Status Update

Sep 12, 2018

Slides

Good morning, ladies and gentlemen, and thank you for waiting. At this time, we would like to welcome everybody to Minerva's conference call to discuss the material facts disclosed yesterday. Today with us, we have Fernando Quiros, Chief Executive Officer Edson Sicre, Chief Financial Officer and Eduardo Pozela, 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 a slideshow of this presentation are available through a live webcast at www.nenerbasfood.com/irandmzirq 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 beliefs and assumptions of company management of information currently available. They involve risks, uncertainties and assumptions because they relate to future events and therefore, depends on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions and other operating sectors 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 Quiros, CEO, who will begin the presentation. Mr. Quiros, you may start the presentation. Thank you very much. I would like to welcome everyone on this call about the strategy to improve the capital structure of Minerva. First, I would like to point that Minerva business plan on growing in South America, being the most diversified and being the biggest exporter out of this region was fully accomplished. This plan followed discipline, it follow consistency and this was the goal of having an opportunity of arbitrating the most competitive area of the world that can produce beef protein. This came at a cost of leverage for the company. Therefore, now in this next step, our main goal is to deleverage the company through the deleverage strategy that we will share with you. We want to, with that, improve our financial structure with the objective of creating value for all the shareholders by deleveraging the company and by distributing consistent dividends from now on the company. So what we'll do today is share with you our plans that have 2 main goals. 1 is a capital increase and the other is the IPO of Patena Foods that is our subsidiary controlled fully controlled by Minerva that have the assets that we acquired in South America ex Brazil. I will handle to Edson that I will go through in more details all the plans that we would like to share with you. So thank you, Fernando. Just a quick introduction. The capital increase is part of our plan, macro plan to improve the capital structure of Minerva. So to improve the capital structure, we thought about 2 different transactions. The first one would be a private capital increase and the second one would be the IPO of Cana Foods. Due to legal reasons, we were not able to release the strategy at one time. So we had to release, firstly, that the Board allowed us to constitute Athena Foods to pursue the IPO. And now it's time to release the terms of the private capital increase. So that's why we could not share with you this macro plan that has the main goal to improve the capital structure of Minerva by accelerating the deleveraging process. As you know, the company became leveraged in the past quarter due to 3 main reasons. The first one was invest to increase those operations and to make those operations more profitable and more efficient. And the third reason is the FX depreciation that is happening not only in Brazil, but also in South America, which is on one side helping a lot our margins, especially the export margin, but on the other side, hampered our debt by generating a non cash expense that made our leverage go up in the past quarters and reached 5 times net debt to EBITDA ratio at the end of the second quarter. So the rationale behind these two transactions is to improve the capital structure in order to deleverage the company and allow Minerva to increase future dividends payout in the medium in the short to medium term. So our current situation, as you can see in the slide number 2, is that Minerva has a negative equity value at the balance sheet of around BRL1 1,000,000,000 at the end of the quarter. Our net leverage was around 5 times at the end of Q2. And because of the situation of high leverage, roughly 60% to 70% of our last 12 months EBITDA, which was around BRL1.3 billion is going to serve our debt. If you add maintenance CapEx and a little portion of working capital remains almost nothing to pay to our shareholders as dividend. So that's the main reason why we decided to speed up the improvement of our capital structure that would improve through cash flow generation and through growth of EBITDA in the coming years. However, by speeding up this process, it will allow us to increase the dividend payout and will put the company in a much more comfortable situation in terms of financial risk and also obviously in terms of leverage. So the two measures that we are pursuing to improve the capital structure is the IPO of Atento Food, which we expect to raise between BRL1 1,000,000,000 BRL1.5 billion and the private capital increase that we announced yesterday that we expect to raise around BRL1 1,000,000,000. So let's talk now on Slide 4 about the IPO of Antena Food. So as we have already shared with the market, we are expecting to raise between BRL1 1,000,000,000 and BRL1.5 billion for a minority stake at this company. So Minerva will continue being the controlling shareholder of Atena Food. We