campari - equita sim · july. in germany, aperol is recovering mkt share and starting to benefit...

IMPORTANT DISCLOSURES APPEAR AT THE BACK OF THIS REPORT� 1

Campari ITALY / Beverage

Upgrade

BUY (Prev. HOLD) Target: € 7.2 (Prev. € 6.1) Risk: Low

STOCK DATA

Price € 6.1

Bloomberg code CPR IM

Market Cap. (€ mn) 3,554

Free Float 49%

Shares Out. (mn) 580.8

52-w eek range 5.34 - 6.55

Daily Volumes (mn) 1.22

PERFORMANCE 1M 3M 12M

Absolute 9.4% -1.4% 7.1%

Rel. to FTSE all shares 0.9% -1.7% 3.5%

MAIN METRICS 2012 2013E 2014E

Revenues 1,341 1,574 1,657

EBITDA 320 350 406

Net income 157 165 209

Adj. EPS - € cents 28.9 28.9 36.0

DPS ord - € cents 7.0 7.0 7.0

MULTIPLES 2012 2013E 2014E

P/E adj 21.2 x 21.2 x 17.0 x

EV/EBITDA 12.6 x 12.7 x 10.7 x

REMUNERATION 2012 2013E 2014E

Div . Yield ord 1.1% 1.1% 1.1%

FCF y ield 3.9% 2.9% 5.7%

INDEBTEDNESS 2012 2013E 2014E

NFP -870 -863 -702

Debt/EBITDA 2.7 x 2.5 x 1.7 x

Interests cov 6.2 x 6.4 x 8.6 x

PRICE ORD LAST 365 DAYS

ANALYSTS Paola Carboni - +39 02620 4287 – [email protected] August 9, 2013 # 274

SALES NORMALIZING, IMPROVING OPERATING LEVERAGE

After several downward revisions in estimates, consensus

expectations have reached a floor in our view, as confirmed by the

signs of stabilization surfaced in Italy and Germany. With a normalized

top line growth CPR will benefit from recent investments on production

and distribution (greater operating leverage). Together with efficiency

gains and synergies with LDM, we estimate an EPS CAGR 2014-15 of

+20% vs. +6% historical average. We therefore believe the stock now

deserves a higher multiple (16.5x 2015 P/E vs. 15x historical).

� 2Q13 above expectations thanks to costs control

- revenues: € 384 mn (+13% YoY) vs € 377 mn exp.

- EBIT pre one-offs: € 78 mn (-7% YoY) vs. € 76 mn exp. (-9% YoY), driven

by costs control (organic SG&A -2% YoY in 2Q vs. +6.5% in 1Q).

- Pre-tax profit € 53 mn (-25% YoY) vs € 60 mn exp. due to one-off costs

from new reorganization projects.

- Net debt: € 944 mn vs € 970 exp thanks to working capital.

Organic revenue +1.4% vs. our +3.4%, offset by external growth (LDM

and new agency brands) and forex. The lower organic growth came from

Brazil and Australia, whilst the two recently most critical markets, Italy

and Germany, showed a tangible improvement in 2Q vs. 1Q (end of the

destocking in Italy and recovery of Germany, helped by easier comps).

� Signs of stabilization in the two most critical markets

Management has appeared confident on an improvement in 2H, thanks to

Germany and Italy (35% of revenues). In Italy, final consumptions are down

-4/5% (vs. 2Q sales -7% YoY) and aperitifs showed a strong rebound in

July. In Germany, Aperol is recovering mkt share and starting to benefit

from the stronger marketing support started in June.

� Highly visible synergies with LDM

Integration of LDM is even slightly ahead of plans, thanks to the buy-

back of distribution rights for the US market in February and to the already

started re-pricing initiatives. Our FY estimates are in the high end of

management just reaffirmed guidance of USD 31-33 mn EBITDA.

� Improving outlook on costs for 2014-15

The company has given a more cautious outlook on the 2013 gross margin

(-50/70 bps from destocking, to be partly recovered in 2014) but with

stronger benefits now expected from the reorganization projects just

started (+20 bps in 2013 and further +30 bps in 2014). We have cut 2013

estimates (-4% for adj. net profit), but raised 2014-15 (+2%).

Our exp. EPS is 3% above consensus for 2014 and 6% above for 2015.

� The next page of the story: operating leverage

Following investments in route to market in 2010-12 and recent

investments in new bottling plants, now the group controls almost entirely

both production and distribution. We therefore believe that, with a

normalized top line growth (+5% CAGR 2014-15, in line with group’s

historical average), CPR will be able to generate stronger operating

leverage than in the past. Together with efficiency gains and synergies with

LDM, we estimate an EPS CAGR 2014-15 of +20% vs. +6% historical

average in 2003-12. We thus believe CPR can deserve a higher P/E in this

phase compared to the past (average 15x). Our target of € 7.2 implies a

2015 cash P/E of 16.5x (or 17x discounted to present vs. prev. 15x). This

compares with current 2015 P/E of 14x and 15.3x for Pernod/Diageo.

Campar i – August 9 , 2013


BUSINESS DESCRIPTION

Campari is the most important spirits producer in Italy and the

6th largest in the world with more than 40 brands divided into

three segments: spirits, wines and soft drinks.

Production is managed mainly on a local basis, and

concentrated in thirteen plants.

Distribution is directly controlled in Italy, Austria, Germany,

Switzerland, Belgium, US, Argentina, Brazil, Russia, Mexico,

China, Australia and Jamaica (accounting for over 90% of

revenues).

Group’s strategy relies also on external growth, on which

management has built a good track record over the years

buying, among others, Skyy Vodka, Aperol, Glen Grant, Wild

Turkey, Appleton.

