Earnings Call: Q2 2019

Jul 26, 2019

Afternoon, ladies and gentlemen, and thank you for waiting. At this time, we would like to welcome everybody to Minerva's Second Quarter August 2019 Results Conference Call. Today with us, we have Fernando Quayas, Chief Executive Officer and Eric Santico, 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 slideshow of this presentation are available through the live webcast at www.minerafoods.combarir and MVAQ platform. The slideshow can also be downloaded from the Marques Bar form in the Investor Relations section in this website. Before proceeding, we wish to mention that all forward looking statements may be made during this presentation relating to Minerva's business prospects, operations, international, estimates and goals. They are based on the beliefs and assumptions of the company management and all the information currently available. They involve risks, uncertainties and assumptions because they relate to the future events and therefore depend on the circumstances that may or may not occur in the future. Investors should understand that the 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 wish now to turn over the floor of the conference call for Mr. Fernando Quiras, CEO, who will begin the presentation. Mr. Queras, you may proceed with your presentation. Thank you. Good morning, everyone, and thank you for participating Good morning, everyone, and thank you for participating in Minerva's conference call on the results for the Q2 of 2019. I'd like to begin this conference with a brief discussion about a topic that has been widely discussed in the last few months, the African swine fever and the opportunity related to the outbreak. Let's move on to Slide 2. African swine fever is a disease that since the second half of 2018 has been decimating pigs' herd in Asia, particularly in China, with a great impact on the animal protein market. In the graph on the right, we see that pork accounts for a large share of the global meat diet, especially in China, where it represents almost 50% of the animal protein consumption, almost all of which is supplied by their domestic production. This means that as a direct effect of the ASF outbreak in China, we expect to see a substantial reduction in this production. Therefore, price is rising and consumption of pork are suffering with it. According to the FAO, the ASR outbreak has reached 234 regions with confirmed cases, most of which in China and neighboring countries such as Vietnam, Cambodia and also in Eastern Europe. Containing the outbreak represents a normal sanitary challenge since the disease is spread easily and is highly lethal to the herds and does not have any control mechanisms such as preventive vaccines. As a result, some experts believe China pig herd will shrink by 30%, which would be a great impact on the entire animal protein chain. It's worth noting that China has approximately 50% of the global pig herd. In the graph on the bottom left corner, we can see some interesting figures, such as a significant decline in pork production in China in 2019 and the prediction for 2020, a clear consequence of the recent and the still present ASF outbreak in the country. There are some markets indicators supporting that this supply shock will be offset partially by consumption of other proteins such beef, thus creating a great opportunity to our industry. As you can see in the information on the bottom right corner, due to the availability of healthy herd and low production costs in South America players currently account we currently account for 70% of the Chinese beef imports, which have been increasing substantially in recent years, thanks to the higher income levels, urbanization and the utilization of the consumption patterns in China. This increased share of South American exporters also benefit from the cuties faced by other players such as Australia, which has been increasingly facing tough climate conditions over the past few years and the United States, which has export restrictions due to localization of hormones in the herd. That is forbidden in China. And also the uncertainty related to the trade war. I would like to highlight Atena's food exposure to the Chinese market, mainly through our operations in Argentina. In the first half of twenty nineteen, our Rosario plant was, on a global basis, the plant with the largest volume of beef exported to China among 100 another units worldwide. In view of this good moment and in order to maximize the opportunity in the Chinese market, in June, we resumed our operation in Venado Tuerto unit, also in Argentina. Currently, Vicinity is in a ramp up stage and will be at full operation by late August. To conclude, we believe that Afro and Swine Fever will further drive growth of beef consumption in China, indirectly benefiting beef producers in South America, the region that's best prepared to meet growing demand in Southeast Asia. In this context, we believe that our footprint in South America, our expertise in the Chinese market and the first effects of the African swine fever outbreaks on animal protein consumption and its production chain will create great business opportunity in the upcoming quarters. It's also worth to say that this impact is not only a temporary issue as also has interesting long term perspectives as ASF outcome implies in protein consumption changes not only because