Earnings Call: Q1 2018

May 10, 2018

Afternoon, ladies and gentlemen, and thank you for waiting. At this time, I would like to welcome everybody to Minerva's First Quarter of 2018 Results Conference Call. Today with us, we have Fernando Quiros, Chief Executive Officer Eduardo Pubiello, Investor Relations Officer Francisco Assia's Controller and Matto Frei, Treasurer Director. We wish to inform if this event is being recorded and all participants will be in listen only during this company's presentation. The audio and slide show of this presentation are available through a live webcast at www.minervafoods.com/irmviqpetafore. A slideshow can also be downloaded from the webcast platform in the Investor Relations section of this website. Before proceeding, we should mention that forward looking statements made during this presentation relation to Minerva's business prospects, operations and financial estimates and goals, they are based on beliefs and assumptions of company management and all information currently available. They involve risks, uncertainties and assumptions because they relate to future events and therefore depending 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 expect the future results of Minerva and K's 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 afternoon and thank you for participating in Minerva's conference call on the results for the Q1 of 2018. You must have noticed in our earnings release, we made 2 restructuring. The first was related to the disclosure of our results from now on. We developed a new layout that will increase the transparency of our results and improve the understanding of the operational dynamics in the different regions that we operate. We have thus divided consolidated gross revenue into 3 divisions. 1st, the Brazilian Industry Division, the International Industry Division, 2nd and the third, the Trading Division. In the Brazilian Industry Division, we will report the results of our Brazilian Unities comprising sales of fresh beef, processed food, such as those produced by Minerva Fine Foods and slaughter byproducts, such as leather, offals, among others. The second one, the international industry division market have the same scope, but with originating products from Paraguay, Uruguay, Argentina and Colombia. Finally, we have the trading division, which concentrates revenues from lifeguidto operations from the trading companies and the resale of 3rd party products in auto distributions among the world. We hope these results will help you understand deeply the particularities of the different regions where Minerva is currently operating. The second restructuring process was in the organizational side. Nowadays, the footprint of the company is more diversified. Therefore, we have different dynamics. So, we decided to implement a new management model that fits into this new reality and which has as main pillars the extraction of our greater operational synergies to give more agility for the decision make and with no doubt to carry out the activities applying the best practices. We will comment the new structure at the end of this presentation after Puzielo's financial presentation. Let's begin the earnings conference call talking about the highlights for the quarter starting on Slide 2. The company consolidated gross revenues totaled BRL3.8 billion in the first quarter and BRL14.4 billion in the last 12 months. 63% of 1st quarter revenues came from the export market. Of the total, the Brazilian Industry division accounted for 46% of the total gross revenues, while International division represented 40% of the and the trading division accounting for the remaining 14%. Talking about that again, 46% of Minerva revenues comes from Brazil, 40% from the other countries in South America ex Brazil and 14% from trading operations among the world. 1st quarter net revenues reached 3,500,000,000 dollars 65% more than in the same period last year. In the last 12 months, net revenue, including pro form a figures of macro suit assets, came to $14,500,000,000 45% more than in the same period of 2017. In this context, the key related net revenues is in line with the guidance for 12 months period between July 2017 June 2018 that we informed for the market ranging from $13,000,000,000 to $14,400,000,000 Based on the Q1 results, we are maintaining this guidance. Besides, yesterday, we disclosed a new guidance, but now for the period between January December 2018, ranging from R14.5 billion dollars to R15 billion dollars First quarter adjusted EBITDA climbed 40 4% over the same period in 2017, totaling BRL285 1,000,000 with an adjusted margin of 8.1%. In the last 12 months, adjusted EBITDA reached $1,300,000,000 up 39% year on year. The adjusted EBITDA margin for the period was 9%. Given the operating results, we never recorded operating cash flow of a positive R187.6 million dollars and free cash flow of a positive R51.6 million dollars In the Q1 of 2018, this was an achievement that is worth mentioning because it's normally the worst quarter of the year. And this also shows our commitment with cash generation. We closed the Q1 of 2018 with a net loss of $114,700,000 We recorded in the last 12 months, we recorded a negative net result of BRL398 1,000,000 impacted by non cash effect of foreign exchange variation. Just to emphasize, this was linked to the currency variation and have a non cash impact. On