Investment in Australian petfood and edible proteins

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 & Media Release

27 September 2022

SCALES CORPORATION ANNOUNCES INVESTMENT IN PETFOOD AND EDIBLE PROTEINS
BUSINESSES IN AUSTRALIA

Scales Corporation Limited (NZX:SCL) today announced the entry into two agreements to expand its
Global Proteins division in Australia. The agreements are:
• The subscription for a 33% interest in a newly established petfood processing operation to be
based in Melbourne. Scales will be partnering with two recognised industry participants who
bring extensive supply relationships
• Concurrently, Scales has entered into an agreement to purchase 50% of the Australian
operations of Fayman International, including a 42.5% interest in ANZ Exports (collectively
Fayman International and ANZ Exports are referred to hereinafter as “Fayman International”)

The combined initial investment from Scales is estimated at A$27 million, to be funded from Scales’
existing cash reserves.

Managing Director Andy Borland says: “the investments announced today demonstrate Scales
commitment to Global Proteins, both in terms of expanding our geographical reach as well as the
range of products that we are able to supply.”

“As demand for proteins increases, access to global supply and key growth markets becomes
increasingly important. Australia’s product mix, growth, and proximity to Asia make it a strategically
important supply base for both our petfood customers and edible by-products markets. The
partnership that we have entered into significantly strengthens our diversity of proteins and our
supplier base. The investment also unlocks potential synergies in our sea-freight logistics activities.”

“We are very pleased to be able to invest in a bricks-and-mortar processing facility in Australia. The
facility shall be focused on the production of petfood ingredients from inedible meat by-products,
similar to the ingredient processing operations currently operating in New Zealand and the USA. The
business, to be known as “Meateor Australia Pty Ltd” is investing in state-of-the-art equipment to
develop a high-quality processing facility. The facility is expected to be operational in Q1 2023 and will
scale up to full production later in the same year. Our partners include the Fayman family, who bring
extensive supply relationships to the operation.”

2




“Fayman International has been successfully developed and grown over the past 40 years and has
strong relationships with suppliers and customers.”

Marvin Fayman, Chairman of Fayman International says: “the Fayman family believes Scales is an
ideal partner to help Fayman International continue to grow and to provide improved solutions to our
supplier partners, for both their edible and inedible meat by-products. We are excited to partner with
the Meateor and Scales team and look forward to leveraging the opportunities available to both
businesses.”

Scales’ directors note that the investments are unlikely to have a material effect on earnings for FY22
and also note the possibility for some disruption to earnings whilst the investments are integrated and
ahead of Meateor Australia becoming fully operational.

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 comprises three operating divisions: Global
Proteins, Horticulture and Logistics. The company’s diverse spread of activities gives Scales broad
exposure to the agribusiness sector. Scales Corporation was founded in 1897 as a shipping business
by George Herbert Scales. Today it has operations across New Zealand, Australia and the United
States. Find out more at www.scalescorporation.co.nz

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1
Scales Corporation Limited –2022 Half Year Results
SCALES CORPORATION LIMITED
Bringing Nutrition to the World
27 September 2022
Petfood and Edible proteins investment in Australia
global nutrition

2
Scales Corporation Limited –Market Announcement
global nutrition
•Investment outline
•Strategic rationale for the investments
•Petfood proteins overview
•Edible proteins overview
•Global proteins –updated supply chain
•Alignment to strategic objectives

