2
Montevideo, 29th June 2016
The objective of the present report is to expose the results of the company valuation
process held for LORSINAL S.A., Abattoir in Uruguay, considering company’s financial
information, management statements and actual macroeconomic information.
In order to determine the value of the company, professional practices of major acceptance
in the matter where considered, being trading and transaction multiples, based on market
information, and Discounted Cash Flow model (DCF).
Within the market approach two methods were used: Comparable Trading Analysis, and
Acquisition Comparable Analysis. Strengths and weaknesses of each of these methodologies
are exposed in the report.
The DCF methodology considers future cash flows of the company, regarding operating and
financial situation for the next ten years at its present value, at a discount rate that reflects
the risk involved in the market and this particular business.
There is not a unique value for a firm, so we express the results of our analysis within a range
of probable values for LORSINAL S.A.
Acc. Virginia André Carriquiry
Partner
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AUREN has not audited or independently verified the information and numbers within this
presentation. They are included exclusively for informative purposes. AUREN makes no
declaration or guarantee regarding the accurancy, veracity or integrity of these information.
AUREN does not assume any responsability over the statements (explicit or implicit) contained
in, or for any omission incurred in this Valuation Report.
This document contains forward looking statements which reflect the current expectations of
management regarding future growth, results of operations, performance and business
prospects and opportunities. Wherever possible, words such as “may”, “would”, “could”, “will”,
“anticipate”, “believe”, “plan”, “expect”, “intend”, “estimate” and similar expressions have
been used to identify these forward looking statements. These statements reflect
management’s current beliefs with respect to future events and are based on information
made available to LatAm Value Partners Ltd. by the Frigorifico Lorsinal S.A. and the companies
of Sundiro Holding Co. LTD. as described below.
Forward looking statements involve significant known and unknown risks, uncertainties and
assumptions. Many factors could cause actual results, performance or achievements to be
materially different from any future results, performance or achievements that may be
expressed or implied by such forward looking statements including, without limitation, those
risk factors listed in the document. Should one or more of these or any other risks or
uncertainties materialize, or should assumptions underlying the forward looking statements
prove incorrect, actual results, performance or achievements could vary materially from those
expressed or implied by the forward looking statements contained herein. These factors
should be considered carefully and prospective investors should not place undue reliance on
these forward looking statements. Although the forward looking statements contained in this
document are based upon what management currently believes to be reasonable
assumptions, prospective investors cannot be assured that actual results, performance or
achievements will be consistent with these forward looking statements. These forward looking
statements are made as of the date of this document and neither Frigorifico Lorsinal S.A.,
Sundiro Holding Co. LTD. nor LatAm Value Partners Ltd. assume any obligation to update or
revise.
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5
Sundiro Holding Co. LTD. (“SUNDIRO”) and LatAm Value Partners Ltd. (“LAVP”) have
come together with the objective of acquiring 100% of the equity capital of Frigorifico
Lorsinal S.A., owned by Mr. Roberto Perez.
This report presents the valuation assessment resulting in the estimated Enterprise
Value of Lorsinal Beefpacking operations.
The valuation was based on the use of two techniques, the “market approach” relying
on trading multiples of public companies and transaction multiples and the Discount
Cash Flow model.
While the estimated EV ranged from US$ 25 MM up to US$ 57 MM, the Mean value
resulted in US$ 33.3 MM.
Mean Value =
33,3
Transaction Multiples (Pure Comparables) 26.5 45.4
Transaction Multiples (All Comparables) 26.4 45.3
Trading Multiples (incl. BRF) 33.3 57.0
Trading Multiples (excl. BRF) 28.8 49.3
Discounted Cash Flow 25.1 34.7
20 30 40 50 60
6
We have decided to use two different analytic techniques to value Lorsinal: the market
approach through trading and transaction multiples and the Discounted Cash Flow model
(DCF). Each method has its strengths and weaknesses and a combination of both provided
insights to us, not obtainable from a single technique.
On the other hand, the “market approach” invokes the law of one price, according to which
identical assets must have identical prices. In practice, we estimated the value of Lorsinal by
observing prices paid for similar companies. Within the market approach we used two
methods: (a) Comparable Trading Analysis (allows for relative comparisons between similar
companies); and (b) Acquisition Comparable Analysis (allows for relative comparisons
between similar transactions).
We believe the market approach has several strengths. It is very objective, since the market
and not the buyer and sellers views of the future, is the one driving the estimated value.
Therefore, it embodies market consensus about discount rates and growth rates, allowing for
direct comparison to true and actual market evidence.
One of the main weaknesses of the market approach is that it may be difficult to find
comparable companies or transactions. However, we believe that we were able to identify a
set of publicly-traded firms and pure comparable transactions that resemble closely Lorsinals
operations, business and economic environment.
Within the market approach we decided to use the Enterprise Value/EBITDA multiple because
of the following reasons:
– Gives a more consistent treatment of leverage; where companies with different
leverages will have different P/E multiples, even though they will have same business
risks and growth trendlines.
– While through accounting net earnings multiples can be easily manipulated, EBITDA
Multiples limit discretion.
The underlying concept behind the use of the DCF model is that Lorsinal will create a stream
of future benefits (cash flows) for SUNDIRO and LAVP, with its value simply being the present
value of the projected future stream, considering a discount rate according to the industry.
The key strength of the DCF approach was that it forced us to explicitly forecast the operating
and financial nature of the upcoming 10 years, by means of which we carefully analyzed a
wide array of issues critical to Lorsinals internal and external environments. On the
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downside, the forecast is set on a myriad of assumptions, where relatively small variations in
some assumptions may change significantly the value stream.
Assumptions implied in forecasted cash flows were defined by SUNDIRO and LAVP,
considering their knowledge of the company under analysis, the industry and the economic
environment.
We found a set of three public companies (Marfrig Global Foods, Minerva S.A. and JBS S.A.)
that meet three key “comparable factors” that were identified as critical for comparability
purposes: (a) The firms should operate in the Meat Protein sector with a defined focus on
beef; (b) Operations should be mainly in South America, and (c) should hold a diversified
worldwide customer base.
A fourth company (BRF –Brazilian Foods) was also included as a comparable firm since,
although it is not focused on beef, it still meet the three factors, and most importantly
resembles the downstream operating model of the target once integrated into SUNDIRO’s
worldwide operations.
Stock Geographic
Name Description
Exchange Scope
Engaged in the processing and distribution of meat. The
Company's activities are divided into 2 operating
segments: Marfrig Beef and Keystone. The Marfrig Beef
segment is responsible for the slaughter, manufacture, Key
distribution, import, export and marketing of beef and operations in
Marfrig lamb meat. The Keystone division focuses on producing Brazil,
Global SAO PAULO and developing multi-protein foods to serve global Uruguay, and
Foods restaurant chains, including McDonald's, Subway, Argentina.
ConAgra Foods, Campbell's Soup, KFC, Taco Bell,
Wendy's, Heinz, and Burger King, among others. It
retails meat under a range of brand names, such as
Pampeano, La Morocha, Montana, Hamby, Bernina,
Bassi, GJ, Angus, South Lamb, as well as Tacuarembo.
Engaged in the slaughtering of livestock and processing of
meat, the sale of chilled, frozen and processed meats, and the Key operations
exporting of live cattle. The Company's industrial facilities have in Brazil,
Minerva a daily slaughtering capacity of approximately 17,330 head of Uruguay,
SAO PAULO
SA cattle and daily beef deboning capacity equivalent to over Paraguay and
20,320 head of cattle. The Company operates approximately Colombia.
17 slaughter and deboning plants, one processing unit and over
13 distribution centers.