the capital structure front, we closed the quarter with a leverage measure by the net debt to adjusted EBITDA over the last 12 months of 4.5 times, 0.1 less than in the last quarter of 2017. This movement shows the beginning of our deleveraging process. We continue with a profitable position in cash of $3,900,000,000 in the Q1. The duration of our debt was around 6 years on March 31, 2018. Minerva continued to account for 22% of South American exports and remained the largest beef exporter in the continent. This is just to reemphasize how strong South America became in the world market of beef. So Minerva is by far the largest and the most diversified producer in East of America. Talking about the integration process, it's worth mentioning that we have concluded the period of setting the SAP, the basis platform for controlling and having always the same standards in all the countries. And we will continue pursuing improvements in our operational and commercial efficiency programs through benchmarks, through best practices and through exchange of positive experience. It's worth mentioning the positive outlook for the opening of new markets in the coming months. As we have already mentioned, we expect the Japanese market to open for Uruguay. The Indonesian market just finished visits into Brazilian plants and shall be opened still in the first half of the year. And also, important to mention the possible reopening of United States for Brazilian and for Argentinian beef. Moving to slide 3, we will begin talking about the sector in Brazil, where we have 45% of our capacity. Isrotta has grown 4% between 1stq 'seventeen and 1stq 'eighteen. In 1stq 'eighteen, beef exports came to 319,000 tons, 21% more than in the same period of last year. Strong export demand came mainly from Asia, Chile and the North of Africa. Also, with Middle East, Avika had an important it was an important destination for Brazil. The domestic performance was in line with the seasonal trend for the period. While characterized by more modest beef consumption, we also had the impact of the replacement of beef with other proteins and the calendar effect of the Carnivale and Easter that fell in the same quarter, compromising the leaf consumption in the period. Nevertheless, with that, Minerva has maintained a stable share, a stable volume of product in the Brazilian local market. We are now going to discuss Paraguay, which concentrates 20% of our production capacity. You can see details on the top right corner. Paraguayan slaughter fell 70% between 1stq2017 and 1stq 2018. This decline was related to the rainy season, which made the logistics much more complicated in reducing the availability of movement and reducing the availability of cattle. Therefore, there was a reduction of exports because of that. Chile also had some also had some suspensions during this period, but this already got back to normal. So, Chile, that's a product market, is fully Verma Lano for Paraguay nowadays. The main destination of Paraguay and exports was Russia, which accounted for 44% of the country's total exports in the 1st Q 'eighteen, 12 percentage points more than in the same period last year, driven mainly by the ban of the Brazilian beef to Russia. Therefore, Paraguay was able to occupy part of the space left by Brazil. In Uruguay, where we have 12% of our operation, the slaughter volume was 8% higher than in 1st Q 2017 and 7% over 4th Q of 'seventeen. The higher slaughter volume was due to the drought in the country, caused by La Nina, which encouraged cattle producers to bring forward slaughter. In the 1st Q 'eighteen, Uruguayan exports performed well, up 16% over 1st Q 'seventeen. The main destination of Uruguayan exports were China and the United States, which accounted for more than half of the country exports. Finally, moving on to Argentina, which represents around 19% of our slaughter capacity. The slaughter volumes moved up 8% between 1stq 'seventeen and 1stq 'eighteen. It's worth noting that, like Uruguay, Argentina also went through a trough caused by La Nina. Argentina export volume once again performed exceptionally, climbed at 56% over 1st Q 'seventeen. This was an outstanding performance, showing that Argentina beef is back to the world market with a well recognized brand. China was the main destination of Argentina exports in the period and accounted for 35% of the total exports, followed by Russia and Chile. I would like to draw your attention to the beauty of Minerva geographic diversification. As an example, Russia closed its market for Brazilian beef. We use it and we increase it our production in Argentina, in Paraguay and also in Uruguay to fulfill the gap. Therefore, we were exporting as Minerva more than when Brazil was opened. To create value when Chile reduced its power by exports, Brazil replaced their debt origin, also helped by Argentina. So, this arbitrage capability is one of Minerva's most competitive advantages. Argentina domestic consumption was also strong in the Q1. It's another point that is relevant to mention. The typical seasonal effect and the demand in the quarter was barely affected by the seasonality. Again, I draw the attention that we have from time to time sanitary events, we have currency events, we have different events that allows Minerva with the geographic diversification to mitigate the risks. There is no other tool that's as efficient as the one