Earnings Call: Q2 2018

Aug 8, 2018

Good afternoon, ladies and gentlemen, and thank you for waiting. At this time, we would like to welcome Ambarella to Minerva's 2nd Quarter of 2018 Results Conference Call. Today with us, will have Fernando Quiras, Chief Executive Officer Edson Siclar, Chief Financial Officer and Eduardo Pozielo, 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 slide show of this presentation are available through our live webcast at www.cunevafoods.com/ir and nziqplatforms. This 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 measurements and are information currently available. They involve risks, uncertainties and assumptions because they relate to future events and therefore depends on circumstance 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 Quiros, CEO, who will begin the presentation. Mr. Quiros, you may start the presentation. Good morning, everyone, and thank you for participating in Minerva's conference call on the results for the Q2 of 2018. We'll begin the earnings conference talking about the highlights for the quarter, starting on Slide 2. Minerva closed the Q2 of 2018 with a positive operating cash flow of BRL296 1,000,000 and a positive free cash flow to equity of BRL244 1,000,000. In the 12 months ended June, free cash flow totaled approximately BRL200 1,000,000. The company's consolidated gross revenue totaled BRL4 1,000,000,000 in the 2nd quarter and BRL15.6 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 BRL1.7 billion, means 43% of the total gross revenue in the quarter, while the International Industry Division contributed with BRL1.6 billion or 40% of the total. The trading division contributed with BRL6 16,000,000 or 17% of the total. Minerva's consolidated exports accounted for 64 percent of the revenues in the 2nd Q of 2018 and were 50.3% higher than 2nd Q 2017, also 7.5% higher than the 1st Q of 2018. The domestic market sales grew 32% against the Q2 2017 and 2% over the 1st Q 'eighteen. The company's focus in the foodservice segment and expansion of portfolio through origins expansion were crucial for this performance. Pizarro's net revenue totaled BRL2.7 billion in the 2nd Q of 2018, 45% more than in the 2nd Q 2017. If we consider the pro form a figures of the assets acquired in Mercosur, net revenues totaled BRL14.9 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 BRL13 1,000,000,000 to BRL14.5 billion, especially due to the company's export profile an environment of more depreciated FX rates. 2nd quarter EBITDA reached BRL353 1,000,000, 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 form a figures was 40% higher than in the same period of last year at BRL1.4 billion with an adjusted margin of 9.1%. At the end of June, our cash position remained comfortable at approximately 2 times higher than the short term maturities, while the debt duration was around 6 years. We concluded in early July the buyback and cancellation of approximately $53,000,000 in bonds during 20262028, which was not reflected on our 2nd 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. Inaba continued to account for 25% that means 1 fourth of South America beef exports and consolidated its position as the largest beef exporter in the continent. If we take in consideration the latest estimates from USDA for beef exports, that indicates that South America is responsible for 30% of the global exports. So we can conclude that Minerva is responsible for approximately 8% of the total global sales on the international markets. Finally, I would like to briefly talk about the studies to possible holding an IPO in our communities outside Brazil, in the Chilean Stock Exchange. Ethel will comment in further details in the end of this presentation, but I think that it's 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, contributing to deleveraging the process and to improve our capital structure. Lastly, as we disclosed yesterday, our guidance for net revenue for 2018 was updated and now we are considering a dollar average of ARS 3.7 and ARS27 for Argentina. We believe that in this new FX scenario and due to our export profile, company's net revenue will now be between BRL15 1,000,000,000 BRL16 1,000,000,000 as the new guidance. We will now move to slide 3, where we will talk briefly about the industry overview. Starting with Brazil, 2nd quarter slaughter volume totaled 5,700,000 heads, 4% up year on year and only 2% less than in the 1st Q of 'eighteen. This decline may be attributed to the truckers' strike, which suspended the transport activities and consequently slaughtering for around 1 week. Despite this nonrecurring event in the 2nd Q 'eighteen, it's worth noting that the animal supply remains positive for the rest of 2018 and should extend for 2019. This increase in animal supply was due to the rotation of females and calves' birth initiated in 2013 2014. In the 2nd Q 'eighteen, 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, replaced Paraguay to that country. Paraguay used to be Chile's main supplier and now because of the country is increasing its exports 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. Valu totaled 526,000 heads, 21% higher than in the 1st Q 'eighteen and virtually in line with the 2nd Q 'seventeen. The quarter over quarter increase was due to the weaker performance recorded last quarter impacted by weather conditions. In the 2nd Q 'eighteen, Paraguayan exports were 19% higher than in the previous quarter. Once again, the main destination of Paraguay exports was Russia, which accounted for 42% of the country's total exports in the 2nd Q 'eighteen, 24% points more than in the same period last year, driven by the ban on Brazilian beef in Russia. Its total volume in Uruguay totaled 543,000 heads and was 11% lower than in 2nd Q 2017, 17% lower than in 1st Q 2018. We would like to remind you that the slaughter of many animals was brought forward to the Q1 due to the drought caused by the La Nina event, which is why the market was already expecting this decline. Uruguayan exports were 9% lower than in the 2nd Q of 2017 17% lower than in the 1st Q 2018. The main destination of Uruguayan exports were China and United States, which accounted for more than half of the country exports out of the period. Finally, we have Argentina, which accounted for around 90% of our slaughter capacity. 