Earnings Call: Q4 2018

Mar 13, 2019

Good afternoon, ladies and gentlemen, and thank you for waiting. At this time, we would like to welcome everybody to Minerva's 4th Quarter and the Year of 2018 Results Conference Call. Today with us, we have Fernando Quiros, Chief Executive Officer and Edison Tigui, 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.minevafoots.comparir and IMSAQ platform. The slideshow also can be downloaded from the webcast platform in the Investor Relations section in 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 the company's management and on information currently available. They involve risks, uncertainties and assumptions because they relate to future easings and therefore, depend on their sequences 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 the Minerva and could cause the results to differ materially from those expressed in such forward looking statements. I will now turn the conference call over to Mr. Fernando Quiras, CEO, who will begin the presentation. Mr. Fernando Quiros, you may start the presentation. Good morning or good afternoon to everyone. Thank you for participating in Minerva's conference call on the results for the Q4 and the full year of 2018. 2018 was a year full of opportunities, and we were able to have as the fruits of our growth strategy through the geographical diversification of our operations according to the business plan that we shared with the market a few years ago. We currently have one of the most modern industrial parks in the continent, and we are the leading beef exporter in South America with 21% of the region's total exports. It's worth mentioning that according to USDA latest estimates, South America was responsible for around 34% of the global exports in 2018. Therefore, we now account for around 7% of the global beef trade in the year. As a result of our geographic diversification, which allow us to access better markets combined with our recognized operational excellence and supported by our business intelligence with our risk management tools, Minerva closed 2018 with a healthy operational performance, including record net revenues and most important, a strong cash flow generation. We will now begin our presentation and discuss the main highlights for the year. Let's start on Slide 2. Slide 2, we now show that we closed 2018 with a free cash flow to equity of BRL752 1,000,000, corresponding to a free cash flow yield of 40%. In the Q4 alone, Minerva recorded a free cash flow of BRL363.3 million with proportional cash flow of BRL340.1 million, underlining the positive momentum of our operations. In 2018, consolidated gross revenues totaled BRL 17.2 billion, a new record of revenues. In the 4th Q 'eighteen, Renauda gross revenue totaled $4,900,000,000 on the quarter. Analyzing the revenues breakdown in the 4Q 'eighteen, 31% of the gross revenue came from the Brazilian division, equivalent to BRL2 1,000,000,000. Apera Foods, our subsidiary that compromises operation in Paraguay, Argentina, Uruguay, Colombia and Chile, also generated another BRL2 1,000,000,000 in revenues, equivalent to another 41% of the consolidated revenues. This shows the balance between our operations in Brazil and the rest of South America. Finally, the trading division accounted for the remaining 80%, contributing with BRL866 1,000,000 to the consolidated gross revenues. Milava exports grew 24% in the 4th Q of 'eighteen over 'seventeen, accounting for 60% of the consolidated sales and grew up 40% in 2018 over 2017, accounting for 62% of the consolidated sales. EBITDA totaled BRL462 1,000,000 in the 4th Q 'eighteen, 27% more than in the 4Q 'seventeen, accompanied by an EBITDA margin of 10%. In 2018, EBITDA came to BRL1.6 billion, up 22% over 2017, with an EBITDA margin of 9.6%, 60 bps more than in 2017. The basis of a more efficient capital structure continues to be the priority of Minerva. We closed 2018 with a leverage measured by the net debt EBITDA ratio of 3.9x, 1.1x less than in the previous quarter, showing our commitment to the leverage. In line with our debt reduction plan, Renalda completed a private capital increase totaling BRL 960,000,000 at the end of the 4Q 'eighteen. It's worth noting that most of the proceeds of the operations were yielded to the tender the largest share of our perpetual bonds, dollars 225,000,000 that was our most expensive debt. Please now move on to Slide 3, where we will discuss our performance in 2018 in further details. We'll begin with our exports, always analyzing our revenue and market share. In 2018, our share of the Brazilian beef exports came to 18% with a volume growth of 12% year on year. In Paraguay, driven by 34% growth in export volume, we we reached a market share of 41%, consolidating our position as the country's main beef exporter. In Uruguay, our share of exports came to 31%, 6% more than in 2017. In 2018, our share of beef exports came to 15% in Argentina and incredible 72% in Colombia. As I mentioned, Minerva has consolidated its position as the leading South American exporter, with a market share of 31%. Now maybe to Slide 4, we will take a look on exports by destination. 