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Edited Transcript of BEEF3.SA earnings conference call or presentation 26-Jul-19 3:00pm GMT

Q2 2019 Minerva SA Earnings Call

BARRETOS SAO PAULO Aug 1, 2019 (Thomson StreetEvents) -- Edited Transcript of Minerva SA earnings conference call or presentation Friday, July 26, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Edison Ticle de Andrade Melo e Souza Filho

Minerva S.A. - CFO

* Fernando Galletti de Queiroz

Minerva S.A. - CEO

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Conference Call Participants

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* Luca Cipiccia

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Tiago Mello

Banco Bradesco BBI S.A., Research Division - Research Analyst

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen, and thank you for waiting. At this time, we would like to welcome everybody to Minerva's Second Quarter of 2019 Results Conference Call.

Today with us, we have Fernando Queiroz, Chief Executive Officer; and Edison Ticle, CFO and Investor Relations Officer.

We wish to inform you that this event is being recorded. (Operator Instructions) The audio and slideshow of this presentation are available through the live webcast at www.minervafoods.com/ir and in MVIQ platform. The slideshow can also be downloaded from the webcast platform in the Investor Relations section in this website.

Before proceeding, we wish to mention that all forward-looking statements may be made during this presentation relating to Minerva's business prospects, operation and financial estimates and goals. They are based on the beliefs and assumptions of the company management and on the information currently available. They involve risks, uncertainties and assumptions because they relate to the future events and therefore depend on the circumstances that may or may not occur in the future. Investors should understand that the general economic conditions, industry conditions and other operating factors could also affect the future results of Minerva and could cause the results to differ materially from those expressed in such forward-looking statements.

I wish now to turn over the floor of the conference call for Mr. Fernando Queiroz, CEO, who will begin the presentation. Mr. Queiroz, you may proceed with your presentation.

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Fernando Galletti de Queiroz, Minerva S.A. - CEO [2]

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Thank you. Good morning, everyone, and thank you for participating in Minerva's conference call on the results for the second quarter of 2019.

I'd like to begin this conference with a brief discussion about our topic that has been widely discussed in the last few months: the African swine fever and the opportunities related to the outbreak.

Let's move on to Slide 2. African swine fever is a disease that since the second half of 2018 has been decimating pig herds in Asia, particularly in China with a great impact on the animal protein market.

In the graph on the right, we see that pork accounts for a large share of the global meat diet, especially in China, where it represents almost 50% of the animal protein consumption, almost all of which is supplied by their domestic production. This means that as a direct effect of the ASF outbreak in China, we expect to see a substantial reduction in this production. Therefore, price is rising and consumption of pork are suffering with it.

According to the FAO, the ASF outbreak has reached [to 134] regions with confirmed cases, most of which in China and neighboring countries such as Vietnam, Cambodia and also in Eastern Europe.

Containing the outbreak represents an enormous sanitary challenge. Since the disease is spread easily, it is highly lethal to the herds and does not have any control mechanism such as preventive vaccines. As a result, some experts believe China pig herd will shrink by 30%, which would be a great impact on the entire animal protein chain. It's worth noting that China has approximately 50% of the global pig herd.

In the graph on the bottom left corner, we can see some interesting figures such as the significant decline in pork production in China in 2019 and the prediction for 2020, a clear consequence of the recent and still present ASF outbreak in the country. There are some markets indicators supporting that this supply shock will be offset, albeit partially by consumption of other proteins such beef, thus, creating a great opportunity to our industry.

As we can see in the information on the bottom right corner, due to the availability of a healthy herd and low production cost in South America players, currently account -- we currently account for 70% of the Chinese beef imports, which have been increasing substantially in recent years, thanks to the higher income levels, urbanization and the Westernization of the consumption patterns in China. This increased share of South American exporters also benefit from difficulties faced by other players such as Australia, which has been increasingly facing tough climate conditions over the past few years, and United States, which has export restrictions due to the utilization of hormones in the herd that is forbidden in China, and also the uncertainty related to the trade war.

I would like to highlight Athena Foods' exposure to the Chinese market mainly through our operations in Argentina. In the first half of 2019, our Rosario plant was, on a global basis, the plant with the largest volume of beef exported to China among [100 other units] worldwide. In view of this good moment and in order to maximize the opportunity in the Chinese market, in June, we resumed our operations in Venado Tuerto unit, also in Argentina. Currently, this unit is in the ramp-up stage and it will be at full operation by late August.

To conclude, we believe that African swine fever will further drive growth of beef consumption in China, indirectly benefiting beef producers in South America, the region that's best prepared to meet growing demands in Southeast Asia.

In this context, we believe that our footprint in South America, our expertise in the Chinese market and the first effects of the African swine fever outbreaks on animal protein consumption and its production chain will create great business opportunity in the upcoming quarters. It's also worth to say that this is -- this impact is not only a temporary issue. It also has interesting long-term prospectives as ASF outcome implies protein consumption changes, not only because of prices but also due to changes in population consumption habits.

