Integrated Annual Report 2018

Business model

MISSION, VISION AND VALUES

The Viscofan Group aims to meet food industry needs through the production and sale of customized casings, and to seize the business opportunities that arise from know-how achieved by the company through the production and sales of collagen-based products for food and bioengineering uses.

Casings play a fundamental role in the production value chain of cold meats, as they contribute to their final appearance and at the same time can provide improvements in productivity and added value to meat processors.

The Viscofan Group has achieved world leadership with a technological proposal and a unique production and commercial presence in the sector.

For 2020 the Viscofan Group has a clear vision: To become a real global leader, “The Casing Company” with the aim of achieving a triple leadership in service, cost and technology in all the meat casing markets where the Viscofan Group is present.

This ambitious vision is executed through the strategic plan MORE TO BE, based on the company's values (service, quality, team work, learning and focus on results) and on the non-negotiable ethical principles that arise from fundamental human rights (respect and non-discrimination, responsibility, efficiency, loyalty, integrity and sustainability).

MARKET ENVIRONMENT

Introduction to the casings market

Casings are soft, cylindrical containers mainly used to keep mixtures of meat, either fresh or processed. Casings can be animal gut or customized.

The Viscofan Group is world leader in customized casings, also known as artificial casings because traditionally these products have replaced animal gut (mainly bladders and intestines) used by meat processors to stuff the meat.

The human being has stuffed meat in animal gut from ancient times, but customized casings originated at the beginning of the 20th century when, due to the difficulties faced in obtaining animal gut, volatility in prices and problems for the industrialization of sausages production, other alternatives emerged in different countries based on different materials that could be used for sausage and cold meat production as an alternative to animal gut. This change involves a qualitative jump for meat processors, achieving better quality, productivity and food safety standards.

The casings market exceeds 60 billion meters and has an estimated value of €4.3 billion. Meat processors get to decide whether to use animal gut (approximately half of the market) or customized casings made up of different materials, according to production and product specifications, combining a better range of casings with substantial production savings. As a result, the higher production requirements and meat processors' sophistication, the greater the tendency toward customized casings rather than animal gut.

Cellulose

Approximately 13% of the total casings market. Cellulose casings are made from high quality natural cellulose. They are used primarily in the manufacture of industrially cooked sausages (frankfurters, Vienna sausages, hot-dogs, etc.).

The casing is generally used only as a cooking mould, and the manufacturer peels it off before sale to the end-consumer.

Using a complex manufacturing process, the cellulose molecules are chemically and mechanically depolymerised and subsequently repolymerised in a viscose that is then extruded in either cylindrical or tubular form, according to the customer’s requirements.

Fibrous

Account for around 7% of the total casings market. Cellulose casings reinforced with manila hemp, which makes for high strength and highly uniform calibre needed for producing sausages. Fibrous casings are primarily used for large sausages and slicing meats such as mortadella, ham, pepperoni, etc.

 

Plastic and others

Approximately 11% of the market. Plastic casings are made from a range of polymers. These are highly versatile casings providing barrier properties, mechanical strength, thermal shrinkage, and heat resistance, depending on the application requirements of the product.

Collagen

Approximately 22% of the market is represented by casings that use collagen as their raw material. Collagen is obtained from cow and pork hides and processed using sophisticated technology so that it can be shaped into casings.

Collagen casings are of two kinds: small calibre (e.g. fresh sausages, bratwurst etc.) and large calibre (e.g. salami, bierwurst etc.). The key difference between both collagen casings lies in the thickness of the casing wall and the way the collagen is processed to withstand a given degree of stress when filled and holding in the weight of the meat.

Analysis on the growth factors within the casings sector

Throughout history this market has proven to be correlated with population and population growth, the evolution food consumption habits and the sophistication of meat processors, who may decide to use animal guts or customized casings in their production process. These factors are behind a growth in volume of between 2% and 4%, which is the historic average of the casings market.

In 2018, the casings market grew in volume by around 2%. This growth was in the low range of historical growth due to the performance in Asia that contrasts with the momentum of other emerging regions such as Latin America, Eastern Europe and Africa. The growth in volume coexisted with a very volatile currency environment, especially in the case of the US dollar and the Brazilian real, which in average terms depreciated by 4.4% and 16.3% against the European currency, respectively, which has meant that value of the casings market in euros has not grown compared to the previous year.

