2. Current situation: the Company is suffering from severe negative
impacts both on the operational and financial sides
Operational Financial
Very expressive drop of beef demand from main Drastic reduction of liquidity in the global
importing countries leading to oversupply financial markets
Re-directioning of export volume to Brazilian Cancellation of financing transactions
domestic market leading to predatory Reduction of short term financing to 30
competition and falling prices days
Prices falling in all markets Increase of the financing costs
Stable cattle prices Increase of Working Capital needs
Beef prices not compatible with cattle prices Increase of the debt due to Real devaluation
Non-payment in several markets
Liquidity crisis places the Company at risk
Negative operational results
2
3. Taken measures in 2008 and current situation
Impacts of the crisis in the Brazilian beef sector
Impacts Taken measures Current situation (Feb/09)
• US$300 million Eurobond issue in May 2008, • All the segments of the capital markets are still
leaving Independência’s debt profile conservative closed for non-investment grade issuers
Close of capital markets/
• Potential adaptation of the investment timetable • Freezing of all the non-essential investments and
Scarcity of long-term funding
for 2009-10 expenses
• Maintenance of the cash position as a “liquidity • Total absence of working capital and exports
cushion”
Scarcity of short-term funding financing lines
• Pursue alternative export financing lines • Expressive increase of spreads
• Reallocation of products to less affected markets
• Significant drop in the exports for all the markets,
(Brazil, North Africa)
Temporary reduction in orders by some
• Active management of supply contracts, avoiding
import markets consequently increase in inventory in tons
inventory builds
• Higher discount rate • One-off losses with anticipated payments to
• Daily limit on volume of spot payments producers
Higher demand for cash payments by cattle
• Intensification of partnerships with suppliers in • More demand for cash payments due the
producers, increasing working capital needs
response to cattle producers seeking larger and producers uncertainty in result of one-off
more solid meatpackers such as Independência problems of some slaugherhouses
• Targeted commercial actions to minimize impact • Expressive losses due to generalized renegotiation
Increase in requests for longer payments
on working capital of sales conditions in terms of prices and payment
terms by clients
• One-off renegotiations of payment conditions periods
3
4. Commercial strategy adopted from October/08 to January/09
Measures and objectives
Inventory retention in October and November to be sold in December that is traditionally a month
of strong demand and increase of prices in the domestic market
Slaughter reduction in December to avoid of high cattle prices, and concession of collective
vacations to reduce fixed costs
Strong increase of slaughter in January foreseeing an improvement of the external market based
on the following history:
Traditional reduction of demand in the domestic market in January resulting in decrease in
the cattle prices in the beginning of the year
Dollar valuation against the Brazilian Real increasing the Brazilian competitiveness versus
other exporting countries
Expectation of higher exports demand maintaining and possibly increasing prices after a
period of few shipments of products
4
5. Agenda
Current situation of the Brazilian beef sector
Impacts on the sector of the global financial crisis
Company return analyses
5
6. Prices and Volumes of sales decrease more than usual
