Minerva SA

BOVESPA:BEEF3

Earnings Call Transcript 2021-Q2

[Operator]

Good morning, ladies and gentlemen, and thank you for waiting. Welcome to Minerva's Second Quarter 2021 Results Conference Call. Today with us, we have Fernando Queiroz, Chief Executive Officer; and Mr. 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 a live webcast at www.minervafoods.com/ir. Slideshow can be also downloaded from the webcast platform in the Investor Relations section of the website.

Before proceeding, we wish to mention that forward-looking statements may be made during this presentation relating to Minerva's business prospects, operating and financial estimates and goals are based on beliefs and assumptions of the company management as well as on information currently available. They involve risks, uncertainties and assumptions because 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 can also affect the future results of Minerva, and results may differ materially from those expressed in such forward-looking statements.

I would now like to turn the conference over to Mr. Fernando Queiroz, our CEO, who is going to begin the presentation. Mr. Queiroz, you may start the presentation.

[Fernando Galletti de Queiroz, executive]

Good morning, everyone, and thank you for participating in Minerva's earnings conference call for the second quarter of 2021. Minerva Foods reaches the end of the first half of 2021 delivering a solid operational and financial performance, thus consolidating our leadership in beef exports in South America. The good performance in the first half are the result of the resilience of our team and consistency of our strategy, which combines operational excellence with profitability, cash generation and financial discipline.

The coronavirus pandemic continues to post difficulties and generating greater volatility to the markets. In this regard, I want to highlight one of the main pillars of our business model and also one of our main competitive advantages. Geographic diversification, which allows us to quickly arbitrate markets and ends up playing a fundamental role in our strategy by reducing risks and volatility, but also expanding opportunities and thus, consolidating the importance of our export platform from South America, in which we hold 20% of the total volume exported.

The global market of beef continues to be growing and driven both by the consistent Asian demand and by the beginning of the cycle of resumption of global consumption and also by the rise in grades. The recovery of the world economy, with the reopening of markets and growth in demand is a movement that gains strength week after week with the advance of the immunization process. The prospects for the second half of the year are increasingly more positive, with the world economy returning to normality and supporting important segments such as tourism and food service, thus consolidating an increasingly heated consumption scenario, not only in the market on the international level, but also in the domestic markets here in South America.

Once again, I stress arbitrage where Brazil, growing its consumption in South America gives us the opportunity to bring products produced within Paraguay, Uruguay and Argentina. The global beef market continues with very solid fundamentals with firm demand and restricted supply. And now with the global economic recovery movement, we are confident there will be increasingly more opportunities for beef exporters in our continent.

Let us now move to Slide 2 to start presenting the results. Let's start with net income, which reached approximately BRL 117 million in the quarter and BRL 376 million in the first 6 months of the year. If we consider the accumulated results of the last 12 months, Minerva's net income totaled approximately BRL 550 million. This is yet another quarter in which Minerva Foods presents a consistent net result and in line with our strategy of creating shareholder value.

Free cash flow, which is one of our priorities, was positive for 14th consecutive quarter, totaling BRL 425 million in the quarter and BRL 734 million in the first half, reaching around BRL 1.4 billion in this 12-month period. Since 2018, the company has accumulated more than BRL 4 billion in free cash generation confirming Minerva Foods' consistency in its operational and financial management.

Gross revenue reached a record level of BRL 6.7 billion in the quarter and of BRL 24.3 billion in the past 12 months. I would like to highlight here the performance of our exports, which accounted for approximately 70% of our gross revenue, both in the quarter and in the last 12 months, being a natural reflection of the strong international demand for beef and the export DNA of Minerva Foods.

Now talking a bit about our operating profitability. In the second quarter of 2021, our EBITDA reached BRL 545 million, with an 8.7% margin. In the past 12 months, Minerva Foods' EBITDA totaled BRL 2.2 billion, an expansion of almost 10% on an annual basis and delivering a solid 9.6% EBITDA margin in the period. As in previous releases, another major highlight of this quarter and one of the main pillars of our management was the soundness of our balance sheet.

We ended second quarter 2021 with a net leverage stable at 2.4x net debt vis-a-vis EBITDA, in line with Minerva Foods' capital discipline. Our liquidity is also very comfortable with BRL 6.3 billion in cash at the end of the period, which combined with the duration of 6.4 years of our indebtedness guarantees a great peace of mind and flexibility in the face of the current challenges and opportunities.

Still talking about our balance sheet, I would like to emphasize the emphasis that the company has made to improve our capital structure. In Q2 2021, I would like to highlight the completion of redemption of the 2026 notes as well as the issuance of BRL 1.6 billion in the local debt market. These are initiatives that seek to reduce growth indebtedness, lengthen the amortization schedule and reduce the cost of our debt. Other initiatives were implemented with the same objective to improve our capital structure and throughout our presentation results, Edison will provide a little more detail regarding these efforts.

The second quarter 2021 was also an important milestone in the evolution and maturity of our sustainability agenda with the disclosure of Minerva Foods' commitments and goals in fighting climate change and protecting the environment. We announced 7 goals of our sustainable agenda with actions and involve the entire chain of stakeholders and that project investments of BRL 1.5 billion in initiatives that will be completed by 2035.

