Camil Alimentos S.A. (CAML3) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Welcome to Camil Alimentos call. With us today, Mr. Luciano Quartiero, CEO; Mr. Flavio Vargas, CFO and IR Officer; and the company's IR team. [Operator Instructions] The audio is simultaneously available in the company's IR website. Management's forward-looking statements and the Q&A session may include projections about future events, which are subject to risks and uncertainties, therefore may or may not happen or may be different from what was expected. Please, Mr. Luciano and Mr. Flavio, you may begin.

Good morning, everyone. Luciano, please?

Flavio, I will start with a brief introduction. I'm not in São Paulo so I don't have a good connection. I will start with some brief remarks and turn the floor to Flavio. I would like to say that the company is very pleased about this acquisition in Ecuador. The company is in line with our strategy. And this -- we have been saying that this is our strategy for the past few years, and that's what the company intends to do, which is to have organic and inorganic growth in and out of Brazil in rice and also in new categories. So this step in Ecuador with rice goes along with what the company has done in Uruguay, Chile and [ Peru ], that is we are going into a new country in rice operation, which is the company's origin and what the company learns faster in terms of operations. We are acquiring a company that has a leading position in Ecuador. And we expect to do something very much in line to what has been done in other countries, especially efficiency improvement because, since this is another country, it doesn't have that many synergies with Brazil. I am concerned about connection, and I will turn the floor to Flavio so that he can start the presentation.

Thank you, Luciano. Good morning, everyone. I think today is a day when we wake up very happy to be able to announce this new acquisition of the company to go into a new geography. With the acquisition of Dajahu, we go into the Ecuadorian market. And like Luciano said, this is part of our strategy of having a food company in Latin America, a Brazilian multinational company that is relevant, working in attractive markets and also working in a leading position in each one of the segments. When we look at the Ecuadorian market, this is a market that -- for us who work with rice, this is a market that makes sense. This country has around 17 million inhabitants, and it hasn't had a special growth economically. Rice is very important in Ecuadorians' diet, just like here in Brazil. It is the main input in Ecuadorians' daily meals. And this country operates around 1,700,000 tons of rice. And this amount that is produced and sold in the country turns it to even a larger market than Uruguay, Paraguay and Chile, basically 50% to 60% larger than these other markets. So this is a market that for us is important. And we wanted to become a leading company, a very relevant multinational company in Latin America. So this was the step and this is a step that makes sense. And the opportunity rose, and we made a deal. So we acquired Dajahu. This is a well-structured company, especially for the local standards. And this is a company that really attract us because, just like us and the way that we like to work, this is a company that is very relevant in the domestic market. It is a leading company with around 20% of the market of aged rice. Aged rice is a special product in the Ecuadorian market. It's a premium product, and you can have a better performance because the rice is whiter, it's looser. And this is a process that was developed in the country where you can accelerate that storing process for rice. So the older is the rice, the better will be its performance on the pans. And it's also very relevant, and it has 7% of local consumption when you consider all segments and end products. So we understand that it is a great platform. The company is among the main companies in the country. It is one of the largest in the food industry there. It does have relevant brands for their domestic market, and the domestic market has a lot of the production there. And we understand that there is an opportunity to migrate to products of higher added value. This is a company that when we look at the productive point of view, it does have a production capacity. This is a company that was losing a little bit in terms of the rice process, and so it has a possibility to be expanded productively. And also market-wise, this is a fragmented market there, so we do have an opportunity to make a consolidation in the country. This company today is only in 50% in the country. So there is an opportunity to enter the other areas and therefore, providing additional growth. And what we expect is what Luciano mentioned, that as we go in, we should be able to contribute with capital and intelligence. Capital seems to be a very determinant topic in the country. The other players in the country have difficult access to capital. So we understand that going in with capital will help us in terms of growth. And it is going to allow us to explore purchasing opportunities so that we can maximize our return. We also expect to have efficiency gains there, both in supply and purchases, procurement and industrial logistics and both in terms of products and distribution as well. So what we expect with this acquisition is that we are able to replicate what happened in Uruguay, Peru and Chile, where we were able to have growth in volume. And here, we believe we do have a relevant growth opportunity and also a better margin improvement because of scale gain and this efficiency leverage that we are going to go after over the years. So in summary, we have a growth platform. Our focus here in the short term is 100% in rice. This is the company's DNA. This is what we know how to work with. We will try to analyze what we can improve or what are the opportunities to improve both in the organic growth as well as in this increase in profitability. And we understand that this first step in the future may represent a possibility to go into other categories in the consumption sector. And we also see that in Ecuador, it might mean a synergy with our fish products. This is an important exporting country for tuna fish, for instance. And that's important for us as well to be close to this market. We think that at some point, we'll be able to look for synergies in also this other area. So we are bringing in the capital, knowledge. And we want to drive up the profitability of this operation. So in terms of financing, we hired IFC, International Finance Corporation, to support us and to assist us in financing and not only because the price is competitive and the term of this financing is special but also because it stresses all our ESG agenda, which is also becoming a focus of the company. In order to have financing, we have to be submitted to a strict diligence in environmental area, and we have that commitment. And having that approval by the IFC, we understand that this is very important, to stress all our commitment with the ESG agenda. So we are announcing today that we signed the contract to conclude the transaction. We believe that's going to take up to 60 days, and we have to meet all the terms. And also, the seller has some topics to meet so that we can finalize the transaction. In terms of multiples, we have paid a multiple that we understood was right, considering the size of the business and also the growth opportunities we foresee. And what we feel in this enthusiasm is differently from last year when talks in the business environment were more introspective and the companies were very much focused inwards to understand what the pandemic would cause and how everyone could overcome this. But now we see that the business environment this year has changed. So we are taking this step that's a nonorganic step that's very important. And we are hopeful that we will be able to conclude and move forward in other conversations because of this process which is being different this year. So now I end here my initial remarks. And I will open this call for the Q&A session.

