Zignago Vetro (ZV.IM)

Transcription

1 Zignago Vetro (ZV.IM) Sector: Chemicals / Glass BUY Initial Coverage: robust and defensive May 26, 2009 Investment view Zignago Vetro Group manufactures and distributes glass containers through its 3 business units: Zignago Vetro (ZV), Verreries Brosse (VB) and Vetri Speciali (VS, in which it holds a 43.5% stake). ZV produces containers for the Food and Beverage sector, mainly for Italy, with limited presence on commoditized productions; in the Perfumery sector, produces containers for the medium segments and some selected ones of mass market. It also develops significant productions for the global markets of container for Cosmetics. VB produces high quality, very sophisticated, containers for the Luxury Perfumery for the global markets; VS produces highly customized specialty glass containers mostly for wines and spirits, especially in very short runs. ZV Group s business model relies on flexible and efficient productions and is characterized by a niche approach to the market, with significant amount of customized productions, a high focus on quality and innovation and on service to the customers. These elements, combined with the high barriers to entry typical of the glass industry (high Capex needs, mature markets, local nature of the competition in some sectors) have grant the Group a strong position, leading some niche sectors. Last results In 2008 ZV Group s total revenues were at 256.8M, of which 33.0% generated abroad. ZV recorded 161.0M of sales, VB 48.0M whereas VS 52.0M (for the share of 43.5%). The Group s EBITDA reached 69.9M, yielding a 27.0% EBITDA margin. The net result was a record 33.7M. The 1Q 09 results seem to have been affected by a strong destocking operated along the value chain, with also a certain decrease in volumes of consumptions in the end markets served by the Group: the sales decreased 20.0%. Nevertheless the company managed to keep the profitability at an excellent level: the EBITDA margin decrease only 8.7% thus increasing at 29.0% of sales. Valuation We initiate the coverage with a BUY rating and a target price of 4.81 per share. The current valuation is still attractive (EV/EBITDA09 5.6x; PE x) as it reflects only partially the competitive advantages of ZV Group and the barriers to entry of its business model. Despite the negative earnings momentum (we forecast a 4.7% decrease in sales and a 22.8% decrease in the net result), ZV Group has defensive qualities and a proven capability to generate strong cash to both afford its Capex needs and to remunerate the shareholders: the dividend yield will be an appealing 8.3% in 2009, 6.1% in Risks The end markets served by ZV Group, which traditionally show good defensive qualities, will suffer from the current economic slowdown. The decrease in volumes could lead to a rising competition price-based. The raw materials and energy price volatility could have an impact on the margins. Key Data Price ( ) 3.55 Target Price ( ) 4.81 Upside/(downside)(%) 35% Market cap ( M) Enterprise Value (FY 08, M) Investment Profile from 1 worst to 5 best Liquidity Management Valuation Returns Growth Stock data Ticker Bloomberg ZV.IM N of shares (M) 80M Free float 30.7% Main shareholder Fimiz S.r.l. (65%) Daily trading volume 60.0K shares Forecast 2008A 2009E 2010E 2011E Sales ( M) EBITDA ( M) EPS ( ) Valuation 2008A 2009E 2010E 2011E EV/EBITDA P/E Dividend yield 5.1% 8.3% 6.1% 6.5% ROCE after tax 18.6% 15.7% 16.9% 17.8% EV/CE ZV MIBTEL Jacopo Tagliaferri Equity analyst Tel: Share j.tagliaferri@twiceresearch.it Perf. % 3M 6M 1Y Absolute -1.5% -4.9% -20.8% Rel. to Mibtel -6.0% 0.6% 21.9% Jacopo Tagliaferri Equity analyst Tel: j.tagliaferri@twiceresearch.it Twice Research S.r.L. con Socio Unico - via San Vittore al Teatro 1, Milano Tel ; Fax P.IVA: numero R.E.A.: Capitale sociale: Società soggetta all attività di direzione e coordinamento di Twice SIM S.p.A.

2 Investment case Zignago Vetro Group manufactures and distributes glass containers through 3 business units: ZV produces containers for the Food and Beverage sector, mainly for Italy, with limited presence on the most commoditized productions; in the Perfumery sector, ZV produces containers for the medium segments and some selected ones of mass market. It also develops significant productions in the global markets of container for Cosmetics; Verreries Brosse produces high quality sophisticated containers for the high-end Perfumery global market; Vetri Speciali (in which it holds a 43.5% stake) produces highly customized specialty glass containers, mostly for wines and spirits, especially in very short runs. ZV Group enjoys a leading position in some niche markets thanks to: long lasting competitive advantages: the focus on customized products and complex shapes employing smallmedium size furnaces which afford major flexibility and allow quick response to the clients; the commitment to innovation (i.e. 14% of total sales were made with new products in 2008) and quality; a relevant know-how on products design, moulds and production. These activities, core competencies of the company, represent key factors of success. high barriers to entry: the glass production is highly capital intensive: the maintenance Capex is, over an investment cycle, around 7% of the sales. The life expectancy of a furnace is 8-10 years for the gas furnaces and 4-5 years for the electric ones; the production of sophisticated glass containers requires highly skilled and experienced human resources. As a result the profitability of ZV Group (the EBIT margin was 15.6% on average in the period ) and its ROCE (14.3%) are higher than competitors ones. ZV Group has built an excellent growth track record (i.e. the CAGR of Zignago Vetro S.p.a. for the period was above 5.0%, well above its reference end markets) thanks to both: a superior organic growth: focusing on growing segments of the Food and Beverage market and of the Cosmetic and the Perfumery ones, with limited presence on the most commoditized products (i.e. water and beer bottles); switching productions among different segments, even on the base of market growth prospective and production utilization; focusing on flexibility of its production plants; leveraging its high quality products. 2

