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

Good afternoon, ladies and gentlemen. You're very welcome to this event where we are going to share the earnings release of the second semester of this year. I'm helping [ Marcy ] today, and it's a great pleasure to be here today for this event. [Operator Instructions] We have a disclaimer that I am showing to you all. 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. The 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 include information about possible or presumed operating results as well as statements preceded by, followed by, or that include the words: beliefs, may, will, continue, expect, anticipate, intends, plans, estimates or similar expressions. The 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. So to move forward with the presentations, we have our CEO, Kleber Gomes; and our -- and Marcelo Silva. Thank you for being here today, and Kleber, the floor is yours.

Good afternoon. It's a great honor to be here once again, to share the results of the second semester of 2021. We are very happy we are leaving a very positive moment in the market, a very positive moment for the company, showing consistent results, a lot of growth, what gives us a certainty that we are on the right path, yet with several improvements for the future. I happy can hold up the presidency of the company on the 1st of April 2020. Right after that, we started to lock down in a pandemic, tough months, and we have worked a lot preparing the seats. And on the 20th of August 2020, we launched our new culture and values, which guides us towards our future. It's a work that counts on several hands, and it has proven to be simple and effective as we wanted it to be. And within our purpose to reimagine animal health, there are 3 values. Play to win for people and connected with the world. Play to win represents our culture for results and our ambition to look forward to having superior results or higher results. Care for people, which is a pharmaceutical company based on technology, and that needs to find the best solutions always. So this is our innovation culture. And in the core of everything, people, we always talk about the fact that taking care of people, they will take good care of our business, and this is also true for food. And within this context, on the 20th of August, we will celebrate the first anniversary of this new culture. We will have the participation of all the collaborators, and for sure, people are engaged in this purpose, living these values, and we have noticed good results on the daily basis of the company. And as I have mentioned, all of this takes us to take positive actions. We have prepared our cycle for strategic planning, and we have actually signalized at the end of 2019, we started the implementation in the beginning of 2020. We moved forward with the implementation in the context of the pandemics. And therefore, we follow this work. So it's a planning with 6 pillars that are very clear, about 20 strategic actions that aim to strengthen our growth and our position among the leaders -- the leading companies in the market with notions of growth path. In the international market, we have had excellent results. Also growth by new products, by adjacent or parallel products with very well-defined projects. And we are working hard in the execution of this strategic planning. Also, we have looked for other actions. And today, we know that a very important topic is the ESG point, all the companies are looking towards it. So for us, it's not something new, but in this new management, we have taken a special care for this point to try to improve what was already good. So we have a very good level of governance. You already know our governance level. We are a company of the new market and we are also looking for new projects. We have new projects in the company. We are changing a good part of our packaging to recycled materials. We are having audio tags in our products to guarantee the accessibility. We also have variety language embedded in it. We have improved our communication for Mexico team and other teams. We are improving the communications. We have actually rebuilt our office in a more accessible way. We have performed several social campaigns last year, and this year, we have performed some of those. A lot of things that I would like to mention, and everything is very interesting. And right now, we are revising our matrix of ESG. It's a project that we are actually searching for support from all the stakeholders of our chain so that from this new positioning, we can direction even better our ESG works. And this work should be concluded in the short term. By the end of the year, we will be implementing our matrix, which will improve our ESG work for the future years. We also have worked a lot with the positioning, the