Davide Campari-Milano SpA

Davide Campari-Milano S.p.A.
March 31, 2014
Volume XL, Issue III
Davide Campari-Milano S.p.A.
BIT: CPR
Dow Jones Indus: 16,457.66
S&P 500:
1,872.34
Russell 2000:
1,173.04
Index Component: NA
Price:
Shares Outstanding (MM):
Fully Diluted (MM) (% Increase):
Average Daily Volume (MM):
Market Cap (MM):
Enterprise Value (MM):
Percentage Closely Held:
52-Week High/Low:
5-Year High/Low:
Trigger: No
Type of Situation: Business Value, Consumer Franchise
€
5.95
576.3
586.3 (1.7%)
1.2
€ 3,456
€ 4,309
51% Alicros S.p.A.
€ 6.64/5.46
€ 6.64/2.34
Trailing Twelve Months
Price/Earnings:
Price/Stated Book Value:
Fiscal Year Ends:
Company Address:
Introduction
Davide Campari-Milano S.p.A. (“Campari Group”,
“Campari”, “CPR” or the “Company”) is the sixth largest
spirits company worldwide. Over the past 20 years,
Campari has grown from a niche Italian aperitif
producer into a diverse spirits Company with over 50
brands distributed in 190 countries. Today, no single
brand contributes more than 10% of sales and more
than three-quarters of sales are generated outside Italy.
The Company has achieved an impressive 10% CAGR
in revenue since its IPO in 2001 and we believe
Campari’s portfolio is well-positioned to capitalize on
current trends including global spirits consumption
growth, international adoption of U.S. whiskies, and a
resurgence in the classic cocktail culture. CPR’s Wild
Turkey whiskey, Aperol and Campari bitters, and
Cinzano vermouth are particularly well-positioned.
Integration of recently-acquired premium rum and
Canadian whisky portfolios will further enhance the
Company’s portfolio in globally underpenetrated
categories. The Company has also built an impressive
emerging markets footprint, which contributed 29% of
revenue in 2013.
Clients of Boyar Asset Management, Inc. do not own shares of Davide
Campari-Milano S.p.A. common stock..
Analysts employed by Boyar’s Intrinsic Value Research LLC do not own
shares of CPR common stock.
We are attracted by the spirit industry’s
economies of scale, strong brand equity, pricing power
and recession-proof demand, as well as the
aforementioned long-term demand drivers. Campari
historically generates mid-20s percentage EBITDA
margins with relatively low (1.5%-3% of sales) capital
Long-Term Debt (MM):
23.1x
2.5x
€ 1,127
Implied Upside to Estimate of
Intrinsic Value:
47%
Dividend:
Payout
Yield
€ 0.08
31%
1.1%
Net Revenue Per Share:
2013
2012
2011
€
€
€
Earnings Per Share:
2013
2012
2011
€ 0.26
€ 0.27
€ 0.27
2.62
2.29
2.16
December 31
Via Franco Sacchetti, 20
20099 Sesto San Giovanni
Milano 720-852-7700 ITALY
Managing Director/CEO: Bob Kunze-Concewitz
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Davide Campari-Milano S.p.A.
requirements. Following the recent spate of acquisitions as well as numerous investments in production and
bottling facilities around the globe, Campari is making great strides in internalizing its route to market. This
should improve Campari’s selling power and margin profile over time while further enhancing the synergies from
any additional acquisitions. Despite these dynamics, Campari shares currently trade hands at relatively modest
2.8x 2013 EV/Sales and 12.7x 2013 EV/EBITDA versus 4.3x and 14.8x average multiples among its closest
peer group. In our view, near-term headwinds in Italy and some smaller markets as well as disappointments in
integrating the 2012 Jamaican acquisition are overshadowing the Company’s long-term track record of profitable
growth—which we believe is intact and even enhanced today. Integration progress and any macroeconomic
improvements could be catalysts for a re-rating of Campari shares in the coming years. In the meantime,
Campari has ample free cash flow and borrowing capacity to continue to pursue modestly-sized and priced
acquisitions. Longer-term, we would not dismiss the possibility that the second generation of Campari’s
controlling Garavoglia family consider a sale. Consolidation has continued at a frenzied pace in the industry for
well over a decade, with recent transactions completed at an average 15x EBITDA multiple and reaching
19.5x EBITDA in the case of Suntory’s pending Beam acquisition. Nonetheless assuming a discounted
14x 2016 EV/EBITDA multiple, we derive a forward-looking intrinsic value estimate of €8.74 per share for
CPR—implying 47% upside from the current price.
History & Business Overview
Davide Campari-Milano S.p.A. traces its beginnings to 1860, when Italian drink master Gaspare
Campari created the eponymous bitter aperitif at his bar in Novara. He soon opened the Caffe Campari in
Milan’s central gallery, where the drink gained widespread popularity and is credited with establishing the
Milanese social cocktail ritual. Famous posters and advertisements commissioned to well-known artists helped
turn Campari into a premier Italian brand by the early 1900s. Son Davide Campari helped focus the business on
the most successful Campari aperitif and the Cordial Campari spinoff, and he soon began to build Campari into
an internationally distributed liquor. The Campari product line was extended in 1932 with the introduction of
Campari Soda, the world’s first pre-mixed, single serve bottle marketed worldwide, which featured a distinctive
bottle designed by Fortunado Despero. Chemist Domenico Garavoglia joined the Company in 1952 and would
guard the secret Campari recipe and eventually lead the Company until his death in 1992.1 Under Garavoglia’s
leadership, Campari would continue to expand its reach, eventually reaching distribution in over 190 countries.
Garavoglia inherited control of the Company after the last living Campari heir passed away in 1982.
As the spirits industry began a still-ongoing wave of international consolidation in the 1990s, Campari
decided to join the fray in 1995 with the acquisition of Dutch company BolsWessanen’s Italian soft drinks
business. In exchange for a 35% stake in the Company, Campari acquired a portfolio including the non-alcoholic
aperitif Crodino, Lemonsoda, and Cynar brands. Campari followed that up with the acquisition of Cinzano
sparkling wine and vermouth, plus Greek liquor Ouzo12, from Diageo for €122.7 million in 1999. Campari also
acquired a portfolio of local Brazilian brands from Diageo for $105 million in early 2001. To support additional
growth and provide an exit for minority shareholders, Campari completed its initial public offering on July 6,
2001. Led by Deutsche Bank and UBS and listed on the Italian Stock Exchange (Borsa Italiana), Campari sold
13.7 million existing shares at €31 per share (€1.55 per share, split adjusted). The IPO allowed Wessanen to
exit its position in Campari, and the Company did not raise any money through primary share issuance. The
Garavoglia family maintained its 51% ownership after the IPO, but the IPO was not without its drama as one of
Domenico’s daughters waged a lawsuit alleging the family had long misrepresented the Company’s financials
and attempted to force her to sell her stake in the run-up to the IPO. The lawsuit ultimately ended in a
€100 million judgment in her favor.2 As detailed later, Campari’s growth accelerated following the IPO through
global expansion of acquired portfolios. Today Campari is a truly international Company with a broad wine and
spirits portfolio; Campari and Campari Soda have declined from 43% of net sales in 2000 to just 14% in 2013.
Business Description
Campari has grown far beyond its 19th century roots as creator of the eponymous aperitif in Italy. Today
Campari is the sixth largest company in the worldwide premium spirits industry, featuring a portfolio of over
50 brands with a footprint including 4 wineries, spirits production facilities in 17 countries, and an increasingly
expansive internal distribution reach globally. Through a combination of organic growth and acquisitions,
1
2
http://www.bloomberg.com/news/2013-03-04/hidden-billionaire-garavoglia-pouring-campari-fortune.html
http://www.just-drinks.com/news/campari-leading-family-hit-by-fine-report_id87963.aspx
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Davide Campari-Milano S.p.A.
