Minerva SA

BOVESPA:BEEF3

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Operator]

Good morning, ladies and gentlemen. Welcome to Minerva's Second Quarter Earnings Release Conference Call. Joining us today are Mr. Fernando Galletti de Queiroz, CEO; and Mr. Edison Ticle, CFO and IRO. This presentation is being recorded and simultaneous translation is available by clicking on the interpretation button. [Operator Instructions] Please note that statements that may be made during the video conference call regarding Minerva's business prospects, operating and financial goals are based on projections made by the company's management, which may or may not materialize. Investors should appreciate that political, macroeconomic and operating factors may affect the company's future and lead to results that differ materially from those expressed in such forward-looking statements. To begin the earnings release conference call for the second quarter 2024, I will turn it over to Mr. Fernando de Queiroz, CEO, for his presentation. Please go ahead, Mr. Fernando de Queiroz.

[Fernando De Queiroz, executive]

Good morning, everyone, and thank you for joining us on Minerva Foods Earnings Conference Call for the Second quarter 2024. Minerva has concluded the first half of the year, delivering robust operating and financial results, thereby reaffirming the consistency and discipline of our business strategy. Once again, the company has demonstrated that geographic diversification is a key pillar of the operational and commercial execution of our business model, reducing risks, maximizing our arbitrage capacity and strengthening our corporate strategy as the largest beef exporters in South America. In Q2 '24, our gross revenue totaled around BRL 8.2 billion, with an EBITDA reaching BRL 745 million and an EBITDA margin of 9.7%. In the first 6 months of the year, EBITDA has added up to approximately BRL 1.4 billion. And over the last 12 months, gross revenue has reached approximately BRL 30 billion. with an adjusted EBITDA of BRL 2.7 billion. Free cash generation, a priority for the company continues to be a highlight, having reached BRL 404 million in the quarter, adding up to BRL 771 million in the semester and over BRL 1.5 billion LTM in Q2 '24. Our sound cash generation performance continues to contribute to our capital structure, which concluded the quarter with a stable adjusted net leverage of 2.98x net debt over EBITDA. As in previous quarters, I would like to comment on the acquisition process of selected Marfrig assets in South America. That is the acquisition of the 16 industrial plants in Brazil, Argentina, Uruguay and Chile. Minerva Foods continues to work with antitrust agencies to conclude the process as soon as possible so that we can begin our own process to integrate the new assets. We remain optimistic regarding the final approval by regulatory authorities, and we'll keep the market updated on any developments on this topic. As usual, in our conference calls, before moving on to the highlights of the quarter, I would like to share with you a little of our vision regarding prospects for the global animal protein market. We remain confident of the opportunities and prospects of the global beef market. The imbalance between supply and demand remains one of the main drivers for the industry. The United States continues to face complex constraints on animals ready for slaughter, which, combined with a resilient demand ends up putting pressure on the availability and prices of beef in the American market. We producers in South America are benefiting from the severe restriction since we're going through the opposite time of the cattle cycle, especially in Brazil, but there are also positive indicators in Paraguay and Uruguay. This context leads to direct benefits in terms of accessing the American market, and that is becoming clear quarter after quarter by the increasing exposure of Minerva Foods to the U.S. Furthermore, reduced supply in the U.S. unlocks opportunities in other international markets. In other words, this is a unique opportunity to expand the global reach of beef produced in South America. In that context, Minerva Foods geographic diversification strategy has once again demonstrated its effectiveness, having enabled the company to arbitrage operationally and commercially among its markets of origin and therefore tap into the best opportunities in our industrial park. As a result of the strategy and our footprint in the South American continent, we continue to obtain new permits, such as Paraguay's recent approval to export beef to Canada, yet another major consumer market in the NAFTA region. Hence, now 3 of Minerva's plants in the country are qualified to export to this market with a capacity of approximately 6,300 heads a day. It's worth mentioning that currently a large part of our industrial park has access to all markets in the NAFTA region, and our products are exported to the United States, Mexico and Canada. Finally, I couldn't fail to highlight the distribution and domestic market, especially in Brazil, which has been achieving very resilient results and has posted a considerable increase in revenue on an annual basis. We continue to advance with favorable prospects in the domestic market, a reflection of the work that has been put into strengthening our brands and maximizing our commercial reach, bringing Minerva Foods and its product increasingly closer to end consumers. Now let's go back to our performance in the second quarter '24 on Slide 2. Starting with gross revenue, which totaled BRL 8.2 billion in Q2 and BRL 29.9 billion in the last 12 months. Exports accounted for 61% of the consolidated gross revenue in the quarter and 63% year-to-date. They remain one of the company's main operational drivers and confirm our ability to arbitrage and access to the international market. Now moving on to our operating earnings. EBITDA in the second quarter reached BRL 745 million, 5% up from the previous year, with an EBITDA margin of 9.7%. In the last 12 months, Minerva Foods' adjusted EBITDA totaled BRL 2.7 billion with a margin of 96%. I'd like to highlight our free cash generation, which reached a significant BRL 404 million in Q2 '24, adding up to approximately BRL 1.5 billion in the last 