3 a value accretive external growth: acquiring plants and companies, often from insolvency proceedings, only when the transaction is coherent with the business model or it provides new opportunities (i.e. to enter new niches and/or new markets as in the case of Verreries Brosse). ZV Group will continue to grow (we expect a 2.6% sales CAGR for the period ) both organically and by acquisitions. The management continuously scouts the market: the current environment could provide interesting opportunities. The Group s solid financial structure (the Net Debt/EBITDA was 1.0x at the end of 2008) leaves room to a re-leverage. Valuation: we initiate the coverage with a BUY rating, our model returns a target price of 4.81 per share. The current valuation is attractive (EV/EBITDA09 5.6x; PE x) as it reflects only partially the competitive advantages of ZV Group and the barriers to entry of its business model. Despite the negative earnings momentum (we estimate an EPS09 down 26.4%), ZV Group has defensive qualities and the proven capability to generate enough cash to both afford its Capex needs and to remunerate the shareholders. The dividend yield will be an appealing 8.3% in 2009, 6.1% in Risks ZV Group serves mature end markets with traditionally good defensive qualities but nonetheless impacted by the current economic slowdown. The decrease in volumes could lead to more competition price-based. ZV Group sales are mostly (67% of total sales in 2008) concentrated in Italy, a country with poor growth perspectives. The raw materials and energy price volatility could have an impact on margins. The loss of insight experienced human capital could weaken the company s capability to supply outstanding quality products and services to its loyal clients base. Table: SWOT analysis Strengths Weaknesses - High barriers to entry - Exposure to mature markets - Experienced management - High Capex needs - Flexible production planning - Capability to produce personalized and complex shapes - Nonstop production process - Sales concentration in Italy Opportunities Threats - Continuous improvement in plants operation - Volatile costs of raw materials - External growth - Loss of insight human capital - Internationalization of sales - Long lasting economic slowdown Source: Twice Research. 3

4 Company description Since 1950 s Zignago Vetro Group (ZV Group) manufactures and distributes glass containers. Today, the Group works through its subsidiaries Zignago Vetro S.p.A., Verreries Brosse S.A.S. and Vetri Speciali S.p.A. (in which it holds a 43.5% stake). ZV has 2 plants located in Italy (Fossalta di Portogruaro (VE), Empoli (FI)), VS has 3 plants in Italy (Ormelle (TV), San Vito al Tagliamento (PN) and Pergine Valsugana (TN)) and VB has 1 production site in France (Normandy). Moreover, the Group has a global presence thanks to commercial subsidiaries in USA (New Jersey and California), Spain (Barcelona) and France (Paris) throughout Brosse USA Inc., Vetri Speciali Iberica Sl. and Verrieres Brosse S.A.S., respectively. In total, ZV Group owns 9 furnaces for the automatic production: 4 furnaces belong to ZV, 1 furnace to VB and 4 furnaces to VS. Furnaces are normally powered with gas or fuel. Only one is powered with electricity. VB also runs 4 furnaces for the semi-automatic production. Moreover, a new furnace for the automatic production of luxury perfumery is under construction in VB. The Group employed 1,395 people in Chart: Group structure as of 2008 Source: Zignago Vetro S.p.A. In 2008 the Group s sales were 258.8M, with an EBITDA margin of 27.0% and a net result of 33.7M (+30% if compared with 2007). The CAGR of the revenues was 12.4%. 4

5 Chart: revenues by Business Unit as of 2008, in % Zignago Vetro 62% Verreries Brosse 18% Vetri Speciali (43.5% stake) 20% Source: Zignago Vetro S.p.A. Italy represents the main market with 172.2M of revenues in 2008 (growing 6.5% if compared with 2007). In Europe the Group generates 59.5M of sales (+16.9%), while other countries registered 25M of revenues (-10.9%). Chart: revenues breakdown by region as of 2008, in % Italy 67% Other countries 10% Europe 23% Source: Zignago Vetro S.p.A. Table: sales and EBITDA breakdown by subsidiaries, as of 2008 ZV VB VS Sales EBITDA EBITDA Margin 26.2% 20.2% 34.9% Source: Zignago Vetro S.p.A. VS achieves higher margins compared to ZV, VB and others competitors thanks to specific peculiar features of the company and to the very high flexibility and efficiency of its plants. 5

