Camil Alimentos SA

BOVESPA:CAML3

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Operator]

This event will be recorded and all participants will be in a listen-only mode during the company's presentation. At the end, we will open the questions for analysts and investors only.We would like to emphasize that any forward-looking statement that might be made during this conference call related to Camil's business outlook, projections and financial and operating goals are based on beliefs and assumptions of the company's management as well as information currently available. These may involve risks, uncertainties and assumptions as they refer to future events and therefore, depend on circumstances that may or may not occur. Investors must understand that such general economic industry conditions and other operating factors may lead to results that differ substantially from those expressed in such forward-looking statements.We will now start the presentation with Mr. Quartiero followed by Flavio's presentation. And at the end, we will open for a 15-minute Q&A. Thank you.

[Luciano Quartiero, executive]

Hello and welcome to the company's comments on the results of the second quarter from June to August of 2023, of Camil.In these first slides, we highlight Camil's main indicators today, which consolidate the company's position as one of the largest food brand platforms in Latin America. We have 35 plants and more than 20 distribution centers across South America, with 8,000 employees. We currently operate in the grain, sugar, fish, pasta, coffee, and cookies categories in Brazil. Internationally, our operations are mainly concentrated in grains in Uruguay, Chile, Peru, and Ecuador, as well as healthy products in Uruguay through Silcom.On Slide 3, we emphasize this new way of looking at Camil's results and growth. Since 2021, in Brazil, we have expanded our portfolio with new categories that have boosted the company's diversification. In 2023, several of the company's initiatives came to fruition, with achievements related to the integration of the acquired companies, all of which are now grouped in the high-value category. We entered the wheat chain, with pasta and cookies, in addition to launching our coffee business. These 3 most recent categories have considerable growth potential and higher added value, in line with the diversification strategy we have always shared with the market. They are part of the high-value segment, highlighted on the right-hand side of the slide, along with the fish category. To facilitate market analysis and align the release of our results with our strategy, we have also grouped grains and sugar in our high turnover category, as well as the International segment, which consolidates the results of Uruguay, Chile, Peru, and Ecuador.Consolidating all of our operations, we bring you the highlights of our second quarter results. We reached BRL 2.9 billion in net revenue. We achieved 8% year-on-year growth and approximately 10% sequentially. As a result, our EBITDA stood at BRL 212 million, up 2% over the previous year and 7% sequentially, with a margin of 7.3%. In terms of volumes, we grew 15% sequentially, driven by high turnover and also international sales, as we'll elaborate further in the coming slides.The operating highlights of Brazil, we talk about high turnover segment, consisting of grains and sugar, 7.3% in the previous year and 13% over the previous quarter. This result was driven by the start of sugar exports, as a result of the joint effort together with our strategic partner in the category, to minimize the effects of a very challenging and highly competitive scenario for this category in the short term. It's also important to note that rice prices in the market have been rising substantially, as indicated by the CEPEA index. This effect began at the end of August and continued throughout September, without affecting the results for the period under review.Moving on to the high-value category, which includes fish, pasta, coffee, and cookies, we posted a 32% growth in volume year-on-year, and also we were able to quickly and efficiently integrate the companies acquired in 2022 into our ecosystem. In the pasta segment, we continued to post good results, with ongoing projects to expand capacity, sales, and profitability. As for Cafe Uniao, we expanded its portfolio and launched it throughout Brazil with new packaging designs adapted to consumer preferences. The new packaging, such as the 250 gram pouch and the 500 gram vacuum packaging, will help us to consistently pursue market share gains in the category.The acquisition of Mabel in the cookies category, despite the initial operating challenges, has brought excellent results for the company, with consistent growth and profitability since joining Camil in November of 2022. Sequentially, we saw a 4% reduction in volumes due to the drop in fish, which is facing a more challenging scenario post-Lent. We should bear in mind that this category has seasonal sales, which should ease in the pre-Lent period of the coming quarters when sales usually tend to increase. The high-value category represents an important step towards further strengthening our position as a food platform with leading brands and a variety of higher value-added products.In the international segment, there was a 15% reduction in annual volume and growth of 25% sequentially. This consolidated result was driven by the seasonality of our operation in Uruguay, which should normalize over the next few quarters due to the country's business model. In the other countries, we saw improvements and higher profitability in Ecuador, an effect partially offset by the continuing challenging scenario in our Peruvian operations. 2023 is a special year, marked by Camil's 60-year history. With a high-value product mix and geographical diversification, we continue to strengthen our brands that are highly recognized by consumers in all categories and countries of operation. We are gradually bringing gains in scale and boosting the results of the new categories, and we remain confident that we are on the right track to achieve our growth and profitability objectives.Now I'll let Flavio comment on the financial results for the period. Flavio, you may proceed, please.

