Minerva S.A. (BEEF3) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and thank you for waiting. At this time, we would like to welcome everybody to Minerva's conference call about the material fact released on September 14, 2020. Today, we have Edison Ticle, Chief Financial and Investor Relations Officer. We wish to inform you that during this event is being recorded. [Operator Instructions] The audio and slide show of this presentation are available through live webcast at www.minervafoods.com/ir and MVIQ platform. The slide show can also be downloaded from the webcast platform in the Investor Relations section of this website. Before proceeding, we wish to mention that forward-looking statements may be made during the presentation relating to Minerva's business prospects, operating and financial estimates and goals. They are based on the beliefs and assumptions of company management and on information currently available. They involve risks, uncertainties and assumptions because they relate to future events and therefore depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the future results of Minerva and could cause results to differ materially from those expressed in such forward-looking statements. I would now turn the conference call over to Mr. Edison Ticle, CFO and IRO. Mr. Ticle, you may start now.

Thank you. Thank you all for being part of this conference. The idea is to have a quick introduction and open to Q&A. So I tried to explain in a nutshell what's the proposed transaction. So yesterday, we released that Athena Foods is proposing -- is trying to close a proposed business combination with SPAC, a special purpose acquisition company, listed in U.S., listed at Nasdaq. This SPAC has $200 million in cash, and the proposed transaction is to merger with Athena. And as a result, Athena will be a listed entity in Nasdaq with $200 million cash plus $100 million private investments that will be provided by the SPAC after the transaction. Athena is valued at $1.5 billion of equity value or $1.354 million as enterprise value, considering a negative net debt of $146 million after the conclusion of the deal. In terms of multiples 2021, Athena is valued at 5.6x enterprise value 2021. So far, we have signed a nonbinding letter of intent with the SPAC, and we expect to close the transaction or to release that the business combination will not work in the next 2 weeks, probably in the coming 3 to 4 weeks. So very quick, this is the main details of the transaction. I am available for your questions and doubts. So I think it's more productive to go directly to the Q&A section. Thank you very much.

[Operator Instructions] Our first question comes from João Soares, Citibank.

And so I was wondering, 2 questions from my side. The first one, I just wanted to understand if you could -- I'm trying to bridge the equity stake that Minerva will receive from the new company. And this $1.5 billion equity value, according to my math, it's -- I mean it's 25%. You're receiving $200 million or 25%, but the additional $100 million from the private placement will not dilute Minerva, only the SPAC shareholders. So do you sort of give $200 million for a 25% stake, would you not reach the equity value of $1.5 billion yet. Just if you could give that bridge, that would be very, very helpful. And the second point, could you provide more details of the SPAC shareholders, where they are from, where they are mandated? Any detail will also be very helpful.

Well regarding the details of the SPAC, unfortunately, because of the confidentiality of the letter of intent, we cannot open any more information regarding the SPAC. We had to disclose the nonbinding letter of intent because Minerva is a listed company and following our fiduciary needs, we -- our fiduciary obligation, we had to disclose all the best available information, especially to Minerva shareholders. So that's why we decided to release a nonbinding letter of intention. Talking about the valuation, if you go to the presentation on Page 28, you will see all the numbers that you asked. But basically, Minerva, will have more than 75%. Minerva will have 76.7% in the surviving entity. Minerva will receive $200 million as a secondary offer, and $100 million from the private placement will stay in the cash of Athena. So it's like having $200 million of secondary and $100 million of primary proceeds. So if you make all the calculation, and it's totally disclosed on Page 28 of the presentation that is in our website, and it is part also of the material fact that we released yesterday, I think you have no doubts regarding the valuation and all the metrics of the deal.

Our next question comes from Barbara Halberstadt, JPMorgan.

So I have a question in terms of your capital structure and how this transaction fits into that in terms of leverage reduction going forward and which entity I see you have some growth opportunities you're highlighting here in your presentation. And how do you're thinking about leverage going forward and reconciling that with these growth opportunities?