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Processes and sells beef, lamb, and poultry products in Brazil
and internationally. The company offers ready-to-eat meal,
super chilled, cooked meat, individually quick frozen products,
portioned cuts for school meals, industrial kitchens, butchers,
supermarkets, restaurants, hotels, distributors, and consumer
markets under the Swift and Friboi brands. It also provides
various food products, including ready meals, margarines and Key operations
patés, super chilled and breaded products, and fresh products, in Brazil,
JBS SA SAO PAULO as well as ham, salami, mortadella, sausages, and other Uruguay,
processed meat products under the Seara, Fiesta, Doriana, Paraguay and
Rezende, LeBon, Frangosul, and other brands. In addition, the USA and
company produces and sells leather for automotive, furniture, Australia.
footwear, and leather goods industries. Further, it
manufactures and supplies casing materials for the processed
meat industry to make items, such as salami, sausages, and
hot dogs; produces biodiesel based on animal fat; offers bovine
collagen,
Focuses on the production and sale of poultry, pork and
processed foods. The Company produces fresh and frozen
protein foods, with a portfolio of over four thousand stock Key operation
keeping units. It sells margarine, sweet specialties, in Brazil and
sandwiches, mayonnaise and animal feed. The Company holds Argentina.
brands, such as Sadia, Perdigao, Qualy, Chester, Perdix and
Patty. In the domestic market, it operates approximately 35
BRF S.A SAO PAULO meat processing plants, three margarine processing plants,
three pasta processing plants, one dessert processing plant
and three soybean crushing plants. It is involved in the
production and sale of whole poultry and in-natura cuts. It is
involved in the production and sale of frozen and processed
products derived from poultry, pork and beef and other
processed foods, such as margarine and vegetable and
soybean-based products.
Name Market Cap* P/E Ratio*
Marfrig Global Foods 912.30 MM NA
Minerva SA 711.25 MM NA
JBS SA 7.04bn 5,42
BRF S.A 10.86bn 15,69
* May 2016
Based on the trading multiples of the selected companies we estimated the range EV value of
Lorsinal creating 6 different scenarios:
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(I) Using the 2008-2015 EV/EBITDA average of Minerva, Marfrig and JBS (excluding BRF)
and combining that with Lorsinals 3-year (I.1), 5-year (I.2) and 8-year (I.3) EBITDA
average.
(II) Using the 2008-2015 EV/EBITDA average of Minerva, Marfrig, JBS and BRF and combing
that into Lorsinals 3-year (II.4), 5-year (II.5) and 8-year (II.6) EBITDA average.
Minerva Marfrig JBS BRF
2008 6.20x 11.04x 17.86x
2009 9.09x 8.52x 11.79x 14.15x
2010 8.45x 10.11x 16.36x 23.36x
2011 7.48x 7.04x 8.62x 12.95x
2012 7.07x 7.06x 10.89x 13.77x
2013 6.97x 9.29x 8.13x 17.46x
2014 6.74x 8.70x 7.40x 15.27x
2015 7.45x 8.68x 6.66x 13.94x
2008-2015 average 7.43x 8.81x 10.96x 15.84x
I. Lorsinal EV: Excluding II. Lorsinal EV:
Trading Multiple
BRF Including BRF
average
million dollars million dollars
Excluding Including 3-yr 5-yr 8-yr 3-yr 5-yr 8-yr
BRF BRF [I.1] [I.2] [I.3] [II.4] [II.5] [II.6]
2008 11,70x 37,1 36,8 63,7
2009 9,80x 10,89x 31,1 30,8 53,3 34,6 34,24 59,23
2010 11,64x 14,57x 36,9 36,6 63,3 46,2 45,81 79,26
2011 7,71x 9,02x 24,5 24,2 42,0 28,6 28,36 49,07
2012 8,34x 9,70x 26,5 26,2 45,4 30,8 30,50 52,76
2013 8,13x 10,46x 25,8 25,6 44,2 33,2 32,89 56,90
2014 7,61x 9,53x 24,2 23,9 41,4 30,2 29,96 51,83
2015 7,60x 9,18x 24,1 23,9 41,3 29,1 28,87 49,95
2008-15
9,07x 10,48x 28,78 28,51 49,32 33,26 32,95 57,00
average
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We complemented the trading multiples valuation with the assessment of comparable
transactions. We screened the market place identifying 7 transactions that fulfill three key
factors needed to meet the “comparability” definition: (a) Should operate in the Meat Protein
sector (b) the Americas should the geographical location of the targets operations, and (c)
the transaction had to occur within a 10-year timeframe to trail as much as possible the
current economic and supply-demand conditions. We then refined down the list to a group of
4 transactions that meet the “pure comparability” definition whereby the main business line
of the target has to be “beef”.
Date Target Country Acquirer Business Line EV/EBITDA
set-13 Carrasco UY Minerva Beef 5.3x
may-13 Smithfield US H. Shineway Pork 9.2x
mar-11 Pulsa UY Minerva Beef 4.8x
set-09 Seara BR Marfrig Pork, poultry, 7.0x
set-09 Bertin BR JBS Beef 12.3x
may-09 Sadia BR Perdigao Pork & Poultry 8.9x
nov-07 Quickfood AR Marfrig Beef 11.0x
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Company
Description
Name
At the time of the purchase, Frigorífico Carrasco was a local family- owned
corporation based in Uruguay. The firm owns a processing and cattle slaughter
(~1000 head/day) plant in Montevideo, and has prominent brands in the domestic
Carrasco and international markets. 2013 Revenue was approximately $140 million, with the
domestic market accounting for one third of total sales. The main export markets
were the EU, China, Israel and NAFTA countries, among others.
At the time of the sale, Smithfield was a publicly-traded US Corporation with +US$
Smithfield 13 Bn in Revenues. It is a hog producer and pork processor marketing fresh and
packaged meats products domestically and across the world. The Company
conducts operations through 4 segments: Fresh Pork, Packaged Meats, Hog
Production and International. The first 3 segments are US-based operations. The
International group comprises its meat processing and distribution operations in
Poland, Romania and the UK, interests in meat processing operations in Western
Europe and Mexico, hog production in Poland and Romania, and interests in hog
production operations in Mexico.
At the time of the acquisition, PULSA was owned by a Brazilian entrepreneur (Mr.
Correa). The facility was a 1000-head/day abattoir in the Province of Cerro Largo
(Uruguay). The company has long track record on producing high quality beef from
PULSA grass-fed Angus and Hereford cattle, targeting both the domestic and international
customer base. It also has some value-added programs such as Organic beef mainly
targeting the US market.
At the time of the transaction Seara Alimentos Ltda was owned by US Cargill
Corporation and was one of Brazil's largest meat processors producing frozen,
refrigerated, pre-cooked, and processed chicken and pork for the worldwide retail
SEARA and wholesale food and foodservice markets. Its products include whole chickens,
chicken cuts, sausage, pork smoked ham, cold cuts, salami, hot dogs, and frozen
entrees. The company also operates a port terminal that has refrigerated-meat
warehousing capacity.
At the time of the sale, Bertin was a leading Brazilian cattle slaughterer and exporter
with operating units in Brazil, Uruguay, Paraguay and China, and exporting to more
than 110 countries. Its production capacity was 16,450 head of cattle a day. Its
Bertin products included raw and processed beef, leather, cleaning products, personal
protective equipment, and dog toys. Established in 1977, Bertin operates 38
production units and employs 28,000 people, selling under several nationwide well-
known brands — Bertin, Vigor, Leco and Danúbio.
At the time of the purchase the firm was one of Brazil's largest pork, poultry, and
beef processors supplying +70,000 domestic and 200 export customers. It
produced more than 1.3 million tons of protein-based offerings, including processed
Sadia foods (frankfurters and sausages), as well as frozen convenience foods (such as
hamburger patties, pizzas, and ready-to-eat meals). The company's other products
include frozen desserts, pasta, and margarine.
Argentina-based company engaged in the food processing sector, specialized in the
manufacture and commercialization of beef and pork products under the Paty,
Quickfood PatyViena, Faty and ICB brand names, among others. Its product portfolio includes
hamburgers, Frankfurter sausages, cold cuts and frozen vegetables. The Company
supplies mainly supermarkets, retailers and fast-food restaurants.
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Based on the transaction multiples of the selected companies we estimated the range EV
value of Lorsinal creating again 6 different scenarios:
(I) Using the average EV/EBITDA multiple of the 7 “comparable firms” and combining it with
Lorsinals 3-year (I.1), 5-year (I.2) and 8-year (I.3) EBITDA average.
(II) Using the average EV/EBITDA multiple of only the 4 “pure comparable transactions” and
combing that with Lorsinals 3-year (II.4), 5-year (II.5) and 8-year (II.6) EBITDA average.