3
Scales Corporation Limited –Market Announcement
global nutrition
Transaction #2
Edible Proteins
•Concurrently, Scales has entered into an agreement to purchase 50% of the Australian operations of Fayman International and 42.5% of ANZ Exports (hereafter
collectively referred to as ‘Fayman International’), for an approximate initial cash consideration of ~AUD$23 million
•Fayman International are a leading global exporter of edible by-products sourced from Australia, and have been operating for over 40 years
•The initial investment, together with purchase price adjustments following completion of the FY23 year, equate to an entry multiple of 6x EBITDA
•Completion is expected in October –see further commentary for business overview, and strategic rationale
Transaction #1
Petfood Proteins
•Scales has entered into an agreement to subscribe for a 33% shareholding of a newly established Petfood business based in Australia
•This business is currently developing a greenfield site in Melbourne to process and market petfood proteins. The plant has been ordered, and we are in
advanced discussions on supply contracts
•Scales will be partnering with two recognised industry participants who bring extensive supply relationships. Each shareholder shall subscribe for a 1/3
rd
stake
•The investment will be the pro-rated capital expenditure and working capital requirements. Scales’ contribution to the initial set up costs are expected to be
AUD$4 million (subject to further capital requirements to be agreed between the parties)
Combined Cash
Investment
Financial
•The combined initial investment from Scales is ~AUD$27 million
•The investments will be funded through cash, and will allow Scales to maintain its conservative capital structure
•Drawdown of capital funds for the Petfood development will be tranchedover time as the development progresses
•The investment in unlikely to have a material impact on Scales’ earnings guidance for FY22
•We expect some disruption to earnings as these investments are integrated into the division, and also whilst the Petfood Proteins business becomes fully
established

4
Scales Corporation Limited –Market Announcement
global nutrition
Australia's product mix, growth and proximity to Asia make it a strategically important supply
base for both our petfood customers and edible by-product markets
These investments are anotherstep towards improving our footprint in Australia, moving up
the supply chain, establishing direct supply relationships and improving the breadth of our
networks and products
Securing Australia
as a supply base
Expanding our
knowledge of by-
product markets
Global partnership
and expansion
We have been wanting toleverage our existing
value chain and explore alternative channels
for animal derived by-products
This investment provides the foundation for
Scales to explore these alternative markets,
expanding our relationships across a range of
customers and channels
As demand for proteins increases, access
to global supply and key growth markets
becomes strategically important
This partnership will give us access to the
above, and provide further opportunities
to expand and diversify our business
globally

5
Scales Corporation Limited –Market Announcement
global nutrition
•Scales has announced the establishment of a new Australian-
based petfood protein manufacturing facility
•Scales will be partnering with industry participants who bring
extensive supply relationships to the venture. Each shareholder
shall subscribe for a 1/3
rd
stake
•Capital expenditure for the development and working capital
requirements will be shared pro rata between shareholders
•The company will be named MeateorAustralia Pty Ltd
Key Transaction Metrics
Cash contributionScales’ contribution to the initial set up costs are
expected to be AUD$4 million (subject to further capital
requirements to be agreed between the parties)
Governance6 Directors, Scales has the right to appoint 2
FundingPurchase price funded through cash
Further ObligationsPuts/Calls (‘Options’) in favour of other
shareholders/Scales, whereby Scales would increase its
shareholding in the future. The EBITDA multiple increases
to 7x on any exercise of the Options
Due DiligenceExtensive due diligence covering commercial, financial,
tax, legal, and environmental

6
Scales Corporation Limited –Market Announcement
global nutrition
•The facility is expected to be commissioned in Q1 2023. The plant has
been ordered, and we are in advanced discussions on supply
contracts. Our intention is toscale up to full production over the
course of2023
•As mentioned in the outline, there maybe some disruption to
earnings as this development becomes established
•The facilityis located close to many abattoirs in the food processing
district of Melbourne, which will reduce the cost and complexity of
internal freight and logistics
•This will ensure ongoing security and continuity of supply for our
customers through a more direct supply chain
Lamb Processing plants
Melbourne Map
Site Location
Melbourne Port
Cattle Processing plants

7
Scales Corporation Limited –Market Announcement
global nutrition
•The expected value of the global petfood market is increasing due to demand for increased quantity and quality of petfood
•Rising levels of disposable income in emerging markets and social changes globally, are the key drivers of pet ownership growth
•Older age groups are also increasingly likely to have pets for the companionship and associated health benefits
•China’s pet population rose 113% between 2014–2019 coinciding with relaxation of ownership restrictions and a falling birth rate, and is
expected to continue to grow, with US exports increasing 243% to China in the last 12 months
7.3% CAGR
2022-2026
https://www.healthforanimals.org/reports/pet-care-report/global-trends-in-the-pet-population/
https://digital.petfoodprocessing.net/sosland/pfp/pet-food-processing-september-2022/index.php#/p/24
https://www.mpi.govt.nz/dmsdocument/51121-Pet-food-export-stats-factsheet
$-
$20
$40
$60
$80
$100
$120
$140
$160
$180
20222023202420252026
(
US$b
)
Forecasted Value of the Global Retail Petfood Market