Let's move to Slide 3 to discuss the main highlights for the second quarter of 2019. We will begin with operating cash flow, which totaled BRL 322 million in the second Q of 2019 and BRL 1.3 billion in the last 12 months.

Another cash indicator, the free cash flow was positive for the sixth consecutive quarter, totaling BRL 143 million in the second Q '19 and BRL 642 million in the last 12 months. Thanks to this strong operational performance, consolidated gross revenues totaled BRL 4.3 billion in the second Q of '19, and in all-time highs, BRL 17.8 billion in the last 12 months ended in June.

Our revenues breakdown shows that 43% of gross revenues or BRL 1.9 billion came from Athena Foods, our operation in South America ex Brazil. The Brazilian Industry Division accounted for 42% of the total or BRL 1.8 billion of consolidated revenues. Our Trading Division was responsible for the remaining 15% with approximately BRL 630 million.

In the second quarter, Minerva exports once again stood out accounting for 67% of the gross revenue in the second Q '19, 14% higher than in the second Q '18.

Consolidated net revenues reached BRL 4 billion in the second Q '19, 8% more than in the second Q '18,

reaching BRL 16.7 billion in the last 12 months ended June.

EBITDA totaled BRL 364 million in the second Q '19, up 3% over the second Q '18, with an EBITDA margin of 9%, 20 bps higher than in the previous quarter.

Adjusted EBITDA came to BRL 1.6 billion in the last 12 months with an adjusted EBITDA margin of 9.6%.

The net result adjusted for the noncash and nonrecurring effect totaled approximately BRL 27 million in the quarter.

We closed the second quarter with leverage measured by net debt-to-LTM EBITDA ratio of 3.8x, in line with the first Q '19.

Our debt duration remained at a very comfortable level at around 5 years. It's worth noting that in early April, we concluded the redemption of our perpetual bonds, our most expensive debt, reinforcing the company's commitment to pursuing a more efficient capital structure.

Let's have a look on Slide 4 where we'll talk briefly about Minerva's operating performance beginning with our exports. In the second Q '19, Minerva continued to be the main exporter in the countries where it operates. In Paraguay, we accounted for 47% of the beef exports, consolidating our position as the country's main exporter. In Uruguay, we had 20% market share of beef exports. In Argentina, our market share reached 70%, 6 percentage points more than in the previous quarter. It's important to point out that we maintain our position as the leading South America beef exporter with 21% market share. And recalling that South America represents 35% of the global exports, Minerva's total exports represent approximately 7% of the worldwide exports of beef.

On the right side of the slide, we have a breakdown of exports by region. In the Brazilian Industry Division, the 2 main destinations were Asia and Middle East, which together accounted for more than half of the division. In Athena Foods exports, Asia was, once again, the main destination, accounting for 42% of exports, 11 percentage points more than in the same period last year. I believe that it will be useful to talk about increasing Athena exports growth to China, and particularly, as revenues from exports to this country as they grew 61% between second Q '18 and second Q '19. This means that in addition to the market share growth, we also had a significant increase in our volume of exports to Asia in the last 12 months.

I would now pass the floor to Edison that will discuss Minerva main financial and operating highlights.

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Edison Ticle de Andrade Melo e Souza Filho, Minerva S.A. - CFO [3]

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Thank you, Fernando. Let's move to Slide 5. Minerva gross revenue reached BRL 4.3 billion in the second quarter of '19, 80% more than in the second quarter of '18. In the last 12 months ended in June, gross revenue reached BRL 17.8 billion, an all-time high and 14% higher than in the LTM second quarter '18.

The Brazilian Industry Division's capacity utilization rate declined to approximately 76.7%, falling 3.4 percentage points from the previous quarter. The decline was mostly due to the rainy season, which lasted a little longer than normal at the beginning of the quarter, and the 1 week -- and also the 1 week suspension of exports to China.

At Athena Foods, the capacity utilization rate stood at 75.4% in the quarter, 3.9 percentage points higher than in the first quarter of '19. We were able to increase the capacity utilization rate, thanks to higher demand in China, and this increase was more noticeable in Argentina and partial normalization of Paraguay's slaughter volumes that were a little bit lower in the first quarter due to the rainfall.

Overall, the company's consolidated installed capacity utilization rate was at 76% in the second quarter, in line with the first quarter. And we're seeing the 75% to 80% range that we considered to be ideal.

On the upper right corner, we have a breakdown of the company's gross revenue by division. For the first time, Athena Foods division accounted for 43% and became bigger than the other divisions in Minerva. Brazilian Industry Division contributed 42% and the Trading Division generated 15% of gross revenues in the second quarter '19.

