Earnings Call: Q3 2018

Nov 7, 2018

Good morning, ladies and gentlemen, and thank you for waiting. At this time, we would like to welcome everybody to Minerva's Third Quarter of 2018 Results Conference Call. Today with us, we have Fernando Queiros, Chief Executive Officer Edison Ticli, Chief Financial Officer and Eduardo Puzziello, 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 a live webcast at www.minervafoods.com/irandmziqplatform. 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 the 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 on 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 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 Queyros, CEO, who will begin the presentation. Mr. Queyros, you may start the presentation. Thank you very much. Good morning, everyone, and thank you for participating in Luminor's conference call on the results for the Q3 of 2018. We will begin the presentation talking about the highlights for the quarter. Let's have a look on Slide 2, where you can see the main highlights. Minerva closed the Q3 of 2018 with positive operating cash flow of BRL406.5 million and a positive free cash flow to equity of BRL93.5 million. The company consolidated gross revenues totaled BRL4.6 billion in the 3rd quarter and BRL16.6 billion in the last 12 months, which was once again a record revenue for the company. Therefore, the company keeps achieving revenue records. The breakdown of gross revenue by division shows that Brazilian division contributed around BRL2 1,000,000,000 or 43% of the total gross revenue in the quarter, while Apenafoods, formerly the international industry division, which correspond to our operating in Argentina, Paraguay, Uruguay and Colombia, This division generated BRL1.8 billion or 40% of the total and the trading division contributed to BRL782 1,000,000 or 17% of the total. Minerva consolidated exports, which accounted for 61% of revenues in the 3rd Q of 2018, recorded a revenue increase of 30 2.3% over the Q3 of the previous year and around 12% over the 2nd Q 2018. Net revenues totaled BRL 4,300,000,000 moving up a substantial 27% over 3rd Q 2017. In the last 12 months in September, net revenues came to BRL 15.6 1,000,000,000, up 46% year on year. 3rd quarter EBITDA reached BRL449 1,000,000, 44% more than in the 3rd Q of 2017. The EBITDA margin stood at 10.4% in the quarter. In the last 12 months, it reached BRL 1,500,000,000, up 40% year on year with an EBITDA margin of 9.3%. Regarding our capital structure, leverage measured by the net debt over LTM EBITDA ratio was below 5 times at the end of the quarter despite of the depreciation of the real in the period. Our cash position came to BRL 4,200,000,000 at the end of September. It's also important to mention our cash policy of having an amount sufficient to buy raw material for the last for at least 3 months current equivalent to BRL3 1,000,000,000. Last week, we announced a tender offer for our perpetual bonds, which are currently our most expensive debt at the annual coupon of 8.75%, which shows Minerva's commitment to its strategy of accelerating deleveraging. Moreover, on September 30, the duration of our debt corresponded to an average of 5.4 years. It's important to mention that we accounted for 21% of the South America beef exports in the last 12 months ended September. These results maintain our position as the leading beef exporter in South America. Considering the USDA latest beef exports estimated, which indicate that the region is responsible for around 34% of global exports, Minerva accounts for around 7% of the total beef exported worldwide. Finally, I would like to highlight that based on the results, we are maintaining our net revenues guidance for 2018 at between BRL15 1,000,000,000 and BRL16 1,000,000,000. We will now move on to Slide 3, where we will talk about Minerva performance, beginning with our exports. In Brazil, we accounted for 40% of exports in the 3rd Q 'eighteen and our export revenue and volume climbed at 16.5% and 12.8% over 2nd Q 'eighteen. In the last 12 months ended September 30, revenues grew 13% and volume increased 8% over the same period in 2017. In Paraguay, our market share was 42%, maintaining our position as the country's leading exporter. In Uruguay and Argentina, our share of beef stood at 17% 18%, respectively. Finally, we were the leading beef exporter in Colombia with a market share of 82%. As I said, when I was talking about the highlights in the last 12 months ended, Minerva maintained its position as the leading South American exporter with a market share of 21%. Let's have a look on the Slide 4, where we talk about exports by division. Slide 4. In the Brazilian Industry division, Asia and the Middle East were the main destinations in the last 12 months ended September. Together, these two reasons accounted for 54% of the division's export in this period. These figures corroborate the recent estimates that growing demand for beef has been concentrated in these two regions. This increase in consumption in Asia and Middle East is closely related to the urbanization and development process