12 months, a result that reflects the company's operational, commercial and financial excellence. Finally, speaking of our capital structure, we concluded the semester with a stable adjusted net leverage of 2.98x net debt over EBITDA, which combined with our solid cash position of BRL 16.5 billion puts us in a comfortable liquidity position for the next quarters. Let's now move on to Slide 3 and take a more detailed look at other highlights for the second quarter. As I mentioned at the beginning of the presentation, the imbalance between supply and demand continues to provide us with excellent commercial opportunities in the global beef market, including the opening of new markets, such as is the case of the approval of 3 of our plants in Paraguay to export to Canada. Also, in the second quarter, we have continued to advance our sustainability agenda, one of Minerva Foods main corporate values. For yet another year, we have achieved 100% compliance in sales with direct supplier farms in the Amazon Biome based on the social environmental criteria established in the public livestock commitment. Q2 '24 also brought news from the Renove Program and MyCarbon. New technical corporation agreements have been signed and new projects aimed at generating carbon credits starting at the end of 2026 have been certified. We have also made progress with the exports of over 300 tons of products from the 0 carbon impact line in the second quarter, especially to premium markets such as NAFTA in Europe. In the institutional sphere, we have published the 13th sustainability report base year 2023, which follows the main internationally recognized framework such as GRI, SASB and TCFD and it was also verified by an independent audit. It is worth mentioning that Minerva Foods as in previous years, is the first company in the industry to publish its report a testament to its pioneering role in the sustainability agenda. Now let's turn to Slide 4 to talk a little about Minerva Foods export performance in Q2 '24. In the second quarter, we continue to lead beef exports from South America with approximately 20% market share in the continent. Once again, reaffirming the competitive advantages of our geographic diversification strategy and our exporting DNA. The quadrant at the top of the slide shows the gross revenue breakdown by destination for Q2 '24. The Americas region was the main growth revenue driver with a total of 36%. Brazil being the highlight with 18% and Chile with 7%. Next, we have Asia with 21% of total gross revenue, with China accounting for 14% of those. The NAFTA region represented 15%, consisting mainly of the U.S.A., which accounted for approximately 13% of our gross revenue. I'd like to stress the resilience of demand from emerging markets, in particular, Asia and the Middle East, which continue to be relevant destinations for our exports with around 43% of the combined market share. Furthermore, I'd also like to draw attention to the performance of the North American market. The U.S. have stood out as an important consumer market, accounting for 19% of our consolidated exports or approximately 13% of the company's gross revenue, a reflection of the restrictions on beef production in the region and which naturally opens up opportunities for exporters in our continent. This scenario should become even more marked in the coming quarters, not only due to strong American demand, but also the impact on neighboring countries such as Mexico and Canada, which with the recent permits of South American producers should fast track the demand for beef from our continent. Minerva Foods currently has access to the NAFTA market through plants in Brazil, Argentina, Uruguay and Paraguay. In the bottom right-hand corner of the slide, we provide more detailed information on the performance of our exports for both our beef operations in South America and our lamb operations in Australia. Starting with our cattle operations shown on the 2 charts on the left, Asia continues to stand out in the quarter, totaling 27% of our exports revenue, followed by NAFTA with 19%, the Middle East was 16%, the Americas with 15%. And in the last 12 months, Asia was also a highlight, accounting for 33% of our revenue, followed by the Americas with 18%, NAFTA with 15%; CIS with 13%; and the Middle East with 11%. Finally, I'd like to reiterate once again the current cattle cycle momentum in South America, particularly in Brazil, where there have been wide availability of animals and record slaughter volumes over the last few months, a trend that should continue at least until the end of 2025. I cannot fail to mention the resumption of animal availability in Paraguay and Uruguay, markets that are expected to expand their supply and production volume over the next 4 years. Going back to the results, the graphs on the right show our operations in Australia, whose main destination is NAFTA with a 38% share, followed by the Middle East with 24% and Asia, representing 21% of exports of the country in the quarter. Europe and Oceania came next with 11% and 4%, respectively. In the last 12 months, NAFTA also remained the main destination with a 38% share. Asia following closely behind with 23%, followed by the Middle East with 20%, Europe with 9% and Oceania with 7%. Before turning the floor over to Edison, I would like to once again reiterate our optimism with the coming quarters and the prospects for the global animal protein market. Recent permits continue to point to great opportunities ahead. The mismatch between supply and demand continues to create a favorable scenario in the market, mainly due to the favorable cattle cycle in Brazil and the negative cycle in the U.S. Add to that, the availability of labor, which in the U.S. is increasingly scarce. Furthermore, I'd like to underscore once again our ability to arbitrage in the international market, thereby mitigating risks, maximizing our operating efficiency and adding value to our operation. For the second half of 2024, we remain confident of our strategies in business, always attentive, focusing on risk management and pursuing increasingly efficient and profitable operating commercial and logistical solutions. Now I'll turn it over to Edison, who will talk about our financial and operating performance.

