Good afternoon, ladies and gentlemen, and thank you for waiting. At this time, we would like to welcome everybody to Minerva's second quarter of 2018 results conference call. Today with us, we have Fernando Queiroz, Chief Executive Officer, Edison Ticle, 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. If you need any assistance during the call, please press star zero to reach the operator. The audio and slideshow of this presentation are available through our live webcast at www.minervafoods.com/ir and MZiQ platforms. 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 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 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. Fernando Queiroz, CEO, 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 second quarter of 2018. We'll begin the earnings conference talking about the highlights for the quarter. Starting on slide two. Minerva closed the second quarter of 2018 with a positive operating cash flow of BRL 396 million and a positive free cash flow to equity of BRL 244 million. In the 12 months ended June, free cash flow totaled approximately BRL 200 million. The company's consolidated gross revenue totaled BRL 4 billion in the second quarter and BRL 15.6 billion in the last 12 months, which is a record for Minerva's revenue. The breakdown of gross revenue by division shows that the Brazilian industry contributed with BRL 1.7 billion, means 43% of the total gross revenue in the quarter, while the international industry division contributed with BRL 1.6 billion, or 40% of the total.
The trading division contributed with BRL 660 million, or 17% of the total. Minerva's consolidated exports accounted for 64% of the revenues in the second Q of 2018 and were 50.3% higher than second Q 2017. Also, 7.5% higher than the first Q of 2018. The domestic market sales grew 32% against the second quarter 2017 and 2% over the first Q 2018. The company's focus in the food service segment and expansion of portfolio through origins expansion were crucial for this performance. Minerva's net revenue totaled BRL 3.7 billion in the second Q of 2018, 45% more than in the second Q 2017. If we consider the pro forma figures of the assets acquired in Mercosul, net revenues totaled BRL 14.9 billion in the last 12 months, 52% higher than in the same period of last year.
We would also like to point out that the revenues in the last 12 months were higher than the guidance provided last June of the range of BRL 13 billion-BRL 14.5 billion, especially due to the company's export profile in an environment of a more depreciated FX rates. Second quarter EBITDA reached BRL 353 million, 27% more than in the same period of last year. While the adjusted EBITDA margin for the period was 9.5%, EBITDA from the last 12 months, adjusted for the non-recurring items and pro forma figures, was 40% higher than in the same period of last year at BRL 1.4 billion, with an adjusted margin of 9.1%. At the end of June, our cash position remained comfortable at approximately two times higher than the short-term maturities, while the debt duration was around six years.
We concluded in early July the buyback and cancellation of approximately $53 million in bonds during 2026 and 2028. It was not reflected on our second quarter figures, because it took place after the end of the quarter. This movement shows, one more time, our commitment to prioritize a better capital structure. Minerva continued to account for 25%, that means one-fourth, of South America beef exports, and consolidated its position as the largest beef exporter in the continent. If we take into consideration the latest estimates from USDA for beef exports, that indicates that South America is responsible for 30% of the global exports. We can conclude that Minerva is responsible for approximately 8% of the total global sales on international markets. Finally, I would like to briefly talk about the studies to possible holding an IPO in our entities outside Brazil, in the Chilean stock exchange.
Edison will comment in further details in the end of this presentation, I think that is worth to point out that the capital markets in Chile is well-developed and shows a lot of opportunities for the company, that Minerva is an actual player on it. It's also worth mentioning that there is no protein company listed in the Chile's stock exchange. This process, when completed, will be an important step for the company, because we believe this will unlock the value of our South American assets, contribute to deleveraging the process, and to improve our capital structure. Lastly, as we disclosed yesterday, our guidance for net revenue for 2018 was updated, now we are considering a USD average of 3.7 and ARS 27 for Argentina.
We believe that in this new FX scenario, due to our exports profile, company's net revenue will now be between BRL 15 billion and BRL 16 billion as the new guidance. We will now move to slide three, where we will talk briefly about the industry overview. Starting with Brazil, second quarter slaughter volume totaled 5.7 million heads, 4% up year-on-year, only 2% less than in the first Q of 2018. This decline may be attributed to the truckers strike, which suspended the transport activities, consequently is slaughtering for around one week. Despite this non-recurring event in the second Q 2018, it's worth noting that the animal supply remains positive for the rest of 2018, should extend for 2019. This increase in animal supply was due to the rotation of females and calves birth, initiated in 2013 and 2014.