Campari is now operationally diverse from both a geographical and product perspective. Following a
realignment in 2012, Campari operates through 4 geographical business units: Italy, Rest of Europe, Americas,
and Rest of World & GTR (global travel retail; encompasses world-wide duty free sales). Italy’s contribution to
Company-wide sales has declined from 57.4% as recently as 2000 to slightly less than 25% of Company-wide
sales in 2013 and continues to decline as a percentage of sales. The United States is Campari’s second largest
country by sales, contributing 20.5% of revenue in 2013. As a whole, the Americas is now Campari’s largest
operating segment, contributing approximately 41% of sales. Europe ex-Italy contributes another 24% while
Rest of World and GTR account for the final 10% of sales. The Americas segment contributes a moderately
lower percentage to Campari’s bottom line (34.8% of EBIT in 2013) primarily due to inclusion of the
lower-margin Jamaican contract manufacturing and consumer distribution businesses, but the Americas unit is
still the largest profit center. Including Jamaica (8% of sales), emerging markets contributed a healthy 29% of
sales in 2013.
Campari Revenues and EBIT by Region, 2013
USA
Jamaica
Brazil
Argentina
Canada
Other America
Total Americas
Revenues
20.5%
8.2%
5.4%
2.5%
2.0%
2.3%
40.9%
EBIT
Revenues
24.7%
EBIT
25.7%
Germany
Russia
Other Europe
Rest of Europe
10.4%
5.2%
8.6%
24.2%
27.6%
Australia
Other
ROW GTR
5.0%
5.2%
10.2%
11.9%
Italy
34.8%
From a product perspective, spirits contributed approximately 73% of CPR’s sales in 2013. Campari’s
spirits portfolio is diverse including a range of aperitifs, whiskies, rum, and vodka. Wine (still and sparkling)
contributed 15% of sales and is primarily sold in Europe outside Italy. Soft drinks, primarily sold in Italy,
represented another 6% of sales while other sources (other finished products, raw materials, semi-finished
goods, third-party bottling, etc.) accounted for the final 6%.
Campari Revenue by Category, 2013 (€1.52 billion)
Other
6%
Spirits
73%
Soft Drinks
6%
Wines 15%
Campari’s top 6 franchises accounted for 53% of sales, with no single franchise responsible for greater
than 10% of sales. These top six franchises are Campari, Aperol, Skyy, Wild Turkey, Lascelles de Mercato’s
rum portfolio, and Cinzano. Below, we provide additional detail on Campari’s portfolio of brands.

Campari (10% of 2013 sales): Nicknamed “red passion,” the bitter liqueur Campari is still produced
according to the secret recipe that dates to 1860 and combines bitter herbs, plants, and fruit with
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Davide Campari-Milano S.p.A.
alcohol and water. Campari is consumed as a traditional aperitif, alone or as an ingredient in classic
cocktails like the Negroni as well as in long drinks. and classic cocktails like the Negroni. Campari’s
core markets are Italy, Germany and Brazil, followed by growing United States and Argentina
markets and France. CPR also introduced pre-mixed, “ready-to-serve” (RTS) Campari Orange
Passion single-serve bottles in 2013.

Campari Soda (4%): The Campari Soda brand is utilized for the Company’s original single-serve,
pre-mixed aperitif, combining Campari and carbonated soda in distinctive overturned chalice glass
bottles since 1932. Campari Soda is almost exclusively (~98%) sold in Italy.

Aperol (9%): Aperol is a low alcohol (~11% ABV), light, bittersweet, orange hued liquor infused with
a blend of herbs, roots, and oranges according to the Barbieri brothers’ original 1919 recipe. Aperol
is a popular aperitif and ingredient in cocktails such as the Aperol Spritz. Campari also sells RTS
Aperol Spritz bottles. Italy is still Aperol’s core market, followed by Germany and Austria.

SKYY (10%): SKYY is Campari’s primary vodka brand. Quadruple distilled, triple filtered and sold in
the distinctive blue tinted bottles, SKYY is the best-selling vodka in the premium category in the
U.S. and number five globally. Established in the U.S. in 1992, SKYY generates 77% of sales in the
U.S., followed by Brazil (4% of brand sales), Canada, and Italy. The Company has expanded its
presence in the flavored vodka category through the SKYY Infusions line featuring 9 flavors.

Wild Turkey (10%): Wild Turkey is a Kentucky bourbon whiskey distiller and bottler with over 150
years of heritage. Wild Turkey generates ~50% of sales from traditional bourbon and rye whiskies
and the other ~50% of sales from its American Honey flavored whiskey and a range of pre-mixed
RTS products including Wild Turkey & Cola and Wild Turkey & Dry RTS drinks. The U.S. remains
Wild Turkey’s largest market, followed by Australia (the exclusive home of the RTS line) and Japan.

Cinzano (8%): Cinzano Sparkling Wines (4% of CPR sales) produces a range of dry and sweet
Italian sparkling wines including Asti, Prosecco, Gran Cinzano, and Rosé. Cinzano Vermouth (3% of
sales) is the second most popular Italian vermouth brand after Martini and Rosso. Cinzano’s core
markets are Russia (Cizano’s largest vermouth market), Italy, Germany, and Argentina.

Lascelles deMercato (6%): Campari acquired Jamaica’s oldest rum distiller Lascelles deMercato
(LdM) in December 2012. LdM’s core brands are the Appleton Estate super premium line of rums,
Appleton Special/White mixing rums, J. Wray & Nephew overproof rums, and Magnum tonic wine.
LdM also holds Jamaican brand rights to Captain Morgan and distributes over 80 third party wine
and spirits brands in Jamaica. LdM generates 50% of sales in Jamaica, another ~30% of sales
spread across North America and the Caribbean, 5% in the U.K. and the remainder across the
globe.

Crodino (4%): Crodino is a non-alcoholic, orange colored aperitif composed of herbs, plants, mixed
fruit and sugar. Produced since 1964 (acquired by Campari in 1995) and sold in single-serve glass
bottles, Crodino is Italy’s most popular non-alcoholic aperitif.

Other Brands: Campari’s smaller brands include Frangelico hazelnut liqueur and Carolans Irish
cream liqueur (combined 3%); a portfolio of local Brazilian branded spirits (4%); Mondoro,
Riccadonna, and Odessa sparkling wines (3%); Sella&Mosca and third party still wines (2%);
Lemonsoda Italian soft drinks (2%); Espolon and Cabo Wabo premium tequila (1%); and Glen Grant
and Old Smuggler Scotch whisky (~1%). Smaller brands include Irish Mist whiskey and Sagatiba
cachaça. Campari also holds regional marketing and distribution licenses to a variety of third party
brands (“agency brands”) including Bowmore, Glen Gariouch, Tullamore Dew and Yamazaki whiskeys.
Shareholders and Management
Campari remains under the control of the Garavoglia family via its family holding company Alicros.
Domenico Garavoglia’s wife Anna Rosa Magno Garavoglia (age 80) remains the family matriarch, while son
Luca Garvagolia (age 45) has served as chairman of Campari since 1994. Bob Kunze-Concewitz (age 46) has
served as CEO since 2007. Prior to joining Campari as Group Marketing Officer in 2005, Mr. Kunze-Concewitz
served as Corporate Marketing Director, Global Prestige Division of Proctor and Gamble.
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Davide Campari-Milano S.p.A.
Successful Acquisition Strategy in Industry with Strong Economies of Scale
Campari’s brand portfolio and operational footprint has dramatically expanded over the past 15 years
from a niche Italian aperitif company into a diversified global wine and spirits company. In large part, this
transition has been fueled by acquisitions. Over the past 16 years, Campari has executed 18 acquisitions, which
are collectively responsible for roughly 50% of the Company’s growth over that timeframe. While value investors
may be justifiably wary of a M&A-fueled growth strategy, we are comforted by Campari’s strong execution track
record as well as favorable industry dynamics. The entire spirits industry—which historically was highly
fragmented—has been undergoing an extended period of consolidation over the past 15 years. Economies of
scale are powerful in the industry for multiple reasons including the importance of large-scale, national/global
advertising and marketing in building brand awareness and consumption (A&P expense is typically ~15%-plus
of revenue among global spirits companies); essential route-to-market advantages of a large-scale sales and
distribution network; and the upfront investment requirements to build scalable production facilities as well as
aged liquor inventories. Although concentration is far higher within certain categories, the industry as a whole
still remains highly fragmented despite the rash of M&A activity, offering attractive incremental consolidation
potential. According to IWSR data, the top 25 spirits companies collectively hold less than a 30% share of the
global distilled spirits market by volume.