It is worth noting that we have had a known implementation of one of the most challenging goals of our commitment, the integration of the Visipec tool with Minerva Foods' proprietary geospatial monitoring system, which was originally scheduled for December and ended up happening now in August. Thus Minerva Foods became the first and only company in this sector to integrate Visipec as a risk analysis tool for indirect supplier farms in the Amazon biome. Later on, Taciano bring more details about this initiative and other matters on the sustainability agenda.

Another highlight of this quarter goes to our innovation area, which is anchored on 3 main pillars: first, advanced data analysis; second, e-commerce platform and marketplace; and three, venture capital with the objective of reducing risk and maximizing opportunities and advancing in the value chain in the food industry. In the case of Advanced Analytics, we already have a team of 20 specialized professionals, and we are evolving in projects focused on maximizing our production matrix and dismantling the animal, and also improving and optimizing our pricing tools.

In addition, our recent venture capital initiatives, such as Clara Foods, Shopper and Amyris, are increasingly gaining operational maturity with excellent prospects for the coming quarters. And we do not stop there. We continue to evolve on this topic, seeking external partnerships with universities, research centers, in addition to the recent installation of our advisory council for sustainability and innovation to advise the company's senior management. These are initiatives that seek to position Minerva Foods at the forefront of the discussion of this very relevant and strategic agenda.

In the first half of the year, we also have evolved with our corporate management. We started our important leadership development program and moved forward with the project to strengthen our corporate culture, which continues to be more solid every day and as an important instrument in the integration and alignment of the business strategy of Minerva Foods. Minerva Foods corporate culture is a fundamental pillar of our business model. In order to continue to evolve and grow further and further, it is essential to strengthen our 5 values: result orientation, commitment, sustainability, innovation and recognition of our team.

Let us now move to the next slide to comment on Minerva's operating performance in the quarter, starting with exports. Q2 2020, we consolidated our leadership position as the largest beef exporter in South America with a 20% market share on the continent. Minerva's leading role in beef exports is the result of our geographic diversification in the region, which supported by our 16 international offices ends up providing us with a great competitive advantage and a prominent position in the international market.

On the right-hand side of the slide, we have the performance of the exports by region where Asia remains as highlight, representing about 60% of export revenue in the past 12 months in Brazil, an expansion of about 10% points compared to the same period last year. It is worth mentioning that 9% of share that places in NAFTA region as a second main destination, which reflects the recent reopening of the United States for Brazilian beef. In the case of Athena Foods, the Asian market has been the main destination for us with 37% of total exported by the division in the past 12 months, followed by the Americas region, which accounted 26% of the total exported by Athena Foods.

The performance of exports makes increasingly evident the growing demand internationally for beef, especially in Asia and especially in the Chinese market where consumption habits continue to transform and benefit from beef protein, which is gaining more and more space in the local diet. Another highlight in our client portfolio is a growing exposure to the North American market. The market is high income capacity in which due to the advanced stage of vaccination is already showing consistent signs of the resumption of economic activity and domestic consumption. I would also highlight the increase in meat prices in local markets as a result of the increase in private grades, leaving a pressure on cost on North American producers.

Finally, I would like to point out that the fundamentals and prospects in the global beef markets are still very sound and attractive. We have a combination of very positive factors for the coming periods that will benefit even more South America. International demand for beef protein remains very consistent in emerging markets, especially in Asia. In addition, we have the advance of vaccination and the recovery of the global economy that gained strength week after week with the reopening of markets and brings a strong recovery, movement in consumption, especially in tourism and food service segments that were heavily impacted since the beginning of the pandemic.

Finally, we add to this the high prices of grades, the persistent restriction in the supply of beef from a stretch which continues to imbalance the world market and particularly benefiting exporters in South America. Given this promising horizon, Minerva Foods' strategy is to continue maximizing our competitive advantages, investing in innovation, niche opportunities, risk management and market intelligence to achieve increasingly efficient and profitable commercial and logistical solutions, always trusting our corporate culture, the work of our team and respecting our commitment to ethics and sustainability.

Now I'll hand over to Taciano, who will talk a bit more about Minerva Foods' sustainability agenda.

[Taciano Custodio, executive]

Good morning, everyone, and thank you, Fernando, for the introduction. In the first half of 2021, we reaffirmed the word that best describes Minerva Foods' positioning sustainability, pioneering. Sustainability is consolidated as one of our corporate values, along with the results orientation, commitment, innovation and recognition. These are our foundations for contributing to the conservation of the planet, the prosperity of people and the well-being with animals.

In April, we announced the Minerva Foods' commitment to sustainability, a set of goals backed by those who work with great responsibility in the face of the challenges of climate change and the protection of ecosystems, which are the basis of Minerva Foods production chain. It is worth reinforcing the path that has brought us here. We are leaders in fighting deforestation, being the first company in this sector with 100% of direct supplier farms geographically mapped in all operating regions. The Savannah, the Amazon, the Rainforest and the marshland of Pantanal in the Federal Public Ministry resulted the main favored and most transparent audit in the sector just deforestation, Minerva maintains the best results among large companies.