[Edison de Andrade Melo e Souza Filho, executive]

Thank you, Fernando. Let's now turn to Slide 5. On Slide 5, we're going to talk about Minerva's operating performance and gross revenue, both for the second quarter '24 and the last 12 months. In line with our focus on experts, the international market accounted for 66% of our gross revenue in the quarter and 64% LTM Q2 '24, excluding the Others division. Breaking down by region, exports in the Brazilian operations reached 58% in the quarter and 60% in the last 12 months. In our LatAm operations, excluding Brazil, exports accounted for 70% of gross revenue in the quarter and 69% LTM. The lamb operation in Australia was no different. Exports reached 82% of gross revenue at the end of Q2 '24 and 71% in the last 12 months. Now on the right-hand side of the slide, we have the breakdown of revenue by Origin. Brazil continues to stand out, representing 46% of gross revenue in the quarter and 49% LTM, followed by Paraguay, which became the second main origin in the quarter was 16% and 15% in the last 12 months. Argentina contributed 14% to the revenue in the quarter and 9% in the last 12 months, while Uruguay attained 11% and 13% revenue in the quarter and LTM, respectively. Australia accounted for 7% of our revenue, both in the quarter and the last months and Colombia had 4% share in our revenue breakdown in Q2 '24 and LTM. Finally, the Others line item, which refers to the former Trading Division contributed 2% of our revenue in the quarter and 3% in the last 12 months. Moving on to Slide 6, we'll discuss net revenue and EBITDA. Let's start with net revenue, which reached BRL 7.7 billion in the second quarter, '24, 5% a year and 7% quarter-on-quarter. In the last 12 months, Minerva's net revenue added up to BRL 28.1. As for earnings, EBITDA in Q2 was EUR 745 million, up 5% year-on-year and 18% quarter-on-quarter, resulting in a margin of 9.7%. In the first half of the year, EBITDA reached BRL 1.4 billion, in LTM Q2 '24, our EBITDA added up to BRL 2.7 billion with an EBITDA margin of 9.6%. Again, on this slide, I'd like to draw your attention to the constancy and consistency of our margins over recent quarters, a testament to how assertive our geographic diversification strategy is and how it allows us to extract maximum efficiency from operating park as well as arbitrage, reaffirming our excellence in operational and commercial execution and especially in risk management of this commodity. We're very happy to share these results. There's a lot less volatility than we usually see across other commodities. And we attribute that strongly to our risk management strategy, our beef desk, our choice meetings and so on. There's a whole framework that applies to our daily management here at Minerva Foods. Now moving on to Slide 7, we'll talk about financial leverage. Our leverage ratio as measured by the net debt over EBITDA indicator for the last 12 months came in at 2.98x at the end of Q2 '24. And as a reminder, this indicator is adjusted by BP's pro forma EBITDA of BRL 11.6 million from the 2 months prior to the incorporation of this asset and does not consider the down payment of BRL 1.5 billion, referring to the acquisition of Marfrig assets in South America. We didn't consider that because the acquisition has not yet been completed. And therefore, there's no contribution from that EBITDA to the company. Now let's turn to the next slide to discuss net profit and operating cash flow. Our net profit in the quarter was BRL 95 million, even with a considerable noncash impact of FX variation in the quarter. Over the last 12 months, the impact was over BRL 1 billion. Over the last 12 months, net profit added up to approximately BRL 70 million. And moving on to the right-hand side of the slide, we can see the operating cash flow in the quarter, which was positive BRL 766 million and roughly BRL 4.2 billion year-to-date in the last 12 months. Here, I'd like to highlight Minerva Foods excellent operational and financial execution, which even in circumstances of great volatility continues to deliver very robust and consistent operating cash generation. Let's move on to Slide 9 to talk about free cash generation, one of our organization's main management drivers and objectives. On Slide 9, building up the cash flow for this quarter. We started with an EBITDA of BRL 745 million, and the working capital line consumed