[Operator Instructions] Our first question is from Guilherme Palhares, Bank of America.

My first question is about some operating opportunities between these 2 companies and synergies from then on. Do you have a number in terms of synergies that you expect when you look at the margin differential that Camil has? Can you think about any convergence there? And also, in terms of head count, the current team of the company will be the same? Are you going to bring in anyone to this new operation? And finally, you just mentioned, Flavio. Is it fair to say that despite of this movement, the company is still active in the M&A market in terms of opportunities -- the opportunities that are still on the table?

Guilherme, thank you very much for your questions. In terms of synergies, I don't want to give you a figure in here. But our expectation, in fact, is that we are able to improve the company's profitability. Today, they operate around 8%. And what we understand is that what we can bring in, in terms of improvements and efficiency, industrial area, also procurement. And we see a lot of opportunities in procurement because there is a capital deficit in the company. So we come in with working capital, and we understand that can allow us to buy products at a special price. We also believe that by having a more aggressive approach, we can grow our size in terms of fixed costs as well. So yes, we do expect to improve the company's margin. We believe that we will be able to have that convergence because they are operating at 8% and we are operating at 10%. But I think it's too early to say where we can get because we still need to know more about the operation and the market -- the local market, I mean. Now in terms of operations, what we have here is -- the way we work, we try to allow the local teams to be independent. This is something we learned over the years. When we acquired Uruguay, we sent 2 people from Brazil. Chile, we sent 1 person there. And in Peru, we were comfortable keeping the whole team there. I believe that in this operation, we have more or less the same understanding. We will use all the ability, the skills and the knowledge of the local team. Obviously, the seller, the owner of the business and the person that was there every day, that person is going to lead the everyday managing of the company. And this person will be helping us so that we switch that management, and we should send someone here from international operations also to take over that local operation. But the idea is that we like to allow them to have autonomy, and this is what we try to give to local teams. And in terms of M&A, the answer is yes. When we talk and we discuss here internally, we say that we have 2 restrictions. One of them is operating, how many operations we can run and integrate in the company; and the financial restriction. The financial restriction is always easier tackle because we can look for financing, loans, we can increase the company's capital to finance an acquisition. And also, we have the operations side of it. For the operation itself, the way we organize ourselves is under the responsibility of our officer that watches over international operations. So we are still comfortable here because in both areas, financially and operationally, we still have room both in the domestic market as well as in the international one.

Next question from Lucas Ferreira, JPMorgan.

Flavio, in the last 12 months, the figure that we see, what that represents in the history of this 8% of margin, the volume, the revenue in the cycle, have they benefited last year from COVID or not? So how does that compare with the history of the company in terms of profitability? And what do you expect for the next 12 months for the company so that we can better understand the valuation here? Was it higher than what was expected or lower? And just to confirm, you said BRL 10 million, and I don't know how much you have in terms of interest charges in IFC. But usually, that takes off your profit. Do you confirm that? Or do you have anything else that allows 2021 to be different for you?

