Minerva SA

BOVESPA:BEEF3

Earnings Call Transcript 2022-Q2

[Operator]

Good morning, ladies and gentlemen, and welcome to the Minerva's video conference to announce the results of the second quarter of 2022. Today with us are Mr. Fernando Galletti de Queiroz, Chief Executive Officer; Mr. Edison Ticle, CFO and IRO; and Mr. Tamara Lopes, Executive Sustainability Manager. This presentation is being recorded and simultaneously translated. [Operator Instructions] The presentation is available for download at ri.minervafoods.com in the Presentations section.

[Operator Instructions] We would like to clarify that any statements that may be made during this conference call regarding Minerva's business outlook, operational and financial goals constitute on projections of the company's Board of Directors and management, which may or may not occur. Investors should understand that political, macroeconomic and other operational factors may affect the future of the company and lead to results which differ materially from those expressed in such forward-looking statements.

To open this video conference, I turn the floor over to Mr. Fernando Queiroz, CEO.

[Fernando De Queiroz, executive]

Good morning to all, and thanks for attending this video conference to disclose the results of Minerva for the second quarter of 2022. Minerva ends the first half of 2022, delivering once again solid results, which attests to the consistency and discipline of our business strategy and consolidate our leadership in exports from South America.

Our focus on operational execution, combined with our financial discipline, capacity for arbitrage and commercial excellence were essential for us to achieve the good results for the first half of the year, with revenue and EBITDA, which were record and the maintenance of a sound and balanced capital structure. We are reporting record numbers in this quarter.

Our gross revenue grew by 34% and totaled BRL 9 billion. Our EBITDA went up to BRL 778 million, a strong growth by 43% year-on-year, being the highest ever recorded by the company, on which contributes for a net income of BRL 425 million in the period. Another highlight for the quarter was our cash generation.

As you know, this is an absolute priority for the company. We generated BRL 416 million. Additionally, I would like to draw your attention to our balance sheet, which reflects our financial discipline. We ended the quarter with a net leverage of 2.3x net debt over EBITDA, even after the payment of BRL 200 million in dividends at the end of the quarter.

The geographic diversification strategy, one of our strategic pillars, continues to play a fundamental role in the performance that the company has been delivering quarter after quarters. It reflects our arbitrage to in the global animal protein market, always focusing on profitability, managing risks and capturing opportunities in the global beef market.

Before giving you details on our performance in Q2, I would like to share with you a little bit about our view as to the outlook for the global animal protein market, especially beef and how our strategy and unique business model position ourselves to capture opportunities and take advantage of the good time in the market.

Since the end of 2019, the bovine herd of animals in Brazil began to show a lower availability for slaughter as a reflection of the movement on the part of ranches to retain females for breeding as a natural reflection of the lower supply of animals, there was an impact on the price of the arroba. And here, I would like to highlight the excellent work of our commercial team with Minerva Foods as the company was able to successfully pass on this cost increase, thus maintaining our profitability at considerable levels.

In recent months, we began to see the first signs and indicators regarding the beginning of the reversal of the cycle, especially with an increase in the slaughter of females, which reflects the return of these animals to the slaughter pipeline after the end of the breeding cycle. Additionally, according to MAPA information regarding vaccination volumes point to a record volume of animals vaccinated in the last few months.

These numbers are an extremely important predictor of the availability of cattle ready for slaughter and that will reach the market in the last -- in the next few periods. This movement towards having more animals in the market was maintained in Q2, and we are even more confident now about the maintenance of this trend in the next few months with the increase of availability of cattle here in Brazil, which naturally benefits the company's performance and the sector as a whole.

In addition to the livestock cycle in Brazil, I would also like to highlight the scenario in North America where the cycle is the opposite and present signs of reversal and consequently, an increasingly strong trend of a reduction in availability of finished animals and a pressure on the domestic supply of beef.

USDA projections indicate a 77% reduction in North America for the year 2023. That is a movement that reflects higher production costs and prices for the final product, which impacts the competitive of North American beef in the global market, especially when compared with South American producers. Also, there is a context of intense volatility in the global grain market. This has been impacted by the adverse climate scenario in the main producing regions and by the conflict in Eastern Europe, in addition to the challenges of the global logistics chain.

There is intense volatility and high uncertainty, which has a direct impact on the cost structure. This not only affects the global pork and poultry production chain, but also the beef chain, especially in those countries where production is via consignment. This results in a significant loss of competitiveness in those countries, which directly benefits South American beef exporters due to a production matrix, which is predominantly via pasture.

And finally, I would like to draw attention to the persistent health problems in the global animal protein chain and its most recent factors, an outbreak of foot and mouth disease that ravages the Indonesia heard and a type of nodular dermatitis, which threatens their herd. This is a threat to the health security of one of the biggest players in the world market, Australia.

