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Executives

Karan Chanana - Chairman & CEO

Ashish Poddar - CFO

Rahul Nayar - Director of Global Communications and Strategy

Analysts

Eric Katzman - Deutsche Bank

Amira Nature Foods Ltd (ANFI) Deutsche Bank Consumer, Retail, Gaming & Lodging Conference March 6, 2013 12:00 PM ET

Question-and-Answer Session

Eric Katzman - Deutsche Bank

I’m Eric Katzman from Deutsche Bank, cover food companies, and very glad to have you all here. I see that the free lunch is working, so many of you have decided to stay, that’s awesome, but there also another good reason to be here and that is Amira Foods. Amira is represented today by Karan Chanana, who is the CEO and we'll -- I ask him some questions about the business. And Ashish Poddar, who is the CFO; also Rahul you might as well stand up, who is the Corporate Strategy and helps with Communications at the company at the moment.

We helped to take Amira public a couple of months ago. The company as had two quarterly results since going public, both of which have been excellent, and yet despite that there is actually been surprisingly little interest. I have been a food analyst for 16 years now. I have gone on countless marketing trips and I can honestly tell you that and whatever, however many times I have been on road meeting with clients going around the country, I think I’ve had two proactive questions about Amira in that time. And it’s a shame because the company has got some tremendous growth at the moment and some tremendous opportunities, but why don’t I start out with the Q&A here.

And so, for those I think it’s fair to say based on that, Karan, that there really is a lack of understanding of the rice market, and more specifically the basmati rice market. And so, maybe you could first of all talk a little about the history of the company and the growth that you’ve orchestrated. And then, also, touch on what is happening in the Basmati rice market today that is so compelling.

Karan Chanana

Okay. Good afternoon everybody. Thank you, Eric. I’m Karan Chanana, Chairman and CEO of Amira Nature Foods. I’m the fourth generation to own and head this nearly a century old company. I grew up in the business but sometimes it feels that life really began six years ago when I took over the business. In the past six years, I’ve successfully transitioned the company from being a family-owned and family-managed to a family-owned and professionally managed enterprise that it is today.

We’ve grown revenues from $50 million six years ago to over $400 million what they will be by the end of this financial year which ends March 31, 2013. In this time period from 2010 to 2012 we nearly doubled our EBITDA from $22 million to $40 million. We launched the Amira brand in 2008. In this short span of time, the Amira brands sells in 25 countries. We do our overall sales in 40 countries. Our growth rate revenue CAGR has been north of 25% over the last three years, our EBITDA CAGR has been higher over the last three years of 36%. All this we’ve been able to achieve with a clear vision which we set out to be an international specialty rice global packaged foods company.

Basmati rice, which is 70% of our revenue, is a specialty staple; it is grown in a defined but large geographies. You could compare it with Champagne. The product is unique it is classified as a super grain reason being it doesn’t only tastes great, it has great aroma, purely white hue, amazing texture, but it’s actually good for you and this planet. It has zero cholesterol, no gluten, very low glycemic index and it’s allergy-free.

Basmati rice also uses just over 50% of the water ordinary rice uses. The growing geography for this unique product is in the foothill of the Himalayas which gives its natural advantage. It is not dependent on rainfall for its irrigation; it is fed by the five rivers which come out of the Himalayan mountain range and the area have seen the farm incomes being higher than other areas enabling the farmer to be wealthier.

Basmati rice is not a commodity, you cannot trade it on an exchange; the tail doesn’t wag the dog at all. And it’s a packaged product sold at a supermarket shelf. We at Amira have set out a vision to grow this 40 countries we have currently to 70 countries; the 25 countries having the Amira branded presence will grow to 50 countries by 2017.

Eric Katzman - Deutsche Bank

And so, thank you for that. So talk to us about the motivation to go public and also how the process may have differed from your expectations going in. One of the things that I found very interesting because as many of you know companies go public today, many times we see private label getting out of -- and there is just a transfer of public versus private investments. But in your case what struck me as very compelling again is that you are raising capital to actually grow the business and that you didn’t sell any shares. So maybe talk a little about the motivation to go public, why you needed the funds and then how the – how you saw the – how you see the process?

Karan Chanana

See, like I said, basmati is a specialty staple. The product needs to be aged before it can be brought to the consumer which gives a great stability. You have predictability and transparency. Now the journey to go public actually began long before, lot of people understand it and I’ll share this with you. Couple of years ago we tried to acquire a company here in the U.S. called American Rice Incorporated. We bid, the highest at it north of $150 million backed by two of India’s largest banks, and we were faced with one simple question. Who are you? So, I set out the vision and said if you have to grow the emerging markets that we operate predominantly today one can grow healthily at a high growth rate in an organic fashion. Going ahead, like a prudent company we would like to look at other inorganic methodologies.

