Earnings Call: Q2 2021

Oct 9, 2020

Good morning, ladies and gentlemen. Welcome to the Q And A session for investors and analysts related to Camille's results for the second quarter of 2020. Here with us today are Ms. We'll see you in Oportiero, Director, President Flavio Vargas, CFO and IR officer, and the company's IR team. In case any of you need assistance, there is this call. Please ask the operator by dialing star 0. This audio is being presented simultaneously in the company's IR website. Comments by the management about the quarter and the Q and A session may contain forward looking statements that are subject to risks and uncertainties and as such may lead to expectations they may not occur or may differ substantially from what was expected. Well, we now initiate the Q and A session for investors and analysts. In case you have a new quest any question, please press star 1. Our first question comes from Guilherme Paladis from Bank of America. Good morning, Luciano, Flavio and Gillette. I have two questions. The first has to do with your operations. Well, certainly we noticed the issue of prices by the company in this past quarter. I just want to have an idea about the second half of twenty twenty. In terms of how the products are performing and how do you see demand? And, again, if you could comment on your share performance. Further on, I will come up with a second question for Flavu. As it has been extensively announced, There was a significant increase in the price of rice in particular in August September. In September, it reached 105, rails at Azalke. And I think that the main question is how will that perform and behave looking forward? Today? We believe that the current price levels may remain sustainable at this 105 BRLs. At least until the next growing season, which means that this price level will be as such until the end of January or early February, then and then in the next growing season, we may see some significant changes. And I would just like to now refer to the growing season and just to just give you some information about our historical prices you know, mostly speaking about rice and izalke. In 2019, Price Everett was about 45 VRLs, per year. And in the first half of this year, growing season from March to August, the average was 66 BRLs. By the end of September, the price reached that level of 105. And as I said before, the company believes that this pricing level will remain throughout the second half of the year, and this leads it to a pricing average to the current growing sis season of around 80 BRLs. Now, when we look at this industry and try to to see what lies ahead and what will be prices looking towards next year, the growing season is being planted as we speak in the south of the country. I think already 25% of the crop has been planted. And in general terms, today, we have about having Hugh Grenjidusu accounts for 60 percent of Brazilian rice production. Half of the region in Hugh Grenjidusu, the plants rise They have enough water to grow a normal crop. And the other half, I mean, today, 65% of the necessary water is available only. So, for the next 4 to 8 weeks, the the the way the season will perform will define the production or the yield expectation for this year. Currently, the expectation is that acreage will remain the same. And then if we have excessive rainfall in the next 4 to 8 weeks, maybe there should be an increase in acreage of about 5%. Now taking into account that we will have a normal growing season with the same acreage. And a very slight increase, we believe that the volatility of prices for year will be lower. I mean, this year, we started at around 48 to 50 BRLs, but it reached a 105. Therefore, we believe that there will be less fluctuations in prices and that the average you know, as we see it, would be between 70 to 80 BRLs for next year. So there will be a drop in prices when you compare it to this current quarter, the one we have now, but even then, these prices have been higher than that of the 2 years if you take into account growing seasons of 2018 and 'nineteen. Their price estimates for the industry And I think this is a general idea in the in the industry is that may be significantly impacted due to the rainfall in this and the next week. In terms of demand, it has been high throughout this period. Particularly in this last pricing period between August September. There was a spike in demand. And so every time we have price increases, as a consequence, there is higher demand. And when prices become flat, which is the current scenario of demand, you know, goes down to accommodate for this period of higher prices. To be more specific specifically right now, we have higher demand, but it's like the the the industry is going through a hangover in terms of price evolution. We just have to to see how much price will impact or Or I know that there was a lot of, news about the price of rice, but we don't know yet how much this will impact on some But as an industry, we don't think that there will be a large impact because rice and beans continue to be a good and cheap alternative when you consider the cost proportion. Even though there has been a spike in prices, we do not anticipate any major demand impact. Now, in regards to share, The company lost some share during the period. And I think that the the main focus of the company has always been, and it remains being the growth in sales volume in a sustainable way with profitability. So we when we look at share, we see it as being a consequence of all of the actions taken by the company in a certain timeline. When the pandemic started and there was a reduction in sales through the food service channel because all of the restaurants