expect to have to use 2 thirds of this cash to pay down debt at Minerva Foods and 1 third as a primary transaction to finance the growth of Atena Foods that will be focused in the short to medium term. In Colombia, where we'd like to increase our operations through acquisitions. In Chile, where we want to improve and grow our distribution operations there and also a chance to have acquisitions in order to grow and to start operating in the industry, in the deboning and slaughtering industry in Chile. And also in Argentina, where we're going to use the money for CapEx and working capital to reopen some plants. And also and more important to grow our brand products strategy towards export to other countries in South America using the distribution network that Minerva and Atena has built in countries like Colombia, Chile and Paraguay. Talking about Argentina, it's important to highlight that in spite of the macroeconomic situation, the sector is doing very well, especially in the export side. Even with the export tax announced by the government a week ago of COP3 per dollar in the export, we are still making good margins on export due to a simple reason. According to our budget, the exports would be really good profitable when we have an FX above MXN 25 per dollar. Today with the FX around MXN 37, MXN 36, even if you take out the export tax of MXN 3, we are still exporting at an FX rate of COP32, COP33, which continues helping a lot to have good margins in this country. It's also worth mentioning that our brand and value added products operation in Argentina is being a really positive surprise and is performing very well. And that's why we are planning to grow this operation and start exporting from Argentina to other countries in South America. Let's go now to Slide 5, where we present again the Atena Foods structure. So as Fernando mentioned, Atena Foods is a 100% consolidated subsidiary of Minerva Foods. And under Atena Foods, we are consolidating all the operations of Minerva in South America in Argentina, Uruguay, Paraguay, Colombia and also in Chile. Moving to Slide 6, we present a combined pro form a income statement of Atener Foods for the first half of 2018. So as you can see, net revenues in the period were above BRL 3,000,000,000, EBITDA around BRL 209 million with an EBITDA margin of 6.8 percent and Atena Foods generated a positive net income of BRL122 1,000,000 in the period. Let's move to Slide 8 to talk about the private capital increase transaction. So, performing the transaction, we are proposing a private capital increase of more than BRL1 1,000,000,000 that will be executed through the issuance of 1 165,000,000 shares at a price of BRL6.42 which is exactly the average price of the last 30 trading days. We also have full commitment from Saliq and VDQ, the controlling block, to subscribe their shares on the private capital increase. So Saliq has 21.4 percent, Vilekhi has 28.2%. So the full commitment of both guarantees a minimum of BRL 527 million of capital increase. Our proposal is to give as an additional advantage to all shareholders that decided to follow the controlling group and subscribe the capital increase. We're going to grant them a 3 year bonification warrant that behaves like an American call option with the same strike price of the cap increase, which is $6.42 It's worth mentioning that this warrant will be traded and listed at B3, the Brazilian exchange, and all the shareholders that decided to follow the private capital increase will be granted with the 3 year warrant as a bonification to incentivize their participation in the transaction. It's also worth mentioning that the use of proceeds of this capital increase will be 100% to pay down debt. So to deleverage Minerva's balance sheet, reducing gross debt, gross leverage and also net leverage. And also it is worth mentioning that the ex subscription rights date will be defined after the extraordinary shareholders meeting approval. So it's going to be in the day after of the extraordinary shareholders meeting approval. That will probably take place on October around 15 or 16 October. Moving now to Slide 9. Let's talk about the advantages of this private capital increase. So the first one is the immediate improvement of the company's capital structure. We expect a deleverage of almost one turn of EBITDA. 2nd, the operation will give equal rights of subscription to all shareholders and aims to keep the participation of each shareholders unchanged. So if all the shareholders' base decide to subscribe, we're going to have no dilution. There will be a positive impact on the liquidity of the shares because we're going to increase the number of shares in the free float and also the market cap of the company. So we expect a positive impact on the liquidity. As I have already mentioned that there is a 3 year warrant modification, which is an additional advantage for the shareholders who decide to follow the capital increase. This 3 year warrant is worth around BRL1.60 or approximately 30% of the price of the capital increase according to the Black and Scholes model. And also there is a minimum commitment in the private capital increase given by the controlling group. Moving to slide 10. Well, to approve the capital increase, we're going to have in October an extraordinary