2nd quarter slaughter volume totaled 3,200,000 heads in Argentina, 5% higher than in the 2nd Q 2017, but 3% lower than in the 1st Q 2018. It's worth noting that like in Uruguay, Argentina also went through a drop caused by La Nina. However, 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 2nd Q 'eighteen, Argentine exports volume moved up 50% over the 2nd Q 'seventeen. China was the main destination of Argentina exports in the period and accounted for 43% of its total. In the Q2, domestic consumption in Argentina was affected by the depreciation of the country's currency and more important by a rising 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 4 to discuss Minerva's performance, starting with our exports. In the Q2, 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 5. 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 International Industry Division, the main export destination was Asia with 31% of the total exports and the American region, especially Chile, with 26%. We think that it's important to say that the Commonwealth of Independent States, also new CRS 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. Now we'll go into other details of the financial and the operation. But I will hand over to Edson to take the floor. Thank you, Fernando. We will present Minerva's financial and operating highlights as of Slide 6. Gross revenue from the Brazilian Industry division came to BRL1.7 billion in the 2nd quarter, around 6% higher than in the Q2 of 2017. Gross revenue from the International Industry Division, which will be Atena Foot, reached BRL1.6 billion, 139% higher than in the 2nd Q of 2017, as shown in the chart on the top right corner of the slide. It happened thanks to the fact that the Mercosur assets were only consolidated as of August 1, or August 1, 2017 or the Q3 of 2017, which means that these operations were not included in the company's results in the Q2 of 2017. Wealth revenue from the trading division stood at BRL660 1,000,000 in the quarter, up 36% over the 2nd Q of 2017. This performance was related to the recovery of life capital exports, propane trading operations in the export market and the company's increased point of sales popularity 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% 17% respectively. Moving to the next slide, we'll continue showing our financial operating results. Minerva's net revenue reached BRL3.7 billion in the 2nd Q of 2018, 45% growth when compared to the 2nd Q of 2017. Adjusted EBITDA amounted to BRL353 1,000,000 in the 2nd quarter, up 27% over the 1st Q of 2018 with an adjusted EBITDA margin of 9.5%. It is worth noting that EBITDA nonrecurring items were exceptionally higher this quarter as a result of the rural tax regularization program that we use to make the payments of Funeral debt. For those who would like to know more about this, we included a note describing the main points of Funeral 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 credit used to pay this debt. So in a nutshell, we had around BRL196 1,000,000 of tax credits at the end of 2017. We recognized BRL570 1,000,000 of new credits along the first half of the year and we used BRL470 1,000,000 of those credits to pay down the funeral debt and other fiscal debt at the end of the second quarter. So the balance at the end of the quarter was BRL297 1,000,000 in tax credits or roughly BRL100 1,000,000 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. We've got capacity utilization rate of 72% in the Brazilian industry, 7% 80% in Atena Foods. So the consolidated basis reached stood 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 Q2 of 2018, in line with the figures that we recorded in 2017. Let's go now to Slide 8, which shows the company's net results for the Q2. In the Q2 of 2018, Minerva had a net loss of BRL926 million after income and social contribution taxes in the Q2. In the 2nd quarter result sorry, the 2nd quarter result was impacted by the non cash exchange FX variation, which was negative by BRL 9 57,000,000 due to the FX exposure of our debt that was around 77% at the end of the quarter. A reminder that the real depreciated around $0.54 during the quarter from the end of the second quarter comparing to the end of the first quarter. We also had an impact coming from the Fugro settlement. That was a non cash impact of BRL580 1,000,000. So if you exclude all those impacts, Minerva would have recorded net income of around BRL600 1,000,000 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 $396,000,000 in the Q2 of 'eighteen. The main highlight was the positive variation coming from the working capital that was around BRL672 1,000,000. In this line, the deferred tax line returned BRL470 1,000,000 dollars because of the Fonerao debt, as we have already mentioned. On the working capital per se, the line is that contributed positively were receivables with around BRL 12,000,000, inventories and biological assets positive by BRL46 1,000,000 and suppliers that returned BRL74 1,000,000 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 20 90 days at the end of the quarter, as we have already mentioned. In the last 12 months and in June, operating cash flow was positive by around BRL464 1,000,000. Let's talk about the free cash flow on the next slide. Adjusted EBITDA was BRL353 1,000,000 in the second quarter. Maintenance and expansion CapEx was BRL51,000,000. The cash financial expenses stood at BRL260,000,000 and the working capital change was positive by BRL202 1,000,000. So free cash flow was positive in the quarter by BRL244 1,000,000. In the 12 months ended in June, adjusted EBITDA reached R1.3 billion dollars including the pro form a figures of the Mercosur assets. CapEx came to BRL244 1,000,000. Cash financial result was BRL893 1,000,000, and the variation in working capital was positive by BRL 23 1,000,000. So as a result, recurring free cash flow was positive by almost BRL200 1,000,000 in the last 12 months. The free cash flow figures are once again that is 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 leverage our net leverage measured by the net debt to EBITDA ratio was 5 times. And the main reason for that increase was related to the FX depreciation that was more than $0.50 during this quarter. Our cash position stood at BRL4.2 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. And it is in line with our policy of keeping an amount of cash equivalent to at least 3 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 6 years. It's also important to mention that we built almost BRL1 1,000,000,000 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 the trade, let's say, the trade war between China and U. S. And on the other hand, the decision was taken because of the cost of hedge that in Brazil today is around 500 to 600 basis points cheaper than it was 12 months ago. So