Camil Alimentos SA
BOVESPA:CAML3
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Camil Alimentos SA
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Good morning, ladies and gentlemen. Welcome to the Q&A session for investors and analysts related to Camil's results for the second quarter of 2020. Here with us today are Mr. Luciano Quartiero, Director, President; Flavio Vargas, CFO and IR Officer; and the company's IR team. [Operator Instructions]
This audio is being presented simultaneously in the company's IR website. Comments by the management about the quarter and the Q&A session may contain forward-looking statements that are subject to risks and uncertainties, and as such, may lead to expectations, they may not occur or may differ substantially from what was expected.
Well we now initiate the Q&A session for investors and analysts. [Operator Instructions] Our first question comes from Guilherme Palhares from Bank of America.
I have 2 questions. The first has to do with your operations. Well, certainly, we noticed the issue of prices by the company in this past quarter. I just want to have an idea about the second half of 2020 in terms of how the products are performing? And how do you see demand? And again, if you could comment on your share performance. Further on, I will come up with the second question for Flavio.
As it has been extensively announced, there was a significant increase in the price of rice, in particular, in August and September. In September, it reached BRL 105 [ azuki ]. And I think that the main question is how will that perform and behave looking forward. Today, we believe that the current price levels may remain sustainable at this BRL 105, at least until the next growing season, which means that this price level will be as such until the end of January or early February. And then in the next growing season, we may see some significant changes.
And I would just like to now refer to the growing season and just give you some information about our historical prices, mostly speaking about rice and azuki. In 2019, price average was about BRL 45 per year. And in the first half of this year, growing season, from March to August, the average was BRL 66. By the end of September, the price reached that level of BRL 105. And as I said before, the company believes that this pricing level will remain throughout the second half of the year. And this leads to a pricing average to the current growing season of around BRL 80.
Now when we look at this industry and try to see what lies ahead and what will be prices looking towards next year, the growing season is being planted as we speak in the south of the country. I think, already 25% of the crop has been planted. And in general terms, today, we have about half -- I mean, Rio Grande do Sul accounts for 60% of Brazilian rice production. Half of the region in Rio Grande do Sul, their plants rise. They have enough water to grow a normal crop. And the other half, I mean, today, 65% of the necessary water is available only. So for the next 4 to 8 weeks, the way the season will perform will define the production or the yield expectation for this year. Currently, the expectation is that acreage will remain the same. And then if we have excessive rainfall in the next 4 to 8 weeks, maybe there should be an increase in acreage of about 5%.
And now taking into account that we will have a normal growing season with the same acreage and a very slight increase, we believe that the volatility of prices for next year will be lower. I mean this year, we started at around BRL 48 to BRL 50, but it reached BRL 105. Therefore, we believe that there will be less fluctuations in prices. And that the average, as we see it, would be between BRL 70 to BRL 80 for next year. So there will be a drop in prices when you compare it to this current quarter, the one we have now. But even then, these prices have been higher than that of the past 2 years, if you take into account growing seasons of 2018 and '19, the price estimates for the industry. And I think this is a general idea in the industry is that may be significantly impacted due to the rainfall in the next week.
In terms of demand, it has been high throughout this period, particularly in this last pricing period between August and September. There was a spike in demand. And so every time we have price increases, as a consequence, there is higher demand. And when prices become flat, which is the current scenario, demand goes down to accommodate for this period of higher prices. To be more specific -- specifically, right now, we have higher demand, but it's like the industry is going through a hangover in terms of price evolution. We just have to see how much price will impact, or I know that there was a lot of news about the price of rice, but we don't know yet how much this will impact consumption. But as an industry, we don't think that there will be a large impact because rice and beans continue to be a good and cheap alternative when you consider the cost proportion. Even though there has been a spike in prices, we do not anticipate any major demand impact.