This is yet another situation that should open new opportunities and open up more space in the global market for beef originating in South America. Additionally, given the geopolitical scenario, the alliances between countries. South America has adopted a neutral position and can, therefore, supply to all the blocks that now exist or may exist in the future.

So as to our results, I would like to highlight our solid performance in the distribution in the domestic market. We continue to evolve in segments that allow greater profitability, such as food service, niche opportunities in premium markets. We are also moving forward with partners and online sales platforms, thus increasing our exposure and the range of products sold and thus maximizing our commercial performance in the distribution to domestic markets.

As regards innovation, one of our pillars of our business model, in addition to advancing in digital platforms, which account for nearly 15% of our distribution and contributes to increase our commercial outreach and market intelligence. We also continue to move forward with our advanced analytics projects, especially data analysis and artificial intelligence tools that allow greater precision and speed in the analysis of scenarios and decision-making.

This increases our ability to arbitrage global markets and help us understand the present, correct best mistakes and maximize predictability and opportunities for the future. The corporate venture capital initiatives that have taken shape in the last few quarters are increasingly gaining operational maturity and have -- and are connected to our production platforms in addition to showing excellent outlook for the coming periods.

Innovation is one of our main corporate values and an essential pillar in the development of our business model. We will continue to evolve more and more of this innovation ecosystem by seeking external partnerships such as universities, research centers, unlocking opportunities and initiatives to position Minerva Foods at the forefront, thus contributing to expand opportunities for value creation in our business.

Moving on to Slide 3. I'm going to talk a little bit about the main highlights of the period. I start by talking about the gross revenue, which continues to break records. It grew more than 34% and reached BRL 9 billion in Q2 2022 and BRL 16.7 billion in the first 6 months of this year.

In the last 12 months, it totaled BRL 32.4 billion. The consolidated export revenue increased by 37% year-on-year and now accounts for 71% of our gross revenue. Export performance reflects the consistent global demand for beef and demonstrates our commercial expertise in serving international markets. In terms of our operating profitability, our EBITDA in Q2 was record at BRL 778 million, a strong increase by 43% on an annual comparison with an EBITDA margin of approximately 9%. For the first 6 months of the year, EBITDA totaled BRL 1.4 billion, a 38% increase when compared to Q2 2021.

Again, the solidity of our performance reflects Minerva Foods operational, commercial and financial excellence and especially the benefits derived from our strategy of geographic diversification such as our ability to arbitrage the markets in the current scenario volatility, which results in risk control and greater profitability.

In the last 12 months, our accumulated EBITDA totaled BRL 2.8 billion, a record on an annual basis with an EBITDA margin of 9.2%. In line with our capital discipline and commitment to a healthy balance sheet, at the end of Q2, our net leverage was reduced to 2.3x net debt over EBITDA, even after the disbursement of BRL 200 million in dividends at the end of the quarter.

Our liquidity position remains comfortable, and we closed the quarter with BRL 6.2 billion in cash, which combined with a duration of 5.2 years, gives us peace of mind and flexibility in face of the opportunities and challenges ahead. Also, our balance sheet, we have been trying to improve our capital structure in Q2. We repurchased and canceled approximately $50 million of the 2031 bond.

In the accumulated for the year, we repurchased BRL 200 million of bonds relating to 2028 and 2023. That is over BRL 1 billion, which demonstrates our commitment to research for a sound less costly capital structure with a better risk profile. Throughout our presentation of results, Edison will bring a little more details about these movements.

As a result of our operational and financial excellence and a sound balance sheet, the generation of the shareholder value remains one of the main guidelines of this management. In April, we distributed BRL 200 million in the form of complementary dividends, thus totaling BRL 400 million in dividends distributed in the fiscal year 2021.

Since 2020, Minerva Foods has already distributed more than BRL 945 million in the form of dividends. That is BRL 1.56 per share. We continue with this strategy, and we approved yesterday together with the company's Board of Directors, the distribution of early dividends in the amount of BRL 128 million or BRL 0.22 per share.

Over the past few years, the company has been very consistent in its capital allocation policy, all this with great discipline and focus on maintaining a healthy capital structure and in unlocking opportunities to generate value for our shareholders. This is a strategy that we will not give up for the coming quarters.

Moving on to other highlights. We continue to evolve on the sustainability agenda, and we led initiatives that increasingly position us as the benchmark in the animal protein sector. I highlight our initiatives in the carbon market with the development of strategic actions with an emphasis on environmental efficiency of our operations and in the pursuit for a production chain that combines high productivity, profitability and low carbon emissions.

In Q2, through our operations in Uruguay, we exported carbon-neutral beef, where the carbon footprint was audited and certified at all stages of the production chain. We also expanded the geographic monitoring of our supplier for farms, particularly in Colombia and Argentina, and we remain committed in focusing our efforts on engaging and training our livestock partners in all regions where we operate.