BRL 700 million in the quarter, especially due to the accounts receivable item. That line is predominantly dollar-denominated. So it ends up being impacted by FX variations and increase in sales in the international market. So those 2 factors drove that account. Our CapEx for the quarter was approximately BRL 204 million, primarily spent on investments in maintenance, BRL 50 million in the organic expansion of our operations and as a result of our hedging policy and the instruments to protect our balance sheet. The financial result on a cash basis was positive BRL 564 million. Thus, we have reached a recurring cash generation of approximately BRL 404 million in Q2 '24. I would also stress that in the semester, free cash generation added up to approximately BRL 771 million positive. Looking at year-to-date results over the last 12 months, free cash flow was positive BRL 1.5 billion, already taking into account all the impacts of the acquisition of ALC and BPU in the quarter. Building up our cash generation, we started with an EBITDA of BRL 2.7 billion, a CapEx of BRL 773 million. Then we have a positive working capital variation over the last 12 months, BRL 516 million and the cash basis financial result, which was negative by around BRL 713 million. Adding up all the variables, we arrived at a recurring free cash flow of BRL 1.7 billion for the last 12 months ending Q2 '24. And to that, the acquisitions of LCL and BPU, our cash flow reaches a total of BRL 1.5 billion, resulting in an annualized free cash flow yield of approximately 40% compared to the company's current market cap. Again, I'd like to highlight and acknowledge our team's effort and dedication in keeping focus and discipline required to deliver solid cash generation, which is a result of Minerva Foods financial and operational strategy, which we pursue every day here at Minerva Foods. Now on Slide 10, we'll discuss the bridge of our net debt. At the end of the previous quarter, our net debt added up to BRL 7.5 billion for the debt bridge in Q2 '24, we've had the benefit of a total free cash generation of BRL 404 million, reducing the debt. The effect of FX variations with an impact on the debt of BRL 1.3 billion, and that has an impact of our gross indebtedness and increases the debt. And we also have about BRL 278 million positive related to noncash derivatives. Adding up the variables and building up the bridge, we arrived at a net debt of BRL 8.1 billion at the end of the quarter. Here, again, I'd like to highlight the efficacy of our hedging policy, which even in a quarter with highly volatile FX has managed to effectively protect our balance sheet. Let's move on to the next slide, where I will comment on our capital structure. On Slide 11, as I mentioned previously, net leverage measured by net debt over adjusted EBITDA. So adjusted by the pro forma BPU performance and excluding the advanced payment for Marfrig's assets in South America, it ended the quarter at a stable 2.98x. Following our very conservative cash management strategy, we concluded the second quarter on a comfortable liquidity position with approximately BRL 16.5 billion and a debt duration, which is also comfortable of approximately 4.6 years, and approximately 86% of our long-term debt, as you can see is in the amortization flow at the bottom of the slide. As for our debt profile, roughly 76% of our debt is exposed to FX variations. And allow me to remind you that we follow our hedging policy to the letter, which establishes that the company currently must hedge a minimum of 50% of long-term FX exposure. And this policy, again, I will repeat, has proven to be very effective and very efficient over the last few quarters. I'd like to reiterate once again that the company continues to actively pursue an increasingly balanced capital structure with a lower risk profile and less burden. Finally, as Fernando mentioned, with regard to the acquisition of new assets, we continue to focus on completing the final stages of the process. We are awaiting approval by the regulatory agencies so we can begin the integration process as soon as possible. As soon as we have any updates, the company will inform the market. Now I turn the floor back over to the operator, so we can start the Q&A session. Thank you very much.

[Operator]

[Operator Instructions] Our first question is from Henrique Brustolin from Bradesco BBI.