6 Short history: 50s years: a glass production factory is set up by Gaetano Marzotto in the Portogruaro area (VE), as division of Industrie Zignago Santa Margherita (IZSM); 1979: Zignago Vetro S.p.A. is established as autonomous Company; 1987: ZV acquires a plant in Empoli from an insolvency proceeding; : IZSM acquires Attività Industriali Friuli S.r.l. (51% owned); 2002: Zignago Vetro acquires the assets of Verreries Brosse S.A.S. from an insolvency proceeding; 2004: IZSM transfers its stakes in Attività Industriali Friuli and Vetrerie Venete into the company Vetri Speciali; 2006: ZV acquires a 43.5% stake in Vetri Speciali from IZSM; IZSM sells its 100% stake in Zignago Vetro to Zignago Holding; 2007: ZV Group is listed on the Italian Stock Exchange, into the STAR segment. Competition analysis End markets (size and trends): mature. ZV Group serves different markets sectors thanks to the special focus given to each of its subsidiaries. Zignago Vetro produces for the Food and Beverage sector, mainly for Italy, and for the Cosmetic and Perfumery sectors worldwide. ZV competes differentiating its offer with customization, innovation and giving service to the customers, in particular through a strong focus on quality and flexibility of the production. Verreries Brosse provides high quality, tailor made and highly complicated shapes products for the high-end Perfumery sector worldwide, competing more on innovation, quality and service. Vetri Speciali focuses on the production of highly customized small runs specialty glass containers for selected segments, mainly wine and spirits. The offer is characterized by a wide range of shapes and colors. According to the Consumer Packaging report 06/07, global market for consumer packaging in 2006 was worth approx. 400BN$. It is estimated to grow at a pace of around 5% per year, reaching over 470BN$ in Since the last months of 2008 have been affected by important turbulences in the global markets, which lead to a slowdown in the demand for glass containers worldwide, we would expect this estimate to be revised downward. In addition the first months of 2009 have been affected by the de-stocking carried forward by the supply chain. In Italy the Beverage sector reached 3.3M of produced ton in 2007 (growing 1.9% compared to 2006), the Food sector 241K of produced ton (-0.6%) whereas the Cosmetics and Perfumery equaled 153K of produced ton (-9.4%). (Source: Assovetro 2007). 6

7 Chart: breakdown of the market by end use, as of 2007 Food 51% Beverage 19% Healthcare 5% Cosmetics 4% Other 21% Source: Consumer packaging report Chart: breakdown of the market by geography, as of 2007 North America 29% Latin America 4% Europe 33% Rest of the world 34% Source: Consumer packaging report Chart: breakdown of the market by material, as of 2007 Rigid plastics 23% Metal 19% Paper & board 30% Other 5% Glass 8% Flexible plastics 15% Source: Consumer packaging report

8 Clients: outstanding and loyal. Thanks to the quality of its products, the reliability of its service and its commitment to innovation ZV Group has been able to build long lasting relations with tier one clients in all the three Business Units. The first 5 clients represent 15% of sales in ZV, 48% in VB and 13% in VS. In ZV the customer loyalty (% of clients present also in the 2 previous years) reaches 71% guaranteeing approx. 90% of sales; in VB the figures are respectively 44% and approx. 94%; in VS 70% and approx. 90%. In the Food and Beverage sector the competition is local because of the high transport costs (i.e. its convenient to buy wine bottles only within 300 km). As a consequence, the majority of ZV s clients are located in Center and North Italy where ZV s plants are located. In the Cosmetic and in the Perfumery sectors the transportation costs are less significant (i.e. the value of the content is a multiple of the value of the containers) thus ZV Group competes on a global scale and has clients worldwide. Market structure and competitors: concentrated. The Food and Beverage sector is quite concentrated. The major European players are Owens-Illinois and Saint Gobain, followed by Vidrala SA and Vetropack Holding AG. Owens-Illinois and Saint Gobain exploit big furnaces, focusing more on economies of scale than on production flexibility whereas Vidrala SA and Vetropack Holding AG have a business model closer to Zignago Vetro Group. In the medium and in the upper part of mass market for Perfumery and in the Cosmetics market ZV competes focusing on quality, customized products, small-run productions, short time to market and service. In the market for luxury Perfumery containers, VB competes mainly with Pochet et Du Courval, Bormioli Luigi, Heinz and SGD. In the Specialty glass containers small-run tailor-made glass containers, realized with flexibility and technical skills are key competitive factors. Saverglass is basically the major competitor of Vetri Speciali. Factors of production and suppliers: not strategic. The main raw materials employed in the production of glass are sand, soda ash and glass cullets. Since the business is highly energy intensive, we consider the power a factor of production. Sand is basically provided by few suppliers located in Europe and in North Africa. In Europe soda ash is almost entirely provided by Solvay Chemicals International SA; ZV Group, as its competitors, is a price taker. In the power supply, ZV Group is price taker. It could, to some extent, exploit the volatility of energy prices making some arbitrage. There are few producers of furnaces worldwide meeting the quality level required by ZV Group. Overall the factors of production do not represent a barrier to entry. 8