Result of our commitment to find illegal deforestation in the Amazon, we are pioneers in addressing real actions regarding the monitoring of indirect supply farms in the Amazon region in collaboration. With the University of Wisconsin, the National Wildlife Federation and Friends of the Earth, we sped up the integration with Visipec, an indirect risk analysis tool, in the Amazon. The target scheduled for December was brought forward to August of this year, making Minerva Foods the first and only company in the sector to analyze the risks of indirect farms in the Amazon.

Our pioneering spirit goes beyond the Brazilian border and reaches Paraguay, a country where we have already monitored 8% of purchases for deforestation criteria overlapping with indigenous lands and environmental protection. As you remember that our goal is to reach the end of this year with 100% of monitored purchases.

In Colombia, we have already started work on mapping suppliers and making geographic diagnosis through buffer zones. We became the first company in the carbon neutral sector in scope 2 regarding our energy mix. We are also the first Brazilian company to receive the Renewable Energy Seal to all our units in Brazil. The seal is issued by the Totum Institute in partnership with the Brazilian Association of Wind Energy and the Brazilian Clean Energy Association.

The works in low carbon production in the chain -- production chain program continues to advance us with carbon balance management in more than 50 supply of ours in all countries of operation. We are confident that the scientific research using primary data that represent the profile of our producer partners will be decisive for the recognition of sustainable practices applied in our value chain, opening up commercial opportunities in importing countries and opportunities in the growing credit market with carbon.

It is our commitment to support suppliers in implementing carbon sequestration practices generating benefits that includes greater productivity and efficiency, greater resilience and protection of biodiversity. For the next few years, we will continue to deliver measurable and transparent results to our stakeholders, taking all the challenges that lie ahead and engaging all the links in the value chain to leverage sustainable production practices in South America. We remain confident in our carbon neutral goal until 2035.

On the next slide, we detail the advances with the integration of the Visipec tool. In collaboration with Amigos da Terra, National Wildlife Federation and University of Wisconsin in the United States, we present the result of monitoring indirect supply of funds in our operations in Mato Grosso and Rondonia and Para. Visipec is a traceability tool that performs risk assessment by matching data from public databases, connecting direct and indirect suppliers, significantly improving Minerva Foods' decision-making process.

We were the first company in the industry to start testing Visipec from May 2020 and we are proud to announce today that we brought our goal of integrating the tool forward from December this year to August. This means that Minerva Foods is the first and only company in this sector to analyze the risks of indirect supply of farms in the Amazon in an integrated manner with the cattle purchase processes of this month and material evidence of our commitment to climate change and ecosystem protection. The results are motivating and support our pioneering spirit.

99.8% of direct suppliers -- of indirect suppliers in meatpacking plants in Mato Grosso and Rondonia are in compliance with the GTFI's best practices and therefore, in compliance with the monitoring of deforestation and farms in the Amazon. There were 7,725 indirect supply farms verified for 2,995 direct farms, a ratio of 2.5 indirect farms for each direct supplier farm.

In the coat or meatpacking plant, see more information of Visipec in Minerva Foods. You can see it on our website and also in the results release on the website is Investor Relations. Follow Minerva Foods on social media and follow our pioneering spirit.

I now hand over to Edison, who is going to detail the operating and financial results. Thank you very much.

[Edison Ticle de Andrade Melo e Souza Filho, executive]

Thank you, Taciano. Let us move to Slide 6. Let's talk about operating performance and breakdown of divisions share of Minerva's gross revenue in second quarter '21. Athena Foods, once again, increased. Its own share now accounts for 51% for consolidated growth rate and while Brazil division remained with 44%, and the trading division with 5%, complementing total revenue. Speaking now of capacity utilization in second Q 2021, we operated on a consolidated basis with a capacity of approximately 74%, still reflecting the operational limitations imposed by the plant.

At Athena Foods, the level of utilization remained stable at approximately 77%. Worth noting that even with the restrictions on exports in the Argentina market that took place in part of second Q, our geographic diversification allowed us to reiterate the scale of production, thus maintaining a level of utilization very similar to the previous quarter. This movement confirms one of our main competitive advantages, the ability to arbitrate, speeding out and slowing down our plants in the various countries where we operate, always in search of operating and commercial optimization.

In Brazil division, the use was 71% benefited, especially by the strong movement of exports. Domestic market is still suffering from the restrictions imposed by the pandemic, both in Brazil and in other countries on the continent. And we believe that the first signs of recovery should start to come up now in the second half of the year.

As we mentioned, consolidated utilization remained below our historical level of 80% and should be resumed over the next few periods with the advancement of the vaccination process, recovery of the global economy and when we move to the end of the pandemic. It is worth mentioning that our analysis, we also always considered the concept of net utilization reflecting working days in operation of each one of the plants in activity in our portfolio.

On the right-hand side of the slide, we highlight our consolidated exports by region, both for second Q 2021 and for the past 12 months. As Fernando mentioned, Asia continues to play a leading role, representing 48% of exports in the quarter. In the past 12 months, the share of the Asian continent totaled 46% of Minerva's exports, with China currently as a major global importer of beef, representing 36% of our exports and remaining the main destination for our products.

