Earnings Call: Q1 2019

May 15, 2019

Good afternoon, ladies and gentlemen, and thank you for waiting. At this time, we would like to welcome everybody to Minerva's First Quarter of 2019 Results Conference Call. Today with us, we have Fernando Queiroz, Chief Executive Officer and Edson Chikli, 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 our live webcast at www.minerafood.com slash ir and in MZiQ platform. The slideshow can also be downloaded from the webcast platform in the Investor Relations section of 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 beliefs and assumptions of company management and information currently available. They involve risks, uncertainties and assumptions because they relate to 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. Fernand Queiroz, CAO, who will begin the presentation. Mr. Queiroz, you may start the presentation. Good morning, everyone, and thank you for participating in Minerva's conference call on the results for the Q1 of 2019. We will now begin our presentation and discuss the main highlights for the quarter. Please have a look on Slide 2. Minerva began the year with recurring free cash flow of BRL42 1,000,000, recording free cash flow generation for the 5th consecutive quarter. In the last 12 months, recurring free cash flow reached BRL743 million and the free cash flow yield surpassed 25%. Consolidated gross revenue totaled BRL4 1,000,000,000 in the 1st Q 2019 and BRL17.4 billion in the last 12 months ended March. Our revenues breakdown show that 44% of gross revenues come from the Brazilian division, equivalent to BRL1.8 billion. Atena Foods, which compromised our operations in Paraguay, Argentina, Uruguay, Colombia and Chile, contributed with BRL1.5 billion or 39% of the consolidated revenues. Finally, the Trading division accounted for the remaining 17%. We once again highlight that Minerva's exports accounted for 61% of the gross revenues in the 1st Q 2019 with a growth of 6% comparing with the 1st Q 2018. It's worth mentioning that the Q1 is seasonally the weakest quarter even for exports. The beginning of the year is the period that some countries are organizing quotas, distributing and also vacation period for some of our clients. EBITDA adjusted for non recurring items totaled BRL329 1,000,000 in the 1st Q 2019, 15% higher than the 1st Q 2018, while the EBITDA margin came to 8.8%, up 60 basis points over the same period last year. As a reflection of the operational and the financial performance, net income adjusted for the non cash and non recurring effects totaled approximately BRL22 1,000,000. Regarding the capital structure, we closed the first month of 2019 with a leverage ratio measured by the net debt to LTM EBITDA ratio of 3.8 times, in line with the 4Q 2018, confirming Minerva commitment to capital discipline. We could not fail to mention the opportunities offered by the swine fever. Expected 15% to 20% decline in global pork supply. According to the USDA, for the first time in 25 years, the global supply of animal protein will be lower than in the previous year, a clear consequence of the African swine fever. This reduction in supply should offer great opportunities for global animal protein producers, including beef producers, especially South American ones that are occupying the gap left in the demand. Our commercial expertise and good relationship with Asian, especially Chinese clients, great cattle availability in the region and the competitive advantage of South American countries in the production of beef make us very optimistic about this opportunity. I always make a point of emphasizing that South America has been increasingly consolidating its position as the world main beef producer and export platform and we are even more optimistic about the possibility that may rise in 2019. We are attending Siau Fair in China during this week and we have some updates from our commercial team. Prices in Asia are between 10% 15% higher comparing the last 3 weeks. Moreover, there is another short term trend related to Australia beef production as effect of extreme weather conditions in the region. Both events unlock great opportunities to consolidate South America as a key player of the beef trade market. Let's have a look on Slide 3, which will talk briefly about Minerva's operational performance beginning with our exports. In 1st Q 2019, we continue to be the main exporter in the countries where we operate. For example, our share in Paraguay beef exports came to 45% consolidating our leadership in the country, while our share in Uruguay beef exports went up to 24% of the total of the country, up 3 percentage points compared to the 1st Q 'eighteen. Considering our share in this and in the other South American countries, the company reached a market share of 20% of the total beef exported out of South America. Minerva was once again the main exporter of the region. We will now analyze our exports by region at the right of the slide, always considering