9 Barriers to entry: high. The glass containers market is mature and stable: the growth is mainly GDP driven. As a result, the glass producers compete for the market share. For a new comer it s difficult and long to grant enough volumes to run close to full capacity in order to break even. The glass production is a highly capital intensive business, both for acquiring new furnaces and for maintaining them since they have a life cycle (8-10 years the gas furnaces; 4-5 years the electric ones). There is also an increasing polarization between companies which compete on volumes exploiting significant economies of scale, thus raising the barrier to entry, and those which focus on quality, thus exploiting technical capabilities difficult to replicate. In fact it takes time to build the know-how and the capabilities necessary to be at the same time efficient in the production and able to manufacture complex shapes. As a result skilled human resources with huge experience of glass manufacturing are extremely worth it (i.e. most of ZV Group employees have many years of experience). ZV Group owns the know-how related to the products design, moulds and production. These activities are core competencies of the company. For all these reasons, the entrance of new competitors is not likely, in particular for clients whose orders are for non standard products. Substitute products: low risk. Since glass guarantees hygiene and perfect food conservation it has a high quality image as packaging tool. We think there is a low substitution risk. The only segments where glass could be partially substituted are: mass market food and beverage with PET and Brik and low profile cosmetic with plastic materials. 9

10 ZV business model and strategic positioning ZV Group has built a unique business model and strategic position, committing itself to avoid the most commoditized products of the overall mature glass market. The Group manufactures mainly high quality and customized products. The combination of flexible production plants and highly skilled workforce allow ZV Group to quickly respond to the clients needs, guaranteeing a fast time to market. ZV Group is able to switch between different productions without loose efficiency: keeping the furnaces running (the furnaces must work continuatively) close to full capacity is crucial to obtain a satisfactory profitability. These competitive advantages, together with the ability to create highly complex shapes and the commitment to continuously innovate have grant ZV Group the duty of its main clients. ZV Group has developed a strong know-how related to the products design, the pattern making and the production of samples. These activities are core competencies of the Group and represent also a service given to the most sophisticated clients. The product innovation is a must in a competitive and mature market as it allows the Group to face the competition based on volumes and prices. Every year the new products contribute to ca. 14% of the total production. The management is highly experienced: not only the top management but almost all the employees have many years of experience within the glass business. The result is a complete control of the whole production process both in terms of operating costs and capital expenditures. ZV Group s unique business model guarantees higher margins and consequently, higher returns on capital employed compared to its main competitors. 10

11 Corporate profile Shareholders: concentrated. The major shareholder is Fimiz S.r.l., owning 65% (52M of shares) of the outstanding shares. Fimiz S.r.l. is owned by Marzotto family s members through a syndicate agreement (known as Patto FIMIZ ). Two others institutional investors control 4% of the company s capital. By difference, the free float is made by 31% of the outstanding shares. Chart: shareholders structure Fimiz S.r.l. 65% Free Float 31% Gartmore I.M. 2% Fortis I.M. 2% Sources: Company data and Consob as of May 2009 Management: competent, experienced and committed. Franco Grisan is the Managing Director of the Company since 2000 and Chairman of the Board of Directors since Graduated in Mechanical Engineering, he entered into the Company as Commercial Director in 1984 and became General Manager in Among other appointments, he is also Chairman of the Stazione Sperimentale del Vetro (established in Murano, Venice), which is an international institute for research, development and testing on glass (hollow glass, flat glass, fibers, etc.). Roberto Celot is CFO and Investor Relations Manager of the company since the IPO. He graduated in Business Economics and is a registered accountant. He joins the ZV Group since Ovidio Dri is Technical Director since 1990 and Deputy General Manager since Graduated in Electronic Engineering, he entered into the Group in Maurizio Guseo is Commercial Director since Graduated in Electronic Engineering, he entered into the Group in Roberto Moretto is R&D Director. He got a Technical Qualification and entered into the Company in There is no stock option plan; the managers hold only marginal stakes of the company (i.e. Franco Grisan owns a 0.05% stake equals to 37K of shares at the end of 2008 and Roberto Celot has a 0.03% stake equals to 21K of shares). 11