as well as the rationalization of habits of consumption patterns and is fully aligned with our strategy of being present in the main markets of these regions. At Atena Foods, former international industry division, the main export destinations were Asia with 34% of the total exports and Americas with 22% with the highlight to Chile. I also think it's important to mention growth in the Commonwealth of Independent States, the CIS, which accounted for 18% of exports, 10% points more than in the same period of 2017. The result is a clear reflection of the growing demand in Russia, which has been served by Atena Foods since December 2017. Let's move on the next slide to talk about the domestic market performance. Regarding our focus in the domestic market, we have been working to route our products to more resilient clients such as small and medium sized retailers and mainly to the foodservice segment. That compromise snacks bars, restaurants, beef based, steak houses, which represents around 56% of the total domestic sales from January to September 2018 in the Brazilian division. It also shows the fragmentation and spraying of our sales in the domestic market. As you can see in the local sales from the Brazilian market, we gradually grew the beef premium sales, which are niche cuts, which are higher profitable. The resale of 3rd party represents 37% of the Brazilian domestic market in the year to date. The 1 stop shop strategy guaranteed to customers a wide option of products such as frozen fish, vegetables, cheese, pork, lamb among others. Talking about Apera Foods. The domestic market positive performance during the 9 months of 2018 was due to our strategy of repositioning the processed products under the brand of Swift in Argentina and also to the sales of fresh beef to more than 60,000 points of sales, mainly in the physical distribution and in traditional retail. We also follow the same strategy in this division, focusing on small and medium sized retailers and food service all across South America. I'll now give the floor to Eitan, who will discuss Minerva financial and operating highlights. Thank you, Fernando. We'll present now Minerva's financial operating highlights, beginning on Slide 6. Gross revenue from the Brazilian Industry division reached approximately BRL2 1,000,000,000 in the 3rd quarter, a growth of 8% when compared to the Q3 of 2017. Gross revenue from Athena Foods reached BRL1.8 billion, up 63% over 3rd Q 2017 as is shown in the chart in the top right corner. Gross revenue from the trading division reached BRL782 1,000,000, 13% higher than the revenues in the same period of last year. As mentioned at the beginning of the presentation, breaking down the revenues, we can see that Brazilian Industry Division contributed for 43% of the company's gross revenues in the quarter, while Atena Food and the trading division accounted for 40% 17%, respectively. Let's go to the next slide to talk about other financial results. So the company's consolidated net revenue reached BRL4.3 billion in the 3rd quarter '18, up 27% over the Q3 of last year. On the top right corner, we have we can see our Q3 EBITDA, which reached approximately BRL450 1,000,000, 44% growth when compared to the 3rd Q of 'seventeen with an EBITDA margin of 10.4%, up 130 basis points over 3Q 2017. Talking about the capacity utilization in the Q3 'eighteen, the Brazilian Industry division operated with utilization rate of 78%, while Artena Foods reached a capacity utilization rate of around 82%. So as a result, the company's consolidated capacity utilization stood at around 80%, up almost 5 percentage points over the 2nd Q of 2018 and almost 3 percentage points more than when compared to the 3Q 'seventeen. These capacity utilization levels are considered ideal and have been gradually increasing since the acquisition of the plants in Paraguay, Argentina and Uruguay in July last year. The net debt to EBITDA ratio in the last 12 months ended the quarter at 4.97 times, a slightly decrease when compared to last quarter. It's important to highlight that the dollar appreciated more than 0.15 dollars against the real between the end of the second quarter and the third quarter. And this could have hampered our results since 80% of our debt is dollar linked. Nevertheless, leverage did not increase in the quarter due to the strong operational cash flow generation recorded in the quarter together with some measures that we took to hedge part of the long term exposure. Now let's move to Slide 8 to discuss net result. In the quarter, Minerva had a loss of BRL132 1,000,000. However, if we adjust these results for non cash effects of the FX duration and for the hedge results, the company would have posted a positive profit in the period of around BRL78 1,000,000. Moving to next slide, let's talk about the operating cash flow. In the Q3, operating cash flow reached BRL406 1,000,000. Working capital variation was negative by BRL133 1,000,000, and this working capital consumption was mainly caused by 2 factors. The first one was the receivables line that increased due to a higher volume sold in the