Current situation of the Brazilian beef sector
The peak of cattle price took place in October and
November resulting in a super valued inventory
In December the volumes in the domestic market
increased, however without the traditional increase
of prices. On the other hand, in January, an increase
off domestic beef supply was verified due to a
reduction in the exports, resulting in beef price
decreasing more than cattle prices
In January, exports prices and volumes decreased
disastrously and due to cattle prices level the
exports income was negative, even with the
Brazilian Real devaluation
The strong competition between the exporting
slaughterhouses in the local market pressured down The deficit operation caused two digits
the in-bone beef prices in the supermarkets, not negative EBITDA margin
covering the costs of production
6
7. Drop in cattle prices was in line with previous years, not
excessive like the decrease in beef prices
Cattle prices evolution from October/08 to February/09
Cattle price evolution (2008/2009) Cattle price evolution per year
(R$/@)* (R$/@)*
130
90
125
88
120
change= +19%
86 115
110
84
105
82
100
change= - 3%
80 change= - 6%
95
change= - 7%
90
78
change= -14%
85
76
80
01-Oct-09 01-Nov-09 01-Dec-09 01-Jan-10 01-Feb-10
74
1/10/2008
19/1/2009
29/1/2009
18/2/2009
20/12/2008
30/12/2008
11/10/2008
21/10/2008
31/10/2008
10/11/2008
20/11/2008
30/11/2008
10/12/2008
9/1/2009
8/2/2009
2004 2005 2006 2007 2008
*Rebased to 100: Prices in 01/Oct: 2004=R$53.2; 2005=R$48.6
2006=R$ 55.9; 2007=R$ 58.9; 2008=R$86.7
Source: CEPEA/Esalq Source: CEPEA/Esalq
7
8. Exports volumes droped by almost three times the reduction
in slaughter volume, causing oversupply of beef
Brazilian beef exports and slaughter volumes
Total slaughter in Brazil Brazilian Beef exports evolution
(1,000 heads) (1,000 ton)
2,094
2,074 2,040
1,941
1,854 1,867 1,866 1,821 1,791
1,754
134
127
1,562 1,547 126
125 125
124
120
1,456
113 112
106
90
83 82
Source: Ministry of Agriculture, Livestockand Supply - as of 25/February/09 Source: MDIC/Secex - Alice Web
8
9. Expressive drop in import volumes from main Brazilian beef
markets
Export volumes in the past months
Brazilian beef exports to Russia Brazilian beef exports to Iran
(1,000 ton) (1,000 ton)
37% of total Brazilian exports in September 9% of total Brazilian exports in September
60
12.5 12.5
50.3 14
50 12
10
40
7.6 7.1
8
25.5
30
5.2
6
16.3
20 13.2 11.2 4
10 2
0 0
Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09
Brazilian beef exports to Israel Brazilian beef exports to Ukraine
(1,000 ton) (1,000 ton)
4% of total Brazilian exports in September
4% of total Brazilian exports in September
6
6.5
4.8 7 6.0
5
6
4 5
2.7
3 4
1.7 3
2 1.1 2
0.7
1 0.4 0.4 0.3
1
0 0
Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09
9
Source: MDIC/Secex - Alice Web
10. Expressive drop in sale prices not followed by cattle prices
incurred in negative results
Beef prices in the domestic and international markets vs. cattle price
10
11. Agenda
Current situation of the Brazilian beef sector
Impacts on the sector of the global financial crisis
Company return analyses
11
12. Reduction of liquidity and pressure on the Working Capital
Impacts on the sector of the global financial crisis
Evolution of ACC lines spread
Liquidity reduction
(%)
• Lack of external lines offers 14% 12.7% 12.6%
• Cancellation of limits and not renewal of 12%
12.5%
existing lines 11.0%
10%
• Banks consolidation with reduction of lines
and limits 7.2% 7.2%
8% 7.1%
6.3% 6.3%
6.1%
• Reduction of limits due to BR Real 6%
6.3%
devaluation (limits in Real and disbursements 5.7%
in Dollar) 4%
4.1%
Increasing in lines costs 2%
Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09