In the second Q18, beef exports came to 250,000 tons, 18% less than in the same period of last year. Please note that as of April, there has been a change to the data system in the Ministry of Development. Exports went mostly to Asia, especially China and Hong Kong. Also Middle East countries were a highlight. Chile stood out, increasing its share of Brazilian exports by 6% of Brazilian exports, replacing Paraguay to that country. Paraguay used to be Chile's main supplier. Now because of the country is increasing its export volume to Russia, Brazil is focusing on replacing Paraguay in the Chilean market. This is a positive move for Brazil. On the other hand, the strike had a positive impact on the domestic beef prices on the week of the event, due to the limited supply that showed in the local market.
As a result, the price difference between beef and other proteins, especially chicken, dropped significantly, benefiting the beef producers. Moving on to Paraguay slaughter, volume totaled 526,000 heads, 21% higher than in the first Q18, and virtually in line with the second Q17. The quarter-on-quarter increase was due to the weaker performance recorded last quarter, impacted by weather conditions. In the second Q18, Paraguayan exports were 19% higher than in the previous quarter. Once again, the main destination of Paraguayan exports was Russia, which accounted for 42% of the country's total exports in the second Q18, 24 percentage points more than in the same period last year, driven by the ban on Brazilian beef in Russia. The slaughter volume in Uruguay totaled 543,000 heads, was 11% lower than in second Q17, 17% lower than in first Q18.
We would like to remind you that the slaughter of many animals was brought forward to the first quarter, due to the drought caused by the La Niña event, which is why the market was already expecting this decline. Uruguayan exports were 9% lower than in the second Q17, 17% lower than in the first Q18. The main destination of Uruguayan exports were China and United States, which accounted for more than half of the country exports of the period. Finally, we have Argentina, which accounted for around 19% of our slaughter capacity. Second quarter slaughter volume totaled 3.2 million heads in Argentina, 5% higher than in the second Q17, 3% lower than in the first Q18. It's worth noting that like in Uruguay, Argentina also went through a drought caused by La Niña.
Argentina is going through a period of higher cattle availability due to the recovery of the country's herd, which started in 2015. It's also important to talk about Argentina exports, which continue to rise. In the second Q18, Argentina exports volume moved up 50% over the second Q17. China was the main destination of Argentina exports in the period and accounted for 33% of its total. In the second quarter, domestic consumption in Argentina was affected by the depreciation of the country's currency. More important, by a rise in inflation. As a result, we saw greater consumption of alternative proteins and processed foods that benefited our operations there. Let's move on now to slide four to discuss Minerva's performance, starting with our exports. In the second quarter, Minerva consolidated its position as South America leading exporter, with 25% market share in the continent.
Our share of beef exports came to 25% in Brazil and 39% in Paraguay, confirming our position of countries' leading beef exporter. Meanwhile, our exports market share came to 24% in Uruguay, 15% in Argentina, and 66% in Colombia. Let's now have a look on the breakdown of exports by region on slide five. In the last 12 months, ended June, Asia and the Middle East were the main destination of exports from the Brazilian industry division, accounting for 53% of total exports in line with the same period in 2017. However, we'd like to point out that this division exports volume climbed 22% in the period, which means that although the percentage of exports remained unchanged, we exported more than in the previous period. Demand for beef has been growing in this region due to urbanization, development process, and a progressive change in consumption habits.
In the international industry division, the main export destination was Asia, with 31% of the total exports. The American region, especially Chile, with 26%. We think that it's important to say that the Commonwealth of Independent States, also known as CIS, having Russia as its main destination, increased its share of exports to 30% in the last 12 months, 7% more than in the same period last year. This result was due to the growing demand from Russia, which is served by this division. We'll go into other details of the financial and the operation, but I will hand off to Edison to take the floor.
Thank you, Fernando. We will present Minerva's financial and operating highlights as of slide six. Gross revenue from the Brazilian industry division came to BRL 1.7 billion in the second quarter, around 6% higher than in the second quarter of 2017. Gross revenue from the international industry division, which will be Athena Foods, reached BRL 1.6 billion, 139% higher than in the 2Q of 2017, as shown in the chart on the top right corner of the slide. It happened thanks to the fact that the Mercosul assets were only consolidated as of August 1st, 2017 or the third quarter of 2017, which means that these operations were not included in the company's results in the second quarter of 2017. Gross revenue from the trading division stood at BRL 660 million in the quarter, up 36% over the 2Q of 2017.
This performance was related to the recovery of live cattle exports, protein trading operations in the export market, and the company's increased point of sales capillarity in the local markets where we operate. As shown in the bottom right chart, gross revenue from the Brazilian industry division represented 43% of the total in the quarter, while Athena Foods and the trading divisions accounted for 40% and 17%, respectively. Moving to the next slide, we'll continue showing our financial operating results. Minerva's net revenue reached BRL 3.7 billion in the 2Q of 2018, 45% growth when compared to the 2Q of 2017. Adjusted EBITDA amounted to BRL 353 million in the second quarter, up 27% over the 1Q of 2018, with an adjusted EBITDA margin of 9.5%.