export that had longer payment term. And the second factor was the supplier's line. Have in mind that in the quarter, in the third quarter, we were still in the off season, so marked by a little lower cattle supply. So in order to keep the supply of capital at reasonable level and at reasonable prices, we used cash payment terms in order to benefit for discounts and to increase the cattle supply during the off season. On the other hand, we had a positive result in the other payables line in the customer advances account. As we have already explained in accordance with our credit policy, we require from some customers and from some countries to have advanced prepayment to start production of the product. So in this case, the advanced prepayment helps us to reduce the cash conversion cycle and allows us to reduce the working capital need. In the last 12 months, operating cash flow was positive by around BRL844 1,000,000 and the working capital requirements were positive by BRL66 1,000,000. Let's now move to Slide 10 to discuss free cash flow. In the 9 months of 2018, the EBITDA, including non recurring items, reached BRL1.1 billion. BRL145 million was expensed in CapEx, BRL644 million negative was the financial cash result. And the working capital contributed positively to the operations with more than BRL100 1,000,000. So in the 9 months ended in September, the company was able to generate BRL389 1,000,000 of free cash flow in the period. In the quarter, the company generated BRL450 1,000,000 of EBITDA and as a result, we generated a free cash flow of BRL94 1,000,000 just in the Q3. Let's move now to slide 11 to talk about the company's capital structure. So as we have already mentioned, our leverage measured by the net debt to EBITDA ratio stood at approximately 5 times at the end of the quarter. It's worth pointing again that despite of the appreciation of the dollar of more than 4% in the quarter, we are able to keep leverage virtually flat, thanks to cash generation, higher EBITDA and the hedge strategy. Our cash position in the quarter came to BRL4.2 billion, in line with our policy of keeping an amount of cash in cash equivalent to at least 3 months of purchase of input, leaving us in a pretty comfortable situation to deal with volatile and adverse scenarios. Approximately 86% of our debt was exposed to the exchange rate variation. However, 50% of our long term net exposure is hedged. And the duration of our debt today is around 4.4 5.4 years. As Fernando mentioned in the beginning of the presentation, Latvika announced a tender offer to purchase to repurchase our perpetual bonds. Those bonds, they have 8.75 percent of annual interest payment and they are the most expensive bonds in our debt. So we decided to launch an offer to repurchase the bond using the proceeds of the capital increase that will be concluded next week. The current amount, the current outstanding amount of the perpetual bond is $291,000,000 and expect to buy back all the bonds in the tender offer during November. Or if there are remaining outstanding bonds, we're going to call all of them in April. So the perpetual notes will be 100% called until the beginning of April. On next slide, let's discuss Atena Foods results. So as we announced in the Q2 of 'eighteen, we structured a wholly owned subsidiary called Atena Food in Chile and we are conducting this company's IPO on the Chilean market. I would like to remind you that Atena is equivalent to our former International Industry Division and covers our operating activities in Paraguay, Argentina, Uruguay, Colombia and our distribution activities in Chile. We included Atena Foods income stated on this slide to give you a broader view of our operations in this company. As you can see, we ended the 3rd quarter with net income of approximately BRL118 1,000,000 and EBITDA of around BRL122 1,000,000 with a margin of approximately 6.7 percent in the quarter. In the 1st 9 months of the year, net income reached BRL240 1,000,000, a net margin of around 5% and EBITDA reached BRL327 1,000,000 with a margin of 6.7%. Please note that some production units that make up Atena Foods were acquired in July 2017 and were operating with narrow margins. So these results reflect the hard work of turnarounds that we have been doing in the past 12 months and the successful integration of those new units into our company's framework. Let's now move to the next slide where we will briefly talk about net revenue guidance. Last quarter, we announced our net revenue guidance for 2018 between in a range between BRL15 1,000,000,000 and BRL16 1,000,000,000 using an exchange rate of BRL3.7 per dollar and BRL0.27 per dollar. In the last 12 months, our net revenues reached BRL15.6 billion. So we are inside the range and that's why we are keeping this guidance for next quarter. Now let's move to the left side of the presentation to talk about the current private capital increase transaction that we opened until November 14. So as we have already announced, the private capital increase was approved by the extraordinary shareholders meeting held on October 15 and the