You're talking about Athena or Minerva, leveraging Athena or...

Yes. For both, for Athena and for the consolidated Minerva since you're doing this transaction.

Okay. So making a simple calculation, if Minerva received $200 million, considering the exercise of the warrants that SALIC is -- we will be probably doing during this month, we're going to have a leverage -- a net leverage of something of around 8 -- 1.8x to 1.9x, which is below our 2x long-term target, or let's say, the long-term optimal level that we foresee for the capital structure of Minerva. In terms of Athena, after the transaction, Athena will be net cash -- will be negative debt of probably $146 million. The growth that we expect for Athena until 2022 will not require additional leverage. The targets that we have for acquisition until the end of 2022, they can be executed only using this net cash that will be in the balance sheet of Athena. So until the end of 2022, we don't expect Athena to have leverage in principle. And Minerva, according to our long-term view for optimal capital structure, we expect the company to be around 2x net debt to EBITDA. I'd like to remember everybody that, in January, we approved a new dividend policy for Minerva. That would imply a minimum 50% of net profit as dividend payout for shareholders if the company at the end of this year and next year have a net leverage below 2.5x, which will probably be the case, especially after -- if we conclude this transaction. So in that sense, at least half of the net profit of Minerva this year will be distributed as dividends for the shareholders. I remember you that until the second quarter, we had almost BRL 570 million -- BRL 530 million of net profit in the year, so not considering the second half of this year. So in that sense, following the policy, the dividend policy approved by the Board, Minerva will probably have the ability to distribute at least 50% of net profit at the end of this year.

Next question comes from Guilherme Palhares, Bank of America.

Okay. So I have 2 questions on my side. The first one is regarding the corporate governance of the SPAC or Athena. How it will work, the way it will work, if the company has any details on that? And I also, thinking about the leverage of Athena, we see that it will be a net cash company, which is differently -- it's different from the profile that Minerva has. So how you think about it? If there is any potential of some asset and liability management as well?

Okay. So talking about the governance, Minerva is listed at Novo Mercado. We have the highest standards of corporate governance in Minerva. Athena will not be different. There is a structure, a governance structure that is being negotiated with the SPAC guys. But what I can tell you is that, obviously, Minerva will keep the controlling position of the Board because Minerva will have 76.7% of the company after the transaction is closed. We're going to have independent members. Probably more than 20% of the Board will be independent members. And we're going to follow all the Nasdaq rules, all the SEC rules for a company like this being listed in the U.S. So what I can assure is that the corporate governance procedures will be at least at the same levels of Minerva, but probably they will be even better in order to follow the regulatory rules that we're having for a Nasdaq-listed company. Talking about leverage, yes, Athena will have net negative leverage after the transaction. By executing the business plan, leverage will probably continue being very close to neutral. This is very important because this opens the new opportunity for Athena in 2023, '24, '25 to continue growing the business. So by doing this carve-out, what we are saying to the market is that the main growth vehicle for Minerva will be Athena. As we have been telling the market, Minerva will become a dividend-payer company, so the growth will totally be under the hands of Athena. So that's why we see the great opportunity to list Athena in U.S. to make Athena the most important growth vehicle for Minerva with a lot of opportunities, a lot of especially room to leverage and to have a much more healthy capital structure in order to continue growing the business, generating value and increasing the return to the shareholders. So the opportunity of this business combination is for the medium to the long term. It's to position Athena and to strengthen its capital structure in order to have Athena growing much higher and much faster than Minerva, and more important, to be the real growth vehicle of Minerva going forward with, let's say, a much more balanced capital structure than the capital structure that we had in Minerva, let's say, until 2018, 2019. So the idea is to keep leveraging Minerva very close to 2x, as we have already spoke to the market. And in the case of Athena, we have target that was approved by the Financial Committee of the Board of Athena that leverage will never be over 1.5x EBITDA. And the idea is to have, in the long term, something around 1.0 and 1.5x net debt to EBITDA. So this will be the capital structure and the leverage profile of Athena for the long term. But in the medium term, as you mentioned, Athena will be net cash. And we would probably use this cash to speed up growth and make more acquisitions in '22 and '23.

