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Edited Transcript of OFSA3.SA earnings conference call or presentation 13-May-20 6:00pm GMT

Q1 2020 Ouro Fino Saude Animal Participacoes SA Earnings Call

May 22, 2020 (Thomson StreetEvents) -- Edited Transcript of Ouro Fino Saude Animal Participacoes SA earnings conference call or presentation Wednesday, May 13, 2020 at 6:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jardel Massari

Ouro Fino Saúde Animal Participações S.A. - Director

* Kleber Cesar Silveira Gomes

Ouro Fino Saúde Animal Participações S.A. - CEO, Chief IR Officer & Member of Executive Board

* Marcelo Da Silva

Ouro Fino Saúde Animal Participações S.A. - Interim CFO & Member of Executive Board

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Conference Call Participants

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* Joseph Giordano

JP Morgan Chase & Co, Research Division - Senior LatAm Healthcare Analyst

* Luciana de Carvalho

BB-Banco de Investimento S.A., Research Division - Senior Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by. At this point, we would like to welcome you for the First Quarter '20 Conference Call for Ouro Fino Saúde Animal. Today, we have with us Mr. Jardel Massari, the Chairman of the Board of Directors; Mr. Kleber Gomes, the company CEO; and Marcelo Silva, the CFO and IRO.

We would like to inform you that this event is being recorded and simultaneously translated. (Operator Instructions) We have a simultaneous webcast that may be accessed through Ourofino's website at ir.ourofino.com. At this address, you will find the banner -- first quarter '20 banner. The slide presentation can also be found there.

Before proceeding, we would like to mention that forward-looking statements made during this conference call referring to the business outlook, projections and operational and financial goals are based on beliefs and assumptions of the company's management as well as on information currently available. They involve risks, uncertainties and assumptions as they relate to future events and, therefore, depend on circumstances that may or may not occur. Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the future results of Ourofino and lead to results that differ materially from those expressed in the forward-looking statements.

I would now like to give the floor to Mr. Jardel Massari. Good afternoon, Mr. Massari. You have the floor.

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Jardel Massari, Ouro Fino Saúde Animal Participações S.A. - Director [2]

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[Interpreted] Good afternoon, and thank you very much for participating in our earnings conference call for the first quarter 2020. I would like to begin by thanking each of the associates for their trust, for their commitment and dedication in the construction of a common purpose, which is reimagining world health. During the entire period in which I was leading Ourofino, this dream that began 33 years ago with myself and Norival has now become the largest domestic animal health industry. In the 3.5 years, when I returned to the management of the company, I attempted to reinforce the values of the founding members to have simplicity and agility in the Ourofino processes with a great focus on what is fundamental: the clients. And this is how the company exists, and this is how we work.

Since April 1, I stepped down from the position of the company CEO and aligned with a succession process that was already underway. Kleber took on the position of Chief Executive Officer. I will continue on as the Chairman of the company's Board of Management, supporting the mission to define the best strategy for Ourofino and thus contribute so that the company can grow even more. Thus, and with great tranquility, as I know his work, his competency and character, myself and the other members of the Board elected him. Kleber joined the company 13 years ago, has a deep knowledge of the business, has led the financial, the IR areas and the legal areas, the IT area and, more recently, the product area, which encompasses research and development, market intelligence and the regulatory part with a very active participation in all of the main strategic movements of the company in the last few years.

And it's not that I'm leaving the company. I will be in the Management Board with all of them. And I will continue offering support to the entire structure of the company, along with Kleber. I wish everybody a great deal of success in this new period.

And I would now like to give the floor to Kleber to speak about the results.

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Kleber Cesar Silveira Gomes, Ouro Fino Saúde Animal Participações S.A. - CEO, Chief IR Officer & Member of Executive Board [3]

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[Interpreted] Thank you very much, Jardel. And I would like to thank you for the confidence and the work carried out with much dedication as one of the company's founding members and in the resumption of the growth of the company in the last 3.5 years. We're very happy to still be able to count upon your participation in the company, contributing with your knowledge, business experience, guiding and leading to greater longevity.