SALES BY PRODUCT CATEGORY - 2012

Spirits77%

Wines15%

Soft Drinks7%

Others1%

SALES BY REGION - 2012

Italy29%

Germany12%

Rest of Europe

9%

Brazil7%

US22%Russia

5%Australia

6%

Rest of the World10%

MAIN FIGURES € mn 2010 2011 2012 2013E 2014E 2015E

Revenues 1,163 1,274 1,341 1,574 1,657 1,744

Growth 15% 10% 5% 17% 5% 5%

EBITDA 295 326 320 350 406 440

Growth 13% 10% -2% 9% 16% 8%

Adjusted EBITDA 299 329 337 355 406 440

Growth 13% 10% 3% 5% 14% 8%

EBIT 269 296 287 312 367 400

Growth 14% 10% -3% 8% 18% 9%

Profit before tax 233 251 236 257 320 364

Growth 18% 8% -6% 9% 25% 14%

Net income 156 159 157 165 209 243

Growth 14% 2% -1% 5% 27% 16%

Adj. net income 159 167 168 168 209 243

Growth 9% 6% 0% 0% 25% 16%

MARGIN 2010 2011 2012 2013E 2014E 2015E

Ebitda Margin 25.4% 25.6% 23.9% 22.2% 24.5% 25.2%

Ebitda adj Margin 25.7% 25.8% 25.2% 22.6% 24.5% 25.2%

Ebit margin 23.2% 23.2% 21.4% 19.8% 22.1% 23.0%

Pbt margin 20.0% 19.7% 17.6% 16.3% 19.3% 20.9%

Ni rep margin 13.4% 12.5% 11.7% 10.5% 12.6% 13.9%

Ni adj margin 13.6% 13.1% 12.5% 10.7% 12.6% 13.9%

SHARE DATA 2010 2011 2012 2013E 2014E 2015E

EPS - € cents 26.9 27.4 27.0 28.3 36.0 41.9

Growth 14.0% 1.7% -1.5% 5% 27% 16%

Adj. EPS - € cents 27.3 28.8 28.9 28.9 36.0 41.9

Growth 9.4% 5.6% 0.2% 0% 25% 16%

DPS ord - € cents 6.0 7.0 7.0 7.0 7.0 7.0

BVPS - € cents 2.1 2.3 2.5 2.7 3.0 3.3

VARIOUS - € mn 2010 2011 2012 2013E 2014E 2015E

Capital emloyed 1,875 1,959 2,308 2,425 2,433 2,442

FCF 137 133 139 104 201 234

Capex 60 25 45 63 37 37

Working capital 377 443 563 621 654 688

INDEBTNESS - €mn 2010 2011 2012 2013E 2014E 2015E

NFP -677 -637 -870 -863 -702 -509

D/E 0.57 x 0.48 x 0.60 x 0.55 x 0.41 x 0.26 x

Debt/EBITDA 2.3 x 2.0 x 2.7 x 2.5 x 1.7 x 1.2 x

Interests cov 7.9 x 7.2 x 6.2 x 6.4 x 8.6 x 12.2 x

MARKET RATIOS 2010 2011 2012 2013E 2014E 2015E

P/E ord 17.8 x 22.3 x 22.7 x 21.6 x 17.0 x 14.6 x

P/E ord Adj 17.5 x 21.2 x 21.2 x 21.2 x 17.0 x 14.6 x

PBV 2.3 x 2.7 x 2.5 x 2.3 x 2.1 x 1.8 x

P/CF 15.3 x 18.8 x 18.8 x 17.5 x 14.3 x 12.6 x

EV FIGURES 2010 2011 2012 2013E 2014E 2015E

EV/Sales 3.0 x 2.9 x 3.2 x 2.9 x 2.6 x 2.4 x

EV/EBITDA 11.8 x 11.2 x 12.6 x 12.7 x 10.7 x 9.5 x

EV/EBIT 13.1 x 12.5 x 14.8 x 14.5 x 11.8 x 10.4 x

EV/CE 1.9 x 1.9 x 1.8 x 1.9 x 1.8 x 1.7 x

REMUNERATION 2010 2011 2012 2013E 2014E 2015E

Div. Yield ord 1.3% 1.1% 1.1% 1.1% 1.1% 1.1%

FCF yield 4.9% 3.8% 3.9% 2.9% 5.7% 6.6%

ROE 13.0% 12.0% 10.9% 10.5% 12.1% 12.6%

ROCE 10.1% 10.1% 8.8% 8.5% 9.9% 11.0%

Source: Equitasim estimates and company data



2Q13 SLIGHTLY ABOVE EXPECTATIONS THANKS TO COSTS CONTROL

- revenues: € 384 mn (+13% YoY) vs. € 377 mn exp. (+11% YoY)

- EBIT pre one-offs: € 77.8 mn (-7% YoY) vs. € 75.9 mn exp. (-9% YoY)

- Pre-tax profit € 53 mn (-24.8% YoY) vs. € 60 mn exp. (-14% YoY).

- 1H net profit € 57.6 mn vs. € 63.3 mn, with a slightly higher tax rate

- Net debt: € 944 mn vs € 970 exp thanks to working capital

Organic growth in revenues was +1.4% (in line with consensus) vs. our

+3.4%, offset by a slightly higher contribution from external growth (driven by LDM

and by new agency brands) and by a lower impact from forex.

A recovery in organic growth was expected compared to 1Q (-9% YoY), which

had been affected by € 25 mn destocking in Italy (linked to the introduction of the

Art. 62 and the consequent reduction of the up-load program the company used to

apply ahead of the strongest summer season) and by a still tough comparison in

Germany.

Actually, both markets showed a tangible improvement in 2Q, with:

- Italy -7% YoY vs. -26% YoY in 1Q, thanks to the end of the destocking effect

already mentioned. Still, this performance was affected in 2Q by the very poor

weather which discouraged shipments; actual sell-out data (source: Nielsen)

remained in line with 1Q, running at a slightly better -5% YoY.

- Germany +6% YoY vs. -20% YoY in 1Q (even better than our -2% YoY exp.),

against a much easier comparison base (the commercial dispute on Aperol

started at the end of 1Q) but also driven by a recovery of Campari and

Cinzano.

On the other side, we have seen on-going strong revenue trend in Argentina (up

double digit, mainly driven by Old Smuggler and Campari) and in the US (still

driven by the double digit growth of Wild Turkey and Campari, as well as the

positive trend of Skyy , +3% YoY).

The gap vs. our estimate came instead from the worse than expected

performance of:

- Brazil (-12% YoY) as a result of the on-going soft performance of local

whiskey brands (40% of revenues), affected by the decline in consumptions of

middle-class consumers and by a shift of more affluent people to more

premium import whiskeys

- Australia, which basically confirmed the 1Q performance with -9% YoY

decline in spite of a much easier comparison. The Bourbon category is

suffering from heightened competitive pressure on core bourbon and RTD.