It is worth noting that EBITDA non-recurring items were exceptionally higher this quarter as a result of the REFIS Rural that we used to make the payments of rural debt. For those who would like to know more about this, we included a note describing the main points of rural in our earnings release. The adjustment is made because the government offers the option to pay the tax debt with accumulated tax credits that we already have in our balance sheet, which means that the settlement had virtually no cash impact on our results. In our quarterly financial report, if you take a look at note number 18, you will find the movement of the credits used to pay the debt. In a nutshell, we had around BRL 196 million of tax credits at the end of 2017.
We recognized BRL 570 million of new credits along the first half of the year, we used BRL 470 million of those credits to pay down the rural debt and other fiscal debt at the end of the second quarter. The balance at the end of the quarter was BRL 297 million in tax credits, or roughly BRL 100 million more than what we had at the end of 2017. The chart on the bottom left corner shows the capacity utilization rate broken down by division and on a consolidated basis. With a capacity utilization rate of 72% in the Brazilian industry, 78% in Athena Foods. The consolidated stages, in fact, it stood flat at 75% of total capacity utilization, in line with previous quarters.
We were able to reduce our cash conversion cycle to 29 days in the second quarter of 2018, in line with the figures that we recorded in 2017. Let's go now to slide eight, which shows the company's net results for the second quarter. In the second quarter of 2018, Minerva had a net loss of BRL 926 million after income and social contribution taxes in the second quarter. The second quarter result was impacted by the non-cash exchange effects variation, which was negative by BRL 957 million, due to the FX exposure of our debt that was around 77% at the end of the quarter. I remind that the real appreciated around BRL 0.54 during the quarter from the end of the second quarter compared to the end of the first quarter. We also had an impact coming from the rural settlement.
That was a non-cash impact of BRL 580 million. If you exclude all those impacts, Minerva would have recorded net income of around BRL 600 million in the quarter. Let's move now to the next slide, where we will talk briefly about the company's operating cash flow. Operating cash flow reached BRL 396 million in the second quarter of 2018. The main highlight was the positive variation coming from the working capital. That was around BRL 672 million. In this line, the deferred tax line returned BRL 470 million, because of the rural debt, as we have already mentioned. On the working capital per se, the lines that contributed positively were receivables with around BRL 12 million, inventories and biological assets, positive by BRL 46 million, and suppliers that returned BRL 74 million to cash because we were able to increase the tenure with the suppliers to buy raw materials.
Well, as a result, our cash conversion cycle reduced to 29 days at the end of the quarter, as we have already mentioned. In the last 12 months, ended in June, operating cash flow was positive by around BRL 464 million. Let's talk about the free cash flow on the next slide. Adjusted EBITDA was BRL 353 million in the second quarter. Maintenance and expansion CapEx was BRL 51 million. The cash financial expenses stood at BRL 260 million, and the working capital change was positive by BRL 202 million. Free cash flow was positive in the quarter by BRL 244 million. In the 12 months ended in June, adjusted EBITDA reached BRL 1.3 billion, including the pro forma figures of the Marfrig assets. CapEx came to BRL 244 million. Cash financial result was BRL 893 million, and the variation in working capital was positive by BRL 23 million.
As a result, recurring free cash flow was positive by almost BRL 200 million in the last 12 months. The free cash flow figures once again attest to the management commitment to the company's financial deleveraging process. We continue being focused on increasing efficiency, increasing returns, and managing well our working capital needs. Moving on to slide 11, we will now talk about the company's capital structure at the end of the quarter. At the end of June, our net leverage measured by the net debt-to-EBITDA ratio was five times. The main reason for that increase was related to the FX depreciation that was more than BRL 0.50 during this quarter. Our cash position stood at BRL 4.2 billion. That provides a pretty comfortable situation to deal with volatility, to deal with the adverse scenarios that we can have in the short term.
It is in line with our policy of keeping an amount of cash equivalent to at least three months of purchase of cattle. At the end of June, approximately 77% of Minerva's debt was exposed to the FX variation, and the duration of our debt was almost six years. It's also important to mention that we built almost BRL 1 billion in hedges at the end of May, beginning of June, in order to protect our balance sheet against a more volatile and more uncertain scenario in the coming quarters. The decision to buy this hedge was in one hand, because of the more volatile scenario, especially because of elections in Brazil and also because of international scenario, dollar becoming more strong and let's say the trade war between China and U.S.
