Ouro Fino Saúde Animal Participações S.A. (OFSA3) Earnings Call Transcript & Summary

Good afternoon, everybody. Welcome to our virtual meeting promoted by Ouro Fino Saúde Animal for us to share the results of our company in the first quarter of 2021. I'm Juliana Matthes. I'm part of the corporate group of Ouro Fino, and it's a pleasure to have you here. At the end of the presentations, we are going to open for Q&A. So in case you want to ask any question, please write down in our Q&A window. We have a disclaimer, and I would like to read it for all of you. Disclaimer. This presentation brings statements about future events that are subject to risks and uncertainties. Such statements are based on our management's beliefs and assumptions and on information that the company currently has access to. Statements about future events include information regarding our intentions, beliefs or current expectations as well as those of the members of the Management Board and Company Directors. Disclaimers according to the statements and information about the future also includes information about possible and presumed operating results as well as statements preceded by, followed by or that include the words believes, may, will, continue, expect, anticipates, intends, plans, estimates or similar expressions. These statements and information are not guarantees of future performance. They involve risks, uncertainties and assumptions because they are related to future events and, therefore, depending on circumstances that may or may not occur. Future results and value creation for our shareholders may differ materially from those expressed or implied by the statements made about the future. Many of the factors that will determine these results and values are beyond our ability to control or predict. In order to talk to you today, we have Kleber Gomes, our CEO; and our Financial Director and Investor Relationship, Marcelo Silva. I would like to thank them both. And to continue our event, I hand the floor to Kleber. Good afternoon, Kleber.

Good afternoon, Juliana. Thank you. Good afternoon, everybody. It's a pleasure to have you all here once again for our report of the first quarter. I'm very happy -- we are very happy with the results we had. It's a historical result in relation to growth. And I would like to highlight our strategy -- the connection of our strategy. We had a strategic planning in 2019. We finished it, and we are implementing since 2020. We are harvesting good crops. We had the chance during the Ouro Fino Day 2021 that happened in March 12 to present a lot about this strategy, our investors, our shareholders, highlighting our growth avenues, our opportunities to grow and how we would be focused in a great execution. And we've seen results in practice. And with that, we've seen some results -- positive results in the last 6 quarters. We only didn't grow in the pandemic quarter, the second one of 2020. All other quarters, we had a meaningful and positive growth. That shows our compliance to the strategy and a great execution. Ahead, Marcelo will highlight all growth points, but we see all actions from strategic planning that were outlined and they are focused on growing, growing in never-penetrated areas, adjacent markets, partnerships, alliances, development of people, culture work. So we have a lot of great things in that sense. Also, we -- it's always nice to mention that we are quite concerned with sustainability. I would like to highlight to all of you that on March 4, together with the financial part, we released our sustainability report showing all our commitment with the actions for the environment, social and also, governance actions. And last, but not least as we usually say, we always highlight that everything we do is with people. And we are very proud of our team, a team that is quite cohesive with a lot of knowledge, market knowledge. And after many years that we haven't been part of the ranking of best companies to work, we took part up to 2014 with good positions. We went back this year. We don't have the results so far, but we were certified as the best company to work by GPTW. And with great characteristics. We had 93% of our employees who answered the survey. That's a great rate. Considering the GPTW benchmark, we had a satisfaction rate of 89%, what, in my opinion, is excellent. Just keep in mind that the best score was 92% last year. So we understand that we are living in practice our values, the values we also presented in August 2020. Our values in which we work with a purpose, always trying to be leaders in our sector and playing to win, taking care of people and connecting to the world. For us, this result of the survey just shows the connection we have among people, our customers, our partners with our strategy. So we are quite happy in that sense. So a lot of positive aspects with a lot of work. We've seen the performance of markets in a very positive way. And here, we have always highlighted our growth drivers. Those who have been here for a while, we say that Production Animals are our major driver, and it is aligned to the growth of protein demand in the world. Brazil is the major supplier, the barn of the world. And in order to have that, the farmer would have -- would need technology, and we are leading that in a clear way in the last years. We've seen Asia demanding protein, mainly in China. We have a lack of animals in the field. And in order to serve this demand, farmers are using technology, mainly reproduction protocols, artificial insemination protocols. And in this positive scenario for protein demand, the commodities price are quite hot. The price of the calf is in historical records. So with the team, we have a very qualified team, and the greatest one to generate demand and visit customers. In our model that is different to access the market, different from major multinational companies that use distributors, we go to the stores to serve almost 5,000 customers per month. So we are leaving this good moment of the market. And it's not a moment. That's what we have been discussing that would happen, and it is happening. We have -- we had a great result in Production Animals. Same thing when we talked about Companion Animals as a driver. We always mentioned humanization of pets. Pets, they -- people, they are more urban, they get married less, they have less kids, they adopt pets. In those moments, they treat pets just like family members, and they live longer. They have more diseases. They hit the markets. The veterinarian who was a general doctor becomes a specialist, has better diagnosis, demand specific treatments and so on. And we've seen that during the pandemic this was even more present once people lived with their pets daily. There was an increase in the adoption of animals. We see that in the segment something that is happening. And that has brought a strong growth in our revenue, not only selling, but a sellout that is quite strong and very positive. So once again, highlighting everything we were talking about the growth driver in a very present way. Another side of our growth is International Operations, basically in Latin America, especially in Mexico and Colombia, where we have a smaller participation but we have room for growth by market access or new products that are being registered in such countries and launched there. And also favored by the exchange rate, and that brings a good margin for International Operations. So it's a set of information and news that are quite positive, and we trust the work that has been done. We have an expectation to close the year in a very positive way, just like we communicated at Ouro Fino Day. We are going to be here to answer your questions. So now I hand back the floor to Juliana. Thank you.