[Henrique Brustolin, analyst]

I have a couple, please. The first one, looking at Brazil, the impact or benefit that you'll probably have from a devalued real will probably not be reflected in the second quarter results. So how do you see the profits in the country progressing over this quarter and especially now starting Q3. How do you see that benefit reflecting on the company's results? So that's the first question. The second question is about exports to the U.S. It's interesting to see that they're still ramping up, considering Brazil's quotas being fallen, what is your export mix to the U.S. between Argentina, Uruguay and Brazil? And specifically about Brazil, how do you see profits from exports even extra quota? So those are my 2 questions.

[Edison de Andrade Melo e Souza Filho, executive]

Since there was an FX depreciation in this quarter, the profitability in exports in the quarter have improved. But as you said, our average export price and our profit considered an average exchange rate that was below the current exchange rate. So what we expect and what we have been seeing in the first few weeks of the third quarter is that earnings at the front are much better than the average of the second quarter when we talk about exports. So that shows us that margins will be at least in the middle of that level in the third quarter. And looking at exports, especially considering the exchange rate from the end to the middle in the third quarter. Let's wait for the end of the quarter. But obviously, the third and fourth quarter are usually the best quarters in the year. So we're optimistic considering our earnings for the next quarter. Those exports to the U.S. reiterate what we've said about the U.S. cattle cycle, but more than that it's about the competitiveness that South America will have. There are 2 ways to fatten the cattle, grains and pasture. And obviously, the cost caps has opened significantly. So regardless of the U.S. quota, Brazil and South America have been proving to be highly competitive. And considering the FX policies in each country, in Brazil, also Paraguay, which is going to step into that space. And so geographical diversification in South America, which is Minerva's main strategy has proven to be highly effective and showing results that beef is a North-South trade, and we are occupying more and more space regardless of the quota systems.

[Henrique Brustolin, analyst]

Just as a follow-up question to the second one, please. Was there any significant difference in your export mix, especially to the U.S. in the second quarter. So considering the quota Brazil and Argentina and Paraguay have open quota. So I just wanted to know whether there was a large difference or if you continue with the same export mix.

[Fernando De Queiroz, executive]

Well, Argentina's quota and Uruguay's quota account for 20,000 tons and they have a linear division across the months and distributed based on company's performances. So there has been no dramatic change in Brazil for these other origins. But South America as a whole is becoming increasingly more competitive to our markets. The U.S. is just one more example.

[Operator]

The next question is from Leonardo Alankar from XP.

[Leonardo Alencar, analyst]

I have a couple of questions and I may ask for a bit more color. So I'd like to start with Argentina. There were some recent news, if you could comment on the reduction of retentions in exports also for beef, and that was recent. So we're talking about heifers and beef. So if you could talk about Argentina, in general, processed meat, fresh meat, do you think the situation in Argentina is going to improve? So my first question is about Argentina. Second question is about Brazil. The slaughter volume has increased considerably. It's still a bit low, but still coming in strong in the second quarter. The first quarter, strong slaughter volumes in Brazil. So part of that was going to be exported, but a lot of that was going to stay in the domestic market. The bigger ones were probably closer to 0 idleness in your bigger operations. So record export volumes in July. So if you could talk about your prospects for the second semester because if you export are not support, there may be more beef in the second semester as expected. So will domestic demand be enough to support the margins that you have been seeing? So if you give me a bit more color on that dynamic, that would be great. And if I may ask a third question, the Others line drew my attention. There was a drop in it. It used to be more representative, especially concerning Colombia, and that has had a reduction. So what's in that Others revenue, please?

[Fernando De Queiroz, executive]

Leo, so let's start with Argentina. The environment in Argentina is improving gradually. The first main impact for us was the reduction and the difference between the official dollar and what they call the blue dollar was reduced to close to 0. So it's a level playing field of competitiveness for all companies. As for the change in export taxes, that's good news. Manufactured products are not highly consumed in Argentina. So the incentive to the export does bring about competitiveness, but the government is giving positive signs that it will interfere less, there will be less restrictions. We no longer have the compulsory restrictions on some cuts to the Argentinian market. We're very optimistic about Argentina and the curve is already showing growth. So we're very positive about what's going to happen in Argentina and we'll recover a strong brand here. As for Brazil, based on our studies, we see the cycle in Brazil will be prolonged. We don't see a reduction in it. We concluded the month with a personal slaughter record in Brazil. We celebrated that over 200,000 heads were slaughtered, which goes to show a very positive dynamics. So there's a lot of innovation going on in Brazil. You're aware of that. The integration with other crops with livestock, Would you like to jump in about the others line?