I. Lorsinal EV
Transaction Multiple
million dollars
Target [all companies] [EV/EBITDA] 3-yr [I.1] 5-yr [I.2] 8-yr [I.3]
Carrasco 5.30x 16.8 16.7 28.8
Smithfield 9.17x 29.1 28.8 49.9
PULSA 4.80x 15.2 15.1 26.1
Seara 7.00x 22.2 22.0 38.1
Bertin 12.30x 39.0 38.7 66.9
Sadia 8.90x 28.2 28.0 48.4
Quickfood 11.00x 34.9 34.6 59.8
Average 8.35x 26.5 26.26 45.44
Transaction Multiple II. Lorsinal EV
million dollars
Target [Beef companies] [EV/EBITDA] 3-yr [II.4] 5-yr [II.5] 8-yr [II.6]
Carrasco
5,3x 16,8 16,7 28,8
PULSA
4,8x 15,2 15,1 26,1
Bertin
12,3x 39,0 38,7 66,9
Quickfood
11,0x 34,9 34,6 59,8
Average
8,35x 26,50 26,26 45,43
13
In order to determine Lorsinal’s value by the DCF methodology, free cash flows should be
forecasted, considering assumptions described below.
These future benefits, and the residual value, discounted by the required rate of return for
investors (cost of equity) results on the company’s value.
FREE CAPITAL
CASH FLOW
DISCOUNTED BY
THE REQUIRED RESIDUAL FIRM MARKET
RATE OF RETURN VALUE VALUE
FOR INVESTORS
(Cost of Equity)
Relatively small variations in assumptions to be described below may change significantly
the value stream. Regarding this fact, three different scenarios are considered in order to
provide a range of possible values for Lorsinal by this methodology. The assumptions and
P&L presented below correspond to the Base scenario, although in order to provide the range
referred above a Pessimistic and an Optimistic scenario is considered.
Business plan assumptions (Base scenario):
Parameter Comments
Revenue drivers
+ The current base 2015 number corresponding to 234 head/day (60%
operating level*) is forecasted to increase to a maximum of 425
head/day in a 3-year period taking the operating level to 85%.
Production levels: + The phase-out increase in slaughter levels considers the need to slowly
Daily Slaughter expand the cattle supplies while strengthening the brand of the new
owners.
+ The annual projected slaughter will be scaled from 61,000 up to
110,500 on that same period, expanding Lorsinals slaughter share
from 3 to 5%.
+ Lorsinals will continue to supply more than 30 countries worldwide
including the Uruguayan and Chinese markets.
Sale Prices + Since the average price is decomposed in more than 300 items to be
supply to +30 markets (~900 possible price combinations), we
understand it is factually impossible to predict the supply/demand
forces driving those prices across the globe.
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Parameter Comments
+ Therefore, the current base 2015/16 mean price is adjusted following
the projected USCPI index.
+ We use Deloittes projections at 1.5% for 2017 and 2% from 2018
USA CPI Index and onwards.
Costs & Expenses
Steer-to-Cow + 75% steers and 25% [based on 2011-2015 average]
slaughter share
+ Starting point is set at US$ 1.82 and 1.54 /kg liveweight for steers and
cows, respectively.
Liveweight Prices + Since projecting cattle prices it not a realistic exercise we set them to
track gross margin target levels.
Slaughter + 520 kgs-steer and 458 kgs-cow [based on 2011-2015 average].
Liveweight
Dressing yields + 54%-steer and 49%-cow [based on 2011-2015 average].
+ The current base 2015 number corresponding to 278 variable labor
force is adjusted as a function of slaughter to 505 employees in 2019.
Fixed labor head count is 107 in 2015 and remains at that level.
Labor + Salaries are paid in pesos and adjusted by local Salary Index (IMS)
projections made by Deloitte. Cost in pesos is translated into US$ by
FX projections that assume an average annual 8% devaluation during
the period under consideration.
Working Capital
Receivables,
Payables and + Days sales outstanding are set at 30 days, Payables at 39 days and
Inventory Inventory (measured in COGS days) at 30 days.
Operating working + Operating working capital results in 6% of the annual revenue, growing
capital levels from US$ 5.7 MM up to US$ 9.6 MM.
+ Interest rate on short-term working capital lines is set at 4.75%.
* Operating level = Actual Slaughter/Slaughter capacity
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Business plan Projections:
Projected P&L (Base scenario)
set-17 set-18 set-19 set-20 set-21 set-22 set-23 set-24 set-25
Revenues 97,8 116,4 144,1 147,0 150,0 153,0 156,0 159,1 162,3
Costs
Livestock 74,1 89,2 111,4 113,9 116,4 119,0 122,0 124,5 126,9
Comission 0,4 0,5 0,6 0,6 0,6 0,6 0,6 0,6 0,6
Freight 1,2 1,3 1,6 1,6 1,6 1,6 1,6 1,6 1,6
Total livestock,
% Revenue 77,3% 78,2% 78,9% 79,0% 79,1% 79,2% 79,6% 79,6% 79,6%
Labor 7,4 7,9 9,0 8,9 8,9 8,9 9,0 9,2 9,4
Production
Costs 4,5 5,4 6,7 6,8 6,9 7,1 7,2 7,4 7,5
Commercial. 2,2 2,6 3,2 3,3 3,3 3,4 3,5 3,5 3,6
Others 2,0 2,4 3,0 3,0 3,1 3,2 3,2 3,3 3,4
Total Costs 91,7 109,2 135,5 138,1 140,9 143,7 147,1 150,1 153,1
EBITDA 6,1 7,1 8,7 8,9 9,0 9,2 8,9 9,1 9,3
EBITDA Margin 6,2% 6,1% 6,0% 6,1% 6,0% 6,0% 5,7% 5,7% 5,7%
Depreciation 0,65 0,86 0,86 0,86 0,86 0,86 0,86 0,86 0,86
EBIT 5,44 6,28 7,82 8,09 8,18 8,36 8,04 8,23 8,42
Interests 0,87 0,78 0,65 0,41 0,42 0,43 0,44 0,45 0,45
PBT 4,57 5,50 7,16 7,68 7,76 7,93 7,61 7,78 7,96
Taxes 1,14 1,38 1,79 1,92 1,94 1,98 1,90 1,95 1,99
Tax rebate
Net Income 3,43 4,13 5,37 5,76 5,82 5,95 5,70 5,84 5,97
Net Income, % 3,5% 3,5% 3,7% 3,9% 3,9% 3,9% 3,7% 3,7% 3,7%
500 85% 85% 85% 85% 90%
85% 85%
85%
400 425 425 425 425 425 425 80%
350 425
300
300 70% 70%
234
200 60% 60%
100 50%
47%
0 40%
2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026
Slaughter, head/day Operating Level, %
16
200 35%
162 166
156 159 30%
29% 150 153
160 144 147
25%
24%
116
120
98 20%
19%
76 15%
80
10%
40
2% 2% 2% 2% 2% 2% 5%
2%
0 0%
2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026
Revenue, MM US$ Annual Revenue growth
10,0 8,9 9,0 9,2 9,1 9,3 6,5%
6,1% 8,9
8,7
6,2%
8,0 5,7% 6,0%
7,1 6,0%
5,5% 6,0% 6,1%
6,1 6,0%
6,0 5,5%
4,2
4,0 5,0%
2,0 4,5%
0,0 4,0%
2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026
EBITDA, MM US$ EBITDA Margin, %
17
9,6 9,8
10,0 9,2 9,4
8,9 9,0
8,5 8,7
8,0
6,9
5,8
6,0
4,0
2,0
0,0
2017 2018 2019 2020 2021 2022 2023 2024 2025 2026
Working Capital, MM US$
Discount Rate:
The discount rate is determined applying the Capital Asset Pricing Model (CAPM), adapted
to Emerging Markets, where:
Ke= rf + βL * (Rm – rf) + IP rf = Expected Risk Free return (US Treasury 10Y)
βL = Unlevered Beta (Specific Risk of the Project: Sector
of activity, operative leverage) – Aswath Damodaran
Rm = Return of the market
(Rm – rf) = Risk premium of market assets
IP = Ibbotson Premium (captures the resulting high
correlation between the returns in case of SMEs due
to high transaction costs, illiquidity and limited
information)
18
Considering Lorsinal, the Discount rate is calculated below.