shut down, etcetera, this latch to an increase of our products in the supermarkets by retailers. Therefore, we think that the the the higher demand came from the lower pricing brands, more from lower pricing brands than premium brands. That's why I say that we lost some share. This is how we are seeing the current landscape, and the company is constantly feeling the pulse of the market to see whether we can validate our assumption. And I think with that, I answer all your three questions. I don't know whether you have anything else. Perfect. Luciano, I just have an additional question or, rather, clarification. And because you also talked about imports of inputs, how do you see this issue in your market and whether there is any more possibility and whether there is enough logistics to accommodate their in whether the imported product meets your quality standards. I think your question is very much related to that PEC measure of the government that they they chose to to eliminate. The tax rate for rice imports and that 0 tax rate is valid until December. When we look at the availability of rice in market, so It's very similar to the Brazilian 1, and that's why we all felt the needs to, to import from other countries. We there were some imports coming from India. The quality of the product in India is inferior when compared to ours. And there was also a lot of imports coming from the US. With that pack reduction, rice prices in the market became more stable, and that's why prices now stand still at 105. Is alk prices. The government initiated, like, with a quota of 200,000 tons, and we believe that by December, there should be 260,000 tons. This tends to be enough to meet market demands, but this will not be enough to put prices down. In fact, Brazilian rice increase its price until the quality of the imported product. That's why we arrived at this price of 105. Perfect, Luciano. Thank you very much. The second question I have is addressed to Flavu, and it has to do with the fact that the company just announced yesterday, and you debenture issues. And I just wanna know whether you have anything else coming down the line and how do you see your P and L for 2021? Thank you. Well, what we've been doing just to recap, when the year started, in early March when the whole pandemic issue started, we were very quick to ensure the company's liquidity position. So back then, we have approximately 400,000,000 BRLs of maturities for the year. And given that scenario, We just got additional funding of a 158,000,000 URLs with the company's main financial partners. But that was a very expense debt. The cost was above CDI plus 4, and the the term of payment was very short. So that 150,000,000 wells, we have just, 1 year term to pay our debt. So we waited until the market settled down. And, you know, when you when you get a short term debt, You already start from the from the beginning with a short short period to pay for your debt. So at that time, we saw an opportunity to extend the term of the debt. And in fact, what we did is that with our 4 financial partners, we we worked out things with 3 of them. In terms of new funding, it was there was a total of a 150,000,000 bureaus. Our net funding was 200,000,000. With an extension with a term extension for 5 for 4 to 5 years. So after that is over, we get a relief in terms of our urgent need to get funding because this is already enough. We no longer have immediate maturities that we had postponed it to March April to 2021. We get some additional funding at a reasonable term considering the current market situations. And now we are comfortable enough to take a look at our balance sheet and just wait for another opportunity to move on with that process of extending the maturities or the due dates, not to have too many things in the short run and in and to prevent, scarcity or short of liquidity shortage of liquidity. At the end of the quarter, our leverage position is 2 times net EBITDA. Or, or net debt over EBITDA ratio. We are already getting the peak of working capital. Our business is very seasonal when it comes to cash generation in the second quarter. That's when we have the the highest capital allocation. And when you look back at the last 12 months, we still have some quarters that were good quarters We are already eliminating the 2 VAC quarters that we had last year, which were the 1st and the second. We We take that out of our calculation, but this year has been a very good year. When we look forward, we noticed that this de leveraging process should continue to occur in looking at the peculiarity of our business model, this is important to us because this ensures more flexibility to make some capital decisions that are necessary, both in terms of how we will allocate our cap to have more flexibility and enough cash in case of any strategic opportunity. Perfect, Flavu. And just one last clarification. In terms of the duration of your debt, what is your target? Thinking in terms of the continuous extension of the debt? Whenever we look at that, we look at the market in general, trying to see what makes more sense like in February of this year, we had we we thought that we would issue the same debt that we had for, you know, 1 year maturity. And in February, that was for 7 years. We thought that 7 years, we would have it at a competitive cost, and that would make sense. But today, this debt that we have with maturities in 4 to 5 years seems to us now more possible in terms of market and cost. In terms of treasury, I would love to have a more extensive timeline to pay that. So I just have to look at the market and see whether it will be worth it to pay an additional premium. Therefore 4 to 5 years as a