the last 12 months in order to exclude the seasonal effects. In the Brazilian division, the 2 main destinations continue to be Asia and Middle East, which accounted for over 50% of the Brazilian exports. In Atena exports, Asia was also the main importer followed by the Commonwealth of the Independent States, with growth of 9% compared to the same period of 2018. We highlight here the company's good performance in markets with great potential such as Asia and Middle East. As I mentioned, China has constantly opened the doors to South American players and Minerva can benefit greatly from this. We are waiting good news related to the Brazilian visit in Asia, including our Ministry of Agriculture, such as opening of new plants to export to China. Also is expected that other countries would open to the market open their markets to Brazil like Indonesia. I will now give to Edson that we will discuss operation highlights. Edson? Thank you, Fernando. Good morning, all. Let's start on Slide 4 to discuss the operational financial highlights. Famineva's gross revenue reached BRL4 1,000,000,000 in the Q4 of 2019, a 6% growth when compared to 1st Q 2018. In the last 12 months ended March, gross revenue reached BRL17.4 billion, up 21% year on year. As we mentioned at the beginning of the presentation, a breakdown of this revenue shows that Brazilian division accounted for 44% of gross revenue, Atena Foods contributed 39% and the trading division accounted for the remaining 17%. The company's installed capacity utilization rate was impacted by the rainfall, especially in Paraguay and also in Argentina. In Paraguay, there were some problems with cattle transportation because of the rainfall. And as a result, Atena Foods' capacity utilization rate fell to 71%. Nevertheless, the consolidated capacity utilization rate remained at the range of 75% to 80%, which we consider very close to the ideal level. Finally, at the right bottom corner of the chart, we once again emphasize the great exposure of Minerva's consolidated exports to regions with strong demand potential such as Asia, especially China, which accounted for 34% of our total exports in the quarter. If you see what happened to the Asia share on Athena Foods, for instance, it grew from 29% in LTM Q1 2018 to 39% in the LTM Q1 2019. So this shows the high exposure of Minerva and also of our subsidiary areas to the growth of the Asian region. Continuing in the next slide, in the Slide 5, presenting the financial highlights. The company consolidated net revenue reached BRL3.7 billion in the first quarter, a growth of 6% when compared to the Q1 of 2018. In the last 12 months ended March, net revenues stood at BRL16.2 billion, up 13% compared to the same period of last year. EBITDA adjusted for non recurring items reached BRL329 1,000,000 in the 1st Q, 17% higher year on year with an EBITDA margin of 8.8%, a 70 basis points expansion when compared to the Q1 of 2018. We had an adjustment of BRL19.5 million in the quarter due to a disbursement related to a divergence in the tax ICMS tax calculation base related to operations in Sao Paulo, Minas Gerais and Goias states. The company incurred in a penalty paid on the Q1. In the last 12 months, however, it is important to highlight that this penalty is under judicial discussion in the coming quarters. In the last 12 months, EBITDA reached BRL1.6 billion, 22% higher than in the same period last year. The gross revenues breakdown shows that in the Brazilian division around 65% of the revenues came from exports and in Athena Foods approximately 72% was rooted to the export market. Finally, the net debt to EBITDA ratio reduced to 3.8 times in the quarter in spite of the FX depreciation of 1% in the quarter. This good result on the deleveraging of the company is obviously a result of the 5th consecutive quarter of free cash flow generation after CapEx, financial expenses and working capital. By the way, let's talk about the cash generation in the next slide. So beginning with the net result in the Q1 2019, after adjustment for the non cash effects, the FX variation, the monetary correction that came from Argentina, FX hedge and the non recurring item already mentioned, the company would have a net income of BRL22 1,000,000. In terms of cash, operating cash flow was BRL240 1,000,000 in the quarter. Looking at the free cash flow in the Q1, the company generated recurring free cash flow of BRL42 $1,000,000 So first quarter EBITDA was R329 $1,000,000 Maintenance and expansion CapEx was R28 million. The CapEx disbursement is below the average, the quarterly average because part of the expenses were postponed to the Q2 in line with the expectations that we have around the approval of new units in Brazil to Chinese market, also opening of new markets like Indonesia in South America. So we decided to concentrate the CapEx on expansion and preparing those lines to be ready to attend these new markets. The cash financial result was negative by BRL247 1,000,000 in