LORSINAL Average 2016 2017 2018 2019 2020 Rest (for
(5 first years) Residual Value)
Expected Risk Free return (Rf) 2,69% 1,74% 2,24% 2,74% 3,24% 3,50% 4,50%
Beta Food processing 0,74 0,74 0,74 0,74 0,74 0,74 0,74
Greater Growth Volatility 0,30 0,30 0,30 0,30 0,30 0,30 0,30
Adjusted Beta 1,04 1,04 1,04 1,04 1,04 1,04 1,04
Market Return 4,9% 3,91% 4,41% 4,91% 5,41% 5,67% 6,7%
Uruguayan higher risk Premium 1,4% 0,5% 1,0% 1,5% 2,0% 2,0% 2,50%
Adjusted Market Return (Rm) 6,3% 4,4% 5,4% 6,4% 7,4% 7,7% 9,2%
Liquidity Premium (IP) 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0%
Long Term Premium (IP) 0,0% 0,0% 0,0% 0,0% 0,0% 0,0% 2,0%
Discount Rate 7,4% 5,5% 6,5% 7,6% 8,6% 8,8% 12,4%
Terminal Value:
Perpetuity is calculated by considering the discount rate defined above, and a business
annual growth rate of 2%.
Lorsinal’s EV:
As follows, three scenarios were defined in order to provide a range of probable EV for
Lorsinal. Assumptions exposed above are to be considered in all scenarios, except for the
Daily Slaughter that varies as exposed below.
Parameter Comments
+ Base scenario: Slaughter levels are smoothly increased from 234
head/day in 2015/16 up to 300 head/day (2017), 350 head/day
(2018) and 425 head/day onwards.
+ Pessimistic scenario: Slaughter levels are increased from 234
Production levels: head/day in 2015/16 to 250 head/day (2017), 300 head/day (2018),
Daily Slaughter 350 head/day (2019), 400 head/day onwards.
+ Optimistic scenario: Slaughter levels are rapidly scaled from 234
head/day in 2015/16 to 350 head/day (2017), 375 head/day (2018),
400 head/day (2019), 425 head/day (2020) and 450 head/day
onwards.
19
Optimistic 34.7
Pessimistic 25.1
Base 30.9
0,0 10,0 20,0 30,0 40,0
20
Lorsinals plant is strategically located within a 250-km radius of two of the largest cattle
producing regions of the country, and only 30 km from the main ocean export gateway.
The plant was fully repurposed and upgraded in 2002, previously it was a cold-cuts facility.
Lorsinal is a top financial performer relative to industry peers.
The facility holds abundant frozen storage capacity (2,980 tons) and carton freezer.
Lorsinal has been fully focused on targeting the export markets being approved to export
to all key markets such as China, HK, EU, South Korea, Russia, the African Continent,
USA, Mexico, Canada, Israel, all Central & South American nations, being Japan the only
market pending to gain access.
Profile
Production
Species Cattle
Total Area 31 hectares
Built Area, m2 11,151
Slaughter Capacity, daily (heads) 500
Slaughter capacity, Heads/hour 60 cattle
Deboning capacity (Q/hr) 125
Ageing Capacity 500
(carcass/day, 36hrs)
Ageing Chambers and total carcass capacity 4 chambers holding 1,000 carcasses
Frozen tunnels capacity (tons/day) 100 tons (carton freezer)
Final product capacity (tons) 2,980
Quality Assurance programs SSOP'S, GMP, HACCP, PCNCU
Profile
Commercial & Personnel
Cattle Direct Sourcing, % 58%
% Steers / total Slaughter 75%
21
Export, % of total sales 83%
Export markets (fresh beef) All destinations except Japan
Tariff Rate Quotas (type and volume) 281 tons Hilton (2015/16) and 851
tons (USA)
Value added portion-controlled line (under
and 851 USA (2015)
construction) and Kosher
Branding Lorsinal SA-EcoMeat
N° of Employees 385
Slaughter, 000 heads Revenue, MM US$
74,2
85,6 80,6
61,8 60,8 76,8
56,6 55,8
70,8 75,8
2011 2012 2013 2014 2015 2011 2012 2013 2014 2015
EBITDA Margin EBITDA Margin (average
2008-14)
16,36%
8,4%
14,10%
13,4% 9,07%
4,2%
5,34% 5,49%
2,82%
Lorsinal Industry Average
22
Lorsinal was incorporated as a Uruguayan corporation with bearer shares, entitling each
holder to one vote; with 100% of the shares belonging to 1 Uruguayan citizen, Mr. Perez
Paternoster.
The Company sells its products in different export countrires and the domestic market. In the
last 5 years, exports and domestic sales accounted for an average of 85% and 15% of the
sales revenue, respectively.
Its business drive is to provide greater value to its customers by offering products with higher
quality than the average local industry, a variety of cuts, better packaging and a superior
service. Therefore, the Company places special emphasis in the quality and type of animals
slaughtered to produce its products, as well as in customer service relationships.
The Company offers a variety of beef products, which include all types of cuts, and that may
be classified in 5 major categories: (i) Fine cuts, (ii) Boneless forequarter cuts, (iii) Boneless
hindquarter cuts, (iv) Offal, (v) Beef byproducts (hides, tallow and bones).
a. International Markets
The Company exports its products through wholesalers and brokers to different countries.
The most important export destinations are China, the European Union, the United States,
Brazil, Venezuela, and Israel. While Russia has been the main destination in terms of exported
volumes for many years, the European Union has been the primary source of exports revenue
due to higher prices for the Hilton and 481 quotas. In the last 3 years, China has become a
prominent destination, sourcing bone-in frozen rib plate, offal and byproducts, and it is
particularly paying higher prices for offal than other markets. The Company has been assigned
a quota of about 851 tons to USA and 281 tons of Hilton quota for 2015 year, as well as
exporting high quality 481 quota to the European Union (481 quota allows to sell 17 cuts
unlike Hilton quota, which only allows 3 cuts). The 481 quota is allocated to European
importers for the purchase of high quality cuts from only 6 countries in the world: Uruguay,
Australia, New Zealand, USA, Canada, and very recently Argentina. In 2012, importers were
allocated 45,975 tons of 481 quota beef, since 2013 the quota has remained at 48,200 tons.
The high quality quota is basically a quota of feedlot-finished animals, which must meet
certainl production requirements. In 2010, Lorsinal invested and obtained authorization to
export Kosher beef-cuts to Israel. Currently, when the Company slaughters to export to Israel,
processes and cuts are certified by an intermediate Kosher certification in order to gain access
to a wider market. The season for this market is from April to September.
23
2012 Exports 2013 Exports
Others;
Others; China; 864 ; 10% China;
542 ; 6% 658 ; 7% Venezuel 1.540 ;
a, 1.923,0 17%
Venezuela; USA; 595 , 22%
2.246,9 ; ; 6%
23% USA; 490
Russia; ; 5%
Israel; 140 ; 2%
Russia; 2.343 ;
1.011 ; 25% Brazil; Israel;
11% 156 ; 2% 2.087 ;
Brazil; EU; 1.893 EU; 1.623 24%
243 ; 2% ; 20% ; 18%
Others;
Others; 2014 Exports 1.163 ; 2015 Exports
1.374 ; Russia; 13%
12% 328 ; 4%
China;
Venezuel 3.023 ;
a; 1.322,0 27% China;
; 12% 4.091 ;
Brazil;
118 ; 1% 47%
Russia;
713 ; 6% USA;
1.152 ;
10% EU; 1.161
Brazil;
; 13%
363 ; 3%
Israel; Israel; USA; 648
1.838 ; 1.279 ; ; 7%
EU; 1.525 16% 15%
; 14%
b. Domestic Market
Sales in the domestic market are carried out mainly through supermarket chains or other
distributors. The Company’s main customers are 2 of the largest national retail chains as well
as several distributors that reach the capital city and the rest of the Provinces. The Company
uses the brand name Lorsinal S.A.-Eco Meat in the local market.
24
a. Location
The Company operates a plant in the province of Montevideo, located 22 kilometers from
Montevideo’s ocean port. The structure was originally built in 1982 and has a total floor area
of 11,155 square meters on a plot of 31 hectares. It has excellent access routes, both from
the countryside and the port, which are fundamental for the company’s export activity.
