FRUTAROM INDUSTRIES LTD. DIRECTORS' REPORT OF THE … · Founded in 1999, Savoury Flavours...
Transcript of FRUTAROM INDUSTRIES LTD. DIRECTORS' REPORT OF THE … · Founded in 1999, Savoury Flavours...
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FRUTAROM INDUSTRIES LTD. DIRECTORS' REPORT OF THE COMPANY'S BUSINESS
FOR THE PERIOD ENDING MARCH 31, 2012
BOARD OF DIRECTORS' DISCUSSIONS OF THE COMPANY'S STATE OF BUSINESS A. REVIEW OF ACTIVITY
Frutarom Industries Ltd. (the "Company”) is a global company established
in Israel in 1933. Frutarom became a public company in 1996 upon registration of its shares for trade on the Tel Aviv Stock Exchange. In February 2005, the Company’s Global Depository Receipts were also listed on the London Stock Exchange Official List. The Company, itself and through its subsidiaries ("Frutarom" or the "Group") develops, produces and markets flavors and fine ingredients used in the manufacture of food, beverages, flavors, fragrances, pharmaceuticals/nutraceuticals and personal care products. Frutarom operates production facilities in Europe, North America, Latin America, Israel, Asia and Africa, marketing and selling over 30,000 products to more than 14,000 customers in more than 130 countries, and employing 2,100 people throughout the world.
Frutarom operates in two major segments: the Flavors segment and the
Specialty Fine Ingredients segment. The Flavors Segment - Frutarom develops, produces, markets and
sells sweet and savory flavor solutions, including flavors and products which in addition to flavors also contain fruit or vegetable ingredients and other natural ingredients ("food systems") which are used mainly in the manufacture of foods, beverages and other consumed products. Frutarom develops thousands of different flavors for its customers, most of which are tailor-made and customized for specific customers, and consistently develops new products to meet changing consumer preferences and future customer needs.
In recent years, Frutarom's Flavors segment has undergone
accelerated growth, mainly the result of its focus on natural and plant food flavors it offers its mid-size and local customers, in emerging and developed markets (focusing in particular on private labels); the provision of customized services, including technological and marketing support and assistance in the development of products, the offer of high level tailor-made services and products, as are normally provided for large multi-national companies; Frutarom’s unique, cutting edge products offered to the large multi-national market sector,
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and Frutarom’s strategic acquisitions, which have and are being successfully incorporated with Frutarom's global activities.
The Specialty Fine Ingredients Segment - Frutarom develops,
produces, markets and sells natural flavor extracts, natural functional food ingredients, natural pharmaceutical/nutraceutical extracts, aroma chemicals, essential oils, unique citrus products, natural gums and stabilizers. The Specialty Fine Ingredients products are sold primarily to the food, beverage, flavor, fragrance, pharmaceutical/nutraceutical and personal care industries.
Specialty Fine Ingredients activities focus on a value-added product
basket, which gives Frutarom a competitive edge over its rivals. Most of the specialty fine ingredients are natural products which enjoy higher-than-average demand compared to non-natural products. Frutarom acts to expand the natural product portfolio it offers its customers, with particular emphasis on the area of natural, functional and healthy foods.
PROFITABLE GROWTH STRATEGY AND ACQUISITIONS Frutarom continues to act with determination to implement its rapid growth
strategy through a combination of organic, profitable growth in its core activities and strategic acquisitions. The Company intends to continue growing in the main regions in which it operates and to expedite its expansion in emerging markets including Asia, Central and South America, Central and Eastern Europe and Africa in which growth rate is higher, as well as in North America, which is the largest market in the world for flavors. Frutarom acts to accelerate its expansion in these markets through focused efforts on strengthening its research and development, production, sales and marketing infrastructures in important target countries and by exploring options for additional strategic acquisitions.
Frutarom has extensive experience with successful implementation of
acquisitions and mergers and it acts to integrate the acquired companies and activities into its existing activity, utilizing both commercial and operational synergies, to optimize cross-selling opportunities, cost savings and improvement of profit margin.
After having conducted seven acquisitions in 2007 and three in 2009, all of
which were successfully integrated with its global activities and contribute to both a growth in sales and improved margins, Frutarom has continued with its acquisition strategy and completed five additional strategic acquisitions in 2011, and three more at the beginning of 2012. The integration of activities is moving ahead successfully and according to plan, and as it
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progresses it is expected to contribute to growth in sales as well as to improved margins and future profits for Frutarom.
Details of the three strategic acquisitions completed during the first quarter of 2012 are as follows: 1) Acquisition of Savoury Flavours
On January 4, 2012, Frutarom, through a subsidiary in the UK, signed an agreement to acquire 100% of the share capital of the UK company Savoury Flavours (Holding) Ltd. and its subsidiaries ("Savoury Flavours") for US$ 5.9M (GBP 3.8M), and additional consideration to be calculated according to performance, using a mechanism prescribed in the agreement, which according to the Company’s estimate will not exceed an amount equal to 5% of the transaction consideration. The transaction was completed upon signing. Founded in 1999, Savoury Flavours develops, manufactures, and markets savory taste solutions (the non-sweet taste spectrum), including mainly flavors, seasoning compounds, marinades and sauces, specializing in snacks and convenience foods. Savoury Flavours has a development, manufacture and marketing site in Britain and a wide customer base including food manufacturers and private labels in the UK and in emerging markets. Savoury Flavours’ sales turnover over the twelve months ending on December 31, 2011 totaled US$7.1 M. From the date of the completion of the transaction until March 31, 2012, the acquired activity yielded US$ 1.6M and net profits (after financing expenses) in the amount of US$0.1 M. Savoury Flavours’ production site is located adjacent to the East Anglican Food Ingredients Ltd. (EAFI) production site, acquired by Frutarom in January 2011, which also manufacturers savory productsl. Frutarom has begun merger and integration of the two activities, and integration of Savoury's activities with those of Frutarom UK will continue over the coming months. The geographic proximity between the two sites, along with the two companies’ complimentary product range and technology, will allow the creation of significant synergies and integration of activities between Savoury Flavours and Frutarom’s savory activities in the UK and throughout the world, which has grown significantly over the last few years. For more details on the acquisition of Savoury Flavours, see the Company's immediate report of January 5, 2012.
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2) Acquisition of Etol:
During the first quarter of 2012, Frutarom, through a Swiss subsidiary, acquired 98% share capital of the Slovenian public company Etol Tovarna arom in eteričnih olj d.d. ("Etol"), in return for €34. M. On May 8, 2012 Etol was delisted from the Slovenian Stock Exchange. Frutarom will acquire the balance of shares from the minority shareholders, for €141 per share (in total €755 thousand) in accordance with the Slovenian law, so that the cost of the acquisition of Etol’s entire share capital will be €35.4 M (US$45.8 M). Etol, founded in 1924, is a leading flavor company, which together with its subsidiaries (the “Etol Group”) develops, manufactures, and markets flavor solutions, focusing on natural flavor products for the food and beverage industry. The Etol Group also has great experience in the development of sweet and savory flavors and fruit based flavors and products and food systems, specializing in local fruits of the region, as well as extensive activities in the growing area of beverage bases that Frutarom plans to further invest in order to substantially expand its global activity. Etol also has trade and marketing activity for products it does not manufacture, targeted for European countries, which will be integrated into Frutarom’s trade and marketing segment together with the trade and marketing activity in Israel. The trade and marketing activity is not counted among Frutarom’s core activities. The Etol Group has a sophisticated and innovative plant located on 70 dunam of land east of Ljubljana in Slovenia. The Etol Group’s products are sold to a wide customer base in Central and Eastern Europe and in emerging markets, with an emphasis on Slovenia, Russia, Poland, the Ukraine, Croatia, Serbia, Belarus, Macedonia, the Czech Republic, Kazakhstan, Turkey and other emerging markets such as Switzerland, Germany and the UK. Etol’s customers include leading food and beverage manufacturers in the countries in which it operates, among them large multi-national food companies. The Etol Group’s activities are synergetic with Frutarom’s activities. Frutarom is acting to integrate Etol's research and development, marketing and sales, logistics, procurement and manufacture with its own global operations, creating operational synergies and cross-selling. In 2011, Etol's sales turnover totaled US$71.4 M (€51.3M). Between January 1, 2012 and March 31, 2012 the acquired activity yielded revenues in the amount of US$15.4 M (€1.7 M), and net profit in the amount of US$ 2.5M (€1.9 M), after acquisition and financing expenses and a one-time income from negative goodwill profit.
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For more details regarding the acquisition of Etol, see the Company's immediate reports of January 17, 18 and 26, 2012, February 12, 2012 and March 17, 2012.
3) Acquisition of Mylner
On February 6, 2012, Frutarom signed an agreement, through its subsidiary in Brazil, to acquire 100% of the share capital of Mylner Indústria E Comércio Ltda, a Brazilian Flavors company, and its Brazilian mother company, Vila Osório Participações s/a (“Mylner”) in return for US$ 15.7 M (BRL27.1 M). Frutarom also paid an additional BRL4.4 M for Mylner's cash balance, BRL2.7 M of which has not yet been paid and serves as security for the sellers' undertaking for indemnification under the share purchase agreement, to be released in installments over three years. Mylner, founded in 1974, develops manufactures and markets flavor solutions, focusing mainly on sweet flavors for beverages and baked goods, natural plant extracts and natural flavor products. Mylner has a modern development, production and marketing site near Sao Paulo, Brazil, including land for future expansion. Mylner’s wide customer base includes leading food and beverage manufacturers in developing countries in Latin America and mainly Brazil. Mylner’s sales turnover in 2011 totaled US$11.4M1. From February 6, 2012 through March 31, 2012, the acquired activity yielded revenues in the amount of US$1.6 M, and its net profits were in the amount of US$0.3 M (before one-time acquisition expenses in the amount of US$0.4 M). For more information regarding this acquisition, see the Company's immediate report of February 7, 2012.
It is Frutarom's assessment that its capital structure (total assets of US$788 M, equity of US$414 M as of March 31, 2012, constituting 52.5% of the total assets) and net debt level (total loans after deduction of cash), which stand at US$186 M as of March 31, 2012, supported by the cash flow it achieves, and together with bank backing, will allow it to continue to realize its strategic acquisitions as it has done over the past few years while strengthening its position as one of the leading global companies in the field of flavors and fine ingredients, and to realize its vision:
“To be the Preferred Partner for Tasty and Healthy Success.”
1 The financial assessments presented above are based on Mylner's managerial reports, which have not been audited.
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B. FINANCIAL STATUS The Group's total assets as at March 31, 2012 totaled US$788.1 M compared to US$558.7 M as at March 31, 2011 and US$650.0M as at December 31, 2011. The Group's current assets totaled US$305.8 M, compared to US$ 236.5 M as at March 31, 2011 and US$246.6 M as at December 31, 2011. The fixed assets deducted by accumulated depreciation and other assets net as at March 31, 2012 totaled US$479.1 M compared to US$320.4 M as at March 31, 2011 and US$401.2 M as at December 31, 2011. The increase in total assets was mainly affected by the acquisitions completed in 2011 and during the first quarter of 2012, and by currency exchange translation differences of subsidiary assets values in European currencies versus the US dollar (the strengthening of the currency exchange rates of European currencies versus the US dollar as at December 31, 2012 compared to December 31, 2011).
C. RESULTS OF OPERATIONS IN Q1 2012
Frutarom sales over Q1 2012 (net of currency effects) increased by 27.5% and reached a quarterly sales record high of US$151.2 M, compared to US$121.0 M in the same quarter of 2011. Over the first quarter of 2012, the global trend of substantial raw material prices increase which had begun during the second half of 2010, continued to moderate, and there were even a small number of price reductions in some of the ingredients used by Frutarom from the record high level which they had reached at the end of last year. Frutarom acted and has continued over the past few months to act with diligence to adapt the sales prices of its products affected by the price increase of raw materials, and will continue to do so as long as the this trend continues. In order to lower costs, Frutarom also continues to expand its circle of suppliers and to strengthen its global purchasing power for raw materials and to maximally utilize of all the varied capacities of its many production sites throughout the world and the many operational synergies gained through its recent acquisitions. Frutarom has acted and acts in order to achieve a successful integration and maximal utilization of cross-selling possibilities deriving from the acquisitions made during 2011 and at the beginning of 2012. The acquisitions performed during the first quarter of 2012 contributed to an increase of US$31.4 M in sales for this quarter.
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The integration of research and development, purchasing and production activities of the eight activities acquired in 2011 and during the first quarter of 2012 are progressing as planned and successfully, and their contribution to the increase in profits is expected to increase in the coming quarters as the integration process progresses. Frutarom estimates that the continued internal growth and a combination of stabilization of raw material prices, together with adjustment of product selling prices which has continued even over the last few months, contribution of the continued realization of streamlining processes and improving the competitive costs structure, while taking maximum advantage of its production sites throughout the world and the successful merging of its recent acquisitions, will bring about improved future margins and continued strengthening of Frutarom’s competitive status as one of the leading companies in the world in the fields of taste, health and fine ingredients.
Sales In Q1 2012, Frutarom's sales, not taking into account the currency effect,
increased by 27.5% reaching a quarterly record high of US$ 151.2M compared to US$121.0 M in the same quarter in 2011. The weakening of the Euro and the British pound and the NIS versus the dollar (offset slightly following the strengthening of the Swiss Franc compared to the US dollar) compared to the first quarter last year, reduced sales in dollar terms by 2.6%. The acquisitions completed over the quarter contributed US$31.4 M to sales during this quarter.
Frutarom's sales in the Flavor segment (again not taking into account the
currency effect) increased by 39.4% compared to the same quarter last year, reaching a quarterly record high of US$109.0M. The effect of the currency exchange rates, as mentioned, reduced sales in dollar terms by 3.6%. The acquisitions preformed during 2011 and in the beginning of 2012 contributed US$27.6 M to sales during this quarter.
Frutarom's sales in the Specialty Fine Ingredients segment decreased (not
taking into account the currency effect) by 3.3% compared to the same quarter last year, and totaled US$37.5M. The effect of the currency exchange rates, as mentioned, reduced sales in dollar terms by 1%. The decrease in sales was impacted to a certain extent by the continued trend of reduction of inventory of some of Frutarom's fine ingredient customers.
Frutarom's sales in the trade and marketing sector increased by 125.0%
compared to the same quarter last year, reaching US$5.4 M. Sales include
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Etol activities in this segment, which contributed US$3.8 M to sales during this quarter.
Sales Breakdown by Fields of Activity in Q1 in 2001-2012 (US$ M and %)
Q1
2012 Q1
2011 Q1
2010 Q1
2009 Q1
2008 Q1
2007 Q1
2006 Q1
2005 Q1
2004 Q1
2003 Q1
2002 Q1
2001
109.0 80.2 75.4 67.4 84.4 49.9 44.7 40.3 20.3 12.7 10.8 9.0 Sales Flavor Segment 72.1% 66.3% 66.5% 68.5% 69.2% 62.0% 63.0% 62.3% 46.2% 45.0% 39.9% 37.3% %
37.5 39.1 37.6 29.6 35.3 29.1 25.5 23.4 22.5 14.2 14.9 13.9 Sales Fine Ingredient Segment 24.8% 32.3% 33.1% 30.1% 28.9% 36.2% 35.9% 36.2% 51.3% 50.4% 55.0% 57.7% %
5.4 2.4 1.2 2.2 3.6 2.6 1.4 1.8 1.7 1.8 1.6 1.5 Sales Trade & Marketing 3.6% 2.0% 1.1% 2.2% 3.0% 3.2% 2.0% 2.8% 3.9% 6.4% 5.9% 6.2% %
0.6- 0.7- 0.8- 0.7- 1.3- 1.1- 0.6- 0.8- 0.6- 0.5- 0.2- 0.3- Sales Inter Segments 0.4% - 0.6% - 0.7% - 0.8% - 1.1% - 1.4% - 0.9% - 1.2% - 1.4% - 1.8% - 0.7% - 1.2% - %
151.2 121.0 113.5 98.4 122.0 80.5 71.0 64.7 43.9 28.2 27.1 24.1 Total Sales
The following is a summary of the profit and loss report for Q1 2010 – 2012 (US$ M):
Q1 2010
Q1 2011
Q1 2012
Difference between
2011 - 2012(%)
Sales 113.5 121.0 151.2 24.9% Gross profit 43.5 45.7 54.9 20.3% R&D, Selling, Administration, General and Other expenses 26.9 29.0 37.1 27.8% Operating profit 16.6 16.6 17.8 7.3% EBITDA 21.3 21.5 25.0 16.2% Financing expenses(income) 1.3 )0.9( 0.9
Profit before tax 15.3 17.5 16.9 -3.4%
Net profit 11.1 13.1 13.5 2.8%
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Gross Profit The Company’s gross profit in Q1 2012 increased by 20.3%, reaching a
quarterly record high of US$54.9 M compared to US45.7 M during the same quarter last year. Gross margin reached 36.3% compared to a gross margin of 37.7% in the same period last year. Net of Etol’s trade and marketing activity (which is not a core activity of Frutarom) gross margin achieved 36.9%.
The increase in gross profit and margin were affected by substantial increase in raw material prices which had begun in 2010 and strengthened over the course of 2011 (as a result of which Frutarom's inventory costs rose). The Company acted and continues to act with determination and will continue to act so as long as the trend continues, in order to prevent future harm and improve Frutarom’s activities and profitability.
Selling and Marketing, Research and Development, General and
Administrative and Other Expenses In Q1 2012 selling, marketing, research and development, general and
administrative and other expenses, totaled US$ 37.1M (24.5% of sales), compared to US$ 29.0M (24% of sales) during the same quarter last year.
Sales and marketing, research and development, general and administrative expenses included one-time reorganization expenses in the amount of US$1.1 M. Other expenses included one – time income in the amount of US$1.3 M (income from negative goodwill for the acquisition of Etol in the amount of US$1.8 M, which was offset by one-time acquisition expenses in the amount of US$0.5 M), so that the net impact on the operating profit was US$0.2M. The increase in expenses derived from a growth in the scope of activity, and mainly from the acquisitions made in 2011 and over the first quarter of 2012 and from one-time expenses for acquisitions, as explained above. Frutarom acted and acts to achieve maximum efficiency while improving its future competitiveness.
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Operating Profit and EBITDA In Q1 2012, operating profit reached a quarterly high for first quarters, totaling US$17.8 M (11.8% of sales) compared to US$16.6 M (13.7% of sales) during the same quarter last year. The EBITDA achieved by Frutarom in Q1 2012 increased by 16.2% reaching a first quarter record high of US$25 M (16.5% of sales), compared to US$21.5 M during the same period last year (17.7% of sales). Operating profit and EBITDA included one-time revenues of US$0.2 M, as detailed above. Finance Expenses / Income In Q1 2012, finance expenses totaled US$0.9 M (0.6% of sales), compared to financing income of US$0.9 M (0.7% of sales) during Q1 2011. Interest expenses during Q1 2012 reached US$1.9 M compared to US$0.4 M during the same quarter last year. The increase in interest expenses is due to the increase in the Company’s loans in light of the acquisitions made. Financing income due to differences in currency exchange rates totaled US$1.0 M compared to financing income due to differences in currency exchange rates which totaled US$1.3 M during the same quarter last year. The difference in financing income is due to the impact of the weakening of the dollar exchange rate versus European currencies and the Israeli shekel as of March 31, 2012, compared to the exchange rate of the dollar versus those same currencies at December 31, 2011, similar to the weakening trend of the dollar versus those same currencies during the same period last year.
Profit before Tax In Q1 2012, profit before tax totaled US$16.9 M (11.2% of sales) compared
to US$17.5 M in Q1 2011 (14.5% of sales). Taxes on Income In Q1 2012, taxes on income totaled US$3.4 M (20.2% of profit before tax)
compared to US$4.4 M in Q1 2011 (25.0% of profit before tax). The reduction in the rate of tax expenses during Q1 2012 is mainly due to
changes in profit mix between companies in the Group acting in different
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countries, where there are different tax rates, and from a lowering of tax rates in some of the countries in which Frutarom operates. Net Profit In Q1 2012, net profit reached a quarterly record high of US$13.5 M compared to US$13.1 M in Q1 2011. Net margin totaled 8.9% compared to 10.8% during the same quarter last year. Earnings per Share In Q1 2012, earnings per share reached US$0.23 per share, similar to the same quarter last year.
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Summary of the quarterly profit and loss reports for 2009 - 2012 (US$ M):
Q1
2009 Q2
2009 Q3
2009 Q4
2009 Q1
2010 Q2
2010 Q3
2010 Q4
2010 Q1
2011 Q2
2011 Q3
2011 Q4
2011 Q1
2012
Income 98.4 106.7 111.6 108.5 113.5 114.3 111.0 112.4 121.0 130.6 135.3 131.6 151.2Gross profit 35.2 39.4 41.2 39.6 43.5 46.9 43.2 41.3 45.7 48.5 47.7 46.8 54.9 Selling, Marketing, R&D, General and Administrative, and Other Expenses
25.0 26.7 27.9 28.6 26.9 27.5 28.2 29.2 29.0 31.5 34.8 34.6 37.1
Operating profit 10.2 12.8 13.3 11.0 16.6 19.4 15.0 12.1 16.6 17.0 12.9* 12.2 17.8
EBITDA 14.5 17.4 18.3 16.0 21.3 24.0 19.8 16.9 21.5 22.2 *18.6 18.1 25.0
Finance expenses 3.3 0.1 0.0 0.9 1.3 2.3 -0.2 -0.2 -0.9 0.8 2.6 3.2 0.9 Profit before tax 6.9 12.7 13.2 10.1 15.3 17.1 15.2 12.2 17.5 16.2 10.3 8.9 16.9 Net profit 5.6 10.1 10.0 7.5 11.1 13.0 11.1 8.8 13.1 12.3 8.7 7.9 13.5
Frutarom’s business is characterized by seasonal fluctuations, generally expressed by higher sales and margin in
the first half of a given year, with lower sales and margin during the second half, mainly in the fourth quarter. The seasonality is a result of the fact that a substantial portion of the Company’s products are used by its customers in the manufacture of beverages, ice cream and yogurt, for which the demand increases during the summer months. As a result, sales of certain flavor solutions and fine ingredients produced by the Company tend to increase in the first half of the year as manufacturers of beverages, ice cream and yogurt restock their inventories and increase production in advance of rising demand during the summer months. The effect of seasonality on the Company’s results and activity has become more moderate in recent years with the significant increase in sales of savory products following the acquisitions of companies and activities in this field. The increase in the sales of natural functional food ingredients, and natural pharmaceutical/nutraceutical extracts, which are intended for the pharmaceutical/nutraceutical industries, also contributes to the lower seasonality's effect on demand.
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D. LIQUIDITY
During Q1 2012, the Company's cash flow from current activities reached
US$17.7 M, compared to a cash flow of US$2.8 M for the same quarter last year.
Frutarom acts and will continue to act to maintain an optimal level of working capital suited to the expected rate of growth, taking into account seasonality, demand and the various raw materials and their current and future anticipated prices.
E. SOURCES OF FINANCE Sources of Equity Frutarom's equity as at March 31, 2012 totaled US$413.6 M (52.5% of its
total assets) compared to US$380.1 M as at March 31, 2011 (68.0% of its total assets) and US$393.6 M as at December 31, 2011 (60.6% of its total assets). The change derives mainly from the growth in profit. Long-Term Loans Including Current Maturities of Long Term Loans (Average)
Average long-term credit from banks provided to the Company in Q1 2012
totaled US$163.0 M compared to US$63.1 M in Q1 2011. The increase is a result of an increase in loans taken for financing the Company’s acquisitions.