ORGANIC CONSTANT CURRENCY GROWTH BY GEOGRAPHICAL MARKET

% of 1H2013 rev. 1Q12 1Q13 2Q12 2Q13 1H12 1H13 2H12 2H13E FY12 FY13E

Italy 25.7% 0% -26% 2% -7% 1% -16% -8% 8% -3% -5%

Germany 9.5% 2% -20% -17% 6% -10% -6% -9% 6% -9% 1%

RoE 11.2% -4% 1% 10% 9% 4% 5% 25% 3% 16% 4%

US 21.2% 5% 8% 20% 9% 13% 8% 5% 8% 9% 8%

Brazil 4.8% -32% 22% -4% -12% -14% -2% -3% -4% -8% -3%

Australia 4.1% 42% -11% 1% -9% 19% -10% 13% 2% 15% -3%

RoW* 23.5% 26% 7% 7% 13% 15% 10% 10% 17% 12% 14%

Total 100% 3% -9% 4% 1% 3% -3% 2% 7% 3% 2% Source: Equitasim estimates and company data. *Includes Jamaica

The slightly better than expected performance of EBIT was the result of a

healthier management of SG&A costs, which were down -2% YoY in 2Q on an

organic basis compared to the +6.5% reported in 1Q.

This more than offset a slightly worse than expected gross margin (still affected by

the negative product and regional mix linked to the softness of Aperitifs and of the

Italian market in 2Q) and a higher than expected A&/P budget (due to a different

phasing vs. 2Q12). Overall, organic Ebit margin excluding one-offs was diluted by

-400 bps in 2Q (improving vs. -540 bps dilution of 1Q).



Net profit was affected by € 9 mn one-offs for a few reorganization projects

just started aiming at improving overall group’s efficiency, particularly at

SG&A level (50 bps cumulated benefit expected by 2014 in terms of Ebit margin).

Tax rate was also slightly higher (37% in 1H13 vs. 36% in 1H12, which was also

our estimate).

CAMPARI OPERATING PEFORMANCE (€ mn)

1Q12 1Q13 2Q12 2Q13 Exp. 2Q13 Act. 1H12 1H13

Sales 279 100% 315 100% 339 100% 377 100% 384 100% 618 100% 699 100%

Change 4% 13% 6% 11% 13% 5% 13%

Gross margin 162 57.9% 160 50.9% 201 59.4% 213 56.6% 213 55.5% 363.2 58.7% 373.4 53.5%

Advertising (45) -16.0% (45) -14.4% (59) -17.3% (67) -17.7% (70) -18.3% (103) -16.7% (115) -16.5%

G&A (53) -19.0% (68) -21.4% (59) -17.5% (71) -18.7% (65) -17.0% (113) -18.2% (133) -19.0%

Ebit pre one-offs 64 22.8% 48 15.1% 84 24.7% 76 20.2% 78 20.3% 147.4 23.8% 125.4 18.0%

Change 4% -25% 8% -9% -7% 6.0% -14.9% Source: Equita SIM estimates and Company data

Net debt came out better than expected, with FCF in line with 1H12 in spite of

the lower profits. This was thanks to a good management of working capital, which

decreased its incidence on L12M revenues by almost 200 bps compared to June

2012 on an organic basis (i.e. excluding the impact from the consolidation of LDM

in terms of both sales and working capital) notwithstanding the temporary pick-up

in inventory for the creation of a safety stock in connection with the start-up of new

bottling plants in the US and Scotland.

SIGNS OF STABILIZATION FROM THE TWO MOST CRITICAL REGIONS

Italy and Germany (overall accounting for 35% of 2013 expected revenues)

were the main drivers of the negative 2012 and 1Q13 performance; in particular

- Italy was affected by trade destocking and an underlying negative trend in final

demand (-5.5% for the spirit market, even worse than the -1/2% of the past

2008-09 downturn)

- Germany was affected by a commercial dispute triggered by the repricing of

Aperol at the beginning of last year (which also affected the rest of the

portfolio), and by a more general market share loss of Aperol.

The 2Q has confirmed the expected recovery but a further support came from

management’s comments during the conference call: both Italy and Germany are

showing signs of stabilization, which make the company more confident on

an improvement in the 2H.

In particular:

- In Italy, not only a catch-up of shipments (-7% YoY in 2Q) with final

consumptions (-5% YoY) has to be expected in the next few months, but also

the underlying consumptions trend is showing some recovery signs,

particularly in July and beginning of August. Aperitifs, in particular,

which are also the main driver of the margin mix, have started to show

positive growth in final demand in the last few weeks, underpinned also by

the hot weather. Management is in fact now allowing for a gradual

improvement of final consumptions on a FY basis (possibly down -4% vs.

current -5%).

On top of this, based on the July and August trends, management is confident

to recover on a FY basis most of the € 25 mn 1Q destocking; most of the

rebound should be seen in 3Q, the period of strongest seasonality in the final

demand for Aperitifs, and also the quarter offering the easier comparison in

2012, with flattish organic revenues (it was actually in 3Q2012 that Italy turned

negative).



- In Germany, Aperol is starting to regain market share on the cheaper me-toos

(whose repurchase rate is very low), which had eroded as much as 40% of this

brand’s revenues in the most important off-trade channel. Planned marketing

activities started in June (ahead of the seasonally stronger summer period),

with immediate benefits for the brand which achieved double digit growth

in final consumptions according to Nielsen data. And also the Hugo

Cocktail, which was recently competing with Aperol in the less important on-

trade channel, is losing steem, as initially foreseen by management.

Management appears confident on a further improvement in the 3Q, with a

stronger focus on marketing support.

We have perceived some more prudence on Brazil and Australia (which are

expected to show a negative performance also on FY basis, in spite of some

improvement envisaged in Australia in 2H), but these two markets account for less

than 10% of 2013E revenues.

Therefore, overall, the encouraging messages on Italy and Germany prevail, with

an overall improving outlook which we expect to translate into a positive

newsflow already as from 3Q, after 3-4 quarters of disappointment.