Lorsinal has consistently invested in the plant, making it one of the most modern plants in
the country as of today. It has cutting-edge chilling equipment and has recently inaugurated
an automatic storage facility. The floor is made of waterproof, non-slip concrete. It has
automatic doors, and the entire lighting is electrical. The plant has been approved and
certified by national authorities (MGAP – Ministry of Livestock, Agriculture and Fisheries and
DINAMA, National Environmental Agency). The plant has sanitary filters in all entrances
(Slaughter, manufacture, plant). In 2010, among other investments, Lorsinal expanded the
deboning room and the storage for packaging materials, and also developed a Kosher
salting chamber to enter the Israeli market. In 2013, Lorsinal inaugurated an automatic
frozen meat storage facility, with capacity for 1,280 tons, and a Kosher-salting chamber for
red offal. In the present, a portioning room for high-quality cuts was recently built.
Moreover, the company has just completed a set of investments deployed to enhance
environmental security as well as improving animal welfare, totalizing + US$ 2.5 MM.
b. Deboning and Slaughtering Capacity
Since the beginning of its operations, Lorsinal has continuously invested in its plant, having
today a daily slaughtering capacity of 500 heads of cattle in a single shift of 8 hours, and a
daily deboning capacity of 500 heads in two shifts of 8 hours.
25
Shift / # of Shift / # of
Slaughtering Deboning
hours per hours per Area (m2)
Capacity Capacity
shift shift
500 1/8-9 500 2/8-2009 11,155
Considering that the company normally operates 5 days a week, its slaughter capacity
amounts to 130,000 heads a year. This capacity is considerably higher than the present
slaughtering levels of 61,000 animals, which would enable increasing slaughtering and
deboning significantly without the need of expanding its facilities (during high seasons, idle
capacity is less). If necessary, the Company could expand its deboning capacity without a
significant investment.
c. Animal Reception and Storage Capacity
The following table briefly describes the facilities for animal reception and storage of products
in process and finished:
Area Capacity
Animal Reception 20 pens with a capacity for 605 animals
1 Scale
Meat storage 8 chilling chambers with the following capacities:
a. 4 chambers with capacity for 1,000 carcasses submitted
for ageing
b. 1 chamber with capacity for 80 carcasses to supply the
domestic market
c. 1 chamber with capacity for 448 quarters, plus 80
boneless quarters
d. 3 chambers with capacity for 730 carcasses to be used
during the deboning process (Pulmon)
Offal Storage 1 chilling chamber with capacity for 10.5 tons
1 static freezing tunnel with capacity for 10.5 tons
1 Kosher offal salting chamber
Storage of Finished 1 continuous freezing tunnel (carton-freezer) with capacity for
Products 100 tons per day, and a total capacity for 235 tons.
2 static freezing/chilling tunnels with capacity for 50 tons each.
2 frozen storage facilities with capacity for 1,700 tons
1 chilling storage facility with capacity for 100 tons
1 new frozen storage facility (brand new) with Storax shelf
system, and capacity for 1,280 tons
Freezing tunnels serve multiple purposes, as they are also used
for chilling.
d. Energy
The plant uses electric energy from UTE’s distribution network for all its equipment and lights.
Cold is generated by electrical compressor systems with ammonia gas, which have sufficient
capacity to supply the whole slaughterhouse, chilling chambers, freezing tunnels, chilling and
26
frozen storage facilities, and a continuous freezing tunnel. Finally, steam and hot water are
generated by means of a high-efficiency wood boiler, which covers the entire slaughterhouse
demand. Wood is the most affordable source of energy in Uruguay due to is vastly developed
and sustainable Eucalyptus-Pines forestry industry.
e. Water Supply and Treatment
Lorsinal draws surface water from quarries for the production process, and then makes it
drinkable in its water treatment plant (with a treatment capacity of 50,000 liters/hour) and
stores it in its own tanks. The approximate water consumption is 500 cubic meters per day.
Cleaning of water tanks is done monthly. In case of cleaning or repair of the water treatment
plant, there are two entry lines from OSE (National Water Supply and Monitoring System)
with a pumping capacity of 25,000 liters/hour.
f. Wastewater Treatment
The Company treats wastewater from the manufacturing process (water, rumen, etc.) in
several pools, first decanting solid waste with a decanter, with fittings and settlers, then odors
are eliminated and the organic load is reduced oxygenating water to meet current water
control standards (microbiological and physicochemical controls are performed). Finally,
treated and cleaned water is channeled into Las Piedras creek. This entire system has been
upgraded and approved by DINAMA.
During the 1st semester of 2015, US$ 0,9 MM were invested in the upgrading of the sewage
water treatment including ponds, power engines, pumps, transformers, lightening and roads.
g. Sanitary Authorizations
The Company’s plant is certified under the HACCP standards and has sanitary authorization
to export all of its products to the most demanding markets (EU, USA and Korea). Some of
these products include chilled and frozen meat, offal and vacuum-wrapped cooked meat. The
company is also authorized to export ovine meat and hamburgers to Russia. Furthermore, it
has also been approved to export to the Israeli market. When the company slaughters for
Israel, processes and cuts are certified with an intermediate Kosher certification, in order to
gain access to a wider market.
a. Cattle
Lorsinal purchases 58% of the cattle through 64 local brokers, 20% directly from large cattle
producers, and 20% from the owners own feedlot. Furthermore, 40% of purchases are based
on live weight of the animal, while the remaining 60% are based on carcass weight.
Lorsinal deals with more than 100 producers, from whom it purchases cattle directly and 90%
of these purchases are concentrated in 33 firms.
27
The company does not directly own a feedlot, but its shareholder owns a feedlot facility with
a one-time capacity to feed 4,500 animals, located in Joanicó, 40 kilometers from Montevideo.
Lorsinal purchases animals for slaughter from that feedlot at market value.
b. Transport
The slaughterhouse pays for the transport of the animals. The Company works with 4
transport companies that provide their services. Transport of packed meat to the port is
outsourced to external freight companies (freight companies are different from cattle
transport companies). The company uses only refrigerated containers.
a. Manufacturing process
The manufacturing process involves several stages. Cattle arrive to the plant at night and
remain in the pens until the following morning. During the morning, cattle are weighted,
receive electrical shocks and enter the slaughtering process. Once cattle have been
slaughtered, hides are removed and carcasses are divided in two sides and hung in the hooks.
Then, they are washed and weighted to determine the “carcass weight” price to be paid to
the producers, and they are labeled with the animal’s information. Next, sides move through
a corridor that enables drying before they are stationed for 36 hours in a cold tunnel for beef
aging.
Once aged, sides are separated depending on the product planning. Sides to be sold in the
domestic market are processed and then go to a storage chamber within the plant until the
products are picked up by the distributors or delivered to the supermarkets in trucks owned
by Lorsinal (to Tienda Inglesa and Macro Mercado). Sides to be processed go to the deboning
sector. Before entering that process, they are divided in quarters, as some of them are sold
in the domestic market (bone-in cuts). During the deboning process, employees manufacture
the different cuts placing them in a conveyor belt that takes them to the packaging and
labeling sectors. The different cuts are packaged, labeled, vacuum-wrapped, and packed in
different cuts – fore cuts and hind cuts – according to their final destination (local market,
export, bone- in and boneless cuts, offal). Next, fore cuts go through a metal detector and
fat meter in order to ensure product quality. Boxes are then sealed and go through a scanner
to be classified according to their destination. Boxes with frozen cuts are stored in the frozen
products chamber, recently built by the Company, and boxes with chilled cuts are stored in
Lorsinal’s chilling chambers, from where they will depart to their final destination, either the
local market or the port for shipment and export.
b. Quality Control
The Company uses international control standards (according to HACCP production
standards). Moreover, all activities carried out in the plant are monitored by the MGAP
(Uruguay National Ag Service), which supervises all stages, from the arrival of cattle to the
28
plant to the exit of products for the local market and for export. Lorsinal also has its own
internal quality control area and a laboratory to perform routine controls, and carries out
certain mandatory analyses in the national laboratory “Laboratorio Instituto Rubino”.
a. Employees
The company has a total of 385 employees. Prior to being hired, employees undergo a
compulsory medical checkup and are required to present medical certificates of fitness to
perform their jobs. Additionally, Lorsinal conducts annual health checks for all staff. The
number of employees of the Company and their distribution according to their function is as
follows:
Operations Administration Controllers Storage Maintenance Total
278 21 16 11 59 385
In terms of staff turnover, approximately 80% of the operative staff has remained in the
Company for more than one year, whereas the remaining 20% has high turnover levels. Every
six months, the Company offers its employees training on products as well as quality and
hygiene in manufacturing.