So this was one part which made us think that, yes, we should be a public company especially which the fact that it complements the vision that I set out of transforming the business from a family-owned and managed to a family-owned and professionally managed enterprise, and being a public company only strengthens that. Then we set out to the journey to decide where to be public. And being the best-in-class we compared ourselves to nonetheless. So, the natural choice was the New York Stock Exchange. The reason for raising the funds is growth capital.

Today, I still own 70% of the company. So the offering was 100% primary growth capital and the motivation to go public was to institutionalize the business. The way I see it the only thing which is loud and clear to all of us is the brand and of the firm belief a food brand especially in the specialty staple like the basmati rice which is irreplaceable. Every population on this planet has rice and bean, rice and vegetables, rice and animal protein and rice and rice pudding; only the recipe varies, and the application of specialty rice is gaining market share over ordinary rice.

We have seen sales in volume terms alone increase by 13% over the last many years for basmati rice and the overall rice space is growing at maybe just 1% or 1.5%. So, very healthy trends, fragmented market place because there is only one global brand Uncle Ben’s. So, great white space opportunity to grow and to grow you need capital so, we came here for growth capital.

And our experience, we have no previous experience of being public. So on expect we came with an open slate and open mind and open whatever scrutiny was needed. And to live up to that we built the team not only on the front end but in the back end. We have Ashish my colleague here, who is the CFO, and we continue to do the same. So, we are confident that we will continue to grow as we have grown in the past because we are doing more of what we have done in the past successfully.

And just a point to that our business model is proven. We enter new geographies through our third party brands, you mentioned private label. What we do is not private label and I’ll explain why. In the emerging markets where we predominantly operate western style modern retail is very small. An example, in India Wal-Mart is a premium retailer in comparison to what it is here, and that defines modern retail and likes of Wal-Mart, Metro, Carrefour. They only have 4% share of grocery sales. So, who is the balance 96%, is mom-and-pop stores. We have over 9 million mom-and-pop stores in India alone, and similar is the landscape in other emerging markets.

Now what does that do? That means there are no private label brands of any significance in the emerging markets. So what do we have? We have distribution companies distributing hundreds of products and putting their name on it. These form our third-party branded customers. We at Amira not only procure, process, age, package but we deliver into the distribution system of our third-party brand owners in all different countries. That enables us to learn about the consumer preference, route to market, opportunities and risks in those markets.

We use these learnings and enable the entry of the Amira brand into these countries making it a low risk, high growth opportunity. Like I said before, rice is not a specialty rice and rice is not a commodity, it’s a $240 billion opportunity at primary wholesale with one global brand.

So, what I’m trying to make is, it’s a very highly fragmented marketplace. The third-party branded customers and the Amira brand grow in the same country at the same time, because of this fragmentation. And the third-party branded customers actually look at Amira entering their market with its own brand as a complementary play and a testimony of our commitment to their market. In one of our markets, we’ve converted our third-party brand customer to our distributor.

So, this is what we do and we’ve done that successfully. We operate in 40 countries, 25 countries have the Amira brand, in five years these 40 countries will be 70 countries. And in five years, 25 countries currently with the Amira brand will grow to 50 countries following this proven strategy.

Eric Katzman - Deutsche Bank

Maybe just a good segue, maybe you can talk a little bit, I think yesterday maybe was in one of the one-on-ones you talked about how this -- the market of Indonesia became an opportunity. I thought that was an interesting story as to how all of the sudden this market opened up to you and you are able to add that on to the list?

Karan Chanana

See over two years ago, Indonesia as a market opened out, they had not bought Indian rice for a while and we heard from somebody in the Indonesian Embassy, because we sponsored one of the golf tournaments that they would like to buy Indian rice. So, I said excellent, how can we enable that? They said, oh, we had issues earlier. I said well, because you didn’t buy from Amira. So, I went and met the ambassador, invited him to our facility. And I would like to add here that Amira was the first one in India to set up an automated basmati plant, an automated rice plant where, with Swiss-German technology from a company called Bühler, where rice is untouched by hand. You put in paddy as it comes from the farm and you get bagged finished product. This has also enabled us to have a host of certifications required to have our package on every supermarket shelf and from the emerging to the western markets here.

Now carrying forward to that we invited the whole delegation, the head of their country’s quality control team, visited our plant, its well documented it was in the press and they approved our facility and that’s how the business started. So, we’ve been doing business with them for two years on a repeated manner and we hope to continue the same. This is just one of the examples where Amira has been an industry enabler and we hope to continue to do the same.

