Minerva SA

BOVESPA:BEEF3

Earnings Call Transcript 2020-Q3

[Operator]

[Audio Gap]

This was the third -- Minerva's consolidated gross revenues is about BRL 2 billion in free cash flow in the last 12 months and reflects the company's solid operational financial performance. Minerva's consolidated gross revenue came to BRL 5.4 billion in 3Q '20. And the last 12 months, the company record was BRL 19.7 billion. We'd like to say that this accounts for the Minerva exports, which is 70% of the gross revenue in the last 12 months, which reflects high worldwide demand and Minerva's focus on beef exports.

Now the third quarter came to BRL 554 million, and a notable 22% increase over 3Q '19 was 10.8% in the last 12 months. As a result of this performance we have, this past quarter, added to a sweeping total of BRL 583 million the first 9 months of the year.

Another highlight of this quarter was the strong financial position. As of the close of the quarter, our leverage ratio, that is the net debt-to-EBITDA ratio over the previous 12 months, it was 2.2, the lowest since 2008 and right in line with our strategy to reduce leverage and improve capital structure.

Minerva ended the quarter with a comfortable cash position of BRL 7.3 billion, which gives us breathing room amidst the challenges of the times and perfectly aligned with our conservative cash management strategy.

Another 3Q '20 highlight is related to the operations in our second plant in Colombia, in Vijagual plant -- which can slaughter 700 heads a day -- is in the ramp-up phase and expected to double operation volume in Colombia through 2021, contributing to the Athena Foods performance.

I would also like to take the opportunity to highlight other recent achievements. The first one is our investment in Clara Foods. Clara Foods is a new innovative start-up in Silicon Valley and a pioneer developing animal-free protein through fermentation. Our $4 million investment in Clara Foods follows the guidelines of our venture capital fund to invest in start-ups and technology companies. And this brings us new opportunities to Minerva.

More good news. Two of the largest international credit rating agencies upgraded our ratings this past quarter, Fitch and Standard & Poor. This is a clear reflection of reliable financial management for many years running, leading to a reduction of debt and improved capital structure, another very important achievement.

And as a result of Minerva's excellent performance in 2020, the Board of Directors has voted on advanced dividend payments to shareholders, representing to 25% of the cumulated net profit year-to-date, BRL 138 million. This movement as well as the recently approved share buyback programs underpins management's commitment to generate value for the company's shareholders.

Lastly, I would like to point out that with us on this conference call today, we have Mr. Taciano Custodio, Director of Sustainability of Minerva Food. He will be discussing some of the company's initiatives and achievements in terms of sustainability, one of the pillars of our business model and our main competitive advantages.

Let us move on to the next slide to talk a bit more about Minerva's operational performance this past quarter.

Starting with exports, Slide 3. In this third quarter 2020, we strengthened our position as the largest beef exporter in South America, with a market share of approximately 18%. These numbers reflect our geographical -- geographic diversification through the continent, which, together with the help of our 16 international offices, gives us a competitive advantage and favorable position in global beef exports.

Now let us dive down into regional export performance for the Brazil division. Asia accounted for 56% of export revenue over the 12 months, a tremendous increase of 31 percentage points over the same quarter last year. Asia was also the primary destination for Athena Foods exports this quarter, accounting for 38% of the division's total exports. The export performance has made it abundantly clear that there is growing demand for beef in Asia, especially in China, but also for other markets, such as Singapore and Philippines and Malaysia. We expect heavy growth in these markets in the forthcoming quarters.

Finally, I believe it's important to stress that market forecasts continue to be quite positive. We expect a number of very encouraging economic and market factors to positively affect our business.

The first is African swine fever virus, which continues to impact Chinese pork. Bear in mind that the outbreak is not limited to China and has spread throughout Asia and parts of Europe, recently hitting Germany, the second largest pork producer. Additionally, we are witnessing changes in eating habits in the Southeast Asia as a result of growing urbanization and higher income. And also we have persistent offers in some relevant suppliers, the world's biggest beef suppliers, which is Australia. This opens more doors for South America beef producers in markets in Asia and the Middle East.