Now on Slide 7, let's talk a bit about our financial results with net revenue which reached BRL 6.3 billion in second Q '21, strong expansion for almost 43% year-on-year comparison, a record amount for the company even considering seasonality that was negative in the first half. When we look at it from the perspective of 12 months, we see a robust year-on-year growth with an increase of almost 28% and totaling BRL 23 billion in net revenue the past 12 months. Part of this revenue, as I mentioned previously, we highlight the good moment of exports which reached a share of approximately 70% of total revenue, both in the quarter and the past 12 months.

Speaking of profitability, Minerva's EBITDA in Q2 reached BRL 545 million with EBITDA margin of 8.7%, which means an increase of 30 basis points when compared to the previous quarter. In the past 12 months, our EBITDA totaled about BRL 2.2 billion, an increase of more than 8% on an annual basis and with an EBITDA margin of 9.6% in the period. It is very clear on this slide, the operational dynamics of the company that is very clear, which is a spread business. That is our profitability is based on the ability to transfer price, especially when we have a cost pressure scenario. Despite recent increases in cattle prices, we correspond approximately to 80%-85% of our total cost. The company has been very efficient in transferring these increases to customers, especially in the export market, which is the main focus of Minerva Foods.

As a result, we have been able to deliver a consistent level of profitability over the past few quarters, even with the upward movement in animal prices. If we look at 2021 against 2020, in certain periods we have seen a cost pressure of almost 40% reflected in the price of cattle. Even so, we managed to keep the margins at a very healthy level with the growth top line, and we are managing to deliver EBITDA and cash a lot higher than the market expected.

Now I want to highlight again, our geographic diversification, especially when we talk about Athena Foods. Despite a more complicated situation in Brazil in terms of cattle suppliers, Athena Foods has had a very highlighted situation, calmer situation and continues to contribute enough for the growth of the company's revenue, which, as I mentioned in the previous slide, represented 51% of the consolidated revenue in this quarter.

Moving now to Slide 8, let's talk about financial leverage. Our leverage ratio measured by the net debt-to-EBITDA ratio over the past 12 months remained stable at 2.4x. The company's net leverage indicator has remained stable since the beginning of 2020 even considering disbursements of BRL 210 million in the share buyback program and another BRL 541 million in the distribution of dividends throughout this period. In other words, we returned more than BRL 750 million to our shareholders, either from earnings or in the form of share buybacks, and given Minerva's high level of cash generation, we managed to maintain leverage below 2.5x stable at 2.4x at a very healthy level that allowed us to continue to forecast good dividend distribution to shareholders over the coming quarters.

Minerva's current level of leverage reflects our commitment to seeking and maintaining a more efficient capital structure, less costly with a lower risk profile and fully aligned to our financial strategy. On this slide, I would also like to stress that we still have BRL 313 million in warrants outstanding, which would be exercised by the end of 2021, thus strengthening company's cash. In other words, as soon as the fiscal year occurs, these resources are added to cash and if we adjusted cash with the effect of these resources, our net leverage ends up being even smaller falling to 2.3x.

Moving on to next slide. Let's talk about net result and operating cash flow. Second quarter '21 was another positive period results. Net income reached BRL 117 million in the quarter and accordingly accumulated BRL 376 million in the semester of 2020. If we consider the accumulated past 12 months, net income totaled practically BRL 550 million. This resulted the reflection of our commercial and financial strategy over the past few years. Total focus of fresh cash generation, risk management, especially on reducing our indebtedness which have been a priority for the company and have contributed in a relevant way to the results we want to achieve quarter after quarter.

Moving to the right-hand side of the slide, operating cash flow was positive reaching BRL 484 million positive. If we have net income adjustment impacting BRL 39 million and the working capital variation contributing BRL 406 million in cash, especially due to the good performance in the supplier line, we get to a cash flow of operating activities totaling BRL 2.3 billion.

Moving on to Slide 10 to talk about Minerva, top priority is free cash flow. On Slide 10, we see free cash flow remained positive for the 14th consecutive quarter, reaching BRL 647 million which means almost 4 years in a row with positive cash generation. Even considering the negative exchange rate hedge results in this quarter, free cash generation remains positive, totaling BRL 425 million in the quarter, making free cash flow build up in the quarter. We started with EBITDA before nonrecurring items, BRL 539 million, CapEx of approximately BRL 69 million concentrated on investments in the maintenance of our plants. Then we have the capital account and turnover that was BRL 406 million positive, as I said, benefiting from the line of supply. Then we have the cash-based financial results, which was BRL 235 million negative.

After the nonrecurring effect of approximately BRL 6 million due to the social expenses and actions against pandemic, we reached a positive recurring free cash flow of BRL 647 million in the second quarter, which added negative cash result of BRL 222 million related to foreign exchange hedge policy, which leave free cash flow in the quarter of BRL 425 million.

Speaking now of the past 12 months, free cash flow totaled approximately BRL 1.4 billion. We start from an EBITDA of BRL 2.2 billion, CapEx in the past 12 months of BRL 352 million, which was impacted by the acquisition of the Vijagual plant in Colombia, also by our corporate venture capital initiatives. The variation in working capital was positive of BRL 547 million in the past 12 months and cash-based financial result, that was negative of approximately BRL 1 billion. We also have BRL 37 million of nonrecurring items related to the pandemic. Thus we reached a free cash flow of approximately BRL 1.4 billion in the past 12 months, reflecting an excellent operating and financial performance of Minerva Foods in the period.