On the other hand, the decision was taken because of the cost of hedge debt in Brazil today is around 500 to 600 base points cheaper than it was 12 months ago. This is the rationale behind the decision to buy hedges, and hedge protects around 50% of our long-term exposure. Let's move now to slide 12 to talk briefly about our guidance for net revenue. We disclosed to the market two guidance for net revenues. In the first one, disclosed last year when we announced the decision of the new assets in Mercosul, we assumed a net revenue between BRL 13 billion and BRL 14.5 billion. Due to a more depreciated FX that benefits companies like Minerva that are more exporters, we overcome this guidance. In the last 12 months ending in June, the company's net revenue reached BRL 14.6 billion.
If we also consider the pro forma numbers from Mercosul assets, the net revenue have reached BRL 14.9 billion. We also discussed in May a second guidance, but this time for the full year of 2018. We had, at that time, an estimate that the company's net revenue would range between BRL 14.5 billion and BRL 15 billion. However, yesterday, we disclosed a new target for this guidance between BRL 15 billion and BRL 16 billion. As Fernando mentioned in the beginning of this presentation, this update was made due to the current FX scenario. For Brazil, we are now considering an FX average of BRL 3.70 per dollar, and in Argentina, we're now considering ARS 27 per dollar for the year. Let's now move to the last slide of our presentation, where we're going to comment our strategy regarding Athena Foods.
As an additional strategy to unlock value and accelerate the deleveraging process, we were authorized by the board of directors to analyze the feasibility of holding an IPO for our subsidiaries outside Brazil in the following countries: Uruguay, Paraguay, Colombia, Argentina, and Chile. The preliminary conclusions of the studies indicate that the best structure at the moment would be to incorporate a non-operational holding company in Chile, where all Minerva's interests in those subsidiaries would be subscribed. This company, that is called Athena Foods, and that is represented by our international industry division will be born fully controlled by Minerva and is the parent company of Minerva's ex-Brazil industrial operations. At this stage, the company is studying the possibility of holding an IPO for this company, Athena Foods, in Chile.
Because Chile, we believe, is an important and growing market in South America, investment grade, high corporate governance standards, attractive multiples, which are on average higher than those multiples of the Brazilian market. Chile has also a high domestic savings rate, which enables large local pension funds to allocate its investment in equity, filling demand and contributing to good pricing for local IPOs. Athena Foods will be born with a substantial share of the Chilean beef market through our beef exports from Paraguay, Uruguay, and Argentina directly to Chile. For all those reasons, we believe Chile is the ideal market for the incorporation and possible IPO of Athena Foods. We also believe that this operation can create value and significant value for our shareholders, accelerate the company's deleveraging process, and create the financial conditions to continue growing our South American operations, especially in Chile, Argentina, and Colombia.
I'll now pass the floor on to the operator to begin the Q&A session. Thank you very much.
Thank you. We will now start the question and answer section for investors and analysts. If you would like to ask a question, please press star one. If at any point your question has been answered, you may remove your question from the queue by pressing the pound key. Marcelo Miyazaki of Citi now want to make a question.
Hi, Fernando and Edison. I have a question on margin trend. I understand that margins started weaker in the quarter, basically because FX was not so high in April, and then in May you had the trucker strike in Brazil. So only in June Minerva had a favorable macro environment. I wanted to understand how steep was the margin curve throughout the quarter, and if you could share with us what level of margin Minerva had in the end of the quarter in June.
Marcelo, thanks for the question. You are right that the margins have been improving through the quarter. And July, it's a positive surprise over June. So it's a trend that the margins are consistently growing, and this is due to FX, but it's also due to the Minerva policy of the focus on exports, especially on some growing markets. So we see the perspectives as positive. We don't give guidance on margin.
Okay, got it. And if you allow me, I have another question on working capital. Well, the reduction in working capital was notable in the first half of the year with cash conversion cycle coming back to the previous levels. I wanted to understand how you're seeing working capital trends in the second half of the year, and if there's more opportunities to further reduce working capital, and if so, in which line specifically do you see?
We are always trying to improve the working capital cycle. 29 days is we are returning to the levels of 2017. Obviously, we would like to have the working capital cycle more close to 27, 26 days. To be conservative, I think it is going to be flat at this level of 29 days in the next few quarters of the year.
Marcelo-
Just to add to Edison, look that we have a significant increase on exports that normally increases the cash conversion cycle. The achievements were really outstanding.
Great. Thank you, Fernando and Edison.
Mr. Somo from Zoho would like to make a question.