In light of this promising outlook, Minerva's strategy is to continue maximizing our competitive advantages to invest in innovative niche opportunities, risk management and market intelligence to ensure increasingly more efficient and profitable commercial and logistics solutions.

[Foreign Language]

We have aspired and pursued all of this while honoring our commitment to sustainability. This sets us apart for the competition and increased business opportunities.

I'd now like to turn the floor to Edison Ticle.

[Edison Ticle Filho, executive]

Thank you, Fernando. I'd like to start with Slide 4. Starting with the operating performance and the breakdown of the company's gross revenue by division in 3Q '20, the Brazil division accounted for 48% of the company's gross revenue, Athena Foods accounted for 44% and division trading for the remaining 8%. This quarter, we noticed a slight improvement in the Brazil plants, and thus operating capacity increased approximately 5 points over the last quarter, nearly 68%, the best rate thus far this year.

Now in Athena Foods, we operated approximately 77% capacity, higher than the previous quarter and a reflection of growing export volumes to China in our plants in Argentina and Uruguay. As a whole, the company's plants operated at 73% capacity this quarter. As mentioned earlier, these rates are still below our historic operating rates of about 80%, that are expected to remain below par for the duration of the pandemic.

Finally, on the right-hand side of the slide, we've included consolidated exports by region, the third quarter, as well as for the 12-month period ending September. As Fernando already mentioned, Asia is our leading export destination. Its response accounted for 42% of our consolidated exports, and China alone, 31% of total exports. In the last 12 months, the Asian continent accounted for 47% of Minerva's exports.

Moving on to the Slide 5, there was the net revenue of BRL 5.1 billion in this third quarter, 14% over the first Q. And in LTM, third Q, net revenue total is BRL 18.6 billion and a 10% increase year-on-year, and an EBITDA margin of 3 -- of BRL 554 million, a solid 22% increase year, with an EBITDA margin of 10.5%.

Let's now talk about leverage. Well, this is measured by the net debt-to-EBITDA ratio over previous 12 months, was 2.2, the lowest ratio close to -- since 2008. Despite nearly 40% depreciation of the dollar over a year-to-date basis, in dollars our leverage ratio at the close of the quarter was 1.9. Minerva's leverage ratio today reflects management's commitment to a more efficient, balanced, less burdensome and lower risk capital structure. This is an issue that we've been discussing and communicated since our follow-on in January and that we have done very well. And we are being able to show level of deleverage way above market expectation.

I would like to also take this opportunity to point out that this quarter, there's an important warrant exercise, including those held by SALIC, adding BRL 397 million to our cash balance this quarter. We still have BRL 381 million in warrants that must be exercised by year-end 2021. Once exercised, these warrants enter our cash flow and this helps in our leverage, adjusting of the leverage of Minerva, so it will be reduced to 2 digits.

Let's talk about net earnings and operating cash flow, Slide 7. We saw net revenue came to BRL 58 million. After calculating for income and social taxes, net revenue totaled BRL 583 million in the first 3 quarters. As Fernando mentioned, the Board of Directors approved [ this advanced ] dividend payment. We have accumulated a legal reserve of 5%, and amount to be paid as dividends will be BRL 0.26 per share, excluding treasury shares.

I would like to point out that following our dividend policy guidelines approved earlier this year, after a year, the year-end results, the company will complement the dividend payout considering the anticipation made on some tenders.

So the dividend policy, we state that every time our leverage level, measured by the net debt, debt, EBITDA LTM and the fiscal year is at a level equal or below 2.5x, the minimum dividend payment will increase 50%, which -- from which 25% are mandatory dividends and 25% are complementary. Therefore, Minerva's anticipating part of the dividend, and by year-end with 2020 financial results, the company will announce the total dividend value for the entire year [ and surely ] discount the anticipated amount.

Minerva's shares will trade ex dividends since November 9, and the advanced dividend payment will be concluded in November 13. This reflects not only the excellent performance, but also our solid risk management model, which has been key in reducing leverage and building a solid capital structure. And this generates value to our shareholders.