On Slide 11, we see the bridge of our net debt. At the previous quarter, our net debt totaled approximately BRL 5.4 billion. Second quarter, we distributed BRL 383 million in the form of supplementary dividends to our shareholders. We also had a positive cash flow for the quarter before the result of foreign exchange hedge, which was BRL 640 million. In addition, we had impact of the hedging instruments that ended up increasing our debt, which were BRL 222 million in the cash concept and another BRL 73 million negative in the noncash effect.

We also have a noncash effect, a negative impact of BRL 103 million net related to exchange variation in the portion of our debt that is tied to foreign currency. So on one hand, we have positive impact on the debt from the exchange variation; on the other hand, we have a negative impact on supply cash in dollars from the same exchange variation and the net effect of this was BRL 103 million. So adding all these accounts and setting up the bridge, Minerva ended the quarter with a net debt of BRL 5.3 billion, a lower level, both in the quarterly comparison as in annual basis. This position confirms our commitment to continue reducing level indebtedness and mainly gradually improving Minerva Foods' capital structure.

I would like to stress that our current hedge policy continues to impose that we have at least 50% protection of our long-term passive exchange exposure, and this can be seen in the explanatory notes of our financial statements, and I'm also available for any further clarifications.

So as our balance sheet, our exchange exposure is also highly protected making us few more comfortable to continue focusing on the execution of operational and financial performance and to continue seeking the path of generating value for our shareholders.

On the next slide, we'll comment on a little more on the capital structure and on the recent liability management initiatives. On Slide 12, as we mentioned before, we have our leverage ratio measured by net debt over EBITDA ratio for the past 12 months that ended up stable, 2.4x. Our cash position at the end of second quarter, we remain comfortable at BRL 6.3 billion.

Speaking of debt, around 68% of our debt is exposed to exchange variations. The liability management operations allowed us to reduce part of this portion that was exposed to exchange rate. But as I mentioned a while ago, there is a commitment of the management to protect our balance sheet. So we have a hedge policy that determines that the company must have at least 50% of its long-term foreign exchange exposure hedged. With this, we protect our balance sheet and this policy has proven very efficient considering the exchange volatility, foreign exchange volatility in Brazil currently. Our duration is 6.4 years. And I highlight that over 80% of our indebtedness is in the long term, almost 60% of our amortization concentrated rated only from 2028 as highlighted in the chart in the slide.

On the right-hand side of the slide, I present to you a little more detail all the liability management efforts and initiatives that the company has been implemented since mid-2020. In second quarter '21, we highlight some initiatives such as the total redemption of our 2026 bonds, which had a coupon of 6.5%. And usually we see around the local market in the amount of BRL 1.6 billion. First year is BRL 1.2 billion, maturing in 7 years and second series is BRL 400 million maturing in 10 years, both series were swapped. They were issued initially on IPCA plus coupon, but we swapped to CDI. So the final cost of the instrument was equivalent to 128% of CDI for both series.

So we locked our cost of debt for 7 to 10 years at 128% of CDI for an amount of BRL 1.6 billion, which is in operation. I repeat, it's quite interesting that will help us further reduce the company's weighted average cost of capital. In addition, we had a market buyback of $41 million at the 2028 bond and recently in July we completed a 2031 bond repurchase, raising an additional $400 million, which are in cash that are going to be used for the rollover more onerous debt.

The result of all these initiatives, in addition to the cost reduction of our debt and gross leverage also reflect the lengthening of our debt profile with the most relevant maturities being concentrated in 2028 and 2031. Obviously, this internal liability management effort, reinforces our commitment to financial discipline and the pursuit of increasingly healthy, less costly with a lower risk profile and especially well-aligned with our strategy for generating income in the long term.

Now I hand over to the operator so that we can start our Q&A session. Thank you very much.

[Operator]

[Operator Instructions] We have a question from Ricardo Alves from Morgan Stanley.

[Ricardo L. Alves, analyst]

Can you tell us about the scenario in Brazil? Second quarter, we're seeing prices in dollar ranging quite high. Can you give us an update would you see in terms of July and August? The internal market in Brazil, second question, is a quarter, second quarter, you put over 50% [indiscernible] and in total your volume maintains quite solid.

If you can talk a bit more about the domestic market, the dynamic of supply and demand, if you have anything specific regarding channels that you could comment, something more qualitative to explain the domestic market, that would help. And last question quite briefly, Argentina, we were quite surprised with the results in terms of dollars considering that we've had these restrictions in the country. If you can give some color in terms of the results of the quarter, perhaps more interested in how you see the situation now in the country in the third quarter?

[Fernando Galletti de Queiroz, executive]

Thank you for the questions, Ricardo. Starting on the international market, increasingly markets are interrelated. Now what we see in terms of the international market is the increase is all proteins due to the increase in the price of grains, the soybean and corn playing a leading role. Inventory quite low, that increases the competitive proteins. There is also an impact in the production system that we have in the northern hemisphere to consignment for this. So this only reinforces the thesis that we have at Minerva Foods that is placing itself on a more competitive platform for beef in the world being the largest and most diversified.