At Minerva Foods, we are more and more confident in the opportunities to generate value within the carbon market, such as the development of segmented products that allow access to more restricted and profitable markets. Additionally, we have initiatives to commercialize carbon credits, and we continue to work in projects focusing on the decarbonization of the agricultural chain.

All of these initiatives attached to Minerva Foods' commitment to sustainability, one of the pillars of our business model and in line with our search for a more productive and efficient chain, which is also more sustainable and amidst lower carbon. Tamara Lopes will later give you the highlights of our sustainability agenda in the first 6 months of 2022.

Before moving on to Slide 4, I would also like to highlight 2 great news for our exports. First, the certification of our plants in Brazil to export the Canadian market, which imported $1 billion in 2021. Then the agreement for beef supply with Hilton Food Solutions, one of the largest food distributors in the United Kingdom, which will help to expand our reach in such an attractive market. This is part of our strategy to move downstream through distribution in key countries.

These achievements in addition to confirming our excellence consolidate the quality and healthiness of Brazilian beef and South American beef and increasingly allow us to expand our global access even to markets with the most demanding and strict sanitary controls. This expands opportunities for local producers in South America.

On Slide 4, you will see a little bit about our operational and financial performance, and we begin with the exports. Minerva Foods performance in Q2 further consolidates one of the main competitive advantages of our business model, the geographic diversification strategy, which increases our ability to arbitrage market distortions and provides us with increasingly efficient and logistic commercials, thus maximizing our competitiveness in the global market.

On the upper right-hand corner of the slide, you have the breakdown of gross revenue in Q2. China remains the main driver of the company's revenue and account even though the numbers have decreased relative to the same period next year -- of last year. China today accounts for 36% of the total. And this is followed by Brazil, Chile, the United States, the Middle East and Western Europe, which together account for 40% of our gross revenue. This shows how good our global diversification is. I would also like to draw your attention to this information as it accurately reflects the success of our geographic diversification.

Minerva Foods through its 25 industrial units can access virtually 100% of the global demand for beef, and this allows us to act in a precise and fast way into arbitrage markets with a focus to reduce risks and maximize our profitability.

Before turning the floor to Tamara, I would like to highlight our optimism with the global beef market, in particular for producers in South America.

The outlook in the international beef market remains very promising, and the strong imbalance between supply and demand provides relevant opportunities. For example, in markets of scale and rapid income growth, such as Asian countries, also in premium markets such as United States, Western Europe and now Canada, we have good opportunities in Latin American countries, the Middle East, Eastern Europe and Africa and regions where there is greater volatility and therefore, allow great opportunities for arbitrage and value maximization.

Countries are now concerned about food inflation and security. So this yet opens another opportunity for all of these -- for all of South America to penetrate more markets. Added to this, the first signs regarding the increase in the availability of heads here in Brazil in a trend that should become even more favorable in the next few quarters. This is a contrast with other worldwide producers where there is lower availability of animals and pressure on beef production costs.

We also have health challenges such as the outbreak I mentioned in Indonesia, which threatens Australian production. And finally, a scenario of high volatility in the grain market, which naturally ends up favoring beef producers in South America.

In view of this promising horizon, our strategy is to continue to focus on our business model, maximizing our competitive advantages, investing in innovation, in niche opportunities, especially in neutralizing carbon in risk management and market intelligence to achieve more efficient and profitable commercial and logistics solution. We rely on our corporate culture, our team and we abide by our commitment to ethics and sustainability.

I'll now turn the floor over to Tamara, who will speak a little bit more about our sustainability agenda.

[Tamara Leite Ferreira Lopes, executive]

Good morning, and thank you, Fernando. The second quarter of 2022 was marked by relevant advancements in the ESG agenda in line with our commitment to sustainability as we announced in 2021. This commitment is linked on the environmental pillar dedication to the planet and has 3 main axes: environmental efficiency in operations, combating illegal deforestation and development of the Renovi program to lower carbon emissions in the value chain.

All goals are aligned with 1 of the 5 values of the Minerva Foods culture, which is sustainability. The company's pioneering spirit in combating legal deforestation in the supply chain in Latin America became even more prominent in the second quarter when we saw a greater expansion of geographic monitoring in the farms that supply directly to our operations in Colombia and Argentina.

In Colombia, more than 40% of the direct supply farms are being monitored; and in Argentina, about 90%. That totals more than 33 million hectares monitored in Brazil, Paraguay, Colombia and Argentina. Additionally, we launched SMGO prospect application at the end of 2021. This app was developed by Niceplanet Geotecnologia, and this app allows rural producers to carry out detailed research with access to the history and social environmental compliance analysis of farms that they intend to commercialize.

Minerva Foods continues to focus its efforts in training its suppliers as to the importance of using the tool through workshops, field visits and guidance materials, which are sent to the suppliers. On Slide 6, we highlight the progress made by the Renovi program in partnership with MyCarbon, the company's subsidiary focused on the development and commercialization of carbon credits which led us to the first export of a carbon-neutral certified product from our operations in Uruguay in May.

