Minerva SA
BOVESPA:BEEF3
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Minerva SA
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Good morning, ladies and gentlemen, and thank you for waiting. At this time, we would like to welcome everybody to Minerva's Third Quarter of 2018 Results Conference Call. Today, with us, we have Fernando Queiroz, Chief Executive Officer; Edison Ticle, Chief Financial Officer; and Eduardo Puzziello, Investor Relations officer. We wish to inform you that this event is being recorded. [Operator Instructions] The audio and slide show of this presentation are available through a live webcast at www.minervafoods.com/ir and MVIQ platform. The slide show can also be downloaded from the webcast platform in the Investor Relations section of this website.
Before proceeding, we wish to mention that forward-looking statements may be made during the presentation relating to Minerva's business prospects, operating and financial estimates and goals. They are based on the beliefs and assumptions of company management and on information currently available. They involve risks, uncertainties and assumptions because they relate to future events, and therefore, depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the future results of Minerva and could cause results to differ materially from those expressed in such forward-looking statements.
I will now turn the conference call over to Mr. Fernando Queiroz, CEO, who will begin the presentation. Mr. Queiroz, you may start the presentation.
Thank you very much. Good morning, everyone. And thank you for participating in Minerva's conference call on the results for the third quarter of 2018. We will begin the presentation talking about the highlights for the quarter.
Let's have a look on Slide 2, where you can see the main highlights. Minerva closes the third quarter of 2018 with positive operating cash flow of BRL 406.5 million and a positive free cash flow to equity of BRL 93.5 million. The company consolidated gross revenues totaled BRL 4.6 billion in the third quarter and BRL 16.6 billion in the last 12 months, which was once again a record revenue for the company. Therefore, the company keeps achieving revenue records. The breakdown of gross revenue by division shows that Brazilian Industry Division contributed around BRL 2 billion, or 43% of the total gross revenue in the quarter, while Athena Foods, formerly the International Industry Division which corresponds to our operating in Argentina, Paraguay, Uruguay and Colombia, this division generated BRL 1.8 billion, or 40% of the total and the Trading Division contributed to BRL 782 million, or 70% of the total. The normal consolidated exports, which accounted for 61% of revenues in the third Q of '18, recorded a revenue increase of 32.3% over the third quarter of the previous year and around 12% over the second Q '18.
Net revenues totaled BRL 4.3 billion, moving up a substantial 27% over third Q '17. In the last 12 months, and in September, net revenues coming -- came to 16 -- BRL 15.6 million -- BRL 15.6 billion, up 46% year-on-year.
Third quarter EBITDA reached BRL 449 million, 44% moderating the third Q of '17. The EBITDA margin stood at 10.4% in the quarter in the last 12 months, reached BRL 1.5 billion, up 40% year-on-year with an EBITDA margin of 9.3%.
Regarding our capital structure, leverage measured by the net debt over LTM EBITDA ratio was below 5x at the end of the quarter, despite the depreciation of the real in the period. Our cash position came to BRL 4.2 billion at the end of September. It's also important to mention our cash policy of having an amount sufficient to buy raw material for the last -- for at least 3 months carries equivalent to BRL 3 billion. Last week, we announced that our tender offer for our perpetual bonds, which are currently our most expensive debt at the annual coupon of 8.75%. This shows Minerva commitment to its strategy of accelerating deleveraging. Moreover, on September 30, the duration of our debt corresponded to an average of 5.4 years. It's important to mention that we accounted for 21% of the South America beef exports in the last 12 months and in September. This result maintains our position as the leading beef exporter in South America. Considering the USDA latest beef exports estimated, which indicated the reason this is responsible for around 34% of global exports, Minerva accounts for around 7% of the total beef exported worldwide.
Finally, I would like to highlight that based on the results, we are maintaining our net revenues guidance for 2018 as between BRL 15 million to BRL 16 million.
We'll now move on to slide 3, where we will talk about Minerva performance beginning with our exports. In Brazil, we accounted for 40% of exports in the third Q '18 and our exports revenue and volume climbing -- climbed 16.5% and 12.8% over second Q '18.