Campari has a track record indicating the Company is a disciplined acquirer. The Company has focused
on purchasing premium brands whose products are highly regarded and well-placed in attractive
categories/geographies but remain underpenetrated. The Company has also been an opportunistic acquirer of
assets from distressed sellers or forced sellers due to regulatory (antitrust) concerns. In many cases, these
smaller assets are overlooked by Campari’s larger multinational peers. This has helped Campari complete
acquisitions at average multiples well below broader industry M&A transactions, which have hovered around
~15x EV/EBITDA in recent years and recently reached as high as 19.5x EBITDA in the case of Suntory’s
pending $15.4 billion acquisition of Beam. As illustrated in the following table, Campari’s major acquisitions were
transacted at an average ~11.5x EV/EBITDA. Management cites a firm 10% ROI hurdle for any acquisition, and
we believe the Company has achieved significantly higher long-term ROI from several sizable acquisitions.
Campari has demonstrated an ability to generate outsized long-term growth from acquired brands by leveraging
its sales/distribution network and marketing reach to expand in un-penetrated or under-penetrated markets.
Product line expansion has also helped to generate incremental growth in many cases. We would also
emphasize that the Company has maintained a reasonably healthy balance sheet throughout its history as a
public company, with leverage ratios (net debt to EBITDA) ranging from 1x-3x and currently reaching
approximately 2.9x pro forma for the recently-announced Forty Creek acquisition. Below, we detail several of
Campari’s transactions as well as the M&A strategy and outlook going forward.
Campari Major Transactions, 2001-2014
Year Acquisition
Closing
Date
Country Key Brands
2014 Forty Creek Distillery Ltd. Canada Forty Creek Canadian Whisky
–
Appleton Estate, Appleton
Special - White, Wray &
2012 Lascelles deMercado
Jamaica Nephew, Coruba rum
11-Dec-12
Carolans, Frangelico,
Carolans, Frangelico,
Irish Mist
2010 from William Grant & Sons Ireland Irish Mist liqueurs
1-Oct-10
Wild Turkey and
Wild Turkey Bourbon,
2009 American Honey
USA American Honey liqueur
29-May-09
2007 Cabo Wabo Tequila
USA Cabo Wabo tequila
2-Jan-08
2006 Skyy Spirits LLC
USA SKYY vodka
2-Nov-06
Glen Grant and Old
Smuggler
Glen Grant and Old Smuggler
2006 from Pernod Ricard
UK
scotch whisky
15-Mar-06
2005 Skyy Spirits LLC
USA SKYY vodka
25-Feb-05
Aperol and AperolSoda
aperitifs, Mondoro sparkling
2003 Barbero1891 SpA
Italy
wine, Enrico Serafino wines
3-Dec-2003
2001 Skyy Spirits LLC
USA SKYY vodka
15-Jan-02
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Consideration Profit
Local Currency Multiple
Millions
Paid
Revenue
Multiple
Paid
$CAN 185.6
14.5x
Multiple Basis
FY Mar 2013E
EBITDA
$US 409
15.0x
TTM June 2012
EBITDA
€ 129
7.5x
$US 581
$US 80.8
$US 62.0
12.0x
11.8x
NA
2009E EBITDA
pro forma
NTM
Est. EBITDA
2007E EBITDA
Est. EBIT
€ 130
$US 156.6
9.0x
<10x
2004 direct
contribution profit
Est. EBIT
3.3x
NA
€ 170
$US 207.5
11.8x
11.5x
FY Feb 2004
EBITDA
2002E EBIT
2.7x
3.7x
4.7x
1.5x
2.6x
NA
NA
NA
Davide Campari-Milano S.p.A.
SKYY
SKYY was Campari’s first major acquisition in the alcoholic beverage industry in the modern era. SKYY
was independently developed by Maurice Kanbar as an ultra-distilled premium vodka and launched in the U.S.
in 1992. Campari acquired SKYY over time in a series of transactions, first acquiring a 9% minority interest in
1998. Campari acquired another 50% in 2001 for $207.5 million or ~11.5x forward pretax profits, while also
obtaining options to purchase the remainder at a reasonable 10x pretax profits, which were exercised in
2005-2006. SKYY recorded doubled-digit annual sales growth in each of its first 12 years, to become a top 5
premium vodka brand in the U.S. by the time it was wholly-owned by Campari. While organic growth rates to
single-digits in recent years, the SKYY franchise still averaged ~5% annual organic sales growth over the past
3 years. We estimate Campari generated an adequate, if not stellar, IRR from the SKYY investments. However,
this overlooks the vital strategic value of the acquisition for Campari: gaining critical mass in the attractive U.S.
spirits market. Campari handed SKYY U.S. distribution rights to its brands in 1999, which helped accelerate
adoption of Campari as well as subsequently-acquired brands.
Aperol
Campari announced the acquisition of Barbero S.p.A. 1891 in December 2003. Barbero held a
collection of Italian wine and spirits assets but generated 59% of revenues and a significantly larger share of
profits from the flagship Aperol brand of liqueur. The other premiere brand acquired was Mondoro, whose Asti
sparkling wine holds a leading share in Russia. The purchase price was €150 million or 12x TTM EBITDA—a
steal, considering Barbero’s growth profile and the value of the Aperol brand. Barbero recorded a 9.2% sales
CAGR and a 30.7% EBITDA CAGR over the 4 years prior to the transaction. Aperol sales growth was an even
stronger 16.5% CAGR in the 3 years preceding the acquisition. Aperol’s top-line growth only accelerated under
the Campari umbrella, recording a 21.6% sales CAGR between 2004-2006 and double-digit annual sales
growth every year through 2011. The growth was initially driven by consumption gains in Italy as Campari
leveraged Aperol’s synergies with its namesake aperitif across its sales and distribution network. CPR also
experienced strong returns on a ramp-up in advertising and promotional investments, including resumption of
TV advertising for Aperol. Italy still accounted for 90% of Aperol sales in 2006, and rapid international expansion
has powered the brand in more recent years; by 2010, 40% of Aperol sales were from outside Italy. Sales
growth faltered the past 2 years, although this primarily reflected weakness in Germany where Aperol lost
distribution with a major retailer due to pricing disputes. Year 2013 figure have not been detailed, but in 2012
Aperol’s sales increased 45% in second tier markets and 110% in the rest of the world.
Aperol Historical Annual Organic Sales Growth
45%
40.3%
39.3%
36.0%
35%
25%
23.2%
19.9%
21.7%
13.2%
15%
5%
‐5%
2005
2006
2007
2008
2009
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2010
2011
‐2.2%
‐1.4%
2012
2013
Davide Campari-Milano S.p.A.
Glen Grant
Campari acquired the Glen Grant, Old Smuggler, and Braemer Scotch whisky brands from Pernod
Ricard on March 15, 2006. This deal brought Campari the leading Scotch and single malt whisky brand in Italy
(Glen Grant) as well as valuable aged inventory and a distillery with the fourth-leading malt whisky production
capacity in Scotland. The transaction was completed under favorable conditions for Campari, as Pernod Ricard
was mandated to dispose of the assets in order to satisfy the European Commission’s conditions for approval of
Pernod’s acquisition of Allied Domecq. Although unlikely to be one of Campari’s higher-returning acquisitions,
the Company acquired Glen Grant at below-average multiples, paying €130 million or approximately 3x sales
and 9x direct contribution profit for the group based on 2004 financials.
