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

Okay. 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 include information about possible or presumed operating results as well as the statements preceded by or 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. 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. Okay. So to start the presentations, we have our CEO, Kleber Gomes; our Development Director and New Businesses, Angelo Silva. And also with us, Marcelo Silva, who is our Financing Director and IRO. Thank you all for having being present here. And now Marcelo will take the floor. Kleber?

Hello. Good afternoon, once again. Thank you, Juliana, for the introduction. I am very glad to be here today once again, to tell you a little bit about our business development in the third quarter of 2021. I would like to start by saying that we are really happy because we were elected by the Animal Health and AGS Market as the Best Animal Health Company in Latin America and South America. This is a very important prize, very relevant to us. It takes into account all the business conditions and the growth, innovation, international expansions, partnerships and development, research and development. We have already got this prize in 2015, so we are very glad to have it once again. It is a recognition for the work of Ouro Fino's team. We have been really engaged here and we are living out the purpose of imagining health, animal health and connect people to the world. I am really glad for the recognition of our effort. Also, it's very important to say that we follow an important culture belief. We believe that culture is what makes difference between companies. So we started this company at the beginning of the management. So we have these values that we have mentioned. And we are celebrating a year now of the resignification of values. We have a very important commitment within the value of caring for people and having our clients at the center of the focus of our strategy. So we have done very good work with our clients, but we want perfection. We are really compromised with revising the client journey so that we can identify every point that can maximize the satisfaction of our clients, our reason to exist. It's a very important work that we are doing at the moment in this way, and we believe it will be very fruitful for the company in the future. We are also advanced in a strategic way. Because of our concern, we've always been concerned about ESG. The company has been committed to environmental and social and governance matters. And in this context, I had some news yesterday that we are already in the finals for the most important report on sustainability. This shows how transparent we are in communicating what we do in our commitment. And we have taken an important step recently, which is to have materiality matrix review, so the items that we are going to prioritize within sustainability. We have 6 new topics that we will cover. And they have sprung from process of chain development. We have done research with suppliers, clients, our collaborators, influencers, vets, regulatory organs, map, and we have results that I consider is really good. We prioritized the animals well-being, climate change, especially greenhouse effect gases, innovation and research -- which is important to the development of our business, management of the supply chain -- which is a relevant point. We have seen how important this is if we observe, for example, COVID aspects and well-being, people's well-being and food safety. So these are things that we are going to see highlighted in our actions and our communications. I would like to thank all the sustainability team here at Ouro Fino that has coordinated this work. We have been talking about evolution in digitalization of our business, transforming the digital mindset. This is connected to our value, values we have, taken very good steps. We have been working with research and development for some digital solutions and we have gone forward with that, and we hope that in the first term of next term, we might have 2 or 3 digital products, which have been aligned to the aspects of maximizing our clients' satisfaction. We are advancing in that. Some are already in the final stage. So we expect that in 2022, beginning of 2022 have more solutions. It's also important to treat data. So we have a data spot here in our company, so that we can manage that, and we are evolving in that theme. So we are in a positive way in the relationship between digital connection. It's also important to say that we have been through a very complicated time during the pandemic. Our administrative teams, most of them had to remain home. And now with all the safety possible, with the advance of the immunization here in Sao Paulo, where our headquarters are, we are safe now to return to on-site activities in our offices about a month ago. So we are doing it in a very good way, and we adopted the hybrid model, 2 days at home and 2 days in the office. And besides that, we are trying to modernize our relationships and all reach that we have. Our team worked 44 hours a week. Now we are going toward 40 hours a week. Are we having a short Friday for the administrative teams and reducing along the industry teams? And we believe this kind of relationship really helps collaborators to engage and produce more. It's a pilot project, will be done for 6 months, so that we can observe its impact. But I understand it will be very positive. And last but not least, we have a strategic way. We are going forward in many different plants in our strategic plan. And we are revisiting 2019 strategic plan as for development and looking for new opportunities. But we are keeping an eye on the results of the year that we are having, and we understand that we are doing very well with a 9-month growth and a generation of cash, which has been robust and net debt is very low. Our investment is very low. So it opens opportunities for us to look for transformational aspects. I am very happy with the results of this year. This quarter has been more impacted because last quarter was the recovery, post-COVID recovery in the quarter. But when we look at the year as a whole, in our sector, as you know, it is seasonable. So we understand this year will be incredible, spectacular. And this makes us trust our work and the strategic plan that we have for the future of the company, always delivering the superior results to what is aligned with our value, play to win. So now I will go back to the presentation. We have some important launching that one of the demands was the acceleration in products. We have been communicating some actions to you. So we have some evidence now, concrete evidence of these results. And we have Angelo Melo here, our Strategic Development Manager to introduce to you some new solutions. So Angelo, the floor is yours.

Thank you, Kleber. Thank you for your participation. That is correct. Now we have Angelo Melo Silva. He is our Strategic Development and New Business Director. Angelo, you're welcome. The floor is yours.