In the last 12 months ended September 30, revenues grew 13% and volumes increased 8% over the same period in 2017. In Paraguay, our market share was 42%, maintaining our position as the country's leading exporter. In Uruguay and Argentina, our share of beef stood at 17% and 18%, respectively. Finally, we were the leading beef exporter in Colombia with a market share of 82%. As I said, when I was talking about the highlights in the last 12 months ended, Minerva maintained its position as the leading South American exporter with a market share of 21%.
Let's have a look on the Slide 4, where we talk about exports by division. Right for -- in the Brazilian Industry Division, Asia and the Middle East were the main destinations in the last 12 months ended September.
Together, these 2 reasons accounted for 54% of the divisions' exports in this period. This figure corroborate the recent estimates that growing demand for beef has been concentrated in these 2 regions. This increase in conception in Asia and Middle East is closely related to the utilization and development of process, as well as the utilization of habits of consumption pattern. And this is fully aligned with our strategy of being present in the main markets of these regions. At Athena Foods, former International Industry Division, the main exports' destinations were Asia, with 34% of the total exports. In Americas, we were 22% with the highlights achieving.
I also think it's important to mention growth in the Commonwealth of Independent states, the CIS, which accounted for 80% of exports, 10% points are more than in the same period of 2017. The result is a clear reflection of the growing demand in Russia, which has been served by Athena Foods in December 2017.
Let's move on to the next slide to talk about the domestic market performance. Regarding our focus in the domestic market, we have been working to root our product search while [ resilient our ] clients such as small and medium sized retailers and mainly to the food product segment that compromise (sic) [comprise] snack bars, restaurants, [indiscernible], steakhouses, which represents around 56% of the total domestic sales from January to September 2018 in the Brazilian Division. It also shows the segmentation in the spring of our sales in the domestic market.
As you can see, in the local sales from the Brazilian market, we gradually grew the [indiscernible] sales, which are niche -- that's -- which are higher, profitable. The resale of third party represents 37% of the Brazilian domestic market in the year-to-date, with one-stop-shop strategy guaranteed to customers, a wide option of products, such as frozen fish, vegetables, cheese, pork, lamb, among others. Talking about Athena Foods, the domestic market's positive performance during the 9 months of 2018 was due to our strategy of repositioning the proceeds -- the processed product under the brand of Swift in Argentina. And also to the sales of fresh beef to more than 60,000 points of sale, mainly in the physical distribution and in traditional retail. We also follow the same strategy in the division, focusing on the small and medium sized retailers and food service all across South America. I'll now give the floor to Edison, who will discuss Minerva financial and operating highlights.
Thank you, Fernando. We present now Minerva's financial operating highlights, beginning on Slide 6. Gross revenue from the Brazilian industry division, which is approximately BRL 2 billion in the third quarter, a growth of 8% when compared to the third quarter of '17. Gross revenue from Athena Foods, which is BRL 1.8 billion, up 63% over third Q '17, as is shown in the chart in the top right corner.
Gross revenue from the Trading Division reached BRL 782 million, 13% higher than the revenues in the same period of last year. As mentioned at the beginning of the presentation, breaking down the revenues, we can see that Brazilian Industry Division contributed for 43% of the company's gross revenues in the quarter while Athena Foods and the trading division accounted for 40% and 17%, respectively.
Let's go to the next slide to talk about other financial results. So the company's consolidated net revenue reached BRL 4.3 billion in the third quarter '18, up 27% over the third quarter of last year. On the top right corner, we have -- we can see our third quarter EBITDA, which reached approximately BRL 450 million, 44% growth when compared to the third Q of '17. With an EBITDA margin of 10.4%, up 130 basis points over 3Q '17. Talking about the capacity utilization, in the third quarter '18, the Brazilian Industry Division operated with a utilization rate of 78%, while Athena Foods reached a capacity utilization rate of around 82%, so as a result of the company's consolidated capacity utilization, it stood at around 80%, up almost 5 percentage points over the second Q of '18, and almost 3 percentage points more than when compared to the 3Q '17. These competitive utilization levels are considered ideal and have been gradually increasing since the acquisition of the plants in Paraguay, Argentina and Uruguay in July last year.
