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Edited Transcript of OFSA3.SA earnings conference call or presentation 12-Feb-20 6:00pm GMT

Q4 2019 Ouro Fino Saude Animal Participacoes SA Earnings Call

Feb 14, 2020 (Thomson StreetEvents) -- Edited Transcript of Ouro Fino Saude Animal Participacoes SA earnings conference call or presentation Wednesday, February 12, 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. - CEO, Member of Executive Board & Director

* Kleber Cesar Silveira Gomes

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

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Conference Call Participants

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* Joseph Giordano

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

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for holding, and welcome to Ouro Fino Saúde Animal Fourth Quarter 2019 Conference Call. Today, we have with us Mr. Jardel Massari, the Chief Executive Officer; and Mr. Kleber Gomes, Products and Finance Vice President and Investor Relations Officer. 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 Ouro Fino's website at ir.ourofino.com, Webcast Fourth Quarter '19 banner. The slide presentation is also available for downloading.

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

We would now like to turn the floor over to Mr. Jardel Massari. You may proceed, Mr. Massari.

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Jardel Massari, Ouro Fino Saúde Animal Participações S.A. - CEO, Member of Executive Board & Director [2]

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A good afternoon to all of you, and thank you all for participating in our fourth quarter '19 conference call. In 2019, we concluded the review of the company's strategic planning aimed at a new cycle of growth and continuity of our businesses. Reinforcing the purpose of reimagining animal health as a company with broad and multispecies portfolio and operating in Latin America, we set for several initiatives geared mainly at excellence in execution. As a result, we remain confident in the drivers of growth in the markets in which we operate and the consequent generation of value for the stakeholders.

In the consolidated results, net revenue grew 5% in 2019 vis-à-vis 2018, reaching BRL 620 million. As highlights, the companion animals and international operations segment both attained an annual growth of 17%, while the production animals segment grew 2%. The consolidated gross margin decreased 5 percentage points standing at 50% in 2019 due to a lower dilution of manufacturing costs, which, along with a greater allocation of R&D expenditures as expenses in different research stages, resulted in a reduction of adjusted EBITDA to BRL 107 million. It is worth mentioning that we have a positive environment and the fourth quarter had a growth of 12% in the consolidated revenues vis-à-vis the same period the previous year reaching BRL 197 million, the highest quarter in the company's history with an adjusted EBITDA margin of 23% and an adjusted profit margin of 13%.

The production animals' segment, this year proved challenging with revenues falling short of our expectations in our projections. In 2019, we did not see a positive scenario in the price of animal proteins, reflecting the expansion of production animal health market. However, the trend of increasing farm productivity associated with the fact that Brazil is still incipient in the use of animal health products are factors which will support the future growth in the market. It is our understanding that our demand generation program, brand recognition and products in the field, and the differentiated access done through the resellers compared to our competitors, will lead to more positive results in the segment. Additionally, in the fourth quarter 2019, it was already possible to observe a slight improvement in the market with the reported growth of 9% in the segment's revenues.

In companion animals, there was an increase in customer positivity and continuity of the plan for the team of technical consultants who work with veterinarians to influence the purchase of products in this segment. With the success of this work of consultants, these actions will be reinforced in 2020. Thus, we understand that the 17% growth in this year is due to the company's strong presence along with the movement of humanization of pets and the respective growth of expenses on the health of these animals and, of course, an increase in the purchasing power of the population. Additionally, as one of our strategic planning initiatives, we improved the segmentation of our target audience of veterinarians, aiming at excellence in our marketing and sales strategies.

In the international operations segment, our efforts are concentrated on enhancing access to the sales channels in countries, especially Mexico and Colombia, replicating the marketing program we use in Brazil. With this strategic planning, we have identified new products in the portfolio of Brazil that will be registered internationally and have the potential to leverage revenues in this segment. So we're working with the competent local authorities for this. The strategic management of our portfolio was another activity we revisited in our strategic planning, defining well-structured processes for internal product development and evaluation of external alternatives that exist in the market with a special emphasis on the open innovation model and integrating the areas of market intelligence, new businesses and portfolio managers. As a result of this, we remain motivated to consistently seek the best results for the company.

I would now like to give the floor to our Vice President of New Products and IRO for further comments.

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

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Thank you, Mr. Massari. We now go on to the financial results. We had a net revenue of BRL 197 million in the fourth quarter, an increase of 12% vis-à-vis the fourth quarter 2018. In the 12 months of 2019, net revenues were up BRL 620 million, a 5% increase compared to 2018.