With the inclusion of the CO2-neutral seal granted by an independent organization with certification systems in more than 100 countries, Minerva Foods can ensure that at all stages of production of the certified meat, it has measured emissions promoting the compensation of those emissions from the use of carbon credits. We also implement emission reduction plans, both in the farms and in the industry.

Additionally, the company joined the Floresta Viva program, an initiative led by the BNDS for the ecological restoration of Brazilian biomes. The objective of the company's participation in the program is to contribute to the restoration of the graded areas in the states of Rondonia, Mato Grosso and Goias.

At the institutional level, the company received important recognitions in the second quarter, as you can see on Slide 7. For the second consecutive year, we were awarded the Renewable Energy sale issued by the Totum Institute in partnership with the Brazilian Wind Energy Association and Brazilian Clean Energy Association, and this for all units in Brazil.

I also highlight that Minerva Foods was the first Brazilian company to receive in all of its operations in Brazil, the certification that ensures the renewable origin of its energy portfolio and that the energy generating plants also adopt unique practices in the social and relationship aspects with communities. Additionally, the company has joined the 2022-2023 portfolio of the CDP Brazil Climate Resilience Index in April.

And finally, transparency regarding ESG matters remains a priority for the company, which published in the beginning of April, its 11th sustainability report with indicators based on the standards of GRI and SASB and on the recommendations of the task force on climate-related financial disclosures. Also in May, the company innovated by improving user experience of its ESG information through a new platform on the institutional website.

In this new platform, users will find in a user-friendly layout, more details about the advances of the company's commitment to sustainability, ESG indicators, answers to frequently asked questions as well as details about our strategic pillars, dedication to the planet, prosperity of our people and product quality and respect for life.

Check out the results of Minerva Foods ESG agenda as detailed in our 11th Sustainability Report 2021 at the link or through our website. We reinforce our commitment, transparency and focus on actions that contribute to an increasingly sustainable planet.

I now turn the floor over to Edison, who's going to talk about our financial and operational results.

[Edison Ticle Filho, executive]

Thank you, Tamara. On Slide 8, you see our operating performance and gross revenue break around for the quarter and for the last 12 months. In line with our export strategy, revenues from exports totaled 71% of gross revenue in Q2 and 69% in the last 12 months. Looking at the breakdown by region. In Brazil, exports accounted for 71% of gross revenue in the quarter and 68% in the last 12 months. In the international operations, exports accounted for 76% of the gross revenue, both in the quarter and in the last 12 months. Also, you can see the breakdown of revenue by origin.

On the right-hand side, you see that Brazil is still a highlight in both periods in the quarter and in the last 12 months and accounts for 48% and 45% of gross revenue, respectively, followed by Paraguay, Argentina and Uruguay with very similar levels in the quarter. Also, under others, we refer to the old trading division and the recently started Australian operation. As was said before, One of our main competitive advantages is our geographic diversification, which gives us the opportunity not only to redirect production as international demand moves, but also to arbitrage markets to search for operational and commercial optimization and improvement in margins.

On Slide 9, we will talk about net revenue and EBITDA. Starting with net revenue. It broke records and reached BRL 8.5 billion in Q2, a significant increase by 35% year-on-year, which reflects the strong international demand, particularly in Asia. In the first 6 months, net revenue was BRL 15.7 billion. Annualized net revenue was record totaled BRL 31 billion in the last 12 months, an increase by 33% on an annual basis and was a record level -- and was at a record level for a 12-month period.

In terms of profitability, our EBITDA was BRL 778 million in Q2, a strong growth by 43% on an annual basis and the highest level ever recorded by the company. In Q2, our EBITDA margin was 9.2%, up 5 basis points growth relative to the same period in 2021. In the last 12 months, EBITDA was record and totaled BRL 2.8 billion with a margin of 9.2%.

Looking at a longer period, our EBITDA practically tripled in the last 5 years, and this reflects not only the positive scenario internationally, but also the excellence of our operational and financial management, market arbitrage and so on. Our profitability derives from our ability to pass on prices, especially when we have a scenario of cost pressures despite recent upward movements in cattle prices, which accounts for 80% of our costs, the company has been very efficient in passing on this business to customers, especially in the export market, which is the main focus of Minerva.

As a result, we have been able to deliver a consistent level of profitability with low volatility, which is extremely important when you are in the commodities business. And this was despite the upward movement in animal prices in the South American channel and here in Brazil. This scenario is beginning to change, and we see the first signs of a reversal in the bovine cycle here in Brazil. And this should see greater availability of animals ready for slaughter over the next few months. In other words, a very positive scenario for our industry as regards to the availability of animals, especially for 2023 and 2024.