Short-Term Loans Excluding Current Maturities of Long Term Loans (Average)
Average short -term credit from banks provided to the Company in Q1 2012
totaled US$50.9 M compared to US$2.6 M in Q1 2011. The increase is a result of an increase in loans taken for financing the Company’s acquisitions.
Suppliers’ and Customers’ Credit (Average)
In Q1 2012, the Company utilized credit from suppliers and other creditors
in the amount of US$89.0 M compared to US$67.5 M in the same quarter last year. During Q1 2012, the Company granted credit of US$109.4 M to its customers, compared to US$78.7 M during the same period last year. The increase in credit from suppliers and to customers is a result mainly of the increase in the Group's sales and its activities.
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EXPOSURE TO MARKET RISKS AND THEIR MANAGEMENT During Q1 2012, there were no substantial changes regarding the Company's exposure to market risks and its management of such, including the impact of the Company's linkage balance, with regard to the Company's reports on this matter in its periodic report for 2011, published by the Company on March 15, 2012, except with regards to its loans, which have increased following the Company’s latest acquisitions. As of March 31, 2012, the Group has a long term loan after deduction of current maturities in a total amount of US$111.7 M, and its short term loans, including current maturities, of long term loans total US$112.1 M. The Company has cash balances of US$37.5 M. SENSITIVITY TESTS Sensitivity to Changes in the US Dollar- NIS Exchange Rate
Profit (Loss) from changes
Fair valueProfit (Loss) from
changes % of change +10% +5% - -5% -10%
Exchange rate 4.087 3.901 3.715 3.529 3.344 Cash and cash equivalents (5) (3) 52 3 5Customers (1,196) (598) 11,960 598 1,196Other debtors (106) (53) 1,062 53 106 (1,307) (654) 13,074 654 1,307
Bank loans 183 92 1831 (92) (183)Suppliers and service providers 201 101 2,011 (101) (201)Other creditors 115 57 1,146 )57( )115( 499 250 4,988 (250) (499)
Total exposure, net (808) (404) 8,086 404 808
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Sensitivity to Changes in the US Dollar-Pound Sterling Exchange Rate
Sensitivity to Changes in the US Dollar-Euro Exchange Rate
Profit (Loss) from changes
Fair valueProfit (Loss) from
changes % of change +10% +5% - -5% -10%
Exchange rate 0.688 0.657 0.625 0.594 0.563 US$ 000 Cash and cash equivalents (745) (373) 7,453 373 745 Customers
(1,139) (569) 11,389 569 1,139 Other debtors (127) (64) 1,273 64 127 (2,011) (1,006) 20,115 1,006 2,011
Bank loans 4,006 2,003 40,058 (2,003) (4,006) Suppliers and service providers 738 369 7,384 (369) (738) Other creditors 766 383 7,660 (383) (766) 5,510 2,755 55,102 (2,755) (5,510)
Total exposure, net 3,499 1,749 (34,987) (1,749) (3,499)
Profit (Loss) from changes
Fair valueProfit (Loss) from
changes % of change +10% +5% - -5% -10%
Exchange rate 0.825 0.788 0.750 0.713 0.675 US$ 000 Cash and cash equivalents (880) (440) 8,799 440 880Customers (4,754) (2,377) 47,535 2,377 4,754Other debtors (153) (77) 1,531 77 153 (5,787) (2,894) 57,865 2,894 5,787
Credit from banks 11,724 5,862 117,241 (5,862) (11,724)Suppliers and service providers 2,817 1,409 28,171 (1,409) (2,817)Other creditors 985 492 9,848 (492) (985) 15,526 7,763 155,260 (7,763) (15,526)
Total exposure, net 9,739 4,869 (97,395) (4,869) (9,739)
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Sensitivity to Changes in the US Dollar-Swiss Franc Exchange Rate
Sensitivity to Changes in the US Dollar-Other Currencies Exchange Rate
Profit (Loss) from changes
Fair valueProfit (Loss) from
changes % of change +10% +5% - -5% -10%
Exchange rate 0.994 0.949 0.904 0.859 0.813 US$ 000 Cash and cash equivalents (212) (106) 2,116 106 212Customers (716) (358) 7,163 358 716Other debtors (257) (128) 2,569 128 257 (1,185) (592) 11,848 592 1,185
Credit from banks 536 268 5,362 (268) (536)Suppliers and service providers 853 426 8,529 (426) (853) 1,389 694 13,891 (694) (1,389)
Total exposure, net 204 102 (2,043) (102) (204)
Profit (Loss) from changes
Fair valueProfit (Loss) from
changes % of change +10% +5% - -5% -10% US$ 000 Cash and cash equivalents (835) (417) 8,349 417 835Customers (1,584) (792) 15,836 792 1,584Other debtors (37) (18) 367 18 37 (2,456) (1,227) 24,552 1,227 2,456
Credit from banks 252 126 2,524 (126) (252)Suppliers and service providers 245 123 2,454 (123) (245)Other creditors 274 137 2,739 (137) (274)Other long term creditors 75 38 750 (38) (75)
846 424 8,467 (424) (846)
Total exposure, net (1,610) (804) 16,085 804 1,610
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Sensitivity to Changes in Interest Rate on Fixed Rate Loans – Fair Value Risk Profit (Loss) from
changes Fair
value Profit (Loss) from
changes % of change +10% +5% - -5% -10%
US$ 000 Short Term Loans (RMB) 23 12 2,503 (11) (23)
Long Term Loans (Euro) 65 32 5,285 (33) (66)
Total exposure, net 88 44 7,788 (44) (89)
F. SUMMARY OF SENSITIVITY TESTS TABLES The functional currency of the majority of the Group's companies is the local
currency in their respective country of residence; therefore, the translation differences of these companies’ balance sheet balances do not affect the Company’s profit and loss report and are directly attributed to the Company's equity (currency translation capital fund).
Sensitivity to Changes in the US Dollar- NIS Exchange Rate
Sensitivity to Changes in the US Dollar-Pound Sterling Exchange Rate
Profit (Loss) from changes
Fair value
Profit (Loss) from changes
% of change +10% +5% - -5% -10%
Exchange rate
4.087 3.901 3.715 3.529 3.344
US$ 000
Total Exposure, net (808) (404) 8,086 404 808
Profit (Loss) from changes
Fair value
Profit (Loss) from changes
% of change +10% +5% - -5% -10%
Exchange rate 0.688 0.657 0.625 0.594 0.563
US$ 000
Total Exposure net 3,499 1,749 (34,987) (1,749) (3,499)
18
Sensitivity to Changes in the US Dollar-Euro Exchange Rate
Sensitivity to Changes in the US Dollar-Swiss Franc Exchange Rate
Sensitivity to Changes in the US Dollar-Other Currencies Exchange Rate
Sensitivity to Changes in Interest Rate on Fixed Rate Loans – Fair Value Risk Profit (Loss) from
changes Fair
value Profit (Loss) from
changes % of change +10% +5% - -5% -10%
US$ 000 Total exposure, net 88 44 7,788 (44) (89)
Profit (Loss) from changes
Fair value
Profit (Loss) from changes
% of change +10% +5% - -5% -10%
Exchange rate 0.825 0.788 0.750 0.713 0.675
US$ 000 Total exposure, net 9,739 4,869 (97,395) (4,869) (9,739)
Profit (Loss) from changes
Fair value
Profit (Loss) from changes
% of change +10% +5% - -5% -10%
Exchange rate 0.994 0.949 0.904 0.859 0.813
US$ 000 Total exposure, net 204 102 (2,043) (102) (204)
Profit (Loss) from changes
Fair value
Profit (Loss) from changes
% of change +10% +5% - -5% -10%
US$ 000
Total exposure, net (1,610) (804) 16,085 804 1,610
19
CORPORATE GOVERNANCE ASPECTS APPROVAL PROCESS OF THE FINANCIAL STATEMENTS
The Company's financial statements are submitted for approval to the Board of Directors, which is the body responsible for the Company's governance, a few days after the committee of the Board of Directors for the review of the financial statements (the "Balance Sheet Committee") discusses the financial statements and forms recommendations to the Board of Directors in accordance with the Companies Regulations (Instructions and Terms for the Approval Procedure of the Financial Statements), 2010 ("Statements Approval Regulations").
Members of the Company's Board of Directors The Board of Directors of the Company is comprised of seven members, of
whom five are directors with accounting and financial expertise as detailed above. For further details regarding the Company's directors see regulation 26 to Chapter D of the Company's periodic report for 2011, published on March 15, 2012 (Further Details on the Corporation).
Balance Sheet Committee and Members
The members of the Balance Sheet Committee are the members of the Audit Committee – Ya'acov Elinav, External Director and the chairman of the committee, Isaac Angel, External Director, and Gil Leidner, Director. The Balance Sheet Committee members have financial and accounting expertise and the capacity to read and understand financial statements and have provided the Company with a written declaration in this regard. Mr. Ya'acov Elinav and Mr. Isaac Angel are independent directors by virtue of their being external directors. Mr. Gil Leidner is an independent director in accordance with the determination of the Company's Audit Committee of May 19, 2011, and the determinations of the Board of Directors on August 17, 2011. For details regarding the skills, education and experience of the members of the Balance Sheet Committee, based on which the Company refers to them as directors with financial and accounting expertise, see regulation 26 in Chapter D of the Company's periodic report dated for 2011, published on March 15, 2012 (Further Details on the Corporation). Balance Sheet Committee Processes for Forming Recommendation to the Board of Directors The Company's financial statements were discussed at the meeting of the Balance Sheet Committee held on May 24, 2012. The members of the committee received the financial statements several days prior to the meeting. The three members of the Balance Sheet Committee attended the meeting as
20
well as the Company's independent auditors, the Company's President and CEO, Mr. Ori Yehudai, the Executive Vice President and CFO, Mr. Alon Granot, the Vice President of Finance, Mr. Guy Gill, and the Global Vice President of Legal Affairs and Corporate Secretary, Ms. Tali Mirsky. At the meeting, presentations were given by the Company and by the auditors. The Balance Sheet Committee discussed, among other things, the estimates and evaluations included in the financial statements, the internal control on financial reporting, the completeness and fairness of the disclosure in the financial statements, the accounting policy adopted, the financial practice implemented at the material matters of the Group, and the valuations, including the assumptions and estimations on which the data in the financial information is based. Within the discussion, the Balance Sheet Committee formed its recommendations to the Board of Directors in accordance with the Statements Approval Regulations. The recommendations of the committee were delivered to the Company's Board of Directors three business days prior to the Board meeting at which the financial statements were discussed, which in the opinion of the Board of Directors was a reasonable time period in light of the scope and complexity of the recommendations. Approval Procedure of the Reports by the Board of Directors
The members of the Board of Directors received the draft of the financial statements several days prior to the date of the Board meeting at which the statements were submitted for their approval. The Company's Independent Auditors and members of the Company's senior management were also invited to attend the meeting, including Mr. Ori Yehudai - the President and CEO, Mr. Alon Granot - Executive Vice President and CFO, Mr. Amos Anatot, Executive Vice President Global Supply Chain and Operations, Mr. Guy Gill - Vice President of Finance, and Ms. Tali Mirsky - Global Vice President of Legal Affairs and Corporate Secretary. The Internal Auditor of the Company, Mr. Yoav Barak, was also invited to that meeting. During the meeting, the Board of Directors discussed the recommendations of the Balance Sheet Committee regarding the financial statements. The President and CEO and Executive Vice President and CFO presented during the meeting the Group's business and financial results to the Board of Directors for the relevant period in comparison with previous periods emphasizing special events that occurred during the period. During the presentation of the results of the Group, the Company's management members answered questions and related to the Directors' comments. Following presentation of the Company's financial results, the Company's Independent Auditors answered the Directors’ questions. Finally, the Board of Directors voted on approval of the financial statements. All of the members of the Board of Directors were present at the Board meeting held on May 29, 2012, where the financial statements for March 31, 2012 were unanimously approved.
21
DISCLOSURE RELATING TO THE CORPORATE FINANCIAL REPORTING A. DIVIDEND DISTRIBUTION IN 2012 On March 14, 2012, the Company's Board of Directors resolved to approve
a distribution of cash dividend in the amount of NIS 0.2 per share. The dividend in the total amount of US$3,113 thousand was paid on May 6, 2012.
B. CRITICAL ACCOUNTING ESTIMATIONS
No significant event has occurred in the report period compared to the Company's periodic report for 2011, published on March 15, 2012.
C. EVENTS SUBSEQUENT TO THE DATE OF THE REPORT ON THE FINANCIAL STATUS At Frutarom's request and according to the resolution of Etol's shareholders, on May 8, 2012, Etol's shares were delisted from trade on the Slovenian Stock Exchange. Frutarom continues to act to acquire the balance of Etol's shares from the remaining shareholders.
D. EXCLUSION OF THE COMPANY'S SEPARATE FINANCIAL
STATEMENTS UNDER REGULATION 9(C) TO THE REGULATIONS The Company excluded, from the Periodic Report, a separate financial
statement as set forth in Regulation 9C to the Regulations (the "Solo Statements") due to the negligibility of the additional information of such statements and the fact that the Solo Statement will not add any material information to a reasonable investor which is not included in the Company's consolidated statements.
The Company determined that the information is negligible as the Company
does not have any commercial activities of any kind whatsoever and therefore the Company's results of operations have no effect on the Groups' consolidated profit and loss statements. The Company does not employ people and it does not have any sales or expenses toward third parties.
All of the Company's revenues (dividend and financing income on re-evaluations of capital bills versus Frutarom Ltd.) derive from Frutarom Ltd. From a balance sheet aspect, other than the settling of accounts with the income tax authority, the Company has no balances versus third parties. The only balances it has are loans and balances to Group members (fully owned) and land in the amount of US$139 thousand.
22
The management of the Company has determined that so long as income from externals or from Companies not fully held by the Company are lower than 5% of total revenues in the consolidated financial reports, and so long as expenses to externals or Companies not fully held by the Company are lower than 5% of total expenses in the consolidated financial statements, the Company's separate financial information under regulation 9C to the Regulations is insignificant, and the absence of such does not harm investors' ability to estimate the Company's fluidity risks and does not add any substantial information for reasonable investors.
The management of the Company has also examined the warning signs contained in Regulation 10(14) to the Regulations and determined that they do not exist..
The Board of Directors thanks Frutarom’s management and employees for the Company’s fine achievements. _____________________ _____________________ Ori Yehudai Dr. John Farber President & CEO Chairman of the Board May 29, 2012
FRUTAROM INDUSTRIES LTD.
INTERIM FINANCIAL INFORMATION
(Unaudited)
31 MARCH 2012
FRUTAROM INDUSTRIES LTD.
INTERIM FINANCIAL INFORMATION
(Unaudited)
31 MARCH 2012
TABLE OF CONTENTS
Page
REPORT ON REVIEW OF INTERIM FINANCIAL INFORMATION 2
CONDENSED CONSOLIDATED INTERIM FINANCIAL INFORMATION – IN U.S. DOLLARS:
Condensed Consolidated Statement of Financial Position 3-4
Condensed Consolidated Income Statement and Condensed Consolidated
Statement of Comprehensive Income 5
Condensed Consolidated Statement of Changes in Shareholders’ Equity 6-8
Condensed Consolidated Statement of Cash Flows 9-10
Explanatory notes to Condensed Consolidated Financial information: 11-17
Kesselman & Kesselman, 1 Nathanson Street, Haifa 33034, Israel, P.O Box 33984, Haifa 31339 Telephone: +972 -4- 8605000, Fax:+972 -4- 8605001, www.pwc.co.il
2
Report on Review of Interim Financial Information to the shareholders of Frutarom
Industries LTD.
Introduction We have reviewed the accompanying financial information of Frutarom Industries Ltd. and its subsidiaries (hereafter - the group), which includes the condensed consolidated statement of financial position as of 31 March, 2012 and the related condensed consolidated statement of income, comprehensive income, changes in shareholders’ equity and cash flows for the three-month period then ended. The Board of Directors and management are responsible for preparation and presentation of the financial information for this reporting period in accordance with IAS 34 – "Interim Financial Reporting"; our responsibility is to express a conclusion of the financial data for this interim period based on our review. We did not review the condensed interim financial information of certain consolidated companies, whose assets included in consolidation constitute approximately 25.14% of total consolidated assets as of 31 March, 2012 and whose revenues included in consolidation constitute approximately 24.41% of total consolidated revenues for the three-month period ended on that date. The condensed financial information of these companies was reviewed by other auditors, whose review reports have been furnished to us; and our conclusion, insofar as it relates to the financial information included for these companies, is based on review reports of the other auditors. Scope of review
Our review was performed in accordance with Standard No. 1 on Review Engagements of the Institute of Certified Public Accountants in Israel - "Review of Interim Financial Information Performed by the Independent Auditor of the Entity". Review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with Auditing Standards generally accepted in Israel and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion. Conclusion Based on our review and the review reports of the other auditors, nothing came to our attention that causes us to believe that the accompanying interim financial information is not prepared, in all material respects, in accordance with IAS 34.
Haifa, Israel Kesselman & Kesselman 29, May, 2012 Certified Public Accountants (lsr.) A member firm of PricewaterhouseCoopers International Limited
3
FRUTAROM INDUSTRIES LTD.
CONDESED CONSOLDIATED STATEMENT OF FINANCIAL POSITION
31 MARCH 2012
31 March 31 December 2012 2011 2011 (Unaudited) (Audited) U.S. dollars in thousands
A s s e t s CURRENT ASSETS:
Cash and cash equivalents 37,526 33,665 36,472 Accounts receivable:
Trade 115,933 85,106 86,054 Other 7,237 11,494 6,990
Prepaid expenses and advances to suppliers 11,705 5,163 5,916 Inventories 133,362 101,113 111,214
305,763 236,541 246,646 NON-CURRENT ASSETS:
Property, plant and equipment 193,442 130,694 145,455 Intangible assets 285,652 189,682 255,710Deferred income tax assets 2,580 1,594 2,073 Prepaid expenses in respect of operating lease 61 167 67 Others 631 - -
482,366 322,137 403,305 Total assets 788,129 558,678 649,951
Dr. John Farber )
Chairman of the Board )
Ori Yehudai ) President and CEO )
Alon Granot )
Executive Vice President and CFO )
Date of approval of the interim financial information by the board of directors: May 29, 2012
4
31 March 31 December 2012 2011 2011 (Unaudited) (Audited) U.S. dollars in thousands
Liabilities and equity CURRENT LIABILITIES:
Short-term bank credit and loans and current maturities of long-term loans 112,143 41,031 52,699
Accounts payable: Trade 56,472 39,961 40,239 Other 49,903 33,323 38,444
Dividend payable 3,113 3,290 - 221,631 117,605 131,382
NON-CURRENT LIABILITIES: Long-term loans, net of current maturities 111,727 26,052 88,947Retirement benefit obligations 13,965 11,916 11,359 Deferred income tax liabilities 26,450 23,032 24,669 Other 750 - -
152,892 61,000 124,975 Total liabilities 374,523 178,605 256,357
EQUITY: Equity attributable to owners of the parent Ordinary shares 16,597 16,597 16,597 Other capital surplus 97,835 96,825 97,356 Translation differences 19,894 28,074 12,356 Retained earnings 280,558 241,456 270,266 Less - cost of company shares held by subsidiary (3,199) (2,879) (2,981)
411,685 380,073 393,594 Non-controlling interests 1,921 - -
Total equity 413,606 380,073 393,594
Total equity and liabilities 788,129 558,678 649,951
The accompanying notes are an integral part of these condensed financial statements.
5
FRUTAROM INDUSTRIES LTD.
CONDESED CONSOLIDATED STATEMENT OF INCOME
FOR THE THREE-MONTH PERIOD ENDED 31 MARCH 2012 3 months ended Year ended 31 March 31 December 2012 2011 2011 (Unaudited) (Audited) U.S. dollars in thousands, except for income per share data
SALES 151,217 121,033 518,443
COST OF SALES 96,285 75,370 329,866
GROSS PROFIT 54,932 45,663 188,577 Selling, marketing, research and development expenses- net 25,260 20,099 88,641 General and administrative expenses 13,016 8,887 39,231 Other expenses (income) - net (1,181) 49 2,041
INCOME FROM OPERATIONS 17,837 16,628 58,664
FINANCIAL EXPENSES (INCOME) – net 923 (874) 5,798 INCOME BEFORE TAXES ON INCOME 16,914 17,502 52,866
TAXES ON INCOME 3,413 4,371 10,835
INCOME FOR THE PERIOD 13,501 13,131 42,031
PROFIT ATTRIBUTABLE TO: OWNERS OF THE PARENT 13,405 13,131 42,031 NON-CONTROLLING INTERESTS 96 - -
TOTAL INCOME 13,501 13,131 42,031 EARNINGS PER SHARE: Basic 0.23 0.23 0.73 Fully diluted 0.23 0.23 0.73
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE THREE-MONTH PERIOD ENDED 31 MARCH 2012
U.S. dollars in thousands INCOME FOR THE PERIOD 13,501 13,131 42,031 OTHER COMPREHENSIVE INCOME -
translation differences 7,538 10,463 (5,255) TOTAL COMPREHENSIVE INCOME
FOR THE PERIOD 21,039 23,594 36,776
OTHER COMPREHENSIVE INCOME ATTRIBUTABLE TO:
OWNERS OF THE PARENT 20,943 23,594 36,776 NON-CONTROLLING INTERESTS 96 - -
TOTAL INCOME 21,039 23,594 36,776
The accompanying notes are an integral part of these condensed financial statements.
6
(Continued) - 1
FRUTAROM INDUSTRIES LTD.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE THREE-MONTH PERIOD ENDED 31 MARCH 2012
EQUITY ATTRIBUTABLE TO OWNERS OF THE PARENT
Cost of Total Other company company's Non- Ordinary capital Translation Retained shares held shareholders' controlling shares surplus differences earnings by subsidiary equity interests Total U . S . d o l l a r s i n t h o u s a n d s BALANCE AT 1 JANUARY 2012 (audited) 16,597 97,356 12,356 270,266 (2,981) 393,594 - 393,594 CHANGES DURING THE 3 MONTHS
ENDED 31 MARCH 2012 (unaudited): Comprehensive income - income for the period - - - 13,405 - 13,405 96 13,501 Other comprehensive income - translation differences - - 7,538 - - 7,538 - 7,538 Total comprehensive income for the period - - 7,538 13,405 - 20,943 96 21,039 Plans for allotment of company shares to employees of subsidiary:
Acquisition of the Company shares by subsidiary - - - - (579) (579) - (579) Receipts in respect of allotment of company shares to employees - (58) - - 361 303 - 303
Allotment of shares and options to senior employees- recognition of compensation related to employee stock - 537 - - - 537 - 537 and options grants
Dividend including erosion - - - (3,113) - (3,113) - (3,113) - 479 - (3,113) (218) (2,852) - (2,852)
Non-controlling interest arising on business combination - - - - - - 1,825 1,825
BALANCE AT 31 MARCH 2012 (unaudited) 16,597 97,835 19,894 280,558 (3,199) 411,685 1,921 413,606
The accompanying notes are an integral part of these condensed financial statements.