Evolution of the population

The world grows in terms of population at a yearly average rate of 1% according to FAO, which expects it to increase from 7.6 billion in 2018 to 7.8 billion in 2020 and to 8.2 billion in 2025.

Emerging markets are still behind population growth, in this sense, Asia, Africa and Latin America make up more than 90% of the annual world population growth.

The bigger demographic mass is led by these emerging markets, which steadily grow in importance with regard to the total. In 2018, around 84% of the population was concentrated in these areas.

The growth of the population is accompanied by the increase in wealth. The IMF estimates GDP growth per capita of 3% in 2019 and in following years. An estimated growth that is greater in emerging regions, although it is still an economic situation with a large imbalance, with the GDP per capita of the emerging areas standing at US$5,240, compared to US$47,980 in developed regions.

Eating habits

The main international organisations continue to project increases in demand per capita for the coming years, in line with the trends that indicate a greater weight of protein in eating habits aided by the increase in the purchasing power of the middle classes, and the growth of the population in cities. In this sense, according to the FAO, it is expected that the population will continue to grow in cities, with 55% of the total world population concentrated in urban centres.

Technological development and sophistication of meat processors

Meat processors need greater flexibility and customisation to adjust to the new preferences of consumers and to the dynamism of the environment, which includes volatility of costs of production input, increases in labour costs, requirements on the quality/price bundle imposed by supply chains, regulatory development, globalisation and the size of meat processing companies, which makes faster and more efficient production increasingly important, with stability in quality parameters, seeking greater automation and lower production waste.

In this sense, the development of customized casings has proven to be a great ally, to be competitive in a world with an evident imbalance between emerging and developed areas. In 2018, 84% of the population lives in emerging areas, and 64% of the meat production corresponds to these areas, a percentage that is reduced to 36% in the case of the casings market.

Position of Viscofan in the casings market

In 2018 the Viscofan Group continued to reinforce its leadership position by revenue while improving its value proposal and position in the market. The wide geographical, technological and product range have permitted this behaviour, which means being “The Casing Company”, the world casings leader, with an estimated market share above 17% and 33% in the customized casings segment.

Geographic diversification:

Viscofan has the largest production and commercial presence of the market. Headquartered in Navarre (Spain) and with 22 manufacturing plants across Spain, Germany, Belgium, Czech Republic, Serbia, United States, Canada, Mexico, Brazil, Uruguay, China, Australia and New Zealand.

Products are distributed to over 100 countries around the world, with a large network of distributors, agents and own commercial offices in Spain, Germany, Belgium, Czech Republic, Serbia, United Kingdom, France, Russia, United States, Mexico, Canada, Brazil, Costa Rica, Thailand, China, Australia and New Zealand.

Technological and product diversification:

Technology diversity makes it possible to offer the market a global solution, being the only one in the sector with proprietary technology in the main available technologies: cellulose, fibrous, plastic and collagen.

This technology diversity makes it possible for the Viscofan Group to offer an extensive product portfolio, adapted to the different needs of customers, and helping them, in turn, to develop the product range of our customers. In this sense, in 2018 almost 55% of casings sales came from customers who buy products from the four main technologies.

MORE TO BE Strategy

In such a demanding environment, the Viscofan Group bolstered its leading position in revenue in the sector while continuing to develop the activities included in its MORE TO BE 2016-2020 strategic plan.

CASINGS

In previous strategic periods named Be ONE and Be MORE, the Viscofan Group transformed itself, adjusting to macroeconomic and market environments in order to create long-term value, with a clear focus on developing competitiveness in cost and then improve its technological capacity.

The transformation of the Viscofan Group is not unconnected with the transformation of today's world, which has also affected the needs of our customers, market possibilities and the new world cost and funding structure.

In such a demanding environment, the Viscofan Group bolstered its leading position in revenue in the sector while continuing to develop the activities included in its MORE TO BE 2016-2020 strategic plan, a natural evolution in the context of the transformation of Viscofan and the environment, focused on leading in all the main casings market in terms of service, cost, and technology.

The current strategy means a step further in the track record that began with the Be ONE (2009-2011) strategic plan. After the acquisitions carried out, this strategic plan decided to restructure operations, perform a management plan to improve economies of scale, which the Viscofan Group didn't have before. This approach made Viscofan become a very efficient company, which gave cost optimisation the greater weight of management.