Thus we see in addition to the grain market, there is a large crisis in Australia where there is no -- you don't see a production. Well, the production has dropped over 30%. So what's happening is that in South America and in various countries, they are taking up spaces of competitors. Demand is positive. Looking to the demand side, it is positive, reduction of restrictions, return to food service, increasing tourism, brings a positive dynamic and only consolidates South America. It's worth highlighting that in the past 2 years, even despite pandemic, there were great opening -- major market openings. So South American countries are taking up more space.

Regarding domestic market in Brazil, the move is interesting. We have a demand for products that are very cheap beef products for industry, for hamburgers and processed foods is growing and products that are more prime products. We're sharing with you that Minerva has distribution very much focused on special and premium segment. We are launching a campaign now that promotes Estancia that is our premium brand in Brazil, [indiscernible] our premium brand in Argentina and the Angus brand in Uruguay, along with [indiscernible]. We're going to start a stronger campaign to promote that so that we can consolidate further this work that we have within the domestic market.

In Argentina, what's happened to Argentina has been positive, and we had major results in the mid, long term. The government they actually paid attention to this foreign market dynamics in which there was -- or there were price differences between exporters, especially as some that were less formal, keeping part of the funds outside Argentina so that they could actually materialize the difference from the official foreign exchange rate and what they had in terms of current foreign exchange. And what they did was to take measures to restrict that. So that was positive. So what we see in Argentina is a gradual formulization in the industry with clearer rules and that are better established and rules that are more acquisitive for all players. This has been very positive and we're very excited about Argentina. The product has a very positive image on the international market. And so you have very good eyes towards Argentina.

[Operator]

The next question is from Gustavo Troyano from Itau Bank.

[Gustavo Troyano, analyst]

My question is regarding Athena. Can you give me more details in terms of performance by region, looking at consolidated revolution of the quarter being quite interesting? I'd like to understand the main driver for this improvement and if you said that the availability of cattle continue supporting this levels that we've seen second quarter moving ahead to the second semester.

[Unknown Executive]

On Page 23 of our release, we have a breakdown by country of Athena revenues and you can clearly see the countries that contributed most. So if you see that Paraguay and Colombia were the great highlights. Colombia, remember, we had an acquisition in October last year, which we doubled the production and slaughter capacity, and the country of Paraguay is actually at a very favorable moment, both in the cycle and sales price. Uruguay too contributed quite a lot for this performance improvement. In Argentina, the expectation is that it would detract performance due to all the reasons that Fernando has just explained, ended up being a surprise even though it was quite positive. So by region, main highlights, Paraguay second, Colombia, where we see Uruguay with a quite positive outlook for the short midterm.

[Unknown Executive]

Gustavo, just adding to what he said, this decision as to how we speed up and slow down that's a decision that we make weekly based on our analytics data. So there is not actually a rule, but actually using the platform that we have to maximize profitability and reduce volatility. So this is the major work that Minerva has been investing in the past 3 years.

[Operator]

The next question is from Thiago Duarte from BTG Pactual.

[Thiago Callegari L. Duarte, analyst]

I'd like to ask 3 questions. The first, I think, for Fernando, if you could just describe a bit better what happened in this quarter. As Edison mentioned just now, there was a surprise, the top line performance of Argentina because of those temporary restrictions that have taken place. I understand, Fernando, when you say that from the standpoint, regulation part of the changes are positive for the operations like yours. Just to understand what was the export flow in the quarter that apparently it was not only, okay, income revenue, but also volume increase. If you could give some color, explain there was some kind of difference in volumes May, June, there was a restriction. So it would be interesting to justify the top line performance that was quite strong.

Second question, you don't usually do this but if you could, even if qualitatively, explain a bit the margins in terms of operation industry Brazil and Athena operations, just so that we can try to make up how the consolidated margins breakdown between these 2 geographies? The third question more for Edison, about working capital, you've led over BRL 400 million in working capital in this quarter of strong revenue growth. When we see cash circulations based on the history we have here it's one of the smartest quarter that we have heard of. If you can talk a bit as to the trade-off between term for receivables and price, if you could explain how the trade-offs happened and its sustainability, that would be quite interesting.

[Edison Ticle de Andrade Melo e Souza Filho, executive]

Thiago, I'm going to start with the last question. In terms of working capital, we have a great focus in holding it. You know it we have the understanding that this business for you to maintain high levels and EBITDA conversion to cash, and you have to have strong working capital. We have an average conversion rate of 80% in the past 14 quarters, which I think is very much out of the curve for the industry. In the case of receivables, we're always looking for alternatives, be it of better negotiations with customers and suppliers and also being creative in operations and financial tools or instruments in this quarter.

