An introduction June 2008 Disclaimer for NZ Farming Systems - - PowerPoint PPT Presentation

NZ Farming Systems Uruguay Limited

An introduction

June 2008

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Disclaimer for NZ Farming Systems Introduction Presentation

This presentation contains not only a review of operations, but also some forward looking statements about NZ Farming Systems Limited and the environment in which the company

• perates. Because these statements are forward looking, NZ Farming Systems Limited's actual

results could differ materially. Although management and directors may indicate and believe that the assumptions underlying the forward looking statements are reasonable, any of the assumptions could prove inaccurate or incorrect and, therefore, there can be no assurance that the results contemplated in the forward looking statements will be realised. Media releases, management commentary and investor presentations are all available on the company's website and contain additional information about matters which could cause NZ Farming Systems Limited's performance to differ from any forward looking statements in this

• presentation. Please read this presentation in the wider context of material previously published

by NZ Farming Systems Limited.

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Table of contents

1 - Overview of NZ Farming Systems Uruguay 2 - Current Soft Commodity Market Dynamics Appendix A – Background Information on Uruguay and Brazil

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1 - Overview of NZ Farming Systems Uruguay 2 - Current Soft Commodity Market Dynamics Appendix A – Background Information on Uruguay and Brazil

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Investment case

Soft commodity theme

• Uruguayan milk price increased from US18 cents to US40 cents per litre between Dec 06 and May 08
• Record prices are due to changes in underlying demand and supply constraints
• Prices may ease over time but a fundamental change is apparent in the supply/demand balance

Land value arbitrage

• Significant land price differential between New Zealand and Uruguay
• Uruguayan land highly responsive to New Zealand farming practices
• Increase dairy yield per hectare expected to result in land appreciation (yield1 of 30% possible vs New

Zealand 8%)

Proven concept

• Groundwork since 1999 to establish track record
• 36,300 hectares acquired, 22,000 regrassed, 5,500 milking cows and 10 cowsheds
• For 2008/2009 expect 12,000 hectares in dairy with 13,000 milking cows and 20 cowsheds
• Original model evolving as assumptions are proven

Highly scaleable

• Solid platform for expansion has been laid
• Multiple options for extending the business model
• No significant constraints on land and development labour

Management expertise

• Management agreements with New Zealand leading farm services company, PGG Wrightson (PGW)
• Management fee structure aligns objectives of manager and NZFSU shareholders

1 Yield calculated as dairy farm EBITDA per hectare

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Milestones to date

Current NZFSU Ownership Interests of directors of NZFSU 9% PGG Wrightson 11% Other Shareholders 80%

• PGW enters Uruguay with seed business
• PGW operates demonstration farm in Uruguay
• PGW buys 3 farms with a total area of 2,686 hectares
• Public offering of NZFSU raises NZ$105m
• Institutional placement of NZ$39m
• Call of remaining NZ50 cents per share and listing on

the NZX (New Zealand Exchange)

• Institutional placement and rights issue raises an

additional NZ$110m

• Shares on issue now 244.2 million with market

capitalisation of NZ$476.3 million

1999 Nov 2005 Dec 2006 Apr 2007 Dec 2007 Dec 2007 Today 2000- 2003

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Commercial structure

Management Agreements

• Management Agreement and Farm Management

Agreement between NZFSU and PGW

• Base fee of 1.5% of gross assets reducing to 1%

from 1 July 2008

• Performance fee of 20% of total investor returns

above a 10% compounding hurdle rate from inception of the company

• Performance aligned with investors via PGW

cornerstone stake and performance fees

• Farm management costs recovered at cost
• Management Agreement has term of five years

with an additional three year termination notice

• Farm Management Agreement has term of three

years with an additional one year termination notice

NZFSU Farm Owning Subsidiaries1 Inputs PGW PGW Other Suppliers Management agreements Notes: 1 There are 5 farm owning subsidiaries at present

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Who is PGG Wrightson?