Thank you, Jul. Good afternoon, everyone. It's a great pleasure to be here today and take this opportunity to share with you some of the work that we have been doing and following that line that we have talked about during the Ouro Fino Day at the beginning of the year. The award for us is growth. It's a deal that we have with the Board, with our founders and our growth will come from part of it. We come from the portfolio expansion, as we have mentioned before. This expansion comes from internal struggles and also external. The new business part, we had already publicized that in the Ouro Fino Day. We would have this partnership with diagnostic kit, with Asan, a company from Korea. Diagnostic is a segment that has been increasing a lot in company animals and vets have tried to perfect their work. And in this line, they try to keep their pets as they keep the humans. So diagnosis is an important aspect of medicine in the company animals medicine. And of course, we will be in this segment. So we have a complete line. There are many products and I'll take this opportunity to reinforce the partnership with those 5,000 veterinarians that we visit monthly, and we want to reinforce that partnership because they are a very safe source of information. And we have information in our diagnostic kits, so that the vets can also make the better decisions, not just to start a treatment based on his own knowledge, but also based on the diagnosis so that he can take better decisions. These kits have been released now in October. They are already in the market. So they will be strong in the market. We have -- we keep the brand and register. So it's an important component of our growth. Another important point are the vaccines. The world is every time more prevention than treatment. We have a very strong sector in vaccines. And in conventional vaccines, so we have returned with our rabies vaccine, the vaccines in the market. So we have traditional vaccines, and we have new markets. We dare to go into the market of vaccines of circovirus and mycoplasm. These are 2 important components for the immunizations of piglets. So the mycoplasm vaccines are products which have been in the market, they have vaccinations that have lasted for over 40 years, but we are renewing it. We are using a new type of immunization isolation. So it is closer to the challenges that we need now, and it brings antigens, innovation adjuvant, innovation and it protects the animal much more. And the immunization lasts much longer, so they are protected for much longer. The tests have been developed. The tests have been done by the Brazilian investors, and they show that it is much superior to the old premium vaccine that is in the market nowadays. This product will be available as from this month in the Brazilian market, and it is a great success for sure. And to have a look at our other compromise, we have to retake the products that we did not have economic competitivity. We have done our homework here. And this month, we have our Brinco Na MOSCA. It's a segment that have a very few people. The farmers are looking for this product. It is trying to substitute the usual treatments that they use. And this one will certainly be a great success. And another component of growth is the international expansion. We follow with our target of registering our products available in Brazil internationally. And this year, we have managed to have 21 new products in Latin America. And in many other countries, we will get 90 key licenses this year. So we are still committed to that, and we have the expansion of portfolios with partnerships. We have vaccines against clostridiosis and reproductive illnesses with an English company. And we have this line of products in Colombia, and we are committed to the expansion of the portfolio. Juliana, please.

Thank you, Angelo, for your participation. Now Marcelo Silva, our CFO and IRO, will present the earnings.