HIGHLY VISIBLE SYNERGIES WITH LDM

Integration of LDM seems to proceed even slightly ahead of plans.

Management has slightly improved its indications in terms of profitability:

the dilution now envisaged in terms of gross margin for 2013 (the first year of

consolidation) is of -170 bps vs. prev. 200 bps dilution indicated in March; this,

coupled with +50/60 bps accreation on A&P (LDM has a lower incidence of the

marketing budget due to its exposure to the ancillary sugar and merchandise

business) and with the -30 bps impact on SG&A, would lead to a total dilutive

impact of -150 bps for the FY13.

This guidance seems to leave even some upside room in the light of the -150

bps dilutive impact shown in 1H13, which should be the lowest seasonality period

for LDM in terms of revenue mix (greater importance of sugar activities in 1H vs.

spirits sales more concentrated in 2H). Actually, 2Q alone, showed a more modest

dilutive impact of only 60 bps (see the table below).

Our FY estimates are in the high end of management just reaffirmed guidance of

USD 31-33 mn EBITDA (which include the first 5/6 mn USD synergies out of a

total 15 mn USD planned).

CAMPARI GROUP: EXISITING BUSINESS VS. LDM CONTRIBUTION (€ mn)

1Q12 1Q13 2Q12 2Q13 1H12 1H13

Exist. LDM Total Exist. LDM Total Exist. LDM Total

Sales 279 250 65 315 339 337 47 384 618 587 112 699

EBIT pre one-offs 64 44 4 48 84 70 7 78 147 114 11 125

Ebit margin 22.8% 17.6% 5.5% 15.1% 24.7% 20.9% 15.8% 20.3% 23.8% 19.5% 9.7% 18.0% Source: Equita SIM estimates and Company data

We believe the encouraging trend in LDM profitability is the result of a faster

than expected integration of distribution, mainly thanks to the buy-back of

distribution rights for the US market last February, and of the fast

implementation of the planned re-pricing activity, particularly on the Appleton

Estate range (about 20% of total LDM spirits revenues). The product is in fact

already well conceived in terms of packaging and formulas, and it is therefore

quite easy to reposition it with just a more effective advertising support and

commercial presence: in particular in the US market, where Campari has the

strongest distribution footprint among LDM international markets, management

envisage a significant upside potential in prices.



LDM PRODUCT RANGE AND SALES BREAK-DOWN BY BRAND

Source: Company’s presentation. LDM sales breakdown as of Sept. 2011 Year End.

IMPROVING OUTLOOK ON COSTS FOR 2014-15

Also in terms of margins, management indications during the conference call were

mixed but with a prevailing positive message.

On a one side, the company updated its guidance on the gross margin

impact of the destocking in Italy: considering that the € 25 mn lost revenues of

1Q will not be fully recovered – just the biggest portion – and that the recovery will

happen as from 3Q instead of as from 2Q as originally planned (this was already

surfaced in the mid May conference call), management is now envisaging a 50/70

bps negative impact on organic gross margin by year end (vs. prev. nil), in the light

of the particularly high profitability usually associated with Aperitifs (Campari,

Crodino, Campari Soda, most affected by destocking) and with the Italian market.

However, part of this negative impact on gross margin (at least half) is expected to

be recovered in 2014, assuming Italy comes back to normal.

On the other side, the company is accelerating a few just started initiatives

for efficiency gains in SG&A (which are the reason why for the € 9 mn one-off

costs posted in 2Q): these initiatives will mainly involve Italy, Jamaica and the

Emea commercial platform, and are expected to produce 20 bps Ebit margin

benefits in 2013, with further 30 bps envisaged in 2014.

The healthy 2Q performance of SG&A costs (-2% YoY organic) was also the first

evidence of this process.

Therefore, the net result of these indications is a – 30 bps impact on the

previously guided organic Ebit margin for 2013, but at least 20 bps

improvement in the outlook for 2014 (50 bps cumulated benefits from efficiency

gains minus the 20/30 bps of the 2013 negative margin mix impact which will not

be recovered next year).

On top of this, the organic Ebit margin performance (i.e., excluding LDM) of

2014 will be underpinned by:

- Recovery of the 50 bps one-off envisaged in 2013 for the start-up phase of the

new bottling plant in the US (duplication of costs, transfer of production etc).

- 50 bps additional margin thanks to the higher costs efficiency stemming from

internalization of bottling in the new plant.



HEATHLY REVENUE GROWTH PROSPECTS AFTER A TRANSITION 2013

After the difficulties of 2012-13, we expect CPR to come back to a normal

growth trend in revenues of about +5%, which is the management’s long term

target and is also consistent with the group’s historical performance (+5% CAGR

in revenues in 2003-12). In particular, this is the trend we are factoring in for 2014-

15, betting also on a normalization of the market context in Italy (+1% YoY exp. In

2014), on Germany coming back to a sustainable moderate growth (+2%)

following the gradual recovery of Aperol, and on the recovery of a low/mid single

digit growth in Brazil and Australia, while confirming the solid growth trend of US.

The table below details our organic growth assumptions by geography (ex-LDM).

ORGANIC CONSTANT CURRENCY GROWTH BY GEOGRAPHICAL MARKET

FY11 FY12 FY13E FY14E

Italy 1% -3% -5% 1%

Germany 23% -9% 1% 2%

RoE 3% 16% 4% 6%

US 3% 9% 8% 7%

Brazil 9% -8% -3% 2%

Australia 53% 15% -3% 3%

RoW 34% 12% 14% 14%

Total 9% 3% 2% 5% Source: Equitasim estimates and company data

Compared to the past, one can argue that the +5% pace might be more

challenging now, in the light of the lower momentum of the Aperol brand which

used to explain as much as 1% of past group’s growth rates.

However in the meantime the group has been able to activate another

promising growth driver with the accelerating momentum of Wild Turkey (the

fastest growing group’s brand of FY12, with +19% organic).

We also believe in the strength of group’s portfolio, which – following the

acquisitions of the last ten years – now covers all the fastest growing categories in

the spirits universe (see the chart below).

