Earnings Call: Q3 2019

Nov 13, 2019

Ladies and gentlemen, and thank you for waiting. At this time, we would like to welcome everybody to Minerva's Q3 of 2019 Results Conference Call. Today with us, we have Fernando Queirov, Chief Executive Officer and Edgyson Chikuy, CFO and Investor Relations Officer. We wish to inform you that this event is being recorded and all participants will be in listen only mode during the company's presentation. The audio and the slideshow of this presentation are available through the live webcast at www.minerafoods.combarir and MZQ platform. The slideshow can also be downloaded from the webcast platform in this Investor Relations section on this website. Before proceeding, we wish to mention that forward looking statements may be made during this presentation relating to Minerva's business prospects, operating and financial estimates and goals. They are based on the belief and assumptions of the company management and on information currently available. They involve risks, uncertainties and assumptions because they relate to the future events and therefore depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the future results of Minerva and could cause results to differ materially from those expressed in such forward looking statements. I will now turn the conference call over to Mr. Fernando Queroz, CEO, who will begin the presentation. Mr. Queroz, you may proceed with your presentation. Good morning, everyone, and thank you for participating in Minerva's conference call on the results for the Q3 of 2019. Let's begin the presentation with the main results highlights. Let's have a look first on slide 2. First, we'd like to highlight operating cash flow, which reached BRL955.2 million in the 3rd Q of 'nineteen and BRL1.9 billion in the last 12 months. Another cash indicator, free cash flow was positive for the 7th consecutive quarter, totaling BRL510 1,000,000 in the 3rd Q 'nineteen and BRL1.1 billion in the last 12 months, a new record for Minerva, thanks to our operational, commercial and financial excellence. Consolidated gross revenues totaled BRL4.8 billion in the 3rd Q 'nineteen and an all time high of BRL18.0 billion in the last 12 months. Our revenue breakdown shows that 49% of the gross revenue equivalent to $2,300,000,000 came from the Brazilian division. Atena Foods, which co brands our operation outside Brazil, accounted for 39% or BRL1.9 billion of consolidated revenues, while the trading division was responsible for remaining 12% with approximately BRL576 million. In the 3rd Q of 'nineteen, exports once again stood out accounting for 68% of gross revenues, 16% higher than 3rdq of 'eighteen. Consolidated net revenues reached BRL4.5 billion in 3rdq 'nineteen, 4% more than in 3rdq 'eighteen and approximately BRL17 billion in the last 12 months ended September. EBITDA reached BRL455 1,000,000 in 3rd Q 2019, a strong increase of 25 percent comparing to the previous quarter, and EBITDA margin stood at 10.1, 100 bps more than in the previous quarter. EBITDA came to BRL1.6 billion in the last 12 months with an EBITDA margin of 9.5%. The net result adjusted for non cash effect and before taxes totaled approximately BRL93 million at the end of the quarter. Reinforcing our commitment to pursuing a more efficient capital structure, Minerva's 3rd quarter leverage measured by the net debt LTM EBITDA ratio ended at 3.8 times, in line with 2nd Q 'nineteen despite of almost a 10% increase in the dollar compared to the previous quarter. Finally, it's important to mention once again the opportunity that African swine fever has created for South American exporters in recent months. Just a quick update. According to the FAO, the ASF outbreak has reached over 580 regions, most of which in China and neighboring countries such as Vietnam, Laos, Indonesia, Cambodia with new cases also being reported in South Korea and Waring, Eastern Europe in the last few months. Containing the outbreak represents an enormous sanitary challenge. Since the disease is spread easily, is highly lethal to the herds and does not have control mechanisms such as preventing vaccines. As a result, some experts believe that the China pig herd will shrink by 50%, a decrease around 25 1,000,000 tons on pork meat, only considering China figures, which will have a major impact on the global animal protein chain. It's worth noting that China has approximately 50% of the global pig herd. The impact of the consumption has become increasingly evident with record import volumes of animal protein in China, especially beef. In the 1st 9 months 2019, China imported 1,100,000 tons of beef, 53% more than in the 1st 9 months of 2018. It's worth noting that the performance of Argentina and Brazil, the 2 main exporters of beef to China in 2019, with a combined market share of almost 50%. But this impact is also be noticeable in other countries due to the huge demand coming from the Chinese market. As a result of strong demand in early September, 2 Minaba slaughter plants were authorized to export to China, increasing the Brazilian Industry Division's exposure to China by more than 5 times, totaling 4,300 heads per day, which should have a positive impact on our operation in the 4th Q 'nineteen. Considering the Brazilian Industry Division and Atena Foods, our current exposure to the Chinese market compromised of 7 plants and almost 10,000 heads per day, around 45% of our total operating capacity. 