of prices but also due to changes in population consumption habits. Let's move to Slide 3 to discuss the main highlights for the Q2 of 2019. We'll begin with operating cash flow, which totaled BRL322 million in the Q2 of 2019 and BRL1.3 billion in the last 12 months. Another cash indicator, free cash flow was positive for the 6th consecutive quarter, totaling BRL143 1,000,000 in the 2nd Q 'nineteen and BRL642 1,000,000 in the last 12 months. Thanks to the strong operational performance, consolidated gross revenues totaled BRL4.3 billion in the 2nd Q of 'nineteen and in all time highs, BRL17.8 billion in the last 12 months ended in June. Our revenues breakdown shows that 43% of gross revenues or $1,900,000,000 came from Atena Foods, our operation in South America ex Brazil. The Brazilian Industry division accounted for 42% of the total or BRL1.8 billion of consolidated revenues. Our trading division was responsible for the remaining 15% with approximately BRL630 1,000,000. In the Q2, Minerva exports once again stood out accounting for 67% of the gross revenue in the 2nd Q 'nineteen, 14% higher than in the 2nd Q 'eighteen. Consolidated net revenues reached BRL4 1,000,000,000 in the 2nd Q 'nineteen, 8% more than in the 2nd Q 'eighteen, reaching BRL16.7 billion in the last 12 months ended June. EBITDA totaled BRL364 1,000,000 in the 2nd Q 'nineteen, up 3% over the 2nd Q 'eighteen with an EBITDA margin of 9%, 20 bps higher than in the previous quarter. Adjusted EBITDA came to BRL1.6 billion in the last 12 months with an adjusted EBITDA margin of 9.6%. The net result adjusted for the non cash nonrecurring effect totaled approximately BRL27 1,000,000 in the quarter. We closed in the Q2 with leverage measured by net debt to LTM EBITDA ratio of 3.8x, in line with the 1st Q 'nineteen. Our debt duration remained at a very comfortable level at around 5 years. It's worth noting that in early April, we conclude the redemption of our perpetual bonds, our most expensive debt, reinforcing the company's commitment to pursuing a more efficient capital structure. Let's have a look on Slide 4, where we will talk briefly about Minerva's operation performance, beginning with our exports. In the 2nd Q 2019, Minava continued to be the main exporter in the countries where it operates. In Paraguay, we accounted for 47% of the beef exports, consolidating our position as the country's main exporter. In Uruguay, we have 20% market share of beef exports. In Argentina, our market share reached 17%, 6 percentage points more than in the previous quarter. It's important to point out that we maintain our position as the leading South America beef exporter with a 21% market share. And recalling that South America represents 35% of the global exports, Minerva's total exports represent approximately 7% of the worldwide exports of beef. On the right 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 more than half of the division. In Atena Foods exports, Asia was once again the main destination, accounting for 42% of exports, 11 percentage points more than in the same period last year. I believe that it will be useful to talk about the increase in China exports growth to China, in particular as revenues from exports to this country as they grew 61% between 2ndq 'eighteen and 2ndq 'nineteen. This means that in addition to the market share growth, we also had a significant increase in our volume of exports to Asia in the last 12 months. I will now pass the floor to Edson that will discuss Minerva main financial and operating highlights. Thank you, Fernando. Let's move to Slide 5. Minerva's gross revenue reached $4,300,000,000 in the Q2 of 'nineteen, 80% more than in the Q2 of 'eighteen. In the last 12 months ended in June, gross revenues reached BRL17.8 billion, an all time high and 14% higher than in the LTM Q2 'eighteen. The Brazilian Industry Division's capacity utilization rate declined to approximately 76.7%, falling 3.4 percentage points from the previous quarter. The decline was mostly due to the rainy season, which lasted a little longer than normal at the beginning of the quarter and the 1 week and also the 1 week suspension of exports to China. At Atena Foods, the capacity utilization rate stood at 75.4% in the quarter, 3.9 percentage points higher than in the Q1 of 2019. We were able to increase the capacity utilization rate, thanks to higher demand in China, and this increase was more noticeable in Argentina and partial normalization of finalized result of volumes that were a little bit lower in the Q1 due to the rainfall. Overall, the company's consolidated installed capacity utilization rate was at 76% in the 2nd quarter, in line with the 1st quarter and we've seen the 75% to 80% range that we consider to be ideal. On the upper right corner, we have a breakdown of the company's gross revenue by division. For the first time, Atena Foods division accounted for 43% and became bigger than the other divisions in Minerva. Brazilian Industry Division contributed 42%. The Trading Division generated 15% of gross revenues in the Q2 2019. Finally, on the bottom right corner, we once again emphasize that the great exposure of Minerva's consolidated exports to regions with strong potential demand, such as Asia, especially China, that accounted for 37% of total exports in the quarter. Let's move to Slide 6 to continue the 13 operating results. The company's consolidated net