GLOBAL PREMIUM* SPIRITS MARKET – VOLUME AND GROWTH RATE (2006-11)

Source: Company’s presentation. * Excluding low price, value and local brands (source: IWSR)

On top of this, the group has been strengthening its production and distribution

platform in the last few years. In particular:

1) Between 2009 and 2011 the group has improved its route to market

adding direct distribution platforms in several new countries (Argentina,



Mexico, Belgium, Ukraine, Australia, Ireland, Russia, on top of group’s

historical markes, i.e. Italy, Germany, US and Brazil), with more than 90% of

revenues distributed by group’s own platforms. This allows the company to

achieve a wider geographical reach, to be more effective in marketing and to

add other group’s brands to the existing local portfolios. We had started to see

this with the strong acceleration in revenues reported by the group in 2010-

2011, a positive trend which was then interrupted by the 2012-13 downturn and

the difficulties in Germany.

2) The LDM business just added provide a further source of future revenue

growth (we expect +7% CAGR), thanks to the dynamic trend of the Rum

category (+3% historical CAGR), integration within group’s distribution

platforms and premiumization/price repositioning.

3) Finally, the recent efforts to improve also control of production allow the group

to be more effective in product innovation and in the time-to-market of new

commercial initiatives. Actually, as from 2011 the group has been investing for

a new own bottling facility in Argentina (for Cinzano), in Scotland (for Glent

Grant) and in the US (for the Skyy and Wild Turkey brands). On top of that, the

company has also announced one month ago the acquisition of its Australian

bottling supplier for the Ready-to-Drink segment. Overall, the group now has

internal production for almost all of its revenues.

CAMPARI GROUP: RECENT INVESTMENTS IN CONTROL OF PRODUCTION

Source: Company’s presentation.

Benefits in terms of internationalisation of portfolio in particular are already

evident: as a way of example,

- Campari posted +21.7% growth in the US in 1H (now its fourth largest market)

and triple digit growth in Argentina, compared to +1.5% YoY growth for the

brand overall

- Aperol in FY12 grew by 45% in its second tier markets (including Switzerland,

Benelux, Australia, UK, USA) compared with -7% of its three core markets

(Italy, Germany and Austria, still account for 90% of revenues)

- Skyy is growing strongly in Brazil, South Africa, Germany, Australia and Italy,

with the US market still accounting for 85% of revenues.

Other opportunities can arise adding new brands in Mexico (potential for Campari,

Wild Turkey), introducing Aperol in Argentina and Russia, starting American

Honey outside of US and Australia (ex: Italy as from 2013).



THE NEXT PAGE OF THE STORY: OPERATING LEVERAGE

We are betting on group’s operating leverage potential as long as revenue

growth comes back to normal.

We haven’t seen yet, in fact, the benefits of group’s efforts on route to market as,

after the enlarging SG&A costs base between 2010 and 1H12 to build up the new

distribution platforms, top line trend slowed down because of the deteriorating

consumptions in Italy/Europe and the specific difficulties of Germany; the

improving profitability of newly controlled markets was therefore offset by

worsening of some historical markets.

In the meantime, as already mentioned, the group has invested on a few bottling

plants between 2011 and 2013.

Overall, we assume that:

- About 90% of the group’s production costs are now fixed. This costs line, in

turn, accounts for about 9% of revenues (i.e. 11% of total operating costs).

- About 80% of the group’s SG&A costs line are now fixed. The SG&A line, in

turn, accounts for 19% of revenues (i.e. 23% of total operating costs)

Therefore, overall the group now has more than 30% fixed costs (vs. slightly above

20% before 2009) which give it a better operating leverage potential. In particular,

with +5% sales growth, we assume a margin improvement of 15/20 bps per

year from production costs and of at least 30/40 bps in terms of SG&A costs.

CAMPARI GROUP OPERATING COSTS STRUCTURE - 1H13

(€ mn) %

Sales 699 100.0%

Cogs, of which -325 -46.6%

raw materials -216 -30.9% Variable

production costs -65 -9.2% 90% fixed

distrib expenses -27 -3.9% variabile

others -18 -2.5% variabile

Gross margin 373 53.4%

A&P -115 -16.5% variable

SG&A, of which -133 -19.0%

Selling expenses -60 -8.6% 80% fixed

G&A -73 -10.4% Mostly Fixed

Ebit pre one-offs 125 18.0% Source: Equitasim estimates and company data (1H13 report).

On top of this, all recent improvements on the production and distribution

front allow the group to consider a wider spectrum of possible acquisitions,

thanks to the higher potential for synergies in a greater number of markets

compared to the past. In our view, the advanced state of integration of LdM

puts the group in the condition of potentially considering another deal even

in the short term. Management remains committed on external growth and this is

also the reason for the on-going suboptimal financial management (€ 387 mn of

cash vs. € 1.3 bn of gross debt as of June 2013, with an excess cash in excess of

about € 250 mn, implying a negative carry of almost € 10 mn on pre-tax profits).

2013 ESTIMATES TRIMMED, SLIGHT UPWARD REVISION OF 2014-15

In the light of 2Q results and of management’s indications during the conference

call, we have trimmed our 2013 expectations (-2% for Ebit pre one-offs and -4%

for adjusted net profit), factoring in:

- a softer top line organic: now +2.1% vs. prev. +3.1%, in the light of the

persisting weakness of Brazil and Australia

- a weaker Ebit margin, to allow for 50 bps of gross margin impact from

destocking in Italy now indicated by management, only partly offset by higher

savings on SG&A (20 bps anticipated in 2013).

- a slightly higher tax rate, in the light of the 1H figure (now we have 35.5%).

CHANGE IN ESTIMATES (%)

2013E 2014E 2015E

Revenues -1% -1% -1%

EBITDA pre one-offs -2% 2% 2%

EBIT reported -5% 2% 2%

Net profit reported -8% 2% 2%

Net profit adjusted -4% 2% 2%

Source: EQUITA SIM estimates



Overall, our model includes:

- a 90 bps dilution of Ebit margin for the organic business, of which 80 bps

are consistent with management indications (-50 bps for one-offs linked to the

start-up phase of the bottling plant in the US, -50 bps in terms of negative mix

from destocking, +20 bps from first efficiency gains on SG&A), and further 10

bps to allow for a possible rise in the incidence of A&P (we are allowing for the

higher support to Aperol in Germany and for the more competitive environment

in Australia).