[Flavio Vargas, executive]

Thank you, Luciano.Now moving on to the financial highlights of the period, we achieved net revenue of BRL 2.9 billion, up 8% year-on-year, which is a record turnover with a new level of scale for the company. Cost of goods sold also grew due to prices and entry into new categories, reaching BRL 2.3 billion. As a result, our gross profit hit BRL 574 million, with a margin of 19.7% in the quarter.SG&A grew by 3%, due to an increase in freight, marketing expenses, export, and personnel expenses, as well as the entry into the cookies category resulting from the acquisition of Mabel. As a percentage of net revenue, SG&A amounted to 14.8%, down 0.8 percentage points over the same period last year. This result is attributed to our efforts to optimize and review expenses in order to increase efficiency and find new synergies among the acquired companies. We have boosted the synergies and profitability of the acquisitions from 2021 to today faster than expected, as Luciano mentioned, therefore exceeding our targets and placing increasing confidence in the growth of the new businesses.As for EBITDA, it stood at BRL 212 million in the quarter, up 2% vis-a-vis the year before, with a margin of 7,3%. Sequentially, we highlight the 9.8% increase in net revenue and 7% in EBITDA, as well as the 1.7-point reduction in the percentage of SG&A to net revenue in the period. Once again, this result is largely attributed to price increases, volume growth in the consolidated accounts, and our actions in SG&A to optimize expenses and increasingly achieve synergies from new businesses. It is worth noting that our net profit amounted to BRL 47 million, a sequential reduction due to increased indebtedness and the higher interest rate scenario compared to the previous year, which led to an increase in financial expenses for the period.With this topic in mind, moving on to Slide 9, the company's net debt amounted to BRL 2.9 billion, with net debt to EBITDA for the last 12 months of 3.4x in the quarter. It is also important to note that our reading of covenants is annual, the next one being in February of 2024. The indicator is usually under pressure in the first half of the year, due to the seasonality of working capital in the rice category, which peaks in the company's first quarters and eases from the third to the fourth quarter. In addition, it is worth noting that the company concluded its 12th CRA-backed debenture issue in June of 2023. The issue consists of simple debentures in a single series, in the amount of BRL 625 million at CDI+0.9% per year, maturing in a single installment in December 2025. With this issuance, and other funding carried out in the last period, we are comfortable that the company's commitments for the next 12 months will be met.CapEx in the quarter in addition to our maintenance CapEx, contemplates of expansion capacity projects for the pasta and coffee categories, previously announced to the market.In terms of ESG, we are consistently implementing the actions pursued by the company. Our initiatives are highlighted in the sustainability report available to you on the CVM and the IR websites, in line with Camil's business plan for the coming years, and with our focus on carrying out actions that are effective in our surroundings. On this slide, you can see some highlights on each front, but I would like to emphasize 2 in particular: compliance to this year's Brazilian corporate governance report, which underscores the best governance practices of publicly-held companies according to the "practice or explain" model. We went from 85% compliance to 92%, which increasingly reinforces our governance initiatives and commitments. In addition, we have achieved 100% of our energy consumption in Brazil coming from renewable sources, and we are moving forward with our plan to build our new thermoelectric plant to increase our own energy generation in line with this target. For more details, I invite you to access our sustainability report and contact our IR and ESG team with any questions or suggestions.In closing, as Luciano has already pointed out, we are working hard to increase our efficiency and gradually grow in scale and profitability. We are confident that we are on the right track to take the company to a new level of scale and profitability.We'll be available for a Q&A if you have any questions. Thank you.