12 Disclosure: fair. The company discloses all the elements the market needs to properly understand the decisions taken by the management. The top management, through a deep analysis of the company strengths and weaknesses and thanks to the knowledge of the sector gained during its tenure, has clearly pointed out the most important actions to leverage in order to create value. Corporate governance: good. The Board of Directors is composed by 11 members: Franco Grisan is the President. 5 components of the BoD are independent. The overall compensation received by the members of the Board equaled 549k in Financial Communication: effective. The top management communicates the financial results in an effective way. It s not used to give any quantitative guidance but the medium and long term objectives are clearly stated. The dividend policy is disclosed: 70% of the net group result is paid out as dividend. That s said, because the company is always looking at external growth opportunities, the impact of an acquisition on the dividend policy will be evaluated case by case. Auditors From 2007 Reconta Ernest & Young S.p.A. has been auditing ZV Group consolidated accounts. The contract duration is until December 31, The remuneration of the auditors was 180k in Share Price Chart: ZV share price over the last 12 months ZV MIBTEL Source: Twice Research. 12

13 Liquidity: limited. ZV Group is listed on the Star segment of the Italian Stock Exchange since May The current share price (as of 25 May 2009) is 3.55 and thus the market capitalization is 284.0M. The average volume exchanged during the last 3 months is equal to 60.0k shares. At this pace only 16.5% of the capital (there are 80M outstanding shares) will be exchanged on a year basis. In May 2008 the BoD authorized a share buyback. At the 25, March 2009 ZV Group owns 1.3M of shares equals to 1.6% of the capital. 13

14 Valuation In order to value ZV Group we run an 8 year DCF, with detailed estimates for the period The model points to a 4.81 target price. We made the following assumptions: the sales will decrease 4.7% in 2009 because of the economic slowdown. Over the period the CAGR is equal to 2.6%, mainly driven by VS and VB; the average EBITDA margin is set at 26% of sales for the group as a whole; the average Capex (including the costs to rebuild old furnaces and the maintenance costs to keep up to use the existing furnaces) is normalized at 20.0M during the period ; in 2009 the working capital will increase up to 22.0% of sales because of decreasing sales, longer receivables and higher stocks. It will move down to a normalized value of 20% already in 2011; the FCF will be on average equal to 28.9M or 10.6% of sales. For the calculation of the Terminal Value we set: the long term growth at zero, the EBITDA margin equal to 26.4%, the Capex in line with the amortization, the WC outflows null. Discounted Cash Flow FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 CAGR Sales % Sales growth -4.7% 3.0% 3.1% 3.1% 3.1% 3.1% 3.1% 0.0% EBIT % Margin 17.6% 18.3% 18.6% 18.9% 19.1% 19.4% 19.6% 19.6% Taxes Tax rate -35.0% -35.0% -35.0% -35.0% -35.0% -35.0% -35.0% -35.0% NOPAT % Depreciation % of sales 8.2% 7.9% 7.7% 7.5% 7.2% 7.0% 6.8% 6.8% Capex % % of sales -8.2% -7.9% -7.7% -7.5% -7.2% -7.0% -6.8% -6.8% Var. Working Capital Free Cash Flow % PV of FCF Enterprise Value ( M) Debt Net (FY 2008) ( M) 63.4 Minorities ( M) 0 Pensions (i.e. TFR; M) 7.4 Equity value ( M) Number of Shares (M) 80.0 Equity value per share ( ) 4.81 Upside 35% 14

15 WACC ZV Risk free rate 4.3% Market premium 4.5% Unlevered Beta 0.8 Ke : cost of equity 7.9% Kd : cost of debt 5.0% Tax rate 27.5% Cost of debt after tax 3.6% Market cap Net debt 70.8 Debt / EV Target 15.0% WACC 7.2% g 0% Sensitivity analysis Long-term growth rate -1.5% -1.0% -0.5% 0.0% 0.5% 1.0% 1.5% 5.7% % % % % % %

16 Comparables ZV Group has built a unique business model and strategic position and, as a result, has only few direct comparables. Listed comparables are: Owens-Illinois, Saint Gobain, Vidrala, Vetropack and Gerresheimer. Owens-Illinois is the worldwide largest glass packaging group quoted in the US stock exchange, with some 100 production plants worldwide. Saint Gobain is a world leader in glass packaging, active mostly in the Beverage and Food jar segments. Both these two players leverage mostly on producing standardized products and on exploiting the economies of scales. Vidrala is a Spanish listed glass packaging producer with 6 plants located in 4 countries (1 of which is Italy). It competes with ZV mostly into the Beverage sector. Vetropack is a Swiss listed glass producer, one of Europe s leading player. It primarily manufactures for the Beverage sector, it has a significant and growing presence in Austria and in the Eastern Europe countries (Czech Republic, Slovakia, Croatia and Ukraine). Gerresheimer is a German listed group, with several businesses. The glass containers production is mainly for the Cosmetic, the Perfumery and the Pharmaceutical sectors That said, we believe the best listed comparables of Zignago Vetro Group are Vidrala and Vetropack. Zignago Vetro 08A 09E 10E Vidrala 08A 09E 10E Vetropack 08A 09E 10E Sales Sales Sales EBITDA EBITDA EBITDA EBIT EBIT EBIT Net result Net result Net result Net debt Net debt Net debt EBITDA margin 27.2% 25.7% 26.3% EBITDA margin 24.3% 24.0% 24.1% EBITDA margin 25.3% 23.6% 23.4% EBIT margin 18.5% 17.6% 18.3% EBIT margin 15.2% 15.1% 15.0% EBIT margin 18.5% 13.7% 13.5% Dividend yield 5.1% 8.3% 6.1% Dividend yield 3.5% 3.7% 3.8% Dividend yield 2.3% 2.4% 2.5% EV/Sales EV/Sales EV/Sales EV/EBITDA EV/EBITDA EV/EBITDA EV/EBIT EV/EBIT EV/EBIT PE PE PE Sources: Bloomberg and Twice Research estimates 16