The animal production segment had a net revenue of BRL 149 million, a growth of 9% vis-à-vis the fourth quarter 2018. For the 12 months, net revenues were BRL 467 million, a growth of 2% vis-à-vis 12 months in 2018. This lower growth reflects a scenario where the animal health market still does not reflect the good moment for the animal protein sector with an increase in prices and export volumes.

The companion animals segment had net revenues of BRL 25.5 million, a growth of 29% vis-à-vis the same quarter of the previous year. As of 12 months of 2019, net revenues were BRL 88 million, an increase of 17% compared to 12 months in 2018. This is due to an increase in volumes and price gains. There was an improvement in the onboarding of clients, the company communication with the consumer and we created this team of technical consultants to leverage demand generation.

For international operations, net revenue was BRL 22 million in the fourth quarter, a growth of 19% when compared to the same quarter 2018. In Mexico, there was a 1% reduction in revenues, offset by a growth of 18% in Colombia and 39% in other countries due to volume gains. For the 12 months, net revenue was BRL 64 million, a growth of 17%, with volume gains, accompanied by favorable exchange rates. Colombia had a growth of 24%, if we remove the negative impact of the exchange rate associated to an increase in sales. In Mexico, the growth was 11% for the 12 months vis-à-vis the same period in 2018, once again, due to a favorable exchange rate and price gains.

To speak about gross margin for the fourth quarter '19, it stood at 50%, a decrease of 4 percentage points vis-à-vis 2018. For the 12 months, gross margin was also 50%, a decrease of 5 percentage point due to a lower dilution of manufacturing costs. In 2018, we had worked with a higher minimum inventory. And this year, we had lower production due to the lower sales in production animals.

Production animals had a gross margin of 45% in the fourth quarter, a decrease of 5 percentage points vis-à-vis the same quarter in 2018. For the 12 months of 2019, gross margin was 46%, a decrease of 6 percentage points for the quarter and the full year due to the lower use of installed capacity.

In companion animals, gross margin was 68%, a loss of 1 percentage point when compared to the fourth quarter 2018. Gross margin was 69%, once again, a decrease of 1 percentage point.

In international operations, gross margin was 62% in the fourth quarter, an increase of 0.4 percentage point when compared to the same quarter in 2018. And the price increases and the exacerbation of prices, offset by favorable exchange rate. In the 12 months, gross margin was 59%, a drop of 5 percentage points due to the negative impact of cost dilution in the plant.

We continue on with adjusted EBITDA, SG&A and other expenses with administrative expenses added up to 70% (sic) [BRL 70 million], a reduction of 3 percentage points vis-à-vis fourth quarter '18. For the full year, expenses represented an increase of 1 percentage point vis-à-vis 2018. The allocation of research and development expenses were 12% -- BRL 12 million higher compared to the full year of 2018 with an impact on dilution of expenses vis-à-vis net revenue. Speaking about research and development, along with (inaudible) we have launched Ativi UC for companion animals that works in the repair and [presentation] of the cartilage structure in pet.

Adjusted EBITDA in the fourth quarter reached BRL 45 million, an increase of 23%, 2 percentage points vis-à-vis the same period in 2018. Adjusted EBITDA was BRL 107 million with a 17% margin, a drop of 5 percentage points. The reduction in adjusted EBITDA can be attributed to the impact on gross margin due to the lower use of the plant.

Speaking about net financial income -- expenses, of income tax and social contribution. These expenses added up to BRL 3 million, a decrease of 29% vis-à-vis the fourth quarter of 2018. For the full year 2019, financial expenses added up to BRL 14 million, a reduction of 9% vis-à-vis the same period in 2018. This is associated to a reduction of the average cost of debt.

Income tax and social contribution for the fourth quarter stood at BRL 1 million vis-à-vis the BRL 1 million of reversion in the fourth quarter 2018. And we would like to mention that income tax and social contribution is made on a fiscal base and is different from the accounting result. We also had an agreement for 100/97 to reduce the base of calculation of the income tax and social tax.

Regarding net profit, for the fourth quarter, it was BRL 25 million with a margin of 13% quite stable vis-à-vis the fourth quarter of 2018. For the year 2019, it totaled BRL 47 million with a net margin of 8%, a decrease of 5 percentage points.