Income Statement
US$ MM sep-08 sep-09 sep-10 sep-11 sep-12 sep-13 sep-14 sep-15
Revenues 68,7 60,6 61,5 70,8 85,6 80,5 76,8 75,8
Export Sales 58,5 52,1 52,9 59,8 72,1 65,3 60,2 60,2
Domestic Sales 5,8 6,0 4,7 6,9 7,7 10,1 10,9 10,6
Subproducts 4,4 2,4 3,9 4,1 5,8 5,2 5,7 5,0
Cost of Goods Sold (51,1) (45,9) (44,2) (58,1) (77,9) (77,2) (65,4) (67,0)
Gross Profit 17,6 14,7 17,3 12,7 7,7 3,4 11,4 8,7
Gross Margin 24,2% 28,1% 18,0% 9,0% 4,2% 14,9% 11,5%
SG&A (8,8) (5,2) (9,0) (9,3) (5,8) (5,6) (5,1) (5,2)
Operating Profit 8,8 9,5 8,3 3,4 2,0 (2,2) 6,4 3,5
Operating Margin 12,8% 15,7% 13,6% 4,8% 2,3% -2,7% 8,3% 4,6%
Finan. Expenses,
others 0,8 (0,5) 0,7 (0,0) 0,1 0,2 0,3 0,3
Earning before taxes 9,6 9,0 9,0 3,4 2,0 (1,9) 6,7 3,2
29
Taxes (2,6) (2,0) (1,8) 0,0 (0,4) 0,5 (1,5) (1,4)
Net Income 7,1 7,1 7,2 3,4 1,6 (1,4) 5,2 1,79
Net Margin 10,3% 11,7% 11,7% 4,9% 1,9% -1,7% 6,7% 2,3%
EBITDA 9,2 9,9 8,7 3,8 2,4 (1,6) 7,0 4,1
EBITDA Margin 13,4% 16,4% 14,1% 5,3% 2,8% -2,0% 9,1% 5,5%
30
Balance Sheet
US$ MM -Sept 30 sep-08 sep-09 sep-10 sep-11 sep-12 sep-13 sep-14 sep-15
Operating Cash 4,7 8,7 5,0 1,9 2,3 3,4 7,5 4,3
Short- term Investments 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0
Accounts Receivable 6,6 3,9 3,0 7,7 7,4 4,5 5,3 5,5
Fiscal Credits 2,0 4,7 3,2 4,5 4,7 4,4 2,0 2,6
Inventory 8,4 7,4 10,6 6,7 13,4 10,1 8,5 8,0
Other Current Assets 0,1 0,8 1,3 1,8 2,5 0,7 1,2 0,3
Current Assets 21,8 25,5 23,2 22,6 30,3 23,0 24,5 20,7
Gross PPE 5,9 4,2 4,6 6,3 7,6 8,7 9,1 10,4
Accumulated -3,5
Depreciation -0,6 -1,0 -1,1 -1,5 -1,9 -2,5 -2,9
Net PPE 5,3 3,2 3,5 4,9 5,7 6,3 6,2 6,8
Diferred Taxes 0,4
Intangibles
Other non current Assets 0,0 0,1 0,4 0,8 0,6 1,2 0,9 0,09
Non current Assets 5,4 3,8 3,9 5,6 6,3 7,4 7,0 6,9
Total Assets 27,2 29,3 27,1 28,2 36,6 30,5 31,6 27,7
ST Necessary to Finance
Bank Debt 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0
Trade Finance Debt 1,3 0,0 0,0 1,6 4,1 4,6 1,0 5,8
Accounts Payable 2,7 3,6 2,5 0,8 6,3 3,4 4,5 5,2
Tax Payable 3,0 3,9 0,5 0,2 0,2 0,5 0,2 0,0
Provisions 0,7 0,0 0,9 1,2 0,2 0,1 0,0 0,04
Other Current Liabilities 0,2 3,1 6,4 4,2 4,0 1,6 1,7 1,9
Current Liabilities 7,9 10,6 10,3 8,0 14,8 10,1 7,4 13,0
Bank Debt 0 0 0 0 0 0 0 0
Trade Finance Debt 0 0 0 0 0 0 0 0
Accounts Payable 0 0 0 0 0 0 0 0
Other non current
liabilities 0 0 0 0 0 0 0 0
Non current Liabilities 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0
Total Liabilities 7,9 10,6 10,3 8,0 14,8 10,1 7,4 13,0
Capital Stock & paid in
capital 1,5 1,1 1,1 1,1 1,1 1,1 1,1 1,1
Adjustments 2,6 0,0 0,0 0,0 0,0 0,0 0,0 0,0
Reserves 1,9 1,3 1,3 1,5 1,5 1,5 1,5 1,5
Retaines Earnings 6,3 9,2 7,2 14,2 17,6 19,1 16,4 10,2
Net Income 7,1 7,1 7,2 3,4 1,6 -1,4 5,2 1,8
Net Worth 19,3 18,7 16,8 20,2 21,8 20,4 24,1 14,7
Liabilities & Net Worth 27,2 29,3 27,1 28,2 36,6 30,5 31,6 27,7
31
Uruguay is a country in the southeastern part of South America. It is home to 3.43 million
people, of which 1.8 million live in the capital city of Montevideo and its surroundings. An
estimated 88% of the population is of European descent. GDP per capita is approximately
US$15,000 and the country has lower poverty rate (9.7% of population) and less social
inequality measures (gini index of 42) than other Latin American countries.
BOLIVIA BRAZIL
PARAGUAY
ARGENTINA
URUGUAY
ATLANTIC
Montevideo
OCEAN
With 176,214 km2 of continental land and 142,199 km2 of jurisdictional water and small river
islands, Uruguay is the second smallest country in South America (after Suriname). The
landscape features mostly rolling plains and low hill ranges with fertile coastal lowland. A
dense fluvial network covers the country, consisting of four river basins, or deltas. Uruguay
has 660 km of coastline.
Uruguay has a climate that is relatively mild and fairly uniform nationwide, but the absence
of mountains, which act as weather barriers, sometimes make it vulnerable to high winds and
rapid changes in weather as fronts or storms sweep across the country. Seasonal variations
are pronounced, but extreme temperatures are rare. As would be expected with its abundance
of water, high humidity and fog are common. The mean annual precipitation is generally
greater than 40 inches (1,000 mm), decreasing with distance from the seacoast, and is
32
relatively evenly distributed throughout the year. The average temperature for the midwinter
month of July varies from 12 °C (54 °F) at Salto in the northern interior to 9 °C (48 °F) at
Montevideo in the south. The midsummer month of January varies from a warm average of
26 °C (79 °F) at Salto to 22 °C (72 °F) at Montevideo.
Uruguay’s economy is characterized by an export-oriented agricultural sector, a well-educated
work force, and high levels of social spending, with service sector accounting for 50% of GDP.
While Agricultural and Livestock related industries represent only 10% of GDP, it is the largest
source of exports (48% of the total). In 2015, exports amounted to approximately US$9
billion, while imports reached US$8,5 billion. Uruguay’s largest trading partners are China
(23% of exports and 18% of imports), following by Brazil (14%/15%) and United States
(7%).
2012 2013 2014 2015*
Population 9,0% 70,0
3,42 3,43 3,42 3,43
(MM) 8,0% 7,8% 57,5 57,5 60,0
GDP 53,4
$14.792 $16.421 $16.199 $15.414 7,0% 51,3
(US$/capita) 48,0 50,0
Inflation (CPI 6,0%
8,1% 8,6% 8,9% 9,4% 40,3
yoy) 5,2% 40,0
5,0%
Trade 4,6%
Balance (% -5,8% -4,3% -4,0% 0,1% 4,0% 30,0
GDP) 3,5%
3,0% 3,2%
20,0
Fiscal Balance 2,0%
-3,0% -2,6% -3,4% -3,6%
(% of GDP) 1,0% 1,0%
10,0
Current 0,0% 0,0
account -5,2% -5,1% -4,6% -3,6% 2010 2011 2012 2013 2014 2015
(% of GDP) GPD USD Bns - right GPD annual growth - left
Public debt
42,6% 40,1% 40,7% 43,5%
(% of GDP)
Exports
26,0% 23,7% 23,6% 17,0%
(% of GDP)
Source: EIU, Global Insight
*UruguayXXI.gub.uy, BCU
The increase in domestic demand and disposable income, as well as the recent US dollar
appreciation has been slowly pushing the inflation up. However, the government policy has
been aimed at smoothing that upward trend by means of selling US dollars as well as
establishing voluntary price control programs with the retail sector. Inflationary pressures will
begin to ease as a result of the expected slowdown in domestic demand and policymaking
ensuring monetary and fiscal instruments working in synchrony.