Wild Turkey
Campari announced its largest-ever acquisition in April 2009, agreeing to purchase Wild Turkey (WT)
from Pernod Ricard for $575 million. Campari paid 9.7x WT’s 2008 contribution profit and 12x forecasted first
12 months EBITDA—another bargain, in our estimation. Although far from a pure comparison given Beam’s
deeper brand portfolio and global distribution, we would note that leading U.S. bourbon producer Beam is in the
process of being acquired by Suntory for 19.5x 2013 EV/EBITDA or 18.4x 2014E EBITDA. Jack Daniels parent
Brown-Forman also currently trades at 19.5x EBITDA. Pernod Ricard was again somewhat of a forced seller in the
case of Wild Turkey, as the company struggled with an excessive debt load amidst the financial crisis; Pernod
announced the WT sale in conjunction with a broader debt reduction plan that included a €1 billion share issuance.
Wild Turkey has proved to be a tremendous strategic platform for Campari. The acquisition bought the
Company entry at scale into the highly attractive U.S. bourbon whiskey market. Wild Turkey was the #1 selling
Kentucky bourbon based on global sales volume and #5 overall at the time of the acquisition, bringing Campari
a valuable brand and distribution network to build off. This acquisition was well-timed at the early stage of the
recent surge in whiskey consumption in the U.S. as well as global consumption of American whiskey. American
straight whiskey sales grew 5.1% over the 52 weeks prior to the announced acquisition, and growth has
accelerated in recent years to 10.2% in 2013. Wild Turkey has out-performed since the acquisition, with U.S.
sales growing 7.4% in 2012 and 15.6% in 2013. In part, this reflects innovations and brand building by Wild
Turkey to win a new, younger consumer with products like American Honey bourbon-based liqueur and Wild
Turkey 101 Rye, and Wild Turkey spiced whiskey.
The combination of Wild Turkey with SKYY also afforded portfolio synergies in the U.S. Integration with
SKYY helped to boost Wild Turkey sales in the relatively underpenetrated Northeast and West Coast markets.
When CPR acquired Wild Turkey, WT faced capacity limitations and was in the early stage of a multi-year
project to build a new distillery that would double distilling capacity with a new distillery. This project is now
substantially complete, and in addition to addressing capacity constraints, CPR expanded the upgrade to
include constructing bottling capabilities that allowed both RT and SKYY to in-source bottling operations in
2013. Internationally, Wild Turkey also brought scale in Australia, where Wild Turkey generates ~1/3 of sales
predominantly through RTD and American Honey. Australia organic sales increased 52.8% in 2010 and the
country now accounts for 5% of CPR’s global sales versus just 1% in 2008. The additional scale helped CPR to
launch its tequila line in the country in 2012. Wild Turkey historically relied on Pernod Ricard for distribution in
Australia but the Company is bringing this in-house.
Carolans, Frangelico, Irish Mist
In August 2010, CPR announced it would acquire the Carolans, Frangelico, and Irish Mist portfolio from
William Grant & Sons. Although Carolans and Frangelico sales have disappointed in recent years, the
acquisition was low-risk for CPR. CPR paid €128.5 million or a modest 7.5x 2009 adjusted EBITDA for the
portfolio. CPR already had various distributor agreements with the brands that covered ~60% of portfolio volume
globally, including serving as global production source for Frangelico, making for an easy integration. Irish Mist
also holds attractive long-term potential. The brand accounted for only 7% of portfolio sales at the time of the
acquisition but tapped into the 2 top-growing whiskey categories in the U.S., Irish and honey flavored.
Lascelles deMercato
Campari completed the acquisition of Lascelles deMercato (LdM) on December 10, 2012. CPR paid
$414.8 million or 15.0x TTM June 2012 EBITDA and 5x sales for LdM. Although the price looks full compared to
CPR’s prior acquisitions, we would note that LdM was previously acquired by CL Financial in 2009 for
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Davide Campari-Milano S.p.A.
$750 million. The Trinidadian conglomerate subsequently ran into serious financial/balance sheet problems,
which prompted the sale to CPR. LdM also offered great strategic value to CPR by providing the Company an
entryway into the premium rum category. Premium rum is the third largest global premium branded spirits
category (ex-low price and value brands) by volume, according to Campari and International Wine and Spirit
Research (IWSR) data. The global category exceeds 140 million 9L cases and has been growing for 10-plus
years. Category volume increased at an attractive 2.8% CAGR between 2006 and 2011. The U.S. is the largest
rum market, accounting for ~35% of the premium market globally. Growth is being driven by international
popularization as well as premium/alternative categories like dark rum, spiced rum, and ultra-premium, aged
“sipping” rums. Rum is gaining popularity but still in the early stages of penetration in much of Europe and AsiaPacific, providing an attractive long-term runway.
LdM’s assets include premium brands (including Appleton Estate and Appleton Special plus Wray &
Nephew) and facilities with a unique heritage and footprint. As noted, LdM is Jamaica’s oldest sugar cane estate
and distillery, dating to 1749. Today, LdM offers a leading supply chain in the Caribbean including cane fields, a
sugar and molasses factory, 2 distilleries, 18 warehouses, and a blending and bottling facility. Importantly, LdM
also brought a deep inventory of aged rum to support growth in the coming years; acquired inventories and
biological assets were valued at $107 million. LdM’s brands and production facilities provide an attractive
platform for international expansion under the leadership of a larger organization like Campari. LdM still
generated 50% of sales by volume within Jamaica at the time of the acquisition. The U.S. if far under-indexed at
only 6% of sales volume in 2011, and Europe ex-U.K. and Asia-Pacific are also underrepresented. Of particular
note among LdM’s brands, Wray and Nephew is the leading overproof rum but still has almost no distribution
outside Jamaica/Caribbean and the U.K. To speed up the process of international penetration, CPR is
re-acquiring LdM’s outsourced international rights in order to leverage CPR’s network. As of the acquisition,
LdM only managed distribution and marketing in Jamaica and the U.K. In February 2013 CPR took a big step,
paying $20 million to re-acquire U.S. distribution and marketing rights to the rum portfolio from Kobrand, which
had just acquired the rights in 2008. Gruppo Campari CEO Bob Kunze-Concewitz remarked,
“This is an important step in the integration of the Appleton portfolio into our distribution
network. It confirms our commitment to achieve a swift in-sourcing of the brands with the
objective to exploit the brands’ full potential in the US market.”
LdM Spirits Volume – Total Volumes FY 2011: 3.5 million 9 Liter Cases
Source: Company report, September 2012
-8-
Davide Campari-Milano S.p.A.
CPR should also be able to wring significant cost savings out of LdM. LdM’s EBITDA margins were only
10% at the time of the acquisition. This partially reflects LdM’s lower margin supply chain sales (sugar and bulk
rum) and consumer products distribution businesses which together contributed approximately 1/3 of acquired
revenues. LdM’s Spirits segment contribution margins were a healthier 32.0% in LdM’s FYE September 2011,
but are still well below CPR’s levels. At the time of the acquisition, LdM was a sprawling web composed of 22
separate operating companies in Jamaica. Campari is merging this disparate organization into a single
headquarters with one sales operation and one back office. The reorganization also included an initial 200
headcount reduction. This process created significant costs and delayed growth in 2013, but we believe CPR
has an attractive long-term opportunity to replicate the successful expansion of acquired brands like Wild Turkey
and Aperol with Lascelles deMercato rum portfolio.
Forty Creek Distillery
Most recently, on March 12, 2014, Campari announced the Company reached an agreement to acquire
Canadian spirits company Forty Creek Distillery Ltd. (FCD). CPR won the open bidding process for FCD with a
CAD $185.6 million bid, valuing the business at 14.5x projected EBITDA for the 12 months ended March 30,
2014. The deal is expected to close on June 2, 2014. Founded by former winemaker John Hall in 1992 (Mr. Hall
will stay on as FCD chairman and whiskey maker), Forty Creek operates an integrated distillery in Grimsby,
Ontario. FCD generates >60% of sales from the namesake Forty Creek brand of premium and ultra premium
Canadian whisky. FCD generates another ~23% of revenue from its Prince Igor vodka line and the remainder
split between Canada Gold whisky, other regional brands of various liquors, and custom third-party bottling.