7
(Continued) - 2
FRUTAROM INDUSTRIES LTD.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE THREE-MONTH PERIOD ENDED 31 MARCH 2012
Cost of Other company Ordinary capital Translation Retained shares held shares surplus differences earnings by subsidiary Total U . S . d o l l a r s i n t h o u s a n d s BALANCE AT 1 JANUARY 2011 (audited) 16,597 96,630 17,611 231,615 (2,661) 359,792 CHANGES DURING THE 3 MONTHS
ENDED 31 MARCH 2011 (unaudited): Comprehensive income - income for the period - - - 13,131 - 13,131 Other comprehensive income - translation differences - - 10,463 - - 10,463 Total comprehensive income for the period - - 10,463 13,131 - 23,594 Plans for allotment of company shares to employees of subsidiary:
Acquisition of the Company shares by subsidiary - - - - (350) (350) Receipts in respect of allotment of company shares to employees - (88) - - 132 44
Allotment of shares and options to senior employees- recognition of compensation related to employee stock and options grants - 283 - - - 283
Dividend including erosion - - - (3,290) - (3,290) - 195 - (3,290) (218) (3,313)
BALANCE AT 31 MARCH 2011 (unaudited) 16,597 96,825 28,074 241,456 (2,879) 380,073
The accompanying notes are an integral part of these condensed financial statements.
8
(Concluded) - 3
FRUTAROM INDUSTRIES LTD.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE THREE-MONTH PERIOD ENDED 31 MARCH 2012
Cost of Other company Ordinary capital Translation Retained shares held shares surplus differences earnings by subsidiary Total U . S . d o l l a r s i n t h o u s a n d s ( A u d i t e d )
BALANCE AT 1 JANUARY 2011 (audited) 16,597 96,630 17,611 231,615 (2,661) 359,792 CHANGES DURING THE YEAR ENDED
DECEMBER 2010 (audited): Comprehensive income: Income for the year - - - 42,031 - 42,031 Other comprehensive income - Translation differences - - (5,255) - - (5,255) Total comprehensive income for the year - - (5,255) 42,031 - 36,776 Plan for allotment of Company shares to employees
of subsidiary: - - - - (892) (892) Purchase of Company shares by subsidiary Receipts in respect of allotment of Company - (382) - - 572 190
shares to employees Allotment of shares and options to senior employees- Recognition of compensation related to employee - 1,108 - - - 1,108
stock and option grants - - - (3,380) - (3,380)
Dividend paid - 726 - (3,380) (320) (2,974)
BALANCE AT 31 DECEMBER 2011 (audited) 16,597 97,356 12,356 270,266 (2,981) 393,594
The accompanying notes are an integral part of these condensed financial statements.
9
FRUTAROM INDUSTRIES LTD.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE-MONTH PERIOD ENDED 31 MARCH 2012
3 months ended Year ended 31 March 31 December, 2012 2011 2011 U.S. dollars in thousands (Unaudited) (Audited) CASH FLOWS FROM OPERATING ACTIVITIES:
Cash generated from operations (see appendix) 20,465 7,014 47,363Income tax paid (2,775) (4,215) (11,788) Net cash provided by operating activities 17,690 2,799 35,575
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (3,600) (1,742) (7,835) Purchase of intangibles (653) (558) (2,564)Interest received 170 120 642 Acquisition of subsidiaries - net of cash acquired (63,597) - (57,963) Acquisition of operations (notes 4) - (9,113) (43,698)Reimbursement in respect of acquisition of operation - - 3,850 Proceeds from sale of property, plant and equipment 72 47 289 Net cash used in investing activities (67,608) (11,246) (107,279)
CASH FLOWS FROM FINANCING ACTIVITIES:
Interest paid (1,379) (364) (2,207) Receipt of long-term bank loans 18,788 - 102,002 Repayment of long-term bank loans (11,956) (7,671) (40,064) Receipt of short-term bank credit and loans – net 46,213 6,956 8,201 Purchase of company shares by subsidiary – net of receipts in respect of the shares (276) (306) (702) Dividend paid - - (3,380) Net cash used in financing activities 51,390 (1,385) 63,850
INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS
AND BANK CREDIT 1,472 (9,832) (7,854) BALANCE OF CASH AND CASH EQUIVALENTS AND BANK
CREDIT AT BEGINNING OF PERIOD 36,472 44,389 44,389 LOSSES FROM EXCHANGE DIFFERENCES ON CASH,
CASH EQUIVALENTS AND BANK CREDIT (690) (892) (63) BALANCE OF CASH, CASH EQUIVALENTS AND BANK
CREDIT AT END OF PERIOD 37,254 33,665 36,472
The accompanying notes are an integral part of these condensed financial statements.
10
FRUTAROM INDUSTRIES LTD.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE-MONTH PERIOD ENDED 31 MARCH 2012
Appendix for Condensed Consolidated Statement of Cash Flows – net cash generated from operations:
3 months ended Year ended 31 March 31 December, 2012 2011 2011 U.S. dollars in thousands (Unaudited) (Audited)
Income before taxes on income 16,914 17,502 52,866 Adjustments required to reflect the cash flows from operating activities:
Depreciation and amortization 6,585 4,570 20,612 Recognition of compensation related to employee stock
and options grants 537 283 1,108 Liability for employee rights upon retirement – net 50 29 225 Loss (income) on from sale of fixed assets 24 (11) 17 Increase (decrease) in provisions – net - (2) 29 Erosion of loans - 146 - Interest paid – net 1,209 244 1,565 Gain on a bargain purchase (1,729) - - 6,676 5,259 23,556
Operating changes in working capital: Increase in accounts receivable: Trade (9,684) (11,919) (12,035) Other 173 (2,828) (3,046) Increase (decrease) in accounts payable and accruals: Trade 9,766 8,083 8,342 Other 1,764 813 (5,524) Increase in inventory (5,144) (9,896) (16,796) (3,125) (15,747) (29,059)
Net cash flow from operating activities 20,465 7,014 47,363
The accompanying notes are an integral part of these condensed financial statements.
11
FRUTAROM INDUSTRIES LTD.
EXPLANATORY NOTES TO THE CONDENSED CONSOLDIATED FINANCIAL INFORMATION
31 MARCH 2012
(UNAUDITED)
NOTE 1 - GENERAL:
a. Frutarom Industries Ltd. is a global company, founded in 1933. The Company operates through the consolidated company (hereafter - Frutarom Ltd.) and the companies under its control (hereafter – the Group). The Group has two main operations: the Flavours activity and the Fine Ingredients activity. The Group develops, manufactures, markets and sells flavours and fine ingredients used by producers of food and beverage, pharma-nutraceutical, flavours and fragrances, and personal care and cosmetics products as well as other products.
b. The Company’s activity is subject to seasonal fluctuations, with generally higher sales in the first
half of a given year and lower sales in the second half of a given year (in particular in the fourth quarter). Many of the Company’s products are used by its customers in the manufacture of beverages and dairy products such as soft drinks, ice cream and yogurts, for which demand generally increases during the summer months. As a result, sales of certain flavors and fine ingredients produced by the Company are higher in the first half of the year than in the second half.
NOTE 2 - BASIS OF PREPARATION OF CONDESED CONSOLIDATED FINANCIAL STATEMENTS
a. The interim condensed consolidated financial information of the group as of 31 March , 2012
and for the 3 month period ended on that date (hereinafter - the interim financial information) was prepared in accordance with International Accounting Standard No. 34 - "Interim Financial Reporting" (hereafter – "IAS 34"). The interim financial information should be read in conjunction with the annual financial statements as of 31 December, 2011 and for the year ended on that date and with the notes thereto, which were all prepared in accordance with International Financial Reporting Standards (hereafter – "IFRS"). The interim financial information is reviewed and is not audited.
b. Estimates –
The preparation of interim financial statements requires management to exercise its judgment; it also requires the use of accounting estimates and assumptions that affect the application of the group's accounting policy and the amounts of reported assets, liabilities, income and expenses. Actual results may differ from those estimates. In preparation of these condensed consolidated interim financial statements, the significant judgments that were exercised by the management in applying the group's accounting policy and the key sources of estimation uncertainty were similar to those applied in the consolidated annual financial statements for the year ended December 31, 2011.
NOTE 3 - PRINCIPAL ACCOUNTING POLICIES:
a. The accounting policies used in preparation of the interim financial information are consistent
with the 2011 annual financial statements, except as described below: Taxes on income in the interim periods are accrued using the tax rate that would be applicable to expected total annual profit or loss.
12
FRUTAROM INDUSTRIES LTD.
EXPLANATORY NOTES TO THE CONDENSED CONSOLDIATED FINANCIAL INFORMATION
31 MARCH 2012
(UNAUDITED)
NOTE 3 - PRINCIPAL ACCOUNTING POLICIES (continued):
b. As specified in the annual financial statements of the group for the year 2011, standards, amendments and interpretations to existing standards came into effect and are effective for reporting period commencing on January 1, 2011, but first time implementation of these standards and interpretations had no material effect on the financial information for the interim period (including comparative figures) of the Group.
c. Additional new standards and amendments to existing standards that are not yet in effect and that
the company elected not to early adopt are listed in the group's 2011 annual financial statements. NOTE 4 – BUSINESS COMBINATIONS
a. Acquisition of Savoury Flavours
On January 4, 2012, Frutarom signed, through a UK subsidiary, an agreement for the purchase of 100% of the share capital of UK company Savoury Flavours (Holding) Limited and its subsidiaries (hereafter – "Savoury Flavours") in consideration for $ 5.9 million (£ 3.8 million) and an additional consideration to be computed in accordance with performances based on a mechanism set in the agreement; in the opinion of the Company, the additional consideration shall not exceed 5% of the amount of the transaction. Founded in 1999, Savoury Flavours develops, manufactures, and markets savory taste solutions, including mainly flavors, seasoning compounds, marinades, and sauces, specializing in snacks and convenience foods. It has a development, manufacturing, and marketing site in the United Kingdom, and a wide customer base including food manufacturers and private label manufacturers in the U.K. and in emerging markets. In the 12 months ended December 31, 2011, Savoury Flavours' sales turnover total $7.1 million. Savoury Flavours’ production site is located close to EAFI’s production site (savory operation that was acquired in 2011). Frutarom has started the merger and combination of the two operations as well as with integrating those operations into Frutarom's savory operations in the UK, and will continue doing so over the coming months. The geographic proximity, along with the two companies’ complementary product portfolios and technologies, will allow significant business synergies between Savoury Flavours’ and Frutarom’s fast growing activities in savory foods categories in the UK and worldwide. The transaction was financed using bank credit. The transaction was completed on the day the said agreement was signed. The cost of acquisition was fully allocated to tangible assets, intangible assets and liabilities which were acquired based on their fair value at the time of the acquisition. Determination of the fair falue of the acquired assets and liabilities is subject to final allocation of the consideration of the purchase to the fair value of assets, Allocation which is performed by the Company and has not yet been completed as of the date of approval of these financial statements.
13
FRUTAROM INDUSTRIES LTD.
EXPLANATORY NOTES TO THE CONDENSED CONSOLDIATED FINANCIAL INFORMATION
31 MARCH 2012
(UNAUDITED)
NOTE 4 – BUSINESS COMBINATIONS (continued):
Assets and liabilities of Savoury Flavours at date of acquisition:
Fair value U.S. dollars in
thousands Current assets: Accounts receivable: Trade 1,078 Inventory 990 Others 123 Non-current assets: Fixed assets 170 Intangible assets 4,984 Current liabilities : Accounts payable and accruals-
Trade (526) Others (429)
Deferred income taxes (578) 5,812
The acquired operations generated revenue of $ 1,553 thousands and net income of $102 thousands (after acquisition and finance costs), for the period from the acquisition date through March 31, 2012.
b. Acquisition of Etol
In the first quarter, Frutarom acquired, through a Swiss subsidiary, 98% of the share capital of the public Slovenian company Etol in consideration for € 34.6 million. On May 8, 2012, Etol was delisted from the Slovenian Stock Exchange. Frutarom will acquire the remaining shares of Etol from the remaining shareholders in consideration for € per share (a total of € 0.8 million) in accordance with the Slovenian law, so that the total cost of acquisition of all of Etol's shares shall be € 35.4 million ($ 45.8 million). Etol, founded in 1924, develops, manufactures and markets sweet and savory flavors, focusing on natural flavor products for the food and beverage industry. Etol also has great experience in the development of fruit based flavors and products and Food Systems, specializing in local fruits of the region, as well as extensive activities in the growing area of bases for beverages that plans to further invest in order to substantially expand its global activity. Etol also has trade and marketing activities for products it does not manufacture, targeted for European countries, which will be integrated into the trade and marketing sector, together with the trade and marketing sector in Israel. Trade and marketing activities are not counted among Frutarom’s core activities.
14
FRUTAROM INDUSTRIES LTD.
EXPLANATORY NOTES TO THE CONDENSED CONSOLDIATED FINANCIAL INFORMATION
31 MARCH 2012
(UNAUDITED)
NOTE 4 – BUSINESS COMBINATIONS (continued):
In the twelve months ended December 31, 2011, Etol's sales turnover amounted to € 51.3 million ($ 71.4 million). Etol has a sophisticated and innovative plant located on some 70 dunam of land east of Ljubljana in Slovenia. Etol’s products are sold to a wide customer base in Central and Eastern Europe and in emerging markets, including Russia, Poland, the Ukraine, Croatia, Serbia, Belarus, Hungary, Slovakia, Macedonia, the Czech Republic, ,Kazakhstan, Turkey and other emerging markets characterized by higher than average growth rates in comparison with the world average market growth as well as developed countries such as the UK, Switzerland and Germany. Leading food and beverage manufacturers in the countries it operates in number among Etol’s customers, including large multi-national food companies. The acquisition is synergetic with Frutarom’s activities. Frutarom is acting to integrate Etol's research and development, marketing and sales, logistics, procurement and manufacture with its own global operations, creating operational synergies and cross-selling. The consideration paid in cash amounted to $ 44,718 thousands (€ 34,601 thousands) and was fully funded by short-term bank credit, the company intends to replace it in 2012 to long-term credit. The cost of acquisition was allocated to tangible assets, intangible assets and liabilities which were acquired based on their fair value at the time of the acquisition. The intangible asests recognized include product formulas in the total amount of € 2,472 thousands ($ 3,195 thousands), customer relations in the total amount of € 1,267 thousands ($ 1,637 thousands) and gain on a bargain purchase in the total amount of € 1,338 thousands ($ 1,729 thousands). The product formulas and customer relations are amortized over an economic useful life of 20 years and 10 years, respectively. The gain on a bargain purchase was recorded as a one-off expense in the statement of income.
15
FRUTAROM INDUSTRIES LTD.
EXPLANATORY NOTES TO THE CONDENSED CONSOLDIATED FINANCIAL INFORMATION
31 MARCH 2012
(UNAUDITED)
NOTE 4 – BUSINESS COMBINATIONS (continued):
Assets and liabilities of Etol at date of acquisition:
Fair value U.S. dollars in
thousands Current assets: Cash and cash equivalents 1,068 Accounts receivable: Trade 16,092 Inventory 10,435 Others 4,925 Non-current assets: Fixed assets 38,647 Computer software 1,752 Other non-current assets 629 Intangible assets:
Product formulas 3,195 Customer relations 1,637 Gain on a bargain purchase (1,729)
Current liabilities : Accounts payable and accruals-
Trade (4,049) Others (4,004)
Deferred income taxes (534) Retirement benefit obligations, net (2,144) Long term loans (21,202) 44,718
The acquired operations generated revenue of $ 15,361 thousands and net income of $ 2.5 million (net of acquisition, finance and gain on a bargain purchase .)
c. Acquisition of Mylner Industria E Comercio Ltda
On February 6, 2012 Frutarom signed, through a subsidiary, an agreement for the acquisition of 100% of the share capital of the Brazilian company Mylner Industria E Comercio (hereafter – “Mylner”) and its parent company Vila Osorio Participacoes in consideration for $ 15.7 million (27.1 Brazlian real). Frutarom also paid a total of 4.4 Brazilian reals for the cash balance of Mylner out of which a total of 2.7 Brazilian real (capitalized value – 2.5 million Brazilian real) was not paid yet and used as security for the seller's indemnification liability in accordance with the purchase agreement, to be realized in installments over 3 years.
16
FRUTAROM INDUSTRIES LTD.
EXPLANATORY NOTES TO THE CONDENSED CONSOLDIATED FINANCIAL INFORMATION
31 MARCH 2012
(UNAUDITED)
NOTE 4 – BUSINESS COMBINATIONS (continued): Mylnar, founded in 1974, develops, produces and markets sweet flavors for beverages and baked goods, and natural flavor products. Mylner has a modern development, production, and marketing site in the area of Sao Paulo, Brazil, including land for future expansion, and employs some 70 workers. Mylner’s wide customer base includes leading food manufacturers mainly in Brazil, and in other developing countries in Latin America In 2011, Mylner sales turnover amounted to $ 11.4 million (app. 19 million Brazilian real). The transaction was financed by bank credit and was completed on the date of signing the agreement. The cost of acquisition was allocated to tangible assets, intangible assets and liabilities which were acquired based on their fair value at the time of the acquisition. Determination of the fair falue of the acquired assets and liabilities is subject to final assessment of allocation of the consideration of the purchase to the fair value of assets and liabilities; this assessment is performed for the Company and has not yet been completed as of the date of approval of these financial statements. Assets and liabilities of Mylner at date of acquisition:
Fair value U.S. dollars in
thousands Current assets: Cash and cash equivalents 2,542 Accounts receivable: Trade 766 Inventory 1,053 Non-current assets: Fixed assets 1,359 Intangible assets 12,974 Current liabilities : Accounts payable and accruals-
Trade (578) Others (858)Short term bank credit (5)
Deferred income taxes (12) Non-current liabilities - Others (782) 16,459
The acquired operations generated revenue of $1,602 thousands and net income of $ 272 thousands (before acquisition and finance costs in the amount of $316 thousands) for the period from the acquisition date through March 31, 2012.
17
FRUTAROM INDUSTRIES LTD.
EXPLANATORY NOTES TO THE CONDENSED CONSOLDIATED FINANCIAL INFORMATION
31 MARCH 2012
(UNAUDITED)
NOTE 5 – DIVIDEND
On 14, March 2012, the Company’s Board of Directors declared the distribution of a dividend of NIS 0.2 per share, in the total amount of $ 3,113 thousands.
NOTE 6 – SEGMENT REPORTING
For management purposes, the Group is organized on a worldwide basis into two major operating activities: Flavour and Fine Ingredients. Another operating activity is Trade and Marketing. Results of operation of the segments are being measured based on operating profit. Segment data provided to the President and the CEO in respect of the reported segments is as follows:
Fine Trade and
Flavors ingredients Marketing Total
operations operations operations Eliminations Consolidated U.S. dollars in thousands
3 months ended 31 March 2012 (unaudited): Revenues 108,966 37,468 5,386 (603) 151,217
Segment results 14,002 3,646 362 (173) 17,837
3 months ended 31 March 2011 (unaudited): Revenues 80,211 39,137 2,394 (709) 121,033 Segment results 11,204 5,451 191 (218) 16,628
Year ended 31 December 2011 (audited): Revenues 369,894 145,008 6,373 (2,832) 518,443
Segment results 46,811 11,745 353 (245) 58,664
The reconciliation of the reported profits and total profits before taxes for the reported periods is described below:
3 months ended Year ended 31 March 31 December 2012 2011 2011 (Unaudited) (Audited) U.S. dollars in thousands Reported segment profits 17,837 16,628 58,664Financing expenses (income) 923 (874) 5,798 Profit before taxes on income 16,914 17,502 52,866
Very Substantial Valuation
The following are details about the purchase price allocation for ETOL according to IFRS3R and the directives of Regulation 8b to the Securities Regulations (Periodic and Immediate Reports), 1970:
Valuation subject Allocation of acquisition price of ETOL Valuator BDO Ziv Haft Consultants and Management Ltd.
Valuation requester Frutarom Industries Ltd., by Mr. Guy Gill, VP Finance
Engagement date March 2012 Approval to attach to reports
The valuator approved in writing the attachment of the evaluation to the Company's reports
Valuation timing Allocation of assets as of January 17, 2012. Valuation was conducted during March – May 2012.
Purchase Price Allocation for assets and liabilities In Euro 000'
Tangible assets, net 33,734 Intangible assets Customer relations 1,267 Know how 2,472 Deferred tax on intangible assets
)747(
Goodwill )1,338( Total 35,387
Identification of evaluator and its characterization
Ziv Haft Consulting and Management was established by partners in the BDO Ziv Haft Accounting firm. Ziv Haft Consulting and Management is part of the global BDO network and provides consulting and management services in a wide variety of areas for companies operating in different areas. The company has rich experience in the following areas: valuations, due diligence – financial and accounting) valuation of goodwill and intellectual assets, performance of financial analysis, current analysis of Israeli public hitech and communications companies, business plans, planning of presentations for potential investors, financial management and analysis of BOT and PFI projects, receivership, liquidation and appointment as special administrator, handling companies in crisis, formulating recovery plans, management of business and companies, supporting mergers and splits, transaction planning and more. Evaluator: Pini Shmueli Nissan. Evaluator's education BA in Economics, Ben Gurion University of the Negev.
M.Sc. in economics, Eitan Bargelis School at the Tel-Aviv University.
Positions held: Director of research and consulting department at
Forsyth; Director of consulting department at Ernst & Young Areas of expertise: Performance of financial assessments and valuations,
including valuations for accounting purposes for reporting corporations in scopes similar to those of the reported valuation or larger;
Pricing and analysis of financial issues for government and private bodies;
Support in IPOs and consultation in mergers. The evaluator has no dependency on Frutarom and there are no indemnification agreements with the evaluator.
Valuation model Customer relations – DCF – Discounted Cash Flow Know how – Royalty Relief Method
Valuation Assumptions
Discount rate: 11% before taxes Growth rate: 2% long term Rate of permanent asset return – 7% Rate of working capital – 4% Rate of HR contribution – 11% Data used as a basis for comparison: the Company’s results in recent years and its forecast.
Frutarom Industries Ltd. Purchase Price Allocation - ETOL Group
Section 1: The Acquisition | Frutarom Industries Ltd. | Purchase price allocation – ETOL Group 2
BDO Ziv Haft Amot Bituach House Building B, 48
Menachem Begin Road, Tel Aviv 66180 Israel www.bdo.co.il
Frutarom Industries Ltd.
Re: A Purchase Price Allocation of ETOL Group.
In accordance with a request Frutarom. (Hereinafter: "Frutarom" or "The
purchaser") BDO Ziv Haft Consulting & Management Ltd. (Hereinafter:
"BDO") has performed an investigation and valuation of the net assets of
ETOL Tovarna arom in etericnih olj d.d. (Hereinafter: "ETOL" or/and the
"Company") with its subsidiary (Hereinafter: "The Group" or/and the "ETOL
Group") acquired by Frutarom, as of January 17th, 2011 (Hereinafter: the
"Valuation Date").
The valuation is based upon data and information delivered to us by the
Company and its management. Among data and information used are:
The company's audited Financial Reports as of December 31, of the
years 2009-2011;
The acquisition Details;
Other information provided by Management, written or oral;
Discussions with Management;
Publicly available information (articles, websites) regarding the
industry;
While making this PPA, BDO used the data and information supplied by the
Company without examining its correctness and completeness. The data and
information received from the Company were assumed correct, and any
reliance thereof is neither confirmation nor verification of their validity.
BDO and its employees are not responsible for the completeness or accuracy
of the aforementioned data, or for any inaccuracy, error, omission or any
other fault caused by using the aforementioned data.
The valuation of the Company's assets involves assumptions, estimates and
forecasts, yet supposed to reasonably assess the economic value based on
the available information at the time of the evaluation. Any change in the
different variables or supplemental information may affect the outcomes of
the evaluation, and consequently the conclusions of the analysis.
This Purchase Price Allocation report contains forward-looking statements,
with respect to the Company, its financial condition and projected results of
its operations. These forward-looking statements are subject to risks and
uncertainties, including, but not limited to, changes in general economic
conditions, failure to forecast the market trends, and specific risks
associated with the nature of target markets and unanticipated events or
circumstances. Changes in economic conditions and market trends might
significantly affect the valuation.
