A View From Wall Street

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A View From Wall Street
USMEF Strategic Planning Conference
Presented by Christine McCracken, Cleveland
Research

• Tucson, Arizona
• November 4, 2008

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Agenda

• Cleveland Research Overview
• Top Down Market Analysis
• Channel Insights
• Commodity Food Industry Highlights
• Industry Implications
• QA

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Who is Cleveland Research?

• Cleveland Research Company
• Founded in 2006 with as an independent research
  firm. 65 employees, 40 in research.
  Headquartered in Cleveland, with Food
  Agribusiness team in Los Angeles.
• Stock Market Research
• We provide in-depth financial research on
  publicly-traded companies across a number of
  sectors. We service the 125 largest
  institutional investors such as Fidelity,
  AllianceBernstein, T. Rowe Price, as well as
  hedge funds.
• What Sets us Apart?
• We go to greater lengths than most of our peers
  to find out whats new and whats changing with
  the companies we cover. This means we spend a
  large amount of our time in the field or talking
  with customers, suppliers, distributors, or
  competitors. Our clients find this to be highly
  value-added and differentiated versus other
  sell-side firms.

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My Background

• Raised on Farms in Minnesota and Florida
• B.S. in Agricultural Economics, UGA
• M.S. in Agricultural Economics, UC Davis
• Early Career in Consulting, Agricultural
  Biotechnology/Investment Banking
• 14 Years in Equity Research Food Agribusiness
  Focus

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Financial Crisis 2008
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What Happened?

• Subprime Housing Bubble Bursts -
  Fannie/Freddie/AIG
• Wall Street Shaken - Bear Stearns/Lehman/Merrill
• Regional Banks Fail -WaMu, National City
• Global Fallout Emerging Markets

Consumer Credit/State and Municipal Governments?
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SP Down 38 From Peak
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Thatll Leave A Mark!
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Whats Next?

• Elections Likely to Drive Market in Near-term
• Tough Holiday Season Likely
• Recession
• Dollar Foreign Exchange Headwinds
• Consumer Credit
• Unemployment Rising
• Inflation

So When Do Investors Come Back In?
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CRC Coverage Universe
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What Matters to Investors?

• What is the Bottom Line
• When business trends get better, earnings go up
• When earnings go up, stocks go up
• Fundamental Business Drivers Best Indicators for
  the Stock
• Sales
• Gross Margins (Cost of Goods)
• Operating Expenses (Shipping/Handling, Labor)
• Other (Interest Expense, Share Repurchase)
• Valuation
• Expectations

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Channel Themes and Inflections

• Planning for a weaker consumer environment
• Trading down proteins, private label, WMT
• Value brands gain adjusting portfolios
• Grocery channel clearly slowing and likely below
  expectations
• Channel shift much more visible to Supercenter
  and Clubs
• Foodservice hanging on by a thread
• Casual dining consolidation
• QSR adjusting mix White table cloth weak
• Packaged Food relatively stable
• Focus on costs Commodity Uncertainty
• Commodity-Related Equities Struggle With Debt

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How Healthy is the Consumer?

• Perceived Wealth Emotions
• Home Value
• CreditCreditCredit
• Drop in Fuel Costs a Plus
• Consumers Still Nearing Price Threshold

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Grocery and Restaurants Diverge
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Food Retail Trends

• WMT asking for incremental allowances
• Starting to hear more pushback on price increases
  this summer (specifically WMT)
• SKU rationalization is a hot topic
• More centralization coming (SVU, KR)
• Tighter inventory management and supply chain
  efficiencies
• Private label development and targets

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Foodservice Still Weak

• Demand is bad and not getting much better
• Too many restaurants, little differentiation
• Grocery taking share in foodservice
• Costs are still rising (labor, food)
• Costs to build and run restaurants sales,
• Demographic shifts less favorable (particularly
  more at-home moms)
• Pricing is uncomfortably high
• Quality is arguably worse in both food service
  at the chains