- Ebit of LDM of 22 mn € (= 29 mn USD), consistently with the 31-33 mn USD

range for Ebitda indicated by management. The implied margin dilution from

LDM of 170 bps is slightly heavier than what management has guided for (-150

bps), but we could have slightly overestimated revenues as we do not know yet

the precise seasonality of the business.

On the other side, we have lifted our expectations for 2014-15 (+2% for both

EBIT and net profit) with:

- Unchanged organic growth in revenues (+5.3%)

- Higher visibility on operating leverage (we assume +40 bps benefit on EBIT

margin, mainly at SG&A level)

- Further savings on SG&A (+30 bps).

Overall, our model thus includes:

- A 210/220 bps Ebit margin improvement for the organic business, of

which 160 bps are consistent with management indications (+50 bps from

recovery of the one-offs linked to the start-up phase of the bottling plant

suffered in 2013, +50 bps in terms of benefits from insourcing of bottling at the

new plant, +30 bps from partial recovery of the negative mix from destocking

suffered in 2013, +30 bps of additional efficiency gains on SG&A) and +50/60

bps are our estimate of margin gains stemming from operating leverage and a

slight positive mix.

- Ebit of LDM of 27 mn € (= 35 mn USD), as a result of further 6 mn USD

synergies, consistently with management plans.

CAMPARI OPERATING PEFORMANCE VS. LDM IMPACT – MANAGEMENT GUIDANCE (bps)

2013 vs. 2012 Drivers 2014 vs. 2013 Drivers

EXISTING BUSINESS

Gross margin -50/70 Mix effect from destocking in IT +30 Recovery of at least half of the negative mix

-50 Start-up of the bottling plant in US (one-off) +50 Recovery of the one-off

+50 Cost efficiency from insourcing of bottling

A&P -

SG&A +20 Efficiency gains from reorganization +30 Efficiency gains from reorganization

LDM

Gross margin -170

5/6 mn USD synergies +30 Further 6 mn USD synergies A&P +50/60

SG&A -30

GROUP TOTAL

Gross margin -270/290 140

A&P +50/60

SG&A -10 50 Source: Equita SIM estimates and Company data

CAMPARI OPERATING PEFORMANCE VS. LDM IMPACT – OUR ASSUMPTIONS

2012 2013E 2014E 2015E

EXISTING BUSINESS

Sales 1,341 1,350 1,417 1,488

EBIT pre one-offs 305 295 340 370

Ebit margin 22.7% 21.8% 24.0% 24.8%

LDM

Sales 225 240 255

EBIT pre one-offs 22 27 31

Ebit margin 9.6% 11.1% 12.0%

GROUP TOTAL

Sales 1,574 1,657 1,744

EBIT pre one-offs 317 367 400

Ebit margin 20.1% 22.1% 23.0% Source: Equita SIM estimates and Company data



Our estimates appear close to consensus for 2013 but significantly above for

2014-15 (in terms of net profit, +3% above for 2013 and 6% above for 2014):

market estimates for the mid-term simply have come down together with 2013

expectations after the announcement of 2Q results.

However, taking management target on synergies from LDM as a commonly

agreed figure at least until 2014, the implied 2014 estimates on the existing

business look conservative on the margin front. In particular, with an implied

organic growth of +4.8% for the existing business (close to our +5.0%),

consensus is implicitly assuming only 100 bps improvement in EBIT margin

in 2014; this means the market is not giving credit to management indications

which envisage a 160 bps improvement, as just mentioned.

OUR ESTIMATES VS CONSENSUS

2013E 2014E

Equita Consensus Equita Consensus

EXISTING BUSINESS

Sales 1,350 1,345 1,417 1,405


Ebit margin 21.8% 21.7% 24.0% 22.7%

LDM

Sales 225 225 240 240


Ebit margin 9.6% 9.6% 11.1% 11.1%

GROUP TOTAL

Sales 1,574 1,569 1,657 1,645


Ebit margin 20.1% 20.0% 22.1% 21.0% Source: Equita SIM estimates and Company data

ACCELERATING EARNINGS MOMENTUM DESERVES HIGHER MULTIPLES

Recent signs of stabilization in Italy and Germany are encouraging us on an

improving top line newsflow going forward.

Having said that, our investment case is based on the fact that, in a normalized

market environment, recent investments in production and distribution can allow

the group to come back to its long term revenue growth path (+5% CAGR 2014-

15) while also generating greater operating leverage.

Together with efficiency gains from recently started reorganization initiatives and

with the synergies with LDM (ahead of plan and highly visible), we estimate an

EPS CAGR 2014-15 of +20% vs. +6% historical average in 2003-12.

We thus believe CPR can deserve a higher P/E in this phase compared to the

past (average 15x). Our target of € 7.2 ps – raised from prev. € 6.1 - in fact

implies a 2015 cash P/E of 17x discounted to present (vs. prev 15x).

CAMPARI GROUP: EXISITING BUSINESS VS. LDM CONTRIBUTION (€ mn)

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Avg

Organic revenue growth 10% 4% 4% 5% 7% 3% -1% 8% 9% 3% 5%

Adj net profit growth -7% 10% 20% 2% 8% 1% 12% 9% 6% 0% 6%

Historical P/E 11.0 14.1 15.0 18.4 15.3 9.9 14.7 17.5 17.9 19.8 15.4 Source: Equita SIM estimates and Company data

We also continue to base our valuation on 2015 as 2013 is clearly a transitional

year and 2014 will not have fully benefited yet from the integration of LDM (the 15

mn USD synergies are planned by 2015).

Furthermore, we continue to look to Campari cash P/E as the company enjoys cash

tax savings related to amortization of deductible goodwill stemming from past

acquisitions (cash tax rate is in fact 26-27% vs. 35% reported). Management, based

on the timing of past acquisitions and therefore on the expiry of fiscal advantages on

their respective goodwill, has indicated that the bulk of the current amount of

deductible amortization will remain almost unchanged for the next 7 years. For this

reason, we correct EPS adding the present value of future tax savings from goodwill.



Last but not least, stock’s multiples would appear even cheaper should we

adjust for the negative carry effect the company is incurring at P&L level in

order to preserve its flexibility for future acquisitions (we estimate this element is

worth € 7 mn net of taxes as of June 2013, i.e. 3% of 2015 exp. net profit).