process was kicked off on the following days. We decided to add this slide to help some investors understand the full process flow until it is concluded. This slide is part of the subscription booklet that is available in our Investor Relations website and present more detailed information. So I believe it's worth reading this material. This slide shows an example of a shareholder who owned 100 shares on October 16. So on October 16, immediately after the Cerro Negro Shareholders Meeting, this investor received 74 BIF1, which are the subscription rights. So the subscription rights give this investor, the shareholders the right to participate in the capital increase on a proportional basis. So as the capital increase will be carried out through the issue of up to 165,000,000 shares, the amount of shares of each shareholder will correspond to around 74% of his position on the day the capital increase was approved. The shareholders who participate in the capital increase will receive 74 Beef9, which had the subscription receipts after the end of the subscription period. As an additional advantage, I'll also explain in the material fact dated September 12, for each subscribed share, the shareholder will be granted with a subscription warrant, which will be traded on the stock exchange under the code of BIF11. This subscription warrant is valid for 3 years, can be converted into beef 3 shares at any time during the maturity. So it behaves like an American call option. In approximately 10 days after the end of the subscription period, the beef the 74 Beef9 receipts will be converted into 74 Beef3 shares. And the shareholder will be in their position with 174 Beef3 shares and 74 Beef11 subscription BIF11 warrant. Lastly, and as this is the last slide from our presentation, I'd like to take the opportunity to invite you all to participate in our Annual Public Meeting, Minerva Day. In New York, Minerva Day will take place at NASDAQ on November 19 and in Sao Paulo, it will take place at Grand Hyatt Hotel on November 26. The IR department has already sent an invite to our distribution list, and we will also make it available in our website with link to subscribe. So we look forward to seeing you all. And now let's begin the question and answer session. Thank you. Thank you. We will now start the question and answer session for investors and analysts. The first question is from Alex Robarts of Citi. Please go ahead. Yes. Hi, good morning, everybody. Thanks for taking the question. Actually, I have two questions and they both relate to Brazil beef. The exports, very robust here in the quarter, better than most of us most of our estimates on the street. And you talk about incremental demand from Asia and the Americas. I mean, I guess those 2 regions together about 40% of your Brazilian beef exports. Could you comment on the quality of that incremental demand? Is it seasonal? I mean, the Americas really because of Chile seems to have almost doubled the importance in your mix. And I'm wondering is that perhaps coming from the new distribution that the JBS assets have given you there. So if you could, first of all, just give us a sense of the quality of this incremental demand in Asia and the Americas. Is it sustainable in the short term? Thanks very much. What's the second question, Alex? Okay. I was going to wait for the answer. But no, listen, I think in the end, it's the cattle cost trend. We've been really seeing pretty favorable arroba prices as we come into the rainy season. We're well off the 2016, 155 peak levels. What is your view in the short term for the cattle price in Brazil? That's the second one. Right. So first on the sustainability of the growth that South America is having both on China, the Southeast of Asia, that's not only China, it's mainly driven by China and in Americas driven by Chile. I would add to that the growth that the Middle East and North of Africa is having. So Middle East and North of Africa, it's also a growing area. There is a better distribution of income. There is more segmentation in the markets there. So it's very sustainable. This area and this part of the world will never be producers in volume, and there is a growing demand. And the kind of product that they require, both on the premium products and on the technology products, have South America as the main supplier. So I would first put a highlight on Middle East and North Africa. 