Section 1: The Acquisition | Frutarom Industries Ltd. | Purchase price allocation – ETOL Group 3
Details regarding the valuation specialist
BDO was founded by the partners of BDO Certified Public Accountants. BDO
is part of the international BDO network, provides a full range of business
services required for national and international businesses in any sector.
BDO has vast experience in the following fields: business valuations,
financial and tax due diligence, goodwill and intangible assets valuations,
financial analyses, business plans, project finance PFI/PPP advisory, M&A,
investment banking and more.
Your exclusive remedy and BDO’s sole liability to you, for any cause
whatsoever will be limited to the fees paid to BDO under this Agreement.
The foregoing limitation will apply regardless of the form of action, whether
contract or tort, including without limitation, negligence, except that such
limitation shall not apply in the case of gross negligence, revenue, data, use
of other commercial injury, or any special, incidental, indirect or
consequential damages, suffered by Frutarom or any third party, whether or
not BDO has been advised of the possibility of such loss, injury, damages or
third party claim, under any cause of action arising out of or relating to this
Agreement.
You acknowledge that Frutarom is solely responsible for the payment of all
fees, expenses, indemnification or other amounts due under or in
connection with this engagement. Frutarom shall indemnify, defend, hold
harmless, and release BDO from and against any and all claims, lawsuits,
judgments, proceedings, damages, costs, and expenses (including court
costs and reasonable attorney’s fees) in any manner relating to, arising out
or associated with this engagement or any of the services provided by BDO
under this Agreement, except that such indemnity shall not apply in the
case of gross negligence or willful misconduct by BDO.
BDO reserves the right to update the evaluation in light of new information,
which was not introduced prior to this analysis.
We would be delighted to be of any assistance.
Respectfully submitted,
BDO Ziv Haft
Consulting & Management Ltd.
Section 1: The Acquisition | Frutarom Industries Ltd. | Purchase price allocation – ETOL Group 4
Results Results
According to the assumptions detailed in this report, we have arrived to the
conclusion that some of the acquired intangible assets were needed to
revaluate to reflect market value. The following table provides details
regarding these assets (In Thousands €):
Source: company's financial reports+ BDO analysis
Source: company's financial reports+ BDO analysis
Remark
The balance sheet data as of the Valuation Date are based on the Groups'
unaudited financial data as of December 31, 2011, according to Frutarom's
management that there were no material changes between December 31,
2011 and the Valuation Date.
Tousands € Note Book Value Fair value% of Purchase
Price
Life Span
(Years)
Current Assets
Cash 826 826 – 2.3%
Short-Term Investments 1,001 1,001 – 2.8%
Account recievables 1 10,815 10,815 – 30.6%
Other recievables 2 1,635 1,635 – 4.6%
Inventories 3 9,316 9,852 536 27.8%
Invetory's Tax Benefit Factor 3 80 (27) (107) -0.1%
Other assets, net 48 48 – 0.1%
Total Current Assets 23,720 24,149 428 68.2%
Long Term Assets
Fixed Assets 4 16,031 29,903 13,872 84.5%
Fixed Asseets's Tax Benefit Factor 4 – (2,774) (2,774)
Intangible assets and long term deferred taxes 1,356 1,356 – 3.8%
Long-Term Financial Investments 1,475 1,475 – 4.2%
Total Long Term Assets 18,862 29,960 11,098 84.7%
Deferred Tax Assets 3,135 3,135 – 8.9%
Total Assets 45,717 57,243 11,526 161.8%
Tousands € Note Book Value Fair value of Purchase Price % )Years(Life Span
Liabilities
Short-Term Financial Liabilities 6 7,064 7,064 20.0%
Account payables 5 3,133 3,133 8.9%
Employees short term liabilities 1,097 1,097 3.1%
Other Short-Term Liabilities 9 9 0.0%
Short-Term Accrued Costs And Deferred Revenues 191 191 0.5%
Provisions And Long-Term Deferred Taxes And Accrued Income 2,578 2,578 7.3%
Loans 6 9,373 9,373 26.5%
Other Long-Term Financial Liabilities 63 63 0.2%
Total Liabilities 23,510 23,510 66%
Total Assets 22,208 33,734 95%
Intangible Assets
Costumers Relationships 1,267 3.6% שנים 10
Tax Benefit Factor 7 (253) -0.7%
KnowHow 2,472 7.0% שנים 20
Tax Benefit Factor 7 (494) -1.4%
Total Itangible Assets 2,991 8.5%
GoodWill 8 (1,338) -3.8%
Purchase Price 9 35,387
Section 1: The Acquisition | Frutarom Industries Ltd. | Purchase price allocation – ETOL Group 5
Notes Notes
1. According to the Company, the Account receivable, as of the Valuation
Date, is attributed to short-term operating amounts, which are received
by the costumers during the current business and expected to be
charged during the current year. Therefore, there is no difference
between the book value and the fair value of this balance and no
adjustments had been made.
2. According to the Company, the other receivables, as of the Valuation
Date, is attributed to short-term operating amounts, which are received
during the current business and expected to be charged during the
current year. Therefore, there is no difference between the book value
and the fair value of this balance and no adjustments had been made.
3. According to the Company, the inventory balance consists of raw
materials inventory in the amount of €7,175 thousands and of finished
goods inventory in the amount of €2,141 thousands. According to IFRS3R,
we re-calculated the value of the finished goods inventory and
adjustments had been made (See Appendix D). Due to the difference,
between the book value and the fair value of this balance, we created a
deferred tax, according to the Group's tax rate received by Frutarom's
management.
4. The Group's fixed assets, as presented in its financial report, consist of
land and buildings, production equipment and machinery, other
appliances and equipment and property-plant and equipment under
construction or in production. The land and the buildings are located at
39 Škofja vasst in Slovenia and serve as the Group's operating activity. In
order to present the land and buildings in their fair value, we used a real
estate valuation expert as of December 31, 2011, received by the
Company. According to the expert valuation, there is a difference
between the book value and the fair value of this balance and
adjustments had been made. Due to the difference between the book
value and the fair value of this balance, we created a deferred tax,
according to the Group's tax rate received by Frutarom's management.
5. On December 31, 2011 the Group's long-term financial liabilities and
short-term financial liabilities balances were set on about €9,373
thousands and €7,064 thousands, respectively. According to the
Company's management the loans were taken in a variable interest,
except one loan, which its interest reflects the market interest rates.
Accordingly, no adjustments had been made as the current liabilities
were already recognized on their fair value.
6. Tax benefit factor was calculated and added to each of the intangible
assets, using the Group's tax rate received by Frutarom's management.
7. The goodwill value is the difference between the purchase price and the
fair value of the tangible and intangible assets
8. The total purchase price amounted to €35,387 thousands (for more
details see section 1 - the acquisition)
Section 1: The Acquisition | Frutarom Industries Ltd. | Purchase price allocation – ETOL Group 6
Contents
The Acquisition 7
Company Overview 9
Financial Statement 14
The Purchaser 17
Market Overview 31
Methodology 43
Valuation of Intangible Assets 51
Results 62
Appendix 65
Section 1: The Acquisition | Frutarom Industries Ltd. | Purchase price allocation – ETOL Group 7
Section 1
The Acquisition
Section 1: The Acquisition | Frutarom Industries Ltd. | Purchase price allocation – ETOL Group 8
The acquisition
The Acquisition The Acquisition
Over the course of the months January to May 2012, Frutarom, through a
Swiss subsidiary, acquired 97.9% of the Slovenian public company ETOL, in
return for €34.6 M. The acquisition was performed in a number of stages:
over January and February 2012, Frutarom acquired 63.4% of ETOL's share
capital in transactions on and outside the Stock Exchange, in return for an
overall sum of €22.3M. on March 15, 2012, Frutarom completed its
acquisition bid in Slovenia, under which it purchased an additional 87,000
shares, which constituted 34.2% of ETOL's share capital, in return for Euro
141 per share (a total of €12.3 M), and following this, Frutarom held 97.7%
of ETOL's share capital. Following this acquisition bid, Frutarom acted to
delist ETOL from the Slovenian Stock Exchange, and this was completed on
May 8, 2012. Over this period Frutarom acquired a further 0.02% of ETOL's
share capital in transactions on the Stock Exchange. Frutarom is further
acting to acquire the balance of shares from the remaining shareholders, for
€141 per share, and in total, consideration of Euro 755 thousand, so that the
cost of the acquisition of all shares in ETOL will be Euro35.4 M (US$45.8 M).
According to Frutrom's management's declaration, that its first intention was to acquire
the entire share capital of ETOL and therefore should be seen at all the purchase
transaction, as detailed above, one acquisition which was planned to achieve one
commercial goal, and subject to IAS 27, we see all of Frutarom's purchase transactions
as a single acquisition.
In light of the above, the acquisition consideration is €35,387 thousands (Hereinafter:
the "Consideration").
As of the Valuation date and before, the Slovenian market was in economic crisis, a
fact which allowed companies' acquisitions in law prices. Accordingly, we believe that
this acquisition was made in coincidental price. A fact that supports this assumption is
that the EBITDA multiplier which derived from this acquisition is lower than the EBITDA
multipliers which derived from Frutarom's previous acquisitions.
ETOL's activity is synergetic to Frutarom's activity. Frutarom estimates that the
acquisition of ETOL will increase its client's portfolio and the amount of revenue in
emerging markets, while expending product portfolio, strengthening its operations and
its market share in these markets. Frutarom intends to utilize ETOL's development,
sales and production capabilities to develop its business in this geographical area.
Section 2: Company Overview | Frutarom Industries Ltd. | Purchase price allocation – ETOL Group 9
Section 2
Company Overview
Section 2: Company Overview | Frutarom Industries Ltd. | Purchase price allocation – ETOL Group 10
Company Overview
General Description Products
ETOL, founded in 1924, is a flavor company dealing, together with its
subsidiaries, in development, manufacture and marketing of sweet and
savory taste solutions, focusing on natural flavor products for the food and
beverage industry.
ETOL also has experience in the development and manufacture of fruit
based flavors and products and food systems, specializing in local fruits of
the region, as well as extensive activities in the area of plant bases for
beverages, in which Frutarom intends to significantly invest and expand
activities.
ETOL has a development, manufacturing and marketing site in Sofia Vas,
Slovenia, in which it has invested widely over the past few years in order to
allow expansion, development and integration of innovative technologies in
the area of flavors, as well as additional real estate properties for future
expansion.
Products
As mentioned, the company is dealing with the sweet and savory tastes
solutions market. The following are the main products of the company;
Syrup products, including various fruit preparations, bases, syrups,
emulsions, liquid aromas for non-alcoholic beverages, casings for
tobacco products, and dry fruit extracts;
Aromas, including household aromas, essential oils, synthetic dyes,
seasoning concentrates, various extracts, powdered flavours, and
tobacco flavours;
Powdered products, including powdered fruit, juices, aromas, spices,
and natural dyes;
Fruit concentrates, distillates and distillation of flavourings (juniper oil,
citrus oil, and spirits extracts).
Costumers
ETOL’s products are sold to a wide customer base in Central- and Eastern
Europe and in emerging markets, with an emphasis on Russia, Poland, the
Ukraine, Turkey, Croatia, Serbia, Slovakia, Belarus, Hungary, Macedonia, the
Czech Republic, Kazakhstan and other developing countries characterized by
higher than average growth rates in comparison with the world average
market growth. Leading food and beverage manufacturers in the countries it
operates in number among ETOL’s customers, including large multi-national
food companies.
Section 2: Company Overview | Frutarom Industries Ltd. | Purchase price allocation – ETOL Group 11
Company's Overview
Costumers Customers
The following presents the sales areas by geographic marketing activities of
the company:
(EU and CEFTA)1 – As for the year 2011 is 45% of the company's sales. The
biggest market in this area is Slovenia, where in 2010 we achieved slightly
lower revenues than the year before. The decrease in sales is contributed to
the lower turnover of the Slovenian food industry in the past two years and
an outflow of customers to low-price traders, where the Slovenian food
industry has not been present so much. The second biggest market in this
area is Poland, where we have slightly fallen behind the last year’s sales,
but we did, however, increase our sales to new customers. Last year’s sales
results were surpassed on the markets of Austria, Germany, Slovakia, Czech
Republic, and Great Britain, whereas lower sales were recorded on the
Hungarian and Lithuanian markets.
(Southeast Europe)- As for the year 2011 is 34% of the company's sales. The
biggest market in this area is Croatia, where we exceeded our results from
2009; followed by Serbia, where we slightly fell behind the achieved
revenues for 2009. The same was also seen in Bosnia and Herzegovina and
Macedonia. The greatest problem of these markets lies in the poor
macroeconomic situation of the countries and, consequently, a general fall
of consumption, and a serious lack of payment discipline. The fastest
growing market of the sales area 2 is Turkey; record sales were achieved in
2010 as a result of intensive and successful sales activities in this market.
(New markets)- As for the year 2011 is 2% of the company's sales. This was
achieved primarily with new transactions, especially on the markets of
Jordan, Saudi Arabia, and United Arab Emirates.
(Eastern Europe) - As for the year 2011 is 22% of the company's sale. The
largest market in this area is Russia, where we created significantly more
revenues than in 2009. The increase in the turnover on the Russian market is
a result of the good work performed by all field units. The second largest
market in this area is Ukraine, where we also achieved a substantial increase
in revenues compared to 2009.
1 The CEFTA area contains Albania, Bosnia, Croatia, Macedonia, Moldavia, Mortgagor and Serbia
Section 2: Company Overview | Frutarom Industries Ltd. | Purchase price allocation – ETOL Group 12
Company Overview
Costumers Costumers
The following presents the company's market share by geographic areas as
for 31.12.2011;
Source: company's financial reports as for 31.12.2011
The following presents the company's income out of its 10 biggest
customers, during the years 2009-2011 (Thousands €):
Source: Data's from company+ BDO analysis
Research and Development
Research and development activity is of crucial importance for market
success. In the area of development, the company organize various
activities such as creating new products and applications, training
programmes, marketing assistance, presentations to buyers and sales
representatives, and the evaluation of raw material, end products and
production. The company also takes part in the general rationalization
and transparency of the company’s operations in whole.
Section 2: Company Overview | Frutarom Industries Ltd. | Purchase price allocation – ETOL Group 13
Company Overview
Employees
ETOL, together with its subsidiaries employs some 248 employees, including
in research and development and sales, and an experienced management
team.
The following presents the employees divided to the different departments,
as for 31.12.2011;
source: company's management
2011Department
38 Management
61 S&M
29 R&D
120 manufacture
248 Sum
Section 3: Financial Statement | Frutarom Industries Ltd. | Purchase price allocation – ETOL Group 14
Section 3
Financial Statement
Section 3: Financial Statement | Frutarom Industries Ltd. | Purchase price allocation – ETOL Group 15
Financial Statements
Profit and Loss Statement Profit and Loss Statement
Following are the Company's audited profit and loss statements for the
twelve months ended on December 31, for the years 2009-2010 and un-
audited statements for the twelve months ended on December 31, 2011
(Thousands €);
Source: company's financial reports
The following is the company's revenue and gross profit tendency, during the
years 2009-2011;
sour
Source: BDO analysis (the decrease in the gross profit during the years 2010-2011 is
attributed to raw materials prices.
Thousands € 2009 2010 2011
Net Revenue 42,946 46,047 51,291
% growth 7.2% 11.4%
Costs Of Products 24,634 26,395 34,532
% of revenue 57.4% 57.3% 67.3%
Gross Profit 18,312 19,652 16,759
Gross profit % 42.6% 42.7% 32.7%
Operating Expences 14,379 16,280 13,771
Operating Profit 3,932 3,371 2,987
% Operating Profit 9.2% 7.3% 5.8%
42,946
46,047
51,291 42.6% 42.7%
32.7%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
38,000
40,000
42,000
44,000
46,000
48,000
50,000
52,000
Net Revenue % Gross profit
Section 3: Financial Statement | Frutarom Industries Ltd. | Purchase price allocation – ETOL Group 16
Financial Statement
Balance Sheet Balance Sheet
Following are the Company's audited balance sheets as of December 31, for
the years 2009-2010 and un-audited balance sheets as of December 31, 2011
(Thousands €);
Source: company's financial reports
Source: company's financial reports
Thousands €
December
2009 ,31
December
2010 ,31
December
2011 ,31
Current Assets
Cash 844 443 826
Short-Term Investments 4,151 3,536 1,001
Account recievebles 11,017 11,913 10,815
Other recievebles 656 444 1,635
Inventories 6,950 9,807 9,316
Invetory's Tax Benefit Factor – – 80
Other assets, net 41 44 48
Total Current Assets 23,660 26,187 23,720
Long Term Assets
Fixed Assets 16,521 15,347 16,031
Intangible assets and long term deferred taxes 1,580 1,336 1,356
Long term financial investments 12,551 5,567 1,475
Total Long Term Assets 30,652 22,250 18,862
Deferred Tax Assets 1,771 3,425 3,135
Total Assets 56,083 51,862 45,717
Thousands €
December
2009 ,31
December
2010 ,31
December
2011 ,31
Short-Term Liabilities
Short-Term Financial Liabilities 2,809 3,500 7,064
Account payables 2,486 3,278 3,133
Employees short term liabilities 1,118 2,736 1,097
Other Short-Term Liabilities 23 73 9
Short-Term Accrued Costs And Deferred Revenues 10 52 191
Provisions And Long-Term Deferred Taxes And Accrued Income 1,194 1,227 2,578
Total Short-Term Liabilities 7,640 10,867 14,073
Long-Term Liabilities
Loans 15,457 13,064 9,373
Other Long-Term Financial Liabilities 60 18 63
Other Operational Liabilities 11 6 –
Total Long-Term Liabilities 15,528 13,088 9,436
Total Liabilities 23,168 23,954 23,510
Capital 32,915 27,907 22,207
Total Capital & Liabilities 56,083 51,862 45,717
Section 4: The Purchaser | Frutarom Industries Ltd. | Purchase price allocation – ETOL Group 17
Section 4
The Purchaser
Section 4: The Purchaser | Frutarom Industries Ltd. | Purchase price allocation – ETOL Group 18
The Purchaser
General General
Frutarom was incorporated in Israel in 1995 as a private company under the
name Frutarom NewCo (1995) Ltd. In 1996 Frutarom changed its name to
Frutarom Industries Ltd.
Frutarom Ltd., a wholly owned subsidiary of Frutarom through which
Frutarom operates and manages its business and production activity, was
established in 1933 as Frutarom Palestine Ltd. Frutarom's operations
initially consisted of the cultivation of aromatic plants and flowers for the
extraction and distillation of flavor and fine ingredients materials and
essential oils.
In 1952, Frutarom's assets were purchased by Electrochemical Industries
(1952) Ltd. In May 1996, as part of Frutarom's spinoff from Electrochemical
Industries (1952) Ltd., Frutarom's shares were listed for trade on the Tel
Aviv Stock Exchange.
In February 2005, Frutarom raised capital from international and Israeli
institutional investors by issuing shares and registering GDRs for trade on the
London Stock Exchange Official List. The goal of raising capital was to
finance future strategic acquisitions as part of Frutarom's rapid growth
strategy, combining rapid internal growth of core activities at above-
industry-average rates, with strategic acquisitions of activities and knowhow
in Frutarom's main fields of activity and in strategic geographic locations.
Today, Frutarom is a global company, one of the ten leading companies in
the world in the fields of flavors and specialty fine ingredients. It serves
mainly the food, beverage, flavor, fragrance, pharmaceutical/nutraceutical,
health and functional food, food additive and personal care industries.
Frutarom is engaged in the development, production and marketing of
flavors and specialty fine ingredients used in the production of food,
beverages, flavor, fragrance, pharmaceutical/nutraceutical, personal care
products among others. Frutarom operates production facilities in Europe,
North America, Latin America, Israel and Asia that serve a customer base of
over 14,000 in more than 130 countries. Frutarom markets and sells over
30,000 products and employs roughly 1,900 people.
Frutarom’s main shareholder is the ICC Group which, through ICC Industries
Inc., holds 21,406,922 shares as of the date of this report, representing
approximately 37.02% of Frutarom's share capital and voting rights.
Section 4: The Purchaser | Frutarom Industries Ltd. | Purchase price allocation – ETOL Group 19
The Purchaser
The Group Structure Company's Activities
All of the Group’s companies are wholly owned by the Group, excluding ETOL Tovarna arom in
eteričnih olj d.d. (63.4%), ETOL-RUS, Ltd. (99.1%), Nutra Lease Ltd. (55%), Frutarom South
Africa (Proprietary) Ltd (75%), Frutarom Gida Urunleri San. Ve Tic. Ltd. Sti (99%), Pucheng
Yongfang Fragrance (51%) and M/S Aromco Flavours India (P) Ltd. (51%).
Frutarom is a global company that develops, manufactures, markets and
sells flavors and specialty fine ingredients used in the production of food and
beverage, flavors and fragrances, pharmaceutical/nutraceutical, personal
care and other products. Frutarom has two main activities, each of which is
a main field of activity and reported as a business sector in Frutarom's
consolidated financial reports (see also Note 6 in the financial reports for
2011), as detailed below:
The Flavor Activity
As part of the Flavor activity, Frutarom develops, produces, markets and
sells sweet and savory flavors used mainly by manufacturers of food and
beverages and other consumer products including flavors and food system
products (products combining fruits, vegetables and/or other natural
ingredients, including sweet and savory flavors). These products are used
in a wide variety of food products such as dairy products, ice cream, sweets,
savory baked products, convenience foods and prepared meals). Frutarom
develops for its customers thousands of different flavors, most of which are
tailor-made, and continuously develops new formulas in order to meet
changing consumer preferences and customer needs. The Flavor Activity is
the most profitable of Frutarom's activities and has experienced accelerated
growth since 2001. Flavor sales increased from US$39.1 million in 2001 to
US$369.9 million in 2011. The growth in the sales of the Flavor activity
derives mainly from Fruarom’s focus on both developed and emerging
Section 4: The Purchaser | Frutarom Industries Ltd. | Purchase price allocation – ETOL Group 20
The Purchaser
Company's Activities Company's Activities
markets, and by serving multinational, mid-sized and local customers with a
special focus on private label customers, and from the successful execution
of strategic acquisitions in recent years. The relative portion of Frutarom's
total sales deriving from the Flavors activity has increased from 39.0% in
2001 to 71.3% in 2011.
The Specialty Fine Ingredient Activity
As part of the Specialty Fine Ingredient activity, Frutarom develops,
produces, markets and sells natural flavor extracts, natural functional food
ingredients, natural pharmaceutical/nutraceutical extracts, specialty
essential oils, citrus products, aroma chemicals and natural gums. Fine
Ingredients are sold principally to the food and beverage, flavor and
fragrance, pharmaceutical/nutraceutical and personal care industries. Sales
of Specialty Fine Ingredients have grown significantly from US$57.5 million
in 2001 to US$145 million in 2011.
The growth in the sales of the Specialty Fine Ingredients was mainly
achieved by the development of new, with special focus on natural
products, by focusing on multinational, mid-sized and local customers and as
a result of several successful strategic acquisitions made in recent years.
The relative portion of Frutarom's total sales deriving from the Specialty
Fine Ingredient activity totaled 28% in 2011.
The majority of the fine ingredients produced by Frutarom are sold to third
parties. However, a portion of the specialty fine ingredients are used by
Frutarom as well and there are some ingredients, for example in the citrus
field, which are used solely by the Flavor activity in the production of
certain flavors giving Frutarom a unique advantage.