that we have to mitigate the risks on the beef sector. Now let's analyze Minera performance, beginning with the exports on Slide 4. In the Q1, Minero continued to be one of the leading exporters in the country where we operate. In Brazil, we once again had a significant 19% market share of exports. In Paraguay, our market share of exports came to 40%, a proper record that shall be broken again in the 2nd Q. All time highs consolidating our position as the largest exporter. So, not only in the Q1, but the Q2, we consolidated our position as the most important and the most relevant exporter out of Paraguay. Meanwhile, in Uruguay, our market share corresponded to 21% of the total exports in the first Q. And in Argentina, we are responsible for 16% where we found the exports of the country. And finally, in Colombia, that is a small basis, we are responsible for 71% of the total country's exports. Moving to Slide 5, we will show the breakdown of exports by region and by division. So, to show you the different dynamics, we divided the results of exports between Brazil, the international division in 2 separate charts. In the Brazilian industrial division, the Middle East stood out in the last 12 months ended March accounting for 31% of the total exports, 3 percentage points more than in the same period last year. The 2nd most important destination was Asia, which accounted for onefour of the division exports in the last 12 months. So, if you added Africa, that's mainly North of Africa, the Maghreb area, you will see the importance of the Islamic slaughter for the company. In the International Industry Division that includes all the South American countries ex Brazil, the main destination was Americas, followed by Asia with 29% to Americas and 28% to Asia. 6% points more than in the last 12 months of 1st Q 2017. This proves what we have been showing to the market in the last few months about the constant growth in demand from Asia and Middle East and the fact that South American exporters are consistently better prepared to meet this demand. I will now turn to Eduardo, our Investor Relations Officer, who will present the company's financial and operating highlights. Guzziello? Thank you, Fernando. Good afternoon, everyone. We will present Minerva's financial and operating highlights as of Slide number 6. As Fernando mentioned in the beginning of the presentation, starting this quarter, we are dividing gross revenue in 3 groups, and we can see the evolution of each of these groups separately on this slide. Gross revenue from the Brazilian Industry Division came to R1.7 billion dollars in the first quarter, around 22% higher than in the 1st Q 2017. Revenue from the International Industry Division reached R1.5 billion dollars in the 1stq 'eighteen, around 165% more than 1Q the 1st Q 2017 as shown in the graph on the top right corner. In addition to the organic growth of this operation, this performance was related to the addition of these new assets as of last August. The capacity utilization rate of our Brazilian units stood at 18.1% in 1stq 2018, more than 10% higher than in the 1stq 2017, while the capacity utilization rate of our units in Paraguay, Uruguay, Argentina and Colombia stood at roughly 72%. In the next slide, we will continue talking about the financial and operational performance of these divisions. But now we are talking we will talk about the trading division revenue, which stood around R530 $1,000,000 in the Q1 of 2019, around 70% above what we saw in the 1st Q 2017. This increase was driven by the improved performance of the Life Cattle segment combined with our strategy of reselling 3rd party products in the domestic market and our propane trading operations in the export market. In the bottom right graph, we also presented the share of each of the 3 divisions in the gross revenue breakdown, showing the importance of each division that makes up our consolidated operation. As Fernando mentioned in the beginning of this conference. The Brazilian Industry Division accounted for 46% of the gross revenue. The International Industry Division represented 40% of the and the trading division accounted for the remaining 14% of the total gross revenue. Minerva's net revenue totaled R3.5 billion dollars in the 1st Q of 2018, 65% more than the same period of last year. Adjusted EBITDA amounted to R285 $1,000,000 in the first quarter, also 33% higher than the EBITDA of the same period of last year. And the EBITDA margin reached 8.1%. So now turning to Slide number 8, we're going to talk about the net res results for the Q1 of 2019. As you can see in this slide, the company records a net loss of R114 million after income and social contribution taxes in the Q1 of 2018. And in the last 12 months and in March, company recorded a net lag of BRL398 1,000,000. As Fernando also mentioned in the beginning of the presentation, all related to the non cash impact of the currency variation. Moving to the next slide, we will talk about the operational cash flow of the company. In the Q1 of 2018, the operating cash flow was positive in BRL187 1,000,000, Adjustment to the net income, R269.5 million dollars while the working capital variation was positive by roughly BRL33 1,000,000. In the 1st Q of 2018, the positive working capital was a result of receivable decline, which returned approximately R341 $1,000,000 to our cash and also another positive contribution