• New Zealand’s leading farming services company
• 170 year history
• 2,700 staff
• 90,000 farmer clients
• more than 130 farm merchandise stores nationwide
• turnover in excess of NZ$1 billion
• A leading agricultural services company at the forefront of New Zealand’s farming technology

and systems

• Listed since 1993 with a current market capitalisation of NZ$660 million
• Services across rural supplies, livestock, wool, banking, insurance, real estate, seeds, grain

and nutrition

• Business in Uruguay since 1999 with current staff of 501 and turnover of US$55 million
• Market leader in dairy real estate in Victoria, Australia and Australasia’s largest seed business

with significant market share

Notes: 1 Excludes 260 PGW staff employed directly in relation to NZFSU

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PGW – New Zealand’s leading rural services company

North Island 1,300 sales force South Island 1,200 sales force

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New Zealand expertise a competitive advantage

• Significant productivity gains have been experienced in

New Zealand dairying over the last 15 years

• Key features of New Zealand farming systems:
• Seasonal milk production
• High genetic worth plants and animals
• Good soil fertility
• Temperate climate favours pasture growth
• Intensive pasture management and animal nutrition
• Paddock subdivision and water reticulation
• High stocking rates
• Large scale, sophisticated operations
• Good information systems
• Limited opportunity to expand dairy farming in New

Zealand and higher milk prices get capitalised into land values

• Significant opportunity to expand the Uruguayan dairy

industry using NZ style farming systems and technology

New Zealand Farm Productivity Statistics

1994/95 2005/06 11 year gain Average kg milksolids per farm 53,300 116,589 119% Average cows milked per farm 183 324 77% Average farm size (hectares) 76 111 46% Average milk production per cow 291 360 23% Milk production per hectare 701 1050 50%

Source: Dexcel, Survey of NZ Dairy farms 2005-2006. Statistics exclude farms with less than 100 cows and business entities that own multiple herds

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Progress to date

• The Company’s portfolio currently

comprises of 36,366 ha of farmland across Uruguay in three regional hubs:

• Western region

– 4 farms: 3,749 ha

• Central region

– 9 farms: 13,406 ha

• Eastern region

– 7 farms: 19,211 ha

• Development plans have been

prepared for all of the Company's farms

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Progress to date - illustrative

Acquire Land (6 mths) Develop Infrastructure (1 year) Dairy Conversion (1 year) Ramp Production (1year) Full Production (1 year) Dairy Cows Milk Production

Steps

− Livestock purchases − Regrassing − Water reticulation − Fencing − Roading − Staff housing − Dairy conversion − Build milking sheds − Farm machinery − Fertiliser application − Increasing dairy

production

− Maintenance − Productivity

improvements (million KG/MS)

Activities commenced

8,600 22,000 3,000 2,700 5,500 1.0

1 July 2008

8,600 22,000 3,000 2,700

Year 1 2009

8,600 22,000 5,700

Year 2 2010

8,600 27,700

Year 3 2011

36,300 54,0001 18.51

Year 4 2012

1 Estimate based on assuming: 60% of effective farm area is used for dairy, 30% for dairy replacements and 10% for beef. 10% of dairy land is ineffective (dams etc) . By year 4, cows/ha of 2.75 and kg milk solids/cow of 343

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Progress to date (cont)

• Development costs per hectare in line with original

projections to date

• Progress of farm conversion on track and regrassing 5,000

hectares more than planned at 22,000 hectares

• Key operational management roles filled with high quality

individuals

• As scale grows, reliance on and support from key input

suppliers and Conaprole is growing

• Production levels below expectations with dry conditions but

conditions have benefited conversion progress

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Economics of dairy farm development

• Uruguayan dairy farming is underdeveloped by New

Zealand standards

• Small herds – average 87 cows (NZ 324)
• Grass based with supplements at shed
• Little or no reticulated water
• Cows milked all year round
• Farms can be acquired and developed for less than 25%
• f the cost of New Zealand dairy farms
• Productivity comparable to New Zealand is likely to be

achieved

• Uruguay milk payout at US$5.88 is similar to New Zealand

at NZ$7.90/kg (US$5.93) of milk solids

• Once developed the EBITDA on Uruguayan dairy farms is

expected to be about NZ$3,000/ha. This translates to a 30% pre-tax return on invested farming capital