Finally, on the bottom right corner, we also again emphasized that the great exposure of Minerva's consolidated exports to regions with strong potential demand such as Asia, especially China, that accounted for 37% of total exports in the quarter.

Let's move to Slide 6 to continue discussing operating results. The company's consolidated net revenue reached BRL 4 billion in the second quarter, 8% higher than in the same period last year. While in the last 12 months ending June, net revenues stood at BRL 16.7 billion, a growth of 12% year-on-year.

Also regarding our top line, exports accounted for around 67% of gross revenue in the Brazilian Industry Division and 77% in Athena Foods. EBITDA reached BRL 364 million in the quarter, 3% higher year-on-year and also a record for our second quarter with an EBITDA margin of 9%.

In the last 12 months, adjusted EBITDA reached BRL 1.6 billion with a margin of 9.6%.

Finally, the net debt-to-EBITDA ratio stood at 3.8x in the quarter, practically in line with fourth quarter and first quarter '19.

We will now move on to Slide 7 to discuss net results and cash flow. Considering the net results before income and social contribution taxes and excluding the noncash effects that impacted the result such as FX variation, monetary correction in Argentina, FX hedge and exceptionally in this quarter, the payment of the consent solicitation to our bondholders, the company would have record a net income before taxes of approximately BRL 27 million.

Bear in mind that the consent was a waiver signed in April to exclude Athena Foods from the guarantee structure of the bonds issued by Minerva.

In terms of cash, operating cash flow was BRL 322 million in the second quarter. Net income adjustments were BRL 336 million while the working capital variation was a positive BRL 99 million.

Our working capital line was supported by the suppliers' line that contributed with BRL 46 million in cash in the quarter, and the other payables line, which includes the advances from clients that generated cash of around BRL 132 million. This line is a little bit volatile because it's correlated to our credit policy and to the destinations of our exports. The credit policy requires prepayments depending on the countries, depending on the client credit score. So there is a great correlation between this account and the breakdown of our sales.

In the second quarter '19, recurring free cash flow was BRL 143 million. We began the buildup with an EBITDA of BRL 364 million, CapEx of BRL 68 million, a negative financial result of BRL 295 million and finally, a positive variation of working capital of BRL 99 million, which resulted in a positive free cash flow of approximately BRL 100 million.

However, with the adjustment for the nonrecurring effect of BRL 43 million related to the consent solicitation, the recurring free cash flow in this quarter was BRL 143 million. It's important to highlight that this is the sixth consecutive quarter of positive free cash flow, which is a very important indicator for the industry since we are in a commodity sector, so cash flow generation is pretty much volatile.

This result reflects the company's commitment to pursuing a more efficient operational and financial management for the long term.

Finally, recurring free cash flow reached a substantial BRL 642 million in the last 12 months. We started with an EBITDA of BRL 1.6 billion in the period, CapEx of BRL 186 million, negative financial result of approximately BRL 1 billion and a positive variation in working capital of BRL 196 million, resulting in a positive free cash flow of approximately BRL 580 million.

Finally, adjusting for the recurring -- adjusting for the nonrecurring items in the period that were around BRL 63 million, we have recurring free cash flow of BRL 642 million for the last 12 months.

Let's move to the last slide of the presentation to discuss capital structure. Our leverage, as we already mentioned, measured by the net debt-to-EBITDA ratio remained flat at 3.8x at the end of June. The company had a cash position of BRL 3.1 billion at the end of the quarter, and around 75% of our debt was exposed to the dollar variation.

Duration of our debt is approximately 5 years. And it's also worth noting the reduction of approximately BRL 750 million in our gross debt, showing our commitment to pursue a more balanced capital structure in order to reduce the carrying cost of our cash and also reduce the financial expenses going further.

Still on the topic of liability management, in the second quarter, we issued a local debenture in -- we issued BRL 400 million of local debenture at the rate of CDI plus 180 basis points. It's a 3-year debenture and 100% of the proceeds were used to refinance short-term debt.

This concludes our presentation, and let's now begin the Q&A section. Thank you very much.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Right now, we have a question from Luca from Goldman Sachs.

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Luca Cipiccia, Goldman Sachs Group Inc., Research Division - Equity Analyst [2]

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I listened to the earlier call so I only have a -- more of a -- maybe more of general sort of follow-up on capital structure. In the results today and I think everything we keep hearing and seeing clearly shows that the environment, the outlook for the sector has improved. The change is looking better, and especially compared to when you sort of initially started to examine or looked into the Athena Foods transaction since then. So with that in mind, can you maybe walk us through how -- is that still the only and preferred option? Or how fluid is that discussion in terms of other alternatives for deleveraging capital structures, especially considering what might be the optimal corporate structure sort of in the medium term, now that the urgency is still there from a balance sheet standpoint, but maybe it's a little less pressing given how the sector and the outlook has evolved?