came from other payables line. Please bear in mind that this line reflects the company's credit policy and contains the prepayment from some clients according to their credit risk. On the other hand, the supplier line consumed BRL234 1,000,000 because the company paid cash for the purchase of more raw material. In the last 12 months ended March, operating cash flow was positive by around R496 $1,000,000 Adjusted net income took out approximately R1.5 billion dollars while the change in the working capital requirement was negative by R460 $1,000,000 Coming to Slide 10, we will not touch on the free cash flow for the Q1 of 2019. As you can see, the adjusted EBITDA reached R285 $1,000,000 while cash CapEx came to roughly R48 $1,000,000 The financial results with cash effect stood at around R218 $1,000,000 While the variation in the working capital, as I just mentioned in the previous slide, reached BRL33 1,000,000. So as a result, the free cash flow was positive by BRL51.6 million in the Q1 of 2019. Regarding the free cash flow of the last 12 months, the EBITDA reached BRL 1,200,000,000, excluding the pro form a figures of the Mercosur assets. Maintenance CapEx came to R2.58 million dollars Cash financial results for the last 12 months reached R795 1,000,000 and the variation of the working capital requirements was negative by R460 $1,000,000 So the results of the last 12 months free cash flow of the company was a negative R277 $1,000,000. Going now to the Slide number 11, we're going to talk about the capital structure of the company. Our leverage, measured by the ratio net debt to EBITDA of the last 12 months, which is 4.5x at the end of March, 0.1x lower than the 1st Q of 2017. So as also was mentioned by Fernando in the beginning of the presentation, this is the beginning of the deleveraging process of the company. Our cash position was $3,900,000,000 sufficient to make us very comfortable to deal with the adverse scenario and settle our debt until 2024. And at the close of the Q1 of 2019, roughly 80% of Minerva's debt was exposed to the FX variation, with a duration of close to 6 years. I will now return the floor over Fernando, who will talk about the new organization structure and also talk about the and then we're going to go through the Q and A. Thank you, Eduardo. As I previously mentioned, today, Unalvo is part of a new reality with a relevant with a much more relevant geographic diversification. We are in a sector that is becoming more and more global. So, we must be more apt to deal with the different dynamics and particularities of our company and on the locations and the geographic locations that we are. Aiming to extract the best synergies from the Uniti's to improve the integration between the management and to apply the best practice in the decision making, we readapt the company organization structure. Thus, we establish a new role of our Global Chief Operational Officer that is global, that will be played by our current COO, Mr. Ian Mars, who many of you already met. Ian is with us for 10 years. He has participated in the growth plan and is fully aligned with the Minerva dynamics and he share our business plan from the very beginning. He will coordinate the operational management team in Brazil, in Argentina, Paraguay, Uruguay and Colombia and from the related business. Another changing that we made was the restructuring of the financial department. Eduardo de Toledo left the company and we will have now 3 areas that are, 1st, risk and control under Francisco de Assis supervision, who is with us for 7 years Treasury, with Nathan Frei, that is with us for 80 years and 3rd, Investor Relations with Eduardo Puzeello here at my side, who has been in the company for 8 years. These areas are 100% integrated and fully aligned with me and with the company's strategy. Once again, I would like to highlight that Renato's main focus is the deleveraging process through the value extraction from our utilities and working capital management. During the integration process, I was focused on the operational side. And now with this step concluded, I will return to focus on the strategic level. This explains why we have decided to have a new structure to follow our principles, discipline, focus and consistency. Finally, I would like to mention that the achievements and the results from Minerva are due to the work of not only one person, but more than 18,000 people, which I emphasize their commitment and their search for a consistent improvement. I will now hand over to the floor to start the Q and A session. Thank you. We will now start the question and answer session for investors and analysts. Lauren Cruz from UBS would like to make a question. Yes. Hi. Thank you. Hi, everyone. Fernanda, you were clear about the restructuring, but I'm just curious to get a bit more of your perspective on what changed in the last few months. We had the appointment of the CFO just a few months ago. So curious, I understand the visibility, the clarity, having executives at the firm to fill these spots now. But I think with some nervousness in the market with management changes at the high level, Curious to get your perspective on kind of what changed just in a few months' time to do this restructuring now? Well, there is not much that's changed, Lauren. Since we acquired the operations of Mercosur, the structure we've been preparing the company for the structure