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Supply/Demand Not Balanced
Top 15 Casual Dining chains slowed from 3-6 from
2000-05 before flattening in 2006 and dipping
negative in 2007/2008 Capacity growth has
moderated from 8-11 to 3-5, but this needs to
slow a lot more (and demand needs to accelerate)
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Demographics Less Favorable
Biggest change is drop in dual-income families,
or fewer working women more stay-at-home moms
favors food retail Flattening of the foodservice
dollar slower growth
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Menu Pricing is Getting Too High
National pricing is over 4 for the first time in
a decade Quality of food and service has been
impaired at many chains
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Average Check Now Near 70
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Foodservice Outlook

• Expect more bad news before good news
• Industry needs structural reconfiguration
• Weak players will get weeded out
• Capacity growth must and will slow
• Differentiation is key
• Cost control is more important
• Financial re-engineering or re-franchising is not
  the right long-term answer

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Outlook for Food Companies

• Consumer Trade Down Private Label?
• Commodity Deflation
• Channel Shift Favors Some, Not Others
• Not All Companies Created Equal
• Sustainability? Organic?
• Food a Defensive Investment?

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Grain Oilseed Outlook

• Economics Favor Corn (Marginally), But Soybeans
  Lower Risk
• Input Costs Remain High, But Falling
• Feed Demand Likely to Fall
• Ethanol Turning the Corner
• Several Bankruptcies (VSE), But Plants Still
  Coming Online
• Political Support Appears Strong
• South American Crop Delays
• China India Will Drive Next Wave

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Livestock, Dairy Poultry Outlook

• Broiler Industry Has Made CutsMore Coming
• Pilgrims Pride Significant Implications for
  Industry
• Russia
• Pork Production Needs to Drop 10
• Liquidation Stalled by Drop in Feed Costs
• Trade Outlook Will Drive Decisions
• Cattle Feeding Industry at the Edge
• Will Take Years
• Dairy Industry Maintains Production
• Turkeys Eggs

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What Happens on Wall Street?

• Continued Consolidation
• Hedge Fund Redemptions
• Tax Loss Selling/Capital Gains
• Holiday Season 2008?
• Fundamentals Still Matter, But Cash is King
• Reduced Exposure to Emerging Markets

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What Happens in Agriculture?

• Acreage Battle Continues
• New Direction for Ag Policy/Trade?
• Value of the Dollar
• Will the Speculators Come Back?
• Liquidity is KeySize Matters
• Protein Industry Liquidation

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Thank You

• Christine L. McCracken
• Cleveland Research Company
• 222 North Sepulveda, Ste 1775
• El Segundo, California 90245
• Phone [phone]
• Cell [phone]
• Email cmccracken_at_cleveland-research.com

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Disclosures
Important disclosures for the companies mentioned
in this report can be found at www.cleveland-resea
rch.com/clients/disclosures Buy The stocks
return is expected to exceed the market due to
superior fundamentals and positive
catalysts. Underperform The stocks total
return is expected to underperform the market due
to weak fundamentals and a lack of
catalysts. Neutral The stock is expected to be
in line with the market due to full valuation
and/or a lack of catalysts. Valuation and Risk
Price targets are established under various
valuation methods including P/E, P/S, EV/EBITDA
on financial estimates based on forward earnings.
Price targets are not established for every
stock. The price targets effectiveness may be
affected by various outside factors. Risk
assessments can be found in the most recent
research on these stocks. Other Disclosures I,
Christine McCracken, certify that the views
expressed in the research report(s) accurately
reflect my personal views about the subject
security(s). Further I certify that no part of
my compensation was, is, or will be directly or
indirectly related to the specific
recommendations or views contained in the
research report(s). The analysts responsible
for the preparation of this report have no
ownership stake in this company. Cleveland
Research Company provides no investment banking
services of any type on this or any company.
The information transmitted is intended only
for the person or entity to which it is
addressed. Any review, retransmission,
dissemination or other use of, or taking of any
action in reliance upon, this information by
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