Source: EIU, Global Insight
33
While the fiscal deficit increased to 3.5% of GDP in 2015, the Public Debt has increased as a
percentage of GDP to 43,5% from 40,7% previous year due to government fiscal deficit,
among others.
The country has a strong foreign exchange position, with central bank reserves increasing
from US$ 7.85 billion in 2010 up to US$15,6 billion last year.
Uruguay is an investment-grade rated economy and one of the most politically stable and
pro-business countries in the region. The country consistently ranks at levels comparable to
the US and above those of other Latin American countries in surveys conducted by the World
Economic Forum and Transparency International, covering: rule of law, corruption and
institutional strength. In addition, Uruguay is one of the top five jurisdictions globally in terms
of freedom of capital flows.
Socially and politically, Uruguay ranks at the top of the Latin American nations, even
outperforming many of the most developed countries. The respect for property rights as well
as the efficiency of the legal system has been of paramount importance for the Uruguayan
government.
34
Finland 1 Finland 2
USA 15 Uruguay 20 N° 1 in Latin America
Chile 26 Austria 27
3 in Latin
Uruguay 40 America USA 28
Spain 49 Chile 31
Brazil 64 Brazil 92
0 20 40 60 80 0 20 40 60 80 100
Finland 2 HK 1
Austria 16
Uruguay 5 N° 1 in Latin America
USA 16 Top-5 in the World
Uruguay 21 N° 1 in Latin America
Switzerland 6
France 23
USA 54
Chile 23
Perú 88 Brazil 91
0 20 40 60 80 100 0 20 40 60 80 100
Source: World Economic Forum; Transparency International, International
Property Rights Index
Uruguay has long favored a prime investment climate for international investors. Sound
macroeconomic policies and a predictable legal system have resulted in an Investment Grade
classification.
Moodys S&P Fitch
Uruguay Baa2 BBB BBB-
Chile Aa3 AA- A+
Brazil Ba2 BB BB
Argentina B3 B- B
35
Uruguay encourages FDI along the following guiding principles:
National Interest Investments in the national territory are declared to be of
Categorization “national interest”
Non-Discrimination Equal treatment to domestic and foreign investors
Absence of Special There are no mandatory permits for foreign investors
Registration Requirements
Fair Treatment The Government commits to granting fair treatment to
investments, without unjustified prejudicial or discriminatory
measures;
Free Capital Flows The Government guarantees the transfer of capital and profits
abroad in freely-exchangeable currency – no restrictions
towards imports or capital repatriation
As a consequence of the aforementioned factors Uruguayan FDI grew 8x in the 2001-2014
period, reaching in 2013 and 2014 an all-time record of US$3.0 billion and US$2.2 billion,
respectively. In 2015 the FDI decreases a 27% in comparison with the previous year.
Because of the high rate of foreign investment, total factor productivity in Uruguay has grown
by 3% annually since 2005. During this period, the rate of innovation has been most prevalent
in the agricultural, renewable energies, forestry and logistics sectors of the economy.
3500
3000
2500
2000
1500
1000
500
0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Source: Central Bank of Uruguay (BCU).
36
Investment in Uruguay, both national and foreign, is declared of national interest by law.
Thus, foreign investors are granted the same incentives as local investors and there is no tax
discrimination or restrictions for transferring profits abroad.
Corporate income tax (IRAE) in Uruguay is 25%. The Tax Reform Law expanded the
framework of automatic investment exemptions, granting IRAE exemptions of up to 40%
according to the type of investment (if revenues under USD 1,1MM approximately).
Furthermore, there are several exempt income and expenditure calculated for one and a half
of its actual amount. These include, but are not limited to, training personnel in priority areas,
improving working conditions and environment, research projects and scientific and
technological development, technicians’ fees for assistance in priority areas or certification
under international quality standards.
Apart from the automatic income tax exemption, Uruguay has a wide range of incentives
adjusted to different types of productive activities, from industrial to commercial and service
activities performed within the country. Arrangements provided for by the Investment Law,
duty free zones, free port and free airport structures, public-private partnership agreements,
industrial parks and temporary admission are some of the main incentive arrangements
available in the country. Furthermore, in Uruguay several sectors enjoy specific incentive
structures including, but not limited to, external financial intermediation, afforestation,
graphic industry, maritime and air navigation, software, vehicles or auto parts, biofuels,
communication and housing industry.
The investment promotion system is provided for by Law No. 16,906, whereby the promotion
and protection of investments made by national and foreign investors in the national territory
are declared of national interest. The Law is actually regulated by Decree No. 002/012.
The Law on Investments provides for the granting of the following benefits, when some
objectives are accomplished:
- Exemption of Wealth Tax (IP) regarding personal property directly intended for any
productive cycle and equipment for electronic data processing.
- Exemption of Value Added Tax (VAT) and exemption of Excise Tax (IMESI), corresponding
to imports and refund of VAT included in purchases of goods intended for any productive cycle
and equipment for electronic data processing.
In the particular case of IRAE exemption, the granting of this benefit is subject to the score
obtained in the matrix of objectives and indicators created by COMAP, based on the
information provided by the investor. Tax exception can reach up to 100% of the amount
37
actually invested in the assets detailed in the project. This amount cannot exceed 60% of that
payable in each period included in the promotional declaration.
Under the temporary admissions system, goods can enter the country free of import duties,
as long as these goods are involved in the manufacturing and are in contact with the end-
product to be exported. The range of goods subject to temporary admission includes: raw
materials, parts, spares, engines, packages and packaging materials, matrixes, molds and
models, half-finished and intermediate products, agricultural products and inputs for the
production process.
Pursuant to Law 16,246 of May 1992, the movement of goods in Uruguayan ports and port
terminals that are suitable to receive overseas ships is free and not subject to authorizations
or government approvals. Goods shall be exempt from import duties, related taxes, and the
Net Worth Tax (under some conditions), while they remain in the port customs area.
Furthermore, port services are not subject to VAT.
Tax free zones are regulated by Law 15,921, and government decrees 454/88, 57/993 and
209/94. Uruguay has established 13 tax free zones that are in most cases privately held.
Large investments like UPM’s pulp mill in Fray Bentos, or the WTC site in Montevideo have
received tax free zone status. There is a government-owned tax free zone in Nueva Palmira
that contains a port terminal and grain silos.
The establishment of new tax free zones must be preapproved by a committee formed by
representatives of the Corporacion Nacional para el Desarrollo and the Ministry of Finance.
The tax benefits are not extended to the company managing the tax free zone, only to its
users. The managing company must develop and upkeep common infrastructure and pay a
fee to the government. In exchange, the company collects dues from tax zone free users.
Tax free zone user applicants must present a business plan to the Ministry of Finance. Eligible
projects must exceed US$10mm of investment, employ at least 75% of Uruguayan nationals,
and export at least 95% of the products or offshoring services rendered (e.g. call centers).
The following benefits apply to users of tax free zones:
Exemption from income tax, asset tax, VAT and all existing and future taxes, other than social
security payable by local employees:
Products or inputs that enter or leave the tax free zone are not subject to taxation
Exemption from taxes on dividend payments abroad, unless the foreign company has to pay
a tax on its home country on dividends received from Uruguay
38
Products manufactured inside tax free zones are not subject to minimum local component
requirements or other regulations.
Uruguay is a democratic republic organized under a presidential system. The president is
directly elected by the national electorate for a term of 5 years, and may not be reelected
consecutively. If no presidential candidate receives an absolute majority of 51 percent of the
vote, there is a runoff election between the top 2 candidates. The country is organized into
19 regional departments or states, each headed by an elected governor.