1st, in the Brazilian division, Asia and Middle East were the main markets in 2018. Together, these regions accounted for 52% of the exports in the period. As you all know, Asia and Middle East are recording a consistent increase in demand for beef. We cannot reveal this growth through the development and the urbanization of this region, together with the changes in habits of consumption on the from the population. Also, it's important to highlight 2 points. The spread of the African sun season in China, impacting in a direct reduction of pork production. There was an article showing that it's already estimated in 15%, the reduction in the total pork herd in China. Also, the natural problems that Australia is facing with jobs and floods that are also impacting the border today, but also compromises for the future. And this is definitely an opportunity for South America. Another highlight of the Brazilian division was the improving shares of Americas to 15% in 2018 versus 7% in 2017. The several percentage points growth was mainly represented by our increase in the Chilean market. Now talking about our Dana Foods. Asia was also the main export destination with 36% of the total, 10 percentage points more than in 2017. The reasons are the same ones that we mentioned before. The second main destination was the Commonwealth of Independent States, especially Russia, up 40% year on year. The result was intensified after Russia banned Brazil beef imports. We're raising its demand to other export countries in South America, especially Paraguay, Argentina, New York and Colombia. Thus, it's very important to be geographically diversified, and this allows us to take advantage of all market opportunities. And next slide, we will comment on our performance in the local markets. In 2018, we worked hard to optimize our domestic sales. We improved our popularity, while we remain focused on the more resilient markets, such as more medium sized retailers and food service, which compromise which comprises snack bar, restaurants, catering and steak houses. These are the clients that we serving through our distribution mainly. And this accounted for 54% of the domestic sales from Brazilian division. This shows the fragmentation and how spread that we are in the popularity that we have. We still expect by the products, products that are not produced by the Nava operations, accounted for 38% of the domestic market in Brazil in 2018. And this is another special highlight. The 1 Stop Shop strategy offers clients a wide range of products, including fish, frozen vegetables, cheese, pork and lamb, among others. We show that the distribution has the strength to sell not only in other products but also from other industry. At Atena Foods, our strategy to reposition the processed foods under Swift brand in Argentina and the sales of fresh beef to our 5 distributor centers contributed to 67%, increasing domestic sales in 2018. Minerva and Athena are focused on the more resilient markets, but depending on big retailers, but also spread around the biggest growth that we see in the markets and always searching for the highest profitability and consistency. And now I'll turn the floor to Edson, who will discuss the main financial numbers. Thank you, Fernando. We will now present Minerva financial operating highlights as of Slide 6. The gross revenue from the Brazilian Industry division reached BRL2 1,000,000,000 in the 4th quarter '18, a growth of 2% when compared to the Q4 'seventeen. Atenafruit gross revenue also reached BRL2 1,000,000,000 in the 4th quarter, a growth of 37% when compared to the same quarter last year. The Trading division reported gross revenue of BRL 866 1,000,000 in the 4th quarter, a growth of 10% compared to 4Q 'seventeen. It's important to highlight that the trading division comprises revenue from LifeCattle operations, Energy Trading and our Protein Trading business, especially located in Australia. As we mentioned at the beginning of the presentation, the revenue breakdown shows that each of our 2 industry divisions, the Brazilian Industry Division and Atena Foods, accounted for 41% of the company's gross revenue, while the trading division was responsible for the remaining 18%. Let's move on to the next slide to discuss more operational and financial highlights. The company's consolidated net revenue reached BRL4.6 billion in the 4th quarter, up 16% over Q4 'seventeen. On the top right corner, we have our 4th quarter EBITDA that reached BRL463 1,000,000, a 27% growth when compared to 4Q 'seventeen, reaching an EBITDA margin of 10%, up 80 basis points year on year. And now talking about the company's capacity utilization rate. At the end of 2018, we capped the utilization rates around 80%, which we consider to be very close to what we would call ideal level. The Brazilian Industry division operated at a utilization rate of 76 percent, while Atena Foods ran at a capacity utilization of 79%. As a result, the company's consolidated