On Slide 10, you see our net leverage ratio in terms of net debt over EBITDA, which was 2.3x at the end of Q2 despite the payment of BRL 200 million in dividends throughout the quarter. Since the beginning of 2020, we have continued to report a balanced leverage, reflecting a sound capital structure and a lower risk profile, which is a commitment that this management has undertaken in 2018 to have a more balanced structure, to deleverage the balance structure, to optimize the capital structure whilst growing generation of value through operations.

On Slide 11, we show that at the end of Q2, net income was BRL 425 million. In the first 6 months, net income reached BRL 539 million. And in the last 12 months, it was BRL 762 million. On the right-hand side of the slide, operating cash flow was positive in Q2 and reached BRL 106 million. In the last 12 months, the cash flow from operations totaled BRL 2 billion and continues to be positive despite the acceleration of operations and the strong revenue in recent periods.

On Slide 12, you see free cash flow in Q2, which was positive by BRL 46 million. During the FCF buildup, we started with an EBITDA of BRL 778 million. CapEx was BRL 179 million and concentrated on maintenance investments BRL 110 million and the rest was used to expand our plants and operations. Then we have the working capital line, which consumed BRL 51 million in the quarter and the cash-based financial result, which was negative by BRL 293 million. Thus, if we add everything, we have a recurring free cash flow of BRL 255 million. Then we add the cash base result of the derivatives, which in this quarter was BRL 161 million, and you have the free cash flow at BRL 416 million in this quarter, which is very good.

In the last 12 months, free cash flow totaled approximately BRL 123 million after payments of BRL 400 million in dividends in the period. We start with an EBITDA of BRL 2.8 billion, CapEx of BRL 78 million, negative variation of working capital by BRL 600 million and a negative financial result by approximately BRL 900 million. The free cash flow was approximately BRL 523 million in the last 12 months. Of this, we decided to pay out BRL 400 million in dividends distributed to the shareholders over the last 12 months. In other words, in -- as JCP and dividends, the company returned to its investors, nearly 100% of all its cash generation in the period.

On Slide 13, you will see our net debt. At the end of the previous quarter, net debt totaled BRL 6.5 billion. In Q2, we had a positive free cash flow of BRL 416 million and is already considering the cash result of the derivatives. Also, -- and this impacts the net debt. We have a noncash impact of BRL 68 million from derivatives, and this is a positive impact, which reduces our debt, and we also have the negative impact of the payment of BRL 200 million in dividends in May.

And finally, we also have a negative impact on the debt. That is the debt increased by BRL 389 million, which has to do with the exchange rate variation of the portion of our debt with that is pegged to foreign currency, the real depreciated in the quarter. So after adding all this and building the bridge, we never ended the quarter with a net debt of approximately BRL 6.6 billion.

I would like to mention that the hedging policy continues to protect our balance sheet. Currently, our policy implies that we must have at least 40% protection for long-term passive foreign exchange exposure. And this can be seen in the explanatory notes of our financial statements. In line with our commitment to financial discipline, our balance remains protected, which makes us even more comfortable to continue to focus on the company's operational and financial execution to look for ways to generate value for our shareholders.

On Slide 14, we are going to look at the capital structure and liability management initiatives. Net debt over EBITDA in the last 12 months ended the quarter at 2.3x, a reduction compared to previous periods, even after the disbursement of BRL 200 million in dividends by the end of the quarter. In line with our cash policy, our position at the end of Q2 was comfortable and totaled BRL 6.2 billion. As for our debt, 68% of our debt is exposed to foreign exchange variation. And remember that we have a hedging policy which is strictly followed. These determines given the cost of hedging and our leverage ratio that at least 40% of our long-term foreign exchange exposure should be hedged.

This has proven to be very efficient given the recent exchange rate volatility in Brazil, and this has protected our balance sheet and the operational results that we have generated. Our debt duration is currently 5.2 years. Approximately 80% of our debt matures in the long term, as you can see in the amortization flow at the bottom of the slide.

On the right part of the slide, we show our liability management efforts that we have been implementing over the last few years. As I said in recent calls, we remain active in the secondary bond market. And we have repurchased bonds maturing in 2028 and 2031 whenever there is an opportunity. In the quarter, we repurchased approximately $50 million of the bonds mature in 2021.

In 2022 alone, we have repurchased and canceled more than $200 million of the bonds of -- for 2028 and 2031 bonds and we have reduced our gross debt by BRL 1 billion only through the repurchase of the bonds.

Looking back over the last 2 years, we have repurchased BRL 420 million. That is BRL 2.2 billion disbursed to repurchase and cancel our debt bonds. This has reduced our gross leverage and consequently, our financial expenses. The result of all this effort is also reflected in the lengthening of our debt profile. As you can see, the most relevant maturities are concentrated in 2028 and 2031. In July, we issued our 12 debenture for BRL 1.5 billion as backing for a CRA emission for 7 years, and the final swap cost was 113.5% of the CDI.