of having a COO, a global COO that would consolidate the operational part. So that's sort of shared with our Board. This is being discussed with our team. So it was time to implement. What really was what is different that is happening at the same time that we had the non election of Eduardo Di Toledo. Once you have a new even though you can make a good search and a new hiring, you got to know the person and it comes to the day to day. So, there is always risks and uncertainties from both parts by having changing on the high level. What we used was the common sense to recognize and to change the structure with a team that we feel very comfortable. That's a team that we do all with us for more than 7 years and it's a very senior team that have been conducting the operations and have been conducting the strategy of the company for all this time. So, it's not something that is it happened now. It's something that was planned and it was adjusted with the new senior team on the financial side. Okay. All right. That's helpful. And if I could just ask some questions on the results. Just first on the margins, there were some items affecting margins in the quarter. With the integration now more or less done, curious to get your perspective on directionally where margins can go for the remainder of this year. And then also on leverage, I think you've given some general leverage targets for us to think about in the next 12 months or so, if you could talk about if you do have a leverage, a public leverage target? First of the margins, the margins, normally the Q1 of the year margins are lower. This is part of the seasonality. This year, we had some good surprises and bad surprises. What was below our expectation was Brazil. The competition in Brazil was had increased. Therefore, there was a compression in margins in Brazil. The positive surprise came mainly from Argentina that outperformed what we expected. So, but I'll give you a view for the 2nd Q. We see Brazil normalizing. We see Paraguay also taking a new increase on volumes. What happened is that in the Q1, there was some retention of cattle due to the logistics. Now that it's normalized. And Argentina keeps performing well, especially with the model that Minerva implemented by being focused on exports. So exports, especially now that the peso has devaluated, make us even more competitive. Just to give you an idea, 1st Q, if we analyze Argentina individually, 1st Q 'seventeen versus 1st Q 'eighteen, the increase in export of Argentina were at 135%. So, we don't give guidance of what would be the deleverage or what would be the deleverage that we will reach by the end of the year. But definitely, our focus is to decrease the deleverage. We have our internal goals. We have our internal measures that we are taking that is leading to some small results in the first Q and we shall continue on that path from now on. Okay. Thanks. Mr. Andrew De Luca from Barclays would like to make a question. Hi, yes. Thanks for the question. I just wanted to follow-up on the prior question on the competitive environment in Brazil. Can you just give us a little bit of color on your outlook in terms of how you're expecting that margin to evolve? I mean, it sounds like obviously the Argentina side of the business is improving, but what's the outlook for the competitive environment for Brazil for the rest of the year? Thank you. What's happening in Brazil is that we are in a positive side of the cycle. The The increase of supply, the increase of availability of cattle is shown and you can see the price that have go down. Not only that, but with the currency, with the Brazilian currency devaluating, this will have a further impact in dollar terms for the capital that we are purchasing. So, this only consolidates South America, in Brazil, in Argentina, in Paraguay as the main and the most competitive supplier of beef worldwide. So, we see the competitive environment more stable and now more healthy for the rest of the year in Brazil, mainly because there is more cattle and there is more rationality. Thanks. And on the back of the greater cat availability and rationality, are there any concerns of additional capacity that's going to be coming online from JBS, for example? Thank you. We are not seeing any move. This is something that we don't control what is happening to that on our competitors, but we don't see change on that. Great. That's very helpful. Thank you. This concludes the question and answer session. At this time, I would like to turn the floor back to Mr. Fernando Quairos for any closing remarks. I would like to end this conference call first by saying that we are very confident with the changes that the company is going through. We believe that we will continue bringing positive results and consolidating our position of being the leaders of exports out of South America. And I would like to thank once again our entire team for doing the best for the company and for making us through the Air Force in Education, the leader of South America. It's a multicultural company. It's a company that's diversified. And lastly, I would like to thank you all for the interest in the company and we remain at your disposal for any questions and clarifications. Thank you very much and do not hesitate in contacting us. Thank you. This does conclude today's presentation. You may disconnect your line at this time and have a nice day.