USD New Zealand Uruguay Kg milk solids / cow 350 343 Cows / ha 2.9 2.75 Kg milk solids / ha 1,015 944 Milk price $ / kg milk solids $5.93 $5.88 Operating expenses / ha $2,550 $1,625 EBITDA / ha $3,590 $3,000 Dairy farm assets1 / ha $43,000 $10,000 EBITDA / Dairy farm assets 8% 30% Source: NZFSU Estimates

Notes

• 1. Dairy farm assets excludes non-dairy producing land

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Economics of dairy farm development (cont)

• Following a period when pastures are sprayed out

and replaced, farms are profitable from year two

• Profitability increases over the subsequent four

years post initial development as the percentage area in dairying increases and pasture and animal productivity increase

• EBITDA significantly increases during year 3 as

dairy production steps up

• Business model assumes only 60% of total farms

are milked on and half this area is irrigated

• Profitability can be significantly increased by

increasing the milking area and making more use

• f irrigation
• Current land holdings will be fully productive by

2012

USD Year 2 Year 3 Year 4 Revenue / hectare1 2,850 $ 4,245 $ 4,750 $ Operating Expenses / hectare 2,150 $ 1,600 $ 1,625 $ Management Fee & Admin / hectare 115 $ 120 $ 125 $ EBITDA / hectare2 585 $ 2,525 $ 3,000 $ Dairy Farm Assets3 / hectare 9,750 $ 9,900 $ 10,000 $ EBITDA / Dairy Farm Assets 6% 26% 30%

Notes 1 Assumes US40 cents milk price per litre 2 Before performance fee 3 Dairy farm assets excludes non-dairy producing land

Illustrative development profile

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Six months to Dec 2007 US$m

Summary Balance Sheet Summary Income Statement Revenue 3.3 Performance Fee accrual 9.2 NPAT (6.8) Assets 297 Liabilities 105 Equity 192

Interim result

• Net loss of US$6.8 million within expectations
• Performance fee accrual based on share price

NZ$1.50

• Operations were close to breakeven
• Expenses tightly managed but strong

performance of Uruguayan economy has seen the peso strengthen, increasing all local costs

Commentary

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Outlook

• Net profit from operations are expected to be in line with plan of US$1.5 million excluding

performance fee

• Two thirds of 2008’s revenue is expected to be from livestock sales, category changes and

livestock valuation reflecting the early stage in dairy production

• Significant progress on dairy production is expected in 2009 with 12,000 hectares in dairy with

13,000 milking cows and 20 cowsheds

• Will continue with its land acquisition programme while the economics of doing so remain

compelling

• To fund further land acquisitions NZFSU will consider raising additional equity
• Diversification of land purchases into neighbouring countries to Uruguay will be considered

where the politics and economics of such a move are warranted and are in shareholders’ interests

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Keith Smith, B.Com, FCA, Chairman

• Chairman of The Warehouse Group Ltd and Tourism

Holdings Ltd

• Director of PGG Wrightson Ltd and Goodman (NZ)

Ltd Murray Flett, B.Com Ag

• Southland-based dairy farmer
• Director of PGG Wrightson Ltd
• Past Director of Fonterra

Sam Maling, LLB, AFInstD

• Chairman of Pyne Gould Corporation Ltd and

MARAC Finance Ltd

• Director of PGG Wrightson Ltd and Perpetual Trust

Ltd. Craig Norgate, BBS, CA, FNZIM

• Managing Director of Rural Portfolio Investments Ltd.
• Inaugural CEO of Fonterra
• Chairman of PGG Wrightson Ltd, a Director of