Now in regards to share, the company lost some share during the period. And I think that the main focus of the company has always been and it remains being the growth in sales volume in a sustainable way with profitability. So we -- when we look at share, we see it as being a consequence of all the actions taken by the company in a certain timeline. When the pandemic started and there was a reduction in sales through the foodservice channel because all of the restaurants shut down, et cetera, this led to an increase of our products in the supermarkets by retailers. Therefore, we think that the higher demand came from the lower pricing brands, more from lower pricing brands than premium brands. That's why I say that we lost some share. This is how we are seeing the current landscape. And the company is constantly feeling the pulse of the market to see whether we can validate our assumption. And I think with that, I answer all your 3 questions. I don't know whether you have anything else.
Perfect, Luciano. I just have an additional question or rather a clarification. And because you also talked about imports of inputs, how do you see this issue in your market? And whether there is any more possibility? And whether there is enough logistics to accommodate there? And whether the imported product meets your quality standards?
I think your question is very much related to that PEC measure of the government that they chose to eliminate the tax rate for rice imports and that 0 tax rate is valid until December. When we look at the availability of rice in markets still, it's very similar to the Brazilian one, and that's why we all felt the need to import from other countries. We -- there were some imports coming from India. The quality of the product in India is inferior when compared to ours, and there was also a lot of imports coming from the U.S.
With that PEC reduction, rice prices in the market became more stable. And that's why prices now stand still at BRL 105 [ sell ] prices. The government initiated like with a quota of 200,000 tons. And we believe that by December, there should be 260,000 tons. This tends to be enough to meet market demands, but this will not be enough to put prices down. In fact, Brazilian rice increased its price until the quality of the imported product. That's why we arrived at this price of BRL 105.
Perfect, Luciano. The second question I have is addressed to Flavio, and it has to do with the fact that the company just announced yesterday a new debenture issues. And I just want to know whether you have anything else coming down the line? And how do you see your P&L for 2021?
Well, what we've been doing, just to recap, when the year started in early March when the whole pandemic issue started, we were very quick to ensure the company's liquidity position. So back then, we have approximately BRL 400 million of maturities for the year. And given that scenario, we just got additional funding of BRL 150 million with the company's main financial partners. But there was a very expense debt. The cost was above CDI plus 4%, and the term of payment was very short. So that BRL 150 million, we had just 1 year term to pay our debt. So we waited until the market settled down.
And when you get a short-term debt, you already start from the beginning with a short period to pay for your debt. So at that time, we saw an opportunity to extend the term of the debt. And in fact, what we did is that with our 4 financial partners, we worked out things with 3 of them. In terms of new funding, it was -- there was a total of BRL 150 million. Our net funding was BRL 200 million with an extension -- with a term extension for 5 -- for 4 to 5 years. So after that is over, we get a relief in terms of our urgent need to get funding because this is already enough. We no longer have immediate maturities that we had postponed it to March and April to 2021. We get some additional funding at a reasonable term, considering the current market situations. And now we are comfortable enough to take a look at our balance sheet and just wait for another opportunity to move on with that process of extending the maturities or the due dates, not to have too many things in the short run and to prevent scarcity or short of liquidity -- shortage of liquidity.
At the end of the quarter, our leverage position is 2x net EBITDA or net debt over EBITDA ratio. We are already getting the peak of working capital. Our business is very seasonal when it comes to cash generation in the second quarter, that's when we have the highest capital allocation. And when you look back at the last 12 months, we still have some quarters that were good quarters. We are already eliminating the 2 bad quarters that we had last year, which were the first and the second. We take that out of our calculation. But this year has been a very good year.
When we look forward, we noticed that this deleveraging process should continue to occur. And looking at the peculiarity of our business model, this is important to us because this ensures more flexibility to make some capital decisions that are necessary, both in terms of how we will allocate our capital, to have more flexibility and enough cash in case of any strategic opportunity.
Perfect Flavio. And just one last clarification. In terms of the duration of your debt, what is your target, thinking in terms of the continuous extension of the debt?
Whenever we look at that, we look at the market in general, trying to see what makes more sense in our current scenario. Like in February of this year, we had -- we thought that we would issue the same debt that we had for 1 year maturity. And in February, that was for 7 years. We thought that 7 years, we would have it at a competitive cost and that would make sense. But today, this debt that we have with maturities in 4 to 5 years seems to us now more possible in terms of market and cost. In terms of treasury, I would love to have a more extensive timeline to pay that so I just have to look at the market and see whether it would be worth it to pay an additional premium. Therefore, 4 to 5 years as a medium term seems to be adequate for now, but I think that if we look back, our purpose at the beginning was to have a longer duration.