Once that goal was accomplished, Be MORE (2012-2015) strategic plan committed to greater development. The best technological improvements introduced, without giving up competitive cost advantage, gave us a more global presence in collagen and in other families, enabling us to reach other markets and a new scale.

But if we really want to be a global leader, we have to lead our key markets. In order to reach that, we need to continue progressing in costs, technology and, of course, going a step forward in our level of service.

And that is exactly what guided the Viscofan Group towards its new vision: Become an authentic global leader.

This vision means that:

  • THE CASING COMPANY puts all its efforts in creating value for SHAREHOLDERS sustainably.
  • THE CASING COMPANY is the global leader in all families of meat casings and actively promotes the development of NEW MARKETS.
  • THE CASING COMPANY is the preferred option of our CUSTOMERS and desired by competitors.
  • THE CASING COMPANY is BENCHMARK of the sector in efficiency and productivity in all its casing technologies.
  • THE CASING COMPANY has THE BEST MARKET TEAM, attracts and maintains talent and develops its capacities.
  • Ultimately, THE CASING COMPANY leads in SERVICE, it leads in TECHNOLOGY and it leads in COST.



Strategic initiatives

This triple leadership arises with the conviction that a global leader creates value when it is productive for its stakeholders, and at the same time sustainable, in the long term. In order to achieve this, the Viscofan Group performs multiple initiatives that can be grouped in three strategic pillars and throughout all organisational departments:

Service axis

This axis groups all initiatives aimed at offering solutions to meet needs, and addressable with a greater range of products, greater proximity, better assistance, greater adaptability, etc.

An example of initiatives aimed at improving the service area is the investment in the new plant in Spain where new cellulose and fibrous technology has been developed and installed. This project allows us to develop new products for the market, as well as gain proximity with European fibrous customers. In this sense, sales in 2018 show a high degree of customer satisfaction.

Since November 2018, Viscofan has been present in Oceania for the first time in its history thanks to the acquisition of the Globus companies in Australia and New Zealand, a geographic complement to improve proximity in the region. With this acquisition, Viscofan incorporates its main distributor in these countries, which has a long history as a supplier of casings, films and bags, among others, as well as a great knowledge in the sale of equipment for the food industry.

Technology axis

Our productive process is based on proprietary technology where know-how of people is essential. This continuous improvement production model is based on Excellence Centres and technology transfer to other centres.

As a result of this model of continuous improvement, in 2018 new production modules were commissioned and installed under a new technology to produce viscose-based casings (cellulose and fibrous) in Cáseda (Spain). It is a production plant with the most advanced technology in the market for producing these types of casings, and which is an advance for Viscofan in terms of efficiency and productive speed.

In 2018, production improvements were also made in fibrous technology in North America, the technological improvement in plastics was consolidated as a result of the acquisitions of Vector and Supralon in previous years, and production improvements in high calibre collagen technology continued.

The acquisition of Transform Pack Inc in Canada is also included in this axis. Completed in February 2018, it allows Viscofan to incorporate specialised technology for transferring ingredients to food, to add spices, flavours, aromas, and colours.

Cost axis

In 2018 steps have been taken to launch projects aimed at improving costs, seeking to save on costs with the homologation of new suppliers, the increase in the collagen capacity in Serbia has enabled economies of scale, and the development of more efficient technologies in production.

Meanwhile, in 2018 the Viscofan Group faced the inflation of raw material, particularly high in the case of caustic soda, glycerine and co-generation gas. The productive improvements achieved in 2018, which has been one of the years with the highest plant production efficiencies, with the exception of the new Cáseda plant, have partially offset this increase in production input costs. In line with this cost context, commercial activity has sought to increase prices in a broad customer base, especially since the third quarter of the year, in order to adapt them to this inflation environment.

In terms of environmental management, the plants in Belgium and Uruguay have obtained the ISO 14001 certification, which means guaranteeing Viscofan's commitment to sustainability in the use of resources, improving the way in which we reduce the impact on the environment, which in turn generates internal profit by improving the use of resources.

R+D AND INNOVATION

R&D team
133
people
  • The corporate research and development centre in Spain coordinates, manages and supports the specific research and development activities conducted at each production plant.
  • Coordination among multidisciplinary is established to exchange best practices, technological knowledge and ideas across productive centers.

Viscofan’s products look simple and are simple to use. This belies the sophisticated technology underlying the manufacturing process which only a few companies worldwide have developed.