[Operator]

We will now initiate the Q&A session for investors and analysts. [Operator Instructions] Our first question comes from Mr. Gustavo Troyano from Itau BBA.

[Gustavo Troyano, analyst]

There are 2 points that I would like to explore further. The first being the margin in the quarter. And then I would like to understand whether similarly to what happened in the past quarter, is it sugar that is the margin detractor in the quarter? And should we expand any granularity here or whether there has been any sequential improvement in sugar vis-a-vis the last quarter? Just to understand where are you getting that margin, which is slightly lower than the margin we saw pre-IPO?And the second question also related to the consolidated sugar margin. I would like to get a better understanding about that export quarter with your relevant supplier. And also to understand what are your next steps? When will the contract expire and whether you're already seeing some margin improvement or you're already seeing any negotiation to extend the contract? Is there any other initiative in place to normalize the impact in the sugar business, which, in my view, is the margin detractor when we look at Camil's platform.

[Luciano Quartiero, executive]

This is Luciano. I believe that in terms of the margin, we have the effect of the first quarter that are repeated in the second quarter. Well, it's sugar. As you said, there is also fish that had the impact of the post-Lent effect, which is a detractor of the consolidated margin. Also, Peru is in the process of transformation, and we expect to reap some benefits in the third quarter and maybe more in the fourth quarter. And we have the new segments. I mean just taking a step backwards, we have the cookie segment, when the company is about to celebrate 1 year of operations. We started November of last year. So that involved a turnaround process, the margin is already positive. But in the cookie segment, the margin is not yet where we believe that is the category's full potential. So as it is in the lower level, it certainly impact. The same goes for coffee. We are now gaining more market share and coffee is not yet performing in accordance with the potential of the category. So in summary, I believe that somehow the effects of the second quarter are similar to the first quarter, as you pointed out.Now in terms of sugar exports. This is a temporary agreement. It will last until the end of this year. Therefore, we already have a volume in place. It's a spot operation. We could call it that. We have to wait until that first agreement is concluded. And then after the turn of the year, we will evaluate whether we would need to do something similar or whether we need to start conversations with our main supplier. Therefore, to answer your question, this is a spot operation. It's not a new contractual commercial transaction. We've been very much impacted through the macro scenario. We believe that the conditions in the macro scenario will still linger through the next sugar season. And if that is the case, we will then have to seek for another solution even though it may be temporary. And I think with that, I think I was able to answer all your questions, Gustavo.

[Gustavo Troyano, analyst]

Yes, you did. Thank you very much. It's very clear.

[Operator]

Our next question comes from Tiago Harduim from Citi.

[Tiago Harduim Alves de Mello, analyst]

I would like to hear from you, something related to international market. In the past quarter, we talked a little bit about that subject. And I remember that Peru was the market that was lagging a little bit behind vis-a-vis the other market. So I just want to get a better understanding about the different dynamics of the different markets in the sequential comparison.And my second question refers to your own energy generation that you comment at the end of your presentation. Could you give me some information on savings in your financials? Because I believe this seems to be something quite interesting for the company.