digital positioning or the digitalization-oriented initiatives that we have done. We have actually worked in the production segment. And we are not yet looking for digital sales, but we already participate in the digital channels. And we are fostering new projects aiming to help the sector to evolve, mainly with projects related to education and rural extension. Our team today has a marketing -- a digital marketing and the positioning of social media that is already strong. And recently, we have engaged some partners to help us in the space, such as the New Lab. They are helping us a lot with the road map for digital projects, and we already have something that are almost ready to be used. And the market moment is a positive moment. It's a positive scenario. We had actually foreseen this last year. It's not always possible to foresee this because we knew that the main drivers of the company were to believe that Brazil and America -- Latin America are the seller of the world. They will provide food for the rest of the world. We have an estimate to increase the population in the world, mainly China, India and Africa. They need -- they will need to have more access to protein. And we know that Latin America and Brazil as the main player are the ones to provide this. And Mexico and Colombia are also paramount for this process. And when we actually see the moment of the market, we understand that by the demand for Brazilian protein, mainly the Asian countries, China has actually helped our GDP to actually trust the agro GDP. So this is what we have rehearsaled a lot. We have repeated this several times. And this is actually linked several factors such as production animals. We understand that there was a lack of animals in the pasture, and with the demand of proteins, the producers need to produce animals. And therefore, you have the package of -- or sanitation being provided, mainly our reproductive packages, our artificial reproduction, artificial insemination. And this has reflected in the numbers of the production animal segment. And not only that, we have also performed throughout this year of work, several operations. You have followed the restructuring of the team of directors and also the other teams and the generation of production in the production fields, and we are always looking for improvements. We have made adjustments. And here, we are very proud to be a Brazilian company that acts side by side with the producers. And therefore, we are always very close to the rural producer, trying do the best. Always when we think of animal health we want people to remember Ouro Fino because we are improving all the time, and this guarantees that we are in the right path. And also regarding the company, as we have always mentioned the humanization of pets, it's a reality already. Today, we don't even talk about tutors. First we started talking about owners of patients, then tutors, and now we call them parents. We are parents of pets. So this market has been favored by the pandemic. Brazil is the second largest market in the world of companion animals. We have a moment where we have domiciled animals with more than 25 million animals. So we are talking about 150 million -- 15 million of dogs and cats, and the numbers are in the median. So people are paying more attention to pets because at this moment, they were a major support, a major emotional support for the families. And this market is very strong. It has been a market of huge growth always, and it continues that way. And the sky is the limit for this sector. And in international operations, we knew that this was our weakest point. And we've mentioned in another event, we have an open path for these operations. We do not have the same portfolio of products that we have in Brazil, what actually is leading us towards making the registration of products there to increase our portfolio and also the growth of our team. And I want to emphasize that it's not easy for a national company to do this process via by internationalization. But today, I'm very proud and I am very happy to say that we do not have 3 teams. Let's think about Brazil, Mexico and Colombia. We have one only team. Mexico and Colombia are participating of everything at the same time with us. So it's been great to work together with all the members of international operations. And this is bringing us positive results, and our expectations for the future are also high. So in general terms, I would say that we are living a very positive moment for the market, for the company. The numbers that Marcelo will show to you reflect what I'm saying right now. And we will continue to work hard with several projects to be performed, but we are sure that we are performing a great work. So thank you very much. I will be available so that later on, I can answer your questions. So now, Marcelo.