Westgate Port Taranaki Ltd, Aotearoa Fisheries Ltd, Sealord Group Ltd

Directors

John Parker, B Agr Sc., AMP, Harvard

• Independent NZFSU Director
• Chairman of Port of Tauranga Ltd and C3

Ltd

• Former Deputy CEO of the NZ Dairy Board

David Cushing, B.Com ACA

• Independent NZFSU Director
• Executive Director of New Zealand Rural

Property Trust Management Ltd

• Director Rural Equities Limited, Wakefield

Health Ltd, Red Steel Ltd and H & G Ltd John Roadley

• Independent NZFSU Director
• Dairy Farmer
• Founder of DEXCEL
• Inaugural Chairman of Fonterra

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Key personnel

Barry Brook, Group General Manager South America Barry has recently taken up the position of Group General Manager South America. Barry is responsible for PGG Wrightson’s Farm Management Service Agreement to NZ Farming Systems Uruguay and the other PGG Wrightson’s business operations in South America. Barry was appointed Chief Executive Officer of PGG Wrightson at the time

• f the Wrightson/Pyne Gould Guinness merger and prior to that he had been Chief Executive Officer of Wrightson since 2004. Prior to his appointment as Wrightson Chief

Executive, Barry was General Manager, International. In this role, he was responsible for the Group’s highly successful seeds business, and for its operations in Australia and

• Uruguay. Barry has a Masters of Agricultural Commerce (Hons) Degree and a Diploma in Valuation and Farm Management, both from Lincoln University.

Raphael Secco, General Manager – Operations Raphael is an Agronomist with 24 years of wide-ranging experience in the operation and management of farming businesses in Uruguay. In the early 1990’s Rafael managed the largest dairy operation of Parmalat in the region and he has undertaken and managed successful dairy conversions for European owners. These were the first dairies in Uruguay certified to ISO 9001-2000. Rafael has also managed a farm of 5500 hectares with intensive beef fattening, which was also the first farm of its type in Uruguay to operate to ISO 9001-2000. Mike King, General Manager – Farm Operations Mike holds a Bachelor of Applied Science in Agriculture, Rural Valuation & Management from Massey University, with recognition in academic achievement as a Massey Scholar. He has an extensive background in farm management and consultancy, particularly in dairying and has previously been involved in large scale dairy conversion and beef

• production. He is experienced in the implementation of New Zealand pasture-based systems in South America.

Carlos Miguel de Leon, Chief Executive of PGG Wrightson Uruguay Carlos has been PGG Wrightson’s senior South American executive since 1999. Carlos Miguel has extensive experience in Uruguayan agribusiness. One of the early movers in the trialling of new seed varieties in Uruguay, he was a founder shareholder and director of Semillas PAS, the seed company founded in 1992 that was subsequently to become Wrightson PAS. Carlos Miguel has been chairman of UROPOV (Uruguayan Association for Plant Breeders’ Protection) for the last 5 years and also chairs the Uruguay Seed Chamber. He has been responsible for the development of PGG Wrightson’s successful seed operations from a small base to market leader and has played a key role in the development of NZ Farming Systems Uruguay. Michael Thomas, Group General Manager, Financial Services Michael is the executive in charge of the management contract between the Manager and the Company. Michael holds Ag.Science and M.Econ with Distinction degrees from Adelaide University and UNE respectively, and Graduate Diplomas in Finance and Investment from the Financial Services Institute of Australasia and Ag. Ec from UNE. He joined PGG Wrightson in mid 2007 from Landmark, an Australian market leader in providing products and services to some 100,000 rural clients, where he was the Executive General Manager of Operations and previously of Financial Services. Michael has over 18 years’ experience in corporate agribusiness.