Our next question comes from Marcel Moraes from Santander.
I have 2 questions. The first is about Uruguay, if you could give us an update about volumes looking forward. There was a significant change in the second quarter, but now the comparison base in the second half is a bit stronger. I just want to understand whether there is any issue related to seasonality between the first and the second quarters? And what is your expectation in terms of how volumes and prices will perform in Uruguay?
Uruguay is a very peculiar operation because during harvesting season the company receives, although I said it will sell throughout the year, though comes February or March, 100% of what will be sold throughout the year is already received, so the company dries it, storages, and then sells it throughout the year. What you said is it's quite interesting because this acceleration of sales in the first quarter doesn't necessarily mean that it will be repeated in the second quarter because we already have all of the products that will be sold throughout the year. I think the main point is that in the last 2 growing seasons, the company had a transfer inventory from 1 season to another, which was higher than historical levels. So with higher sales in the first quarter and the maintenance of that level in the second quarter means that our transfer inventory for the next season will be even below historical levels. It used to be higher, but this year, as sales are stronger, it will be lower. The dollar price levels are up, and we believe that the U.S. prices will be maintained throughout the second half of the year.
My second question refers to working capital. It's well-known that most working capital is used in the first half of the year. And in the second half, you start generating cash, which contributes to your final cash generation. I just want to understand whether is it possible to have some visibility about the working capital requirement that you will have for this year because we see a pre-working capital cash generation of about BRL 500 million this year. Therefore, depending on your working capital requirement this year, you could have BRL 200 million, BRL 300 million, I don't know how many million of BRLs. And as this is the 1 year where you have a lot of revenue exposure, there was an impact already in the first half of the year. But I just want to understand your thoughts for the whole year. How could we -- what could be expected in terms of cash generation?
Well, Marcel, I will start with a few comments and then Flavio would just add to that. Well, you said it well, the peak of the company's working capital takes place more specifically between June and July. So our -- the closing of our second quarter, which occurs in August, when we already have an idea of the working capital requirement. Throughout the second half of the year, we start releasing that. So where does that demand for working capital comes from? Part of it comes from the inventories in Uruguay, part of it from inventories in Chile. Here in Brazil, there was a slight increase in inventory because we do some prepayment to all of our suppliers. And throughout the year, I have an increase in the fish category because in fish, there is some seasonality. We have a period that starts in November and December, where we sell more. So we start building up our inventory of fish throughout the year to get prepared for higher sales at the end of the year. And throughout January and February, part of that inventory of fish has been sold up.
How do we see the landscape for this year? The company funds its working capital day. So in terms of rice increases, when it goes beyond that ballpark figure of BRL 50 and BRL 60, then regardless of the volume of the inventory, we have an increase in working capital. On the other hand, when we look at higher sales in Uruguay that I just mentioned, when we look at higher sales of fish. And today, our inventories are lower. And higher sales in Chile. And even looking at Brazil, higher sales in Brazil, even though in Brazil, we have higher inventory levels, and this inventory will come down come February. All of that, when we look in terms of days, we believe that in terms of days, the company is better positioned when compared to last year taking into account all of these factors that I just mentioned. I don't know whether this answers your question. But if you need any further clarification, our IR team can give you more details about that.
Next question is from Ian Luketic from JPMorgan.
Ian, maybe your line is muted?
Can you hear me now?
Yes.
Luciano and Flavio, if you allow me, I have a follow-up question. How much longer do you think you can keep that high price given this drop in volume that we have currently? When we look at your margins, it has been dropping sequentially, especially also vis-à-vis the year before. So what could we expect in terms of gross margin looking forward if you will continue to grow prices, especially on the side of farmers?
And my second question is also a follow-up, and it relates to market share. Looking at next year, assuming that the demand will not be so high as this year. And maybe the lower pricing brands, if they remain resilient and strong, how do you see your market share? So I just want to understand your view on pricing for next year. So I think that maybe prices will go down a bit. And how can you grow volume so that your top line next year is higher than this year's?