medium term seems to be adequate for now, but I think that if we look back, our purpose at the beginning was to have a longer duration. Thank you. Thank you both of you. Our next question comes from Marcel Morales from Santander. Good morning. I have two questions. The first is about Uruguay. If you could give us an update about volumes looking forward, there was a significant change in the second quarter, but now the comparison base in this second half it's a bit stronger. I just want to understand whether there is any issue related to seasonality between the 1st and the second quarters and what is your expectation in terms of how volumes and prices will perform in in Uruguay. Uruguay It's a very peculiar operation because during harvesting season, the company receives otherwise that it will sell throughout the year. So comes February or March, a 100% of what will be sold throughout the year is already received, so the company dries it, storages, and then sells it throughout the year. What you said is it's quite interesting because this acceleration of sales in the first quarter doesn't necessarily mean means that it will be repeated in the second quarter because we already have all of the products that will be sell will be sold throughout the year. I think the main point is that in the last two growing seasons, the company had a transfer inventory from 1 season to another, which was higher than historical levels. So with higher sales in the first quarter and the maintenance of that level in the second quarter means that our transfer inventory for the next season will be even below historical levels. It used to be higher, but this year, as sales are, are stronger, it will be lower. The dollar price levels are up, and we believe that the US prices will be maintained throughout the second half of the year. Thank you. Thank you very much. My second question. It's well known that most, working capital is used in the first half of the year and in the second half you you start generating cash, which contributes to your final cash generation. I just want to understand whether is it possible to have some visibility about the working capital requirement that you will have for this year? Because we see a pre working capital cash generation of about 500,000,000 barrels this year. Therefore, depending on your working capital rec requirement this year, you could, you know, have 200, 300. I don't know how many million of URLs. And as this is the 1 year where you have a lot of revenue exposure, if there was an impact already in the first half of the year, But I just want to understand your thoughts for the whole year. How could we ex what would what could be expected in terms of cash generation? Well, Marcelo, I will start with a few comments and then Flavio would just add to that. Well, you said it well, the peak of the company's working capital takes place more specifically between June July. So hours, the closing of our second quarter, which occurs in August when we already have an idea of the working capital requirement. Throughout the second half of the year, we start releasing that. So where does that demand for working capital comes from part of it comes from the inventories in Uruguay, part of it from inventories in Chile, here in Brazil, there was a slight increase in inventory because we we do some prepayment to all of our suppliers. And throughout the year, I have an increase in in the fish category because in fish, There is, s seasonality. We have we have a period that starts in November December where we sell more So we start building up our inventory of fish throughout the the year to get prepared for higher sales at the end of the year, and throughout January. And February, part of that, inventory of fish has been sold up. How do we see the landscape for this year? The company funds is working capital day. So in terms of rice increases when it goes beyond that ballpark figure of 5060 Then regardless of the volume of the inventory, we have an increase in working capital. On the other hand, when we look at higher sales in Uruguay that I just mentioned. When we look at higher sales of fish, And today, our inventories are lower. And higher sales in Chile, and even, you know, looking at Brazil, higher sales in Brazil. Even though in Brazil, we have higher inventory levels and this inventory will come down come February. All of that, when we look in terms of days, we believe that in terms of days, the company is better positioned when compared to last year, taking into account all of these factors that I just mentioned. I don't know whether this answers your question. But if you need any further clarification, our IR team can give you more, more details about that. Thank you. Thank you very much, and congratulations for your results. Thank you, Marcela. Next question is from Jan Locatiki from JP Morgan. Ian, maybe you are your line is muted. Can you hear me now? Yes. Good morning, Luciano, and Flavio. If you allow me, I have a follow-up. I have a follow-up question. How much longer do you think you can keep that high price giving this drop in volume that we have currently. When we look at your margins, it has been dropping sequentially, especially also vis a vis the year before. So What could we expect in terms of gross margin looking forward if you will continue to grow prices, especially on the side of farmers? And my second question is also a follow-up and it it relates to market share. Looking at next year, assuming that the demand will not be so so high as this year. And maybe the lower pricing brands, if they remain resilient and strong. How do you see your market share? So I just want to understand your view on pricing for next year. So I think