Good afternoon, ladies and gentlemen. Thank you, Kleber. It's a great pleasure to be here to share the results with you, consolidated results, the consistent results. The company has grown in the first semester 34% if compared to the second semester of 2020. The second semester of 2020 was the one that was mostly hit by the pandemic, and we started to observe since June a recovery. And we actually ended the 2020 year with a good scenario due to the great work of the company and the teams that didn't -- actually, that did all they could to deliver an excellent year results. So the growth of 34%, we reached BRL 230,000 of net revenue, and we are growing more than 40%. And we are reaching more than BRL 400 million. I will explain each of the points that generated growth, but with regards to gross margin in the first trimester was around 50.1% over the net revenue. So in this semester, we had a higher impact in the inputs, mainly the ones that are [ dolo rised ], if compared to the second trimester of 2020. So we needed to do a replacement in our inventory. So we had 49.8% in the gross margin compared to the 2020. So we are working internally to grow, but keeping rentability level that is healthy. If we look towards the production animal segments, and as was mentioned, the market is still heated and favored by the scenario of exports, we have kept the price of proteins in favor on good levels. So this keeps all the rural producers motivated to increase the level of investment for animals' energy and increasing productivity and the production of livestock. And this represents some lines of products, mainly the reproductive and [ peresetary ] lines. So it shows a strong growth. And our thesis in our segment was the following. Due to the necessity and the increase of some seasons, we have to go through the sanity. And this has happened in 2020 and now in 2021 as well. So our net revenue was 28% compared to the first semester. So we have had a growth of 40% compared to last year, reaching BRL 289 million of net revenue. So the first semester of 2021, we had a gross margin of 43.8% compared to the second, a better margin compared to last year. So the first point is the campaign of this year, we have a product for use that is helping this. And the impact of dollar over the cost of some imported inputs that are favored when we actually see the impact of sales that is higher or bigger. So this happened in the first trimester of 2021 for the cost of products. And when we actually look towards the 6 months, we see that the gross margin is 43.8% compared to the margin of last year. So we have actually had the opportunities of the market, and we are recomposing the margins with the levels that have been practiced by the competitors and with the increase in the demand for products. In other companies, on the second trimester, we have had 66%, because in the second trimester of 2020, it actually increased. And it was the most affected one, mainly because of cities such as Sao Paulo, Belo Horizonte, and an important growth. Mainly when we look towards the 6 months, we reached BRL 60 million in net revenues. And it's a segment that is a healthy one. It has gapped the level of investment in the demand. And we have increased the scores in positive nations, and we have kept our scores. So it's a relevant point, and we have to check the economical fundaments of the company. And in terms of international operations, we are actually expanding internationally, as mentioned. Although we have challenges, but we are growing throughout the trimester, not only in Mexico and Colombia, but also in the exports to other countries of Latin America. We have had a 46% growth, reaching BRL 27 million. And it's important to highlight that Mexico and Colombia were expressive growth in volume in the local average, favored by the exchange. And we have had a difference from the second semester of 2020 and the first semester of 2021. So there was a growth. So when we see the gross margin, it goes from 63.9% to 65.9%, it's favorable mainly because of Mexico and Colombia and also the foreign exchange that was favorable. So when we had -- I can say that we had a healthy growth actually helped by the foreign exchange and the sales mainly due to Mexico and Colombia. With regard to expenses, there was a reduction. Part of the expenses are fixed expenses. So the sales grew, but we could dilute the SG&A in the first semester and in the first months of the year. And this trend should happen in the next 6 months as well. And with regard to research and development, it's also kept at the same level to continue the development of products. The growth that we have had, BRL 18 million in 2020, the first months, to BRL 25 million in the first 6 months of 2021 reflects the impact that we have right now in the projects with more density of the company and also focus in the development of new products, keeping 6.3 percentage of the net revenue. The combination of growth of revenue, trying to find balance of gross margin, contributed to the growth of EBITDA in the first semester of 2021. So we reached BRL 51 million, and the gross was of 32%. And then we reached BRL 76 million with a margin of 19% versus 15% from last year. The financial -- the net financial expense and income tax was negative in the first trimester of 2021, and BRL 8.2 million in the second. And here, it's important to emphasize that the foreign exchange fluctuation affected us. And actually, it was very favorable in the first semester of 2021 because we had that moment with the exchange rate for our sales in dollars. And in the second semester, there was a fluctuation in the foreign exchange. It's [indiscernible], but it's less positive than in the first 6 months of 2020, which brings us a relative smaller gain due to the fluctuation. And also income tax, the company improved the taxable profits compared to last year. And we have to remember that there are some differences in the taxes, and they might not be exactly the same. The adjusted net profit grew 92%. So we reached BRL 29 million in the first trimester and BRL 39 million in the semester. So it's a combined growth, a maintenance of margin. I also like to talk about the generation of cash. We grew 44% in revenue, so we had a robust growth. So last year, we followed the position of keeping a good level of inputs in our inventory. We kept it, and we are trying to keep the level -- a healthy level of inventory, and we invested more in inventory. And although we did this, we generated -- we had a generation of cash of BRL 44 million. This is very expressive and relevant. And also, it's important to say that the sales growth happens with the reduction of some point, and we have to respect the working capital. So we are actually keeping the inventory and also the billings in a decrescent way. So there is a difference if comparing both years' periods. And the combination of generation of cash, it helped the indebtedness. The net debt was minus 10 million, and it dropped to 0.9 in the first semester of 2021. So we are in a very comfortable cash position and leverage. So the cost of the debt from 5.19% to 6.15% reflects the lower in the interest rate. So I mentioned that the company is skipping their schedule for R&D investments. We have an investment for R&D that is needed for Latin America, added to what is invested for the year. This represents 8% of the net revenue of the company. So I shared with you all the results that are in a summarized way. So I'm here also available for Q&A.