Trade & Marketing Activity
In addition to the Flavor and Specialty Fine Ingredient activities, Frutarom
trades and markets various raw materials produced by third parties to
customers in Israel. This activity is not considered a core activity by
Frutarom's management as volumes are low; it is therefore not reviewed
separately in this report. In 2011, this activity totaled approximately US$6.4
million and its relative portion of Frutarom's total sales was approximately
1.2%.
The following are the Group's sales (in US$ thousands) for the years 2009
through 2011, showing Flavor Activity sales and their percentage of the
Group's total income:
Source: company's management
Thousands $ 2008 2009 2010 2011
Income From Flavors Division 339,819 297,062 306,374 369,894
% of revenues 72% 70% 68% 71%
Section 4: The Purchaser | Frutarom Industries Ltd. | Purchase price allocation – ETOL Group 21
The Purchaser
Company's Activities
Customers
The Flavor Activity is the most profitable of Frutarom's activities and has
undergone accelerated growth since 2001. Flavor sales grew from US$39.1
million in 2001 to US$369.9 million in 2011. The relative portion of the
Flavors Activity out of Frutarom's overall activities grew from 39% in 2001 to
71.3% in 2011.
New Products
As part of its Flavors activity, Frutarom is constantly developing a variety of
new products. New products are generally developed in cooperation and
adapted to the needs of a specific customer. No new product developed by
Frutarom is significant in terms of expected sales turnover and/or
development costs.
Customers
The flavors manufactured by Frutarom are sold to an extensive customer
base comprised of thousands of large multinational, mid-sized, local and
small customers. The customers are primarily food and beverage
manufacturers and they are located in over 120 different countries
worldwide. The Flavors activity does not have any one customer whose
purchasing turnover constitutes over 10% of Frutarom's sales turnover (over
the last few years there have also been no customers whose scope of
purchase was more than 3% of Frutarom’s sales turnover).
The management of Frutarom estimates that it has no dependency on any
one of its customers.
The majority of sales are made to permanent customers since, as previously
discussed, the flavor segment is characterized by long-term relationships
and customer loyalty. As is customary in the flavor market, there are no
long-term supply contracts.
Marketing and Distribution
Frutarom maintains a global marketing, sales and customer technical
support organization, with established local R&D, sales and marketing
personnel in all of its key target markets. Frutarom estimates that its global
presence provides it with a competitive advantage and is a key factor in the
success of its growth strategy. On December 31, 2011, Frutarom had 660
professionals, approximately 50 sales and marketing offices and 30 local
laboratories which are located in its target markets, in close proximity to its
customers, including in the US, Brazil, Mexico, the UK, Germany,
Switzerland, France, Italy, Slovenia, Norway, Denmark, Israel, Russia,
Ukraine, Turley. Kazakhstan, Romania, China, Japan, Hong Kong, Indonesia,
India and South Africa. Frutarom markets and sells its products
Section 4: The Purchaser | Frutarom Industries Ltd. | Purchase price allocation – ETOL Group 22
The Purchaser
Marketing and Distribution Research and Development
primarily through its own sales personnel. In certain countries, Frutarom
uses third party agents and distributors to sell its products.
Frutarom's global sales and marketing organization is a key component of its
strategy to provide tailor-made specialized products and services and high
quality customer support to both large multinational and mid-sized and local
customers.
Research and Development
Frutarom's sales and marketing personnel and its research and development
personnel work equally closely with both large multinational and mid-sized
and local companies to offer timely and responsive personalized
development services, including custom flavors development and specialty
fine ingredients tailor made to the customer's specific needs. Frutarom
estimates that the mid-sized and local customer segment represents more
than 60% of the global food and beverage market.
The development of fine ingredients is in many cases Frutarom's own
initiative, based on its assessment of market trends and needs while
focusing on developing products with higher margins in order to continue
and improve Frutarom's product mix and optimize production capabilities
and capacity.
The Flavors activity has approximately 23 research and development
laboratories. The main laboratories are locatedin the UK, Switzerland,
Germany, the US, Slovenia, Israel, Italy, Turkey, China, Brazil and South
Africa. In the Fine Ingredient field, Frutarom has approximately 8 research
and development facilities located in Israel, the UK, Switzerland the US and
the Netherlands.
Seasonality
Frutarom's business is subject to seasonal fluctuations, generally with higher
sales and profitability in the first half of a given year and lower sales in the
second half of a given year (in particular, in the fourth quarter). A major
part of Frutarom’s products are used by its customers in the manufacture of
beverages and dairy products such as soft drinks, ice cream and yogurts, for
which demand generally increases markedly during the summer months. As a
result, sales of certain flavors and fine ingredients produced by Frutarom
rise in the first half of the year, as manufacturers of beverages and dairy
products re-stock their inventories and increase production in advance of
rising demand during the summer months.
Sales of Frutarom’s products slightly decrease in the third quarter as the
summer ends and further in the fourth quarter as the weather cools, and
Section 4: The Purchaser | Frutarom Industries Ltd. | Purchase price allocation – ETOL Group 23
The Purchaser
Seasonality Raw Materials and Suppliers
many of Frutarom’s customer’s reduce production and inventory levels in
advance of the year end and the holiday season.
The impact of seasonality on Frutarom’s results has steadily decreased in
recent years as Frutarom has increased its sales of products such as savory
flavors, functional food ingredients and natural botanical extracts intended
for the pharmaceutical/nutraceutical industry, generally impacted less by
seasonality.
Raw Materials and Suppliers
30.1 Frutarom purchases thousands of raw materials from a wide range of
suppliers which it uses for the manufacture of its products, with more than
one supplier for most products. The principal raw materials purchased by
the Group include plants, leaves and roots from which Frutarom produces
natural flavor extracts, functional food ingredients and
pharmaceutical/nutraceutical extracts. In addition Frutarom purchases
essential oils from which it manufactures specialty essential oils such as
citrus oils and mint oils. Other raw materials purchased by the Group
include natural and synthetic chemicals, alcohols, esters and acids and
oleoresins. The Group’s supply chain managers, both global and local, and
the purchasing units regularly monitor the raw materials price trend and if
necessary, the Group acts to adjust the selling prices of its products to the
changes in the raw material prices. Frutarom has a global unit which
coordinates purchase of raw materials defined as strategic from suppliers,
serving both of the Group’s primary activities.
In recent years, none of Frutarom's suppliers have supplied more than 10% of
the consumption of its raw materials. There is a small number of raw
materials for which Frutarom has sole suppliers; however, since these raw
materials are used in only a limited number of Frutarom's wide range of
approximately 30,000 products, and since the raw materials having only one
supplier are used in a limited number of Frutarom's products (none of which
is substantial), Frutarom's management estimates that Frutarom's
dependency on these exclusive suppliers is not material.
Human Resources
As at December 31, 2011 Frutarom employs 1,644 employees. The following
table shows the breakdown of the Group's employees by fields of activity in
the last three years:
Field 2009 2010 2011
Sales and Marketing 329 334 353
Research and Development 214 229 253
Operations 688 688 775
Management 217 221 263
Total 1,448 1,472 1,644
Section 4: The Purchaser | Frutarom Industries Ltd. | Purchase price allocation – ETOL Group 24
The Purchaser
Goals and Business Strategy Goals and Business Strategy
Frutarom’s strategic objective is to achieve growth combining rapid organic
profitable growth of its core business, at higher rates than average in the
industry, and continued improvement in profitability. Frutarom's strategy of
rapid growth combines internal profitable growth of its core businesses
together with strategic acquisitions in order to achieve its vision.
The key elements of Frutarom’s strategy are as follows:
Focus on two core businesses, leveraging synergies between them and
providing comprehensive taste and health solutions to the food and
beverage industry: Frutarom will continue to focus on its two core
businesses, Flavors and Specialty Fine Ingredients, while leveraging the
synergies between them to create partnerships with and value to its
customers by providing unique health and flavor solutions, tailor-made and
customized according to its customers' demands. The trends of health and
taste leads the growth in the global food and beverage market in recent
years in view of consumers' growing demand for food and beverage products
with natural content and nutritional and healthy ingredients (low fat, salt,
sugar etc.) and consumers' perception of these products as high-quality,
healthier and environmentally friendlier along with the demand that
products would not lose their high-quality taste despite their being
"healthier". Since fine ingredients are the key components used in the
production of flavors, Frutarom's expertise in natural fine ingredients and
other ingredients enable it to develop and produce high quality, unique and
customized flavor and health solutions as per its customers' demands. The
Group’s Fine Ingredient business benefits from the expertise of the Group in
the Flavor business, allowing it to better understand the needs of its
customers including third party flavor manufacturers. In addition, as some
of Frutarom’s fine ingredients are sold directly to food and beverage
producers, the Group’s strategy is to use a single sales person to sell both
flavor and fine ingredients products to its customers, thereby improving its
operational efficiency and increasing the level of service.
As part of its strategy combining its core businesses, Frutarom focuses on its
ability to offer its customers comprehensive, integrative solutions in the
fields of taste and health. This way, for example, Frutarom combines its
Food Systems capabilities with its capabilities in the field of natural flavors,
natural functional food ingredients, and other natural extracts for the
production of new, innovative, integrative solutions suited to the needs of
its customers, food and beverage producers. As part of its rapid and
profitable growth strategy and its wish to offer its customers comprehensive
solutions, Frutarom acted and will act to expand the scope of its activity
and wide product portfolio in the savory field. Frutarom’s acquisitions in
recent years significantly strengthened its market share and the solutions it
offers to manufacturers of meat and fish products, snacks and convenience
food in a manner which will contribute to its continued growth.
Section 4: The Purchaser | Frutarom Industries Ltd. | Purchase price allocation – ETOL Group 25
The Purchaser
Goals and Business Strategy Goals and Business Strategy
Continues focus on superior customer service and product development
for both large multinational, midsized and local customers: Frutarom
continues to enhance its customer service and expand its product and
solution portfolio for both large multinational as well as mid- size and local
customers. In the large multinational food and beverage customer segment,
Frutarom focuses on specialized product offering and increase its offering of
comprehensive natural solutions. In the mid-size, local and private label
customer segment, Frutarom intends to continue to offer its customers the
same level of service and customized product and solution development as
normally reserved for large multinational companies. In addition, Frutarom
offers midsized, local and private label customers, which are usually of
limited resources compared to large, multinational customers, assistance in
the development of their products while providing marketing support and
flexibility in supply and quantities.
Expand market position in developed markets: Frutarom believes there
are additional opportunities to expand in both Western Europe and North
America supported by the unique solution portfolio it offers to its customers
and by leveraging cross-selling opportunities resulting from its recent
acquisitions and the many opportunities to perform additional acquisitions.
Further penetration and foothold in emerging markets: Frutarom believes
that there are significant growth opportunities in certain fast growing
emerging markets with growing demand for flavors and unique ingredients
and with above average growth in the food and beverage markets. Over 2011
and in the beginning of 2012, Frutarom has acted to strengthen its position
in and further penetrate the emerging markets where it already operates,
which include, among others, Asia, Central and Eastern Europe , Central and
South America, Asia and Africa, and will continue to act thus, through
organic growth and strategic acquisitions. Frutarom intends to expand into
additional emerging markets, and to benefit from the high growth potential
in these markets. Frutarom believes that increasing its local presence in
these emerging markets will provide it with a competitive advantage and
acts to accelerate its growth in these markets by focused strengthening of
the development, production, marketing and sales in important targets
countries while exploring options for strategic acquisitions.
Achieving leadership position in the growing market for natural and
healthy products: Frutarom is well-positioned to take advantage of the
growing trend of food and beverage manufacturers to utilize more natural
and healthy ingredients in their products. The acquisitions of companies
and activities it implemented in recent years in the fields of unique
ingredients, and the various flavors fields, as well as strengthening its
Section 4: The Purchaser | Frutarom Industries Ltd. | Purchase price allocation – ETOL Group 26
The Purchaser
Goals and Business Strategy Goals and Business Strategy
research and development and marketing infrastructure, strengthened
Frutarom’s position as a global market leader in the natural and healthy
products field. Frutarom leverages the variety of its existing expertise in
natural flavor extracts, functional food ingredients and natural
pharmaceutical/nutraceutical extracts thus empowering its abilities to
provide its customers with full solutions with the emphasis on taste and
health. Frutarom intends to continue allocating resources to its research
and development and sales and marketing activities to continue and expand
the development and marketing of healthy and natural products. Frutarom
cooperates with academic institutions, research institutes and start-ups
worldwide in order to expand its pipeline of unique and innovative products
that it intends to launch in coming years, while focusing on consumers'
health and convenience.
Expanding investments in research and development: Frutarom believes
that technology and innovation are key to its success. Therefore, Frutarom
intends to continue to invest in research and development both in the Flavor
and Fine Ingredient activities.
Improving profitability: Frutarom intends to act to expand its margins by:
(i) continuing to focus on achieving organic profitable growth at a higher
rate than the rate of the increase of fixed expenses (ii) continuing to
leverage and exploiting the synergies in and between the segments (iii)
continued focus on operating efficiencies including maximization of facilities
utilization and inventory management and strategic lowering of the cost of
raw materials, while unifying global purchase and management, and
allocating resources to focused purchase in important target countries, such
as China and India; (iv) adjusting prices of Frutarom’s products; (v) efficient
assimilation and integration of acquisitions of recent years and new
acquisition to be made (vi) integration and joining of sites and activities,
while achieving substantial operational savings and maximizing the cross
selling opportunities , and (vii) continuing to improve its product mix and to
develop and market unique new, higher margin, value-added products.
Continue rapid growth also through strategic acquisitions: Acquisitions
have also contributed to Frutarom’s rapid growth and Frutarom will continue
to evaluate acquisition opportunities that meet its strict investment criteria
and keep enhancing shareholder value as part of its ongoing growth strategy.
Frutarom examines and will continue examining acquisition opportunities
that will expand its portfolio of products, targeted geographic reach and
customer base, and which provide Frutarom with further options to expand
its integrative product portfolio and cross-selling opportunities. In addition,
Frutarom is working diligently to integrate its recent acquisitions with its
own operations in order to optimize cross-selling opportunities and
Section 4: The Purchaser | Frutarom Industries Ltd. | Purchase price allocation – ETOL Group 27
The Purchaser
Goals and Business Strategy Goals and Business Strategy
additional synergies while realizing cost savings.
As stated, in 2011 and even after the balance sheet date, Frutarom
continued to execute strategic acquisitions and implement its rapid growth
strategy. Over 2011, Frutarom performed five acquisitions and after the
balance sheet date, Frutarom performed three more acquisitions. These
acquisitions strengthened Frutarom’s position as a global leading player in
flavors and its geographic spread and allowed it to enter new markets. In
addition, these acquisitions expended its product portfolio in the area of
sweet and savory solutions, including natural products, combining fruit and
vegetable ingredients and beverage bases, its customer base, both large,
multi-nationals and medium sized and local, and provided Frutarom with a
wide variety of cross selling options. The acquisitions also contributed to
Frutarom’s technology and know-how and managerial capacity.
During the last few years Frutarom executed strategic acquisitions as
follows:
Acquisition of the Savory activity of Rieber: On December 23, 2010,
Frutarom signed an agreement through a Norwegian subsidiary for the
acquisition of Rieber's Savory activity (the "Rieber Activity") in consideration
for approximately US$4.3 million (approximately 25 million NOK). The
acquisition was completed on February 1, 2011.
The Rieber Activity was part of an international food group of Rieber & Son
ASA and includes the development, production and marketing of savory
flavor solutions including flavors, seasoning mixes and functional ingredients
used by the food industry, and in particular by the processed meat and fish
and convenience food sectors.
The Rieber Activity has a wide customer base, which includes leading food
manufacturers, mainly in the Scandinavian countries. The Reiber Activity is
highly synergetic with Frutarom’s activities in the savory field in Europe,
which has grown substantially over the last few years following the
acquisition of the savory activities of Nesse, Gewurzmuller and the German
CH, acquired by Frutarom in 2006, 2007 and 2009, and the acquisitions of
EAFI, Savory Activities of Reiber and of CH Italy in 2011 and the acquisition
of Savoury Flavours in 2012. The sales turnover of the Rieber's Activity from
the date of completion of the acquisition until December 31, 2011 totaled
approximately US$ 6.3 million (approximately 34.9 million NOK).
Frutarom has acted for the integration of Rieber activities, and at the end of
2011 completed transfer of production work to its plant in Germany, thus
achieving efficiency and operational economy, leaving development,
marketing and sales in Norway.
Section 4: The Purchaser | Frutarom Industries Ltd. | Purchase price allocation – ETOL Group 28
The Purchaser
Goals and Business Strategy Goals and Business Strategy
Acquisition of EAFI's activity and assets: On January 20, 2011, Frutarom
signed an agreement, through a UK subsidiary, for the acquisition of the
activity and assets of the English company EAFI in consideration for US$4.8
million (GBP 3 million). The acquisition was completed on January 31, 2011.
EAFI, founded in 1979, develops, manufactures and markets savory solutions
including flavors, seasoning mixes and functional ingredients to the food
industry in general, and to the processed convenience food, snacks and
processed meat and fish in particular. EAFI has a wide customer base and a
development, manufacturing and marketing site in the UK.
EAFI's activity is highly synergetic with that of Frutarom in the UK as well as
with Frutarom's savory activity in Europe, which increased substantially in
recent years as explained in section 1.12 above.
EAFI's sales turnover from the date of completion of the transaction until
December 31, 2011 totaled US$9 million (approximately GBP 5.6 million).
Acquisition of Savory assets and activities of CH Italy: On May 26, 2011
Frutarom, through its subsidiary, signed an agreement to acquire the assets
and savory activity of Christian Hansen ITALIA in return for €25 million. The
acquisition was completed on July 29, 2011.
CH Italy’s savory activity develops, produces and markets unique and
innovative savory solutions including flavors, seasoning compounds and
functional ingredients for the food industry, with special emphasis on
processed meat and convenience food applications. The acquired activity is
a leader in savory solutions with an extensive customer base comprised
mainly of the leading Italian meat processors; the activity also enjoys export
sales in Russia, Ukraine, Poland, Czech Republic and France. The acquisition
also included a state-of-the-art, high-capacity plant located in Parma, Italy
that will enable Frutarom to increase its activities and to take advantage of
operational synergies with its existing savory activities in Europe, and
innovative R&D laboratories.
CH Italy’s sales turnover from the date of completion of the transaction until
December 31, 2011 totaled approximately US$8.6 (approximately €6.3
million).
Acquisition of Aromco: On August 19. 2011 Frutarom, through a subsidiary
in the UK, signed an agreement to acquire 100% of the share capital of the
UK company Aromco Ltd. for approximately USD 24.6 million (GBP 15
million). The acquisition was completed upon signing.
Aromco, founded in 1985, develops, manufactures, and markets flavors for
the food and beverage industry. Aromco is active in emerging markets with
Section 4: The Purchaser | Frutarom Industries Ltd. | Purchase price allocation – ETOL Group 29
The Purchaser
Goals and Business Strategy Goals and Business Strategy
high growth potential in Eastern Europe, Africa and Asia as well as in the UK.
Aromco operates a plant in Hertfordshire, England.
Aromco’s sales turnover from the date of completion of the transaction until
December 31, 2011 totaled approximately US$5.9 million (approximately
£3.7 million).
Acquisition of Flavor Systems: On September 13, 2011 Frutarom signed an
agreement to acquire 100% of the shares capital of the US Flavor Systems
International Inc. company ("Flavor Systems")in return for the sum of
US$34.8 million. The final price of the transaction will be determined in
accordance with an agreed earn-out mechanism, based on a 6.5 multiplier of
EBITDA exceeding US$5 million, gained by Flavor Systems during the 12
months starting on October 1, 2011 and ending on September 30, 2012 (the
"EBITDA"), up to a cap of US$10 million. In addition, in the event that the
EBITDA during that period will be less than US$5 million, the sellers will
repay an amount of up to US$6 million to Frutarom. Therefore, the
consideration for the acquisition may range from US$28.8 million to US$44.8
million, according to the aforementioned mechanism. In addition, Frutarom
paid US$6.5 million for real-estate assets owned by other companies held by
the shareholders of Flavor Systems. The acquisition was completed on
October 3, 2011.
Flavor Systems, established in 1994, deals in development, production and
marketing of sweet and savory flavors to the food and beverages markets.
Flavor Systems owns a modern plant and R&D laboratories, located in
Cincinnati, in the Mid-West of the USA. The acquisition also includes a new
and advanced production site, with a high production capacity. The site will
allow substantial expansion in areas, among others, where Frutarom has not
yet acted until now, such as coffee and flavored shakes sold in convenience
stores and in leading food chains throughout the US. Through this
acquisition, Frutarom also entered the area of savory flavors, where it has
not yet acted to date.
Flavor System’s sales turnover from the date of completion of the
transaction until December 31, 2011 totaled approximately US$5.1 million.
Acquisition of Savoury Flavours: On January 4, 2012, Frutarom, through a
subsidiary in the UK, signed an agreement to acquire 100% of the share
capital of the UK company Savoury Flavours (Holding) Ltd. ("Savoury
Flavours") for approximately US$5.9 million (GBP 3.8 million), and additional
consideration to be calculated according to performance, using a mechanism
prescribed in the agreement, which in Frutarom’s estimate will not exceed
an amount equal to 5% of the purchase price. The acquisition was completed
upon signing.
Section 4: The Purchaser | Frutarom Industries Ltd. | Purchase price allocation – ETOL Group 30
The Purchaser
Goals and Business Strategy
Savoury Flavours, founded in 1999, develops, manufactures, and markets
savory taste solutions, including mainly flavors, seasoning compounds,
marinades and sauces, specializing in snacks and convenience foods. Savoury
Flavours has a development, manufacture and marketing site in the UK, and
a wide customer base including food manufacturers and private labels in the
UK and in emerging markets.
Savoury Flavours’ turnover over the twelve months ending on December 31,
2011 totaled USD 7.1 million (£4.4 million).
Savoury Flavour’s production site is located in close proximity to the
production site of EAFI, which also deals in the savory field. the geographic
proximity between the sites, the complementary product basket and
technologies of the two activities will allow the creation of significant
synergies between the activities of Savoury Flavours and Frutarom’s growing
activities in the UK and throughout the world, which have significantly
increased over the past few years.
Section 2: Market Overview | Frutarom Industries Ltd. | Purchase price allocation – ETOL Group 31
Section 2
Market Overview
Section 2: Market Overview | Frutarom Industries Ltd. | Purchase price allocation – ETOL Group 32
Market Overview
The Global Market of Flavors, Fragrances and Fine Ingredients The Global Market of Flavors, Fragrances and Fine Ingredients
The global flavors, fragrances and fine ingredients market in 2011 was
estimated at approximately US$23 billion. Frutarom does not operate in the
market for fragrance compounds, but does operate in the markets for
functional food ingredients (which is not included in the above estimation).
Accordingly, the Company believes that the global market in which it
operates is valued at approximately US$18.2 billion. Based on Leffingwell &
Associates’ data, Frutarom is ranked globally as one of the top ten
companies in the field of flavors and fragrances.
In 2011 IAL Consultants estimated that global sales in industrialized nations
(the USA and Western Europe) in the flavors market in which the Company
operates would grow at an annual rate of between 3% and 3.4% during the
years 2012-2015. The Company estimates that the volume of sales in these
countries in the fine ingredients market in which the Company operates will
increase at a similar annual rate during the same period. In accordance with
these estimations, the growth rate in emerging markets in which Frutarom
operates, such as Asia, Central and South America, Eastern Europe and
Africa is expected to be significantly higher as a result of changes in
consumers' preferences in these markets and the shift to processed foods,
and may reach average annual rates of 4% to 7.1% from 2012 to 2015. The
manufacturers of the flavor, fragrance and fine ingredient markets can be
divided into three main groups: large multinational
companies, mid-sized companies, and local and small companies.