Before I speak about the performance, I wish to desire success to the new CFO. He's an accountant from the University of Sao Paulo and getting a masters from the Dom Cabral. He has been at Ourofino for 13 years as a financial manager controllership, and I'm sure he will continue to contribute to the company in his new role.

We will now speak about the results of the company in the first quarter. In the first quarter of 2020, the company had significant net revenue increase of 23% with a dilution of 7 percentage points in SG&A and a consequent improvement in EBITDA of BRL 5 million in the period. The International Operations and Production Animals segment were the most important with 66% and 20% increase vis-a-vis the last year. For Companion Animals, the increase was 7%. The operational cash generation was BRL 42 million and an improvement of 45 days in the financial cycle.

In an environment of greater volatility due to the COVID-19, the company remains motivated and confident in the feasibility of Ourofino 2.0 with multispecies portfolio company and incremental innovation strategy, expanding its operations and guaranteeing care when it comes to companion animals, even during the period of crisis, the medium and long-term drivers of growth in the market in which we operate, even though there are negative effects, will allow us to go forward.

In Production Animals, we had a lesser impact because this is an essential chain and the sellers did not suffer penalties to maintain their business establishments. Notwithstanding the fact, some of them have decided to close temporarily and perhaps postpone the business fairs in Brazil. The representative of -- the cost of this segment is low and this will allow greater productivity for the rural producers. And we think that veterinary drugs and projects will be maintained.

In Companion Animals, one of the drivers is availability of money among the population affected by economic factors. However, it should be noted the important role that animals play in this new context. They have a therapeutic power and a positive impact on the mental health of their owners. So this also guarantees the purchase of drugs and veterinary products. However, we see that less owners visit pet shops with an impact on the sales as we observed in the first quarter.

In International Operations, the company played an important role with trade associations, especially in Colombia, where the mobility restriction was stronger. And we have been able to market animal health products as this is an indispensable activity. There have also been improvements in profitability and a sustainable growth for the medium and long term in Mexico and Colombia. The customer service has been maintained, but we have adopted several of these to digital contacts with customers, which tend to be catalyzed. We -- this includes our International Operations. And we have trained our teams to create solutions for digital contact in their sales to generate demand. And in animal care, training and workshops are being offered to clients through specialists to maintain our relationship and accelerate the digital transformation in the company.

Now to ensure supply to customers, especially because of the percentage of input from India and China, we have strengthened our inventory management and supply chain monitoring. Inventories finished the first quarter of '20 with an increase of 17% vis-a-vis the first quarter 2019, and the inventories are appropriate for operations in Brazil, Mexico and Colombia. From the financial viewpoint, the cash position was strengthened in the first quarter through fundraising, which totaled BRL 90 million, with an average CDI rate by 2.4% for 1 term year. We also have reviewed the CapEx and maintained only essential projects that were underway, and they're essential for our portfolio. The receivables portfolio has also been intensified. And so far, we remain at historical levels.

Especially for the protection of our employees' health, we created a Risk Management Committee that sets forth the best practices, and we have replaced face-to-face meetings with remote ones. We have canceled international and national trips, and the corporate group is working from home. We're also sanitizing working environment, and employees have received hand sanitizers produced by the company. Now we know that there will be impacts in the short term because of a contraction of economy, and we will continue to work to guarantee that we can mitigate these impacts. I would like to thank all of the employees, community and our shareholders at this moment.

I now give the floor to Marcelo to continue presenting our results.

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Marcelo Da Silva, Ouro Fino Saúde Animal Participações S.A. - Interim CFO & Member of Executive Board [4]

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[Interpreted] Thank you, Kleber, and thank you for the confidence. And I also wish you much success as the leader of the company. We're going to begin speaking about the net revenues of the company.

In the first quarter, the consolidated net revenue was of BRL 112 million, a growth of 23% year-on-year. We're going to speak about 3 segments. The Production Animals segment had a net revenue of BRL 72 million with a growth of 20% vis-a-vis the first quarter '19 because of volume gains and a favorable exchange rate as the sales segment of poultry and swine are back to the dollar. The commercial team has been trained to work proactively, although remotely, they are offering training online with agribusiness specialists. And associated with social media and television, we are activating new customers.