Hi, congratulations for the results. I just wanted to ask about how you see the leverage trend evolving for the remainder of the year. I understand that the second quarter, five times net leverage had the impact on the debt, and it takes a few months for you to pass that on in terms of getting the benefit of the weaker BRL. If you could comment on how you see that evolving in the second half of the year. The second question, just related to the range for the IPO of BRL 1 billion to BRL 1.5 billion, just wondering if you could share your assumptions in terms of the international businesses percentage that you're planning to sell. Valor had a story, I think suggesting 25%, and that gets to a BRL 1 billion price tag if you use eight times EV/EBITDA multiple.
If you could just share to get to the BRL 1.5 billion, if you're expecting maybe higher than 25% or a different EV/EBITDA multiple. Thanks.
Firstly, regarding the Athena Foods IPO, unfortunately, we cannot share any of the assumptions that we have. We are in the phase of preliminary studies. What we can tell you is what I told during the previous call, that the intention is to raise between BRL 1 billion and BRL 1.5 billion with this IPO, keeping a controlling position for Minerva at Athena Foods. Regarding your first question about leverage, you can see that the company is generating free cash flow. If the FX was stable, the company would be deleveraging in the past four quarters. Our expectation is to continue generating free cash flow, but the path of leverage is something that I cannot predict simply because I don't know what is the path of the FX.
As you know, FX is very important to define our leverage because 77% of our debt is dollar-linked. What I can tell you is that the company will continue committed to generate free cash flow in order to speed up the deleveraging process. If the FX is more depreciated, the path will be more volatile. If the FX is less depreciated, the path will be more favorable and less volatile.
Okay, thank you.
Mr. Bokku from HSBC would like to make a question.
Hi, thank you for taking my questions. A couple of questions from me, if I may. Before operating cash flow and free cash flow, you say if we consider before working capital changes where it was about, I think, BRL 40 million. Now we appreciate that first two months of the quarter were rather difficult and things have improved in June. But what do you see the free cash flow generation as sustainable in the second half before working capital? Because obviously with the conversion cycle remaining flat in 29 days, we shouldn't expect another BRL 200 million every quarter from working capital changes. That's my first question.
As I mentioned, conservatively speaking, we don't expect working capital in the coming quarters to contribute with such a big amount of money for free cash flow. However, in terms of margins, July was better than June, and August has been better than July. On the CapEx side, CapEx is practically only maintenance CapEx. CapEx, which will be around the figures that we presented in the first and in the second quarter. The right answer is yes, we are pretty confident that the operational cash flow will continue being high in the coming quarters. Again, don't expect so much cash coming from working capital improvements, but on the operational side, we believe margins will be at least at the same level that we saw in the second quarter.
Okay. I guess another question on the Funrural. Thank you for providing the color on those changes in taxes. Just so that I understand, do you expect any cash outflows in the future related to Funrural?
No.
No. Okay. That was basically already paid for in the past and you just use credits to basically take the accounting charge. Is that what it was?
Yes. That's correct.
Okay. If I just may ask one last question very quickly. On your Athena Foods, I don't know if you can share with us your EBITDA margins for the international divisions, or at least the range.
Unfortunately, we cannot share the numbers at this point. What I can tell you is that the margins are really much better than they were one year ago when we acquired the assets and we were integrating those assets. We have been doing a very good job on integrating the assets, extracting synergies, what allowed us to increase substantially the margins comparing to the second quarter of 2017.
Okay. Thank you so much.
Mr. Talazac from Insight Investment would like to make a question.
Hello. My question is regarding CapEx. I just wanted to be clear on how much CapEx we should estimate for all of 2018, and perhaps any comments on 2019, 2020.
For 2018, the full year, it's something very close to what we did in the past 12 months, around BRL 240 million. What's your second question?
Well, any comments regarding where we should see CapEx for 2019?
Probably the same level.
Okay. Thank you.
This concludes this question and answer section. At this time, I would like to turn the floor back to Mr. Fernando Queiroz for any closing remarks.
Thank you very much for attending our conference call for the results of the second Q of 2018. I would like just to reinforce that the integration process with the South American unities have been very successful, which allow us to take confident steps on the study of listing the international division into the Chilean market. I also would like to thank all the Minerva team, all the efforts, all the work that they have been doing on this integration and the coordination that allowed us to arbitrate this market like anybody else. Finally, I would like to thank Dan for gaining the share of having one-fourth of all the beef exported out of South America being produced by Minerva. Thank you very much. We remain at your disposal and any further clarification, do not hesitate in contacting us.
Thank you. This does conclude today's presentation. You may disconnect your line at this time. Have a nice day.