shareholders meeting. We're going to have some subjects to be voted, but the two most important subjects are obviously the private capital increase approval and also we are proposing the change of Minerva's poison pill. According to Minerva's by law, the poison pill today is 20%. We will propose the change of the poison pill to 30 3.34%. In case the poison pill change is approved, the minimum capital increase would reach BRL700 1,000,000 because the change will allow Saliq to increase their share and to take the opportunity of subscribing possible leftovers in the capital increase subscription process. So assuming that Saliq will subscribe those leftovers, the minimal capital increase would reach BRL700 1,000,000. The base case, another important information. In case the change of poison pill is approved, VDQ and Saliq, they have also agreed an extension on their shareholders agreement of 5 years. So the original shareholders agreement was 10 years. So in case we change the poison pill, this agreement will be extended for more 5 years. And also, if the Poisson bill change is approved, Saliq commits to a new lockup of 5 years in their share beginning on the date in the date of the change of poison pill. We present also on the slide 10 a base case timeframe. So we announced to the market the capital increase in September. We expect the extraordinary shareholders meeting to take place in October around 15 or 16 October. D plus 1 after approval will be the date of the X subscription rights. And in November, we expect to have the due date to subscribe around 15 or 16 November. Let's go now sensitivity analysis where we try to present some scenarios that we use it to base the decision of doing these 2 transactions, what will be the expected effect on our capital structure. So going to Page 12, we present a scenario where the net revenues for 2019, they range it ranged between BRL15.5 billion to BRL16.5 billion and margins that range from 9% to 10%. If we take the center figure using 9.5 percent of EBITDA margin and net revenues of BRL15.75, we get BRL1.5 billion roughly of EBITDA for 2019. So using this scenario, this average scenario, moving to page 13, we present what would be our leverage, our net leverage in different scenario. So in the scenario number 1, just considering a capital increase of around BRL 1,000,000,000, in the center scenario, dollar leverage would be around 3.3 times, assuming an EBITDA of BRL 1,500,000,000 for 2019. In the second scenario, assuming BRL 1,000,000,000 of capital increase and BRL 1,000,000,000 in the raising in the IPO of Atena Foods, leverage would be around 2.5 times. And the 3rd scenario, considering BRL1 1,000,000,000 of capital increase and BRL1.5 billion in the IPO of Atena Foods, leverage would be around 2.3 times. All those scenarios were built considering an FX rate of BRL3.90 per dollar for the end of 2019. To finalize, we'd like to show an appendix about the overall. We released it during the earnings of the Q2 that Minerva decided to adhere to the funeral during that quarter. There was some confusion regarding what was done with especially regarding the deferred tax assets that we have in our benefit. So I'd like to highlight that the cash payment was approximately BRL25 1,000,000 to the funeral program. So this was the total cash disbursement in the quarter and it was fully recognized in the financial statements. And after applying 100 percent of exemption for fines, charges and interest, the remaining overdue amount for the company was around BRL470 1,000,000. This BRL470 1,000,000 was totally paid down using our deferred tax assets. So if you go to the table in the Slide 15, you can see that our balance at the end of 2017 of deferred tax assets was around BRL196 1,000,000. We activated, we recognized the income statement during the first half of the year around BRL570 1,000,000. From this BRL570 1,000,000, we used BRL470 1,000,000 to pay down all the pending debt related to Funeral. So there's no more pending debt with the Federal Revenue Service. Regarding FURAL, everything was fully settled and fully paid. So the balance after this settlement and after the activation in the income statement of the new deferred tax asset was around BRL300 million, BRL297 million at the end of the quarter. So just to highlight, there is no more pending debt related to Fungoral. Everything was already paid. We used only BRL25 1,000,000 to pay for Fungoral and the remaining overdue amount was 100% paid using our deferred tax assets. Thank you very much. Let's go to the Q and A section. Thank you. Thank you. We will now start the question and answer section for investors and analysts. Marcelo Limon from Citi would like to make a question. Hello. Thanks, everybody. Edison, I wanted to understand better how do you see the potential for reduction in interest payments with this capital increase? As I understand, a lower leverage would reduce your risk, would allow you to pay more expensive debt and also navigate with lower cash position. So I wanted to understand how your average cost of debt could be reduced with the repayment of more expensive debt? And secondly, could you comment a bit at least qualitatively how the business is doing in the 3rd quarter with the FX at these levels, both in Brazil and Argentina? And