The Companion Animals segment had a net revenue of BRL 21 million in the first quarter with a growth of 7% because of volume increases, especially therapeutical and antimicrobial products. Now although remotely, we continue to have the acknowledgment of brand and products. Clinics, veterinary hospitals and pet shops have been authorized to remain open guaranteeing the health of companion animals.

The International Operations segment had a net revenue of BRL 19 million in the first quarter, an impressive growth of 66% vis-a-vis the first quarter '19. Now if we don't consider the exchange rate impact, the growth was of 56% percent. We had an increase in volume because of the sale of the hoof-and-mouth vaccine to Uruguay. In Colombia, the net revenue growth was of 9.4%, and there was a number, of course, a favorable exchange rates and also some losses because of the strong quarantine due to the pandemic. In Mexico, there was a reduction of 28% in net revenues and price gains of 8% a year but not offset by the losses in volume. The company activities underwent restructuring, and this includes pricing, the team, all of which geared to improving profitability and contribution margins.

Gross margin in the first quarter of '20 was of 46%, a decrease of 3 percentage points vis-a-vis the first quarter '19. The animal production segment had a gross margin of 36%, a decrease of 4 percentage points because we had a worsening of product mix. Additionally, beginning in the second quarter '19, there was a state decree in Sao Paulo that demanded that the ICMS of the products sold within the state be taken away from our credit with an impact on margin.

The Companion Animals segment had a gross margin of 66% in the first quarter, a decrease of 3 percentage points vis-a-vis the first quarter '19. The margin losses were due to an increase in production costs because the areas destined to products for pets were used less and, therefore, we had a higher unit value per product.

The International Operations segment had a gross margin of 60%, an increase of 4 percentage points vis-a-vis the first quarter '19. The result is due to the positive exchange rate and price gains that offset the worse mix.

SG&A in the first quarter '20 added up to BRL 53 million higher vis-a-vis the same period last year, BRL 3 million more or 6%. This increase reflects a higher recognition of expenses in research and development amounting to BRL 1.5 million and the salary readjustment of employees for 2019. There was a dilution of expenses of 7 percentage points, down to 47%. Adjusted EBITDA in the first quarter was BRL 5.2 million, reflecting the dilution of expenses with SG&A and offsetting the drop of gross margin during the period.

Regarding the net financial expenses for the first quarter, it added up to BRL 1.5 million, a reduction of 58% vis-a-vis the first quarter '19. This is because of a lower cost of capital that was approximately 5.74% a year and CDI and TJLP indicators. We raised BRL 90 million at the average cost of CDI plus 2.42% per year, once again to help us have liquidity with this scenario of COVID-19. But this brought to an increase of financial expenses. Now we had BRL 42 million in operation of cash generation. The net debt remains stable, a growth of 3%, and net debt over EBITDA stood at 1.89.

Now some comments on income tax and social contribution with -- and losses during the period. Income and social contribution in the first quarter was BRL 0.3 million negative compared to the BRL 2.7 million positive for the first quarter '19. The adjusted losses in the first quarter of '20 added the BRL 3.1 million, an improvement of 52% vis-a-vis the first quarter '19. This reflects the income (sic) [increase] of net revenue from the company that offset the percentage loss of gross margin and the dilution of SG&A.

Now we have some comments in terms of our dividends. In the first quarter '20, we invested 8% of the net revenues in research and development, totaling BRL 9 million vis-a-vis 11% in the same period the previous year. This represents a reduction of BRL 1 million during the period. This percentage is in line with our historical investments and the essential projects in the company will be maintained.

I would now like to return the floor to the operator for the Q&A session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from Luciana Carvalho from Bank of Brazil.