8
Scales Corporation Limited –Market Announcement
global nutrition
•Scales is also announcing a further partnership with the Fayman family, via their Australian interests in Fayman International
•Over 40 years of operations, Fayman International have built relationships with, and sourced supply from, more than 70 abattoirsin Australia and
has more recently been developing procurement relationships in other key supply markets
•This business is an exporter of edible by-products predominantly to Asia -this enables Scales to leverage our understanding of these markets and
share common shipping and logistics networks
Key Transaction Metrics
Cash considerationApproximate initial cash investment of ~AUD$23 million for 50% shareholding, and a contingent top-up payment
on completion of FY23 result
Implied MultipleApproximately 6x EBITDA
Governance6 Directors, Scales has the right to appoint 3
FundingPurchase price funded through cash
Further ObligationsPut/Calls (‘Options’) in favour of other shareholders/Scales, whereby Scales would increase its shareholding in the
future. The EBITDA multiple increases to 7x on any exercise of the Options
Due DiligenceExtensive due diligence covering commercial, financial, tax, legal, and environmental

9
Scales Corporation Limited –Market Announcement
global nutrition
•While Fayman International exports across the globe, it generates ~90% of its revenue from exports to 8 countries, with a specific concentration of
sales to South East Asia
•Fayman International have developed deep relationships with customers in these markets, with long tenures over their operating history
•Scales views these as a key strategic growth markets with large forecasted increases in meat consumption as incomes rise and consumer
preferences change (see chart below)
Asia
15.3%
19.4%
Asia forecast meat consumption (mill t)
Fayman International Export Markets
Highest volume markets
OECD, RC analysis

10
Scales Corporation Limited –Market Announcement
global nutrition
•Fayman International has developed its business by positioning itself as
a solutions provider.
•Their value proposition to suppliers is that they are able to market and
sell all of their by-product, as a single offtake partner, thereby
simplifying suppliers’ operations. This includes bothedible and inedible
protein
•Their product mix is heavily weighted towards Beef by-products;
however, they also export lamb, chicken and pork
•Australian cattle herd numbers are rebuilding, and this lays the
platform for increasing supply volume from this market

11
Scales Corporation Limited –Market Announcement
global nutrition
•Scales’ strength in global proteins lies in its supplier and customer relationships coupled with its logistics network, and areputation for quality
products. As mentioned in the half year presentation, Scales will look to leverage this expertise for complementary expansion
•These transactions provides Scales access to all three by-product channels -as demonstrated below
Global Supply
Transport to abattoirs
Processed into various primary cuts
Core focus -primary meat cuts
marketed and sold by abattoir
3
rd
parties use material
for a range of products
Petfood processing –MDM,
slurries and offal
Extraction of key minerals and
compounds
Sold as edible products
Further processed with additives to
form retail ready petfood
Further processed to form nutraceutical
and pharmaceutical grade products
Edible proteins are used in multiple food
products
Global supply chain
Due to small volumes,
by-products (fats, trimmings,
bones and offal) are collected by
3
rd
parties, or sent to landfill
Scales’ updated supply chain

12
Scales Corporation Limited –Market Announcement
global nutrition
•Providing a direct relationship with 70+ abattoirs, giving us access to new proteins out of Australia
•Providing the opportunity to procure and process Australian beef material sourced through our expanded
edible network for petfood processing
•Giving Scales access to knowledge and potential markets for value-add opportunities, including but not
limited to opportunities in the Pharmaceutical industry
•Leveraging our combined operations in Australia, and adding critical resource to our existing logistic network
•Simplifying our supply chain due to the site's proximity to the Port
Secure global supply and
access new markets
Expand species
offering
Add value through
innovation
Expand logistics
globally
•Becoming a strategic partner to our suppliers, taking all by-product material –both inedible and edible
•Giving access to new markets and customers across key growth regions
These investments deliver on Scales’ strategic objectives by