also on the outlook for margins and cash flow generation. Marcelo, it's hard to make an estimation regarding what will be the reduction in our total cost of that. However, according to our simulations, if we succeed in the IPO raising between BRL1 1,000,000,000 and BRL1.5 billion, if we succeed 100% in the private cap increase raising BRL1 1,000,000,000, We believe that the total part of the EBITDA that today is around 6% to 70% that goes to serve our debt, it would come down to something around 45% in the short to 1,000,000 third. This is the estimation that we have. And this reduction from 70 to 40 would allow us to increase the dividend payout for the shareholders in the medium term. Marcelo, regarding the performance for the Q3, what we can tell you is that we kept increasing our exports. Therefore, the benefits of having a more devaluated currency in Brazil and a more devaluated currency in Argentina is very favorable for the company. Therefore, the Q3 shall looks to be better than the second quarter. Even though we had in Argentina some measures that are some export taxes, with the devaluation, this is more than offset more than offset by the currency by the devaluation of the currency. Therefore, Argentina and Brazil and the rest of South America keep a very strong pattern of exports, mainly to Southeast of Asia and to the Middle East. Therefore, the numbers, the initial numbers shows a better result in the Q3 than in the second one. Right. Perfect. Thanks. Waleed from Safra would like to make a question. Hi, thank you very much for your presentation. I had a question regarding the leverage. So I understand the transaction is effectively reducing the leverage by one turn. But just wanted to understand, given that in presentation, you mentioned that the improved capital structure would allow you to increase the dividend payout. What are your ambitions in terms of leverage for the company? You are still one of the most leveraged companies in the protein sector at this time. So from a creditor perspective, just wanted to understand where do you see leverage for the company and where do you see it comfortable? Firstly, we are not the most leveraged company in the propane side. We have some brothers that are even more leveraged than us. 2nd, if you take a look at our sensitivity analysis, you will see that in the medium point, considering scenario 1, 2 and 3, leverage would be in one scenario 3.3 times and the other two scenarios at 2.5 or 2.3. We believe that leverage below 3 times would allow us to increase the dividend policy to increase the dividend payout. So the sensitivity analysis includes what you account for as increase in dividend payout. Is that correct to assume that? No, it doesn't assume that because to increase the dividend payout, first, we have to reach on a leverage below 3 times, below 2.8 times. So until we get there, we are not going to increase the dividend payout. But once we get there, we're going to pay more dividend. Okay, fully understood. Thank you very much. Mr. Aras from Scooter, Lotterix Frasierno would like to make a question. Hello. Thank you for the presentation and good morning. I wanted to know if you if the team is targeting any particular part of the capital structure to with these the expected proceeds of the capital raise? And also, what might be the ideal cash position to hold? Can you repeat the two questions, please? We couldn't understand. The first one The first question, just if you have an idea of what part of the debt stack that you might target to take out with the use of these capital proceeds? And the second is what would be the ideal liquidity position? Well, regarding the debt that we are going to pay down, it will be a function of maturity and cost. So we don't have any specific there yet, but we're going to follow strictly what makes sense in terms of maturity versus cost. About the liquidity of the IPO, you mean, well, the total offer would be between BRL1 1,000,000,000 and BRL1.5 billion. I don't know if this is your question. Sorry. I mean, after reducing debt, what do you think is the right cash position to hold on the balance sheet? Okay. Well, we have a minimum cash policy that is it will be equal to 3 months of purchase of cattle. Today, it would be around BRL2.8 billion, BRL3 billion roughly. We are higher than that because of the financial risk that we see in the scenario and also because of the high leverage of the company. So by reducing leverage, we will allow us to reduce this carrying cost of cash, reduce gross debt, reduce net debt and allow us to have a cash policy, a cash balance more close to the policy that we have been following as minimum cash policy. Okay, perfect. Thank you. This concludes the question and answer section. At this time, I would like to turn the floor back to Mr. Fernando Quiros for any closing remarks. I'd like to thank you all for participating in this conference call, where we shared with you our plans on how to improve our capital structure. We'd like to renew our commitment on creating value for the shareholders. And we remain at your disposal for any doubts or any questions that you eventually may have. Thank you very much. Thank you. This does conclude today's presentation. You may disconnect your line at this time. Have a nice day.