I would also like to speak about indebtedness. Net debt over EBITDA stood at 2x with a slight increase because of the reduction in cash impacting net debt and a reduction of adjusted EBITDA when compared to 2018. The average cost of debt is 5.91% per year, accompanying the reduction of long-term index, such as CDI and others. For the 12 month of 2019, the amount was BRL 86 million with an amortization of debt, payment of interest, totaling BRL 132 million. Fundraising added up to BRL 32 million (sic) [BRL 90 million] and we have 60% of our debt for the long term.

I would now like to return the floor to the operator, so that we can go on to the question-and-answer session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Mr. Joseph Giordano would like to pose the question.

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Joseph Giordano, JP Morgan Chase & Co, Research Division - Senior LatAm Healthcare Analyst [2]

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This is -- Kleber, a question, 2 relatively simple questions regarding the company, thinking about the rollout of your biologics plant. I would like to know about the pipeline of new products. You have a few products that will be placed at the plant.

My second question refers to foot-and-mouth disease and from the viewpoint of domestic demand in the industry and the viewpoint of product structure, I would like to gain an understanding of what we can do with this plant, with the new products. And when it comes to companion animals pets, you have created a partnership for a new product. What is that we can expect in terms of the company pipeline if there is an expansion of this market, and if you're going to go beyond the normal medication?

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

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Thank you for your question. I would like to begin by your last question, speaking about products and portfolio. As Jardel highlighted in the management message, we're undergoing a strategic planning process revision, which reaffirmed all of the plans that we were following in the company. In terms of pets where we have a very broad portfolio with very strong and operating in Latin America. And of course, we have the future of biologics. And we have reaffirmed that Brazil and Latin America are the greatest production of protein animals throughout the world, and that this protein is greatly sought after. Therefore, our planning ended up on focusing on areas of greater excellence in protection. And one of the critical points was the strategic planning of our portfolio.

To give you an idea, we had some products that were all being marketed, and we hired specialists exclusively to look at our portfolio and to work with the teams in the markets. They look at new trends. They take part in the main congresses. They are working with startup and innovation centers along with market intelligence, enabling us to be very active when working with our portfolio. And we have seen that we still have very interesting possibilities that we can explore within the markets where we have a foothold. And therefore, we're beginning a new and very strong cycle of product development, always keeping in mind that our cycles are not very long and we do have a very long registration period.

We know that everything changes at a very quick pace in the world. If we want to compete with the entire world, it is very difficult. We have a very robust structure in Brazil when it comes to development. And of course, we're going to consider opportunities outside of Ouro Fino. We hope that by acting this way, we will have a very strong and positive result.

Now to speak about the future, about going forward in the foot-and-mouth disease. Well, it is a difficult scenario due to what the government did. The year 2019 was the first year with a 2-millimeter (sic) [2-milliliter] vaccine. We marketed the 2-milliliter and 5-milliliter vaccine in 2018, and we began with a 2-milliliter vaccine in 2019, which meant that we had a significant outflow of volume. Now when we look forward, what we have foreseen is that the vaccination will be stopped this year, but the others will proceed as planned. And based on public information, it is still not very clear if the government has complied with all of its immunizations and the deadlines at the government. Our plant continues to produce this vaccine for the time being. Now we know that we can turn around our plants for other options. We still have not made this decision.

And I would like to highlight what I deem to be a positive point that our company in this sector is the one that perhaps is the least dependent one. It has a very low inventory level. It has a good portfolio. And the foot-and-mouth disease vaccine is not the one where we have the highest profit. Its contribution to our result is not considerable. And because of this, we're thinking of other possibilities that could appear in the future. For example, an opening of the Brazilian market for export and, of course, this would depend on the approval of the ministry, but this is what we are considering.

Now if we speak about our biologics plant, we truly do not have great novelties vis-à-vis what we have announced during the year the plant has been finalized. We launched the first vaccine, which is the most updated one for circovirus. This vaccine is being introduced into the market. And we continue to develop our vaccine portfolio geared to beef cattle and swine. But once again, this is a rather complex and long-term project.

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Operator [4]

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(Operator Instructions) At this point, we would like to end the question-and-answer session. I will now return the floor to Mr. Jardel Massari for the company's final remark.

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Jardel Massari, Ouro Fino Saúde Animal Participações S.A. - CEO, Member of Executive Board & Director [5]

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We would like to thank all of you for your participation and for accompanying us during the year 2019. We work on with confidence to deliver value to our shareholders in 2020 and in coming years. A good afternoon to all of you, and thank you very much.

I would like to go back to a point we received a question online asking about a material fact that we disseminated yesterday. We're still in the quiet period. And because of this, we cannot make any comments regarding that.

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Operator [6]

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The conference call for the fourth quarter 2019 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.]