M&A Announcement

Jul 28, 2021

Good morning, ladies and gentlemen. Welcome to Camille Alimento's call. With us today, Mr. Luciano Quartiero, CEO Mr. Flavio Vargas, CFO and IR Officer and the company's IR team. The audio is simultaneously available in the company's IR website. Management's forward looking statements and the Q and A session May include projections about future events, which are subject to risks and uncertainties, Therefore, may or may not happen or may be different from what was expected. Please, Mr. Luciano and Mr. Favio, you may begin. Good morning, everyone. Luciano, please. Flavio, I will start with a brief introduction. I'm not in Sao Paulo, so I don't have a good connection. I will I'll start with some brief remarks and turn the floor to Flavio. I would like to say that the company is very pleased about this acquisition In Ecuador, the company is in line with our strategy. And this we have been saying that this is our strategy for the past few years, and that's what the company intends to do, which is to have organic and inorganic growth in and out of Brazil in rice and also in new categories. So this step in Ecuador with rice It goes along with what the company has done in Uruguay, Chile and Peru. That is we are going into a new country In the RISE operation, which is the company's origin and what the company learns faster In terms of operations, we are acquiring a company that has a leading position in Ecuador, And we expect to do something very much in line to what has been done in other countries, especially efficiency improvement because since this is another country, it doesn't have that many synergies with Brazil. I am concerned about connection, and I will turn the floor to Flavio so that he can start the presentation. Thank you, Luciano. Good morning, everyone. I think today is a day when we wake up very Happy to be able to announce this new acquisition of the company to go into a new geography. With the acquisition of Dajahoe, we go into the equatorian market. And like America, a Brazilian multinational company that is relevant, working in attractive markets and also working in a leading position in each one of the segments. When we look at the equatorial market, This is a market that, for us, who work with rice, this is a market that makes Since this country has around 17,000,000 inhabitants, and it has had a special growth Economically, rice is very important in Ecuadorians' diet, just like here in Brazil. It is the main input in Ecuadorians' daily meals. And this country operates around 1,700,000 tons of rice. And this amount that is produced and sold in the country turns it Even a larger market than Uruguay, Paraguay and Chile, basically 50% to 60% larger than these other markets. So This is a market that, for us, is important. And we wanted to become a leading company, a very relevant multinational company in Latin America. So this was a step, and this is a step that makes sense. And The opportunity arose, and we made the deal. So we acquired Desajo. This is a well structured company, especially for the local standards. And this is a company that really attract us because Just like us and the way that we like to work, this is a company that is very relevant in the domestic market. It is a leading company with around 20% of the market of aged rice. Aged rice is a special product in equatorial market. It's a premium product, And you can have a better performance because the rice is wider, is looser. And this is a process that was developed in the country where you can accelerate that a storing process for rice. So the older is the rice batter will be its performance on events. And it's also very relevant. It has 7% of local Consumption when you consider all segments and products, so we understand that it is A great platform, the company is among the main companies in the country. It is one of the largest in the food industry there. It does have relevant brands for their domestic market, And the domestic market has a lot of the production There and we understand that there is an opportunity to migrate to products of higher added value. This is a company When we look at the productive point of view, it does have a production capacity. This is a company That was losing a little bit in terms of the rice processing. So it has a possibility to be expanded productively and also market wise. This is A fragmented market there, so we do have an opportunity to make a consolidation in the country. This company today is only In the 50% in the country, so there is an opportunity to other areas and therefore, providing additional growth. And what we expect is what Luciano mentioned that As we go in, we should be able to contribute with capital and intelligence. Capital seems to be a very determinant topic in the country. The other players in the country Have difficult access to capital. So we understand that going in with capital will help us in terms of growth, and It is going to allow us to explore purchasing opportunities so that we can maximize our return. We also expect to have efficiency gains there, both in supply and Purchases, procurement and industrial logistics and both In terms of products and distribution as well, so what we expect with this acquisition is that we are able to replicate What happened in Uruguay, Peru and Chile, where we were able to have a growth in volume. And here, we believe we do have a relevant growth opportunity and also a better margin improvement because of Stale gain and this efficiency leverage that we are going to go after over the years. So in summary, we have a growth platform. Our focus here in the short term It's 100% in rice. This is the company's DNA. This is what we know how to work with. We will try to analyze what we can improve, what are the opportunities to improve, both in the organic growth as well as in this increase in profitability. And we understand that this first STAP in the future may represent a possibility to go into other categories in the consumption sector. And we also see that in