Thank you. Thank you, Kleber. Well, from now on, Marcelo Silva will present our results. Good afternoon, Marcelo.

Good afternoon, Juliana. Good afternoon, everybody. We are here to communicate the results of the first quarter of 2021. As you are going to see, we are with a strong growth with an improvement in margin generation of cash and keeping a low debit. We grew in the first quarter of 2021, the best one in history, and consolidates a history of growth, 51%. We reached BRL 169 million of net revenue, and we improved our gross margin from 45.8% to 49.3% in 2021. That reflects the efforts of the company, the good moment or the market trend, as Kleber mentioned, and shows that we are in the correct pathway just with the results from the strategic planning. Moving forward in the segments. In Production Animals, we had a growth of 62%. The net revenue reached BRL 116 million. And we also had an improvement in the gross margin that reached 39.9% versus 36.1% in the first quarter of 2020. That growth reflects the positive scenario of exportation and the price of protein that has kept farmers quite excited to keep the growth -- the levels of investment, and we should highlight reproduction line due to the increase of the herd and also the calf. The alignment of opportunities with a single relationship, the way Ouro Fino access the market, is differentiated. And that brings a competitive position due to the incentives the efforts in generating demand. Our field team at the market, at the farm, showing the productivity that our products may bring and improve profitability of the property and the gross margin reflects the increase of volume. And also, we had this price repass, the price was readjusted, and that brings a positive impact. We also had an improvement in the mix. All that combined, bring a gain of gross margin in relation to the first quarter of 2020. Companion Animals drove a growth of 43%, BRL 30 million of net margin, and we had gross margin of 70.3% versus 65.7%. Kleber mentioned, this sector is growing a lot. The pandemic brought a movement, increase of -- the increase of number of pets, and our perspective is quite positive because people are taking care of their pets, and they have that humanized relationship, animals and their tutors. We have kept growth quite balanced in selling and sellout. An improvement in our margin also reflects a better mix and a reduction in production, and we also had an adjustment in that period, adding to the gross margin. International Operations, we had a growth of 20%, BRL 23 million, versus BRL 19 million from last year, 69%. The gross margin shows the favorable exchange rate. We also had an increase in volume in local operations and an improvement in the mix of our revenue. So we also expanded our operations. We increased the participation of companies in other countries aside from Mexico and Colombia because those are the ones we act with local distributors. Well, we grew -- we diluted, the SG&A went from 39.9% to 31.5% due to the growth that we could really reduce expenses. On the other side, we maintained, even during the pandemic, a strong R&D agenda. And in the result, the expenses for R&D went from BRL 8 million to BRL 12 million in the first quarter of 2021. You are going to see in the consolidated results that the company is speeding up and also increasing the intensity of research and development to expand the portfolio, something that was also in our strategic planning. The combination of growth and dilution of expenses brings an EBITDA of BRL 25 million versus BRL 5 million in the first quarter of 2020, quite meaningful. And an improvement in the margin was 4.6%, and now it's 15% in the first quarter of 2021. We had an impact in the financial expenses that was less favorable in relation to the first quarter of 2020. Basically, it impacts the derivative