3rd Q 2019 brought more good news to the Brazilian Industry Division. The country was authorized to export beef to Indonesia, the world's main consumer market for Halal cuts. 10 Brazilian plants were authorized for this market, 5 of which belongs to Minerva with a total capacity of 6,400 heads per day. In order to further benefit from a strong demand for beef in the Chinese market, on October 1, we are announcing a MOU for a creation of a JV with a local partner to develop new business opportunity in China. Let's move to the next slide where will discuss the strategic partnership in more details. The partnership with the Chinese player will enable Minerva and Athena Foods to strengthen their presence in China and in Asia, expanding our distribution capillarity and contributing to new business opportunities through customized products with higher value added. Currently, a lighter share of Minerva and Atenus exports to the Chinese market refers to the B2B operation, which means that we will work with distributors who are responsible for accessing the final customer. The partnership is designed to allow us to directly assess final customers and thus make progress in the beef value chain. Direct access to the final consumer will allow us to better understand the Chinese market, expanding the business opportunities and strengthening our presence in the region. Finally, I would like to highlight that Avenova holds control of the partnership with a 51% interest and this venture does not require meaningful investments apart from a limited amount of working capital. Let's now have a look on Slide 4, where we will take a brief about Minerva's operation performance, beginning with our exports. In the 3rd Q of 'nineteen, Minerva continued to be one of the main exporters in the country which we operate. In Paraguay, we accounted for 43% of beef exports, consolidating our position as the country's main exporter. In Uruguay, we had a 22% market share of beef exports. In Argentina, our market share reached 16%. It's important to point out that we maintain our position as the leading South America beef exporter with a 20.1% market share. On the right hand side of the slide, we have a breakdown of exports by region. In the Brazilian Industry division, the 2 main destinations were Asia and Middle East, which together accounted for almost half of the division exports. In Athena Foods exports, Asia was once again the main destination accounting for 44% of exports, 11 percentage points more than in the same period last year, mainly impacted by strong demand from China. If we consider currency spreads on 4Q 'nineteen, the Brazilian operation has been recording almost 200 bps increase on its margins as an effect of major prices and exposure to Southeast Asia. These results reflect a strong demand from Asia and the positive export momentum mentioned at the beginning of the presentation, which we will continue in the coming quarters. Bear in mind that we will receive the approval for additional 2 plants in Brazil only late in September. So the results contemplated only the last 2 weeks of the quarter, which means that we will notice effective impact on results in the coming quarter. I will now give the floor to Edson, who will discuss Minerva operating and financial highlights. Thank you, Fernando. We will now present Minerva's financial operating highlights as well as Slide 5. Talking about our performance, on the upper left corner, we have a breakdown of the company's gross revenue by division. The Brazilian division accounted for 49%, while Atena Foods contributed with 39% and finally the trading division generated 12% of the revenues in the 3rd quarter. Brazilian division capacity utilization rate reached almost 80%, more than 3 percentage points higher than the previous quarter. Atena Foods, the capacity utilization stood at 77.7% in the quarter, more than 2 points higher than in the 2nd quarter. Overall, the company's consolidated capacity utilization rate reached 78% in the quarter, within the 75% to 80% range that we consider to be optimal. Finally, on the right side, we also again emphasize the great exposure of Minerva's exports to regions with strong growth of demand, such as Asia that accounted for 39% of total exports in the quarter, which means a clear effect of the growth of demand coming from China. As Fernando just mentioned, China currently accounts for a large share of exports in the region with the highest demand potential in the short and medium term. Indonesia is also a big opportunity that also Fernando has just mentioned. Asia as a country as a continent accounted for 39% of total exports and around 30% went only to China versus 23% in the Q3 of 'eighteen, which means an increase of 7 percentage points, a scenario that we