The cold meat production sector requires high performance products at very competitive costs, in order to enable large scale production. Responding to this demand implies a huge technological and development challenge that Viscofan performs successfully as the major casings supplier, using the four most common materials that are currently available in the market: cellulose, collagen, fibrous and plastic, thus offering the complete range of customized casings and being the only supplier able to offer it.

Therefore, Viscofan takes the view that its leading position in the highly competitive world market can only be sustained by cutting-edge efforts in research and development of its technology and products. Only through the application of this philosophy will Viscofan be able to continue advancing in its leadership of innovation in the global casings market, benefiting all of its stakeholders.

Constant innovation required by our globalised world must be taken into account. The products of Viscofan must be compatible with the food habits and uses of millions of world consumers, their preferences and evolution over time. Viscofan couples its growth as a business with the development of its innovation capability so that it can access the best technologies available on the market, implement them and improve them, and develop its own technologies to create an enduring competitive edge.

The complexity of Viscofan’s production process and the sophisticated technology underlying its products mean that research and development units are structured into teams specialised by casing type, mainly at centres of excellence (i.e. sites that stand out due to their management, proactivity, service, knowledge, productive quality innovation and are a reference of best practices for the rest of production sites of the company).

In 2018, the average R&D workforce comprised 133 employees across the Group. The corporate research and development centre in Spain coordinates, manages and supports the specific research and development activities conducted at each production plant, and coordinates the multidisciplinary teams which exchange best practices, technological knowledge and ideas across product sites.

The goal is to harmonise and align production standards worldwide, based on the most advanced concepts and processes relating to both manufacturing technologies and philosophies of control, quality and product features that have made Viscofan what it is today.

Technology is transferred from centres with technology development units for both products and processes to all the Group’s other facilities. The goal is to harmonise and standardise production standards worldwide, based on the most advanced concepts and processes relating to both manufacturing technologies and philosophies of control, quality and product features that have made Viscofan what it is today.

At present, there are strategic product and technology development projects across the entire casings range in progress (cellulose, collagen, fibrous and plastic casings), as well as other diversification products aimed at developing applications that equip Viscofan with the product range required to reinforce its presence in the world market. On-going Research, Development and Innovation projects focus mainly on:

  • The development of new products according to the target markets defined in the expansion plan, and new generation implementations, designed and oriented towards offering products with differential performance and features.
  • The development of active casings that are able to confer functionalities to the meat product they contain.
  • The development of production alternatives and technological solutions through radical breakthroughs which allow an increase in added value or significantly reduce production costs for meat casings through modernisation, streamlining and simplification, improving Viscofan’s competitiveness.
  • Research aimed at developing technological processes that enable an adequate range of materials to manufacture casings.
  • Technological support for improving existing products and processes, and for the Company’s international expansion, all this adhering to Viscofan’s technological and quality standards and current regulations, as well as the optimisation of production costs.
  • Innovative uses of raw materials that we use and of which we have extensive know-how.


Support from international research centres  

Viscofan has a long track record of working with institutions and research centres in different countries. In particular, Viscofan plays an active role in the customized casings industry and is, therefore, involved in several industry associations and groups that seek to cooperate towards enhancing the industry’s contribution to the community. These institutions include:

  • Comité International de la Peliculle Cellulosique (CIPCEL). Based in Brussels, comprises the leading producers of regenerated cellulose film products.
  • Collagen Casing Trade Association (CCTA). Also based in Brussels, comprises the leading producers of collagen casings worldwide.
  • Centro Español de Plásticos (CEP). This is the Spanish association of entities relating to the manufacture and processing of plastics.
  • Gelatin Manufacturers of Germany (GMG). An organisation of German gelatin producers.
  • AINIA. Food Technological Centre based in Spain that supports R&D of its partners, especially in the areas of quality, food safety, sustainability, environment, design and industrial production.
  • ANICE. The Spanish National Association of the Meat Sector is the biggest meat association in Spain to give advice, represent and defend the sector's interests.
  • National Centre for Technology and Food Safety (CNTA), the purpose of which is to provide advanced technological services to improve competitiveness in the food sector through quality and innovation and under the principle of food safety.
  • AIMPLAS. The Plastics Technology Centre offers integral solutions to companies within the plastic sector through the technical implementation of R+D+i projects.
  • NAITEC. Multidisciplinary Technology Centre for the Industry.