The net debt-to-EBITDA ratio in the last 12 months ended the quarter at 4.97x, slightly decreased when compared to last quarter. It's important to highlight that the dollar appreciated more than $0.15 against the real between the end of the second quarter and the third quarter. And this could have hampered our results, since 80% of our debt is [indiscernible]. Nevertheless, leverage did not increase in the quarter due to the strong operational cash flow generation recorded in the quarter together with some measures that we took to hedge part of the long-term exposure.
Now let's move to Slide 8 to discuss net results. In the quarter, Minerva had loss of BRL 132 million, however, if we adjust this result for non-cash effect of the FX variation and for the hedge results, the company would have posted a positive profit in the period of around BRL 78 million.
Moving to next slide, let's talk about the operating cash flow. The third quarter operating cash flow reached BRL 406 million, working capital variation was negative by BRL 133 million, and this working capital conception was mainly caused by two factors. The first one was the receivables line that increased due to a higher volume sold in the exports that have longer payment terms. And the second factor was the Suppliers' line. Having mind that in the quarter -- in the third quarter, we worked during the off-season, so marked by a little over cattle supply. So in order to keep the supply of cattle at reasonable level at -- and at the reasonable prices, we used cash payment term in order to benefit for this constant increase of the cattle supply during the off-season.
On the other hand, we had a positive result in the other payable clients in the Customer Advances account. As we have already explained in accordance with our credit policy, we require for -- from some customers and from some countries to have advanced prepayments to start production of the product. So in this case, the advanced prepayment helps us to reduce the cash conversion cycle and allows us to reduce the working capital need. In the last 12 months, operating cash flow was positive by around BRL 844 million. And the working capital requirement was positive by BRL 66 million.
Let's now move to Slide 10 to discuss free cash flow. In the nine months of 2018, the EBITDA including nonrecurring items reached BRL 1.1 billion. BRL 145 million was spent in CapEx, BRL 644 million negative was the financial cash results and the working capital contributed positively to the operations with more than BRL 100 million. So in the 9 months ended in September, the company was able to generate BRL 389 million of free cash flow in the period.
In the quarter, the company generated BRL 450 million of EBITDA and as a result, we generated a free cash flow of BRL 94 million just in the third quarter.
Let's move now to slide 11 to talk about the company's capital structure. So as we have already mentioned, our leverage measured by the net debt-to-EBITDA ratio stood at approximately 5x at the end of the quarter. It was pointing again that despite -- in spite of the appreciation of the dollar of more than 4% in the quarter, we are able to keep leverage virtually flat thanks to cash generation, higher EBITDA and hedge strategy.
Our cash position in the quarter came to BRL 4.2 billion in line with our policy of keeping an amount of cash and cash equivalents at least 3 months of purchase of input, leaving us in a pretty comfortable situation to deal with volatile and adverse scenarios. Approximately 86% of our debt was exposed to the exchange rate variation, however, 50% of our long-term net exposure is hedged, and the duration of our debt today is around 4.4 -- 5.4 years.
As Fernando mentioned in the beginning of the presentation, last week, when offered a tender offer to purchase -- repurchase our perpetual bond -- those bonds, they had 8.75% of annual interest payments and they are the most expensive bonds in our debt, so we decided to launch an offer to repurchase the bond using the proceeds of the capital increase that will be concluded next week.
The current amount -- the current outstanding amount of the perpetual bond is $291 million, and I expect to buyback all the bonds in the tender offer during November or if there are remaining outstanding bonds, we're going to call all of them in April so the perpetual notes will be 100%, call it, until the beginning of April.
On next slide, let's discuss Athena Foods results. So as we announced in the second quarter of '18, we stripped through the hole on its subsidiary, called Athena Foods in Chile, and we're conducting this company's IPO on the Chilean market. I would like to remind you that Athena is equivalent to our former International Industry Division and covers our operating activities in Paraguay, Argentina, Uruguay, Colombia and our distribution activities in Chile.
We included Athena Foods income statement on this slide to give you a broader view of our operations in this company. As you can see, we ended the third quarter with net income of approximately BRL 118 million, and EBITDA of around BRL 122 million with a margin of approximately 6.7% in the quarter.
In the first 9 months of the year, net income reached BRL 240 million, a net margin of around 5% and EBITDA reached BRL 327 million with a margin of 6.7%. Please note that some production units that make up Athena Foods, we acquired in July 2017, and were operating with narrow margins. So this result reflects the hard work of turnarounds that we have been doing in the past 12 months and the successful integration of those new units into our company's framework.