Large multinational manufacturers generally operate globally and have
revenues in excess of US$ 1 billion. In the global flavor and fragrance
markets there are five such manufacturers which, according to Leffingwell &
Associates, represent approximately 64% sales in the flavor, fragrance and
fine ingredients markets (excluding sales of natural functional food
ingredients and pharmaceutical/nutraceutical extracts). These multinational
manufacturers focus primarily on customers who are large multinational
food and beverage producers.
Local and small companies generally have revenues of less than US$ 400
million (most of them are much smaller and sell only several million dollars).
The Company estimates that in the global flavor and fragrance markets
there are approximately 700 such companies that, according to the
estimation of Leffingwell & Associates, represent approximately 24% of the
value of the flavor, fragrance and fine ingredients market (again excluding
sales of natural functional food ingredients and
pharmaceutical/nutraceutical extracts). These companies generally focus
on smaller local customers and have limited capabilities in the areas of
service, research and development and innovation.
Mid-sized companies, such as Frutarom, have revenues between US$ 400
million and US$ 1 billion. In the global flavor and fragrance markets there
Section 2: Market Overview | Frutarom Industries Ltd. | Purchase price allocation – ETOL Group 33
Market Overview
The Global Market of Flavors, Fragrances and Fine Ingredients The Global Market of Flavors, Fragrances and Fine Ingredients
are only five such mid-sized companies. According to the estimation of
Leffingwell & Associates these five companies represent approximately 12%
of the value of the flavor, fragrance and fine ingredients market (excluding
sales of natural functional food ingredients and pharmaceutical/
nutraceutical extracts). Some of these mid-sized players focus heavily on
specific geographic markets (such as the USA, France and Japan).
The flavor and fine ingredient market in which the Company is active is
characterized by high barriers to entry, such as:
Long-term relationships – The market is characterized by long-term
relationships between manufacturers and their customers, which include
mostly the food and beverage, flavor and fragrance and
pharmaceutical/nutraceutical industries. These industries impart great
importance to reliability, quality of service and the manufacturers'
knowledge and understanding of the customers' needs.
Research and development – End user preferences are dynamic, making the
customer’s market (usually in food or beverage) competitive. The market is
characterized by a large number of new and innovative products.
Accordingly, manufacturers are required to invest heavily in research and
development in order to offer a wide range of innovative products.
Sometimes this investment is undertaken
at the initiative of the flavor manufacturer, while other times at the
customers’ initiative (the food/beverage manufacturer) in cooperation with
the flavor manufacturer.
Compliance with quality and regulatory standards – The flavor and fine
ingredient products are principally intended for the food and beverage and
pharmaceutical/nutraceutical industries, which are subject to strict quality
and regulatory standards. As a result, manufacturers are required to meet
the same strict standards. In recent years the quality and regulatory
standards have become increasingly stringent, possibly imposing a burden on
the competitiveness of small flavor manufacturers and increasing barriers to
entry for new players.
The importance of flavors in the final product – Flavors play a major role
in determining the taste of the end product and are often a vital element in
determining its success. Flavors cannot be precisely replicated and, as they
represent a relatively small percentage of the final product's overall cost,
food and beverage manufacturers will usually avoid replacing the flavor and
its manufacturer.
Investment in production capabilities– In the fine ingredient field,
considerable capital investment is required to build manufacturing facilities
and/or increase
Section 2: Market Overview | Frutarom Industries Ltd. | Purchase price allocation – ETOL Group 34
Market Overview
The Global Market of Flavors, Fragrances and Fine Ingredients
Flavors market
existing production capabilities. These investments serve as a significant
barrier to entry for new manufacturers in the industry.
In light of the barriers to entry described above, the penetration of new
manufacturers into the market is done mainly through mergers and
acquisitions. In general, the market is characterized by a trend of
consolidation and a decrease in the number of players.
Flavors market
General
Flavors are the key building blocks that impart taste in processed food and
beverage products and, as such, play a significant role in determining the
consumer acceptance of the end products in which they are used.
Frutarom estimates that global 2009 sales of flavors for the industry
amounted to approximately US$ 7.7 billion. Flavor products are sold
primarily to producers of prepared food, beverage, dairy, bakery, meat and
fish, confectionery and pharmaceutical products.
The following are examples of end user products using flavors:
Beverages - carbonated, noncarbonated, sport and functional, alcoholic and
juices.
Dairy - yogurt, drinking yogurt, ice cream, cheese and chilled desserts.
Bakery - cakes and cookies, crackers and cereals.
Confectionery - candy, chocolate, jam and chewing gum.
Savory and convenience food - ready meals, instant soup, ready sauces and
instant noodles.
Snacks - potato chips and other savory snacks.
Meat - sausages and frankfurters.
Processed Fish.
Oral hygiene and pharmaceuticals - toothpaste, mouthwash, vitamins and
medicines.
Others - animal feed and pet food and tobacco.
The global market for flavors has expanded rapidly over the last 60 years,
primarily as a result of an increase in demand for, as well as an increase in
the variety of, consumer end products containing flavors. The demand for
consumer goods containing flavor products has increased as a result of rapid
population growth and consumer preferences resulting from various factors
Section 2: Market Overview | Frutarom Industries Ltd. | Purchase price allocation – ETOL Group 35
Market Overview
Flavors market
Flavors market
such as increases in personal income, leisure time, health concerns and
urbanization. These factors have led to an overall increase in food and
beverage products containing flavors and to rapid growth in demand for
convenience food and foods with healthier and more natural content.
The following table sets forth the sales of flavors by region in 2010 and the
projected annual growth rate in these geographic regions:
Source: Estimates based on IAL Consultants 2009.
Flavors in North America and Western Europe in 2009 accounted for
approximately 50% of global flavor sales in 2010although the population in
these countries account for less than 10% of the world's population. Demand
for flavor products in developed countries is expected to grow moderately,
with more rapid growth expected in emerging markets such as Asia Central
and South America, Eastern Europe and Africa. Sales in these emerging
markets are expected to grow as a result of projected growth in GNP in
these regions and from changes in consumer preferences. Frutarom is
enhancing its growth in these markets through a number of efforts including
a focused strengthening of the research and development, production,
marketing and sales infrastructure in the important target countries and
exploring options for strategic acquisitions.
Following are the characteristics of the Flavor Market:
• Reliable with high levels of service - Food and beverage producers, the
principal customers of flavor manufacturers, expect reliable, high-quality
service to meet their needs in terms of support and lead time, while
maintaining high quality, regulatory and safety standards. These
requirements encourage the formation of long-term relationships
between flavor producers and their customers. As a result large
multinational customers, and increasingly also mid-sized customers, have
Country
Estimated world consumption in
2010 (Millions $)
Average growth expected in
2010-2015
Western Europe 1,619 3%
Eastern Europe 551 4%
North America 2,315 3%
South America 493 7%
Asia 2,414 6%
Middle East and Africa 5,741 4%
Total 13,133 5%
Section 2: Market Overview | Frutarom Industries Ltd. | Purchase price allocation – ETOL Group 36
Market Overview
Flavors market Flavors market
pruned the flavor suppliers that they will work with, placing those that
remain on "core lists" creating a barrier to entry for small flavor
manufacturers.
Research and development - The development of flavor products in
general and of new flavor extracts in particular is a complex, creative
and technological process that calls for depth of knowledge and skill on
the part of a flavor manufacturer's research and development personnel.
Effective research and development is critical in ensuring a continuous
stream of innovative products and in maintaining the profitability and
growth of a flavor manufacturer. The initiative for the development of
new flavor products can be spurred by the flavor manufacturer or by the
customer who is in need of a specific flavor for use in a newly developed
end product. As such, in order to anticipate market demands, a flavor
manufacturer's research and development personnel are required to be
familiar with the taste requirements of various end product types and
target markets. In addition, as most flavors are tailor made for a
specific customer, a close collaborative relationship with the customer is
essential. These flavor formulas are treated as commercial secrets and
remain the proprietary asset of the flavor manufacturer. As most flavor
products are tailor-made for a customer, customers are less likely to
replace suppliers for such flavor products during the course of the end
products' life cycle.
• Low price sensitivity - Since flavor products play a major role in
determining the flavor of the end product to which they contribute, they
are a vital element of its success. Flavor products cannot be precisely
matched and their cost, compared to the total cost of the end products,
is negligible. When selecting a flavor supplier, a customer will generally
place a greater emphasis on the reputation, innovation, service, quality
and consistency of the supplier than on the price of its flavors. The
demand for flavors is therefore generally less sensitive to changes in
price.
• Production processes - Flavor products in general and flavors in
particular typically contain a variety of ingredients (typically over 30 per
flavor), which are blended using unique formulas created by a
manufacturer's flavorists. The production processes involved in the
manufacture of flavor products are less complex and capital intensive
compared to those of fine ingredients. However, the production process
for flavor products requires skill and knowhow to achieve the required
consistency and quality.
Section 2: Market Overview | Frutarom Industries Ltd. | Purchase price allocation – ETOL Group 37
Market Overview
Flavors market Flavors market
• High and relatively stable profitability - As the flavors market tends to
be characterized by long-term relationships and high customer loyalty,
combined with relatively low price sensitivity and simple production
processes, it generally benefits from high and stable margins. This is
true also in comparison to the fine ingredient industry.
Food and Beverage Market Characteristics
Flavors are sold primarily to food and beverage producers; therefore the
flavor market is generally driven by trends characterizing the demands of
food and beverage consumers. According to Data Monitor, global sales in
the food and beverage market amounted to US$ 3,282 billion in 2010.
Frutarom estimates that over 50% of such total global sales are generated by
mid-sized, local and small food and beverage producers. Although there has
been a general trend towards consolidation in the food and beverage
industry, Frutarom estimates that mid-sized (annual revenues of between
US$ 100 million and US$ 3 billion) and local and small (annual revenues of
below US$ 100 million) food and beverage producers will continue to play a
significant role in the market, and that new mid-sized, local and small
producers will continue to emerge.
The large multinational flavor manufacturers often focus on large
multinational food and beverage producers, offering their customers a high
level of service and tailor-made product development. Frutarom believes
that these flavors producers focus to a lesser extent on mid- sized and local
customers, offering limited service and offering less customizable product
offering to these customers.
However, the Company believes that mid-sized and local food and beverage
producers require the same level of service and tailor-made products as
their larger counterparts, and also require short lead times and
manufacturing flexibility. Small, localized flavor producers generally do not
have the product variety and service capabilities to support the needs of
these customers. A specific example of this type of customer is the private
label customer. This situation creates a business opportunity for mid-sized
flavor producers to service this segment.
The following are the main trends in the consumer market for food and
beverages which in turn drive the flavor market:
• Local and global tastes - Taste preferences vary by geographic location
and among different cultures. Flavor manufacturers must have thorough
knowledge of local tastes in each of the countries in which they are
active. It is also important for a global flavor manufacturer to have a
physical presence in its key target markets in order to facilitate direct
contact with customers, to better understand local tastes and to be able
Section 2: Market Overview | Frutarom Industries Ltd. | Purchase price allocation – ETOL Group 38
Market Overview
Flavors market Flavors market
to respond quickly and efficiently to changes in consumer preferences.
Additionally, the trend toward globalization now characterizes the flavor
industry as multinational food and beverage customers are now
launching global brands in many different markets simultaneously, often
by changing the taste profile to meet the preferences of the respective
populations worldwide.
• Preference of natural products - There has been a general increase in
consumer demand for food and beverage products containing natural
ingredients and having dietary values (reducing fat, salt, cholesterol,
etc.). Natural products are generally perceived by consumers as being
of higher quality, healthier and more environmentally friendly.
Similarly, there is growing demand for organic products and ‘clean label’
products. As a result, natural food and beverage products are viewed as
specialty, premium products that can command higher prices. This
trend has created new opportunities for flavors manufacturers to
develop new and innovative natural flavor products. Frutarom focuses
on developing and producing natural products and currently its products
consist of two thirds of natural products.
• Private label - private label goods manufacturers, which tend to be mid-
sized, local or small food manufacturers, are a growing customer
segment in the flavor industry. Over the last decade consumers of food
products have become increasingly price conscious, increasing sales of
private label products in comparison to the branded food and beverage
industry. This trend was accelerated in 2009 as a result of the economic
crisis. As a result, supermarket chains and other retailers have been
increasing their private label product offerings. Supermarket chains and
other retailers have also placed greater importance on developing their
own brand image. The demand from supermarket chains and retailers
for private label products that mimic existing branded products as well
as unique premium products has provided the flavors industry with new
opportunities for growth. Frutarom has increased and will continue to
increase its market share in the private label market.
• Continuously growing consumption of convenience food - There is an
increase in demand for processed foods with greater convenience
(consumed both inside and outside of the home). This increase in
demand for convenience foods has been spurred by new packaging and
cooking technologies as well as changing social habits and consumer
preferences. Examples of convenience foods include "ready to eat"
meals, fresh pasta; ready-to-cook, fresh seasoned or marinated meat or
poultry; salads; and sauces in liquid form. This has created new
opportunities for flavor manufacturers in the savory flavors and
Section 2: Market Overview | Frutarom Industries Ltd. | Purchase price allocation – ETOL Group 39
Market Overview
Flavors market Flavors market
• functional fine ingredients fields which are responsible for the creation
of food texture and its extended shelf life, to develop and market
flavors and unique fine ingredients products for this segment.
• Emerging markets - In recent years, certain developing markets, such
as Asia, Central and South America, Eastern Europe and Africa have
experienced above-market-average growth in demand for flavors
products. Further, these markets have been characterized by a trend
towards increased consumption of processed foods, which in turn has
driven the emergence of mid-sized, local and small food companies,
creating new market opportunities for flavor manufacturers. The
Company expects that the improvement in the global economy and in
the consumption rate will lead to a continuous improvement in the
growth rate of these markets.
The key success factors in the flavor segment are:
• Long-term relationships - Long-term relationships with customers and
collaboration in the development of new products.
• Global and local presence in target markets - Knowledge of the
various flavor preferences in the different markets and the ability to
provide global and local support to customers.
• Superior and reliable service - The ability to provide a high level of
service and the reliability of a flavors manufacturer in giving service
are critical for mid-sized, local customers and multinational customers.
• Presence in emerging markets - Emerging markets grow at
considerably higher rates in comparison to developed markets.
Presence in these key areas, along with knowledge and understanding
of their unique needs and the ability to provide support to local
manufacturers is a critical success factor.
• Innovation in research and development - The ability to develop
innovative products both at the initiative of the flavor manufacturer
and in collaboration with customers is of extreme importance.
Competition
Compliance with strict quality, regulatory and safety standards - Since the
flavors are intended principally for the food and beverage and
pharmaceutical markets, they must comply with strict quality, regulatory
and safety standards.
In the flavor market, Frutarom's main competitors consist of large global
manufacturers, mid-sized companies and smaller, local manufacturers.
Competition is based to a large extent on innovation, product quality, the
Section 2: Market Overview | Frutarom Industries Ltd. | Purchase price allocation – ETOL Group 40
Market Overview
Competition
Competition
ability to provide the customer with added value, and establish and
maintain long term customer relationships, value added service, reliability
and development of products which are tailor made for the customers'
needs and the future market directions. As the cost of flavors accounts for
only a small percentage of the total cost of an end product, this market
tends to display low price sensitivity. Flavor manufacturers must
differentiate themselves by maintaining close collaborative relationships
with customers, thorough knowledge and understanding of target markets,
innovative abilities, effective research and development and an established
reputation for consistent, reliable and effective service, product supply
and quality, and the ability to supply product on short notice and with
short lead time.
Large multinational flavor manufacturers are established, experienced
companies with a global presence and established technical and
commercial capabilities, focusing primarily on large multinationals
customers. The large multinational flavors producers with whom Frutarom
competes include Givaudan, Firmenich, IFF Inc., Symrise and Takasago.
The midsized flavors manufacturers with whom Frutarom competes focus
on both large multinational food and beverage producers as well as and
mostly on mid-sized and smaller food and beverage producers who tend to
operate in smaller geographical regions. Mid-sized flavor manufacturers
with whom Frutarom competes include Sensient, Mane, Robertet, Kerry
Ingredients; Wild and Dohler.
The Company estimates that there are approximately 700 small and local
flavor manufacturers with more limited research and development
capabilities who focus on narrow market segments and local customers. In
recent years there has been a trend towards consolidation in the flavor
manufacturing industry, resulting in increasing market concentration.
Risks Factors
The risks of the global market of flavors, fragrances and fine Ingredients
refers to macroeconomic risks and to risks related to the Industry.
Macroeconomic Risks
The following are the main macroeconomic risk factors:
• The effect of the global economy on the Company's activities - Due to
the nature of its global activity, Frutarom is exposed to fluctuations in
the global economy. Economic crisis and recession in important target
countries may cause dips in demand for the Companies products (mainly
for premium products) and significantly slow down the development and
Section 2: Market Overview | Frutarom Industries Ltd. | Purchase price allocation – ETOL Group 41
Market Overview
Risks Factors
Risks Factors
launch of new products by the customers.
Stability in emerging markets - the companies operates in a number of
countries outside of Western Europe and the United States, such as
Russia, Turkey, Kazakhstan, Ukraine, China, countries in North, South
and West Africa and countries in Central and South America (such as
Mexico and Brazil), and therefore is generally exposed to the political,
economic and legal systems and conditions in these countries which are
generally less predictable than in developed countries
Currency fluctuations - The companies has sales, expenses, assets and
liabilities denominated in currencies other than the U.S. due to that
fact, Fluctuations in the exchange rates of these foreign currencies
could have an impact on companies results of operations.
Changes in interest rates - The companies' sources of banking finance,
as needed, for short and long term, are linked to different coins,
according to the activity currency of the subsidiary, and bear Libor
interest at variable rates. According to its policy. Therefore, if
interest rates increase, the companies may not be able to refinance its
credit agreements, or any other indebtedness, on attractive terms.
Increases in interest rates will impact companies' cash flow.
Risks Related to the Industry
Extensive competition - The companies in the global market of
flavors, fragrances and fine Ingredients faces an increased competition
both from large multinational and mid-sized companies as well as
smaller local companies in many of the markets in which it operates.
Some of the competitors have greater financial and technological
resources, large sales and marketing organizations and great name
recognition, and may therefore be better able to adapt to changes and
trends in the industry. The global market for flavors is characterized by
close, collaborative relationships between flavor manufacturers and
their customers, particularly in the large multinational customer
segment.
• Changes in regulations - The companies are subject to a variety of
health, safety and environmental rules at national, state and local
levels in the various countries in which it operates. Generally, there is
a trend towards increased regulation in the industry in which the Group
operates. This has been a result of increased public sensitivity toward
the composition and use of flavor products and from the fact that as a
result of their medicinal qualities and claimed health benefits,
nutraceuticals and functional food products are being increasingly
viewed by regulators as having similar characteristics to
Section 2: Market Overview | Frutarom Industries Ltd. | Purchase price allocation – ETOL Group 42
Market Overview
Risks Factors
Risks Factors
pharmaceutical products, which may lead their subject to the
regulatory framework governing the market for pharmaceutical
products. The application of new governmental regulations on the
nutraceuticals and functional foods could result in substantially greater
ongoing compliance costs, which, in turn, could have a material
adverse effect on Companies business, results of operations or financial
condition.
Environmental, health and safety regulations - Companies in the
flavor and fine ingredients industry also use, manufacture, sell and
distribute a number of environmentally hazardous materials, and
therefore are subject to extensive regulation regarding the storage,
handling, manufacture, transportation, use and disposal of their
products, ingredients and byproducts. Any increase in the stringency of
applicable environmental regulations could have a material adverse
effect on companies business, results of operations or financial
condition.
• Fluctuations in prices of raw materials - The last years were
characterized by relatively high fluctuations in the prices of raw
materials used by the companies in the flavor and fine ingredients
industry the to manufacture its products, and in certain periods,
including the recent months, a global trend of increase occurred in the
prices of raw materials, including some of the raw materials Frutarom
uses in the manufacture of its products. The supply chain managers,
both global and local, and the purchasing departments are closely
monitoring the raw materials price trend globally.
• Payment of damages as a result of possible product liability claims
due to product warranty - The companies' business exposes it to a risk
of product liability, particularly as it is involved in the supply of flavors
and fine ingredients to the food and beverage, flavor and fragrance,
functional food, pharmaceutical and personal care industries. If a
large product liability claim was successfully brought against the
Company, its insurance coverage might not be adequate or sufficient to
cover such a claim in terms of paying damages and/or defense costs. A
lack of or inadequate insurance coverage could result in a material
adverse effect on the Company’s business, results of operations or
financial condition. If product liability claims were brought against the
Company, it might damage the Company’s reputation as well as require
the Company to divert significant time and effort of its management,
which could affect the Company’s business regardless of the outcome
of the claim.
Section 4: Methodology | Frutarom Industries Ltd. | Purchase price allocation – ETOL Group 43
Section 4
Methodology
Section 4: Methodology | Frutarom Industries Ltd. | Purchase price allocation – ETOL Group 44
Methodology
General The Acquisition Method
According to IFRS 3R, the Venturer is required to identify the identifiable
assets and liabilities of the jointly controlled entity, at the acquisition date.
The goodwill figure was derived by applying the "Residual Approach". Under
this approach, the Purchase Price is allocated to tangible assets and to
specifically identifiable intangible assets, with any remainder allocated to
goodwill.
According to IFRS 3R, An entity shall account for each business combination
by applying the acquisition method.
Applying the acquisition method requires:
a) identifying the acquirer;
b) determining the acquisition date;
c) recognising and measuring the identifiable assets acquired, the
liabilities assumed and any non-controlling interest in the acquiree;
and
d) Recognising and measuring goodwill or a gain from a bargain purchase.
Identifying the acquirer
For each business combination, one of the combining entities shall be
identified as the acquirer.
Determining the acquisition date
The acquirer shall identify the acquisition date, which is the date on which
it obtains control of the acquiree.
The date on which the acquirer obtains control of the acquiree is generally
the date on which the acquirer legally transfers the consideration, acquires
the assets and assumes the liabilities of the acquiree—the closing date.
Recognising and measuring the identifiable assets acquired, the liabilities
assumed and any non-controlling interest in the acquiree
As of the acquisition date, the acquirer shall recognise, separately from
goodwill, the identifiable assets acquired, the liabilities assumed and any
non-controlling interest in the acquiree.
Classifying or designating identifiable assets acquired and liabilities
assumed in a business combination
At the acquisition date, the acquirer shall classify or designate the
identifiable assets acquired and liabilities assumed as necessary to apply
other IFRSs subsequently. The acquirer shall make those classifications or
designations on the basis of the contractual terms, economic conditions, its
operating or accounting policies and other pertinent conditions as they exist
at the acquisition date.
Section 4: Methodology | Frutarom Industries Ltd. | Purchase price allocation – ETOL Group 45
Methodology
Measurement principle Bargain purchases
The acquirer shall measure the identifiable assets acquired and the
liabilities assumed at their acquisition-date fair values.
Recognising and measuring goodwill or a gain from a bargain purchase
The acquirer shall recognise goodwill as of the acquisition date measured as
the excess of (a) over (b) below:
(a) the aggregate of:
1. the consideration transferred measured in accordance with this IFRS,
which generally requires acquisition-date fair value;
2. the amount of any non-controlling interest in the acquiree measured
Recognising and measuring goodwill or a gain from a bargain purchase
1. in accordance with this IFRS; and
2. In a business combination achieved in stages, the acquisition-date
fair value of the acquirer’s previously held equity interest in the
acquiree.