Despite the seemingly full acquisition price on a backward-looking basis, Forty Creek looks like a nice
asset acquisition with a strong profitability profile and attractive growth prospects. CPR management expects to
generate a 10% IRR on the acquisition within 2-3 years, which appears feasible. Forty Creek’s core product line
is well-placed in the growing Canadian premium whisky category and is highly regarded with numerous major
tasting award wins. FCD also has a track record of innovation, such as the recently-launched Forty Creek
Cream whiskey. FCD increased revenue at an 11.9% CAGR from 2008-2013, and FY 2014 (ending March 31)
revenues are expected to grow at an even faster 15.6% pace to CAD $39.5 million. Forty Creek is now a leading
independent Canadian whisky but still holds only an estimated 7.4% market share in its category in Canada and
a 12.5% share within its Ontario base. Capturing the full margin on wholesale sales with its integrated
production and sales operation, FCD has an attractive margin profile that is growing as the company scales.
EBITDA margins expanded ~550 bps from 2009 to 28.4% in 2013, and are projected to reach 32.4% in FCD’s
FY 2014 (ends March 31, 2014). FCD still has some spare production capacity at its distillery, and margins
could continue to expand going forward.
Forty Creek Distillery Financials
Financials Trend (2008A-2013A*)
2013* Net Sales Breakdown
Canada
Gold
Whiskey
3%
Others
5%
50%
34.1
35
29.8
30
27.2
40%
25.4
Forty
Creek
Whiskey
63%
$ CAN (MM)
25
Custom
Bottling
6%
21.4
25.6%
20
28.4% 30%
27.8%
22.9%
15
20%
10
6.5
4.9
Prince Igor
Vodka
23%
26.4%
7.2
9.7
8.3
10%
5
0
0%
2009
2010
Net Sales
* Fiscal Year Ending 31 March
Source: Campari Company Presentation
-9-
2011
EBITDA
2012
2013
EBITDA %
Davide Campari-Milano S.p.A.
A combination of Forty Creek and Campari Group could also offer meaningful synergies. FCD still
generates 80% of sales in Canada, with the remainder in the U.S. This is almost reverse of the broader
Canadian whisky category, which generates 75% of volume sales in the U.S. vs. 17% in Canada. Overall,
Canadian whisky captures a 31% volume share of U.S. whisky sales, but is over-concentrated in the standard
and low-priced categories, presenting another attractive opportunity for CPR to leverage its existing U.S. route
to market to introduce Forty Creek’s premium whiskies. On the flip side, FCD could also allow Gruppo Campari
to improve its route to market in Canada. Interestingly enough, FCD already performs contract blending and
packaging operations in Canada for Campari’s recently-acquired Appleton line of rums. The relationship is
expected to be extended so all Campari brands are internally bottled in Canada.
Canadian Spirit Market by Category (2012)
Others
12%
Canadian Whisky Volume by Country (2012)
Others
5%
Whiskey
27%
Sweden
1%
South
Africa
2%
United
States
75%
Canada
17%
Vodka
29%
Rum
20%
Liquers
12%
Source: IWSR 2012
Future Acquisition Strategy Looks Attractive
Going forward, Campari management expects to continue to pursue acquisitions opportunistically. The
Forty Creek acquisition is expected to be funded entirely with cash on hand, and management is comfortable
the Company has ~€350 million in capacity to pursue additional acquisitions today. Notably, acquisitions are
expected to be driven less by category expansion going forward, now that the Company has largely filled out its
portfolio and established a meaningful presence across aperitifs, vodka, whiskies, rum, and other liqueurs.
Instead, the focus will be on (1) local brands with strong equity to build new distribution networks in emerging
markets, and (2) filling out markets where CPR already controls distribution by integrating attractive brands.
Management continues to emphasize a disciplined approach to additional M&A while maintaining a 10% return
hurdle. The Company has a good track record of avoiding excessive leverage and focusing on attractively
positioned assets or forced sale situations. Considering the economies of scale inherent in the industry and
CPR’s growing network, we are cautiously optimistic that M&A will continue to add to shareholder value creation
over the long term.
Campari is rumored to be among the bidders for United Spirits’ Wythe & Mackay Scottish whisky
division. Diageo is auctioning the unit in response to regulatory concerns with its acquisition of a controlling
interest in United Spirits. The division is a leading supplier of blended Scotch whisky to the U.K. market and also
holds the higher-value single malt Scotch distilleries Tamnavulin and Dalmore, which could be sold separately
or together. Whythe & Mackay has reportedly drawn interest from several strategic and financial bidders, which
tempers any enthusiasm we may have for CPR’s pursuit of the business.3 However, single malt Scotch whisky
is also growing tremendously in the U.S. (volumes up 11.6% in 2013) and Wythe & Mackay’s aforementioned
Scottish single malt distilleries are considered crown jewels in the premium single malt category. The integration
of a high-quality single malt Scotch portfolio into CPR’s Wild Turkey network could present attractive growth
opportunities in the U.S.
3
http://www.reuters.com/article/2014/03/12/unitedspirits-whytemackay-idUSL1N0M31X620140312
- 10 -
Davide Campari-Milano S.p.A.
Strengthened Portfolio and Global Network Provides Organic Growth Prospects
While acquisitions are a meaningful part of Campari’s growth story, the Company’s record of internal
growth must not be overlooked. Organic sales growth (excludes acquisitions, foreign exchange fluctuations,
agency brands and other one-time impacts) averaged 4.3% over the past years 10 years despite including an
extended global recession and an extremely slow recovery in Europe. In fact, Campari recorded only one year
of declining sales over this timeframe, (1.0%) in 2009. In part, this reflects alcohol and spirits consumption’s
virtual imperviousness to recessions, although supplier sales are still volatile on a short-term basis due to
wholesale/retail destocking activity. Campari’s organic sales reaccelerated after 2009 on the back of restocking
and market share gains, exceeding 8% in both 2010 and 2011. Organic sales growth slowed the past 2 years to
just 1.7% in 2013, but this reflected particularly challenging macro conditions and one-time, regulation-related
destocking in Italy, disputes with a major retailer in Germany, and shipment impacts related to acquisition
integrations and network transitions. Putting aside incremental M&A activity, we believe CPR is well positioned
to generate mid-to-high single digit average annual organic growth going forward. Below, we highlight some of
the additional underlying factors that could support this thesis.
Campari Annual Organic Sales Growth, 2004-2013
8.4%
8%
8.8%
7.1%
6%
4%
3.8%
4.1%
4.6%
2.8%
2.7%
1.7%
2%
0%
-1.0%
-2%
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Italy Headwind: Declining Contribution with Upside
As illustrated in the following table, Italy has been a significant drag on Campari’s performance in each
of the past 4 years. In fact, cumulative organic growth in Italy is negative over the past 5 years. In part, this
reflects the region’s higher concentration in soft drinks (21.5% of regional sales); Campari’s soft drinks portfolio
is almost exclusively sold in Italy. The business has come under a combination of competitive pressures and
general category weakness, but the Company is rolling out new advertising campaigns as well as new line
extensions to try to halt the declines. More generally, Campari’s Italy portfolio has suffered from severe
macroeconomic weakness over the past 4 years. This has particularly impacted on premise sales as restaurant
volume has suffered. Sales in Italy in 2013 were also temporarily impacted by a new law restricting vendor
financing terms. Encouragingly, spirits sales (down 0.1% in 2013) have held up better and organic sales
rebounded to 10% growth in 2H 2013 as order volume realigned with consumption. Longer term, we see upside
in Italy vs. recent years’ performance as the macroeconomic headwinds eventually recede and the soft drinks
portfolio becomes a smaller piece of the pie. Furthermore, organic growth internationally as well as acquisitions
including the pending Forty Creek deal will continue to reduce Italy’s importance to Campari as a whole.
