

[email protected]

Dale AntonsenManaging Director

[email protected]

John CaggianielloManaging Director

[email protected] 416.513.4177

Brett FranklinPresident

[email protected]

Mike ReynoldsManaging Director

[email protected]

Johnny EarlManaging Director

[email protected] 604.637.1514

Dan PorterManaging Director

[email protected]

Stephen ShawManaging Director

[email protected]

Kevin TremblayManaging Director

[email protected]

Mark RegehrManaging Director

[email protected]

Craig MaloneyManaging Director

[email protected]

Patrick KhouzamManaging Director

[email protected]

Jason BurgessManaging Director

[email protected]

Erik St-HilaireManaging Director

[email protected]

MNPCF – RECENTLY CLOSED DEALS

NATIONAL

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