capacity utilization is stood at around 77%, 2.2 percentage points over the end of 2017. Just a correction, Brazil Industry was at 79% and Atena Foot was at 76% in the 4th quarter. I would like also to emphasize that one of the highlights of our working capital management was a reduction in our inventory cycle, which came from 28 days to 20 days by the end of 2018. Our benchmark for the inventory cycle is around 18 days, and we will pursue this target on the coming quarters. Let's move now to the next slide to talk about the consolidated figures for 2018. In 2018, net revenues reached BRL16.2 billion with a CAGR rate of 19% in the last 4 years. As a result, we exceeded our net revenue guidance for 2018 in approximately 1%. The guidance was between BRL 15,000,000,000 and BRL 16,000,000,000, and we reached BRL 60,200,000,000 in the year. EBITDA reached around BRL 1,600,000,000 in 2018, a growth of 22% compared to 2017, reaching a margin of 9.6%, up 60 basis points comparing to Q4 'seventeen. Return on invested capital came to 22% in 2018, up 4 percentage points over 2017. In the Q4 of 'seventeen, just to remind you, we started the integration process of the operations that we acquired in South America in 2017. And the integration process had an impact on our return on invested capital level that was above 20%. In 2017, it reached 18%. But during 2018, we were able to manage the integration successfully, and it reached 22% during the year. Finally, in the same slide, we can see the net debt to EBITDA ratio that ended the year at 3.9x, a reduction of 1.1 times quarter over quarter and a reduction of 0.7 times year on year. It reaffirms our commitment to accelerating the company's financial deleveraging process. Let's move now to Slide 9 to discuss net result. We recorded a net loss of BRL 92,000,000 in the 4th quarter after taxes. However, excluding the non cash effects of impairment monetary collection regarding our operations in Argentina and other nonrecurring effects, especially in the financial results, the net result would turn into a positive of BRL 27.4 million before income taxes and social contribution. Let's move now to next slide to discuss the company's in getting our products. Another positive contribution came to the line inventories, as I have already mentioned, which returned BRL 187 1,000,000 to our cash and reduced the average cycle of inventory to 20 days. We were also able to extend our suppliers' payment terms at the end of the year that had a small positive impact of BRL8 1,000,000 in the quarter. I'll move now to Slide 11 to discuss free cash flow. 4th quarter EBITDA reached BRL463 1,000,000, while CapEx was BRL43 1,000,000. The cash result was a loss of BRL298 1,000,000 and the working capital variation was positive by BRL242 1,000,000, leaving us with a positive free cash flow of BRL 363 1,000,000 just in the quarter, a meaningful result, especially when you compare to company's actual market cap. In 2018, adjusted EBITDA, including nonrecurring items, reached BRL 1,550,000,000. CapEx was BRL 189,000,000 and financial results on a cash basis was a loss of BRL953 1,000,000. The variation in working capital also gave a positive contribution of BRL 343 1,000,000 in the year. So the free cash flow for the full year of 2018 was a meaningful BRL752 1,000,000. Needless to say that this good result on free cash flow is an important driver for our further debt reduction and deleveraging process that will take place during 2019. Let's move now to Slide 12 to talk about our important steps that we are taking in order to accelerate the company's deleveraging process. So just to remind you, last September, we presented 2 action plans to accelerate Minerva's deleveraging process, a private capital increase and the IPO of our international division, Atena Foods. Well, talking about the capital increase, it was concluded last December with a participation of 91% of the shareholder base, reaching a total cap increase of BRL 965 1,000,000. As expected, given our focus on reducing leverage, the 100% of the proceeds of this operation were used in the tender offer of our perpetual bonds. We successfully tendered 75 percent of the bonds or $225,000,000 of these bonds that were the most expensive debt instrument in our portfolio. Good to remind you that we're going to exercise the call option that matures in April to buy back the outstanding bond around BRL70 1,000,000 paying par value in April 2019. And it will allow us to continue reducing gross debt and also net debt by reducing further financial expenses. Let's move now to next slide to talk about the Atena Foods IPO. So the second step on our deleveraging plan announced last September is the IPO of our international subsidiary, Athena Foods, on the Chilean Stock Exchange. We have already concluded a number of stages in the initial plan. And in November, we made the first filing with the Chilean Capital Markets Regulatory Agency. We are now just waiting for CMF to give us the green light to announce the deal and start the road show probably in April. So