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1 - Overview of NZ Farming Systems Uruguay 2 - Current Soft Commodity Market Dynamics Appendix A – Background Information on Uruguay and Brazil

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Dairy commodity and milk price dynamics

• Uruguayan milk price has more than doubled from

US18 cents per litre to US40 cents in less than a year

• Dairy commodity prices have been trending up since

2002 with particularly strong growth in the past 12 months

• Record prices for all dairy products are due to

changes in underlying structural demand and short- term supply constraints

• Prices are expected to ease over time however

NZFSU believe there has been a fundamental change in the supply/demand balance

Source: USDA

Dairy Commodity Prices in Oceania Uruguay (Conaprole) Payout

1,000 2,000 3,000 4,000 5,000 6,000 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 US$/ metric tonne Butter Whole milk powder Skim milk powder Cheddar

Average Payout (Litre) US cents 1996 19.2 1997 19.1 1998 16.4 1999 14.5 2000 14.9 2001 15.3 2002 11.2 2003 11.8 2004 14.4 2005 16.8 2006 18 2007 23 *2008 40 * Current price

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Key drivers of dairy demand

• Total world production of milk is approximately 657

million tonnes of which 7%, or 46 million tonnes is traded internationally

• International demand for dairy products is expected to

grow by 13 million tonnes of milk on average a year. A significant portion of this is expected to be met by the export market

• Key drivers of dairy demand are:
• Rising income per capita in non-OECD countries
• Urbanisation and the associated changes in diets

and tastes in Asia

• Increasing presence of western retail chains in

Asian countries

• Population growth expanding the consumption

base

• Dissemination of belief in the health benefits of

dairy based products

• Increased oil revenues in Middle Eastern and

South American countries

SOURCE: FOOD AND AGRICULTURE ORGANIZATION OF THE UNITED NATIONS

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Supply side dynamics

• The current supply constraints are expected to

continue in the short-medium term, factors restricting supply include:

• Australian drought
• EU production quotas
• High feed costs in the US (driven by the

demand for bio-fuels)

• Only 7% of worldwide production, or 46 million

tonnes of milk per year, is traded internationally

• South America is well positioned to expand

production to meet this shortfall

EU Stocks of butter and skim powder (2002-2008)

SOURCE: USDA

Global Dairy Commodity Index

SOURCE: USDA

50 150 250 350 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

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1 - Overview of NZ Farming Systems Uruguay 2 - Current Soft Commodity Market Dynamics Appendix A – Background Information on Uruguay and Brazil

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About Uruguay

• Long standing democracy in South America
• Western style country similar in size and population to New Zealand but

less developed. Two thirds of the size of NZ with 11% more farm land

• Economy reliant on agriculture
• Good growth inflation exchange and interest rate fundamentals
• Now less vulnerable to the performance of Argentina and Brazil
• People are well educated and hard working
• Focussed on attracting and protecting foreign investment
• Good farming infrastructure and well developed dairy industry

Uruguay: Forecasts

Source: Business Monitor/Deloitte Source: Business Monitor, Moody’s

Uruguay

Uruguay Nominal GDP (USD millions)

5,000 10,000 15,000 20,000 25,000 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007A 2008F

2005A 2006A 2007A 2008F 2009F Nominal GDP, US$b 16.6 19.3 23.1 28.8 31.8 Population, mn 3.3 3.3 3.3 3.3 3.3 GDP per capita, US$ 5,026.0 5,825.0 6,947.0 8,649.0 9,515.0 Real GDP growth, % change y-o-y 6.6 7.0 7.4 5.8 4.0 Unemployment, % of labour force, eop 12.2 10.9 9.2 na na Budget balance, % of GDP (2.3) (1.4) (1.2) (1.2) (1.4) Consumer prices, % y-o-y, eop 4.9 6.4 8.5 7.2 6.3 Exports, US$bn 3.9 4.8 5.7 na na Imports, US$bn 3.4 4.0 4.5 na na Trade balance, US$m (10.6) 10.0 (38.7) na na Current account, US$bn 0.0 (0.4) (0.2) (0.5) (0.7) Current account, % of GDP 0.3 (1.9) (0.8) (1.6) (2.0) Forex reservces (- gold), US$bn 3.1 3.1 4.1 4.8 5.5 Foreign debt, US$bn 11.4 10.6 12.2 12.8 13.5

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Uruguayan dairy industry

• The dairy industry is Uruguay’s seventh largest exporter
• The Uruguayan dairy industry has good infrastructure and a

similar co-operative structure to New Zealand

• Strongly concentrated industry, with two companies receiving

around 80% of milk production and accounting for 75% of the sector’s exports

• Conaprole is Uruguay’s largest company. It pays for milk

straight away and suppliers do not have to invest in it to supply

• 98% of domestic consumption is satisfied through domestic
• production. Exports accounted for 70% of production in 2006.