Ian, I will start answering your question, but then feel free to ask any additional questions if you think that I didn't answer you completely. The entire rice industry transferred their price increase. So although the increase is through August and September, in early August, rice prices were BRL 65, by the end of August prices reached BRL 80, until reaching BRL 105 in September. All of that increase has been transferred.
In terms of this moment of high prices, it's very common for industries to use some of their average inventory in order to transfer prices. To be very direct, we understand that the industry was able to transfer this entire raw material acquisition cost. And part of this price is not yet reflected in retail because supermarkets already have their own inventories, and so prices are still what they were. But I believe the entire industry, and I'm also including here the whole chain, retail and industries, we are faced with a major challenge. And I'm referring to the transition moment when we will go from BRL 105 to BRL 70 or BRL 80, which is what we see looking forward -- looking at the next coming years.
This, again, will depend on the production of this current growing season. And among other factors, there will be an effect, but this entire industry is very alert and monitoring the season. We think that by January and February, there will be -- we will encounter some difficulties in terms of selling because people will just wait for prices to go down. And we -- on the industry side, we'll be also looking at how prices will perform. Therefore, I see some impact when it comes to sales. I think with that, I answer your question on pricing.
Now looking at market share and how the company intends to grow its first line. I believe that the first point, despite the fact that the current pricing level is at BRL 105, in 2020, the average price will be BRL 80. This is our opinion. Now if we consider that next year prices will vary between BRL 70 to BRL 80, we will have a challenge of growing the first-line by 10%. But this sector -- for the entire chain, we -- for us, it has been interesting to have a higher price. So the average price in 2019, producers did not remunerate the others on the chain. So for the industry and retail, the reduction in fixed cost is also a challenge. I'm not saying that this price of BRL 70 or BRL 80 is right or whether it should be BRL 60 or BRL 100. But once your price levels does not remunerate everyone in the chain, clearly -- I mean it does remunerate everything, then the price is sustainable. But I think that the entire chain will reach a new price level.
Now speaking about market share, if the effects of the pandemic are mitigated and we go back to normal consumption, like the food industry, we resume its full activities, we will not be so affected in terms of market share, but our desire to grow is still present. And we will grow by strengthening our positions -- position in markets where we think there is still a lot of possibility, there is still some white areas or white spots that we are not present in Brazil. And eventually, the company continues to believe that the consolidation of this industry should go through some inorganic moves. Therefore, the opportunity to consolidate the market remains high for the company. We are a major leader in volumes in Brazil. We are very large vis-à-vis the second place, and we have over 12% market share. It's still a very fragmented market with many good opportunities ahead.
Well, if you need any further clarification, please feel free to ask some more.
No, it was very clear, Luciano. And as you mentioned, consolidation, I have a question about M&A. Now that we are shifting gears a bit, because you said that there are many opportunities for consolidation, your market share -- I mean it's all because the industry is very fragmented. But considering this price level and profitability, I believe that there are opportunities. So you could escalate further. So my question is whether you are seeing good opportunities, and you think that there are good possibilities or people are really thinking too much to their side?
There is always a difference between the price that people ask for what they have -- and the people -- the price that we believe it's the right price. As we said before, with higher profitability and higher price possibilities, the company continues to evaluate opportunities. As we believe, as I said before, there will be a new price level for rice. And therefore, the company continues to look at the market. If we didn't believe that there will be a new price level, it would probably make sense to be out of this M&A market for a while or stop looking. But as the company believes that there will be a new pricing level, the company continues to evaluate opportunities. But there is always a challenge of closing that gap between how much people are asking for and how much we are willing to pay. And we are looking not only at rice, but other things. The company continues to look for other opportunities in the countries where we are already present and in other countries in Latin America. This search continues, and our strategy remains the same.
[Operator Instructions] As there are no further questions, I would like to inform that Camil's Q&A session is now concluded. Thank you very much for participating, and have an excellent day.
[Statements in English on this transcript were spoken by an interpreter present on the live call.]