Campari Annual Organic Sales by Region, 2009-2013
Italy
Americas
Rest of Europe
Rest of World & GTR
Total
2009
0.8%
(7.2%)
4.5%
39.3%
(1.0%)
2010
3.3%
9.6%
16.9%
3.6%
8.4%
- 11 -
2011
1.4%
9.4%
12.6%
28.3%
8.8%
2012
(3.3%)
8.6%
3.4%
11.9%
2.8%
2013
(4.1%)
6.3%
3.1%
(1.1%)
1.7%
Davide Campari-Milano S.p.A.
U.S. Spirits Growth
The corollary to Campari’s Italy segment’s underperformance is outperformance in the Americas
segment. The Company’s organic sales growth averaged 8.5% in the region the past 4 years. In part, this
reflects the favorable industry-level dynamics in the U.S. Overall U.S. per capita spirits consumption increased
from 29.7 L per year in 1997 to 35.2 liters in 2011.4 This is attributable to a combination of loosened regulation
of sales, advertising, promotion (e.g. spirits tasting), and distribution activities at county, state and federal levels,
spirit flavor innovations, and increasingly sophisticated taste preferences. Spirits have already gained 510 bps
market share (volume basis) in the domestic alcoholic beverage industry since 2000. Longer-term, we expect
growth in per capita spirits consumption to continue to be a tailwind in the U.S. Combined with population
growth and annual price increases, this could easily translate into 5% annual revenue growth domestically, prior
to any market share gains by Campari. In fact, U.S. spirits supplier revenues increased at a 5.1% CAGR
between 2000-2013 according to the Distilled Spirits Council. Integration of the Appleton rum portfolio and Forty
Creek into the U.S., as well as the investments at Wild Turkey’s facilities in Kentucky, provide a great
opportunity for CPR to gain additional share over the coming years.
Historical U.S. Spirits Supplier Revenues
Source: DISCUS, MSDB via Forbes
5
Premiumization and Classic Cocktail Resurgence
Campari’s portfolio is also well-positioned to capitalize on consumption trends within the spirits industry,
especially in the U.S. In the broadest terms, this includes a long term migration toward premium and ultrapremium priced spirits (what the industry dubs “premiumization”). Premium category sales have grown at ~2x
the rate of standard and low priced categories in the U.S. over the past decade-plus, and the vast majority of
Capari’s portfolio resides in premium-plus segments. A related trend is the recent resurgence in mixology and
the cocktail culture in the U.S. Recently, this has benefited whiskey more than any other primary spirits
category, which now plays into one of Campari’s strengths.
The overlooked beneficiaries of the cocktail craze are bitters like Campari and Aperol, as well as
Cinzano sparkling wines and vermouths. Typically consumed as virtually un-replicable ingredients in classic
cocktails like the Negroni and the Aperol Spritz as well as an ever-expanding list of new inventions, the brands
are ideally placed to capitalize on this trend. The Campari brand’s organic growth in the U.S. accelerated from
10.7% in 2012 to 19.5% in 2013. Aperol is still in the very early stages of penetration in the U.S., but sales
skyrocketed 56% in 2012 (2013 results not reported) and the Company is just beginning to promote the Aperol
Spritz. Importantly, we believe the popularization of Aperol and Campari, like classic cocktails more broadly, is
4
5
http://management.fortune.cnn.com/2013/02/19/alcohol-whiskey-renaissance-us/
http://management.fortune.cnn.com/2013/02/19/alcohol-whiskey-renaissance-us/
- 12 -
Davide Campari-Milano S.p.A.
still in the early stages. Google Trends illustrates a continued surge in searches for Aperol, Campari, and related
cocktails in the U.S., while search volume is still only 14% that of Italy. Search volume is heavily concentrated in
New York and the West Coast, where the cocktail renaissance is in a further stage of development, which bodes
well for future adoption.
U.S. Google Search Trends, Campari and Negroni, 2005-Present
Campari
Negroni
Source: Google Trends
U.S. Google Search Trends, Aperol and Aperol Spritz, 2005-Present
Aperol
Aperol Spritz
Source: Google Trends
International Whiskey Sales
We are optimistic the American whiskey resurgence of recent years will continue to spread globally.
American whiskey accounts for an outsized ~2/3 of U.S. spirits exports, but is still under-penetrated globally
compared to other whiskey types. This could change in the coming years as previously-overlooked bourbon and
American whiskey have unique brand connotations and flavor characteristics, and they are increasingly
associated with quality, premium products. In fact, there are signs that American whiskey adoption is already
gaining steam globally. Bourbon and Tennessee whiskey exports increased a solid 5% to $1.0 billion in 2013
and are up from less than $400 million in 2003, according to the Distilled Spirits Council. Wild Turkey is barely
penetrated internationally beyond Australia and Japan, which are the #3 and #6 U.S. spirits export markets
industry-wide, suggesting attractive long-term growth in the other regions.
- 13 -
Davide Campari-Milano S.p.A.
Whiskey Leads U.S. Spirits Export Growth
Source: U.S. Department of Commerce, ITC via DISCUS
Tequila
We have yet to discuss Campari’s tequila portfolio. Campari acquired Cabo Wabo tequila for
$80.8 million in January 2008 and Destiladora San Nicolas (Espolón and San Nicolas brands) for $27.5 million
in late 2008. Although accounting for only ~1% of Gruppo Campari sales, these brands and their Mexican
distilleries offer an attractive long-term growth runway. Tequila is predominantly consumed in Mexico and the
U.S. (86% combined share as of 2007) and the premium categories are still in the very early stages of adoption.
Campari’s tequila portfolio has posted impressive growth rates since re-launching on the Company’s platform in
2009, with organic sales compounding at a 25% annual rate.
Campari Tequila Portfolio Annual Organic Sales Growth
Organic Sales Growth
2010
62.4%
2011
3.7%
2012
23.7%
2013
16.4%
Emerging Markets
Campari has vastly increased its emerging markets exposure in recent years through a combination of
organic growth and acquisitions. Emerging markets expanded from 8% of sales in 2007 to 20% in 2012, and
totaled ~26% of sales in 2013 including LdM’s presence in Jamaica. Campari’s prominent emerging markets
exposure includes Brazil (5.4% of 2013 sales), Argentina (2.5%), and Russia (5.2%). As illustrated in the
following chart, U.S. spirits sales to emerging markets have exploded over the past decade but are still at a
small base today.
Putting the current disruptions aside (if that is possible), Russia is an extremely attractive, wellestablished market for Campari. Russia is the #2 spirits consumption (by volume) country in the world, but the
premium-plus categories still only capture ~2% of spirits sales by volume. CPR is well-placed with its Cinzano
vermouth (often paired with vodka, Russia’s predominant spirit) as well as in the wine segment with its premium
Mondoro brand sparkling wine. Highlighted by a doubling of the Mondoro brand sales, Organic sales increased
36.9% in Russia in 2013 following 61% growth in 2012, and Russia now represents a very meaningful 5.2% of
Gruppo Campari revenues.
- 14 -
Davide Campari-Milano S.p.A.