[Edison de Andrade Melo e Souza Filho, executive]

Well, if you look at the second quarter '24 and '23, there was a 33% drop, mainly due to the exports of live cattle. So there's been a considerable reduction and the idea is to discontinue that operation. So that's why there has been such a reduction since then. In the first quarter, there was a 17% drop which is normal, especially considering our energy generation, there are some seasonal peaks, and it's volatile. That's why it's in the Others line. So you can expect some volatility in that line, but it's becoming less and less relevant. It's between 2% and 3% of the company's total revenue quarterly. And once we conclude the acquisition of the new assets in South America, the relevance will drop by 40% to 50%. So it'll become less and less relevant.

[Leonardo Alencar, analyst]

Just as a follow-up question, Edison. This continued the live cattle operation. Could you provide some more color on that, please?

[Edison de Andrade Melo e Souza Filho, executive]

Yes, we're gradually discontinuing our live cattle operation because of the volatility in revenue and return on invested capital is good, but it's becoming less relevant. And to our strategy, especially in line with our objectives of ESG, it no longer makes sense in terms of risk and return to keep that operation going. Some of the assets we had that were related to that operation, we have disposed of over the last 12 months. Probably by the end of the year, we should discontinue that operation at Minerva.

[Operator]

Our next question is from Gustavo Troyano from Itau BBA.

[Gustavo Troyano, analyst]

My first question is about the U.S. Your ability to increase your export mix to the U.S. has been discussed for a while. But what I'd like to hear from you is going into '25 and assuming a scenario where cattle supply continues to drop in the region. Do you think that export mix will continue to increase? And if so, I'd like to understand up to what point to try and understand if you might discuss new permits or increasing the quota considering that scenario? My second question is also about the change in export mix. Could you talk about the working capital cycle. Will that change? So as you increase your exports to the U.S. I'd like to hear from you what the difference in the export cycle from Asia to the U.S. will be so we can try to understand what the impact will be on your working capital cash flow as that change takes place, if that is indeed your basis scenario.

[Fernando De Queiroz, executive]

And let me add another country to the equation for 2025. For the U.S. we're seeing a huge reduction in slaughter. There will be a reduction in the slaughter of cows and it will have an impact on the production of calves. The U.S. is an operation where Minerva has a distribution operation in the U.S. So we're opening new markets, both in food services retail and meat packing. It's a very active market. We're looking for alternatives. Beef in America is part of our mix of Brazil, Argentina and Uruguay, we're very well positioned to have an increase. We think that there will be a premium in the U.S., but there will be a trade down, and that trade down will favor beef from South America. Considering our distribution structure in the U.S. it might have an impact on our working capital. So Edin will talk about that. Well, you know that when we increase exposure to riskier markets, the counterpart is that you have to increase prepayments. Therefore, there's an improvement in working capital. The same way, when you diversify to less risky markets, as is the case now that we are reducing Asia and increasing the U.S. naturally the working capital cycle worsens temporarily due to these new markets and the credit policy we work with when it comes to these clients. Now if you work at our working capital worsening, this quarter, BRL 700 million. It's in the receivables account. Half of that is due to the FX effects from receivables, 70% to 80% of our receivables are dollar denominated. So the FX depreciation has a direct impact, increasing that account in BRL, but not necessarily having grown in terms of volume. It's just a translation from dollars into BRL. That was roughly BRL 300 million this quarter. There are BRL 390 million, BRL 400 million are related to the increase in the operation indeed. If you compare this quarter to the first quarter this year, the operation is accelerating by 16% to 17% in terms of volume. So that does require more working capital. And based on the trade down of our sales going to less risky markets, then you have a longer cycle. Now looking at a snapshot for the year. In the second quarter, we consumed 700. We're consuming 350, 380 in the year up until July. Our projection for the year would be to repeat what we've done in the last couple of years, which is to have a flat working capital consumption or maybe another BRL 100 million, BRL 200 million for the year. We still see the same scenario for this year. So we believe this change in the second quarter will be a one-off. We'll be operating closer to this mix of the second quarter, and we do not expect any additional working capital requirements until the end of the year. There will be fluctuations and volatility, but we still believe that by the end of the year, we'll be delivering on target close to 0 or BRL 200 million TOPS. Gustavo, I mentioned China in that equation. And Dino has just put it very well when it comes to working capital in the U.S. What we're also doing is to monitor how China has been slaughtering animals this year. China has the third largest herd, but producers are decreasing their herd, similarly to what we saw happen in the U.S. So it's very likely that there will be a lack of internal supply and China will go back to this equation to this market, and it will be very relevant.