[Luciano Quartiero, executive]

I mean in terms of the international market, each country has its own dynamics. In the case of Peru, for a few years, I mean, even more than quarters, we are dealing with a very different scenario. Political instability has also affected the economy. Peru has great informality in its economy. And this has been potentialized due to the different crisis that the country has experienced, our margins in Peru have been very low, and we lost a lot of volume. I think we are performing something around 50% to 20% below historical levels. Therefore, that we acquired great effort on our parts to readjust our supply, our plants. We used to work a lot with imported rice, but now we are focusing on local rice supply with our second brand. So this entire dynamics and the changes that have been implemented in the past 2 and 3 quarters is something that should bear fruits in the coming quarters. So recovery in Peru will be gradual.Now looking at Ecuador, which is a new operation. There, we are performing above expected. Our sales volume is good, but the margins are quite positive because this also involves increases in rice prices. And the company was right, was correctly positioned. That's why our margins are better than expected. And both Peru, Ecuador and also Chile, there is a certain sales stability. In Uruguay, things are a bit different, and I'll leave that for the end to talk about Uruguay. In Chile, given the fact that Chile is facing economic and political different moments, we've been experiencing a recovery period. And this recovery is continuous and sequential. Therefore, I think that in the next coming years, Chile will perform according to historical levels.Now looking at Uruguay, the Uruguay model is quite different when compared to the other countries. Our model in Uruguay, I mean 100% of the rice that will be sold in February, March and April has been received, and this price will be sold throughout the year. Therefore, throughout the year, depending on the moment of the international market because in Uruguay, 92%,93% of our sales are earmarked for exports and only 7% or 8% of the rice is sold in the domestic market, there might be quarters with higher or lower volumes. So Uruguay has a higher volatility in terms of volume in different quarters. But throughout the year, this volume tends to be normalized. So we look at that geography as having an annual cycle. And due to Uruguay's relevance in volumes when compared to other countries, at the end, this brings more volatility in terms of volumes. But if you look at the year picture, things are more normalized.These are some of the comments I had on the countries. Now I'll turn the floor over to Flavio so he can give you some numbers about the energy generation.

[Flavio Vargas, executive]

Energy, the energy topic, that is a very cool project because it is in the intersection of all of the things we do in terms of ESG and sustainability because, in fact, it really comes to solve one of our problems, especially in terms of waste, which is where we will dispose off the husk and so we have the byproduct and energy can be used in our plants and the surplus can be sold to the free market. In terms of the investment, the company got some funding through a green debenture of BRL 150 million to do the funding of this operation, especially in regards to the equipment, we should initiate the civil construction very soon. The license that allowed us to initiate the work was recently issued by all of the competent authorities in the state of Rio Grande do Sul. So the civil construction work should start up soon. And this, I think, should occur in the next few months.Now on the financial aspect, because after all, we make the investment. But at the end of the day, this is a variable expense because we buy the energy that we consume. We buy it in the free market. And in terms of the expense, most of that expense has to do with the investment. So we have an initial investment, it's a bulk investment, and then we start with the depreciation. There is a maintenance and operation costs, which is low. Therefore, technically, this is almost like a energy generation company within the company, and so the financial dynamics is different. Now financially speaking, when we approved that investment, it had generated an ROE over 15% and this is without leverage. And now the return impact will only be measured, I mean, how much financially speaking, this will be generated throughout the operation because in any energy contract, you cannot do the hedging and have a long operation and lock up the price for a long period of time. So therefore, the financial return will depend on the difference between the price of energy that I would buy from the market. when compared to the operating cost, which is low and also depreciation of the investment that is being done right now.

[Operator]

Our next question comes from Mr. Leonardo Alencar from XP.

[Leonardo Alencar, analyst]

In fact, I would like to revisit the issue of the operations. Well, certainly, the rice operation is something that appeared at the end of the quarter with the spike in prices. But looking at the figures of today, I know that September, I think, had an increase, maybe higher than that of August. I know that there are seasonal issues, et cetera. But I would like to learn more about that dynamic. How much of that spike in rice prices is final or whether there will be a continuity in the increase in rice prices and whether that has to do with a seasonal inventory and whether that impacted your numbers or whether that seasonal effect could be prolonged, if you have any other strategic position vis-a-vis your inventories?And also, with a follow-up question about sugar, I know that you have an export contract until the end of the year, maybe 2024, you may have to seek for other means. Do you see any risk in terms of relocating production? And by doing so, you would lose market share? Or do you anticipate any problems with that commercial content with industries that you already have right now? Could you just give me a follow-up on that sugar business and what that entitles in terms of your short-term strategy?