Well, in terms of size, the company had growth -- was posting growth, yes, this year. And so far, they are more or less with a sideways performance. And we do have last year's performance, but we need to set our foot in the country to be able to use that as a driver for growth. So in the short term, we will have to learn so that we can boost the operation, but we believe we can have a sustainable growth in the operation and have operating and profitability gains with the drivers that I mentioned before. In the financial point of view, this is an acquisition that is 100% leveraged. We will be using IFC's support for the funding not only of the equity that we are paying for but also this working capital that we understand is going to be needed to be able to do investments in machinery and so on. So when you look at the consolidated results, it will have a small impact in the bottom line because of the size of the operation. But the way we look at it is that when you look at the country and this ambition to be an international company with relevance in Latin America in rice and food industry, this is an operation that makes sense. So more than looking at the numbers, we are very optimistic that we will be able to drive up results out of this business.

Next question from Gustavo Troyano, Itaú BBA.

And my question is about the mix of products of the acquired company. Can you talk about the margin difference between the premium products, which I believe are the main ones in the portfolio of Dajahu, and the economic products that you mentioned in the portfolio? And still on the premium, can you tell us what are the main technology differences that the process for aging rice involves here, in processing and packaging rice?

Well, when I think about the mix, it's not much different from what we have in Brazil. Obviously, with some products, we end up having a higher margin in premium products, differently from an economy product for the company. Specifically, they have a profitability of a relative base that is higher. Because of the industrial characteristics that they have today, they do not purchase paddy rice, and that allows us to have lower competitiveness because they have a greater focus in the aged rice. And that's how they can have more -- a product that is of more premium characteristics. So in terms of operations, this is one of the drivers that we try to study, to bring in more scale, to purchase straight from producers. And so this will allow us to become more competitive as well in white rice. But that is a fact. They have greater competitiveness now in aged rice than in white rice, and that's very similar to margin differences that we have here in Brazil. In terms of technology, the Ecuadorian market developed the following. In order for them to have a better performance and to have that loose rice, you have to have a sustainable rice, and that happens all over the world. So when you are working with good rice, especially the one for the Brazilians, that's an older rice. So you receive the rice, you send it to the silo and you wait for a few months. The rice rests there and it becomes looser. The technology that they developed for aged rice is that they start with white rice, they heat up the rice for a certain period of time and then they let it cool off. And then even if it is a new rice, it starts to have that older rice characteristic. It gets looser and whiter. So in terms of the business point of view, this technology ends up bringing down your capital allocation because you do not have to buy the rice and wait for it to come out of the silo and wait for it to set there and to have a better performance. And in the functional point of view, we were surprised because it has a great performance. Because it absorbs more water, so the grains are larger and look nicer, whiter grains, and the rice is very loose. And for the local characteristics of the company, it ends up having a performance that is very good, specifically in the high areas. What I mentioned that is a characteristic of the industry is that rice in the higher zones, they are submitted to a low atmospheric pressure so it is more soaked. So that is a very local characteristic. And they study bringing that to Brazil and other places, and we have that discussion. And maybe the problem that we have to work with it in the local market is that this aged rice, when you buy that in a bag, it is kind of yellowish. So in the Ecuadorian market, they worked with marketing. And they learned that even if the rice is yellow in the package, but when you cook it, it is -- it gets larger and it is fluff and it's loose. And -- but here in Brazil, we would have that barrier to overcome because this was a marketing campaign that they had there. So that's what I had to talk about technology. I don't know if you want more details.

And I would like to add, Flavio. I think this technology was developed because of a need of having the rice better cooked in high altitudes, which is a characteristic in Ecuador that's very specific.

[Operator Instructions] If there are no further questions, I would like to turn the floor back to the company's management for their final remarks.

Thank you all very much for your participation. I would like to end this call stressing something that Flavio mentioned during the Q&A. The company in the last few years and -- before and after the IPO, has worked on the inorganic growth. This in the last 20 years, and the company had almost 1 acquisition a year. And after the IPO that became a slower pace. But as Flavio mentioned, considering the current scenario, the company is very optimistic about this new acquisition. In these the past few years and specifically in the past few months, we prepared ourselves financially and also operationally. So this is an area that in the past few years didn't bring us that many results, but we have a great expectation for the upcoming months. Thank you all very much, and see you next time.

Camil's audio conference has ended. Thank you very much for your participation, and have a nice day. [Statements in English on this transcript were spoken by an interpreter present on the live call.]