Specifically we had a discount policy for supplies and the monthly rate of pay for the bank is lower -- is lower than what I can pay cash to suppliers. This is applicable to any supplier, I pay in the business and we have 30, 45 days, I pay cash and I can get a discount that is relevant and I am funded by the financial institution, which lengthens the term for 120 days, on average between 60 to 120 on average 90 and the financial cost of the 90 days is below the discount I managed to get with the partner. So it makes all sense. I am really releasing cash for the operation and the margin gaining some -- having some positive financial revenue as a whole, enabling growth of the operation with the maintenance of high conversion rate, EBITDA, cash.

On margins, you know that we don't usually disclose that. We may say that Athena this quarter had margins slightly above Brazil. Athena was 31% of our revenue. The trading was practically negligible with 5% of the trading margin is a bit higher than the industrial margin but doesn't have such relevant contribution in the final attribution and now Athena was better, a lot of stress or highlight to Paraguay with 2-digit margins, quite consistent soon. Colombia margin is very close to 2 digits, and the remaining of operations, 44%. The Brazil and the operations with margins that were a bit below consolidated margin of the company.

[Fernando Galletti de Queiroz, executive]

Thiago, just to add to what Edison said, Athena operations also had one of the major clients, the very distribution of Minerva, the internal work of Minerva Brazil. So the separation by geography is very relative because when you have the margin made for the place where you sell, the place where you produce, it creates some bias in terms of analysis.

Therefore, what we have shown here with the arbitrage policy is how the ensemble becomes stronger. The internal market in South America is Brazil. Regarding Argentina, we have a very -- a policy that is very much geared to the exports. We have put our work very much geared to niches within the foreign market, benefiting from the positive image that Argentina has.

So we are able to, even with the restrictions and having within the restrictions the work that have been continued with the government that the government allowed the quota system, we -- since we are very well placed within the export market in Argentina we are able to react quickly and mitigate part of the restrictions, respecting the rules that was set by the government. As I mentioned in the previous question with Ricardo and Gustavo, we see Argentina in a very positive way with a stronger or an increasing formalization in our industry.

[Operator]

Our next question is from Isabella Simonato from Bank of America.

[Isabella Simonato, analyst]

I think most of my questions have been answered. But over, I have one, then I would like to ask. When we look at the slaughter and try to reconcile that with the capacity use, you look at working days but looking at Brazil, specifically, we see a relevant increase year-over-year and the volume of slaughter drops at the same time that we have an increase in sales. Could you help us reconcile this math looking at second quarter of 2020?

[Fernando Galletti de Queiroz, executive]

Well, we look at slaughter working days and the open plants. If you remember, we had 2 plants that were for some period closed during the second quarter, one of them because of maintenance and the other one was we had some precautions regarding COVID pandemic maintenance and lack of supply of cattle and other groups. When we have managed capacity, we look at the plants on the data that are actually open and then even having a drop in slaughter, you end up using that resource a bit more once it was -- when it available. If you want to get details call Danilo, Luis and Filipe, they can provide you with the details but the concept is this one that I've just explained. Is it clear?

[Isabella Simonato, analyst]

Yes, it is.

[Fernando Galletti de Queiroz, executive]

But in terms -- when we look at sales volume, this means greater [ guild ]. Is that what we can conclude or is the movement of having greater inventory over the quarter, there is more yield as well with the cattle that or where slaughtering is heavier than first quarter and even more than last year but we had regions where we had more priority so we had capacity use of over 90% Rondonia, Rolim de Moura which is a huge plant. On average, second quarter, it operated over 90% capacity. So you have a larger plant operating over 90% with more days running and with a heavier animal. So you have a greater average on the capacity use.

[Operator]

The next question is from Thiago Bortoluci from Goldman Sachs.

[Thiago A. Bortoluci, analyst]

I have a question regarding the opening of new markets. Over the past weeks, we've seen some headlines suggesting a certain statement in the opening of China because of new -- and the opening of new plants in Brazil, if you could comment on what has actually changed, if anything, has changed and what's your outlook for this process? That would be great.

[Fernando Galletti de Queiroz, executive]

We don't see any actual changes within the process. Obviously, we follow the news, but we don't have any confirmation, any reality, much on the contrary. Speaking to the Brazilian government, people responsible for the opening, all the processes follow normally so we should, indeed, have new openings, new market openings, new licenses for plants and then Thiago, not only Brazil, we see that also in other countries like Paraguay, Colombia. Uruguay itself with the stronger policy and everything is justifiable and with the world supply demand, thinking about the IMF that is natural that commercial and also sanitary agreements between South American countries and the main consuming countries that should be intensified and actually sped up.

[Operator]

[Operator Instructions]

[Fernando Galletti de Queiroz, executive]

We have a question from [indiscernible] on what we think about the cattle price until the end of the year?

We like to trust the market. The market is pointing to an average price of BRL 330 of Sao Paulo base, if we see future, it's approximately this estimate that we trust. We think that the prices should be flat the remainder of the year again, we are taking for granted what the market is estimated.

Another question on working capital. Actually, this is our strategy. Our strategy is to generate EBITDA, operating cash flow with the smallest consumption possible of working capital. This will improve and maintain high rates of our better conversion for cash at the end of the line or the bottom line. As to cash generation recently, do you think about having a share buyback?

