Food Safety: In a State of Transformation

Transcription

1 Food Safety: In a State of Transformation Prepared by Cornerstone Capital Group For the Investor Responsibility Research Center Institute Webinar August 2, 2016

2 Agenda Introductions Research Review IRRCi Perspective Q&A 2

3 Webinar Logistics Attendees in listen only mode. Questions encouraged. Type using the Question function, and we will answer following report overview. You will receive an with link to replay. Report and all others available at Share webinar info on social media. Find Audio issues during webinar, contact

4 Speakers Michael Shavel Global Thematic Analyst Sebastian Vanderzeil Research Analyst Jon Lukomnik Executive Director Investor Responsibility Research Center Institute Q&A Gail Hansen Founder and Senior Consultant Hansen Consulting, LLC 4

5 About the Investor Responsibility Research Center Institute Not- for- profit established in Funds, disseminates objective, unbiased research on range of issues at intersection of corporate responsibility, investors informational needs. Academic and practitioner research. Annual research award with two $10K awards. More than 40 research reports available at no charge. 5

6 About Cornerstone Capital Group Founded in 2013, Cornerstone is a financial services firm offering investment advisory, research and strategic consulting and investment banking services. Our research connects global themes to industry and equity market analysis to identify investment opportunities and risks across sectors. Works with investors, corporations and financial institutions to drive the systematic analysis of Environmental, Social and Governance (ESG) factors throughout the global capital markets. 6

7 Overview Setting the Setting Stage the Stage Drivers of Food Safety Food Safety Disclosure Areas of Growth 7

8 Summary of Key Findings Immediate financial impact depends on factors such as type of company (e.g. restaurants) and size of recall Emerging consumer preferences and heightened food safety awareness are complicating responses to risk Technologies present opportunities for efficiency, cost- reduction and enhanced food safety performance (supply- chain technology, advanced robotics, genomic sequencing) Food Safety Modernization Act (FSMA) shifts burden from reactive compliance to proactive responsibility Level of disclosure varies by segment of industry; food safety expertise greater in senior and mid- level management 8

9 What Is Food Safety? Food Quality Origin, color, texture, flavor, nutrition Food Safety Food Security Ensuring quality and preventing contamination and foodborne illness Broader focus; physical, social, and economic access to sufficient, safe food 9

10 History Number of recalls has been increasing But outbreaks and illnesses have been declining Source: Swiss Re, FDA, USDA, Cornerstone Capital Group Source: Centers for Disease Control and Prevention, Cornerstone Capital Group 10

11 Food Safety s Financial Impact Source: Cornerstone Capital Group 11

12 Food Safety s Financial Impact Restaurant companies most sustained impact on shareholder return In 3 events, same store sales immediately declined and remained depressed for several quarters Pilgrim s Pride and Tyson both recalled poultry products Pilgrim s Pride share price decline dramatically; Tyson s was largely unaffected Remaining cases little or no observable impact The diversified product portfolio mutes the immediate impact, but may not insulate longer- term brand damage 12

13 Drivers of Food Safety Behavioral/ Demographic Regulatory Technological 13

14 Organic, Antibiotic- and Preservative- Free, Locally Sourced Food US documented outbreaks associated with unpasteurized milk, Source: Centers for Disease Control and Prevention 14

15 Fewer Meals Being Cooked at Home Share of US consumer spending on food at home and on food away from home, Ready- to- eat meals are most affected by recalls in the US Source: USDA Economic Research Service, Cornerstone Capital Group Source: Swiss Re 2015, Cornerstone Capital Group 15

16 Consumer Awareness US consumer perception on how much food producers take issues into account Source: The Chicago Council on Global Affairs 2015, Cornerstone Capital Group 16

17 Animal Protein and Dairy Rising global meat and milk consumption Source: World Health Organization, Food and Agriculture Organization of the United Nations, Cornerstone Capital Group 17

18 Vulnerable Age Groups Incidence of select infections per 100,000 people by age in the US, 2014 Source: 2014 FoodNet Annual Report by Centers for Disease Control and Prevention, Cornerstone Capital Group 18

19 Technological Innovation Supply Chain Technology Powered by Internet of Things (IoT) Automated data collection and analysis, continuous monitoring, remote real- time accessibility, digital record- keeping Sensors and radio frequency identification (RFID) technology Advanced Robotics Originally used for palletizing downstream Harsh environments, higher productivity, embedded traceability, less contact with food products Nestlé fully automated storage and material handling system at production site for baby/infant food Genomic Technology Whole genome sequencing (WGS) Identify pathogens during outbreaks of foodborne illness Monitor compliance with FSMA during routine inspections 19

20 Food Safety Modernization Act (FSMA) Source: FDA, EC, Cornerstone Capital Group 20

21 International Regulatory Landscape Globalization of food supply chain Interconnected systems US FSMA TTIP and TPP EU More labeling requirements and restrictions Source: Roka Bioscience China Addressing problem areas; not participating in multi- party trade agreements 21

22 Food Safety Disclosure Assessment Framework Sample Resources Nearly 60 of the largest U.S.- based companies throughout the food supply chain Company filings, interviews with company management, investor relations, and food safety officers Meat and produce Diversified and snack foods Transportation and distribution Grocery stores Restaurants Agricultural products Annual report Earnings transcripts Sustainabilityreports Website Areas of review Internal food safety and supplier management systems Product traceability External certification Executive compensation Food safety committee and staff training Published food safety key performance indicators Food safety risks in 10- K reports Lead safety person Food safetyexpertise on board Sick leave policy Source: Cornerstone Capital Group 22