that that maybe prices will go down a bit, and how can you grow volume so that your top line next year is higher than this year's? Ian, I will start answering your question, but then feel free to ask any additional questions if you think that I didn't answer you completely. The entire rice industry transferred their price increase. So all of the increases through August September In early August, rice prices were 65 by the end of August prices reached 80 until you're reaching 105 in September. All of that increase has been transferred. In terms of you know, this moment of high prices. It's very common for industries to use some of their average inventory in order to transfer prices. To be very direct, We understand that the industry was able to transfer this entire raw material acquisition cost. And part of this price is not yet reflected in the the in in retail because Supermark has already have their own inventories, and so prices are still what they were. But I believe the entire industry, and I'm also including here the whole chain, retail and industries, we are faced with a major challenge, and I'm referring to the transition moment when we will go from a 105 to 70 or 80, which is what we see looking forward, you know, looking at the next coming years. This again will depend on the production of this current growing season. In among other factors, you know, there will be an effect, but this entire industry is is very alert in monitoring the season. We think that by January February, there will be we will encounter some difficulties in terms of selling because people will just wait for prices to go down and we on the industry side, we'll be also looking at how prices will perform. Therefore, I see some impact when it comes to sales. I think with that, I answer your question on pricing. Now looking at market share and how the company intends to grow its 1st line, I believe that the first point, despite the fact that the current pricing level is at 105 BRLs, in 2020, the average price will be 80. This is our opinion. Now if we consider that next year prices, we'll will vary between 70 to 80. We will have a challenge of growing the first line by 10%. But this sector, for the entire chain, we, for us, it has been interesting to have a higher price. So the average price in 20, in 2019, producers did not remunerate the the the the others on the chain. So for the industry in retail, the reduction in co in fixed costs is also a challenge. I I'm not saying that this price of 70 or 80 is right, or whether you should be 60 or 100. But once your price levels does does not remunerate everyone in the chain. Clearly, I mean, if that's remunerate everything, then the process is sustainable, but I think that the entire chain will reach a new price level. Now Speaking about market share, if the effects of the pandemic are are mitigated. And we go back to normal consumption, like the the food industry, we resume it's it's full activities. We will not be so affected in terms of market share, but our desire to grow still present. And we would, we would grow by strengthening our positions, position in mark is where we think there is still a lot of possibility. There is still some white areas or white spots that we are not present in Brazil. And eventually, the company continues to believe that the consolidation of this industry should go through some inorganic moves. Therefore, the the opportunity to consolidate the market remains high for the company We are major leader in volumes in Brazil. We are very large vis a vis the 2nd, the the 2nd place, and we have over, 12% market share. It's still a very fragmented market with many good opportunities ahead. Well, if you need any further clarification, please, feel free to ask some more. Now, it was very clear, Luciano. Thank you very much. And as you mentioned consolidation, I have a question about M And A now that we are shifting gears a bit because you said that there are many opportunities for consolidation, your market share. I mean, it's all because the industry is very fragmented, but considering this price level and profitability, I believe that there are opportunities, you know, so you could escalate further. So my question is whether you are seeing good opportunities and you think that there are good possibilities or people are really thinking, you know, too much to their side. There is always a difference between the price that people ask for what they have and the peep the the price that we believe it's the right price. As we said before, with higher profitability and higher price possibilities the company continues to evaluate opportunities. As we believe, you know, as I said before, there will be a new price level for rice. And therefore, the company continues to look at the market. If we didn't believe that there will be a new price level, it would probably make sense to to be out of this M and A market for a while or stop looking, but as the company that believes that there will be a new pricing level, the company continues to evaluate opportunities. But There is always a challenge, you know, of closing that gap between how much people are asking for for how how much people are asking for and how much we are willing to pay. And and we are looking not only at rice, but other things. The company continues to look for other opportunities in the countries where we are already present and in other countries in Latin America. This search continues and our strategy remains the same. That was very clear. Thank you very much for your answers. As there are no further questions, I would like to inform that Camille's Q and A session is now concluded. Thank you very much for participating and have an excellent day.