[Operator]

[Operator Instructions] Our next question is from Thiago Duarte from BTG Pactual.

[Thiago Duarte, analyst]

I have a couple of questions. The first one is about the margins. Gross margin was really good. Historically speaking, one of the best for the second quarter, but it was partly offset by the SG&A, at least when we look at the revenue percentage. So I would imagine the company is getting ready to integrate the assets that will be coming in. And I would imagine that this is part, if not the whole of a heavier SG&A structure. So does that assumption makes sense? And does it explain that potential issue? And my second question is to Edison about hedging. As you mentioned, your hedging strategy was key, especially this quarter. And I get the feeling considering the quarter as a whole, we can only see a snapshot of the balance sheet at the end of the quarter. But you are practically fully hedged over the quarter. So I'd like to hear from you what kind of hedging can we consider looking forward? I know that your minimum policy is 50%, but 50% to 100% is quite a lot. So I'd like to hear that from you.

[Fernando De Queiroz, executive]

So we'll start with the hedging because it's easier. Our policy is established by a metric that takes into consideration the cost of hedging and the company's leveraging. So if you look at our leveraging and the cost of hedging, the recommendation is to hedge 55% of our long-term debt and 10 plus or minus 10%. So it's not 50% to 100%, 50% to 65%. Now, we are at 57%, but that plus or minus 10% is discretionary. So it's up to me and my team to make that decision based on what's happening in the market. I think I've answered your question. About the first question on SG&A, there has been an increase of about BRL 35 million, and that can be split into '18 to '19 to EPU consolidation expenses. So BPU has increased that when compared to the second quarter 2023. But the BPU's margin that's coming in now because of what's happened in Uruguay is worse than the company's average margin. So SG&A, given the integration of BPU ends up being disproportionate as if it had the same gross margin and EBITDA as the rest of the company or if it had a bigger margin, it would dilute that cost. That's why if you look at it as a percentage, it looks higher. And the other part, the remaining increase in SG&A has to do with the second quarter where we have increased the payment reimbursement where we've paid bonuses to employees, a large part of that has to do with our competence regime quarter-by-quarter but it's been realized in the second quarter. There's no relevant integration expenses. It's important to say that because we'll be using less structure we have hired some people, expanded our staff to prepare the team and our management structure for these new plants, but that's not relevant. We have always highlighted that as a huge synergy potential of this deal. We will be bringing in assets and variable costs, but no fixed cost. So fixed cost will be considerably diluted. So it will not affect that line, Thiago.

[Operator]

[Operator Instructions] If there are no more questions, I'd like to turn the floor over to Mr. Edison Ticle to read the questions in writing.

[Edison de Andrade Melo e Souza Filho, executive]