if we get the green light by end of March, beginning of April, we expect to have this idea concluded until the end of May. We also disclosed the Apena Food income statement with quarterly and 2018 numbers. In 2018, 2018, Atena recorded a net revenue of BRL7 1,000,000,000 with an EBITDA of BRL490 1,000,000, resulting in a margin of 7%. Important to highlight that Atena's leverage is very close to 0. So the net margin of this company is very close to the EBITDA margin. In 2018, the net result was BRL290 million, more than 4% net margin. Let's move now to Slide 14 to talk about capital structure. As I have already mentioned, the leverage measured by the net debt to EBITDA ratio stood at around 3.9x at the end of the year. We are moving further with our plans for further deleveraging process. And we also completed the offer to purchase our perpetual bonds, as we have already mentioned earlier. Approximately 78% of our debt was afforded to FX variation in the 4th quarter with a duration of around 5 years. We will continue to focus on the deleveraging process by combining an efficient management of liabilities and free cash flow generation from operations in order to continue reducing our debt. Let's move now to slide to the next slide of this presentation to talk about the net revenue guidance. So in 2018, we had a guidance of BRL15 billion to BRL16 billion. As we mentioned earlier, we reached BRL16.2 billion. So we exceeded in less than approximately 1% the guidance. So it was achieved. And for 2019, we are releasing our guidance of net revenues of in a range of between BRL 16,500,000,000 to BRL 17,500,000,000. This net revenue new guidance is based on an exchange rate of BRL3.3 per dollar. And to conclude our presentation, I would like to thank Mr. Puigielo that is no longer the Investor Relations Officer. After almost 10 years, he is leaving Minerva to lead our financial area in Atena Foods, our international security area, becoming my becoming again my colleague and helping us with the important task of taking care of our new subsidiary in Chile. So thank you, Mr. Tuilera, and good luck on your new role. So let's begin now the Q and A session. Thank you very much. Thank you. We will now start the question and answer session for investors and analysts. We have a question from Mr. Julie Murphy from JPMorgan. Julie Murphy, you may proceed now. Good morning. Thank you for the question. I appreciate the comments about accelerating the deleveraging process and the next step of that plan being ATHENA. I'm wondering if there are leverage targets that you're currently contemplating. I think we talk about something like 3.5 times and what those targets would be with or without the IPO of Athena and perhaps time lines? So When we released the deleveraging plan in September, we also shared with the market some sensitivity analysis regarding the amount of the proceeds from the IPO and what would be our leverage in different scenarios of margin and the size of the IPO. If you go back to those scenarios, if we are able to have an IPO between BRL 1,000,000,000 and BRL 1,500,000,000 leverage at the end of 2019, according to these scenarios, would be in the range of 2.5x and 2.9x. So we are not giving guidance regarding the leverage, But I think those exercise that we shared with the market are good, let's say, a good GPS for what we are foreseeing in terms of leverage for the end of 2019. Okay. Thank you. And that concludes our question and answer session. At this time, I would like to turn the floor back to Mr. Fernando Quiros for any closing remarks. Fernando Quiros, you may proceed. Thank you. I'd like to finish this conference call by providing our commitment to create value for the shareholders by completing the financial deleveraging plan and cash generation through our operational and commercial efficiency and using our geographical diversification and And we emphasize the discipline, the focus and the commitment that we have. Also, I'd like to remind you that regarding the global trade, we will be always looking at the opportunities created by the imbalance between global beef supply and demand, which has consistently benefited South America Breakers, consolidating our position and taking advantage of our region's higher spreads and cost of production. We will continue focusing our efforts on consistently improving the execution of our business plan, seeking to increase our sales penetration in the domestic and foreign markets, in addition to consolidating continuous improvement in operational efficiency. Last but not least, I would like to once again thank Minerva and entire team for their efforts and the dedication, especially Eduardo Puiziano, reiterating everything that Edson mentioned. Our team allowed the company to record a remarkable performance in 2018. I also thank you all for the interest in the company, and we remain at your disposal for any questions or clarifications. Thank you very much, everyone. And this concludes today's presentation. You may disconnect your line at this time. Have a nice day.