Eric Katzman - Deutsche Bank

And its very difficult for investors here to keep track of what’s going on in these various markets, what do we know is happening in Indonesia. But you are expanding in the US and you are launching in the UK and that’s obviously something that we even though it’s a small percentage of your sales, I think investors will right or wrong key in on that. And so, maybe you could kind of give us a lay of the land as to how you see growing the brand here in the US beyond what you already have, and then also in the UK?

Karan Chanana

Okay, very interesting. Last year I spent sometime, quite a lot of time actually building the team in the UK. So our Amira UK CEO comes from Nestle, he was the Sales Director there; the Amira UK Commercial Director also has a Nestle background, he has nearly four decades of experience in the food space in the UK; our Head of Marketing comes from a company called Westmill Foods, which is part of the Associated British Foods Group, which owns Twinings and British Sugar, etcetera.

So I put this team together, we came out with a new packaging, the Amira font we own now. We spent a lot of time, effort and energy building this space, and we are launching second half of May in the UK in the mainstream multiples with Morrisons, followed Tesco, Asda, Co-Op, Waitrose, et cetera.

1600 distribution points signed up already, going to grow to 7,000 by the end of the calendar year, and this is just the beginning. And why UK? UK being, it’s pretty simple actually. The national dish of UK isn’t fish and chips anymore, it’s Chicken Tikka Masala. And what goes with that is in Indian Basmati Rice.

Now, to your point, I’m going to doing the same thing now here in the U.S but before that I’ll tell you we are in the U.S at Costco in over 160 locations. We’re in Smart & Final and we’re also in the Restaurant Depot, Jetro, and what has enabled us to be in Costco very rapidly. We know that Costco is not an easy place to have your brand presence, we have to meet up the brand there we lost that in 2010. The reason we were able to be so successful is because we already had a relationship through our third-party branded customers so we knew the route to the club store market. And now this summer I hope to spend time here in the U.S to build down the team to go into the mainstream.

Anecdotally I tell you, if I know what I know now this comes from the experience of being a public company that everybody, everybody investor we spoken to wants high growth one’s emerging market wants to buy the product at Whole Foods. And what you’re buying right now is the knock-off cheap Texmati. At least do take a bag when you go home and try it; it’s a slam-dunk. But what I’m trying to say is I would have spent that time here and built a team and that would have actually paid a lot more dividend I’m sure on the stock price.

So, to your point, I’m going to spend time, build the team, get smart people at the end of the day. I have said on our earnings call we, one of the great dividends which we started to yield of being a U.S listed public company is the people, the resources, the talent, the intellectual capital will able to draw because it’s smart people, growth is about people.

Our Vice President of Branded Sales in the Middle East comes from Kraft, our Head of Snacks comes from Pepsi; we have drawn talent from Levers and McCormick Kohinoor. I mentioned the team in the UK, and we continued to add people from -- our Head of Sales and Marketing in India spent 14 years at Nestle. So, this is a dividend which we are reaping and you will see that in our availability, product on the shelves and the results.

Eric Katzman - Deutsche Bank

And you have a relationship with Goya which is a private company necessarily people and the audience may not know them. And you’ve worked with them and you’re in Costco and that’s going to show. Talk a little bit about the U.S market and how the relationship with Goya and Costco is progressing in and how that’s a model for other countries as well?

Karan Chanana

Goya is a third-party branded customer for us and it’s relatively small. Costco is the Amira branded platform for the Amira brand. We’re in four divisions of Costco over 160 locations. As we all know Costco operates in seven divisions in the United States each operate like an independent company we've to tackle them independently go and list your product and then independently.

We were at 130 odd -- 134 locations when we listed we've grown to over 160 locations currently and we've a two people team on the ground in California, where we've an office and we're hoping to grow through the rest of the divisions and cover all 438 outlets locations of Costco. The team is focused on the club store because that's what we know and they are busy with that. So that's why the reason to come here sit and establish a team to get into the mainstream and let the investors buy the product.

Eric Katzman - Deutsche Bank

Okay. Let's switch over to back to or over to India for a second it's about a third of your sales. May be you can describe the competitive environment there a bit. Obviously the company -- the investors here at McCormick they bought Kohinoor and that I think is somewhat of a recognition by U.S. company that there is significant growth in the market and that not just spices and seasonings have a future there but also branded packaged foods and so maybe you could talk a little bit about the competitive landscape and go from there?