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Luciana de Carvalho, BB-Banco de Investimento S.A., Research Division - Senior Analyst [2]

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[Interpreted] Jardel, Kleber and Marcelo, congratulations. I have 2 questions. The first refers to volume. You had an advance in the volume in each of the segments. But in Companion Animals, you had a drop in March because of the pandemic. I would like to understand what you are considering for production. There's the expectation that there will be less slaughter perhaps of animal protein, a greater supply of fowl. What will happen with the volumes going forward if the impact continues? Will the impact be greater in the second quarter on your volumes? The second question refers to the mix. You said that there was an impact on your margin because of the product mix. I would like to gain an understanding of what happened with April. Can we expect that the second quarter will also have a greater impact? Or do you believe that you can have an enhancement or improvement of the mix during the year? If you could give us an idea on prices and volumes, I would be very grateful.

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Kleber Cesar Silveira Gomes, Ouro Fino Saúde Animal Participações S.A. - CEO, Chief IR Officer & Member of Executive Board [3]

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[Interpreted] Hello, Luciana. Thank you for your question. First of all, thank you for the congratulations for myself and for Marcelo. We're quite prepared, and we're going to do our very best work. Now our outlook on the market, in fact, we're going through an unprecedented crisis. Initially, what we see for business is that Protection Animals (sic) [Production Animals] will be quite protected. We're speaking of a food chain, and the food chain is less affected. Agribusiness has been deemed to be an essential activity. And we have always worked very closely with our customers. We have a fragmented customer base. We have in-house resources. We work with television in Uberaba, for example, we have an inside advertising agency. So with great speed, we were able to offer this remote service to activate all of our customers. This was a surprise, and we're going to accelerate our digitalization process as part of our commercial model.

To be more specific, I don't think we have had a very great volume reduction in this segment under present day conditions. The crisis does not allow us to have a very clear view of its termination. But I think this segment, because of the protein, is protected. And in the protein chain, perhaps there will be a reduction of domestic demand, but this will be offset with an increase in exports. Brazil has increased exports in the last few years, especially to China, which is a very good buying market. And we believe that the purchases from China could offset a reduction in internal activity, especially foodservice. Now our cost, our price of inputs, the final cost of the animals is quite low and the benefit of the processing is not worthwhile. So I think we have protection on several sides when it comes to Production Animals.

Now in Companion Animals, the situation is different. We're aware of the impact of income on the growth of the market. And this segment was also protected by that decree, considering it an essential business, the health of animals is essential. Initially, there was a closedown of activities. Most of pet shops were being managed by families. It's a family business. Families were left without an income. And of course, this had a significant impact. We had a significant drop in Companion Animals sales in March.

Now going forward, we know that April and May will be the most critical months of this crisis. And subsequently, we should go through a resumption. In our business, 75% comes from Production Animals, and we have been able to maintain figures that are very similar to what we had historically. Now foreign trade is very much geared on the exports of protein. But there is a stronger lockdown in Colombia that hampered the operation. In Mexico, we were restructuring the model and the team, and the crisis surprised us in the middle of the process, making this change somewhat more difficult, but it is underway. When it comes to the mix compared to the first quarter. Well, we know that the first quarter is always weaker. We sell more -- sell little in International Operations, which lowers our margin, and there's less economic activity on the site. We hope that this will be circumscribed to April and May, and then we will go back to normal fee in the second semester.

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Operator [4]

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The next question is from Joseph Giordano from JPMorgan.

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Joseph Giordano, JP Morgan Chase & Co, Research Division - Senior LatAm Healthcare Analyst [5]

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[Interpreted] And congratulations, Kleber and Marcelo. I would like to move away a bit from the discussion of COVID-19. This is going to go by in 3 or 6 months. What is important perhaps is to understand what is happening with the growth in the company going forward and the expansion of your product portfolio, especially when it comes to the biologic products? Therefore, in this reduction in CapEx, what is going to happen in terms of research and development within the company for those products where you have not begun the research? Will they be postponed or not? And a certain curiosity that I have in terms of your biological plant. What is happening with it? And finally, if at some point in time, it would be possible to transform that production for human health vaccine. In terms of biosecurity, the plants are probably very similar. And perhaps you could use that idle capacity to produce vaccines for COVID.