market related to the swap of foreign rate. Due to the volatility, it increased a lot in the first quarter in relation to 2020. And that effect refers to a swap operation of a debit of BRL 30 million with a 1-year deadline. We took that in April last year for liquidity. It had a rate of 4.85% per year, but we paid in the second half of April, so this is not going to happen again. Net profit reached BRL 9.6 million, a margin of BRL 5.7 million. In face of the losses we had last year. That reflects a gain of net profit for the company. It's important to highlight the cash generation of BRL 23 million. We generated almost an EBITDA in cash generation. We had the payment of amortization and interest, CapEx of BRL 17 million, and we finished the first quarter with a cash of BRL 290 million versus BRL 226 million in December 2020. The net debit is quite low. We reduced 30% the net debit that went from BRL 212 million in the first quarter of 2020 to BRL 148 million in the first quarter of 2021 from 1.89x to 0.91x. So we have low leverage. The cash today is around BRL 200 million. It is addressed to strategic projects, and it is robust and enough to support the growth of the company, to support our cash flow, and this is for everything related to the strategic planning, mainly in the access of adjacent markets, as we mentioned during Ouro Fino Day. Well, I've mentioned about this before. If you see we invested in -- between intangible and expenses, we kept 9% of our net revenue dedicated to projects for product launching. Well, I would like to thank you all for your trust. We are available for questions. And thank you, Juliana, the floor is yours now.

Thank you, Marcelo, for your presentation. Well, we are going to start our Q&A session. I would like to invite you all to take part. You just write down your questions in the Q&A window. Write the question, your name and the name of your institution or company. Okay. So we have the first question from [ Kayo ]. Kayo, thank you for your participation. Kayo congratulates us for the results and asks if there was any advance about the possibility to manufacture COVID-19 vaccines in Ouro Fino's labs?

Kayo, thank you. Thank you for your question. I don't know if you are familiar with the subject. But anyways, I would like to highlight that we communicated the market on April 20 this year once there were some news about the possibility of the company -- of veterinary and pharmaceutical companies, some of them, the ones that have plants to produce biological products, vaccines would be used to manufacture vaccines for COVID. So we stated our position that we have followed. We have -- we had some contacts, but we have the same position. There's nothing concrete to be mentioned. I highlight that us, just like some other labs in the sector, have one of the best manufacturing plants for vaccine production. A plant, [ MD3+ ], that is the greatest biosafety in the world to manufacture foot and mount disease vaccines, and we have been manufacturing for more than 10 years. And we also have a plant that was recently opened at the end of 2019 for recombining vaccines, and you all know that we have a project under development to cover the rest of the market. So we have followed all the discussions. We are answering the context but we have nothing concrete to be communicated, nothing related to that. Thank you for your question.

Next question from [ Victor Junior ]. Victor, thank you for your participation and your presence. He also congratulates us for the results and asks Companion Animals sector that has been growing faster was in line with Production Animals in the last quarter. Do you see that this -- do you see this as a trend to have this balance of growth? And even with the exchange rate in a favorable manner, the International operations grew less than the national operations. Why?