Ecuador, it might Main a synergy with our of fish products. This is an important Exporting country for tuna fish, for instance, and that's important for us as well. So to be close to this market, We think that at some point, we'll be able to look for synergies in also this other area. So we are bringing in the capital, knowledge, and we wanted to drive up The profitability of this operation. So in terms of financing, we hired IFC, International Finance Corporation, to support us and to assist us in financing. And not only because the price is competitive and the term of this financing is special, but also because it stresses all our ESG The agenda, which is also becoming a focus of the company. In order to have financing, we have to be submitted to a strict diligence in the environmental area. And we have that commitment. And having that approval By the IFC, we understand that this is very important to stress all our commitment with the ESG agenda. So we are announcing today that we signed the contract To conclude the transaction, we believe that's going to take up to 60 days, and we have to meet all the terms. And also, the seller has some topics to meet so that we can finalize the transaction. In terms of multiples, we have paid a multiple that we understood that was right considering the size of the business and also the growth opportunities we foresee. And what we feel in this enthusiasm is that differently from Last year, when talks in the business environments were more introspective and the companies were very much focused inwards to understand what the pandemic would cause and how everyone could overcome this. But now we see that The business environment this year has changed. So we are taking this step That's a nonorganic staff. That's very important. And we are hopeful that We will be able to conclude and move forward in Other conversations because of this process, which is being different this year. So now I end here my initial remarks, and I will open this call for the Q and A session. We will now start the Q and A session for analysts and investors. Our first question is from Guilherme Palhares, Bank of America. Good morning, Luciano and Flavio. My first question It's about some operating opportunities between these two companies and synergies From then on, do you have a number in terms of synergies that you expect when you look at margin differential that Camilo has? Can you think about any convergence there? And also, in terms of headcount, The current team of the company will be the same. Are you going to bring in anyone to this new operation. And finally, you just mentioned Flavia. Is it fair to say that in spite of this movement, the company is still active in the M and A market in terms of opportunities and the opportunities that are still on the table. Thank you. In terms of synergies, I don't want to give you a figure in here, but Our expectation, in fact, is that we are able to improve the company's profitability today. They operate around 8 And what we understand is that with what we can bring in, in terms of improvements and efficiency industrial area, also procurement. And we see a lot of opportunities in procurement because There is a capital deficit in the company. So we come in with working capital, and we understand that can allow us to buy products at a special price. We also believe That by having a more aggressive approach, we can grow our size in terms of fixed costs as well. So yes, we do expect to improve the company's margin. We believe that we will be able to have that convergence because they're operating at 8 and we're operating at 10. But I think it's too early to say where we can get because We still need to know more about the operation and the market the local market, I mean. Now in terms of operations, we have here as the way we work, we try To allow the local teams to be independent, this is something we learned over the year over the years. When we acquired Uruguay, we sent 2 people from Brazil, Chile, we sent 1 person there. And in Peru, we were comfortable keeping the whole team there. I believe that in this operation, we have more or less the same understanding. We will use all the ability, the skills and the knowledge of the local team. Obviously, the seller, the owner of the business and the person that was there every day, That person is going to lead the everyday managing of the company, and this person will be helping us So that we switch that management, and we should send someone here from international operations also to take over that local operation. But the idea is that we like to We'll allow them to have autonomy, and this is what we try to give to local teams. And in terms of M and A, the answer is yes. When we Talking we discuss here internally, we say that we have 2 restrictions. 1 of them is operating of how many operations we can run and integrate in the company and the financial restriction. The financial restriction is always easier to tackle because we can look for Financing loans, we can increase the company's capital to finance an acquisition. And also, we have the operation side of it. For the operation itself, the way we organize ourselves is under the responsibility of our officer that watches over international operations. So we are still comfortable here because In both areas, financially and operationally, we still have room, both in the domestic market as well as in the international one. Next question from Lucas Ferreira, JPMorgan. Hello, Flavio. Flavio, in the last 12 months, the figure that we see, what that represents in the history, this 8% of margin, the volume, that revenue and the cycle they have they benefited last year from COVID or not? So how does that compare with the history of the company in terms of profitability? And what do you Expect for the next 12 months for the company, so that we can better understand the valuation here. Was it higher than what was expected or lower? And just to confirm, You said $10,000,000 and I don't know how much you have in terms of interest charges