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Kleber Cesar Silveira Gomes, Ouro Fino Saúde Animal Participações S.A. - CEO, Chief IR Officer & Member of Executive Board [6]

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Joseph, thank you for the question. And also thank you for the incentives. At this point in time, first of all, let me do this step by step. Now in my new position, I have to work with 3 main points. First of all, the commercial supply. We want to strengthen this ever more with the support of the digital transformation. We have to expand the portfolio. This is one of our great growth pillars, as we have said, and also bring streamlining, motivation for people and become more expeditious with our people. Now along this path, the company, of course, has adopted some precautions. We have greater liquidity. We have held back nonessential investments, but we haven't taken our foot off the accelerator when it comes to the portfolio expansion. Logically, based on what happened with the crisis, we carry out assessment. We hope that it will be terminated in 1.5 or 2 months, that we will have a gradual resumption.

But the company has not held back any investment when it comes to portfolio expansion. The plant continues to operate with biologicals and other developments. We do have work ahead of us. And as your company is very interesting, yes, we have followed up on the eventual production of vaccines throughout the world. We read news on that there was -- would be potential vaccine, that they're seeking plants. Now we have 2 biological plants, one for traditional vaccines based on cells, and we have a new plant with recombinant vaccines. So yes, we're very aware and attentive to that. And if an opportunity comes up, we hope to make the most of it. It would be excellent to be able to have the vaccine, and we hope that we can contribute in that direction. Thank you.

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Operator [7]

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The next question is from [Gabriel Minati] from the Getulio Vargas Foundation.

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Unidentified Analyst, [8]

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[Interpreted] My question is very similar to the previous one. You have inaugurated that new plant of biologicals, and it allows you to produce more products. Now in 2018, 2019, it had a revenue growth of 15%. Now despite that in the first quarter, the growth was 20% vis-a-vis 2018. Now how has this plant grown? Do you have incremental production? And what is the role that this plant is going to play in the coming years?

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Kleber Cesar Silveira Gomes, Ouro Fino Saúde Animal Participações S.A. - CEO, Chief IR Officer & Member of Executive Board [9]

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[Interpreted] Gabriel, thank you for the question. In biological products, first of all, you need to make a plant and then begin to produce vaccines. And of course, vaccines require the existence of a plant. Now the growth that you see during this quarter has no relationship with the plant. The plant continues to produce a single product that we launched at the beginning of 2019, the circovirus vaccine, the first that exists worldwide. But it is still in the ramp-up stage. There has been no growth. The growth this quarter relates to a strong growth of volume in January and February. We felt a slight drop in March, especially in Companion Animals and in International Operations because of the closedown of pet shops and, internationally, because of the lockdown in Colombia and the situation of Mexico. In Production Animals, we had figures that were very similar to the budget, somewhat higher, and we're working with the customers remotely. What we expect from this plant going forward, in the coming 4, 5 years, is that it will have a significant contribution in the launch of biological products that would represent 25% of the market as a whole. I'm not saying that the company will have that market share, but that is the biologic market. So we have significant work ahead of us. Thank you for your question.

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Operator [10]

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(Operator Instructions) At this moment, we conclude the Q&A session. I will now return the floor to Mr. Kleber Gomes for the closing remarks. You have the floor, sir.

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Kleber Cesar Silveira Gomes, Ouro Fino Saúde Animal Participações S.A. - CEO, Chief IR Officer & Member of Executive Board [11]

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[Interpreted] I would like to thank all of you for the confidence and interest in the company. We continue to work arduously following this strategic planning that was structured throughout the year 2019. The company has sound data, it has the support of good liquidity and we're accelerating in terms of strategic issues. We're all very motivated. The Board is very motivated. Jardel will continue working closely with us. This is a positive moment. As part of the context of the pandemic, I think we're protected from that situation.

Thank you very much. And our IR team is at your entire disposal should you have any doubts. Thank you very much.

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Operator [12]

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The first quarter 2020 conference call for Ourofino ends here. We would like to thank all of you for your participation. Have a good afternoon.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]