[Luciano Quartiero, executive]

Speaking about the increase in rice prices that started at the end of August, and it continues throughout September. So in our second quarter, there was no impact because it ended on August 31, but the impact was throughout the month of September. And today, we are talking about levels very similar to the peak of the first year of the pandemic. Therefore, that was a very significant increase that occurred in the last 6 to 8 weeks. All of this increase when we compare the price to growers. And at the other end, when we look at the price on the supermarket shelves, that increase is not already reflected in the supermarket shelves. Therefore, you have the topic that refers to the entire chain of the industry and customers. That's point number one, meaning that we should still anticipate some price increases at the supermarket level. And then you also asked about impact in our working capital, certainly, higher prices will require more working capital. The inventory position of the company is slightly higher in grains right now, but this is not a significant impact. I would say that our highest inventory impact today comes from the fish operation because there was seasonality of low sales post-Lent and now this inventory will be reduced through the third and fourth quarter due to the pre-Lent season, and this is probably the highest impact in the company today. But now if we look at price expectations going forward. I think we should anticipate a better crop season. There was a question related to water availability, looking on the grower side. With El Nino, this is already solved. There is one or another geography that is struggling with water scarcity. But in general, the water topic has been solved. And today, what we see is a slight delay in planting season because of rainfall. So planting is about 10 to 15 days late. So as the water issue goes back to normal and everything goes back to normal, the expectation is to have a better season. But with this moderate El Nino or moderate or strong will last until February or March, I think the concern with climate and rainfall throughout the period will be something very constant. And so these are the comments I have about rice. But if you need any further clarification, just let me know.And when we talk about sugar, the company lost a bit of share in the past quarters, this situation, this macro situation, the current situation has been going on for about 1.5 years. And as I said before, we anticipate that this situation should remain going into the next year. And I believe that the market share we had to lose in a way, it's already in the past. I do not expect any further drop. But certainly, we want to recover the lost market share. But it depends on changes in the macro scenario. And when I look at it, and I think you probably have better ways to get information from the sugar market. But when we analyze the major macro aspects. It doesn't seem reasonable to believe that this current situation that we think that will last until next year will last longer in the longer term because this will bring lots of imbalances. But in case this happens, we will have to renegotiate our supply contracts. And so somehow this will be solved. But when I look at all the variables and again, if I look at how things stand at the moment, it's difficult to believe that the situation will linger much longer. So I don't think this is a structural topic. But if it comes to be consolidated as such, the company can just sit down and revisit the supply contracts we have today. So this is a point that will merit attention and we are doing all we can to minimize the impact. We will have to endure some very hard 12 months going forward, but we are looking at things very closely our share, our execution to see what we can do to improve things. But again, this is not a structural topic. And if it comes to be so, we have different paths to be exploited. And I think with that, I answered your question. I don't know if you have anything else.

[Operator]

Our next question comes from Mr. Lucas Ferreira from JPMorgan.

[Lucas Ferreira, analyst]

I have a few questions about new businesses. pasta, cookies and coffee. I think there are 2 things happening. There is a turnaround of the businesses, so increase in volumes. And then there are some marketing commercial issues, and I would like you to comment about the performance of the brands and volumes as well. And also, I want to hear some more specific issues about the markets of each category. And I'm referring to cost more specifically. My question is because I want to get a better understand about volumes and margins. And I know that you have a turnaround in place. So what can you tell me about pricing. In the case of coffee, prices have gone down substantially. Do you see any other further movements going forward in the case of cookies and pasta, there might be some downtime given the fact that prices of wheat are down. So can you please comment on prices of wheat, et cetera, in your overall price equation?