As Fernando said, and I reinforce this now, all these initiatives attests to our incident search for a less costly healthier capital structure with a lower risk profile, thus reflecting our commitment to financial discipline and our value creation strategy. Arbitrage, risk management and financial discipline are the main values for us to continue to achieve these excellent operational results.

I turn the floor over now to the operator, so we can start the Q&A session. Thank you.

[Operator]

[Operator Instructions] First question, Ricardo Alves from Morgan Stanley.

[Ricardo Alves, analyst]

Can everybody hear me?

[Edison Ticle Filho, executive]

Yes. You may go ahead.

[Ricardo Alves, analyst]

Edison, Fernando, thanks for the call. I would like to explore some international markets, beginning with Paraguay. And given the volatility we saw in negotiations with Russia in the first semester, Chile became more relevant. So what is demand looking like in Paraguay, especially if we take into account the demand from Chile in the second semester? So can you give us a little bit more color on that?

And in Uruguay, I have seen a reduction in slaughter, some processing plants have been stopped. So what is your operation like in Uruguay? Are you concerned about anything? Or is the outlook for the second semester, a positive one? So can you give me an update on these 2 markets? And then I have a question about cash generation.

[Fernando De Queiroz, executive]

So let's talk about the market first. Thank you for your question. Paraguay serves some markets which are important, Russia, Chile, Brazil, part of Europe and Taiwan, these are destination markets, which are very important for Paraguay. When demand changes, demand is arbitrated and then we can change from place and from destinations. So it's not a problem for us. We continue our operations in Paraguay as our second largest volume in terms of zloty. So things are normal.

But what I would like to highlight is our ability to arbitrage market. So moving from one origin or one destination, one country, one unit to another is one of the things we do best. And Uruguay, if you look at the first semester, it performed a lot better in terms of slaughter, and this attests to our ability to arbitrage. There is a seasonality. And of course, operations have to be adapted to the seasonality issues. What I suggest is that you should look at the total volume and the total price of Minerva in a combined manner. We will reduce operations in those places where profitability is lower and accelerate operations in those places where profitability is higher.

[Ricardo Alves, analyst]

If you allow me one more question, and this could be to Edison maybe. The improvement in cash flow was extremely fast. And once again, you paid early dividends. So there seems to be a confidence in terms of your ability to generate cash and confidence on the part of the management. So what about free cash flow for the year as a whole, considering your operational performance and also any expectations relating to CapEx, financial flows and so on for the rest of the year? And considering this new outlook, do you expect to pay out more dividends? So just an update in that sense.

[Fernando De Queiroz, executive]

Ricardo, as you know, we cannot give guidance on these issues. But what I can say in terms of cash flow generation, we are working with the same levels as last year. So there will be normal fluctuations quarter-on-quarter.

In the first quarter, the market had questions in terms of cash conversion because of working capital. And we said this was an ad hoc thing relating to China. In Q2, we proved to be right and that the concerns were not really founded. So look at our performance in 2021 and project it as a basis for 2022 in terms of free cash flow generation.

There was a worsening in working capital in the first quarter, but the situation is now more balanced in Q2, and we think it can be improved by year-end.

In terms of the profitability of operations, it's good. Volumes are growing, not only volumes, but prices as well. We saw a 35% growth relative to last year. So 13% can be attributed to volume and 22%, 23% to price, so we have been growing in a very healthy manner. And in terms of dividends, we decided to pay early dividends of the minimum legal. So this is the 25% that is mandatory after the deduction of the legal reserves of the accumulated profit for the first 6 months.

We have a policy for dividends, which has been approved by the Board. The minimum is 50% of the net income if leverage is equal or lower than 2.5x and we assess that at the end of the year when the balance sheet is approved.

What we did now to give a signal in terms of our favorable -- of our allocation of capital in a favorable manner to the shareholders is to pay out the minimum dividend for the profits in the first semester. We don't want to stop there much to the contrary. There is a policy approved by the Board, and this will be followed. Again, it depends on the results of the second semester and the publishing of the balance sheet at year-end so that we can have the final numbers for dividends and publish these numbers. And then whenever we think it makes sense from the point of view of allocation of capital, we may pay early dividends, but probably they will be in line with the minimum legal mandatory dividends because this is what makes sense in terms of cash management until we close the balance sheet.

[Operator]

The next question comes from Mr. [indiscernible]

[Unknown Analyst]

Fernando, Edison. I would like to touch upon 3 points. The first question comes to Fernando. I think the outlook you have been sharing your vision is very clear in terms of the imbalance between supply and demand and the positioning of South America. But can you give me a more short-term vision in terms of Asia and China? We saw a brutal pickup in imports this year. Prices reached record levels in Q2. So can you give us a little bit more color about the demand, especially in terms of price? Do you believe that these levels is kind of sustainable in the second half of the year? Or were these levels driven by like the recomposition of inventory, especially after Brazil was banned from exporting in 2021?