Viscofan also collaborates with different universities and research centres:

  • University of Navarre (Spain)
  • Public University of Navarre (Spain)
  • South Carolina University (USA)
  • MORE Institute Research (Germany)
  • Hochschule Manheim Fraunhofer Institute (Germany)
  • Tübingen University (Germany)
  • Sao Paulo University (Brazil)
  • Suzhou University (China)

The principal issues on which these collaborations are based are: food safety, analysis and development of new materials, process and food industry engineering, advanced physical and chemical analysis, basic research on materials and alternative uses and other packaging systems.

Moreover, Viscofan is importantly supported by the different administrations of the countries where it develops R&D activities, for example: the Center for Industrial Technical Development (CDTI) and the Ministry of Economy and Competitiveness (MINECO) in Spain, the Federal Ministry of Education Research in Germany, the National Council of Science and Technology (CONACYT) in Mexico and the Institute of Technological Research (IPT) in Brazil.

Bioengineering
1. Medical collagen
  • Collagen suspension Viscolma® and collagen membranes that are used as coating, as a quality collagen source or as medical implants
  • Cardiomesh. This product combines a CCC collagen membrane with allogeneic stem cells from fatty tissue to treat patients with heart failure.

 

2. Nutraceutical collagen
  • COLLinstant®, a high quality collagen hydrolyzate. These collagen hydrolysates are used as a component of nutritional supplements that improve the health of skin, bones and articulations.

BIOENGINEERING

Collagen is the most abundant protein in the human body and therefore there are numerous applications and uses that can be given to this material. Therefore, Viscofan is developing more and more businesses and activities around collagen. We started with medical applications and we also recently added advanced nutrition.

2018 has been a very important year for the Bioengineering unit, in which we have begun to develop the two alternative markets in which Bioengineering is involved: the medical and nutraceutical markets.

In the nutrition market, we have started to market COLLinstant®, a high quality collagen hydrolyzate. These collagen hydrolysates are used as a component of nutritional supplements that improve the health of skin, bones and articulations. As the biggest global manufacturer of collagen casings, with COLLinstant® Viscofan will now access this high-potential market.

In the case of medical collagen, we produce the collagen suspension Viscolma® and collagen membranes that are used as coating, as a quality collagen source or as medical implants. Viscofan works with its customers in the development of medical products with this unique collagen. Since 2017, the new medical plant that has been installed has been equipped with cutting-edge technology to process collagen, and it worked under a quality management system certified by ISO 13485, which is required for medical products.

An example of the use of solutions developed with Viscofan's collagen materials is the product VB-C01 for cardiac repair, the Cardiomesh project. This product combines a CCC collagen membrane with allogeneic stem cells from fatty tissue to treat patients with heart failure. The trial has been approved by the Spanish Medicines Agency and recruitment began last October. This trial is financially supported by the Spanish Ministry for the Economy and Competitiveness, and Viscofan works on it through a research consortium with the Clinical University of Navarre, the Hospital Gregorio Marañón of Madrid and the Minimal Invasive Surgery Centre Jesús Usón in Cáceres.

2018 closes in Bioengineering as a year of consolidation of the productive units and startup of alternative businesses that are called to a more significant contribution to the group's profit.

EXPECTED RESULTS IN 2019

The first few months of 2019 confirm the growth trend in market volumes, although there is still certain pressure on the prices of raw materials and energy. The Viscofan Group faces the second half of the 2016-2020 MORE TO BE strategic plan with the aim of reducing its cost structure and continuing to improve the levels of service and technological development.

As such, the Viscofan Group expects to increase revenue by between 6% and 8%, recurring EBITDA by between 10% and 13%, and recurring Net Profit by between 8% and 14%, based on an investment of €60 million (down by over 15% compared to the investments made in 2018) and considering an average exchange rate of US$/€ 1.13.

In 2019, the Group will carry out an intense operational activity consolidating and advancing in the projects framed within this strategic plan, including the installation of the necessary capacity to complete the new technology project in Caseda.

Growth figures while progress is being made in the projects framed within the 2016-2020 MORE TO BE strategic plan. Period that until now has required a significant investment and operational effort to carry out a large number of projects that are now a reality and will allow the Group to improve the value proposition in the service, technology and cost areas. In 2019, the Group will carry out an intense operational activity consolidating and advancing in the projects framed within this strategic plan, including the installation of the necessary capacity to complete the new technology project in Caseda.

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