Let us move to our cash position. Cash flow for operations came to BRL 955 million this past quarter. And working capital came to BRL 491 million in Q3 due to a positive supply line variation of BRL 796 million, though the operating cash flow for the last 12 months stands at a positive BRL 3.6 billion.

On Slide 8, we will now talk about free cash flow. So the third, it was positive for the 11th quarter running, totaling BRL 595 in the third Q '20, building up EBITDA this quarter, not adjusted for nonrecurring items, totaled BRL 540 million, and investments came to BRL 131 million.

Keep in mind that Fernando mentioned that we acquired Vijagual meat packing plant in Colombia, which is for a total of approximately BRL 75 million, which is included in the BRL 131 million account. Cash basis, income came to a negative BRL 319 million, and especially impacted our bonds, interest payment, considering a depreciated for FX rate. Working capital expenses totaled BRL 491 million, excluding nonrecurring items totaling approximately BRL 14 million to -- designed to address the novel coronavirus. From BRL 2.1 million, with a total of CapEx to the last 12 months, cash basis loss came to BRL 226 million and a variance of cash flow needs to -- came to a positive BRL 450 million. And if we add these to the EUR 39 million for nonrecurring items, we reach a free cash flow of BRL 2 billion in the last 12 months, a reflection of Minerva's solid economic performance.

Now we compare this to the EBITDA in the same period, and the cash flow came to BRL 2.2 billion. So the cash conversion ratio comes to 95%. This means that Minerva can safely use EBITDA as a proxy for free cash flow.

I think it's to find (sic - hard to find) in this industry, another company that has a conversion cash rate so high as the one that we were able to obtain in Minerva in the last 12 months, which was 95%.

I will now talk about the bridge of the net debt. It was BRL 5.4 billion in the last quarter. In this third quarter, free cash flow stood at BRL 595 million, of which BRL 14 million for nonrecurring items, BRL 397 million mainly from exercise of warrants, BRL 18 million from hedging and the ForEx variation affecting our debt, bringing our debt to BRL 291 million in this quarter. So our debt would have gone up BRL 291 million this quarter.

When we add everything up and set up the bridge, we ended with the debt that went from BRL 5.5 billion to BRL 4.7 billion by the quarter's end, even in spite of ForEx depreciation totaling approximately BRL 0.6 -- BRL 0.16 over the previous quarter. So we have continued to improve the capital structure. Our hedge policy will continue to be -- to protectively 50% of long-term ForEx exposure. So we continue very well protected in our balance sheet. This will ensure that we continue delivering solid operation and financial performance.

On the next slide, we'll talk about -- a little bit more about capital structure. As we already said, the leverage ratio, that is net to debt ratio over the previous 12 months ending third quarter, was 2.2, its lowest since 2008. The company's cash position was BRL 7 -- BRL 7.3 billion on September 30, the highest ever recorded from Minerva. This is due to a hedge policy that requires that we keep a significant part of our cash in U.S. dollars. So this is a protection when there is high volatility.

And speaking about the profile, 79% of our debt is exposed to exchange rate variation, and it will come due in approximately 5 years. We have to remember that our hedging policy requires to protect 50% of our long-term FX exposure.

Finally, I would like to highlight the recent rating upgrades from both agencies, Fitch and Standard & Poor. The upgrade reflects Minerva's efforts to improve its capital structure, solid liquidity position, decrease of our leverage level and consistent free cash flow generation. Thus, know that we're reducing the Minerva's risk perception. This, of course, shows a better perspective for the risk agencies.

I would now like to give the floor to Taciano, Sustainability Director, who will talk about Minerva's ESG initiatives.

Taciano, you have the floor.

[Taciano Custodio;Director of Sustainability, executive]

Well, good morning, and thank you for joining us on this earnings call. This is an excellent opportunity to review the Minerva Foods ESG agenda and how we address sustainability in South America.

The sustainability at Minerva Foods is based on 3 main pillars:

Dedication to the planet. This is reflected on on-the-ground actions to combat climate change, monitor the supply chain for social environmental impact and pursue operational efficiency like energy management, waste management, greenhouse gas emissions and water consumption.