23 Assessment Results Source: Cornerstone Capital Group 23

24 Assessment Results Source: Cornerstone Capital Group 24

25 Observations for the Food Supply Chain Restaurants Lowest average disclosure rate for internal food safety systems and external auditors Absence of industry- wide standard Calories consumed by place US food contamination outbreak by place 2010 Source: USDA Economic Research Service analysis of National Health Examination Survey data, Cornerstone Capital Group Source: Efficient Consumer Response 2013, Centers for Disease Control and Prevention, Cornerstone Capital Group 25

26 Observations for the Food Supply Chain Lower levels of disclosure moving from upstream to downstream Market concentration in both food suppliers and demanders (bilateral oligopolies) results in the most comprehensive standards Food safety expertise generally present in mid- level and senior management, rather than in boards Executive compensation rarely linked to food safety goals 26

27 Potential Growth Opportunities Food Testing and Analysis Source: Roka Bioscience 2015, Cornerstone Capital Group Key companies - Molecular: DuPont, Bio- Rad, and Roka Bioscience - Immunochemical and Culture: Neogen and biomerieux - TIC (testing, inspecting, and certification) companies Supply Chain Technology PAR Technology s SureCheck software MOCON s products detect leaks and measure the rate at which gases are transmitted through packaging material Automation and Robotics Cognex Vision and ID products aid in bottle inspection and label placement 27

28 From IRRCi s Perspective Food safety issues unique expressions of universal trends Changing consumer taste Globalization Regulation Technology Management and operational needs, but also board and governance imperatives Sub- optimal disclosure Challenge for investors is to distinguish anticipatory companies which both have the right strategic plan and can execute on that plan 28

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30 Contacts Michael Shavel, CFA Global Thematic Analyst Sebastian Vanderzeil Research Analyst Gail Hansen Founder, Senior Consultant Hansen Consulting, LLC Jon Lukomnik Executive Director IRRCi 30

31 Important Disclosures The information in this material is for illustration and discussion purposes only. It is not intended to be, nor should it be construed or used as, investment, tax or legal advice, any recommendation or opinion regarding the appropriaten ess or suitability of any investment. No representation is mad e that the investment advice, investment process, or risk management techniques of Cornerstone Capital Inc. (together with its affiliates, Cornerstone ) or th at a client s objectives or goals will or are likely to be achieved or successful or that any underlying investment will make any profit or will not sustain losses. All investments involve risk. Cornerstone may engage in investment practices or tradin g strategies, or give investment advice, that may increas e the risk of investment loss and a loss of principal may occur. The risk man agement techniques th at may be utilized by Cornerstone cannot provide any assurance that a client will not be exposed to risks of significant trading losses. An investor is subject to potential loss of his/her investment. Any descriptions involvin g investment process, investment advice, investment examples, statistical an alysis, investment strategies or risk man agement techniques are provided for illustration purposes only, will not apply in all situations, may not be fully indicative of any pres ent or future investments, may be changed in th e discretion of Cornerstone and are not intend ed to reflect performance. Portfolio characteristics and limits reflect guidelines only and are implemented, and may change, in the discretion of Cornerstone. To the ext ent that Cornerstoneis given discretionary authority, investments will be selected by, and will vary in the discretion of, Cornerstone and are subject to availabilit y and market conditions, among oth er factors. A client s actu al returns and volatility will depend on a variety of factors including overall market conditions and th e ability of Cornerstone and/or the client to implement the client s investment objectives and policies. Investments are subject to th e risks of market volatility, which may be severe. Such market volatility may be caused by, among other ev ents, unpredictable economic and political events that may cause sudden and severe reductions in the value of investments. Any opinions, assumptions, assessments, statements or the like (collectively, Statements ) regarding future events or which are forward- looking, includin g regarding portfolio characteristics and limits, constitute only subjective views, beliefs, outlooks, estimations or intentions of Cornerstone, should not be relied on, are subject to change due to a variety of factors, including fluctuating market conditions and economic factors, and involve inherent risks and uncertainties, both general and specific, many of which cannot be predicted or quantified and are beyond Cornerstone s control. Future evid ence and actual results (including actual composition and investment characteristics of an investment portfolio) could differ materially from those set forth in, contemplated by, or underlyin g these Statements, which are subject to change without notice. In light of thes e risks and uncertainties, there can beno assurance and no representation is given that these Statements are now, or will prove to be accurate, or complete in any way. Cornerstone undertakes no responsibility or obligation to revise or update such Statements. Statements expressed herein may not necessarilybeshared by all personnel of Cornerstone. This material is as of th e date indicated, is not complete, is subject to change and does not contain material information regarding Cornerstone or any specific investment or investment advice. No repres entation is mad e with respect to the accuracy, completeness or timeliness of information and Cornerstone assumes no obligation to update or otherwise revise such information. Unless th e context otherwis e requires, th e term investor and client may be used interchangeably. This information is confidential, is the property of Cornerstone, is intend ed only for intended recipients and their authorized agents and representatives and may not be reproduc ed or distributed to any oth er p erson without prio r written consent. Cornerstone Capital Inc