Let's now move to the next slide, where we will briefly talk about net revenue guidance. Last quarter, we announced our net revenue guidance for 2018 between -- in a range between BRL 15 billion and BRL 16 billion. Using an exchange rate of BRL 3.70 per dollar and ARS 27 per dollar. In the last 12 months, our net revenue reached BRL 15.6 billion, so we are inside the range and that's why we are keeping this guidance for next quarter.
Now let's move to the last slide of the presentation to talk about the current private capital increase transaction that we opened until November 14.
So as we have already announced, that the private capital increase was approved by the Extraordinary Shareholders' Meeting held on October 15, and the process was [ ticked ] off on the following days. We decided to add this slide to help some investors understand the full process flow until it is concluded. This slide is part of the subscription booklet that is available in our Investor Relations website and presents more detailed information, so I believe it's worth reading, this material. This slide shows an example of our shareholders who owned 100 shares in October 15. From October 16, after -- immediately after the Extraordinary Shareholders' Meeting, this investor received 74 BEEF1, which are the subscription right. For the subscription rights, give these investors, the shareholders the right to participate in the capital increase on a proportional basis. So as the capital increase, it will be carried out through the issue of up to 165 million shares, the amount of shares of each shareholder will correspond to around 74% of disposition on the day the capital increase was approved. The shareholders, who participate in the capital increase, will receive 74 BEEF9, which has the subscription receipt, after the end of the subscription period.
As an additional advantage, I also explained the material [ effect ] dated September 12. For each subscriber's share, the shareholder will be granted with a subscription warrant, which will be traded on the stock exchange under the code of BEEF11. This subscription warrant is valid for 3 years and can be converted into BEEF3 shares at any time during the maturity. So it behaves like an American call option. In approximately 10 days after the end of the subscription period, the BEEF, the 74 BEEF9 receipts will be converted into 74 BEEF3 shares and the shareholder will be in their position with 174 BEEF3 shares and 74 BEEF11 subscription -- BEEF 11 warrant.
Lastly, and as this is the last slide from our presentation, I would like to take the opportunity to invite you all to participate in our annual public meeting, Minerva Day. In New York, Minerva Day will take place at Nasdaq on November 19, and is supposed to take place at Grand Hyatt Hotel on November 26.
The IR department has already sent an invite through our distribution list and we will also make it available in our website with link to subscribe. So we look forward to seeing you all. And now let's begin the question-and-answer session.
[Operator Instructions] The first question is from Alex Robarts of Citi.
Actually, I have 2 questions and they both relate to Brazil beef. The exports, very robust here in the quarter, better than most of our estimates on The Street. And you talk about incremental demand from Asia and the Americas. I guess those 2 regions together about 40% of your Brazilian beef exports. Could you comment on the quality of that incremental demand, is it seasonal? I mean the Americas, really is because the Chile seems to have almost doubled the importance in your mix, and I'm wondering is that perhaps coming from the new distribution that the KBS assets have given you there? So if you could first of all, just give us a sense of the quality of this incremental demand in Asia and the Americas, if it's sustainable in the short term?
What's the second question, Alex?
Okay, I was going to wait for the answer, but no, listen. I think in the end, it's the cattle cost trend. We've been really seeing pretty favorable arroba prices as we come into the rainy season, we're well off the 2016, 155 peak levels. What is your view in the short term for the cattle pricing in Brazil? That's the second one.
Right. So first on the sustainability of the growth that South America is having both on China, Southeast of Asia that's not only China, it's mainly drive by China and in Americas driven by Chile. I would add to that the growth that the Middle East and North of Africa is having. So Middle East and North of Africa, it's also a growing area where you have better distribution of income. And there's no segmentation in the markets there, so it's very sustainable. This area and this part of the world [ will never be ] producers in volume and there is a growing demand. And the kind of product that they require, both on the premium products and on the commodity products, have South America as the main supplier. So with first step with highlight on Middle East and North of Africa.