Benefiting our people. Our presence can be felt beyond the consumption of our products, and prosperity for all is essential to our company. This pillar represents the dedication and commitment of the more than 18,000 families who make up our labor force. Whether it's providing jobs and income over 36 cities throughout the continent or whether it is supporting communities during the pandemic, Minerva Food actively contributes to local and community development everywhere we operate.

And finally, product quality and respect for life, pillars that addresses the safety of the food we produce and export to over 100 countries as well as the respect and care for the animals we handle.

Before we go into the challenges facing our industry, I would like to provide a little bit more context on agricultural production in Brazil. Brazil is an agricultural powerhouse and has a lot of conservation [ and ] forest law. More than 65% of the country consists of native flora, with more than 30% protected conservation area or indigenous; and more than 20% consisting of private property according to the EMBRAPA data.

Minerva Foods has committed publicly to not employing slave or child labor and not contributing to deforestation. We have invested heavily in a social environmental monitoring platform in cooperation with NicePlanet. And we rank top in Brazil and South America in terms of supply chain monitoring, in fact recently corroborated in an audit by the federal Prospectors (sic -- Prosecutor's) Office. Our monitoring platform consists of over 10,000 farms in Brazil and Paraguay that together form over 9 million monitored hectares in the Amazon, Brazilian savanna region called Cerrado and Paraguay's semi-arid region called Chaco.

Through technology and monitoring, we review 100% of our purchases in Brazil for environmental restrictions and illegal deforestation against IBAMA list and off-limit areas. We also check of all our purchases against slave labor list.

And you can see a sample image of our monitoring systems, and we can see the maps that Minerva's suppliers in blue; red, the occurrence of the deforestation; and according to the National Institute of Space Research and in greenhouse area the environmental conservation; and in yellow, the indigenous land. Minerva does not buy animals from suppliers' farms that overlaps with indigenous lands, conservation unit, nor does it buy animals from suppliers which properties are related to deforestation.

By zooming in on our monitoring platform, we can identify a property that does not meet Minerva Foods' sustainability criteria. Because you can see with the suppliers' property identified by blue has restrictions related to deforestation, which means this is a supply which is blocked by Minerva Foods' system. This -- the integration of our cattle acquisition with geographic monitoring ensures greater security and transparency to this process.

On Slide 6, we have an example of the report generated by Minerva system containing the information that disables and blocks the purchase of animals from the mentioned suppliers. The supplier property which does not meet the sustainability criteria is automatically blocked in Minerva's system until the presentation of official documents that prove the property is regular again. In this sense, we work proactively with our own field team guiding suppliers to [ regulize ] this property with the authority's support. The use of the best geographic monitoring tool, combined with the systems integration and the commitment of our teams, provide safety and transparency in our cattle acquisition process.

Slide 7. We have Minerva Food's commitment to society. It's reflected in the recent audit report produced by the Pará Federal Prosecutor's Office. Pará is one of the regions most impacted by cattle production. I would like to stress that this is the state government that provides the database for the audits, which ensures the transparency and authoritativeness of audits and findings and corporate commitment to no deforestation.

Minerva Foods [ stands ] received the best 4 of all large-scale companies, 100% compliance following an audit of 100% of company purchases in the first review and 99.7% compliance following the audit of 97% of company purchases in direct second review.

The NGO, Friends of the Earth, recently published a status report on the occasion of 10 years since the signing of the consent decree in the State of Pará. Publication included -- and we have seen the excellent results and Minerva outstanding performance. There is no doubt that sustainability is a focus for our corporate business model.

One of the biggest challenges in our industry is monitoring our suppliers, especially those who make up the first links of the supply chain. In other words, those who supply the animals to our direct suppliers. I would like to give you a bit more context and show how this affects the company food chain in general, Minerva, whose business model is geared towards the export market. And according to a study by NicePlanet Geotechnology, 90% of deforestation occurs on farms no larger than 500 hectares. And 65% of the deforestation is on these -- actually limited to farms no bigger than 100 hectares.