17 Last results 1Q 09: decreasing revenues due mainly to destocking along the supply/distribution chain. The global economic slowdown translated in a strong destocking operated by the whole value chain in which ZV Group operates. The end markets served by the Group have been clearly affected but the decline in volumes has not been dramatic. Zignago Vetro Group revenues experienced a -20.2% compared with 1Q 08 results (48.6M in 2009 vs. 60.9M in 2008). In Italy the sales decreased 16.0%. VB, exposed to the luxury Perfumery sector, recorded a 48.3% decrease in sales. VS continued to perform positively. the EBITDA equaled 14.1M (15.5M in 1Q 08) with a 8.7% decrease. The company works efficiently to reduce the consumption of raw materials and to lower the demand for outsourced services; the personnel costs were in line with those of the previous year (12.7M, 26.3% on revenues); the EBIT reached 8.5M (17.4% on sales) with a slowdown of 14.1% if compared with 1Q 08 (9.9M ); the net result equaled 5.4M (6.1M in 1Q 08), 11.1% on sales (9.9% in 1Q 08). The tax-rate decreases from 35.3% in 2008 to 34.4% in at the balance sheet level, the stocks increased heavily (up to 50.3M from 40.3M at the end of 2008) due to the weak top line trend. the operating cash flow was satisfactory at 10.8M compared with 11.5M a year before. The 1Q 09 results were weak but the Group has shown strong capacity of adapting the production process to the reduced demand and managing the expenses thus maintaining good margins. Moreover, the first quarter results have been mainly affected by a strong destocking along the whole chain; thus we foresee a recover in the second half of the year. Table: 1Q 09 results of Zignago Vetro Group, in M 1Q 09 1Q 08 Yoy Sales % EBITDA % EBITDA Margin 29.0% 25.4% -8.7% EBIT % Net result % Source: Zignago Vetro S.p.A. 17

18 Full Year 2008: strong results. In 2008 ZV Group experienced increasing results both in Italy and abroad, registering growing operating cash flow (+17.6% in comparison to 2007). The results were boosted especially by Vetri Speciali (sales +20.9% if compared with 2007) and Verreries Brosse (+5.8%). In details: the sales experienced a 6.7% growth, up to 258.8M (240.7M in 2007). By subsidiaries, ZV registered a 1.7% increase compared to 2007, VB a 5.8% and VS (the 43.5% stake is consolidated line by line) a 20.9%; the EBITDA came out at 69.9M, increasing 8.7% if compared with the 2007 results (63.5M and 26.4% respectively in 2007). The EBITDA margin was a healthy 27.0%. The 2008 EBITDA result was positive influenced by lower raw material purchases (-1.3% if compared with 2007); the EBIT reached 47.6M, marking a 11.0% growth compared to 2007; the net result was 33.7M, increasing 30.0% thanks to lower financial charges (- 51.8%) and interests (-11.0%); The net financial position (included the pensions) increased up to 70.8M (it was 53.9M in 2007) because of the capex made in a new furnace in Verreries Brosse. Table: Breakdown of ZV results by subsidiaries, as of FY 08, in M Sales Growth EBITDA EBITDA Margin Zignago Vetro S.p.A % % Verreries Brosse % % Vetri Speciali (43.5%) % % Source: Zignago Vetro S.p.A. Table: FY 08 results of Zignago Vetro Group, in M FY 08 FY 07 Yoy Sales % EBITDA % EBITDA Margin 27.2% 26.4% +10.0% EBIT % Net result % Source: Zignago Vetro S.p.A. 18