Our next question comes from Thiago Duarte, BTG Pactual.

Oh, sure. No problem. Yes. Two questions. The first one, if you could explore a little bit the strategic value on the -- about the idea of making acquisitions outside South America, particularly Australia, as you guys put in the business plan in the presentation. So just if you could explore a little bit the rationale. It's a different mindset from what we have been hearing from you guys for many years. So it would be interesting to hear the benefits and the opportunities that you are envisaging in Australia in particular. And the second question would be, it's actually a follow-up from the discussion about the capital structure of Athena, if you could. If there is already any sort of dividend policy that you are targeting for Athena so that you could combine the M&A pipeline and dividends within that 1 to 1.5 leverage range that you mentioned in the previous question.

So talking about the capital structure of Athena, well the minimum dividend policy is to pay at least 25% of net profit. We haven't discussed it, a new dividend policy in Athena yet. Obviously, we are waiting to have this deal closed, have a new Board. And then if it's the -- and then we'll obviously have a discussion regarding dividend policy, but it's not -- it isn't something that we have already done. For now, you can consider 25% of net profit as dividend. Talking about Australia, the rationale behind Australia is to build a real global beef company. So having diversification in terms of origin is key in this business, especially to supply the main growing area in the world, that are Asia first, and second, Middle East growing areas in terms of demand of red protein. So the rationale behind going to Australia is to diversify further to another important origin that is specialized in niche markets. And we believe that using our commercial channels, especially in Asia and Middle East, would allow us to extract a lot of value from acquisitions in Australia. You have seen in the presentation we are targeting not only beef plants, but also and most interesting, lamb plants in Australia. Our partner, SALIC, they have a lot of activity in farming in Australia, especially in the lamb sector. So it could be a perfect partnership for Athena to have lamb plants in Australia, be able to source the animal directly with our partner and export to Middle East and also to China using much more efficient channels, commercial channels that we have and that we establish by being, as a group, one of the most important exporters of beef and red meat to Middle East and also to Asia. So the opportunity that we see in Australia are related to: consolidate further the market in lamb and beef; extract synergies, especially commercial synergies using our commercial channels; and third, benefit and leverage our lamb operations in Australia or future lamb operations in Australia, leverage it by partnering with our partner, our partner in Minerva, SALIC that is in the farming business in that country.

Our next question comes from Andrew De Luca, Barclays.

Yes, so just going back to Barbara's question a little bit earlier. At the Minerva level, you guys have always talked about the internal targets are based on net debt. But if we look at gross leverage, it's still relatively high. So can you just remind us how you think about your gross leverage? And does it make any sense at this stage to consider reducing the amount of gross debt that you have?

Yes, it makes a lot of sense to reduce gross debt as well. We have been carrying a lot of cash because the financial risk of the company when the leverage is a little bit higher than what we expected for our optimal capital structure make the financial risk of the company higher. So in that sense, it makes sense to keep more cash. It's not the case anymore in Minerva, so you can expect cash and gross debt to be reduced in the next 12 to 18 months. However, we have a minimum cash policy in Minerva that would imply a minimum cash of around BRL 3.5 billion to BRL 4 billion today. So you can expect a cash reduction of at least BRL 2 billion in the next 18 months. That will imply 1 -- almost 1 turn of reduction in terms of gross debt to EBITDA.

Next question from Andre Hachem, Itaú.

I have a very simple question on my end. Can you just comment on the milestones to complete the transaction? So what should we look in terms of new dates or what should be -- I mean, what should be obviously the procedural dates we should look out for in order to complete this transaction what you have to see its evolvement?