First question is how long do we expect the regulatory approval to take for the acquisitions. Well, there's a legal term that says that given the date we made the request on this should take place in the fourth quarter. So sometime between October and December. That's what we expect officially.Luis asks when you announced the purchase of Marfrig assets, the dollar was 4.95. Net debt over EBITDA was 5. Now the dollar is about 5.60, but had the acquisition become cheaper. If so, will the multiple go down to 4.60, 4.70. Well, we have always thought that we'd be able to extract quite a lot of value from that acquisition. So a higher EBITDA than expected. With that, the acquisition multiple and the payback of the acquisition would go down to figures lower than what we had estimated. Now that the dollar has gone up, and our exporting profile, profitability of exports improved at the end of the second quarter. It's even better in the third quarter than it was in the second quarter, which was better than the average of last year. Therefore, the answer to your question is, yes, we can't estimate by how much, but definitely looking at value-generating drivers and what we can extract from acquisition, they're much better and much clearer than when we made the acquisition. Although I think we're the only ones who see that, I don't think the market is still looking at that in any detail. Considering the price of the share right now, why not buy back your own shares? The decision to buy back shares is made by the board, not by the management. However, it is discussed in Board meetings and obviously, we're waiting on the decisions made by the regulatory agencies so that we can have a more in-depth discussion about what to do in terms of capital allocation. And obviously, now speaking as the CFO and in charge of our balance sheet, there is an objective to deleverage the company and to use all the resources. And when we consolidate the acquisitions to have as the priority goal to deleverage the company. And that has been said by the Board that, that is the main goal for this management. If that priority changes, then the discussions might change. But right now, the Board and we are in line with the Board, we agree believes that the best use for our generated cash is to deleverage the company. Pedro Satius is asking, if we can wait, expect that the approval of the acquisition of assets in Uruguay will still happen in the fourth quarter this year and the integration as well. As I said, we're working based on legal deadlines. And they say it will be between October and December. So that is what the company expects to be the official deadline for all the assets acquired. Based on the cattle cycle, can we expect a down cycle in Brazil being offset by Uruguay and Paraguay? Well, speaking of cycle, we're very optimistic about the cycle in Paraguay. In Brazil, we disagree from market analysts. We believe that it will continue to be good in '25, not only continue to be good, but we believe that productivity gains and the better use of females have made the bottom and the top of the cycles to have changed significantly. So the number of animals that are ready for slaughter, even at the most negative, this favorable part of the cycle, we believe that the number of animals is about 3 million to 4 million heads more than it was in 2020 or 2021, which was the floor of the last negative cycle. And the same goes for the positive side of the cycle, which we had about 30 million heads ready for slaughter year. That number has also changed, and it's now closer to 37 million, 38 million heads in the positive side of the cycle. There have been structural changes that are important. I don't see any analysts looking at that. We'll try and provide more color on that, especially when we do get the regulatory approvals. The company is fully focused on obtaining those approvals, but we're very optimistic, structurally speaking, about the cattle cycle in Brazil than most analysts. So in answer to your question, Brazil and Paraguay still have very positive cycles in 2025 and the number of heads ready for slaughter will be at a higher level than what we've seen in the last 5 to 10 years. And Uruguay will possibly go into a positive cycle as of 2025. Let me check if there are any more questions. The price of beef, we're very optimistic. As I've said, Fernando mentioned that when he talked about exports and towards the domestic market, results to our surprise, have been better than we had imagined for the year. That's it. The other questions are about the approvals for the Marfrig deal. I've already talked about that. Do we have a guidance for second semester of '24? Can we expect the same impact? Yes. Our projections and simulations are compatible with those of the market. There are still valid. We have shared those with the market. And we do not have a guidance for liability management. We're always ready to make the most of market opportunities. In terms of dividends and costs, our objective is to have an optimized capital structure and especially less burdensome. There's a question from Guilerme from Santander. So I'll turn it back over to the operator.

[Guilherme Palhares, analyst]

I had some technical issues. I'll be quick. If you could comment on the breakdown of the company's financial results, there have been positive results in terms of the cash impact of derivatives and the net interest on the cash basis.

[Eduardo de Toledo, executive]

If you look from a recurring point of view, with a higher level of gross debt, the expected expense will be BRL 450 million for the quarter. If we look at liabilities, minus revenue at our cash. The FX hedging for the quarter, if we look at all these interest expenses, liabilities, financial expenses, look at the hedging, it has contributed with roughly EUR 800 million to the cash. That's why the cash financial expenses were just over $500 million. The contribution from hedging was about $800 million on a cash basis.

[Operator]

The Q&A session is now concluded. And I will turn it over to Mr. Fernando de Queiroz for his closing remarks. Please go ahead, Mr. de Queiroz.

[Fernando De Queiroz, executive]

Thanks, everyone, for this conference call. Before we conclude, I'd just like to reemphasize the opportunity and the space that South America has been occupied recently. More open markets, higher penetration in the existing markets. So what we had estimated for South America, 40% to 50% trade globally is coming to fruition. Again, we have proven our operational excellence, our focus, our discipline and how much geographic differentiation can bring us in terms of efficiency. Minerva's exporting DNA has proven to be increasingly more effective with a commodity that is becoming increasingly more global. We continue to be confident in the company's consistent results. And lastly, I would like to personally thank Minerva's team for their focus and for how they're preparing for the integration of these new assets. Again, after 19 acquisitions, we're now moving on to the 20th acquisition. We definitely have to face challenges but I feel very confident in our team. I'd like to congratulate our team in the operation and the specific integration team. After all, our company is committed to sustainability, not only environmental sustainability, but financial sustainability. So connecting people, food and nature. Thanks once again. And we're here for you if you need anything, if you have any questions, just reach out. Thank you.

[Operator]

Minerva's earnings conference call is now concluded. For further questions, please contact the Investor Relations team at [e-mail]. Thank you for joining us, and have a great day.