And then the second question, and I'm looking at the consolidated margin here, and your strategy to arbitrage in terms of origin in different geographies gives me the impression that the driver of margins in the quarter might have been Brazil. Can you confirm that? What was the performance of Brazil in terms of margin or EBITDA margin? Was it better than the performance of the company as a whole, which was 9.2%? And also in terms of freight, freight seems to have been the culprit in terms of sales expenses in the quarter. Can you tell us a little bit about freight and whether it looks more like normal, like business as usual?

[Fernando De Queiroz, executive]

Your questions are all very relevant. We are penetrating the Chinese market to look at the trends. Unlike other countries, the new consumer in China is a young consumer who is buying from a different channel. Consumers in China, beef consumers are now in Tier 1 and Tier 2 cities. These are young people up to 35 years old, who are high income. They are the new middle class, and they no longer consume meat in food services. The pandemic has changed the habits.

This is a very interesting signal. I don't know if you noticed that, but there was a fluctuation in the price of pork. There was an excess supply, the price of pork dropped in the first semester, but this did not affect the demand or the price of beef. So unlike what we see in other countries, pork and beef are now on 2 different tracks. There is no relationship between the anymore.

So beef is being sold now to a younger audience, to young consumers who see beef as an aspirational product. And also, they are buying from a different channel. Young people, they don't cook pork meat at home, but they do cook stakes. And this is what explains this delinking between the consumption of beef and pork and is delinking from prices as well.

In terms of freight, this is not normal, and we do not believe that in the next 3 years, anything will look like normal. So [ refer ] has increased very sharply there was some disruption in the supply disruption in the supply chain. So there are destinations which have become a lot more expensive. We have a ship fleet, which is larger. They are more efficient. They're coming on stream. And in some South American ports, you have limitations regarding the size of these ships, which won't be able to operate in South American ports.

So we have to look at this new fleet, and we have to gauge the benefits. And this, of course, has to do with the port infrastructure of South American countries, which is really not the best, to be honest. Edison is going to address your second question.

[Edison Ticle Filho, executive]

The answer is yes. freight has increased up to 200% for some destinations. So SG&A has grown disproportionately relative to the revenue, but this has to do basically with freight. Fernando has talked about some of the reasons, but actually, what happens is that freight is more expensive now. And in terms of margins for countries, Brazil contributed the highest. Brazil, then Paraguay, then Argentina and then Colombia and Uruguay in this order.

If you take the separate margins, but we work with a consolidated margin, there are many sources of income that comes from the arbitrage. So you move from one country to the next in terms of origin, new arbitrage and you push beef from one country to the next to supply the domestic market. So this conclusion about the countries which have the best margin is difficult to draw because of our strategy that focuses on arbitrage. But if we want a brief answer, yes, Brazil was the biggest contributor.

[Operator]

[Operator Instructions] Our next question comes from Mr. [ Almeda ].

[Unknown Analyst]

Fernando Edison. There are some points I would like to raise. We have been talking about M&A, allocation of capital. So I wanted to understand with this macroeconomic scenario that we see now with an increase in interest rate. Do you still have the same view in relation to M&A? Or are you of a new understanding now? Also, can you talk about liability management? I think you have worked on that more recently. But going forward, what do you see happening in that front?

And then in the domestic market, some plants enjoying blank holidays? And what about Mexico? How is the situation for you in Mexico? And last but not least, in terms of export of neutral-carbon beef, who is buying these products? Is it food services? Is it retailers? What is the premium today and going forward? And in terms of volume, how much would that be? I would like to understand what this can represent.

[Fernando De Queiroz, executive]

So I'm sorry, I missed the second question. The first one was about M&A. And the second one?

[Unknown Analyst]

No, about domestic market in Brazil with plants in blanket holidays and so just to give us a little bit more color about that.

[Edison Ticle Filho, executive]

Okay. So I'll take the first question. In terms of M&A, we haven't said anything specifically. We have a business plan. We have a strategic approach to grow in Colombia and Australia. We have talked a lot about it. And this continues. It's still on the table. It's still the same strategy. What I highlight is capital discipline. Our commitment towards having a balanced capital structure and optimal structure, lighter, less costly, and we have delivered on that. We are not going to relinquish our financial balance to engage in M&A.

We can do something. Like in Colombia, we doubled the operation in Colombia through an acquisition, and we didn't jeopardize our balance sheet. We have been generating a lot of free cash flow from operations. So we want to use this operational cash to do M&A. The responsibility, the discipline is the same.

And now I turn over to Fernando.

[Fernando De Queiroz, executive]

First, in terms of domestic market. If you look at Slide 4, we show the breakdown of revenues in Brazil is the second or the third largest destination. Brazil is the second or the third largest destination, but also -- in terms of revenue, sorry. But it's not only about local production. Brazil is also a destination of exports from Argentina, Uruguay and Paraguay. And it's a very important destination.