Thank you, Marcelo. Thank you, Kleber. Now we will open a Q&A session. [ Stella ] JPMorgan Bank. Thank you for the presentation. Thank you, Stella, for your question. Actually, she has 3 questions. Does the company has any strategy of M&A in the top line? And how do you see currently the opportunities in the production of vaccines for COVID-19? And how does the company wants to accelerate the growth in the pet chain? What are the lines of products to be added to the portfolio?

Stella, thank you for your questions. Great questions, by the way. So first of all, from the strategy of M&A, yes, we do have an M&A strategy. We have tackled, and I've mentioned that. We have said that in our strategic planning, we are analyzing the market possibility. It's not something very simple. We are a company with a very robust portfolio. And we are not a company with a huge M&A history background. So we decided to start in a conservative way, analyzing on the other side. We actually prepared ourselves last year with the cash generation, generation of cash, and we are prepared. Yes, we are prepared to foster for new opportunities in the market, and we are analyzing all the opportunities that there may be. With regard to the anti-COVID vaccine, this is a very debated point. We have actually seen debates on this in the press as well. And what do we have to say about that? Of course, as a Brazilian company, we would love to be able to help the country right now, considering that there are few possibilities and manufacturers that can produce vaccines in Brazil. And some veterinarian companies, there are 3 companies in the sector that are the main ones because they already have a good history for the production for long years of some vaccines for foot-and-mouth disease. And Ouro Fino, as you already know, differentiating from other veterinarian companies, we have the possibility to the production of other vaccines as well with an incredible pipeline. And we have invested in another manufacturer park. And this park actually is one of the best of Latin America. And within this context, we would have these plants and possibilities to produce vaccines, but several points needed to be concluded. But we are not the holders of the technology for the production of the vaccine. We have followed all the pharmaceutical labs that are involved in this production. We understand that the vaccines have a development, the development of the product. There is a patent. And we do not develop the vaccine. So in this context, to use our plants, we would have to do a partnership or some kind of partnership with a human laboratory that holds the technology. And we haven't been able to do such negotiations. Therefore, we are looking for these possibilities and opportunities, and we are actually going after this for the future. But right now, we are aligned with what we have actually disclosed for the market. There is a possibility, but no further information or concrete information can have come to the moment. And with regard to the growth of the pet line, that was an excellent question as well, because this is a market that is growing a lot in the world and also in Latin America and Brazil. And yes, we have an opportunity to grow more in this market. We are developing a pipeline strategy. We already have one for this line that goes through biologicals, remembering that we are not working with vaccines for pet right now, but we have products that are already patented, and we have to wait for the patents to come. But also there is something related to the exploitation of adjacent markets. And we understand that the pet market is bigger than the pharmaceutical pet market. And we have launched recently dermal cosmetics for pets, and we will have some novelty soon, probably some new things that are to be launched even this year. And we will have a complete line for companion animals, and we are aiming to capture the accelerated growth of this market as well as for production animals and international operations. So this is the work we have in a daily basis to try to actually accelerate the growth of the company in general. And it is actually founded in our strategic planning that was performed in 2019, and we are putting it into practice. I have to say that there is a cycle for the launch of products. It takes time, and we are working very hard on that. So thank you very much for the questions. Thank you.

Thank you. [ Guilherme Noon ] has also said hello, and I believe that one of Stella's questions was his question. Therefore, we will close our Q&A session. I'd like to say thank you for being here with us, and our company is always open so that we can live and share our values, Ouro Fino values with you. So now, Kleber, the word is yours for the wrap.

Thank you, Marcelo. Thank you for the team that has given us support, for everybody involved in helping us with this live. And I'd like to thank you for all the shareholders who trust our work, our Board of Directors that is always helping us on a daily basis, directors that are always working hard and helping us so that we can bring the best results. And also the entire Ouro Fino team, and I would say that we have the best team in the market, and they are working every day, making this happen. So I always have to say thank you to our team. We are available to explain any questions you may have, and our team is here and available to all of you. So thank you very much. We have high expectancies for the rest of the year. Thank you.