Scales acquires stake in US petfood ingredient manufacturer

Scales Corporation Limited
Head Office: 52 Cashel Street | Christchurch 8013 | New Zealand
Postal: PO Box 1590 | Christchurch 8140 | New Zealand
Phone: +64 3 379 7720
scalescorporation.co.nz



NZX Release

14 December 2018

SCALES CORPORATION ACQUIRES 60% OF US PETFOOD INGREDIENTS MANUFACTURER
SHELBY JV LLC FOR US$23.2M

Diversified agribusiness Scales Corporation Limited (NZX:SCL) today announced an agreement to
extend its existing petfood ingredients business Meateor through the acquisition of 60% of Shelby JV
LLC (Shelby), a large independent US buyer, processor, and seller of ingredients for the petfood
industry. The acquisition, for consideration of US$23.2 million, is from Brett Frankel, the founder and
President of Shelby who will retain a 40% shareholding post transaction. The transaction is
unconditional but for the satisfaction of Completion obligations. Completion is scheduled to take
place prior to the end of the 2018 calendar year.

Managing Director Andy Borland says “Shelby operates in a sector that we know and understand
well. We are pleased and excited to be extending our existing petfood activities through this
partnership with Shelby, its founder Brett Frankel, and its management team, all of which are very
highly regarded in the market. Whilst undertaking our commercial due diligence we were encouraged
by the strength of the relationships that Shelby has with both its customers and suppliers, and the
high regard in which they hold Shelby.”

“In addition, the Shelby partnership has a strong strategic alignment with the operations of our
existing petfood ingredients business, Meateor. Shelby extends the range of proteins that Meateor
presently offers whilst also offering an in-market point of contact for customers that are shared
between the two businesses. Shelby adds approximately 80,000 MT of product sales to Meateor’s
sale volume of ~27,000 MT
1
.”

Brett Frankel, President of Shelby says “Shelby believes Scales is an ideal partner to help Shelby
continue to move forward as a leading independent petfood ingredients processor. We are excited to
partner with the Meateor and Scales team, and look forward to leveraging the opportunities available
to both businesses to grow the breadth of solutions that we offer to our customers.”

Tim Goodacre, Chairman of Scales Corporation said “the acquisition of Shelby demonstrates our
commitment to our strategy refresh. Scales has experienced strong growth in its Food Ingredients

2
2017 sales volume

2




division and believes that this division continues to offer both attractive market opportunities and
strong financial returns that meet or exceed our long-run ROCE target of 15%.”

“We believe the Food Ingredients division can replace the earnings from the pending sale of our
Coldstore business in the medium term. To this end, we are setting an EBITDA earnings target of
$25.0 million from this division in the next five years and have ear-marked further funding of up to
$50.0 million over this period to meet these targets. Meateor and the Food Ingredients division is,
and will continue to, consider various acquisition and strategic growth opportunities to extend the
breadth and depth of its supply base and product range in particular.”

Scales was advised by Maher & Associates (lead buy-side advisor), PwC (financial and tax), and
Sills, Cummis & Gross (legal).

Contact
Andy Borland, Managing Director, Scales Corporation Limited, Mob: 021 975 999,
email: andy.borland@scalescorporation.co.nz

About Scales Corporation
Scales Corporation is a diversified agribusiness group. It currently comprises three operating
divisions: Horticulture, Storage & Logistics and Food Ingredients. The company’s diverse spread of
activities gives Scales broad exposure to New Zealand’s agribusiness sector. Scales Corporation
was founded in 1897 as a shipping business by George Herbert Scales. Today it employs more than
700 staff New Zealand wide. Find out more at www.scalescorporation.co.nz.