believe should be intensified in the coming quarters, especially because of the new approved plant from Brazil to China. In the last 12 months, China accounted for 27% of consolidated exports. It's important to remember that also Fernando just mentioned, the 2 plants that were approved in September, they haven't contributed to the results of the Q3 yet. They're going to start contributing in the Q4 and coming quarters. On Slide 6, we can see the 3rd quarter net revenues that reached BRL4.5 billion, up 4% over Q3 'eighteen. In the last 12 points ended September, net revenue came to around R17 $1,000,000,000 up 80% year on year. Also regarding our top line exports accounted for 66% of gross revenues in the Brazil Industry Division and 79% of gross revenue in Atena Foods Division. This also reflects the strong demand for China, which in the case of Atena Foods is served by our plant in Argentina and other 3 plants in Uruguay. EBITDA reached R455 $1,000,000 in the quarter, jumping 25% year over year with an EBITDA margin of 10.1 percent. In the last 12 months, EBITDA reached more than BRL1.6 billion. Finally, the net debt to EBITDA ratio stood at 3.8 times, flat when compared to the Q2 of 2019. Although gross debt has a significant impact coming from the FX variation that depreciated 9% in the period or more than $0.35 The strong cash generation reported by Minerva in the quarter allowed us to offset the impact and contributed to keep leverage stable in the quarter. Let's move now to Slide 7 to discuss net results and cash flow. Considering the net result before income and taxes and also excluding non cash effects coming from FX variation and monetary correction, the company would have had a net income before taxes of approximately BRL93 1,000,000. We had a negative impact on the FX side that came from the FX variation, which is non cash and also positive impact coming the FX hedging policy that impacted in BRL165 1,000,000 positive in the quarter. Moving to the cash generation, operating cash flow reached almost R1 $1,000,000,000 in the quarter. The main highlight was the working capital variation that was positive by BRL415 1,000,000 in the quarter and was supported by firstly the other payables line, which includes the advances from clients that generated around R225 $1,000,000 in the quarter. This is explained by the higher advanced payment required for some clients for some sales made during the quarter. And also we had a very positive impact for almost half of the BRL415 1,000,000 coming from the suppliers line where we were able to increase our days of payment during the quarter. We expect those improvements to continue happening in the Q4 and coming quarters. So we expect working capital to continue generating positive cash flow in the coming quarters. In the 3rd Q '19, free cash flow reached BRL510 million. Talking about this buildup, we begin with EBITDA of R455 1,000,000. Total CapEx of the quarter R62 1,000,000. Cash basis financial results negative BRL298 1,000,000 and also the working capital positive variation of BRL415 1,000,000. So again, free cash flow was positive in the quarter by around BRL510 1,000,000, which implied a free cash flow in the last 12 months of more than BRL1 1,000,000,000 in the 12 months ended in the 3rd quarter. It's worth noting that this is the 7th consecutive quarter of positive free cash flow. So this shows the commitment that we have on pursuing a more efficient operational management and also our commitment to use the cash flow generated by operations to deleverage further the balance sheet of the company. Let's move now to Slide 8 to discuss Minerva's capital structure. As we have already mentioned, the leverage the net leverage ratio remained flat at 3.8 times at the end of September in spite of the great impact that came from the FX depreciation in the quarter. The cash position at the end of the quarter was R3.6 billion dollars very comfortable and enough to pay all the amortizations until 2026. 79% of our debt was exposed to the dollar variation and it's worth reminding that currently more than 50 percent of our long term exposure is hedged. Finally, the debt duration is stayed also in a comfortable profile, reaching almost 5 years. This concludes our presentation. We are now open for the Q and A section. Thank you very much. Thank you. We will now start the question and answer section for investors and analysts. This concludes the question and answer session. At this time, we would like to turn the floor over to Mr. Fernanda Nochebas for any closing remarks. I would like to close this conference call by once again thanking Minerva's entire team for their efforts and dedication, leading to a healthy performance in the Q3 of 2019. I'd also like to reiterate our invitation to our Minerva Day 2019, which will be held in New York at NASDAQ Markets High, Times Square on November 18 at 1 p. M. I also thank you for your interest in the company and we remain at your disposal for any questions and clarifications. Thank you very much. Thank you. This concludes today's presentation. You may disconnect your lines now.