If we look at yields in Brazil, the cattle production on farms no bigger than 100 hectares is quite small. These farmers deliver just 36 heads per year, which directly limits the operational profitability and their ability to invest in technology to improve production systems on their farms.

So the very small farmers who have farms no larger than 100 hectares, they cannot qualify and cannot supply significant scale of livestock to meet the quality -- the safety requirements of international markets.

Characteristics like maximum age, weight, pH levels and marbling can only be ensured with investments in field, health, nutrition, animal welfare, pasturing and intensification system. Those that do not have enough profitability are not in -- cannot get into the export market.

When it comes to indirect suppliers, Minerva once again has proved itself a pioneer in sustainability as it pursues alternatives and seeks solutions to this problem. We are the first company to test Visipec, a tool for tracing indirect suppliers and one that focuses risk assessment.

The preliminary results, all the tests applied in the state of Mato Grosso and Rondônia are very positive, with 99.9 meeting the criteria established by the indirect suppliers workgroup. 3,314 farms were assessed and listed as potential indirect suppliers to the 3 plants considering our test sample. The test, using the Visipec tool, is another way in which Minerva Foods, together with various players of the Brazilian beef supply chain, aims for greater transparency and safety in cattle sourcing.

Now in the savanna region called Cerrado, each one of the 2020 suppliers has been included in the monitoring system for the Barretos and [indiscernible] plant in the state of São Paulo. And inroads are being made to supply chains for the Palmeiras de Goias, Janaúba plants in Minas Gerais.

Our target is to have every one of the 2020 suppliers registered in the monitoring platform by December of this year, yet another example of the important advances in the Minerva's food supply chain management.

And we took this beyond Brazil as well. More than half of the suppliers in the semi-arid region of Paraguay, the Chaco, are now monitored for compliance with sustainability criteria. You can read the results on an independent audit of our monitoring process on our website. Minerva Foods' commitment to sustainability is backed by concrete actions and results, not empty promises [ with ] magical results in some distant future. We are working in the present with the best tools available, bringing everyone on board to confront the challenges to our value chain.

As a final point, I would like to stress our commitment to social responsibility and to highlight our recent activities in response to the coronavirus.

[indiscernible] donated over 20 -- 42

[Technical Difficulty]

the beginning of the pandemic. This includes hundreds of tons of beef, thousands of PPE items, personal hygiene products, thousands of medications and hospital equipment and leasing mobile ICUs for the city's housing communities in which we operate. We have also set a BRL 32 million support fund to help our customers in these difficult times.

Animal welfare is a key pillar in the food supply chain. We treat this very seriously, and we heavily invest in training our employees, updating our plants and maintaining process certification. Proper animal management ensures better-quality products and more profitable suppliers. Our plants are certified, and our team is trained by top-quality instructors like Dr. Temple Grandin, an internationally known expert in animal welfare.

And as I mentioned in the beginning of the presentation, we have approved as an example of sustainability in South American cattle industry, our pioneering spirit and leadership in addition to serving one of the pillars of our business is supported by important partners like IFC, which is the International Finance Corporation, which is recognized the world over for pushing sustainability governance and social responsibility for demanding such [ in ] the company in which it invests. Minerva Foods is the only cattle company in Latin America that is partnered and receiving investments from IFC.

Finally, wrapping up, I would like to encourage all of you to visit our sustainability website, which includes all of the company's commitments to sustainability as well as audit reports of our Brazil and Paraguay supply chain, our greenhouse gas inventory, the only independently audited in greenhouse gas inventory in the industry, and social responsibility policies and programs that guide company operations, and of course, our sustainability report, which we have been publishing annually since 2012.

We at Minerva Foods are committed to the agri business and are proud to produce beef, a dietary staple, in a way that is ethical, sustainable and socially responsible so that we could supply high-quality safe foods for our customers the world over.

Thank you for your attention, and I turn back to Edison.

[Edison Ticle Filho, executive]

Thank you for your presentation, Taciano. This concludes our presentation.

And I will now give the floor to the operator to start the Q&A session.

[Operator]

[Operator Instructions] The first question is from Luciana from the Banco Brazil. Luciana?

[Luciana de Carvalho, analyst]

Congratulations for your results. I would like to talk a little bit about China.