the quarter, while the working capital variation was is likely negative around BRL12 1,000,000. So the recurring cash flow stood at BRL42 1,000,000. If we put in the calculation the non recurring effect of the BRL19.5 million, the free cash flow total in the quarter was a positive BRL23 million. Looking at the cash flow for the next for the last 12 months, the recurrent free cash flow was BRL743 1,000,000, a 25 percent positive free cash flow yield when compared to the company's market cap. And if we adjust for the non recurring items, the free cash flow was BRL724 million in the last 12 months. Let's move now to Slide 7 to discuss capital structure. Our net leverage, as we have already mentioned, remained practically flat at 3.8x at the end of March. The company's cash position ended the period at BRL3.9 billion, keeping us in a very comfortable position for any possible volatile scenarios. At the end of the Q1, around 76% of our total debt was exposed to the FX variation and the duration of our debt was approximately 5 years. This concludes our presentation. We will now begin the Q and A session. Thank you very much. Thank you. We will now start the question and answer session for investors and analysts. Mr. Diego Sainz from Masvylife would like to ask a question. Hi, good afternoon. I would like to ask if you could comment a bit about the cattle availability in the different markets where you operate and what are your expectations regarding the cattle cycle in each of these markets? Let's start with Brazil. Brazil has been breaking records on birth of coughs for the last 4 years. So it's at least for the next 3 years we have a positive cycle in Brazil. Paraguay, it's in a retention of females. There are new areas, new pasture that was being incentivized by the government. So Paraguay, for the next 5 years we have a pretty stable supply. Going to Argentina, same direction as Brazil, records on births of COFs. So very positive scenario for at least 3 years. Uruguay is flat. There is no increase, no decrease, stable size of the herd. So no major surprises from Uruguay, but there is not much growth coming from Uruguay. Colombia also in a positive scenario, very similar to the Paraguayas one, new areas, new frontiers. So in general, South America, it's increasing. If you analyze South America as a whole, the herd is increasing, while the rest of the world is decreasing. If you look, Australia is the lowest size of the herd since 2000. Same thing applying to the major developed countries. So very positive scenario for consolidating South America as the major supplier of beef meat in the world. Okay. Thanks. And if I may have a follow-up regarding Argentina, are you looking to mean, if you see an opportunity, are you looking to still expand capacity or open new plants even after the postponement of the Athena IPO? Yes. Well, considering all the swine fever, the possibility that the record exports that Argentina is breaking into Southeast of Asia pulled by China. We'll keep on track with the reopening of Venado Tuerto. That's one of our plants over there. That requires a small CapEx. Just to complement and put some numbers on this decision, the reopening of Enado to Euerto can require something between $5,000,000 to $10,000,000 of CapEx and not more than $20,000,000 in terms of working capital. However, this plant can add an additional EBITDA for 2020 of around $30,000,000 So it's less than 1 year payback. So it's no brainer to reopen as soon as possible this plant. Great. Thanks. Allen Cho from MEEG would like to ask a question. Hi, thank you for the presentation. I'm curious if you could provide us an update on your leverage and the ratings outlook. What kind of rating do you view as optimal for your operations? And my second question would be on the impact of the trade tariff and also the African swine fever in China. How do you assess the impact on your business? Thank you. So we have a clear deleveraging plan. We are using 100% of the free cash flow generated from operations to pay down debt. So that's why if you compare the leverage to 1 year ago, net leverage was around 4.5 times. Even with the currency in Brazil depreciating more than 20% and we are able to reduce leverage 3.8 times. We have a clear commitment to continue deleveraging the company and put the leverage ratios in 2 years at a level between 2 times and 2.5 times. And part of the deleveraging plan to help to deleverage more quickly the company is the IPO of Athena Foods that we are going to do as soon as possible when the market conditions allow and when the market conditions improve. Talking about ratings, our ratings from Standard and Poor's are at BB- level with a stable outlook. Talking to rating agencies, if you are able to deleverage more quick the company especially through the IPO of Athena Food, we can have an upgrade in the short term at least one notch. And the idea is to continue deleveraging the company to keeping the free cash flow generation being