[Luciano Quartiero, executive]

Well, let me give you an overview per category, starting with coffee. When we look at raw material prices, comparing the current price with the price from 12 months ago, there was a drop of almost 40%. So this entire drop has been already transferred to prices. We expect that prices will not go down any further. I mean with coffee, 1 year, you have a very good season. In the following year, we have a drop in yield in the seasons by 20%. So that fluctuates a lot. And that leads us to believe that whatever was supposed to go down, that is already, you know, hit the ceiling. In terms of volumes, we are launching new products. As we mentioned, we have smaller packages and vacuum packaging, and this will help us in that continuous path towards growth. I think there will be a growing demand for the vacuum packaging. And I also believe that competitors are more aggressive, but we continue posting gradual growth. As I said before, the margins are not yet where we want them to be because there is great potential for further increases. And there is also our movement to gain scale and to improve costs. So our margins will improve through better prices and lower costs. So in general, these are my comments about the coffee segment.But now looking at pasta and cookies, the drop in wheat prices in the last 12 months also was also around 40%. In these 2 categories, the dynamic is different between the 2. With pasta, profitability is quite good. In the past few weeks, we saw that some SKUs were being promoted at different price levels. This is the first sign that the selling price is dropping. Some industries are giving in, we are being very careful with these new 2 categories because as I said before, their pricing strategy is different when compared to our other categories. That's why we are being very careful because it's important that we follow the models of branding of the category. So when we noticed that some products are being promoted, then we follow through. But with a drop of the main raw material by 40%, I personally do not believe that the industries can still practice margins like that for much longer. Therefore, I mean, that drop happens at a lower pace, than the speed of raw materials. So the challenge is how long this will last, looking at the next quarters. We also have increased capacity for pasta. We will grow our capacity by 50% to 60%, and this will occur in the next 3 quarters until all of the equipment is in place. Our coffee capacity expansion has been concluded. As for cookies, the representation of raw material in the cost of cookies is lower, but we are closely monitoring the price performance and sell-in and sell-out prices. And we also look at some specific issues of some SKUs with lower prices. This is one-off situations. But again, we are closely looking at the dynamics of the category, and we will only move forward when we understand what the other players are doing. But we are now noticing some SKUs and some more aggressive actions, which are reflecting on this cost reduction of raw materials. Also, I said before that we are involved in this operation for about a year. The company has learned a lot, there are issues related to how the product is being distributed. So we are still on that learning curve, which is long. But again, the important thing is that turnaround, I mean, operating now on the positive side, it's a very good achievement. There was a transfer of the cookies line from Sao Paulo to Aparecida de Goiania, that transfer was concluded last week. Therefore, we are indeed now in full production with that new line, and this should also bring us some benefits. But we have to bear in mind that there is a learning curve of that operation as well. I believe that these were my comments on the cookie side. we do not have any higher capacity expansion because we have a significant idle capacity in our 2 plants. So these were my comments, Lucas.

[Operator]

Our next question came through the chat box from [ Alexandre de Tovu ]. Could you please comment on your new investments in pasta and coffee? What are the new capacities in terms of tonnage after the conclusion of your investment in comparison with your current sales level?

[Luciano Quartiero, executive]

As for coffee, once when we acquired the plant, the capacity was for 2,000 tons in ballpark figures. With the expansion, we increased that to slightly above 5,000 tons. And physically speaking, we have the space. I mean, it's not contracted, but in the plant, we have room to more than double that capacity of 5,000, if we can do that throughout time. Our coffee plant is running slightly below 50% of its capacity. Now looking at pasta,we had a capacity of approximately 90,000 tons a year, and now we are jumping to 160,000 tons a year. This capacity, as I said, will take 3 quarters to be reached. So we are occupying something around 85% to 90% of the installed capacity of the company. That's why we are talking about expanding. Thank you for the questions.

[Operator]

The Q&A session is now concluded. Thank you so much for joining us, and have a very good day.[Statements in English on this transcript were spoken by an interpreter present on the live call.]