[Technical Difficulty]

[Foreign Language]

[Edison Ticle Filho, executive]

They already have station order. For the fourth [Technical Difficulty] and from the numbers that we see in this fourth quarter, we see a margin in Minerva and not only in Athena. So Athena Food has a very high competitiveness due to the cost and the price of the cattle because, at the point of sale, they are present in markets very similar to Brazil, and they pay higher price for their products.

[Fernando De Queiroz, executive]

Ricardo, I would like to add to what Edison said. We can also talk about diversification in South America. This strategy makes it possible for us to have an arbitration in the -- always be present with competitiveness, and Athena Foods shows this.

Athena with Brazil show this even stronger. This represents more than 40% of world exports and with competitors that have a price gap significantly higher. If you take into account the large majority of competing markets have as the grain -- the base of cost with the price of grains increasing and the way we produce here in semi-confinement in feedlots, this gives us a competitiveness which is not comparable. So it shows that the Athena model and diversification of Minerva is extremely sustainably in a more sustainable world and more competitive.

[Operator]

[Operator Instructions] The next question is from Isabella Simonato from the Bank of America.

[Isabella Simonato, analyst]

I have 2 questions. The first one is exploring a little bit of the cattle cycle here in Brazil. I understand that the demand has been very important to pull the price of the arroba, which is the [ fifth ]. We also see the price of the calf. Going forward, how do you see the availability in the cycle? This is my first question.

The second one has to do with working capital. There was a very good improvement coming from suppliers. Can you tell me a little bit more about the quarter? And looking at the fourth quarter, how this should behave?

[Edison Ticle Filho, executive]

The arroba is 15 kilos. Well, we have been talking about this for a long time. We see the cycle in Brazil since 2020, in the beginning of '21 is very well aligned with what we expected. Our forecast and the price of the 15-kilo called arroba has felt high, so it's very aligned to what we expected. This change in cycle, we have to focus less on the price of the cattle and more on the spreads. And I always repeat this in all the calls because independent to where the price of the 15-kilo arroba is if we can -- this can be repassed to the sales price and maintain the spread in the margin. We have shown that the situation of the unbalance of demand and supply of beef in the world has given us a bargaining power, which is very important, and we have been able to keep the margins above 2 digits.

If we look at our data quarterly, our average in the last 12 months was above 9.5%, above 10%, at least in the last 8 quarters. So this shows that we have had a good bargaining power with our clients. And although the arroba, the 15 kilos is BRL 150, it's gone up to BRL 200, we have kept our margins in a very healthy level in free cash flow.

So looking forward, there is no reason to be concerned about the scenario. There is a less favorable cycle here in Brazil with some pressure, and -- but this has all been anticipated in this second semester in the price of cattle.

There's no reason why we shouldn't believe that we have the bargaining power, and therefore we can repass the prices and keep our revenue in the level of 2 digits. We're talking about free cash flow, well, in the [ houses of ] the suppliers, this came through a financial tool that we set up in which we have the financial institution paying down payments with a discount up to 2% and using up to 90 days, charging between 0 30 to 0 40 a month. So we earn 2% in discount, and we pay 1.20 or 1.5 of cost, and we have positive effects because it helps us in our margin, because for the financial cost of this goes directly to our CMV. And the second benefit is the money that was in working capital that helps us reduce our indebtedness, and therefore reduces the margin, plus the financial expense.

So with the accounting, it's very -- it has -- it's very profitable. From the financial point of view, we have a smaller debt and with the possibility of free cash flow.

[Isabella Simonato, analyst]

Well, that's very, very clear. And the idea is to keep this going ahead or was this only for this quarter?

[Edison Ticle Filho, executive]

No. No, it's ongoing. This is a program that we have in place with several institutions. And I don't think this is going to grow, because there's a limit to purchase a pipeline with the discount of this magnitude. So probably, we've come to our limit, but there's no reason why we should go back. So we do have this gain in the third quarter, and it will continue to be ongoing in the coming quarters.

[Operator]

And next question is from Mr. João Soares from the Citibank.