As I mentioned in my speech last year, for example, strong cash generation allowed us to return to shareholders over BRL 750 million, BRL 250 million approximately through share buyback over the year and -- a bit over BRL 500 million was through dividend distribution. Probably, there will be a mix. Unfortunately, I cannot answer it because this is a board decision. I can give you my opinion, my personal opinion and recommendation has been to consider the part of the profits that will be distributed to shareholders this year should be made in the more aggressive share buyback. Why are the share price not following the market prices? So we can say is that our responsibility is to generate value.

The only thing that we control is company's price. The price is something decided by the government, we cannot influence or make comment to value generation. We have been fulfilling our role, and this is the maximum we can input. Any forecast with resuming export market in Argentina, how much this impacted our results? We talked a lot about it over the call. We managed to actually curb difficulties in Argentina and generate a result that it was quite significant exports in Argentina have been resumed, so no forecast. This actually has happened.

Question on Athena IPO, as I mentioned a few times, totally out of the script. We have no need, no plan of pursuing again Athena's IPO. That was a situation which we had a capital structure that was more burdensome and balanced it, made sense from the standpoint of releasing some value and at the same time, rebalancing the capital structure. This happened through the cash -- operating cash generation. We have a structure that is really quite balanced and even at a moment that is more complicated in terms of cattle cycle in Brazil, especially.

So it doesn't make any sense for us to sell an asset, especially such a strategic asset as essential. Barbara also asks the relation regarding liability management, strategy, capital structure of the company. We are comfortable with growth debt and deal cash for the company and lastly, what we should think about capital allocation. As we said, we have a clear policy, the distribution of dividends and actually have a clear position, minimum that is compulsory of distribution is 50% of net profit.

So continue the scenario what we have seen in past quarters, the company should distribute to at least 50% of its net income. On liability management, we did most of it in the second quarter and I'd say that we have practically concluded, we've managed to have now much more favorable capital structure but in summer, we reduced 200 basis points in the weighted capital structure of third parties. We actually put [indiscernible] in 2028 and 2031, we had a [indiscernible] that we put more money in cash that is going to be used for us to pay shorter and more burdensome debt.

So the liability management exercise is really ended unless we have an opportunity very much outside the curve of getting money that is cheaper and longer to refinance our debt. Gross debt and cash level; we have been reducing gross debt. If you follow our cash flow quarterly, we have been rescuing more debt and rolling them and what we have in terms of foreign exchange and our hedge policy, we have 2/3 of cash in dollar and this ends up bringing an increase to our cash and therefore, you end up feeling less the effect on the gross debt that we have.

[Operator]

Ladies and gentlemen, please wait for the reconnection of the speaker. So you may proceed.

[Fernando Galletti de Queiroz, executive]

Okay. How far have you heard me and to what part?

[Unknown Executive]

My suggestion is for you to repeat the webcast question. And answer it again.

[Fernando Galletti de Queiroz, executive]

So the question is on gross debt and gross leverage and cash. We have been reducing gross leveraging between BRL 1 billion, BRL 1.5 billion net of gross debt in the next quarters, and this should reduce 0.8% gross leverage and with this, in the same proportion, the cash should drop. BRL 6 billion should go below BRL 5 billion, about BRL 4.55 billion and so we have minimum cash implying 3 months at least of purchase of input. This is about BRL 3.5 billion, BRL 4 billion.

Now cash would be between BRL 4 billion and BRL 5 billion to have some room for minimum cash and at the same time, contributing to reducing the growth leverage of the company. And well, I think the other questions here, most of them have already been answered. We have a question on M&A. We have already said and the main goal recently, the company has been fixed capital structure and return money to shareholders through dividend payment.

We are certainly open and attentive to good opportunities. We had a specific M&A in October. We bought a plant in Colombia for this kind of specific M&A something that we are always keeping on our radar and any steps for M&A that we take, it will be towards not complicating or not lessening our capital structure that we have reached since last year. So this is it. So we end the Q&A session.

[Operator]

We now close the Q&A session. I would like to give the floor to Mr. Fernando Queiroz for his final remarks.

[Fernando Galletti de Queiroz, executive]

I'd like to close this conference call by thanking everyone and the entire Minerva team for their dedication and all the integration, all their dedication and drive to have result in minimizing volatility and generating value to the company and shareholders despite the difficulties and challenging and regional differences, we're able -- we have been able to along the period to extract results from our operations.

We move even in a very challenging moment, we will continue to face this together in the way we have conducted in our business with determination, with exports, good capillarity and being focused in distribution, getting closer to our customers, the great focus on sustainability, on innovation as we've mentioned during our conference call, in our presentation and focus in increasingly improving the teams, all the places with training and especially with integrations.

As we move ahead, we have a quite positive scenario on the international market based on what we've mentioned, reduction of availability of countries, of competing countries, and we continue to move forward on this export agenda along with South America that is increasingly taking up space on the international scene.

So we continue firm and pay attention to the global market opportunities, always with the financial discipline with operational discipline with a clear and transparent strategy for the whole market for generating value in the short, mid-term and long term and thank you very much for your interest in Minerva Foods, and we are remain at your disposal both for any questions and clarifications that you want to further close with our team. Thank you very much to you all.

[Operator]

Our results conference call is ended. We thank you all for your participation, and we wish you a good day.

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