Emerging U.S. Spirits Export Markets Growth, 2000-2013
Source: U.S. Department of Commerce Compiled by U.S. International Trade Commission (FAS Value)via DSC 2013 report
The Company is also experiencing rapid, high-margin sales growth in South Africa and Nigeria as well
as rapid penetration gains in China, but they collectively still represent well below 5% of sales. China may offer
the best long-term opportunity for Campari. China is the #1 spirits consumption country in the world by volume,
but like Russia, still has only a fringe premium market. This is rapidly changing, with the Chinese imported spirits
market expanding by 250% (sales basis) between 2001 and 2012 according to Ipsos. The imported spirits
market China’s premium spirits market is historically concentrated in cognac, and to a lesser extent, whiskey
and sparkling wine and Campari’s larger competitors have a huge leg up. Martell cognac, Chivas whisky (both
owned by Pernod Ricard), and Hennessey cognac (LVMH) collectively held 43% of China’s imported spirit
market as of 2011, and competitors like Rémy Cointreau (13% of sales from Asia-Pacific, led by Rémy Martin
cognac in China) are also well ahead of CPR in penetrating China. However, we view this as an upside
opportunity for CPR vs. significant downside risk for the aforementioned peers, who are currently experiencing
drastic declines (20%-plus) in China due to the government’s recent crackdown on corruption, as well as a
broadly slowing economy. While CPR does not have a valuable cognac brand, it is stronger in sparkling wine
and over time alternate liquors are likely to gain awareness among a broader population of Chinese consumers.
Campari’s China sales are concentrated in sparkling wine as well as SKYY, which the Company reports is the
#2 and fastest-growing premium vodka in the country.
Campari Network Gains Scale
Campari is reinvesting internally to build its global production, sales, and distribution network, which
should further enhance the Company’s internal growth prospects. Through a combination of M&A and internal
reorganization, Campari has expanded from owning just 5 in-market companies (internal production and
distribution) in 2006 to 16 today. The Company acquired distributors in Argentina (2008) and Russia (2011) to
support internal markets in those countries. With the Forty Creek acquisition, Campari also plans to launch
another subsidiary in Canada to support all brands in 2015. The Company generated an impressive 90% of
sales through its own distribution network in 2012. Some route to market in-sourcing is still in the investment
phase, including Australia and Lascelles deMercato in key international markets. As the Company enlarges its
portfolio of internally distributed products in these markets, this should provide a nice tailwind in the coming
years.
Campari is also reinvesting to boost its production and bottling capabilities, with a planned $100 million
in investments over 3 years beginning in 2012. The Company’s largest investments are at the Wild Turkey
distillery in Kentucky. Wild Turkey was already in the midst of a major distillery upgrade at the time of the
acquisition by Campari. A new distillery was completed in 2010, ~doubling distilling capacity. The Company
- 15 -
Davide Campari-Milano S.p.A.
more recently completed a new $43 million bottling plant on site. The plant will have initial production capacity of
~4 million 9L cases. This will allow CPR to internalize bottling for Wild Turkey (formerly performed by Pernod
Ricard) as well as SKYY and all major brands while leaving capacity to support future demand in both North
America and across the globe. The Company has also completed new production facilities in Brazil, Argentina,
and Russia in recent years and is also investing in expanded distillation capacity in Mexico to support the
fast-growing tequila portfolio. Campari also acquired the Australian contract beverage packer Copack for
AUD 20 million in September 2013 to in-source bottling there.
Financial Performance, Balance Sheet & Free Cash Flow
Campari’s financial performance reflects the attractive characteristics of a large-scale, integrated spirits
company. Historical gross margins are in the mid-to-high 50% range, advertising and promotion expense
averages 17.5% and SG&A is closer to 16%. Campari’s EBITDA margins averaged 25%-26% between
2009-2012. This represented a ~200 bps expansion from pre-recession, 2004-2007 EBITDA margins, reflecting
leverage from Campari’s previously-discussed organic revenue growth and margin capture from in-sourcing
more production and distribution. In 2013, adj. EBITDA margins (down 290 bps to 22.2%) were negatively
impacted by the acquisition of LdM (10% margins) and its low margin consumer distribution and supply chain
sales. Integration and start-up costs related to LdM and the bottling in-sourcing projects also negatively
impacted margins. Looking forward, 2014 results will have a (6%) drag on EBIT from foreign exchange based
on recent rates (USD and emerging markets weakness vs. euro). Challenging macro conditions in Italy, Brazil,
Russia, and Jamaica, among others, will also weigh on results in 2014. Once these conditions normalize and as
Campari continues to in-source its route to market to support global distribution of its brands, we expect to see
EBITDA margin expansion resume.
Campari Historical Financial Performance, 2008-2013
(€ millions)
Net sales
Contribution after A&P
EBITDA pre one-off’s
Adj. EBITDA Margin
EBIT pre one-off’s
EBIT
EBIT Margin
Net income
2008
942.3
341.2
218.3
23.2%
199
195.4
20.7%
126.5
2009
1,008.40
401.2
265.1
26.3%
239.7
235.6
23.4%
137.1
2010
1,163.00
463.6
298.6
25.7%
272.8
269.5
23.2%
156.2
2011
1,274.20
505.5
329
25.8%
298.7
295.5
23.2%
159.2
2012
1,340.80
532.3
337.4
25.2%
304.7
287.5
21.4%
156.7
2013
1,524.10
561.2
339.1
22.2%
299.6
289.3
19.0%
149.8
Campari is a steady free cash flow generator. Maintenance capital expenditures totaled €33 million in
2013 but averaged less than €20 million or <2% of revenue in prior years. Campari spent an incremental
€48 million on bottling and other investments at the Kentucky facility between 2011-2013, but the projects are
now complete and management projects only €12 million in total growth capex in 2013. Overall, management
expects €51 million in capex during 2014. Campari’s FCF also benefits from cash taxes well below reported
rates due to tax deferred amortization of acquired goodwill. Campari also has modestly lower working capital
requirements and higher inventory turns than many of its competitors whose portfolios are more concentrated in
aged spirits. Internally-produced aged spirits obviously require a long investment runway for stock storage and
production, whereas Campari’s aperitifs can be produced in a relatively short period to match demand. Overall,
free cash flow totaled €105.9 million in 2013 or €146 million (€2.51 per share) including the working capital
impact of forex and acquisitions.
Campari Historical Cash Flow and Leverage, 2009-2013
(€ millions)
Operating Cash Flow
Maintenance Capex
Extraordinary Capex
Free cash flow
Net Leverage
2009
261
(13.5)
(41.3)
184.3
2.4x
2010
230.6
(21.2)
(38.5)
132
2.3x
- 16 -
2011
202.4
(17.3)
(7.6)
136
1.9x
2012
224.3
(21.1)
(24.1)
126.5
2.6x
2013
220.5
(33.0)
(25.9)
105.9
2.5x
Davide Campari-Milano S.p.A.
Campari has historically maintained a moderately leveraged balance sheet, between 1x-3x EBITDA. At
December 31, 2013, net debt stood at €853 million or 2.5x 2013 adj. EBITDA, with a strong liquidity profile
(average maturity profile of 5.75 years). Pro forma for the pending Forty Creek acquisition, net leverage is
approximately 2.9x. As discussed, most free cash flow has been redeployed into acquisitions over the past 12
years. The Company also spends a small amount of cash to offset stock dilution and has paid an annual
dividend since the IPO. In March 2014, CPR announced a proposed 14% increase in the dividend to €0.08 per
share. Still a modest 31% payout ratio (2013 EPS) and a 1.1% yield, this could continue to grow nicely in the
years ahead.
Valuation and Conclusion
We view the spirits industry as a potentially attractive investment space given its favorable long-term
consumption trends, economies of scale, consumer franchise value, and ongoing consolidation activity. Longterm annual sales growth in the premium spirits market has averaged mid single-digits over the past decade
despite the formidable macro headwinds. Sales growth at Campari has been even stronger, averaging
compound annual revenue growth of 9.8% and compound annual organic growth of 5.2% since the Company’s
IPO in 2001. This is reflected in the performance of Campari shares, which have compounded at 11% (price
appreciation only) over the same period. However, shares are essentially flat over the past 18 months, reflecting
a more mixed performance within CPR’s portfolio. As a result, Campari still trades at a material discount to its
peers and our estimate of intrinsic value. Pro forma for the Forty Creek acquisition, CPR shares currently trade
at approximately 2.8x 2013 revenue and 12.7x 2013 EBITDA vs. average multiples of 4.5x sales and
14.8x EV/EBITDA for 4 of its closest peers. We would also note that valuations for Remy Cointreau (down 35%
the past 12 months) and to a lesser extent Pernod Ricard (down 13%) share prices and valuation have come
down markedly due to ongoing double-digit sales declines caused by the aforementioned China issues.