Good afternoon, Victor. Thank you for your question. I don't think that is the pet market that decelerated. It grew 43%. I expect it to grow even more. It's the market that has way more expenses -- adoptions, expenses and everything. But Production Animal grew a lot, 63%, but pet had 43%. And our expectation is that it will keep on growing even above the Production Animals. In relation to International Operations and expectations, we had in the first quarter of 2020 one exportation of a certain product that is the foot-and-mouth disease vaccine to Uruguay, and that didn't happen in the first quarter of 2021. So that's the reason. And probably, it's going to happen in the second quarter. So there was this mismatch of the sales of this product that is quite seasonal related to the campaign in the country. So if you look the explanation note for opening of sales in the main countries and you exclude, it goes beyond 60%, the compared growth per se. So thank you.

Thank you. [ Marcel Rubio ], he also congratulates us for the results. Thank you, Marcel. And his question is, how Ouro Fino sees the current rupture of the supply chain in the world? And which actions have you taken to avoid the delays of the strategic input for the development and launching of products?

Marcel, thank you. Thank you for your question. It's a great question. We see India in the second wave of COVID. So what have we been doing? Since last year, in fact, monitored really close mainly China and India were part of our input -- active input comes from. We had a fine work with operations, sales planning, and our decision was to increase the level of our inventory. So if you check our inventory in the first quarter of 2020 and the first quarter of 2021, you'll see that there is a meaningful increase of input, mainly raw material, that is a safety -- an additional safety we are working with a level above the historical level. So there will be no break in our production. We don't see any chance. We didn't have in 2020. And we have been working to avoid that in 2021. We have an office in China, and we are locally following all suppliers. We have a close relationship with suppliers in India. So our countermeasure is to be even closer to keep a safety level that is larger. So it's going to be okay, and there will be no lack of products.

Great. [ Eugenia Caballero ], she has 2 questions to us. How do you see the environment for demand and price for reproduction protocols? And what is -- how is the pipeline for new products and vaccines? Eugenia, thank you for your questions.

Hello, Eugenia, how are you? Well, great question. I just mentioned about the fact that we are leaving a growth in Production Animals. And we mentioned that the adoption of technology would increase productivity in the way to provide protein to the world. And reproduction is the major aspect that has been used with technology. The market is warm. It was like that last year. The SBIR report showed a growth of around 30% in reproduction in relation to last year. And we expect this segment to be warm still. And this is a market for all who see lack of animals in the field, we need cows, and this is through reproduction. We have a complete portfolio. We have a technical team that is amazing, and they managed to innovate in these sectors with important protocols that are quite adopted by our customers. So the markets will be warm in the future. We are going to capture that with our field work. Thank you for your question.

Kleber, we also have another question from Eugenia about the pipeline of new products and vaccines.

Eugenia, thank you. We are here developing products, vaccines. I would like to highlight here that we had a first question about COVID. We didn't abandon any project. We are executing the projects just like they were established. We managed to advance a lot. I cannot mention any information beforehand, but we are on our way, getting results from research, development, positive development in our purpose. So in a close future, in a couple of years, we are going to have a good position in biological products, especially swine, bovine and pets. Thank you.

Thank you, Kleber. Well, we don't have any other questions. So I would like to thank you all for being here today this afternoon. And our company is always open to leave our values together with you. To finish Kleber, a quick wrap-up, please.

Well, thank you, Juliana. Thank you all. Thank you, Marcelo, for being here with us. I would like, first of all, to thank you all for being here, listening to us. Those who follow our company, I would like you to trust our company because we are working hard, and the results are quite transparent to all of you. I would like to thank our team, the Ouro Fino team, those who are in the field who wake up early, who work hard and make all that happen. And also, I would like to highlight this year, our Management Board, our Board of Directors has been a great partner in the administration we have worked together. And I would like to thank you all. We are here available to all of you. Have a great afternoon, and see you soon.