2nd, the biggest growth is coming from Asia, Southeast of Asia, especially China, that they are changing their habits. The amount of fast food chains, the amount of their western the rationalization of their habits is playing a very important role on the growth of the demand. So there you're going to see as well a premium market, commodity market that our products that will be used for further processing like burgers, sausages, angers things. So in this area, we are seeing a decrease on the size of their herd. Therefore, they will be more importers. Overall, the only place or the only region in the world that is growing its supply, it's on South America. And there is a decrease in traditional suppliers like Europe and especially in Australia. Therefore, we are seeing a very sustainable demand for South America. Talking about Chile, the last one and South of Americas in general, Chile has a very small size of the herd that they have important. They are very important market that they have the income, the per capita income and the beef consumption is part of the harvest of the Chileans. So it's driven also a very sustainable demand. We are supplying all these countries, not only from one origin, but through all the origins that we can, just like Chile, is supplied by Brazil, by Argentina, by Paraguay, some things from Uruguay. Russia, that's another market that's important. We're also supplied by the 3 or 4 countries that we are originating. So we see the growth of the demand and the bridges between South America and the importing countries only being stronger. In fact, the countries are getting more specialized in what they produce and producing cattle is linked to the availability of water that South America has plenty. In terms of cattle cost, what we are seeing, we are in the low season and therefore the cattle traditionally goes up during this period of the year. What we are seeing is that in the last 5 years, Brazil broke records on birth of costs. Therefore, the availability keeps increasing. But luckily and strategically, the demand keeps increasing as well. So we don't see any surprise for capital price. We see that during the high season that starts next early next year, depends on the rain, it will be another very important and sustainable year for the production follow-up on Chile, sorry. And I know it's a relatively new market with the Adena Foods and such. It was the one market that you didn't really show us the market share number, at least as I could see on the press release. But could you comment a little bit about are you gaining share in Chile? Is the market growing in Chile faster than other markets? And is it a fair assumption to have that you would be seeking to get perhaps some at least some double digit share in that market? Thanks very much. We are in double digit share. All the meat that is imported into Chile, 40% is coming from Minerva or Atena operations. So we are by far the most relevant exporter into the Chilean market. What we you don't have that there because Chile is a consuming and distribution market is not a producing market. What we showed on our slide was the share that we have of exports out of the organs that we produce. Got it. Thank you. The next question is from Andrew DeLuca of Barclays. Please go ahead. Hi, good morning. I wanted to go back to comments you guys had in September when you mentioned that the Mercosul assets were requiring more working capital than you expected. Can give us an update in terms of the additional working capital investments, if any, that are required for the Medical School business? Mercosul business required more working capital just after the acquisition. So in the Q4 of last year, we invested almost BRL400 million in working capital. The majority was in the macro two assets. Since then, we have been in the process of integration, the process of turning around those operations. And for now, as you can see, the capacity utilization around 82%. We can see that the Mercosur assets are in a much more stable operation, and we don't expect additional requirements of working capital in the short term. Great. And then my second question is with regards also to working capital and the remaining in Russia and now you being able to export from Brazil. How do you see that market evolving as a percentage of Brazilian revenues? As far to predict, there are only few plants that are approved. That depends on if there will be new plants approved. We hope it will because Russia has always been a relevant market for Brazil. But to predict how much percent of the total Brazil exports will go to Russia, it's practically impossible without knowing what are what's the number of plants that will be approved. There are no additional questions at this time. This concludes the question and answer session. At this time, I would like to turn the floor back to Mr. Fernando Queyros for any closing remarks. I'd like to thank you for participating in our conference call about the outstanding results that we showed on the 3rd Q. I'd like to highlight that this is a result of a very detailed strategy and a very efficient execution of this strategy of diversifying Avenova into South America. That is the area of the world that is occupying more space and more share in international trade. So I would like to thank you all for supporting and for following us on this strategy. And finally, I would like to thank all the Minerva team for being aligned with this strategy and support in every day, in every hour, in every moment of the strategy that we implemented. So thank you very much. We remain at your disposal for any further clarification or any further information that you may require. Thank you very much. Thank you. This concludes today's presentation. You may disconnect your line at this time and have a nice day.