Karan Chanana

Okay. India is a very interesting country. We've 1.2 billion people and growing young population, and there is huge demographic dividends to be had. I mentioned earlier, western style modern retail is small but growing at 20%. It could grow faster. The Indian government has recently allowed 51% ownership for supermarkets like multibrand retail like Wal-Mart, Metro, Carrefour and many others. We at Amira set to gain from that dividend. Currently we're the number one brand at Wal-Mart India and how we did that.

We're an international focused company. The Amira brand is the focus of our growth. We've taken the international learnings and plugged it in into the modern trade space in the emerging markets and that has enabled us today we've a fill rate of almost 91%, which is higher than some of the large consumer good majors. India has a growing middleclass population of a CAGR of 13%. It is estimated that we'll have over 600 million middleclass by 2025, which will obviously brings out with it purchasing power.

Unlike the West, where there has been stress on the economies, emerging markets have been growing at high single-digits rate. People have actually got wealthier in the last five, six years, whereas things have remained static here and what do people do, especially in the emerging markets as they get wealthier, people always eat better. So they trade up and basmati rice is the specialties people that first trade up to. So the natural progression is to go from ordinary rice to basmati rice on an occasion, then on a periodicity, may be once a month, once a week and everyday like we can do in our households.

So taking that forward the private consumption in India is slated to be $1.5 trillion by 2025 conservatively. Amira sales in India are growing rapidly much stronger than last year and going ahead we expect to be even stronger than it is today. How we're doing that? We operate in India through a Pan India Distribution Network and to accelerate that, I spoke of the modern retail, we're very good at that, but it's a small market, as terms of percentage of sales.

We've set out our target to have 15 direct distribution centers. These direct distribution centers are being set up with a clear vision to do deep down drill penetration into the mom-and-pop stores.

The first direct distribution center is already up and running in the central southern city of Hyderabad. We have two other locations already identified are in process, and the 15 Phase I rollout will be completed within 36 months. Now you could ask what will it cost and everything, but it is relatively I would say affordable, inexpensive at a $300,000 estimated per location, spread over three years and driving high growth.

Eric Katzman - Deutsche Bank

So, I focused mostly on the top-line at this point and your goals are to grow the top-line at least 20% and you've been doing better than that. But maybe it makes sense now to switch over a little bit to the process of procurement, how you -- your relationship with the basmati rice farmers, how you get the rice what you do with it once you hold it, maybe Ashish could help out a little bit with the inventory situation and kind of how that flows through, so may be touch on couple of those stuff?

Karan Chanana

Okay interesting. The procurement process in India is unique in its own ability and it -- this is a advantage for Amira and a barrier to entry for us, how? The Indian landscape is doing with small farm holdings and large families, two-thirds of the population lives off the land. So this is where the importance of our history and relationship comes in and is a unique Amira advantage. We've been dealing in that space with the farmers over four generations. So what does that do? The quality of the farm produce we buy is finalized at our facility.

There is a built-in trust over this four generation of transactions we've done with the farmer, which is a huge enabler. We are a responsible customer to them and a responsible corporate of what we do. We interact with the farmers throughout the year, we provide them with package of practices our agronomist go out in the field update them on the weather, the soil, do soil testing, satellite mapping, and provide the data to the farmers enabling them to expand cultivation of basmati rice as the demand grows.

This is a distinct advantage embedded to others and I'll explain that how large companies like PepsiCo try to do basmati rice they had a brand called Season's Harvest, 12, 15 years ago but eventually got out because the farmer would not allow them to decide at their premises, because there's no history behind it. The farmer in India knows PepsiCo now a little bit but doesn't know what kind of noble company it is. For them we're the large multinational because they're concentrated on what their wealth is and who they'll trust with there, because most farmers are living just beyond subsystems that's a natural advantage we at Amira carry.

Now to talk off after procurement we age the product like I said basmati is like champagne it's a unique product comes from a defined but very large geographies so there's a lot of headroom to keep expanding production. We age the product. We process it in our modern facility. This facility which was set up in '95, and we expanded capacity in 2010 has enabled Amira to be the only rice company from India on the automatic approval list of the U.S. FDA uninterrupted since 1996.

Now, on the inventory Ashish will take you through how and what we do in terms of the numbers.

Ashish Poddar

Yeah good afternoon everyone. So in terms of inventory I just would like to let you know that our harvest seasons began from October and it ended in January. And historically our inventory levels are high for this quarter. So that's why we have around $197 million inventory as on the date of balance sheet, reporting date of the balance sheet and that's primarily due to the fact that we have to procure material in this quarter in order to satisfy future expected demands.

Eric Katzman - Deutsche Bank

And so this new production facility which was again one of the primary reasons that you raised the capital, the new production facility is going to be coming on in the next couple of years if everything goes according to plan. How do you see that helping your gross margins and profitability?