MULTIPLE COMPARISON

3M perf Price EV/EBITDA Ebitda margin Sales growth P/E EPS

% 2013 2014 2015 2013 2014 2015 2013 2014 2015 2013 2014 2015 14-15 CAGR

DIAGEO 6% 2,110 15.3 14.2 12.9 34% 34% 35% 4% 8% 8% 19.6 17.7 15.8 12%

PERNOD RICARD 0% 92 13.4 12.5 11.5 28% 29% 29% 2% 5% 6% 18.2 16.2 14.6 12%

REMY COINTREAU -9% 81 15.0 13.0 11.8 25% 26% 21% 5% 6% 8% 23.2 19.7 17.5 15%

Average ex. RCO -1% 14.4 13.3 12.2 28% 29% 29% 4% 6% 8% 18.9 17.0 15.2 12%

CAMPARI (mkt price) -3% 6.1 12.7 11.1 10.2 23% 24% 25% 17% 5% 5% 21.2 17.0 14.7 20%

Premium/(discount) vs. Avg. -12% -17% -16% 12% 0% -4%

CAMPARI (our tgt price) 7.2 15.1 14.4 12.6 24.8 24.8 19.9

Premium/(discount) vs. Avg. 5% 8% 3% 31% 46% 31%

CPR cash P/(E (mkt price) 6.1 20.3 16.3 14.0

Premium/(discount) vs. Avg. 8% -4% -8%

CPR cash P/E (tgt price) 7.2 23.9 19.2 16.5

Premium/(discount) vs. Avg. 27% 13% 9% Source: EQUITA SIM estimates and Bloomberg Consensus

ASSUMPTIONS CAMPARI DCF

g 1.00% 2013E 2014E 2015E 2016E 2017E 2018E Perpet.

WACC 7.3% Sales 1,574 1,657 1,744 1,840 1,932 2,028 2,048

Change % 17% 5% 5% 5% 5% 5% 1%

EBITDA 350 406 440 474 506 537 522

Change % 9.4% 15.9% 8.3% 8% 7% 6% -3%

Margin 22.2 24.5 25.2 25.8 26.2 26.5 25.5

D&A (39) (39) (39) (40) (40) (40) (37)

EBIT 312 367 400 435 466 497 485

VALUATION (€ MN) Change % 8.4% 17.8% 9.1% 9% 7% 7%

Margin 19.8 22.1 23.0 23.6 24.1 24.5 23.7

Taxes (84) (101) (108) (116) (126) (137) (150)

NPV of Free Cash Flows 2009-13 1,277 EBIT after Tax 227 266 292 319 339 360 335

NPV of Terminal Value 3796 Change % 4.9% 17.1% 9.8% 9% 6% 6% -7%

Estimated Enterprise Value 5,072

2011A NFP -870 Capex (120) (37) (37) (37) (37) (37) (37)

(increase) decrease in WC (59) (33) (34) (38) (36) (38) (10) Cash savings 2019-2024 (actual value)

25 FCF pre-minorities 87 235 260 284 306 325 324

Dividend paid in current year FCF Minorities 0 0 0 0 0 0 0

Factoring of receivables -68 FCF post-minorities 87 235 260 284 306 325 324

Earn out on Sagatiba 7.6

Equity Valuation 4,168 Discount Factor .96 1.03 1.10 1.18 1.27 1.36 1.36

PV of FCF 91 229 236 240 241 239 238

# of Shares 581

Target price ord. 7.2 Tax rate 27% 28% 27% 27% 27% 28% 31% Source: EQUITA SIM estimates

SENSITIVITY ANALYSIS

CAMPARI DFCF SENSITIVITY (€ PS)

Perpetuity Ebitda Margin

25.0 25.5 26.0

WACC

6.8% 7.8 7.9 8.1

7.3% 7.0 7.2 7.3

7.8% 6.4 6.5 6.7 Source: EQUITA SIM estimates



STATEMENT OF RISKS

The primary elements that could negatively impact the stock include:

- Special laws reducing spirits consumption (i.e.: higher duties, advertising

restrictions, ban on smoking in pubs and bars etc.)

- Change in consumers’ tastes and habits

- Lower than expected returns from investments in advertising & promotion.

- Movements in forex rates (20% exposure to USD and 5% exposure to

Brazilian Real).

- Any possible sharp rise in input costs (mainly glass and sugar).