(b) The net of the acquisition-date amounts of the identifiable assets
acquired and the liabilities assumed measured in accordance with this IFRS.
Before recognising a gain on a bargain purchase, the acquirer shall reassess
whether it has correctly identified all of the assets acquired and all of the
liabilities assumed and shall recognise any additional assets or liabilities that
are identified in that review. The acquirer shall then review the procedures
used to measure the amounts this IFRS requires to be recognised at the
acquisition date for all of the following:
(a) the identifiable assets acquired and liabilities assumed;
(b) the non-controlling interest in the acquiree, if any;
(c) for a business combination achieved in stages, the acquirer’s
previously held equity interest in the acquiree; and
(d) The consideration transferred.
The objective of the review is to ensure that the measurements
appropriately reflect consideration of all available information as of the
acquisition date
Section 4: Methodology | Frutarom Industries Ltd. | Purchase price allocation – ETOL Group 46
Methodology
Bargain purchases Approaches to Valuation
Occasionally, an acquirer will make a bargain purchase, which is a business
combination in which the Net assets Acquired exceed the purchase price.
If that excess remains after applying the requirements, the acquirer shall
recognise the resulting gain in profit or loss on the acquisition date. The gain
shall be attributed to the acquirer.
Approaches to Valuation
The generally accepted approaches to valuate an asset's fair value, are
commonly referred to as the following:
1. Market approach;
2. Income approach;
3. Asset-based approach.
Within each category, a variety of methodologies exist to assist in the
estimation of fair value. The following sections contain a brief overview of
the theoretical basis of each approach, as well as a discussion of the specific
methodologies relevant to the analyses performed.
Market Approach
The market approach references actual transactions in the equity of the
enterprise being valued or transactions in similar enterprises that are traded
in the public markets. Third-party transactions in the equity of an enterprise
generally represent the best estimate of fair market value if they are done
at arm’s length. In using transactions from similar enterprises, there are two
primary methods. The first often referred to as the Guideline Transactions.
Method, involves determining valuation multiples from sales of enterprises
with similar financial and operating characteristics and applying those
multiples to the subject enterprise. The second, often referred to as the
Guideline Public Company Method involves identifying and selecting publicly
traded enterprises with financial and operating characteristics similar to the
enterprise being valued. Once publicly traded enterprises are identified,
valuation multiples can be derived, adjusted for comparability, and then
applied to the subject enterprise to estimate the value of its equity or
invested capital.
Income Approach
The income approach is based on the premise that the value of a security or
asset is the present value of the future earning capacity that is available for
distribution to investors in the security or asset. A commonly used
methodology under the income approach is a discounted cash flow analysis.
A discounted cash flow analysis involves forecasting the appropriate cash
flow stream over an appropriate period and then discounting it back to a
Section 4: Methodology | Frutarom Industries Ltd. | Purchase price allocation – ETOL Group 47
Methodology
Approaches to Valuation
present value at an appropriate discount rate. This discount rate should
consider the time value of money, inflation, and the risk inherent in
ownership of the asset or security interest being valued.
Asset-Based Approach
A third approach to the valuation is the asset-based approach. The discrete
valuation of an asset using an asset-based approach is based upon the
concept of replacement as an indicator of value. A prudent investor would
pay no more for an asset than the amount for which he or she could replace
the asset new. The asset-based approach establishes value based on the cost
of reproducing or replacing the property, less depreciation from physical
deterioration and functional obsolescence, if present and measurable. This
approach generally provides the most reliable indication of the value of land
improvements, special-purpose buildings, special structures, systems, and
special machinery and equipment. The asset based approach had used in this
study.
The valuation of the intangible assets of acquired companies is particularly
important since the most valuable assets of this type of company generally
are not recorded on the balance sheet before acquisition. Intangibles that
may exist at the time of the acquisition include: (a) base (or core),
developed, and in-process technologies; (b) customer-
related intangibles (such as a distribution network or a customer base); (c)
trademark(s), trade name(s), and related intellectual property; and (d)
covenants not-to-compete.
In the determination of the Fair Value for each intangible asset, each
assessment should consider specific factors of the asset, including (but not
limited to):
The value of economic or monetary benefit to market participants;
The remaining economic life;
The relative risk profile;
Assembled workforce was also identified for the valuation analysis, but was
incorporated as part of goodwill. IFRS3R - Business Combinations, requires
that the assembled workforce shall not be recognized as an intangible asset
apart from goodwill in a business combination. Nevertheless, the assembled
workforce was identified separately for the purpose of calculating the
appropriate contributory charge needed to arrive at the Fair Value of each
of the Intangible Assets on a standalone basis.
As a result of our review, two intangible asset categories (which meet the
criteria for separate recognition apart from goodwill) were identified for
analysis: (a) Know-How, (b) customer relationships.
Section 4: Methodology | Frutarom Industries Ltd. | Purchase price allocation – ETOL Group 48
Methodology
WACC WACC
When applying the Income Approach, the cash flows expected to be
generated by a business are discounted to their present value equivalent
using a rate of return that reflects the relative risk of the investment, as
well as the time value of money. This return, known as the weighted
average cost of capital (“WACC”) is calculated by weighting the required
returns on interest-bearing debt and common equity capital in proportion to
their estimated percentages in an expected industry capital structure.
The general formula for calculating the WACC is:
WACC = Kd (D%) + Ke (E%)
Where:
WACC= Weighted average rate of return on invested capital;
Kd= After-tax rate of return on debt capital;
D%= Debt capital as a percentage of the sum of the debt, preferred and
common equity capital (“Total Invested Capital”);
Ke= Rate of return on common equity capital; and
E%= Common equity capital as a percentage of the Total Invested Capital.
CAPM has been empirically tested and is widely accepted for the purpose of
estimating a company’s required return on capital. In applying the CAPM,
the rate of return on capital is estimated as the current risk-free rate of
return on US Treasury bonds, plus a market risk premium expected over the
risk-free rate of return, multiplied by the “beta” for the valued company.
Beta is defined as a risk measure that reflects the sensitivity of a company’s
stock (or capital) price to the movements of the stock market as a whole.
The CAPM rate of return on capital is calculated using the formula:
Ke = Rf + β(Rm * Rf)+ SCP+ Sp Where;
Ke= Rate of return on capital (in this case, Total Invested Capital);
Rf= Risk free rate of return;
Β= Beta or systematic risk for this type of capital investment (in this case,
asset beta);
Rm – Rf= Market risk premium; the expected return on a broad portfolio of stocks
in the market (Rm) less the risk free rate (Rf);
SCP Small cap premium - Ibbotson valuation edition 2011 yearbook
Srp Specific Premium
Section 4: Methodology | Frutarom Industries Ltd. | Purchase price allocation – ETOL Group 49
Methodology
WACC WACC
We based on the Capital Asset Pricing Model (CAPM) in calculating the
WACC.
Following are the parameters that served for the calculation of the
Company's WACC, as of December 31, 2011:
Source: BDO analysis.
Following are the comparable companies included in the beta calculation:
International Flavors & Fragrances Inc. IFF, Givaudan AG, Symrise AG and
Frutarom Industries Ltd.
Terminal growth rate of 2% was determined based upon the real economy
expected growth rate in the long run, and upon a conservative element of
the Unit's internal growth.
While implementing the Income Approach to evaluate different assets, each
asset should be discounted in a rate reflecting its own risk. The risk and
liquidity of each type of asset being acquired may be greater than, equal to
or less than the overall discount rate of the company (regardless of how it
was computed). In most businesses that possess an array of asset types,
certain acquired assets may be:
a) More risky and/or less liquid (e.g., technology/patents, IPR&D, goodwill);
b) Comparably risky and/or liquid (e.g., customer lists,); or,
c) Less risky and/or more liquid (e.g., fixed assets and working capital).
It is generally appropriate to address this issue by assigning reasonable
premiums or discounts to the overall company discount rate when valuing
specific assets. Individually, each asset requires a higher or lower return
specifically related to the risks associated with that asset achieving its
estimated cash flows. Working capital assets (e.g., cash, accounts
receivable and inventory) and other tangible assets (e.g., machinery and
equipment and real property) have lower risks than intangible assets (e.g.,
Name מקור Symbol Value
Company's Debt Based on the Comparison companies D/V 19%
Company's Equity Based on the Comparison companies E/V 81%
Cost Of Debt Weighted average from Company's management Kd 5.0%
Tax Rate effective tax rate of the Company T 20%
Risk Free Rate Slovenian 10 years govermental bonds (Bloomberg) Rf 4.08%
Beta Levered Beta- According to compairing Companys' data β 0.69
Market Premium Sloveniany risk premium- Damodaran Rm-Rf 7%
SCP Ibbotson valuation edition 2011 yearbook SCP 4.07%
Cost Of Capital Rf +β*)Rm-Rf(+SCP Ke 13.2%
Wacc (D/V)*(1-T)*Kd + (E/V)*Ke 11%
Section 4: Methodology | Frutarom Industries Ltd. | Purchase price allocation – ETOL Group 50
DCF Approach
WACC
engineering drawings, trained work force, patents, etc.) and therefore have
lower required returns. In the aggregate, however, the firm's required
return represents the weighted average return of the value of each asset
multiplied by its required return.
In the case of ETOL, however, since the value of the tangible assets is small
compared to the total (enterprise) value of the company, the required rates
of return of the related assets were estimated to equal the company’s
WACC. Accordingly, the following required rates of return for the each asset
were used to derive the appropriate capital “charges” for estimating cash
flows under the income approach[1]: fixed assets – 7%; Working Capital – 4%;
and assembled workforce – 11%;
Section 5: Valuation of Intangible Assets | Frutarom Industries Ltd. | Purchase price allocation – ETOL Group 51
Section 5
Valuation of Intangible Assets
Section 5: Valuation of Intangible Assets | Frutarom Industries Ltd. | Purchase price allocation – ETOL Group 52
Valuation of Intangible Assets
Customer Relationships
General
General
When an operating entity is sold, the company that was bought is often
party to agreements or relationships that are of material value to the
acquirer. These may include existing agreements with customers and/or
returning customers. Due to the fact that the future cash flow of the
business would be negatively affected in the absence of these agreements or
relationships, they are deemed to have an economic value.
Customer relationships can arise from contracts, but also from other sources
such as ordinary supplier-customer sales-related communications.
The Group engages in unofficial contracts with its customers, which form an
unwritten commitment between it and its customers. The Group's customers
portfolio consist of a variety of clients in different geographical areas,
when, to date, about 45% are from European union (mainly Slovenian and
Polish markets), about 34% from South East Europe (mainly Croatian and
Serbian markets), and about 20% from Eastern Europe (mainly Russian and
Korean markets). Flavors' manufacturing for the food industry whose
character, quality, importance, stability and a level of bureaucracy,
creating a long-term labour relationship.
The Group engages with its customers by orders. From the date the Group
received the current order, the transaction is validated and can't be
cancelled. In case the order hasn't been made, the client can terminate its
relationship with the Group. According to international standards, customer
list usually doesn't derive from contractual or other legal rights. However,
customer lists often leased or replaced. Therefore, customer list, acquired
in a business combination, maintains the separation criterion and can be
identify separately from goodwill.
To estimate the fair value of the customer relationships we have analysed
the Group's list of major customers (starting in 2006 until today). According
to the mentioned analysis and to the Company's management, the average
annual churn rate is about 10%. In addition, we found that the Group's
average sales amount from its key customers increased over the years.
The Valuation of the Intangible Asset
Following are the customer relationships' valuation's main assumptions:
The asset's economic useful life - The economic useful life of the customer
relationships derived from an analysis of the Group's major customers, which
constitute the majority of its revenues. This analysis shows that the
weighted average economic useful life is about 10 years, and more (the
economic useful life's calculation is taken as a function of the Group's
Section 5: Valuation of Intangible Assets | Frutarom Industries Ltd. | Purchase price allocation – ETOL Group 53
Valuation of Intangible Assets
The Valuation of the Intangible Asset
The Valuation of the Intangible Asset
activity period with each client and the volume of purchases of the same
client). Accordingly, it was assumed that the average economic useful life of
the Group's customer relationships is 10 years and the derived average
annual churn rate of the group's existing customers is 10%.
Revenue - The analysis of the Group's customer list and revenue shows that
the Group's weighted revenue from existing customers growing over the
years (see section 2 – The Purchased Company and its Operation).
Accordingly, revenue from existing costumers, which is taken into account,
derived from the acquisition model considering an annual churn rate of 10%,
as obtained from the analysis below.
The following graph presents the Group's expected revenue amount from
the existing customer relationships between the years 2012-2021 (€
thousands):
Source: BDO analysis.
Gross Profit – The forecasted customer relationships' gross margins are
based on the profitability rates presented in the acquisition model (see
Appendix A), as obtained by Frutarom's Management. In addition, the gross
profit was found reasonable in light of the Groups outcomes in the years
2009-2011.
.
48,008 44,381
40,387 36,002
31,202 25,460
19,477
13,245
6,755 3,445
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Section 5: Valuation of Intangible Assets | Frutarom Industries Ltd. | Purchase price allocation – ETOL Group 54
Valuation of Intangible Assets
The Valuation of the Intangible Asset The Valuation of the Intangible Asset
Sales and Marketing Expenses – According to the Company's management,
the strong competition in the flavours and raw materials industries requires
the Group to invest efforts in preserving existing customers. Therefore, it
was assumed, that over the entire projection period, the sales and
marketing expenses out of revenue from existing customers ratio will be 85%
of the corresponding ratio presented in the acquisition model (according to
the variable component of this expenditure which was assumed in the
acquisition model).
General and Administration Expenses – It was assumed, that that over the
entire projection period, the general and administration expenses out of
revenue from existing customers ratio, will be at the corresponding rate in
the acquisition model.
Research and Development Expenses - It was assumed, that that over the
entire projection period, the research and development expenses out of
revenue from existing customers ratio will be at the corresponding rate in
the acquisition model.
Contributory charge for the use of know-how – Contributory charge was
applied to the pre-tax cash flow, to reflect the customer relationships' use
of know-how (for details about determining the rate of royalties, see section
- valuation of know-How – Royalties rate).
Excess Cost Attributed to Inventory - From the forecasted cash flaws we
have deducted the excess cost attributed to inventory (see Appendix D).
Income Tax – A 20% tax rate was deducted from the forecasted cash flaw,
according to the effective applicable to the Group in Slovenia.
Contributory Charges - Contributory charges were applied to the after-tax
cash flow, to reflect the returns on other assets required to sustain the
customer relationships. These assets included assembled workforce, fixed
assets, and working capital (for details about the contributory charges
calculation see Appendix B).
Tax Benefit - Tax savings due to amortization of the asset were added to
derive the Fair Value of the customer relationships. These tax savings reflect
the future tax benefits associated with amortizing the asset for income tax
purposes. Accordingly, the value of the estimated tax benefit is 12% (see
Appendix C).
Discount Rate - Net cash flows were capitalized at discount rate of 11%
Section 5: Valuation of Intangible Assets | Frutarom Industries Ltd. | Purchase price allocation – ETOL Group 55
Valuation of Intangible Assets
The Valuation of the Intangible Asset
according to the Groups' weighted average cost of capital (see section
methodology – WACC calculation).
Asset Valuation - Based upon the above assumptions, the value of the
customer relationship asset was estimated at €1,127 thousands and with the
addition of tax benefit in the amount of €140 thousands was estimated at
€1,267 thousands.
Section 5: Valuation of Intangible Assets | Frutarom Industries Ltd. | Purchase price allocation – ETOL Group 56
Valuation of Intangible Assets
The Valuation of the Intangible Asset
The following table presents the valuation of the fair value of the customer relationships, as of the Closing Date (€ thousands):
Tousands € 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Revenue 48,008 44,381 40,387 36,002 31,202 25,460 19,477 13,245 6,755 3,445
COGS 31,917 29,409 26,675 23,701 20,473 16,651 12,738 8,662 4,418 2,253
Gross Profit 16,091 14,972 13,712 12,301 10,728 8,809 6,739 4,583 2,337 1,192
% of revenue 33.5% 33.7% 34.0% 34.2% 34.4% 34.6% 34.6% 34.6% 34.6% 34.6%
Operating Expences
S&M (4,850) (4,457) (4,033) (3,574) (3,080) (2,513) (1,923) (1,307) (667) (340)
% of revenue -10.1% -10.0% -10.0% -9.9% -9.9% -9.9% -9.9% -9.9% -9.9% -9.9%
G&A (5,235) (4,747) (4,236) (3,704) (3,148) (2,569) (1,965) (1,336) (682) (348)
% of revenue -10.9% -10.7% -10.5% -10.3% -10.1% -10.1% -10.1% -10.1% -10.1% -10.1%
R&D (1,554) (1,420) (1,277) (1,125) (964) (787) (602) (409) (209) (106)
% of revenue -3.2% -3.2% -3.2% -3.1% -3.1% -3.1% -3.1% -3.1% -3.1% -3.1%
Operating Profit 4,453 4,348 4,165 3,897 3,536 2,941 2,250 1,530 780 398
% of revenue 9.3% 9.8% 10.3% 10.8% 11.3% 11.5% 11.5% 11.5% 11.5% 11.5%
Know-How Charge (480) (444) (404) (360) (312) (255) (195) (132) (68) (34)
Less - the difference between
book value to fair value
attributed to Inventory (536)
Profit Before Tax 3,437 3,904 3,761 3,537 3,224 2,686 2,055 1,397 713 363
Tax Rate 20% 20% 20% 20% 20% 20% 20% 20% 20% 20%
Tax (687) (781) (752) (707) (645) (537) (411) (279) (143) (73)
Net Profit After Tax 2,750 3,123 3,009 2,830 2,579 2,149 1,644 1,118 570 291
% Net Profit After Tax 5.7% 7.0% 7.5% 7.9% 8.3% 8.4% 8.4% 8.4% 8.4% 8.4%
Contributory Charges
Fixed Assets (2,015) (1,863) (1,695) (1,511) (1,310) (1,069) (818) (556) (284) (145)
Working Capital (656) (607) (552) (492) (427) (348) (266) (181) (92) (47)
WorkForce (541) (500) (455) (406) (352) (287) (219) (149) (76) (39)
Net Cash Flow (463) 153 306 421 491 445 340 231 118 60
Discounted Cash Flow (440) 131 236 292 307 251 173 106 49 22
Value For Discounted Cash Flow 1,127
Tax Benefit Fector 12%
Tax Benefit 140
Total Value Of CR 1,267
Section 5: Valuation of Intangible Assets | Frutarom Industries Ltd. | Purchase price allocation – ETOL Group 57
Valuation of Intangible Assets
Know-How General
General
The ETOL Group's portfolio expresses the Group's accumulated knowledge
which is attributed to the products manufacturing method. The accumulated
knowledge in the Groups' product portfolio allows the Group to produce its
products in efficient way. The Group's Knowledge is of economic value, since
it is necessary to an optimally production and saves the time required for
product development. According to Frutarom's management estimations,
based on its past experience, the projected economic useful life of the
Group's know-how is 20 years. This Knowledge is updated gradually as a
result of a constant learning curve.
The Group is engaged in developing, manufacturing and marketing of flavors
extracts to the food and beverage industry. The Group's products are
manufactured with production innovative patents and extensive knowledge
that the Group acquired over the years, which gives it a competitive
advantage over competitors in the market.
The value of the Know-How was estimated by applying the Relief from
Royalties Approach. The Know-How ownership exempts the owner from
having to engage in product development and therefore to gain profits. The
implementation of the Relief from Royalties Approach requires evaluation of
the proper royalty rate, which was determined between unrelated parties.
The economic value of the accumulated know-How had been declining over
time, due to product obsolescence, for which the portfolio relates.
Therefore, the reasonable buyer is willing to pay only for the inherent value
in the ability to sell the product, reduced steadily with aging product
portfolio.
The Company has another activity area (Hereinafter: the "Trade Activity"),
which accounted for about 21% of the Groups' revenue in the years 2008-
2011. The Trade Activity doesn't involve know-how, as it engages in a field
of sale and purchase of raw materials. In light of the above, for the fair
value revaluation of the Groups' know-how, we relied on a rate of 79% of the
Group's future revenue, which were determined in the acquisition model, as
received by Frutarom's management.
Valuation of the Intangible Asset
The valuation of the intangible asset know-how was preformed according to
the Relief from Royalties Approach, when the asset value is estimated based
on the total revenue for which the royalties are paid.
Following are the Know-How's valuation's main assumptions:
The asset's economic useful life – We have analysed the economic useful
life of the Group's existing know-how since its inception. According to the
Company's management, the Group's production methods are used for many
Section 5: Valuation of Intangible Assets | Frutarom Industries Ltd. | Purchase price allocation – ETOL Group 58
Valuation of Intangible Assets
Valuation of the Intangible Asset Valuation of the Intangible Asset
years. Based on discussions with the Company's management it was assumed
that the know-how average economic useful life is 20 years.
Royalty Rate – To assess the royalty rate saved for the use in the Group's
accumulated know-how, we examined a number of transactions (see
Appendix E) in which royalties paid for the use of accumulated know-how in
the production of products to the food and beverage industry, including the
utilization of food mixtures. To derive to the appropriate royalty rate, we
focused on transaction in which the accumulated know-how includes a
production formula, use in flavours and raw materials in a certain dosage as
part of the production process. These transactions show that the range of
royalties paid is in the range of 1% and 7% (www.royaltiessource.com).
Based on our experience, we assumed that the royalty rate on behalf of the
use of the ETOL Group's know-how is about 1%, similar to the lower bar of
the above range. Purchaser who doesn't have this knowledge will have to pay
royalties at a rate of about 1% for using it.
The royalty rate which is taken for calculation is lower than the excepted
royalty rate as "rule of thumb" in royalty's transactions (Royalty Rates for
Licensing Intellectual Property by Russell Parr, J Wally & Sons, 2007). The
rule indicates that the royalty rate should be about a quarter of the
operational profit rate. According to discussions with the Company's
management a royalty rate of 1% was taken, similar to the lower bar of the
royalties transaction range. The reason for using this royalty rate is that the
Group achieves profit margins which are lower than usual margins among
companies in the sector, due to the nature its activity. The Group is a
production enterprise in which most of the existing knowledge lies in its
fixes asset. Therefore, a potential buyer would pay a lower rate of royalties
for the Group's existing know-how.
In the first two years a royalty rate of 1% was charged from the total
expected revenue, as according to the Company's management this is the
time required to develop products to market. After this period, a royalty
rate of 1% was charged only for the portfolio, which is sold by ETOL Group,
as of the Closing Date. It was assumed that tae rate of these products will
gradually decrease until December 31, 2013 (the know-how economic useful
life is 20 years).
Because the production methods are updated throughout the period, a
potential buyer would pay royalties knowledge only on the knowledge he
had acquired in the first place.
Section 5: Valuation of Intangible Assets | Frutarom Industries Ltd. | Purchase price allocation – ETOL Group 59
Valuation of Intangible Assets
Valuation of the Intangible Asset Valuation of the Intangible Asset
The following graph presents the revenue of which the know-how royalty
rates are recorded between the years 2012-2021 (€ thousands):
Source: BDO analysis.
Income Tax – A 20% tax rate was deducted from the forecasted cash flaw,
according to the effective applicable to the Group in Slovenia.
Tax Benefit - Tax savings due to amortization of the asset were added to
derive the Fair Value of the customer relationships. These tax savings reflect
the future tax benefits associated with amortizing the asset for income tax
purposes. Accordingly, the value of the estimated tax benefit is 8.4% (see
Appendix C).
Discount Rate - Net cash flows were capitalized at discount rate of 11%
according to the Groups' weighted average cost of capital (see section
methodology – WACC calculation).