revenue reached BRL4 1,000,000,000 in the 2nd quarter, 80% higher than in the same period last year, while in the last 12 months and in June, net revenues stood at BRL16.7 billion, a growth of 12% year on year. Also regarding our top line, exports accounted for around 67% of gross revenue in the Brazilian Industry division and 77% in Athena Foods. EBITDA reached BRL 364 1,000,000 in the quarter, 3% higher year on year and also a record 4th 2nd quarter with an EBITDA margin of 9%. In the last 12 months, adjusted EBITDA reached $1,600,000,000 with a margin of 9.6%. Finally, the net debt to EBITDA ratio stood at 3.8x in the quarter, practically in line with Q4 and Q1 'nineteen. We will now move on to Slide 7 to discuss net results and cash flow. Considering the net results before income and social contribution taxes and excluding the non cash effects that impacted the results, such as FX variation, monetary correction in Argentina, FX hedge and, essentially, in this quarter, the payment of the consent solicitation to our bondholders, the company would have record a net income before taxes of approximately BRL 27,000,000. Bear in mind that the consent was a waiver signed in April to exclude Aetna Foods from the guaranteed structure of the bonds issued by Minerva. In terms of cash, operating cash flow was BRL 322 1,000,000 in the 2nd quarter. Net income adjustments were BRL 336 million, while the working capital variation was a positive BRL99 million. Our working capital line was supported by the suppliers line that contributed with BRL46 1,000,000 in cash in the quarter and the other payables line, which includes the advances from clients that generated cash of around BRL132 1,000,000. Design is a little bit volatile because it's correlated to our credit policy and to the destination of our exports. The credit policy requires prepayments depending on the country, depending on the client credit score. So there is a great correlation between this account and the breakdown of our sales. In the Q2 2019, recurring free cash flow was BRL143 1,000,000. The buildup with an EBITDA of BRL264 1,000,000 CapEx of BRL68 1,000,000 a negative financial result of BRL295 million and finally, a positive variation of working capital of BRL99 1,000,000, which resulted in a positive free cash flow of approximately BRL100 1,000,000. However, with the adjustment for the nonrecurring effect of BRL43 1,000,000 related to the constant solicitation, the recurring free cash flow in this quarter was BRL143 1,000,000. It's important to highlight that this is the 6th consecutive quarter of positive free cash flow, which is a very important indicator for the industry since we are in a commodity sector, so cash flow generation is pretty much volatile. These results reflect the company's commitment to pursuing a more efficient operational and financial management for the long term. Finally, recurring free cash flow reached a substantial BRL642 1,000,000 in the last 12 months. We started doing fine EBITDA of BRL 1,600,000,000 in the period, CapEx of BRL 186 1,000,000, negative financial results of approximately BRL 1,000,000,000 and a positive variation in working capital of BRL 196 1,000,000, resulting in a positive free cash flow of approximately BRL580,000,000. Finally, adjusting for the recurring adjusting for the nonrecurring items in the period that were around BRL63 1,000,000, We have recurring free cash flow of BRL642 1,000,000 for the last 12 months. Let's move to the next slide of the presentation to discuss capital structure. Our leverage, as we already mentioned, measured by the net debt to EBITDA ratio remained flat at 3.3x at the end of June. The company had a cash position of BRL3.1 billion at the end of the quarter and around 75% of our debt was exposed to the dollar variation. Duration of our debt, approximately 5 years. And it's also worth noting the reduction of approximately BRL750 1,000,000 in our gross debt, showing our commitment to pursue a more balanced capital structure in order to reduce the carrying cost of our cash and also reduce the financial expenses going further. Still the topic of liability management in the Q2, we issued local debenture. In we issued BRL 400,000,000 of our local debenture at the rate of CDI plus 1 180 basis points. It's a 3 year debenture, and 100% of the proceeds were used to refinance short term debt. This concludes our presentation, and let's now begin the Q and A section. Thank you very much. Thank you. We will now start the question and answer session for you. Right now, we have a question from Luca from Goldman Sachs. You may proceed. Hi, good morning. Thanks for the question. I listened to the earlier call. So I only have a more of a maybe more of a general sort of follow-up on capital structure. I mean, the results today, and I think everything we keep hearing and seeing clearly show that the environment, the outlook for the sector has improved, has changed, is looking better and especially compared to when you sort of initially start to examine or looked into the Athena Food transaction since then. So with that in mind, can you maybe walk us through how is that still the only and preferred option or how fluid is that discussion in terms of other alternatives for deleveraging capital structure, especially considering what might be the optimal corporate structure sort of in the medium term now that the urgency is