• In Dollar: from 6% per year to12% Source: Independência internal data
• In Reais: from 110% of CDI to 170% of CDI
FX variation
2,60
Reduction of payment period to 30 days leading to (USD/R$)
concentration of maturities per every month and 2,40
increasing the pressure over renewals renegotiation 2,20
Increase of debt due to the Real devaluation 2,00
impacted the debt service and the operational flow 1,80
Cancelation of refinancing transactions in course 1,60
1,40
12
*As of 26/02/09
Source: Bloomberg
13. Agenda
Current situation of the Brazilian beef sector
Impacts on the sector of the global financial crisis
Company return analyses
13
14. Slaughter return calculation – States of Mato Grosso do Sul, Goiás
and Minas Gerias
Slaughter total cost (R$/@) Male Female
Arroba price 74.00 68.00
Transport from the farm to the slaughterhouse 1.09 1.41
Sales taxes 3.77 3.32
Slaughter fixed costs 2.50 2.50
Slaughter variable costs 3.86 3.86
Slaughter total cost (R$/@) 85.22 79.09
Slaughter total cost (R$/kg) 5.68 5.27
Slaughter total revenue (kg) Male Female
In-bone beef price 5.02 4.43
Leather price 0.11 0.11
Offals price 0.52 0.52
Slaughter total revenue (kg) 5.65 5.06
Slaughter return (R$/kg) Male Female
Slaughter total revenue (kg) 5.65 5.06
( - ) Slaughter total cost (R$/kg) 5.68 5.27
( = ) Slaughter return (R$/kg) (0.04) (0.22)
Losses of a 1,000 heads/day slaughterhouse (70% of males and 30% of females)
Average weight(@) 18.00 13.50
Losses (R$ 6,678.00) (R$ 13,203.00)
Daily total losses (R$ 19,881.00)
14
15. Slaughter return calculation – States of Mato Grosso and
Rondônia
Male Female
Slaughter total cost (R$/@)
Arroba price 66.00 61,00
Transport from the farm to the slaughterhouse 2.39 2,39
Sales taxes 1.17 1,17
Slaughter fixed costs 4.42 4,42
Slaughter variable costs 5.69 5,69
Slaughter total cost (R$/@) 79.67 74,67
Slaughter total cost (R$/kg) 5.31 4,98
Male Female
Slaughter total revenue (kg)
In-bone beef price 5.02 4,43
Leather price 0.08 0.08
Offals price 0.52 0.52
Slaughter total revenue (kg) 5,62 5,03
Male Female
Slaughter return (R$/kg)
Slaughter total revenue (kg) 5,62 5,03
( - ) Slaughter total cost (R$/kg) 5,31 4,98
( = ) Slaughter return (R$/kg) 0,31 0,06
Income of a 1,000 heads/day slaughterhouse (70% of males and 30% of females)
Average weight(@) 18,00 13,50
Income R$ 59.220,00 R$ 3.402,00
Daily total income R$ 62.622,00
15
16. Deboning return calculation–Mix of domestic market and exports
R$/kg % of
Deboning total revenue (R$/kg) (piece) total R$/kg
Hindquarter
Debonig total cost (R$/kg) (R$/kg)
Tenderloin 11.06 3,4% 0.37
Striploin 8.22 15,5% 1.27 In-bone beef price
(weighed average male/female) 4.85
Full rump 10.01 8,4% 0.84
Rump cap 16.00 2,2% 0.35 Sales taxes 0.12
Inside round 7.36 13,3% 0.98
Deboning fixed costs 0.27
Silverside 6.40 8,8% 0.57
Deboning variable costs 0.80
Eye round 7.59 3,7% 0.28
Debonig total cost (R$/kg) 6.04
Knuckle 7.13 8,1% 0.58
Shank 6.90 6,3% 0.43
Other items 0.96 30,5% 0.29
Hindquarter total revenue( R$/kg) 5.96
Frontquarter
Chuk 5.18 16% 0.83
Deboning return (R$/kg)
Shoulder 5.18 29% 1.49
Deboning total revenue (R$/kg) 4.78
Neck 5.18 14% 0.74
( - ) Deboning total cost (R$/kg) 6.04
Brisket point end 5.18 10% 0.51
( = ) Deboning return (R$/kg) (1.25)
Other items 0.94 31% 0.29
Frontquarter total revenue (R$kg) 3.86 Losses of a 1,000 heads/day slaughterhouse (4.000 cuts production)
Center Daily production (kg) 220,000
Center cuts for dry beef (charque) 3.20 Daily total losses (R$ 275,485.65)
R$/kg % of
Deboning weighed revenue (R$/kg) R$/kg
(piece) total
Hindquarter 5.96 48% 2.86
Frontquarter 3.86 39% 1.51
Center 3.20 13% 0.42
16
Deboning total revenue (R$/kg) 4.78