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Edison Ticle de Andrade Melo e Souza Filho, Minerva S.A. - CFO [3]

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Luca, just one thing. I think the IPO of Athena Foods has 2 important objectives for us. The first one obviously is to speed up the deleveraging process of our balance sheet. But I think there's another one, which is unlock value -- unlock hidden value from our international operations. So when we pursued the IPO of Athena Foods, we have these 2 main objectives in mind. We have been very careful in terms of evaluation to do this IPO. We have the chance or the option to the IPO until April next year, but obviously, we're open to other opportunities, to other alternatives. But so far, we keep having the IPO of Athena Foods as our plan A.

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Luca Cipiccia, Goldman Sachs Group Inc., Research Division - Equity Analyst [4]

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Right. And sorry, just when you say hidden value, why would it be hidden? At the end of the day, you're in the same sector, you are listed in Brazil, which is arguably the most developed of the markets in LATAM and one where there's probably a greater awareness and understanding about the protein industry in general. So when you -- I think you've mentioned the hidden value before, but like why would it be hidden? And why an IPO?

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Edison Ticle de Andrade Melo e Souza Filho, Minerva S.A. - CFO [5]

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Yes. It's a good question, Luca. Firstly, the multiples of the companies in the sector in Brazil, they suffered a bit because of the high leverage of the sector. As you probably know, Athena Foods has practically no debt. So this would imply a premium to Athena Foods compared to any other listed player in Brazil. The second is that the growth of Minerva, 100% of the growth will be done in Athena Foods. So when you see the growth in Minerva, it's diluted in our operations. When you focus only in Athena, Athena Foods, it tends to be an important growth company. And third, Athena Foods has more access to market that are growing more fast in the world like Asia, like China. It's much more exposed to those markets than Minerva as a whole. So I think that there are couple of reasons that would imply Athena Foods to have a better valuation than Minerva. I think I mentioned 3, the 3 most important of them. But if you want, we can discuss further other reasons why we see Athena Foods at the higher valuation than Minerva.

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Fernando Galletti de Queiroz, Minerva S.A. - CEO [6]

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I would add to what Edison said, Luca, that our position as leading exporter in all these countries in South America that we're in, this also brings a different value for being the #1 or #2 exporter in all these countries that we have.

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Operator [7]

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(Operator Instructions) Our next question is from Tiago Mello from Bradesco BBI.

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Tiago Mello, Banco Bradesco BBI S.A., Research Division - Research Analyst [8]

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So I'd like to ask you on food service. So in our view, the segment has become something of a trending topic and we see it gaining some investor attention. So I would like to know if you have any updates on this segment in both in both terms of growth and profitability, especially now due to the ASF. And also we have talked to some other protein companies such as, for example, BRF and they have mentioned interest in teaming up for possible food service partnership. So I would like to know if that would be on the table for Minerva.

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Fernando Galletti de Queiroz, Minerva S.A. - CEO [9]

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Worldwide, we are present in 3 main segments. It's the retailers, the industries and the food service. There is a big growth and a lot of demand from the food services segment. That's why Minerva is specialized in working in niche. So we have -- we are one of the biggest exporter of organic, we are one of the biggest exporter on special breeds such as Hereford or Angus. So things like that, it's part of our strategic plan. The growth, especially in Southeast of Asia, is very focus into the food service where our presence is very strong and keeps growing. We are world suppliers of food service chains. So we are very, very close, and we're partnering with them on their development, on the development of their products. It's a part of our strategy to be -- and it's part of what's happening to the world, to be more and more segmented.

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Tiago Mello, Banco Bradesco BBI S.A., Research Division - Research Analyst [10]

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Okay. So just a quick follow-up. So in terms of partnerships, would you see something possible due to, I don't know, protein portfolio diversification?

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Fernando Galletti de Queiroz, Minerva S.A. - CEO [11]

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No, we'll not go down to -- in the chain. Our focus is to produce in the origins and to have partnerships in delivering the products to our clients. We are not operators of food service chain, it's not our focus.

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Operator [12]

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(Operator Instructions) As there are no further questions, this concludes the question-and-answer session. At this time, I would like to turn the floor over to Mr. Fernando Queiroz for any closing remarks.

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Fernando Galletti de Queiroz, Minerva S.A. - CEO [13]

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I would like to end this conference call by emphasizing that we remain confident in our business model, in our team's hard work and in the combination of meritocracy, appropriate strategy, operational efficiency, capital discipline and commitment to the ethical and sustainable practices as the best way to create long-term value. I once again would like to thank all the Minerva team for their effort and dedication to reach the results that we discussed today.

I'd like to thank you all for the interest in Minerva. And please feel free to contact us should you have any questions. Thank you very much.

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Operator [14]

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Thank you. This concludes today's presentation. You may disconnect your lines at this time. Have a nice day.