still there from a balance sheet standpoint, but maybe it's a little less pressing given how the sector and the outlook has evolved? Luca, different thing. I think the idea of Atina Foods has 2 important objectives for us. The first one, obviously, is to speed up the deleveraging process of our balance sheet. But I think there's another one, which is unlock value unlock hidden value from our international operations. So when we pursue that growth of Tina Foods, we have these 2 main objectives in mind. We have been very careful in terms of valuation to do this IPO. We have the chance or the option to do the IPO until April next year. But obviously, we are open to other opportunities, to other alternatives. But so far, we keep having the Aperol Fatima Foods as our plan A. Right. And sorry, just when you say hidden value, why would it be hidden? At the end of the day, you're in the same sector. You are listed in Brazil, which is arguably the most developed of the markets in Latin America and the ones where there's probably greater awareness and understanding about the product industry in general. So when you I think you've mentioned the hidden value before, but why would it be hidden? Hidden? And why you like to go? Yes, it's a good question, Luca. Firstly, the multiples of the companies in the sector in Brazil, they suffered a bit because of the high leverage of the sector. As you probably know, Atena Foods has practically no debt. So this would imply a premium to Atena Foods compared to any other listed player in Brazil. The The second is that the growth of Minerva, 100% of the growth will be done in Athena Foods. So when you see the growth in Minerva, it's diluted in our operations. When you focus on in Atena, Atena Foods tends to be an important growth company. And third, Atenafur has more access to markets that are growing more fast in the world like Asia, like China. It's much more exposed to those markets than Minerva as a whole. So I think there are a couple of reasons that would imply at Dana Foods to have a better valuation than Minerva. I think I mentioned 3, the 3 most important of them. But if you want, we can discuss further other reasons why we see Atena Foods at a higher valuation than Minerva. I would add to what Edson said, Luca, that our position as a leading exporter in all these countries in South America that we are in. This also brings different value for being the number 1 or number 2 exporters in all these countries that we have. Okay. That was clear. Thank you. Thanks for the clarification of the answer. It's very interesting. Thank you. Our next question is from Thiago Mello from Arevesco Biblay. Thiago, you may proceed. Yes. Hi, Fernando Mendez. So thank you for the question. So I'd like to ask 2 on Foodservice. So in our view, the segment has become something of a trending topic, and we see it gaining some investor attention. So I would like to know if you have any updates on the segment in both terms of growth and profitability, especially now due to the ASF? And also, we have talked to some other protein companies such as, for example, BRS, and they have mentioned interest in setting up for a possible foodservice partnership. So I would like to know if that would be on the table for Minerva. Worldwide, we are present in 3 main segments. It's the retailers, the industries and the foodservice. There is a big growth and a lot of demand from the foodservice segment. That's why Minerva is specialized in working in niche. So we have we are one of the biggest exporter of organic. We are one of the biggest exporter on special breeds such as Perfor or Angles. So things like that, it's part of our strategic plan. The growth, especially in Southeast Asia, it's very focused into the foodservice, where our presence is very strong and keeps growing. We are world suppliers of food surface chains. So we are very, very close, and we are partnering with them on their development, on development of their products. It's a part of our strategy to be and it's part of what's happening to the world that should be more and more segmented. Okay. Thank you. So just a quick follow-up. So in terms of partnerships, would you see something possible due to, I don't know, protein portfolio diversification? No. We will not go down to the chain. Our focus is to produce in the origins and to have partnerships in delivering the pellet through to our clients. We are not operators of foodservice chain. It's not our focus. Yes. Okay. Thank you very much. As there are no further questions, we do conclude the question and answer session. At this time, I would like to turn the floor over to Mr. Fernando Queroz for any closing remarks. I'd like to end this conference call by emphasizing that we remain confident in our business model, in our team's hard work and in the combination of our meritocracy, appropriate strategy, operational efficiency, capital discipline and commitment to the ethical and sustainable processes as the best way to create our long term value. I once again would like to thank all the Nuenavra team for their efforts and dedication to reach the results that we discussed today. I would like to thank you all for your interest in Minerva, and please feel free to contact us should you have any questions. Thank you very much. Thank you. This does conclude today's presentation. You may disconnect your line at this time. Have a nice day.