this is the rationale behind the decision to buy hedges and hedge protect 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 2 guidance for net revenues. In the first one, we disclosed last year when we announced the acquisition of our of the new assets in Mercosur, we assumed a net revenue between BRL13 1,000,000,000 and BRL14.4 billion due to a stronger FX with benefit due to a more depreciated FX that benefits companies like Minerva that are more exporters, we overcome this guidance. And in the last 12 months ended in June, the company's net revenue reached BRL14.6 billion. If we also consider the pro form a numbers from Macosso assets, the net revenue have been have reached BRL14.9 billion. We also disclosed 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 $14,500,000,000 15,000,000,000 dollars However, yesterday, we disclosed a new target for this guidance between R15 $16,000,000,000 and R16 $1,000,000,000 As Fernando mentioned in the beginning this presentation, this update was made due to the current FX scenario. For Brazil, we are now considering an FX average of ARS 3.70 per dollar. And in Argentina, we are 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 on our strategy regarding Atena 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 IPO 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 interest in those subsidiaries would be subscribed. This company that is called Apiana Foods and which is and that is represented by our International Industry Division will be born fully controlled by Minerva and is the parent company of Minerva ex Brazil in this cell operation. At this stage, the company is studying the possibility of holding an IPO for this company, Atena 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, fueling demand and contributing to good pricing for local IPOs. Atena 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 Atena 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 and A session. Thank you very much. Thank you. We will now start the question and answer section for investors and analysts. Marcelo Iloi, 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, we never had a favorable macro environment. So I wanted to understand how steep was the margin curve throughout the quarter. And if you could share with us what level of margin I mean ever 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 NAVA policy on 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. But 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're 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. But to be conservative, I think it's going to be flat at this level of 20, 90 days in the coming in the next few quarters of the year. Marcelo, just to add to add some, look that we have a significant increase on exports that normally increases the cash conversion cycle. So the achievements were really outstanding. Mr. Somo from Zoho would like to make a question. Hi, congratulations for the results. Just wanted to ask about how you see the leverage trends evolving for the remainder of the year. I understand that the second quarter 5 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. So if you could comment on how you see that evolving in the second half of the year? And then the second question just related to the range for the IPO of $1,000,000,000 to $1,500,000,000 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 1,000,000,000 dollars price tag if you use 8 times EV EBITDA multiple. If you could just share to get to the 1.5 percent, if you're expecting maybe higher than 25% or a different EV EBITDA multiple? Thanks. Firstly, regarding the Atena Foods IPO, unfortunately, we cannot share any of the assumptions that we have. We are in the phase of preliminary studies. So what we can tell you is what I told during the previous call, that the intention is to raise between BRL1 1,000,000,000 and BRL1.5 billion with this IPO keeping a controlling position for Minerva at Athena Foot. Regarding your first question about leverage, you can see that the company is generating free cash flow. So if the FX was stable, the company would be deleveraging in the past 4 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. And as you know, FX is very important to define our leverage because 77% of our debt is dollar linked. So 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 PAS will be more volatile. If the effect is less depreciated, the path will be more favorable and less volatile. Mr. Borkou from HSBC would like to make a question. Hi and thank you for taking my questions. A couple of questions for me, if I may. Before free cash flow, operating cash flow and free cash flow, obviously, as we consider before working capital changes, it was about, I think, dollars 40,000,000 Now we appreciate that 1st 2 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 200,000,000 every quarter from working capital changes. So 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. So the right answer is yes, we are pretty confident that the operational cash flow will continue to be high in the coming quarters. Again, don't expect so much cash coming from working capital improvement. But on the operational side, we believe margins will be at least at the same level that we saw in the Q2. Okay. And I guess another question on the Furrural. Thank you for providing the color on that on those changes in taxes. But just so that I understand, do you expect any cash outflows in the future related to Funeral? No. No. Okay. So that was basically already paid for in the past and you just used credits to basically take the accounting charge. Is that what it was? Yes. Yes, that's correct. Okay. And if I just may ask one last question very quickly. When you're seeing the food, I don't know if you can share with us your EBITDA margins for the international divisions or at least the range? Well, 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 1 year ago when we acquired the assets and we were integrating those assets. So 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 Q2 of 'seventeen. Mr. Tal Lazard from Inside Investments 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 BRL240 1,000,000. What's your 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 Quiros for any closing remarks. Thank you very much for attending our conference call for the results of the 2nd 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 them for gaining the share of having one 4th of all the beef exported out of South America being produced by Minerva. So 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.