P&L 2010 2011 2012 2013E 2014E 2015E

Revenues 1,163 1,274 1,341 1,574 1,657 1,744

Growth 15% 10% 5% 17% 5% 5%

Total opex -868 -948 -1,021 -1,224 -1,251 -1,304

Growth 16% 9% 8% 20% 2% 4%

Margin -75% -74% -76% -78% -76% -75%

EBITDA 295 326 320 350 406 440

Growth 13% 10% -2% 9% 16% 8%

Margin 25% 26% 24% 22% 24% 25%

Depreciation& amortization -26 -30 -33 -39 -39 -39

Provisions na na na na na na

Depreciation&provistion -26 -30 -33 -39 -39 -39

EBIT 269 296 287 312 367 400

Growth 14% 10% -3% 8% 18% 9%

Margin 23% 23% 21% 20% 22% 23%

Net financial profit/Expenses -38 -45 -51 -55 -47 -36

Profits/exp from equity inv 1 0 0 0 0 0

Other financial profit/Exp na na na na na na

Total financial expenses -37 -45 -51 -55 -47 -36

Non recurring pre tax -3 -3 -17 -5 0 0

Profit before tax 233 251 236 257 320 364

Growth 18% 8% -6% 9% 25% 14%

Taxes -76 -91 -79 -91 -110 -120

Tax rate 33% 36% 33% 36% 34% 33%

Minoritiy interests 0 -1 -1 -1 -1 -1

Non recurring post tax na na na na na na

Net income 156 159 157 165 209 243

Growth 14% 2% -1% 5% 27% 16%

Margin 13% 12% 12% 10% 13% 14%

Adj. net income 159 167 168 168 209 243

Growth 9% 6% 0% 0% 25% 16%

Margin 14% 13% 13% 11% 13% 14%

CF Statement 2010 2011 2012 2013E 2014E 2015E

Cash Flow from Operations 215 225 198 226 271 305

(Increase) decrease in OWC -48 -66 -120 -59 -33 -34

(Purchase of fixed assets) -60 -50 -59 -105 -37 -37

(Other net investments) -149 -33 -317 -15 0 0

(Distribution of dividends) -35 -35 -41 -41 -41 -41

Rights issue na na na na na na

Other 30 -1 106 0 0 0

(Increase) Decrease in Net Debt -46 40 -233 7 161 194

Source: Equitasim estimates and company data



INFORMATION PURSUANT TO ARTICLE 69 ET SEQ. OF CONSOB (Italian securities & exchange commission) REGULATION no. 11971/1999 This publication has been prepared by Paola Carboni on behalf of EQUITA SIM SpA (licensed to practice by CONSOB resolution no. 11761 of December 22nd 1998 and registered as no. 67 in the Italian central register of investment service companies and financial intermediaries)

In the past EQUITA SIM has published studies on Campari. EQUITA SIM is distributing this publication via e-mail to more than 700 qualified operators today: Friday, 09 August 2013

The prices of the financial instruments shown in the report are the reference prices posted on the day before publication of the same.

EQUITA SIM intends to provide continuous coverage of the financial instrument forming the subject of the present publication, with a semi-annual frequency and, in any case, with a frequency consistent with the timing of the issuer’s periodical financial reporting and of any exceptional event occurring in the issuer’s sphere of activity. The information contained in this publication is based on sources believed to be reliable. Although EQUITA SIM makes every reasonable endeavour to obtain information from sources that it deems to be reliable, it accepts no responsibility or liability as to the completeness, accuracy or exactitude of such information. If there are doubts in this respect, EQUITA SIM clearly highlights this circumstance. The most important sources of information used are the issuer’s public corporate documentation (such as, for example, annual and interim reports, press releases, and presentations) besides information made available by financial service companies (such as, for example, Bloomberg and Reuters) and domestic and international business publications. It is EQUITA SIM’s practice to submit a pre-publication draft of its reports for review to the Investor Relations Department of the issuer forming the subject of the report, solely for the purpose of correcting any inadvertent material inaccuracies. This note has been submitted to the issuer. EQUITA SIM has adopted internal procedures able to assure the independence of its financial analysts and that establish appropriate rules of conduct for them.

Furthermore, it is pointed out that EQUITA SIM SpA is an intermediary licensed to provide all investment services as per Italian Legislative Decree no. 58/1998. Given this, EQUITA SIM might hold positions in and execute transactions concerning the financial instruments covered by the present publication, or could provide, or wish to provide, investment and/or related services to the issuers of the financial instruments covered by this publication. Consequently, it might have a potential conflict of interest concerning the issuers, financial issuers and transactions forming the subject of the present publication.

In addition, it is also pointed out that, within the constraints of current internal procedures, EQUITA SIM’s directors, employees and/or outside professionals might hold long or short positions in the financial instruments covered by this publication and buy or sell them at any time, both on their own account and that of third parties.

The remuneration of the financial analysts who have produced the publication is not directly linked to corporate finance transactions undertaken by EQUITA SIM.

The recommendations to BUY, HOLD and REDUCE are based on Expected Total Return (ETR – expected absolute performance in the next 12 months inclusive of the dividend paid out by the stock’s issuer) and on the degree of risk associated with the stock, as per the matrix shown in the table. The level of risk is based on the stock’s liquidity and volatility and on the analyst’s opinion of the business model of the company being analysed. Due to fluctuations of the stock, the ETR might temporarily fall outside the ranges shown in the table.

EXPECTED TOTAL RETURN FOR THE VARIOUS CATEGORIES OF RECOMMENDATION AND RISK PROFILE

RECOMMENDATION/RATING Low Risk Medium Risk High Risk

BUY ETR >= 10% ETR >= 15% ETR >= 20%

HOLD -5% <ETR< 10% -5% <ETR< 15% 0% <ETR< 20%

REDUCE ETR <= -5% ETR <= -5% ETR <= 0%

The methods preferred by EQUITA SIM to evaluate and set a value on the stocks forming the subject of the publication, and therefore the Expected Total Return in 12 months, are those most commonly used in market practice, i.e. multiples comparison (comparison with market ratios, e.g. P/E, EV/EBITDA, and others, expressed by stocks belonging to the same or similar sectors), or classical financial methods such as discounted cash flow (DCF) models, or others based on similar concepts. For financial stocks, EQUITA SIM also uses valuation methods based on comparison of ROE (ROEV – return on embedded value – in the case of insurance companies), cost of capital and P/BV (P/EV – ratio of price to embedded value – in the case of insurance companies).

MOST RECENT CHANGES IN RECOMMENDATION AND/OR IN TARGET PRICE (OLD ONES IN BRACKETS):

Date Rec. Target Price (€) Risk Comment

nil

DISCLAIMER The purpose of this publication is merely to provide information that is up to date and as accurate as possible. The publication does not represent to be, nor can it be construed as being, an offer or solicitation to buy, subscribe or sell financial products or instruments, or to execute any operation whatsoever concerning such products or instruments. EQUITA SIM does not guarantee any specific result as regards the information contained in the present publication, and accepts no responsibility or liability for the outcome of the transactions recommended therein or for the results produced by such transactions. Each and every investment/divestiture decision is the sole responsibility of the party receiving the advice and recommendations, who is free to decide whether or not to implement them. Therefore, EQUITA SIM and/or the author of the present publication cannot in any way be held liable for any losses, damage or lower earnings that the party using the publication might suffer following execution of transactions on the basis of the information and/or recommendations contained therein. The estimates and opinions expressed in the publication may be subject to change without notice.

EQUITY RATING DISPERSION AS OF JUNE 30, 2013 (art. 69-quinquies c. 2 lett. B e c. 3 reg. Consob 11971/99)

COMPANIES COVERED COMPANIES COVERED WITH BANKING RELATIONSHIP

BUY 40.5% 41.2%

HOLD 50.9% 52.9%

REDUCE 8.7% 5.9%

NOT RATED 0.0% 0.0%

campari - equita sim · july. in germany, aperol is recovering mkt share and starting to benefit...

Documents