used to pay down debt until we reach a leverage ratio, Marco, to 2 times. I'll hand it to Fernando to talk about the ASF prospects. First on the swine fever, consider that China holds 50% of the world herd of pork and there are estimations that between 30% or higher than 30% will be affected to be gone contaminated by the swine fever. That means a reduction on the total global supply of pork of 50%. If we consider that 1 third of that will be replaced by beef protein, we'll have approximately 2 times of the trade that exists today. As I said in the presentation, we have our team into the main food fair into China. The reports from last night is that prices are up around 15% comparing the prices that were traded 3 weeks ago on average, some products more than that, some products a bit less. So this shows the gap on the supply demand that exists. On the trading tariff war, we are not so we see that if the war continues between U. S. And China, it will open a door, a wider door for South America to occupy the space. If they get to an agreement, it won't have a dramatic effect on our business because the beef produced in the United States contains hormones and hormones are not accepted by the Chinese authorities. So we think that even though you can have an agreement that we can each one can judge if it's likely or unlikely. We see that South America will definitely occupy this space. These are reinforced saying that Australia trend is to go down dramatically on the production for the last half of the year. Thank you. That's very helpful. Maybe a follow-up on the IPO of Athena Foods. I'm just curious if you would consider other option other than IPO, maybe private placements or any other arrangement that could help you achieve your goals of a monetization of this interest? Thank you. We could consider any option that would help us to achieve our objective, especially in terms of valuation of Athena Foods. From now what we see is that the IPO of the company is the best way to maximize the value and to reach what we believe is a fair value for the company. Okay. Thank you. Chris DiCarriou from Marathon Asset would like to ask a question. Yes. Hi. My So the postponement of the IPO was due to market conditions as the company stated. I know that they it was supposed to price was a very bad day in the market. But just sort of what sort of is behind your expectation that you might be able to get it done in June? I guess be my first question. And if something happens in the markets where you can't get an IPO done, can't sell it, I mean, how sort of what's the backup plan for getting leverage into that 2x to 2.5x range? I will repeat, the top priority of the company is to lease at Dana Foods to do the IPO. This is the main way of concluding our deleveraging or more quick deleveraging process. If for some reason we postpone again the Athena Foods IPO, we're going to continue deleveraging the company through the free cash flow generation that by the way was really strong in 2018 and we expect to continue being strong in 2019. In order to have a more quick deleveraging of the company, the IPO plays an important role. And regarding your question, on Monday was the worst probably the worst day this year to price any type of operation, especially an IPO of a new sector in the in the Chilean market. However, the good news is that the bids were there. Many investors interested on being part of the Athena Foods investment story. However, because of what was happening in the market on money, everybody was much more conservative in terms of valuation, in terms pricing. We don't need to sell this company, to sell and take off this company quick. So we can wait to have better market conditions to get what we believe is a fair valuation for our company. Great. Thank you. This concludes the question and answer section. At this time, I would like to turn the floor over back to Mr. Fernando Quirot for any conclusion remarks. I'd like to end this conference call by emphasizing our commitment to capital discipline and the creation of shareholders' value through our strategy of geographic diversification, operational and commercial efficiency and risk management tools. We'd like once again to reinforce that we will always be on the to look out at opportunities created by the imbalance between global beef supply and demand, especially now with this new opportunity offered by the African swine fever. We will continue seeing focusing on our efforts, on constantly improving the execution of our business spend, seeking to increase our sales penetration in the domestic and export market. In additional, consolidating continuous enhancements in operational and commercial efficiency. Last but not least, I would like to thank Almina's entire team for their efforts and dedication. I would like to thank you all for interest in the company. Please feel free to contact us should you have any questions. Thank you very much. Thank you. This does conclude today's presentation.