The industry’s growth has been export-led

• 1.4bn litres of milk exported in 2006
• Milk supply has grown at a compound annual rate of 5% over

the last 20 years

Exports per product Export markets Dairy product exports (USD m)

Source: Uruguay Ministry of Agriculture Milk powder 45% Cheese 24% Butter 12% UHT milk 18% Source: Uruguay Ministry of Agriculture Others 36% Argentina 1% Brazil 14% Mexico 21% Venezuala 22% USA 6% Source: Deloitte

278 156 125 129 126 140 189 245 100 200 300 1999 2000 2001 2002 2003 2004 2005 2006 Milk powders Cheese Butter Long life milk Other 1999-2006 CAGR = 8.5%

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About Brazil

• One of the four major economies emerging as a key future driver
• f global economic growth
• Moderate free market and export orientated economy, currently

the tenth largest economy in the world and the largest in South America

• Agriculture is estimated to represent 10% of Brazil’s GDP with key

exports being sugar, coffee and also beef and poultry (of which it is the world’s second largest producer)

• Main trade partners are the EEC (26%), US (24%), Latin America

(21%) and Asia (12%)

Brazil: Forecasts Brazil Nominal GDP (USD billions)

Source: Economist Intelligence Unit, Bloomberg Source: Economist Intelligence Unit

Brazil 2005A 2006A 2007A 2008F 2009F Nominal GDP, US$b 881.8 1,072.1 1,313.7 1,630.7 1,677.7 Population, mn 181.6 184.2 186.8 189.3 191.9 GDP per capita, US$ 4,790.0 5,740.0 6,940.0 8,500.0 8,630.0 Real GDP growth, % change y-o-y 3.1 3.7 5.4 4.6 4.0 Unemployment, % of labour force, eop 9.8 10.0 9.3 9.0 8.9 Budget balance, % of GDP 1.6 1.3 0.1 (0.8) (0.5) Consumer prices, % y-o-y, eop 5.7 3.1 4.5 5.0 4.3 Exports, US$bn 118.3 137.8 160.6 183.2 199.7 Imports, US$bn 73.6 91.4 120.6 153.6 171.6 Trade balance, US$bn 44.7 46.5 40.0 29.6 28.1 Current account, US$bn 14.0 13.6 1.5 (13.3) (9.2) Current account, % of GDP 1.6 1.3 0.1 (0.8) (0.5) Foreign debt, US$bn 187.3 192.1 223.9 221.1 225.3

200 400 600 800 1,000 1,200 1,400 1,600 1,800 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

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Brazilian dairy industry

• Brazil’s dairy industry is widely viewed as having immense

growth potential, due to vast tracts of undeveloped land

• Milk production is rapidly increasing in Brazil, however it is

viewed as inefficient, as milk production per cow is low relative to other dairying nations

• Brazil’s southern regions are the key source of milk production,

with conditions that are the most similar to New Zealand

• The southern region is also close to NZFSU’s existing
• perations, has an optimal climate and has the most limited

potential for social unrest

• Approximately half of Brazil’s milk production originates from

very small farms

Dairy market (USD m)

Source: Datamonitor Source: USDA

Brazilian milk powder production (000 tonnes)

100 200 300 400 500 600 98 99 00 01 02 03 04 05 06 07 08F CAGR = 8.3% 5,000 10,000 15,000 20,000 25,000 30,000 03 04 05 06 07 08F 09F 10F 11F 12F 03 - 07 CAGR = 8.0% 07 - 12 CAGR = 6.9%