Company
Diageo plc
Pernod-Ricard SA
Brown-Forman Corp.
Remy Cointreau SA
Average
Davide Campari-Milano SpA
Ticker
DGE.L
RI.PA
BF-B
RCO.PA
Price
GBX 1,860
EUR 84.50
USD 89.69
USD 58.25
Market
Capitalization
46.6
22.2
19.1
3.0
Enterprise
Value
55.7
31.0
16.9
3.4
EV/EBITDA
(TTM)
14.2x
12.8x
19.5x
12.8x
14.8x
EV/Sales
4.9x
3.8x
6.5x
2.8x
4.5x
CPR
EUR 5.95
3.5
4.3
12.7x
2.8x
In our estimation, there are a number of explanations for Campari’s current discount. We believe
investors and the sell side community tend to discount Campari for its “unfocused” portfolio without dominant
brands. No single brand (separating Campari from the Campari Soda soft drink line) accounts for more than
10% of sales, and no brand dominates any of the major spirits categories globally. According to Thomson/First
Call data, out of 20 sell-side analysts, 10 rate Campari hold and an unusually high 6 rate the Company sell.
Other prospective investors may be turned away from CPR because Campari is not a pure-play spirits
Company. CPR generated only 73% of revenue from spirits in 2013, a small portion of which includes lowermargin agency sales for third party brand spirits. CPR’s portfolio in the somewhat less attractive wine and soft
drinks categories contribute most of the remainder. In addition, we suspect Campari’s Italian incorporation and
historically Italy-focused operations has limited Campari’s exposure to international investors, while Italy’s
particularly weak macroeconomic conditions further deterred investors in recent years.
We do acknowledge that Campari cannot match the global scale or dominant brands of a Bacardi,
Diageo (including Johnnie Walker, Crown Royal, Smirnoff, etc.), Brown-Forman (Jack Daniels), etc. However, in
our view investors continue to overlook the progress Campari has made in the 21st century and its ongoing
opportunities. Although the Campari does not possess dominant global brands in any of the major spirits
categories, the Company holds a leading position in the bitters/aperitifs segment. At less than 5% of global
premium liquor volume and historically viewed as a category with only limited, regional appeal, the segment is
easily overlooked. However, the Company’s leading Campari, Aperol, and Cinzano brands are especially well
placed to capitalize on international adoption of the classic cocktail culture. Secondary market sales are growing
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Davide Campari-Milano S.p.A.
at strong double-digit and even triple-digit rates and remain under-penetrated. With the string of small
acquisitions over the past decade, the Company has also created a well-rounded portfolio of premium-plus
whiskey, rum, vodka, and tequila brands. The attractive U.S. spirits region is now Campari’s second largest
market, while Italy now accounts for <25% of sales while offering long-term upside from any meaningful
economic recovery. Campari has also built up an attractive footprint in emerging markets, which now contribute
close to 30% of Company-wide sales. Additionally, via both acquisitions and capital investments, the Company
is in the midst of expanding and in-sourcing its production and route-to-market globally, with a highly valuable
production, bottling, direct sales structure, and distribution network gaining scale.
In the near term, Campari’s results may be impacted by unfavorable currency fluctuations,
macroeconomic conditions in parts of Europe and emerging markets, integration costs and capital investments.
However, in our view these are temporary headwinds and the combination of this near-term uncertainty plus the
Company’s recent slow growth has created an attractive opportunity in CPR shares. Looking longer-term, we
project Campari can continue to generate mid single-digit annual organic revenue growth given the
aforementioned conditions. Pro forma for the Forty Creek acquisition and anticipating only modest 250 bps
margin expansion over the next 3 years (still placing EBITDA margins below 2012 levels), we estimate CPR
could generate upwards of €400 million in EBITDA by 2016. At a still below-market 14x EV/EBITDA, our
forward-looking intrinsic value estimate is €8.74/share for CPR. In addition to improved maturation of the
Company’s existing portfolio and route-to-market, additional accretive acquisitions could provide a catalyst for
incremental value creation. Finally, we would not dismiss the possibility that CPR is an acquisition target itself at
some point. The Garavoglia family still controls Campari but matriarch Rosa Anna Magno Garavoglia is 80 years
old and although son Luca Garavoglia (age 45) is chairman, there has been highly-publicized dissention and
legal battles between the second generation. Campari would present an attractive acquisition target, and based
on recent transactions, Campari would likely command at least 15x-16x EBITDA in a transaction.
Davide Campari-Milano Estimate of Intrinsic Value (€mm)
EBITDA – 2016E
€
Enterprise Value
418
14x
€ 5,846
Net Debt – 2016E
Equity Value
€ (770)
€ 5,077
assumed multiple
Diluted Shares Outstanding– 2016E (mm)
580.8
CPR Est. Intrinsic Value Per Share
€ 8.74
Implied Upside to Intrinsic Value
46.9%
Risks
Risks that Campari may not achieve our estimate of the Company’s intrinsic value include, but are not
limited to, general economic weakness impacting the Company’s businesses; changing consumer preferences
among spirits or versus other alcohols; lost distribution or failure to reach distribution agreements on favorable
terms; dilutive acquisitions or failure to integrate existing acquisitions; increased regulation or taxation; and
minority shareholder-unfriendly behavior by the controlling family.
Analyst Certification
Asset Analysis Focus certifies that the views expressed in this report accurately reflect the personal
views of our analysts about the subject securities and issuers mentioned. We also certify that no part of our
analysts’ compensation was, is, or will be, directly or indirectly, related to the specific views expressed in this
report.
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Davide Campari-Milano S.p.A.
DAVIDE CAMPARI-MILANO S.P.A.
CONSOLIDATED BALANCE SHEETS
(€ millions)
ASSETS
Dec. 31, 2013
Current assets
Inventories
Current biological assets
Trade receivables
Financial receivables
Cash and cash equivalents
Receivables for income taxes
Other receivables
Total current assets
Dec. 31, 2012
€ 442.6
4.5
288.5
31.5
444.2
17.0
29.4
1,257.8
€ 434.1
4.9
311.9
42.4
442.5
9.5
33.1
1,278.4
396.6
17.3
0.5
1,556.4
26.0
0.9
12.4
33.7
2,043.7
388.7
17.2
1.2
1,643.5
20.5
1.1
11.5
39.7
2,123.4
Non-current assets held for sale
TOTAL ASSETS
1.0
€ 3,302.5
1.0
€ 3,402.8
LIABILITIES AND STOCKHOLDERS'EQUITY
LIABILITIES
Current liabilities
Short term debt banks
Other financial liabilities
Payables to suppliers
Payables for taxes
Other current liabilities
Total current liabilities
€ 122.3
44.4
198.1
7.2
113.1
485.0
€ 121.0
34.9
211.0
16.3
136.0
519.2
Non-current liabilities
Bonds
Other non-current financial liabilities
Staff severance fund; other personnel-related funds
Provisions for risks and future liabilities
Deferred tax
Total non-current liabilities
1,127.0
48.7
8.6
32.4
204.7
1,421.4
1,178.2
35.2
13.0
30.6
193.6
1,450.5
Shareholders' equity
Share capital
Reserves
Group's shareholders' equity
Minority interests
Total shareholders' equity
TOTAL LIABILITIES AND STOCKHOLDERS'EQUITY
58.1
1,333.6
1,391.6
4.5
1,396.1
€ 3,302.5
58.1
1,370.8
1,428.9
4.2
1,433.1
€ 3,402.8
Non-current assets
Net tangible fixed assets
Biological assets
Investment property
Goodwill and trademarks
Intangible assets with a finite life
Investment in affiliated companies and joint ventures
Deferred tax assets
Other non-current assets
Total non-current assets
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