The government of Uruguay operates under three independent branches: Executive,
Legislative and Judicial. The Executive Branch is held in the hands of the President and his
cabinet of Ministers. The Legislative Branch rests with the parliament, which is composed of
the senate (31 members) and the chamber of representatives (99 members).The Judicial
Branch is headed by the Supreme Court of Justice. Each of the above branches is autonomous
as regards the duties entrusted to them by the Constitution.
All of Uruguay's major political parties support economic reforms and free trade. There are 3
main political parties /coalitions. There are no dominant parties and the three coalitions have
run the country at least once since 1990. Consensus among political parties is high. As a
result, public trust in institutions and government branches remains significantly stronger
than in other countries in the region. A summary description of each party is presented below:
Colorado Party: has traditionally represented the urban areas and the working class. In the
1990s, this party increased its support for smaller government and less state control.
The National Party (or “Blanco”): is the main party of rural voters, and is generally regarded
as the most conservative of the nation's parties and a staunch supporter of free enterprise.
Encuentro Progresista-Frente Amplio (“EP-FA”): is a leftist coalition that supports limited free
trade and private enterprise, but favors the implementation of an income tax as a means to
redistribute wealth and increase social spending.
Tabaré Vazquez, from the EP-FA party won the 2015 presidential election and took office as
President on 1st March 2015. The EP-FA party has ruled the country since 2004, and although
a leftist coalition, its economic policy has become a bastion of pragmatic economic policies
that favor business and foreign investments.
39
Although the global beef industry has not been alien to those factors driving the global
commodity price downward trend, there is a set of strong underlying elements shaping sound
prospects for the entire beef value chain.
On the demand side, population growth, higher disposable income, urbanization, changes in
lifestyles are expanding beef demand. Also changes in consumer patterns with beef dishes
becoming more and more common in the diets of the emerging market homes, retail stores
and the entire foodservice segment.
According to FAO (2013), while consumption of all types of meat is forecasted to increase,
beef is the only category expected to show accelerated growth for the 2013-22 decade.
2003-12 2013-22 % Change
160
Beef 0.2% 0.5% 150%
Kg per capita
120
Pork 0.7% 0.4% -43%
80
Poultry 2.5% 0.9% -64%
40
Sheep 1.0% 0.3% -70%
0
Source: FAO, 2013
0 30.000 60.000 90.000
GDP (PPP) per capita
Source: LAVP analysis
based on FAO and World Bank
The expansion of meat demand and
specifically beef consumption has been
5,0 6000
driven by the economic growth of the Beef, kg/capita/yr
GDP U$S/capita 5000
Emerging Economies. As the purchasing 4,0
power improves, consumers shift their diet 4000
3,0
decreasing consumption of cereal-based 3000
dishes while increasing meat consumption. 2,0
2000
In this respect the case of China is probably
1,0 1000
one of the most outstanding.
0,0 0
Source: FAO, World Bank &
OECD
40
Chinese beef demand is expected to grow from 7 million tons in 2014 to 8.5 million tons in
2018. Rabobank expects imports to continue to grow at 10-15% per year (Rabobank report,
2014).
1.700
5,4x
550 2,0x
412
1,3x
29 99
2011 2012 2013 2014E 2018E Beef Pork Poultry
On the supply side, in the medium and long-term world expansion in cattle and feedstuff
production depends on two fundamentals drivers, more available land and productivity
growth. A significant part of the developed world such as European Union, Japan, South Korea,
among others, face strong land and water availability challenges. Moreover, the uninterrupted
growth in the Asian population is and will continue to constraint the potential to expand cattle
and feedstuff production.
In the short-to-medium term, world demand is expected to faced tight supplies from many of
the key world players (US, Australia and EU), which together account for more than 35% of
world beef production.
The US, 2nd largest beef producer in the world, and currently showing the lowest inventory
levels since 1960, has just began a herd rebuilding process that will further tight world beef
supplies.
115 12,0
11,0
105
10,0
95
9,0
85 8,0
2002
2000
1996
2004
2006
1990
1992
2008
2010
2012
1994
2014
1980
1988
1998
1982
1984
1986
Source: USDA, 2014 Source: MLA, ABARE, 2015
41
Due to prevailing droughts and market dynamics, Australia has shown record slaughter and
live exports since 1979 that has pushed cattle inventory numbers to the lowest in 15 years,
which will severely constraint beef supplies in the upcoming 3-4 years.
Finally, the European Union, the 3rd largest
8,8 world cattle producer, has shown an
uninterrupted decrease in production for the
8,3 8,3
8,1 8,1 8,1 last 25 years. The drivers of this trend -
7,9
insufficient land availability, strict
7,4 environmental regulations, and high labor costs
– are expected to continue and even intensify
in the future.
2003
2010
2011
2012
2013
2014
2002
2001
2004
2005
2007
2000
2006
2008
2009
1999
Source: FAO, 2014
42
The Uruguayan cattle and beef industry developed long before the country was even
established as a nation, becoming one of the main drivers of economic and social development
during the last 100 years.
A century of development and growth allowed the cattle industry to be at the forefront of
industry productivity driven by the adoption of well adapted British breeds, genetic
improvements, high yield pastoral species, grazing management, as well as modern industrial
processes.
As a consequence, cattle industry has become one of the most cost competitive globally,
further supported by the country’s temperate climate allowing for year-round grazing
systems. Uruguay also benefits from lower transportation costs due to a very compact cattle
raising area, a flat landscape, and a well-developed truck transportation network.
100
6,0
75 Operating costs Labour Land Capital
4,5
50
3,0
25
1,5
0
0,0
Brazil
Colombia
UK
Ireland
Ukraine
Uruguay
Argentina
Indonesia
Australia
Namibia
Source: Beef Farming systems across the world;
Debiltz & Parton
Source: AgriBenchmark, * Average 2011 -2013
Due to the fundamental importance of exports to the country’s economic growth, the beef
industry has diligently worked to achieve its current prime sanitary status. Uruguay’s herd
sanitary status, comparable to that of the US and Australia, grants access to every market in
the world with the exception of Japan, which is currently being negotiated.
Because of its pasture-based feeding technologies and the country’s long prohibition against
the use of animal byproducts on feed, Uruguay holds the highest BSE status (negligible BSE-
risk status) according to the World Animal Health Organization (OIE ).
The aforementioned results in the fact that Uruguay currently exports to more than 101
countries, a diversification strategy that has proved successful to maximize carcass value.
43
Mercosur Yes
101
NAFTA Yes
EU Yes
68
Russia Yes
Africa Yes
33
China/Hong Kong Yes
South Korea Yes
Japan Negotiation undeway*
1980 2000 2014
Source: INAC
Driven by the strong world beef demand and the transformation of Uruguay’s agricultural
sector, the cattle industry is undergoing profound changes. Uruguay currently holds the
largest total cattle and breeding stocks since available records exist.
4.3 11.9
4.1 4.0 11.6
4.1 4.0 11.5 11.4
3.8 3.8 11.1 11.0
3.4 3.6
3.4 10.5 10.6 10.5
10.2
Source: Dicose Source: Dicose
The high profitability of lands used for crop production set during the last decade a “large
opportunity cost” for cattle ranching that ignited a technological change within beef production
systems.
The calving rate has consistently increased since the mid-1990s, While between 1995-2005
it averaged at 61%, since then the average has been in the 66-68% range.
44
That large opportunity cost also drove a widespread adoption of animal management
technologies that has both increased cattle stocking rates (+40%) and animal growth rates
(+ 87%).
70%
Liveweight kg/ha per yr
Liveweight kg/head per yr
66%
62%
124,5
91,7 58%
65,8 66,6
54%
1995 1998 2001 2004 2007 2010 2013
1999 2006-12 average
Source: Dicose; Variabilidad regional de la
Source: Dicose
productividad ganadera, OPYPA (Bevejillo)
Finally, the dramatic expansion on grain production has created an abundant supply of
feedstuffs strengthening the economics of supplementation in cow-calf and finishing
operations.
3,5 76
Corn, Sorghum
3,0
Wheat 72
2,5
2,0 68
1,5 64
1,0
60
0,5
0,0 56
2002 2005 2008 2011 2014 2007-2009 2010-2013
Source: Diea
Source: Anuario Opypa 2013, 2014
45