19 Questions and Answers Q: Does the business have high capital intensity? A: Yes, it does. Each furnace requires high capital expenditures not only for acquiring it but also for its maintenance. Looking at ZV Group, the Capital Employed / Sales ratio was equal to 64.3% in 2008 (99% in 2004). The overall depreciation rate of the tangible assets equaled 18.3% in 2008 (29.1% on average during the period ), reflecting the high required Capex. The Working Capital represented 16.1% of the sales with a decreasing trend thanks to a better management of stock and trade account payables. Q: Does the future growth require high capital expenditures? A: Yes, it does. Glass containers production is a high capital intensive business. ZV Group has 6 product facilities with 9 furnaces. A gas furnace works for 8-10 years on average. The average annual Capex is about 9-10M plus 9-10M of maintenance Capex. During 2009, ZV Group will complete the building of the furnace (in Verreries Brosse). Q: Is there a heavy operating leverage? A: Yes, there is. ZV Group manages the whole production process and it is also responsible for selling and delivering the products. In 2008 we estimate that the fixed costs represented nearly 50-60% of total operating costs and around 50% of revenues. High fixed costs are the consequence also of huge energy usage. The main raw materials are soda ash, sand and glass cullets. Q: What is the working capital composition? A: The incidence of the working capital on sales isn t high (20% on average in ). The WC were 41.8M in 2008: the trade receivables were 58.2M (52.5M in 2007), growing less than the trade account payables (49.6M in 2008, 43.5M in 2007). The inventories reached 40.3M in 2008 (15.6% of the sales), marginally increasing from 37.8M in 2007 (15.7% of the revenues). Q: Is ZV Group s price environment positive? A: Yes, it is. On the supply side, ZV Group has many suppliers but it strictly depends on Solvay for soda provisions (there aren t other significant suppliers in South Europe) and ENI for gas. For sand, packaging and other materials ZV Group has many suppliers. On the clients side the company focuses on quality which grants a stable gross margin in spite the inflationary raw materials environment of the last year. The Food and Beverage sector counts few hundred clients (mainly medium size customers producing high quality products) generally located in North Italy. The Cosmetic and the Perfumery sectors have clients worldwide thanks to the recognized high quality of ZV Group s products. Q: What is the company cost structure? A: The 3 major cost items are: raw materials (33.2% of total operating costs and 24.5% of sales in 2008), the cost of services (38.0% and 28.0% respectively) and labour cost (27.2% of total operating costs and 20.0% of 2008 sales). The cost for services (56.3 M in 2008) is mainly represented by energy costs. 19

20 Q: Is the financial structure healthy? A: Yes, it is. At the end of 2008 the Net Debt/EBITDA ratio was 1.0x in line with the average value registered during the period The Net Debt increased during 2006 due to the acquisition of a 43.5% stake in Vetri Speciali (the Net Debt/EBITDA increased up to 1.4x in 2006). In 2007 the Net Debt decreased thanks to the cash generation. In 2008 the company s Net Debt increased because of the investments made (i.e. a new plant in Vetri Speciali and in Verreries Brosse). Q: Is there a credit risk? A: No, there isn t. ZV Group works with high end clients and big companies having the balance sheet to face the current global slowdown. More than 60% of the receivables are insured. Q: Are there any off-balance risks? A: No, there aren t. Q: Are there any write off risks? A: No, there aren t. The stock is mainly done of finished products not subjected to deterioration and risk price since products are made on order base. Q: Is the profitability satisfactory? A: Yes, it is. In 2008 the firm EBITDA Margin was 27.2% while the average EBITDA margin since 1988 has been 25.5%. In 2008 the ROCE after tax equalled 19.2%. Q: Is the shareholders remuneration satisfactory? A: Yes, it is. The dividend policy provides to distribute 70% of the net result if no extraordinary events happen. In M in dividends were distributed (0.295 for each share), granting a 9% of dividend yield. The dividend policy is sustainable in light of the company s capacity to generate cash. Q: Is the share price fair? A: No, it isn t. The current valuation is attractive (EV/EBITDA09 5.6x; PE x); as we think the risk / reward of ZV s shares is appealing. 20

21 FINANCIALS Income statement ( M) 08A 09E 10E 11E Balance sheet ( M) 08A 09E 10E 11E Sales COGS LONG LIVED ASSETS Gross Profit WC EBITDA CAPITAL EMPLOYED Depreciation, Amortization EBIT EQUITY Net Financial Results MINORITY INTEREST Income tax PROVISIONS Net result PENSIONS (e.g. TFR) NET DEBT EPS ( ) CAPITAL INVESTED DPS ( ) Margin (%) 08A 09E 10E 11E Ratios 08A 09E 10E 11E Gross Margin 75.5% 47.0% 47.0% 47.0% ROCE after tax 18.6% 15.7% 16.9% 17.8% EBITDA Margin 27.2% 25.7% 26.3% 26.3% ROE 37.6% 27.3% 26.4% 25.8% EBIT Margin 18.5% 17.6% 18.3% 18.6% Capital Turnover Net Margin 13.1% 10.1% 10.4% 10.9% Net Debt / EBITDA Gearing 79.1% 90.4% 72.0% 55.7% Growth (%) 08A 09E 10E 11E WC / Sales 16.3% 22.0% 21.0% 20.0% Sales growth 6.7% -4.7% 3.0% 3.1% Amortization / Sales 8.7% 8.2% 7.9% 7.7% EBIT growth 11.0% -9.7% 7.5% 4.6% Capex / Sales 15.7% 8.2% 7.9% 7.7% Net growth 30.0% -26.4% 6.1% 7.3% Cash Flow statement ( M) 08A 09E 10E 11E Valuation 08A 09E 10E 11E Cash Flow EV/Sales /- Var. Working Capital EV/EBITDA Operating Cash Flow EV/EBIT Op. Cash Flow / Sales 21.1% 13.1% 19.1% 18.9% P/E Capex P/B FCF EV/CE FCF / Sales 5.3% 4.9% 11.2% 11.2% P/FCF FCF Yield 4.0% 4.3% 9.9% 10.3% Dividend yield 5.1% 8.3% 6.1% 6.5% Stock data 08A 09E 10E 11E Number of Shares (M) Average share price LTM ( ) Market cap ( M) See Legend for all definitions Enterprise Value ( M) Source: Company data, Twice Research estimates LEGEND 21