And with this, I mean that, yes, Brazil's domestic market is important, and we are going to serve the market from where we can get the largest profits. In terms of market, we see something really interesting. There is a polarization of consumers. You're either working with hyper-premium markets. So the market is becoming more premium on one side and then you have down trading on the other side. So in Brazil, people are consuming either cheaper products or hyper premium products. And we have to be competitive and generate value in the hyper-premium segment.

And as you know, we have special brands such as [indiscernible] which have increased penetration in the market. And then on the other side, in the down trade side, we can position those products which look more like commodities. As regards carbon-neutral products, we cannot disclose what the channels are. What I can say is that B2B, especially global accounts, either industries or retail or food services, all of them are now concerned about decarbonization. All of them are looking for products which are carbon neutral, not only on the part of the farm, but also in the chain, 1, 2 and 3. So what we never did was to get ready to serve this niche, which is growing and demanding more and more from us.

[Operator]

Our next question comes from Mr. Gustavo Troyano.

[Gustavo Troyano, analyst]

Fernando, Edison. I would like to understand a little bit more about the recent numbers in terms of export prices at CSX. You -- there was an expectation regarding a reduction in prices, but this recent variations are they in line with your planning? Is there any factor that has a greater explanatory power? So anything you can share with us would be very helpful and much appreciated.

[Fernando De Queiroz, executive]

The demand at the macroeconomic level continues to be strong. There are seasonalities in different places, and they are different. And we monitor what happens in each market on a daily basis. The data provided by CSX are limited because they analyze average prices. So if you have a mixed operation, you may conclude that there was an increase, an improvement or worsening in prices, which is not necessarily true.

What I would like to highlight, Gustavo, and you can refer to a slide where we have the breakdown of our revenues, is that our revenues are more diversified in those countries where we operate. So diversification has increased dramatically, and it breaks our dependence from any one single market. So the diversification is healthier for us because we are serving more markets, especially we are serving all importing markets or export markets from one of our origins or any of our origins.

I would now like to turn the floor over to Mr. Edison Ticle, who's going to take the questions received on the Q&A icon.

[Edison Ticle Filho, executive]

I'm going to try to summarize and Mathios asks what is the percentage of volume for Brazil and China? China, 76%. More details about risks for Australia having to do with the foot and mouth disease in Indonesia. Do you want to take that?

[Fernando De Queiroz, executive]

The viruses have been detected in airports in Australia. The alerts are now maximum. If a flight of tourists from Indonesia arrives in Australia, they have to work on special carpets, they have to go through this infection chambers. There is panic and the alert is very high in Australia. Yes, there is a risk because there is a flow of living animals from Australia to Indonesia, and this flow should be reduced. This shows that there should be an export -- reduction of export of leaving animals from Australia to Indonesia. And this opens the door for us to export to Indonesia. It's an opportunity for us.

[Edison Ticle Filho, executive]

Ricardo asks about the crisis in Argentina, the impacts on our performance and what measures we are taking.

We are following from a very close range what's happening in Argentina, and we have prepared the company to export increasingly more and also in our processing plants and fresh products. So we can provide consumers with lower cost products. There is a trading down in the country because of the high inflation and the available income. The operation is doing well. The margins are relatively good. We have been monitoring the crisis from a very close range.

But in the end, we believe this is going to be good for us. It's a classic crisis, balance of payment. So depreciation of the currency should go -- should be the route for them, and this will benefit exporters.

Marcelo asks about the EBITDA margin in Q2.

We published that it's 9.2%. And in Q3, what we see is that things are looking very similar in line with what we saw in Q2.

The other question is the outlook about -- for the prices of beef. Do we expect any reduction in view of the global recession?

And we answer, no. Fernando has given you an outlook. Prices have grown very strongly this year. They should remain stable by the end of the year, but this is good news because the prices are now at the highest level ever seen in dollars in history. So there should be a leveling up and this is healthy, I would say.

We have no more questions from the webcast. I'll now turn the floor over to the operator.

[Operator]

We now end the Q&A session. And I turn the floor over to Mr. Queiroz for his final remarks.

[Fernando De Queiroz, executive]

I would like to finish this video conference by thanking you all for participating and by reaffirming that our outlook for the second semester is positive. In terms of a global scenario, South America should take more space because of its competitiveness and access to the market. There are positive things in the pipeline, new markets opening to South America, and we should see that in Q -- in the second semester.

Additionally, I would like to say that the instruments that Minerva has available, allow our teams to lead and to navigate in volatile scenarios. This allows us to bring in more value and to generate more value for our shareholders.

And I end by thanking the team, our team is our highest value, a team that works together different divisions, working together, interacting and speaking one language, leaving according to one culture, 22,000 people thinking and acting in the same direction. Thank you very much to all. Thank you very much to the Minerva team, and we remain available should you require any further clarifications. Thank you very much.

[Operator]

Minerva's conference call is now ended. If you have questions, send them to the IR team by e-mail. Thank you so much for participating, and have a nice day.

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