Asset Valuation - Based upon the above assumptions, the value of the know-
how asset was estimated at €2,281 thousands and with the addition of tax
benefit in the amount of €191 thousands was estimated at €2,472 thousands.
42,141 43,826
42,135 39,110
37,043
32,610 30,239
27,759 25,168
22,463 19,639
16,693 13,621
10,420
7,086 3,686
2012 2014 2016 2018 2020 2022 2024 2026 2028 2030
Section 5: Valuation of Intangible Assets | Frutarom Industries Ltd. | Purchase price allocation – ETOL Group 60
Valuation of Intangible Assets
Valuation of the Intangible Asset
The following table presents the valuation of the fair value of the know-how, as of the Closing Date (€ thousands):
source: BDO analysis
Thousands € 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031
Revenues - Know How 42,141 43,826 43,047 42,135 41,082 39,110 37,043 34,877 32,610 30,239 27,759 25,168 22,463 19,639 16,693 13,621 10,420 7,086 3,614 3,317
Royalties 421 438 430 421 411 391 370 349 326 302 278 252 225 196 167 136 104 71 36 33
Tax Rate 20% 20% 20% 20% 20% 20% 20% 20% 20% 20% 20% 20% 20% 20% 20% 20% 20% 20% 20% 20%
Net Cash Flow 337 351 344 337 329 313 296 279 261 242 222 201 180 157 134 109 83 57 29 27
Discounted Cash Flow 320 300 265 234 205 176 150 128 107 90 74 61 49 38 29 22 15 9 4 3
Value For Discounted Cash Flow 2,281
Tax Benefit Fector 8.4%
Tax Benefit 191
Total Vlue Of KH 2,472
Section 5: Valuation of Intangible Assets | Frutarom Industries Ltd. | Purchase price allocation – ETOL Group 61
Valuation of Intangible Assets
Assembled Workforce Assembled Workforce
The assembled workforce was valued for the purpose of calculating the
appropriate contributory charge to be deducted from each of the Intangible
Assets’ cash flows. We used the Cost Approach to value the trained
workforce of the Group as of the Valuation Date. The Group’s realized
savings from obtaining a fully efficient, pre-existing, trained workforce
totalling approximately 248 employees, rather than incurring the costs to
assemble such a workforce, include:
Recruiting and screening expenses - Recruiting fees include recruiting
costs and placement fees (executive search firms) typically incurred to
hire new employees. Screening potential employees includes reviewing
resumes, interviewing and performing reference checks on the
candidates.
Training and orientation expenses - Training and orientation expenses
were calculated by multiplying the average time required to train a new
employee by the compensation, including benefits, of the trained
employee. Training costs include the start-up time for the trainee to
become oriented with the organization and reasonably proficient at his
or her task. Orientation costs were calculated by multiplying the
average time needed by a new employee to attain a full level of
productivity (the start up time) by the compensation, including
the benefits, of the new employee.
Based on this analysis, the Fair Value of the assembled workforce of teh
Groups, was estimated at € 5.2 million (see Appendix B).
Section 6: Results | Frutarom Industries Ltd. | Purchase price allocation – ETOL Group 62
Section 6
Results
Section 6: Results | Frutarom Industries Ltd. | Purchase price allocation – ETOL Group 63
Results
Results Results
According to the assumptions detailed in this report, we have arrived to the
conclusion that some of the acquired intangible assets were needed to
revaluate to reflect market value. The following table provides details
regarding these assets (In Thousands €):
Source: company's financial reports+ BDO analysis
Source: company's financial reports+ BDO analysis
Remark
The balance sheet data as of the Valuation Date are based on the Groups'
unaudited financial data as of December 31, 2011, according to Frutarom's
management that there were no material changes between December 31,
2011 and the Valuation Date.
Tousands € Note Book Value Fair value% of Purchase
Price
Life Span
(Years)
Current Assets
Cash 826 826 – 2.3%
Short-Term Investments 1,001 1,001 – 2.8%
Account recievables 1 10,815 10,815 – 30.6%
Other recievables 2 1,635 1,635 – 4.6%
Inventories 3 9,316 9,852 536 27.8%
Invetory's Tax Benefit Factor 3 80 (27) (107) -0.1%
Other assets, net 48 48 – 0.1%
Total Current Assets 23,720 24,149 428 68.2%
Long Term Assets
Fixed Assets 4 16,031 29,903 13,872 84.5%
Fixed Asseets's Tax Benefit Factor 4 – (2,774) (2,774)
Intangible assets and long term deferred taxes 1,356 1,356 – 3.8%
Long-Term Financial Investments 1,475 1,475 – 4.2%
Total Long Term Assets 18,862 29,960 11,098 84.7%
Deferred Tax Assets 3,135 3,135 – 8.9%
Total Assets 45,717 57,243 11,526 161.8%
Tousands € Note Book Value Fair value of Purchase Price % )Years(Life Span
Liabilities
Short-Term Financial Liabilities 6 7,064 7,064 20.0%
Account payables 5 3,133 3,133 8.9%
Employees short term liabilities 1,097 1,097 3.1%
Other Short-Term Liabilities 9 9 0.0%
Short-Term Accrued Costs And Deferred Revenues 191 191 0.5%
Provisions And Long-Term Deferred Taxes And Accrued Income 2,578 2,578 7.3%
Loans 6 9,373 9,373 26.5%
Other Long-Term Financial Liabilities 63 63 0.2%
Total Liabilities 23,510 23,510 66%
Total Assets 22,208 33,734 95%
Intangible Assets
Costumers Relationships 1,267 3.6% שנים 10
Tax Benefit Factor 7 (253) -0.7%
KnowHow 2,472 7.0% שנים 20
Tax Benefit Factor 7 (494) -1.4%
Total Itangible Assets 2,991 8.5%
GoodWill 8 (1,338) -3.8%
Purchase Price 9 35,387
Section 6: Results | Frutarom Industries Ltd. | Purchase price allocation – ETOL Group 64
Notes Notes
1. According to the Company, the Account receivable, as of the Valuation
Date, is attributed to short-term operating amounts, which are received
by the costumers during the current business and expected to be
charged during the current year. Therefore, there is no difference
between the book value and the fair value of this balance and no
adjustments had been made.
2. According to the Company, the other receivables, as of the Valuation
Date, is attributed to short-term operating amounts, which are received
during the current business and expected to be charged during the
current year. Therefore, there is no difference between the book value
and the fair value of this balance and no adjustments had been made.
3. According to the Company, the inventory balance consists of raw
materials inventory in the amount of €7,175 thousands and of finished
goods inventory in the amount of €2,141 thousands. According to IFRS3R,
we re-calculated the value of the finished goods inventory and
adjustments had been made (See Appendix D). Due to the difference,
between the book value and the fair value of this balance, we created a
deferred tax, according to the Group's tax rate received by Frutarom's
management.
4. The Group's fixed assets, as presented in its financial report, consist of
land and buildings, production equipment and machinery, other
appliances and equipment and property-plant and equipment under
construction or in production. The land and the buildings are located at
39 Škofja vasst in Slovenia and serve as the Group's operating activity. In
order to present the land and buildings in their fair value, we used a real
estate valuation expert as of December 31, 2011, received by the
Company. According to the expert valuation, there is a difference
between the book value and the fair value of this balance and
adjustments had been made. Due to the difference between the book
value and the fair value of this balance, we created a deferred tax,
according to the Group's tax rate received by Frutarom's management.
5. On December 31, 2011 the Group's long-term financial liabilities and
short-term financial liabilities balances were set on about €9,373
thousands and €7,064 thousands, respectively. According to the
Company's management the loans were taken in a variable interest,
except one loan, which its interest reflects the market interest rates.
Accordingly, no adjustments had been made as the current liabilities
were already recognized on their fair value.
6. Tax benefit factor was calculated and added to each of the intangible
assets, using the Group's tax rate received by Frutarom's management.
7. The goodwill value is the difference between the purchase price and the
fair value of the tangible and intangible assets
8. The total purchase price amounted to €35,387 thousands (for more
details see section 1 - the acquisition)
Section 7: Appendix | Frutarom Industries Ltd. | Purchase price allocation – ETOL Group 65
Section 7
Appendix
Section 7: Appendix | Frutarom Industries Ltd. | Purchase price allocation – ETOL Group 66
Appendix A
The Acquisition Model
The following is the acquisition model- Base Case Scenario (In thousands €):
source: Company's Management
Thousands € 2009 2010 2011 2012 2013 2014 2015 2016 מייצגת
Net Revenue 42,946 46,047 51,291 53,342 55,476 57,695 60,003 62,403 63,651
growth % 7% 11% 4.00% 4.00% 4.00% 4.00% 4.00% 2.00%
Costs Of Products 24,634 26,395 34,532 35,463 36,762 38,107 39,502 40,947 41,628
of revenue % 57.4% 57.3% 67.3% 66.5% 66.3% 66.0% 65.8% 65.6% 65.4%
Gross Profit 18,312 19,652 16,759 17,879 18,715 19,588 20,501 21,456 22,023
Gross profit % 42.6% 42.7% 32.7% 33.5% 33.7% 34.0% 34.2% 34.4% 34.6%
Operating Expences
S&M 6,444 7,015 6,288 6,340 6,555 6,778 7,008 7,247 7,392
of revenue % 15.0% 15.2% 12.3% 11.9% 11.8% 11.7% 11.7% 11.6% 11.6%
G&A 7,935 9,265 5,824 5,817 5,933 6,052 6,173 6,296 6,422
of revenue % 18.5% 20.1% 11.4% 10.9% 10.7% 10.5% 10.3% 10.1% 10.1%
R&D - - 1,660 1,726 1,775 1,824 1,876 1,928 1,967
of revenue % 0.0% 0.0% 3.2% 3.2% 3.2% 3.2% 3.1% 3.1% 3.1%
Total Operating Expences 14,379 16,280 13,772 13,883 14,263 14,654 15,057 15,471 15,781
of revenue % 33.5% 35.4% 26.9% 26.0% 25.7% 25.4% 25.1% 24.8% 24.8%
Operating Profit 3,932 3,371 2,987 3,996 4,451 4,934 5,444 5,985 6,243
Operating Profit % 9.2% 7.3% 5.8% 7.5% 8.0% 8.6% 9.1% 9.6% 9.8%
Tax (799) (890) (987) (1,089) (1,197) (1,249)
Tax Rate 20.0% 20.0% 20.0% 20.0% 20.0% 20.0%
Net Profit After Tax 3,197 3,561 3,947 4,356 4,788 4,994
Net Profit After Tax % 6.0% 6.4% 6.8% 7.3% 7.7% 7.8%
Change in Working Capital (119) (693) (734) (763) (793) (413)
Investment In Fixed Assets (2,186) (2,273) (2,364) (2,459) (2,557) (2,608)
Depreciation 3,568 3,294 3,080 2,909 2,772 2,608
Annual Cash Flow 4,460 3,889 3,929 4,043 4,210 4,582
Time 0.5 1.5 2.5 3.5 4.5 4.5
Residual Value 50,907
DCF 4,233 3,326 3,027 2,806 2,632 31,829
WACC 11.0%
None Operatin Assets 3,302
Less Financial Liabilities 16,500
Equity Value 34,654
As Of December 31, 2011
Section 7: Appendix | Frutarom Industries Ltd. | Purchase price allocation – ETOL Group 67
Appendix B
Workforce Contributory Charges
The following is the workforce fair value calculation as for the Valuation
Date (in thousands €);
source: BDO analysis
The following is the working capital calculation:
source: BDO analysis
Fixed Assets – The fixed assets fair value based on an external expert
valuation which recieved by company's management. The difference
between the book value and the fair value is attributed to the real estate
valuation expert of the company's land and the buildings.
Working capital – (see appendix D)
Workforce – (See appendix B)
Representative Income – the Revenue of 2011 was taken, which is
representative in our opinion for the Group activity.
Department No Of Employees
Average
Mounthly
Salery
(Thousands €)
No. of months
for training
Total cost
(Thousands €)
1 38 12.4 2 941
2 61 7.6 2 927
3 29 11.1 3 966
4 120 6.9 2 1,652
סה"כ 248 4,486
Total Training Cost (Thousands €) 4,486 (1)
Estimation of recruiting and screening expenses 2,082 (2)
Total Cost 6,568
Tax 20%
Total Cost after tax 5,254
Charge )Thousands €( Value
PT rate of
return
AT rate of
return
Annual
Charge Revenues
% Of
Revenues
Fixed Assets (1) 29,903 9% 7% 2,153 51,291 4.2%
Working Capital (2) 17,533 5% 4% 701 51,291 1.4%
Workforce (3) 5,254 11% 578 51,291 1.1%
Section 7: Appendix | Frutarom Industries Ltd. | Purchase price allocation – ETOL Group 68
Appendix C
Tax Benefit Tax Benefit
The following is the Tax benefit factor of the ETOL's Customer Relations
Asset;
source: BDO analysis
The following is the Tax benefit factor of the ETOL's Know-How Asset;
source: BDO analysis
NOCapitalization
Period
% Yearly
Amortization% Tax C * D PV(E) @12%
1 1 10% 20% 2% 1.9%
2 2 10% 20% 2% 1.7%
3 3 10% 20% 2% 1.5%
4 4 10% 20% 2% 1.4%
5 5 10% 20% 2% 1.3%
6 6 10% 20% 2% 1.1%
7 7 10% 20% 2% 1.0%
8 8 10% 20% 2% 0.9%
9 9 10% 20% 2% 0.8%
10 10 10% 20% 2% 0.7%
Tax Benefit Factor 12.4%
Tax Benefit Calculation NOCapitalization
Period
% Yearly
Amortization% Tax C * D PV(E) @12%
1 1 5% 20% 1% 0.9%
2 2 5% 20% 1% 0.9%
3 3 5% 20% 1% 0.8%
4 4 5% 20% 1% 0.7%
5 5 5% 20% 1% 0.6%
6 6 5% 20% 1% 0.6%
7 7 5% 20% 1% 0.5%
8 8 5% 20% 1% 0.5%
9 9 5% 20% 1% 0.4%
10 10 5% 20% 1% 0.4%
11 11 5% 20% 1% 0.3%
12 12 5% 20% 1% 0.3%
13 13 5% 20% 1% 0.3%
14 14 5% 20% 1% 0.2%
15 15 5% 20% 1% 0.2%
16 16 5% 20% 1% 0.2%
17 17 5% 20% 1% 0.2%
18 18 5% 20% 1% 0.2%
19 19 5% 20% 1% 0.1%
20 20 5% 20% 1% 0.1%
Tax Benefit Factor 8.4%
Tax Benefit Calculation
Section 7: Appendix | Frutarom Industries Ltd. | Purchase price allocation – ETOL Group 69
Appendix D
Inventory
The following is the revaluation of the Advances for inventories of the group
(Thousands €);
source: BDO analysis
The book value of finished goods inventory is €2,141 thousands. In order to
to derive the fair value we divided the book value with the representative
cost of sales rate (66%). Out of the result we reduced 17% selling and
marketing expenses and marketing margin.
Therefore, the Advances For inventories fair value, is €2,676 thousands.
Thousands €
Advances For inventories 2,141
Selling Price 3,220
S&M And Marketing Margin 544
Fair Value 2,676
Section 7: Appendix | Frutarom Industries Ltd. | Purchase price allocation – ETOL Group 70
Appendix E
Royalties Transactions
The following are transactions in which royalties paid for the use of accumulated know-how in the production of products to the food and beverage industry;
Source: (www.royaltysource.com).
The Transaction Upper Range Down Range
Abrasive Asbestos & Misc Nonmetallic Mineral Products 4.0% 4.0%
Know-How Use License in the Beverage Manufacture Sector. Includs the Chemical formula and machining process 4.5% 4.5%
Diagnostic Substances 7.0% 7.0%
Bevereges 1.0% 1.0%
Pharmaceutical Preparations 3.0% 3.0%
Grain Mill Products 3.0% 3.0%
Agriculture Services 4.0% 4.0%
Miscellaneous Food Preparations & Kindred Products 5.0% 2.5%
Individual 2.0% 2.0%
Cookies and Crackers 1.5% 1.0%
Eating Places 5.0% 3.0%
Food and Kindred Products 4.0% 1.0%
Range 7.0% 1.0%
Quarterly Report Regarding
Effectiveness of Internal Audit on
Financial Reporting and on
Disclosure
Quarterly Report Regarding Effectiveness of Internal Audit on Financial Reporting
and on Disclosure Under Regulation 38C(A)
The management of Frutarom Industries Ltd (the “Company”), supervised by the
Company’s Board of Directors, is responsible for prescribing and conducting a proper
internal control on the Company's financial reporting and disclosure.
For this matter, the members of the management are:
1. Ori Yehudai, President and CEO
2. Alon Granot, Executive Vice President and CFO
3. Amos Anatot, Executive Vice President Global Supply Chain and Operations.
4. Dana Maor, Global Vice President, Human Resources
5. Guy Gill, Vice President Finance
6. Tali Mirsky-Lachman, Global Vice President, Legal Affairs and Corporate Secretary
7. Lilit Levi, Global Chief Information Officer
Internal control on financial reporting and disclosure includes controls and procedures
which are conducted in the Company, which are planned by the Company's President
and CEO, and CFO and under their supervision, or by whoever fills these positions in
practice, under the supervision of the Company's Board of Directors. These controls and
procedures are meant to provide a reasonable level of certainty regarding the reliability
of the financial reporting and the preparation of the financial reports in accordance with
the provision of the law, ensuring that the information the Company is required to
disclose in the reports it publishes under the provisions of the law is gathered,
processed, summarized and reported on the date and the manner prescribed by law.
Internal control includes, among others, controls and procedures designed to ensure that
the information the Company, as stated, is required to disclose is gathered and delivered
to the Company’s management including the President and CEO, and to the highest
ranking financial officer whoever fills these positions in practice, in order to allow timely
decision making with regards to the disclosure requirement.
Due to its structural limitations, the internal control on financial reporting and disclosure
is not designed to provide absolute certainty that misrepresentation or omission of
information in the reports will be avoided or revealed.
In the annual report regarding effectiveness of the internal control on the financial report
and disclosure attached to the periodic report for the period ending December 31, 2011
(hereinafter: the latest annual report for internal control), the Board of Directors and the
management assessed the Company’s internal audit; based on this assessment, the
Company's Board of Directors and management concluded that the aforesaid internal
audit for December 31, 2011 is effective.
As of the date of the report, no events or issues which could alter the assessment of the
effectiveness of the internal audit as presented in the latest annual report for internal
control regarding the latest internal control were brought to the attention of the Board of
Directors and the management.
As at the date of the report, based on the assessment of efficacy of the internal
assessment in the annual report regarding the latest internal audit, and based on the
information presented to the management and the Board of Directors as stated above,
the internal audit is effective.
Director’s Declaration
Declaration of the President and CEO
The undersigned, Mr. Ori Yehudai, hereby declares as follows:
1. I have reviewed the Quarterly Report of Frutarom Industries Ltd. (the "Company") for
the first quarter of 2012 (the "Reports");
2. To my knowledge, the Reports do not include any false representations of any
material fact and do not omit representation of any material fact required in order to
ensure that the representations contained in these, in light of the circumstances
under which they were included, are not misleading in relation to the period of the
Reports;
3. To my knowledge, the financial reports and other financial information contained in
the reports duly reflect the Company's financial situation, its results of operations
and cash flow for the dates and periods to which the Reports relate in all material
aspects;
4. I have disclosed to the Company's auditors, the Board of Directors and the Audit and
Balance Sheet Committees of the Company's Board of Directors, based on my most
updated assessment of the internal control on financial reporting and disclosure:
a. All the material deficiencies and weaknesses in prescribing and implementing
the internal control on the financial reporting and on the disclosure which may
reasonably adversely affect the ability of the Company to gather, process or
report on financial information in a manner which could raise concerns regarding
the reliability of the financial reporting and the preparation of the financial reports
in accordance to the provisions of the law; and –
b. Any fraud, material or not material, which involves the president and CEO or
anyone directly reporting to him or other employees who hold significant
positions in the internal control on the financial reporting and on disclosure;
5. I, alone, or together with others in the Company:
a. Set controls and procedures, or ensured the existence and set up of controls and
procedures under my supervision, designated to ensure that material information
relating to the Company, including its consolidated companies as defined in the
Securities Regulations (Annual Financial Reports), 2010, is brought to my
attention by others in the Company and the consolidated companies, particularly
during the preparation of the Reports; and
b. I set controls and procedures, or ensured the enactment and performance of
controls and procedures under my supervision, designed reasonably ensure the
reliability of the financial reporting and the preparation of the financial reports in
accordance with the provisions of law, including in accordance with accepted
accounting principles:
c. No events or issues occurring during the period between the 2011 periodic report
and this time which could change the Board of Directors’ and management’s
conclusion regarding effectiveness of the internal report on the Company’s
financial statement and on the disclosure have been brought to my attention.
The above does not derogate from my lawful responsibility, or from the lawful
responsibility of any other person.
Date: May 29, 2012 `
_______________
Ori Yehudai
President and CEO
Directors’ Declarations
Declaration of the Executive Vice President and CFO
I the undersigned, Alon Granot, hereby declare as follows:
1. I have reviewed the interim financial reports and the other financial information
contained in the interim reports of Frutarom Industries Ltd. (the "Company") for the
first quarter of 2012 (the "Reports");
2. To my knowledge, the interim financial reports and the other financial information
contained in the interim Reports do not include any false representations of any
material fact and do not omit representation of any material fact required in order to
ensure that the representations contained in these, in light of the circumstances
under which such representations were included, are not misleading in relation to
the period of the Reports;
3. To my knowledge, the interim financial reports and other financial information
contained in the interim reports duly reflect the Company's financial situation, its
results of operations and cash flow for the dates and periods to which the Reports
relate in all material aspects;
4. I have disclosed to the Company's auditors, the Board of Directors and the Audit and
Balance Sheet Committee of the Company's Board of Directors, based on my most
updated assessment of the internal control on financial reporting and disclosure:
a. All the material deficiencies and weaknesses in prescribing and implementing
the internal control on the financial reporting and on the disclosure insofar as it
relates to the interim reports and the other financial information contained in the
interim reports, which may reasonably adversely affect the ability of the
Company to gather, process or report on financial information in a manner which
could raise concerns regarding the reliability of the financial reporting and the
preparation of the interim financial reports in accordance to the provisions of the
law; and –
b. Any fraud, material or not material, which involves the president and CEO or
anyone directly reporting to him or other employees who hold significant
positions in the internal control on the financial reporting and on disclosure;
5. I, alone, or together with others in the Company:
a. Set controls and procedures, or ensured the existence and set up of controls and
procedures under my supervision, designated to ensure that material information
relating to the Company, including its consolidated companies as defined in the
Securities Regulations (Annual Financial Reports), 2010, , is brought to my
attention by others in the Company and the consolidated companies, particularly
during the preparation of the Reports; and
b. Set controls and procedures, or ensured the enactment and performance of
controls and procedures under my supervision, designed reasonably ensure the
reliability of the financial reporting and the preparation of the financial reports in
accordance with the provisions of law, including in accordance with accepted
accounting principles:
No events or issues occurring during the period between the 2011 periodic report
and this time, relating to interim financial reports and to any other financial
information contained in the interim report, which could, in my opinion, change the
Board of Directors’ and management’s conclusion regarding effectiveness of the
internal report on the Company’s financial statement and on the disclosure have
been brought to my attention.
The above does not derogate from my lawful responsibility, or from the lawful
responsibility of any other person.
Date: May 29, 2012 `
_______________
Alon Granot Executive Vice President and CFO