in IFC. But usually, that takes off your profit. Do you confirm that? Or do you have anything else that Well, In terms of size, the company had growth, Was posting growth? Yes. This year and so far, They are more or less with a sideways Performance, and we do have last year's performance. But we need to Set our foot in the country to be able to use that as a driver for growth. So in the short term, we will have to learn so that we can boost the operation, but we believe we can have a sustainable growth in the operation And I have operating and profitability gains with the drivers that I mentioned before. In the financial point of view, this is an acquisition That is 100% leveraged. We will be using IFC's support for the funding, Not only of the equity that we are paying for, but also this working capital and that is going to be needed to be able to do investments and machinery and so on. So when you look at the consolidated results and have And you see a small impact in the bottom line because of the size of the operation. But the way we look at it As that when you look at the country and this ambition to be an international company with relevance in Latin America, in rice and food industry. This is an operation that makes sense. So more than looking The numbers looking at the numbers, we are very optimistic that we will be able to drive up results out of this business. Next question from Gustavo Toriano, Itau BBA. Good morning, Flavio. Thank you for taking my question. And my question is about the mix of products of the acquired company. Can you talk about the margin difference between the premium products, which I believe are the main ones in the portfolio of Dazau the economic products that you mentioned in the portfolio. And still on the premium, can you tell us what are the main technology Well, I think about the mix, It's not much different from what we have in Brazil. Obviously, with Some products we end up having a higher margin In premium products, differently from an economy product. For the company, specifically, They have a profitability of a relative base that is higher because of the industrial characteristic that they have today. They do not purchase patty rice, and that Allows us to have lower competitiveness because they have a greater focus in the aged rice. That's How they can have a more a product that is of a more premium Characteristics. So in terms of operations, this is one of the drivers that we try to A study to bring in more scale to purchase straight from producers. And so this will allow us to become more competitive as well in white rice, but that As a fact, they have greater competitiveness now in aged rice than in white rice. And that's very similar to margin differences that we have here in Brazil. In terms of technology, The equatorial market developed the following. In order for them to have a better performance and to have that loose rice, you have to have a Sustainable rice, and that happens all over the world. So when you are working with good rice, especially the one for The Brazilians, that's an older rice. So you receive the rice, You send it to the silo and you wait for a few months. The rice rests there, And it becomes looser. The technology that they developed for aged rice is that They start with the white rice. They heat up the rice for a certain period of time, and then They let it cool off. And then even if it is a New rice, it starts to have that older rice characteristic. It gets looser and wider. So in terms of the business point of view, this technology Ends up bringing down your capital allocation because you do not have to Buy the rice and wait for it to come out of this silo and wait for it to set there and to have a better performance. And In the functional point of view, we were surprised because it has a great performance Because it absorbs more water, so the grains are larger and look nicer, Whiter grains and the rice is very loose. And for the local characteristic of the company, It ends up having a performance that is very good, specifically in the high areas. What they mentioned that is a characteristic of the industry is that the rice and the higher zones, They are submitted to a low atmospheric pressure. So it is more so that is a very local characteristic. And they study bringing that to Brazil and other places. And we have that discussion. And maybe the Problem that we have to work with it in the local market is that this aged rice, when you buy that in a bag, It is kind of yellowish. So in the equatorial market, they worked with marketing, And they learned that even if the rice is yellow in the package, but when you cook it, It is it gets larger, and it is fluff and it's loose. And but here in Brazil, we would have that barrier to overcome because this was a marketing campaign that they had there. So that's what I had to talk About technology, I don't know if you want more details. And I would like to add, Flavio, I think this technology was developed because In Ecuador, that's very specific. Excuse me. If there are no further questions, I would like to turn the floor back to the company's management for their final remarks. Thank you all very much for your participation. I would like to end this call stressing something that Flavio mentioned during the Q and A. The company in the last few years And before and after the IPO has worked on the inorganic growth, this in the last 20 years. And the company had almost one acquisition a year. And after the IPO, that became a slower pace. But As Flavio mentioned, considering the current scenario, the company is very optimistic about this new acquisition. And these Past few years and specifically in the past few months, we prepared ourselves financially and also operationally. So this is an area that in the past few years didn't bring us that many results, but we have a great expectation for the upcoming months. Thank you all very much, and see you next time. Camille's audio conference has ended. Thank you very much for your participation, and have a nice day.