[Joao Pedro Soares, analyst]

I would like to understand about the long-term growth of the company. I think that now I would like to understand the situation in Australia. It was [indiscernible] to use the know-how. I would like to understand if you're giving financing to finance the growth in Australia.

[Edison Ticle Filho, executive]

Well, this is part of the average -- the medium and long-term plans of the company. We have proved here that with a strong operational free cash flow, we can meet the metrics of delevering suggested. And in fact, we're doing this earlier than the market expected, than our business plan was pointing at.

So if we can keep the cash generation operational, as we have done in the last 11 quarters, we can reduce the leverage to a more comfortable level below 2-fold. In a short period of time we'll be able to comply with the dividend policy, which is to distribute a 50% of the profit at the end of the year. And we'll have a business growth -- business plan -- and something -- nothing transactional. It's something that's quite specific like we did in Colombia, where we spent BRL 75 million to buy this plant. And we have a positive -- BRL 600 million positive cash flow.

So this is how we're going to be managing the capital. Besides the business plan, we have an estimate which is Iain. Iain is very knowledgeable in Australia. So we're going to use all his know-how at the right moment, without committing the capital price of the company.

One of the fundamental points that we have a difference is also the risk management that we have. So with more geographical diversity, we can have more efficiency. So what we are seeing is that this DNA of Minerva for diversification and risk management that has geographically diversification, I can tell you that all the plans we have -- or that we already have shows the consistency in our plans.

[Joao Pedro Soares, analyst]

I would like to add. The working capital Isabella brought up, could you tell me how much does this represent in financial expense, the cash in this structure? I'm looking at the annualized cash flow.

[Edison Ticle Filho, executive]

Well, this structure is -- we have the gain of the on-site discount and also the financial expense of increasing the terms. So instead of reducing my CMV, I only use 2%, minus the cost of the financial product. This is an operational offer, and this is considered in the CMV.

[Joao Pedro Soares, analyst]

Congratulations for your excellent results.

[Operator]

[Operator Instructions]

[Unknown Executive]

There's a question here from the webcast from [ Rafael Soma ]. He says, could you talk about -- there's BRL 64 million negative with the real that was depreciated. Could you talk about the working capital of the supplier?

The second part of the question has been answered, about the foreign trade hedge, is when the exchange went beyond the closing of the second [indiscernible], we had to protect cash that was more than BRL 1 billion that we want with a hedging policy transferring [indiscernible] in a call.

How could we do this? We had dollars, but I bought the book, and we booked between BRL 5.20 and BRL 5.40, and the exchange rate was BRL 5.54. So we lost the premium. The result of the hedge was negative and it gives a hedge of BRL 0.16 plus the carryover price, which is 1% to 2% per quarter.

So it's easy to do the accountability, and you eliminate the cost of the options that were not exercised when we come to this negative in -- small negative results in the quarter. Although we have lost a little bit, I think the strategy was right, because it brought an enormous symmetry to our position of hedging, especially after the movement of the exchange from going BRL 4 to BRL 5.2 at the end of the second quarter. This was an impact of an impact of BRL 1.4 billion in this period. So that was it.

Total transparency and recapping, we have made MDF in a call, and these options 1 and the hedge policy continue the same way.

[Operator]

We are now going to close the Q&A session, and I will give the floor to Mr. Fernando Queiroz for the final comments.

[Fernando De Queiroz, executive]

So I would like to close this teleconference. I would like to thank everyone and the Minerva team for their performance and their dedication in this quarter.

I would like to highlight the resilience and the dedication of what we are facing this year. I'm very happy to see that our team has new working habits in home office, keeping the same level of dedication and commitment. Focus and discipline during this period was fundamental for us to transform adversity to an opportunity. We're going to continue watching and being the leaders and with being ethical and sustainable because we believe this is the best way for value generation in the long term.

Thank you very much for your interest in Minerva. And we are available for any questions or any comments with transparency, clarity and inclusion, always generating more value for the shareholders.

Thank you very much.

[Operator]

The Minerva teleconference is now closed. We would like to thank all of you for your participation, and have a wonderful day.

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