Karan Chanana

We’ve seen, we’ve expanded capacity in 2010 and our EBITDA margins have gone up by almost 180 Bps. As a result of that, currently we processed a third of what we sell. We’re a sales led company. We’re not hostess to capacity. Now in order to grow qualitatively and as we are adding more Amira branded sales we need to add capacity okay.

Currently the plan is to double capacity and once doubled we will be doing little more than half of our sales processed in-house. The stage we’re at we are under negotiations with our technology suppliers, dealers, and others and once these are complete there will be a rollout of the CapEx and we hope the capacity to be up and running as planned in fiscal, by the end of fiscal '15 which is March 31st, '15.

Ashish Poddar

Just want to add that one if I can, fiscal year 2010 when we doubled our capacity our EBITDA margins increased from 10.7% to 12.1%. And we expect in 2015 when our new facility will be running we will be able to have our EBITDA margins roughly around 14.5% to 15%.

Eric Katzman - Deutsche Bank

Right. So the time has gone by very quickly. We've a couple of minutes left. I’d like to throw it open to the audience to see if there any questions out there. Don't be shy. And I have to go all the way to India to ask you next question.

Karan Chanana

You’re welcome.

Eric Katzman - Deutsche Bank

Yeah. Here we go.

Unidentified Analyst

You mentioned there was a tendency to trade up towards basmati rice, what is the price came in due of basmati versus the rice that may be as otherwise consumed and how is the price -- how is the pricing trend has been in basmati rice overtime?

Karan Chanana

Interesting question. Basmati is 2.5 times in price of ordinary rice. If you see the historical trend ordinary rice has a minimum support price in India, Thailand intervention in Europe and the U.S. So the price has doubled over the last six years and we see a similar trend continuing. This is also a great demonstration of the pricing ability of the specialty staple because it’s not a commodity, it’s not a repetitive purchased product people don’t go and buy it every week, people buy it once a month or in a longer time span.

So to give you an example if you were to spend a $1 or $2 more in the western world on a packet of product, which you bought six to seven times a year the absolute number is insignificant for the western community and being a specialty staple in the emerging markets where people are earning more and more money the first thing they do is put better quality specialty staple inside them and that's how it goes it's a trade up it is starting from an occasional trade up to a periodic trade up and we've seeing strong growth in India and international.

I said, I mentioned that over 13% growth in volume of basmati sales internationally over the last five years we've seen and this continues despite the higher prices because the absolute number on per capita is insignificant its not a commodity and there is no replacement of that, its an allergy-free staple its the only allergy-free staple on demand.

Eric Katzman - Deutsche Bank

We have another minute left Karan I’ll throw it back to you and just say, what are your biggest concerns going forward in order to meet your business planning your financial targets and where do you see kind of the next biggest opportunity I'll just -- I'll hint that yesterday you had kind of mentioned that China now looks like its going to need to imports so maybe I'll answer my own question but, may be you can touch on your concerns and may be what opportunities China could hold?

Karan Chanana

We -- like I said we're doing more of what we've already done. We launched the brand in 2008, its available in 25 countries, we've gone through a planned growth process, we’re doing the same in countries where we're available with the third party brand the only exception being UK the reason of that exception is it’s a mature market that's why we set up a team with great experience and the dividend is there for, I'd encourage all of you to go and buy a pack when you visit London post May.

So, we're just growing the way we planned. We're doing more of what we've done and the opportunity you talk of China is it’s been tremendous it’s the world’s largest rice and specialty rice consumer. They’re already buying large volumes of jasmine rice and anybody would have it that basmati rice is far superior in quality than jasmine except that Indian companies haven’t done a good enough job of distributing the product and making it available on the shelves as a premium brand and that's the path we’re walking down.

So there was a newspaper article here in the U.S Al mentioned to me and it was completely missed by the investor community where it says China is going to be a large importer of rice and that's the fact. And very recently three months ago India and China on a country-to-country basis signed an agreement allowing free trade or access to the Chinese market for Indian rice. So, we haven’t even scratched the surface there yet and the implementation of these things are just happening as we speak. So, Indian rice will be starting to get into China and in fact delivered. We have a population larger and wealthier than what is available in India and it's anybody’s guess how bigger the market that can be.

Eric Katzman - Deutsche Bank

Great. So, we’ll leave it there. Thank you very much.

Karan Chanana

Thank you, Eric.

Eric Katzman - Deutsche Bank

Okay.

Karan Chanana

Thanks for being here.

Ashish Poddar

Thank you.

Karan Chanana

Thank you everybody.

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