---

SCALES CORPORATION LIMITED
GROWING YOUR DIVERSIFIED AGRIBUSINESS
Acquisition of 60% stake in Shelby JV LLC
14 December 2018

December 2018Scales –Acquisition of Shelby Foods
TRANSACTION OVERVIEW
•Scales has today announced the acquisition of a 60% interest in Shelby JV LLC (Shelby), one of the largest independent buyer and
processor of ingredients for the petfoodindustry in the United States.
•Shelby is an attractive investment when viewed against our investment criteria:
➢Shelby represents an extension of our existing petfoodingredients business Meateor. It operates in a sector that we know and understand
well.
➢This investment is consistent with our stated Refresh Strategy and in an area that plays well to our strengths.
➢Shelby handles approximately 80,000 MT of petfoodingredients annually, bringing total petfoodingredient volumes handled by Scales’ Food
Ingredients division to over 107,000 MT, making us a significant independent, global petfoodingredients processor.
➢Opportunities exist to extract synergies through the increased breadth of proteins, customer and supplier networks, and know-how.
➢Attractive standalone economics. Over time, Shelby is expected to deliver a ROCE in excess of our long-term objective.
2
KeyTransaction Metrics
Purchase PriceUS$23.2m for 60% shareholding
Implied Multiple6.5x2019 maintainable EBITDA
Governance5 Directors, Scales has the right to appoint 3
FundingPurchase price funded through debt
Due DiligenceExtensive due diligence covering commercial, financial, tax, legal, and environmental
AdvisorsMaher & Associates (buy-side)
PwC(financial & tax)
Sills, Cummis& Gross (legal)
All figures in this presentation are in USD unless stated otherwise.

December 2018Scales –Acquisition of Shelby Foods
SHELBY –OVERVIEW
3
Shelby’s operations are similar to Meateor’soperations within New Zealand
Procurement
In 2018, Shelby purchased animal
byproducts(mostly offals) from some 20
meat processing plantsas shown on the
map below.
Processing
Byproductsare processed at one of 7
locations. Shelby owns and manages its
processing facility in Amarillo, TX. Third
parties toll-process the remaining product.
Sales
Sales are made to large petfood
manufacturers. During 2017, Shelby
generated revenues of US$56m from the
sale of ~175m lbs (~80k MT) of
ingredients. The majority of sales are Pork
and Beef offals.
Processors
Suppliers
Amarillo Plant
Shelby,Locations of Suppliers and Processing Operations
Pork
48%
Beef
40%
Chicken
10%
Other
2%
Sales by Species (2017)

December 2018Scales –Acquisition of Shelby Foods
SHELBY –OVERVIEW (CONTINUED)
•Shelby is capably led by a high quality management team:
➢Brett Frankel (President and Founder):
—With over 20 years of experience in the petfoodindustry, Brett has strong networks amongst suppliers and customers. Brett is well-
regarded and connected within the industry.
—Brett will continue to be responsible for day-to-day management of the company and retains a 40% shareholding in Shelby.
➢Bruce Curtis (Chief Operations Officer):
—Bruce is Shelby’s head of operations and has over 40 years of experience in the petfoodand meat industries.
—Bruce is also very well-regarded in the industry, shares responsibility for petfoodsales with Brett, and remains committed to working
with Shelby.
➢Heather Gorny (Chief Financial Officer):
—Heather started with Shelby in 2016. She has a background in accounting, and previously managed the Shelby account in her role
as a public accountant.
•Shelby will be governed by a board of 5 Directors.
➢An extensive Shareholder’s Agreement governs the operations of Shelby.
➢This agreement provides Scales with the ability to appoint up to 3 Directors (out of a maximum 5). Scales will appoint a US-based individual
with relevant sector experience to sit alongside Andy Borland and John Sainsbury on the Board.
4
Leadership and Governance

December 2018Scales –Acquisition of Shelby Foods
$5,468
$4,707
$5,684
$7,554
$9,182
$8,041
30%
29%
38%
49%
53%
30%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
$8,000
$9,000
$10,000
201220132014201520162017
Food Ingredients - Underlying EBITDAFood Ingredients - ROCE
STRATEGY REFRESH
•Scales has focused investment initially on its Food Ingredients division, as it offers both attractive market opportunities and strong
financial returns.
•This division has consistently delivered positive results since our IPO:
➢EBITDA has increased by 71% between 2013 and 2017.
➢ROCE (30% in 2017) continues to perform well above our long-term Group objective of 15%.
•Scales believes the Food Ingredients division can comfortably replace the earnings from the pending sale of the Coldstorebusiness over
the next three years.
5
Food IngredientsEBITDA ($000s) and ROCE, 2012-2017
IPO