Second, the biggest growth is coming from Asia -- Southeast of Asia, in [ specialty ] China, that they are changing their habits. The amount of fast food chains, the amount of their -- westernization of their habits, is playing a very important role on the growth of the demand. So there, you want to see us -- well, a premium market, a commodity market [ that ] will be used for further processing like burgers, sausages and these things. So this area, we are seeing a decrease in the size of the herd for there'll be more in products. Overall, the only place -- the only region in the world that is growing with supply, it's on South America. And there is a decrease in traditional suppliers like Europe and especially in Australia. Therefore, we are seeing a very sustainable demand for South America.
Talking about Chile is the last one in South of Americas in general. Chile has a very small size of the herd that they have important -- they are very important markets that we have income, the per capita income in the misconception start of the habits of the chicken. So it's driven also a very sustainable demand.
We are supplying more to these countries, not only from one origin, but through all the origins that we can. Just like Chile and supplies by Brazil, by Argentina, by Paraguay, some things from Uruguay, Russia, that's some other market that's important. We also supply by 3 or 4 countries that we are originating. So we see the growth of the demand and the bridges within South America and the important countries only being stronger. In fact, the countries are getting more specialized in what they produce and producing capital is linked to the availability of water, that South America has plenty. In terms of cattle cost, what we are seeing that we are in the low season, and therefore the cattle traditionally goes up during this period of the year. What we are seeing is that in the last 5 years, Brazil broke records on birth of calves. Therefore, the availability keeps increasing, but, luckily and strategically, the demand keeps increasing as well. So we do not see any surprise for cattle price. We see that during the high season, that starts next -- early next year, depends on the rain, it will be another very important and sustainable year for the production in Brazil and in South America in general.
Very helpful. Now that was clear. If I could just have the follow up on Chile, sorry, and I know it's a relatively new market, with the Athena Foods and such. It was the one market that you didn't really show us the market share number, at least as I could on the press release, but in -- could you comment a little bit about, are you gaining share in Chile? Is the market growing in Chile faster than other markets? And is it a fair assumption to have that you would be seeking to get perhaps some -- at least some double-digit share in that market?
Well, we are in double digits share, all the meat that is imported into Chile, 40% is coming from Minerva or Athena operations. So we are by far the most relevant exporter in each of the Chilean market. What that -- you don't have that there because Chile is a consuming and distribution market, it's not a producing market. What we showed in our slide was the share that we have of exports, also of the origins that we produce.
The next question is from Andrew De Luca of Barclays.
I wanted to go back to some comments you guys had in September when you mentioned the Mercosur assets were requiring more working capital than you expected. Can you just give us an update in terms of the additional working capital investments, if any, that are required for the Mercosur business?
Mercosur business required more working capital just after the acquisition. So in the fourth quarter of last year, we invested almost BRL 400 million -- more than BRL 400 million in working capital. The majority was in the Mercosur asset. Since then, we have been in the process of integration, the process of turning around those operations and for now, as you can see, the capacity utilization around 82%, we can see that the Mercosur assets are in a much more stable operation and we don't expect additional requirements of working capital in the short term.
Great. And then my second question is with regards also to working capital and the [indiscernible] in Russia, and now you being able to export from Brazil, how do you see the market evolving as a percentage of Brazilian revenues?
Well, it's hard to predict, there are only a few plants that approved other things and if the new plants approve it, we hope it will because Russia has always been a relevant market for Brazil. But to predict how much percent of the total Brazilian exports will go to Russia, it's practically impossible without knowing what -- what's the number of plants that will be approved.
There are no additional questions at this time. This concludes the question-and-answer session. At this time, I would like to turn the floor back to Mr. Fernando Queiroz for any closing remarks.
I'd like to thank you for participating in our conference call about the outstanding results that we showed on the third Q. I'd like to highlight that this is a result of very detailed strategy and in a very efficient execution of the strategy of diversifying Minerva into South America. That is the area of the world that is occupying more space and more share in international trade. So I would like to thank you all for supporting and for following [ us on new stratagem ] and finally, I would like to thank all the Minerva team for being aligned with the strategy and support in every day, in every hour, in every moment of the strategy that we have implemented. So thank you very much. We remain at your disposal for any further clarification or any further information that you may require.
Thank you very much.
Thank you. This concludes today's presentation.
You may disconnect your line at this time, and have a nice day.