22 EV or Enterprise Value = Market capitalization + Pension (i.e. TFR) + Net Debt CE or Capital Employed = Fixed Assets + Working Capital Fixed Assets = Tangible + Intangible + Financial assets WC or Working Capital = Stocks + Trade Accounts Receivables + Other current assets + Deferred and prepayment Trade Accounts Payables - Other current liabilities - Deferred and prepayment Net Debt = Interest Bearing Liabilities Cash Securities IC or Invested Capital = Shareholders Equity + Minorities + Net Debt + Pension (i.e. TFR) DA = depreciation and amortization CF or cash flow = net result + depreciation and amortization FCF = free cash flow NOPAT = net operating profit after tax COGS = cost of goods sold Gross Profit Margin = net sales cost of goods sold EBITDA = Earning before interests, taxes, depreciation and amortization EBIT = Earning before interests, taxes ROCE = return on capital employed after tax ROE = return on equity ROA = return on assets Capital Turnover = Sales / Capital Employed Gearing = Net Debt / Shareholders equity PE = price to earnings PB = price to book FCF yield = FCF / market capitalization EPS = Earnings per share (fully diluted) DPS = dividend per share (fully diluted) Risk free rate = 10 years Italian Government Bond (e.g. BTP) Unlevered Beta = Beta / [ 1 + ( 1 t ) ( D / E ) ] WACC = Ke * E / EV + Kd ( 1 t ) * D / EV 22

23 DISCLAIMER Analyst Certification The analysts who prepared this report write their own opinions and their remuneration has not been, and will not be, geared to the recommendations or views expressed in this study, neither directly nor indirectly. The financial analysts or their relatives are not manager, company director or adviser of the Issuer. TWICE SIM S.P.A. and TWICE RESEARCH Srl have adopted internal procedures to ensure the independence of their financial analysts and to prescribe appropriate rules of conduct. Disclaimer This recommendation has been prepared by TWICE RESEARCH s financial analysts; TWICE RESEARH is a company of TWICE GROUP. This analysis is based on information deemed to be reliable and originating from the company under analysis or other reliable sources, for the completeness and accuracy of which TWICE RESEARCH Srl assumes no liability. TWICE RESEARCH Srl is used to show a draft of the study to the Investor Relations Office of the Issuer to check the information contained, not to valuating them. The financial instruments herein are valorized at the reference price of the day before the publication, where the valorization is different it is indicated. Coverage policy TWICE RESEARCH Srl intends to provide continuous coverage of the financial instrument analyzed in this document and to produce additional reports in conjunction with the release of periodic financial data and related significant company and market events occurring within the sphere of activities of the issuing company. During the last 12 months TWICE RESEARCH Srl did not draw any recommendations about the instrument as far as this report is an initial coverage. Specific disclosures Pursuant to Article 69-quarter and 69-quinquies of CONSOB regulation no /99 we hereby declare that TWICE GROUP has a specific interest in the issuing company, as well as the financial instruments and transactions mentioned in the analysis, as a result of occasional long and short positions in the financial instruments mentioned in the analysis or the execution of related transactions. The analysis is drawn up with care, clearness and disclosure. It is released solely for information purposes and is in no way to be considered an offer to sell, underwrite, or trade, or a recommendation of any kind to purchase, underwrite, or trade financial instruments or, in general, to invest in the related securities. TWICE RESEARCH Srl may not be held liable for any effects resulting from the use of this report. In particular, and in consideration of the fact that past performance is not an indicator of future earnings, TWICE RESEARCH Srl provides no guarantee that investments goals will be met, nor does the company assume responsibility for any imprecision in the data report and/or elaborated upon in the report. Any reproduction, in whole or in part, of this report without the express written consent of TWICE RESEARCH Srl is prohibited. It is not intended for and should in no way be transmitted or otherwise distributed neither in the United States, Canada, Australia, or Japan, nor in any other nation in which distribution requires prior authorization by the proper authorities. Valuation methodology Company valuations are based on the following valuation methods: discounted cash flow method (DCF), asset-based evaluation method and multiplesbased models (for examples PE, P/BV, PCF, EV/Sales, EV/EBITDA, EV/EBIT etc.). The financial analyst chooses the valuation method that prefers. 23