December 2018Scales –Acquisition of Shelby Foods
STRATEGY REFRESH (CONTINUED)
•Petfoodingredients is the key component of Scales’ Food Ingredients division. We believe this continues to be an attractive industry for
investment:
➢Spending on pets is demonstrating strong year-on-year growth. This growth is being driven by lifestyle changes such as delayed marriages
and fewer children.
➢Globally, petcareis a $100b industry of which ~$72b is forecast to be spent in the United States. The petcareindustry in the US has grown
at a compounding annual rate of 5.1% since 2010.
➢China, third in the world for dog ownership, is also demonstrating strong growth. The Chinese petfoodmarket was valued at US$1.9b in
2017 and is expected to grow at a CAGR of 9.7% for the next 5 years (source: Mordor Intelligence)
➢Petfoodingredients provide broad exposure to this trend. Scales’ objective is to be a key provider to a wide range of brand owners.
6
Food
$29.9
Supplies /
Medicine
$15.5
Vet Care
$18.3
Other
$8.5
Petcareexpenditure in the United
States, 2018 by sector ($ billions)
Total
$72.3
Billion
48.35
72.13
0
10
20
30
40
50
60
70
80
Petcareexpenditure in the United States, ($ billions)
CAGR = 5.1%
Source: American Pet Products Association (www.americanpetproducts.org)

December 2018Scales –Acquisition of Shelby Foods
GAME PLAN
•Scales intends to implement the following game plan for Meateor:
➢To create a business dedicated to providing key protein ingredients to petfoodbrand owners operating internationally.
➢Meateornow sources product from NZ, Australia and the United States. Meateorintends to further extend our reach of supply and the range
of proteins offered to our petfoodcustomers.
➢Meateorwill enter into alliances to further develop this network; either working alongside existing operations that are complementary to our
own, or with protein suppliers to ensure access to all highly regarded protein sources.
➢Acknowledging that our customers are operating in a fast moving consumer market Meateorwill look to provide additional services to enable
them to remain nimble, reduce fixed capital requirements, and enable them to focus on developing the range and mix of products offered.
➢Meateorwill leverage Scales’ existing experience with export markets, and in particular China, where the market metrics for petfoodgrowth is
considerable and proteins available from offshore are highly sought after.
Scales has set an EBITDA earnings target of $25.0 million over the next five years
for its Food Ingredients division, and Scales has ear-marked further funding of up to
$50.0 million over this period to meet these targets. It is expected that the Food
Ingredients division will continue to exceed our ROCE target of 15.0% on a
consistent basis.
7
The purchase of Shelby accelerates the development of our petfoodingredients business and its growth strategy.

December 2018Scales –Acquisition of Shelby Foods
DISCLAIMER
Receipt of this presentation constitutes acceptance of the terms set out above in this disclaimer.
This presentation has been prepared as at 13 December 2018 to provide a general overview of the proposed acquisition of Shelby JV LLC
(Shelby) by Scales Corporation Limited (Scales). It has been prepared solely for information purposes and does not purport to be complete
or comprehensive and does not constitute financial product, investment, tax or other advice.
This presentation may contain projections or forward-looking statements. Such projections or forward-looking statements are based on
current expectations, estimates and assumptions and are subject to a number of risks, uncertainties and assumptions. There is no
assurance that results contemplated in any projections or forward-looking statements in this presentation will be realised. Actual results may
differ materially from those projected in this presentation. No person is under any obligation to update this presentation at any time after its
release to you or to provide you with further information about Scales, other than as required by Scales’ continuous disclosure obligations.
This presentation includes statements of EBITDA, a non-GAAP financial measure which is not prepared in accordance with NZ IFRS. We
calculate EBITDA by adding back (or deducting) depreciation, amortisation, finance expense / (income), and taxation expense to net
earnings / (loss).
We believe that EBITDA provides useful information to readers to assist in the understanding of our financial performance, financial position
or returns, but it should not be viewed in isolation, nor considered as a substitute for measures reported in accordance with NZIFRS. Non-
GAAP financial measures may not be comparable to similarly titled amounts reported by other companies
While reasonable care has been taken in compiling this presentation, none of Scales, Shelby nor any subsidiary, director, employee, agent
or adviser of Scales or Shelby (to the maximum extent permitted by law) gives any warranty or representation as to the accuracy,
completeness or reliability of the information contained in it. The information in this presentation has not been and will not be independently
verified or audited. This presentation is not an offer of securities, or a proposal or invitation to make any such offer.
8