Hello. Good afternoon, everyone. It's a pleasure to be here to talk about our earnings. Please go to the next slide. Well, the company brings again very strong growth, very low leverage, very low expenses and cash generation, strong cash generation. We believe that this combination of growth and controlled expenses and a strong cash generation is what permits us to advance with our strategic initiatives with internal initiatives and inorganic initiatives. We are working on that. We have talked about that on Ouro Fino Day. When we look at the results of 9 months of 2021, we are growing 25% on a basis that was 2020, which was the best year of Ouro Fino. The 4% growth in the third quarter has to be analyzed within the context that in 2020, we have had in the second quarter, the worst impact because of the pandemic, the COVID pandemic. We had a lockdown in the big cities and an uncertainty period. We have evolved to the second quarter and grown in the third quarter, 40%. So we are growing 4% on a basis that has grown 40%. So we look at the normal cadence of third quarter of 2021 compared to the third quarter of 2019, our average growth is 23%. So it's even higher than our biggest competitors when we look at the consolidated results. So the message here is that we continue to grow strongly comparing to the normal trimester. Also, but I want you to look at the 25% of growth on this 9-month period, which shows the tendency of growth and the tendency to deliver a very good year in 2021 as we have done, as we did in 2020. Please can you move to -- about the gross profit, we have a marginal loss to 50.6% when we look at the 9-month rate. We have part of our proceeding coming from China. And as you know, this is suffering a lot of pressure from dollar economy because of the high rate of dollar and the price of commodities. So we have a pressure in the cost, and we have a logistics scenery that international that has pressured our margins. The company has worked as a countermeasure to optimize the management of expenses. And systematically, every year, we work on betting on the prices to recover the margin because of inflation, expensive people and so on. Well, the production annual segment has very strong growth, 23% in the 9 months. If you compare it with the last -- the next term, we have a 3% in this quarter. But again, we are talking about BRL 179 million revenue in the third quarter of 2021. And if we have -- if we compare it, we will have a growth of 22%. So it's -- we still have a warm market, and we are growing in all our lines, volume and price, especially in the reproduction line, our ETF line. Companion animals. The total net revenue is 31%, BRL 39 million in net revenue. And in the quarter, BRL 29 million revenue, but it's, again, important to see that this segment has been impacted in the third quarter of 2020, because most of our network is in Sao Paulo, Bela Vista, these cities have been affected by the lockdown in the pandemic. So we had to -- we grew 47% in the third quarter of 2020 compared to 2019. So it's a consistent growth, and it reaches 22% in accumulated CAGR. And comparing 9 months if you compare 2020 and '21, the volume growth and the dimension of cost compensated the proceeding cost, and we are accumulating growth. In international operations, it's a great growth driver. We are still advancing in our process of international expansion, mainly Mexico and Colombia. There is a massive investment in people and also the launching of new products, new brands, and we have grown 18% in the quarter, in local currency, with the help of the exchange rate. This could be a little bit bigger. Colombia had in May, June, July, some difficulties in relation to their tax reform because of some strikes in the country. But now the situation has been normalized. So we have a 27% growth, and we have an improvement of gross margin that has been favored by the exchange rate. I want here to highlight the control of expenses in the company. We have a 5% decrease. We have fewer rates than inflation. So when we look at the 9 months, we go to BRL 180 million, a growth of 4.2%. We have the numbers showing that the company has grown more with efficiency and reducing costs without losing the view of keeping strategic investments. So we -- if you look at the expenses of R&D, you will see that we've grown to BRL 41 million in investments in this period. Historically, we invest 6% to 7% of the company's revenue in the development of new products. And this is the internal agenda for growth. And we have 8% of the total net revenue invested in R&D of new products. The EBITDA has grown 35%, has been in line with the revenue. So we managed to compensate part of the increase in the cost and the loss of margin. And we have managed to keep an intense investment on research and development, growing 25%, BRL 126 million in the accumulated -- in the last 9 months. And the income tax reflects the fiscal basis that we also had a bigger profit. And of course, we also had to pay more tax. Our adjusted net profit has grown 29%, reaching BRL 74 million against BRL 58 million in 2020. We have the effect of the interest rate that, of course, pressures the financial expense. But on the other hand, we have a very healthy debt. 50% of our indebtedness is not indexed to SELIC. It's indexed to TJLP. So we have 74% of our debt in the long run. So we feel very safe about the capital -- working capital of the company, and a substantial part, 50% is not indexed to SELIC. Generation of cash has been robust. We have generated BRL 100 million. This generation could have been bigger. We are cautious. We are working with a coverage of the stocks. We don't have any rupture in the stock, even considering this adverse scenery. We have taken the decision to strengthen the position of stocks and cover more. So we had a variation. And when you look at BRL 108 million above the historic leverage, which pressures the generation of cash, but this was a strategic decision to avoid a new rupture. We have paid proceeds of BRL 21 million and CapEx BRL 42 million, and we have a cash on financial investment of BRL 183 million accumulated. Our indebtedness has fallen from 1.02x to 1.84x (sic) [ 0.84x ] and 5% to 7.35% substantially reflects the increase of the basic interest rate, but we had a reduction of our debt in 6%. And this working capital is very healthy, composes our strategy to continue to grow. We have a very - BRL 108 million in cash, and we have a very low debt, much lower than the market. Just to reinforce the commitment to invest and to be the vanguard of knowledge, it's not easy to make vaccines. You have seen all the discussion about the COVID. So we are bringing 2 vaccinations, which are very important to buy the stock in Brazil. So the results can be felt now in the next few months and springing from all the effort that the company has done to have new products, especially those products which are regarding technology prevention. Well, I thank you. And I am very happy to have presented good results, and now I am available for any questions.

Thank you, Marcelo, for your participation. Well, we will start our Q&A. [Operator Instructions] As I belong to the communication area, I would like to invite you to follow Ouro Fino's everyday work, our values in our social media, in all our business units. We have Ouro Fino Animal Health, Ouro Fino Pet, on Instagram, on LinkedIn, on Facebook, on TikTok, the most important medias in our country. We also have our cooperative site. So feel free to visit us and follow our everyday work. We have a question now [ Hena Urich ]. He says, what's your long-term plan? Are you going to start on new business segments?

Thank you for your question. As I said, we have done a strategic plan in 2019. This strategic plan is still in full deployment. We monitor the results, and we are aligned with that, which was predicted. And we understand that there are new possible ways to accelerate this growth. So when we look in the long run, in the long term, we understand, yes, there are opportunities. So midway, we have started a process to add something to our plans. We are revisiting all animal sectors, not just animal health. And looking at those markets, look at those which have synergy with our current activities. So we have this phase of company animals, and we are concluding for production animals at the beginning of the year, and then we will choose a few things. Obviously, we understand there will be new opportunities to exploit adjacent segments. That makes sense to us, like Angelo has mentioned with diagnosis. It's not a medicine in itself, but it's start of an important clinician routine. It will help that reach more precise diagnosis with their analysis, bringing a tendency of more attention in the point of care, the daily practice. In the same way, there are many alternatives. And yes, we may deep dive into the market animal soon. This will be -- this work will be concluded first and possibly Ouro Fino Day in 2022, about 2021, we may bring you some news.

The second question from Lucas. He has congratulated us for the excellent result. In relation to new acquisitions, can we expect a new acquisition this year? In these acquisitions, will the focus being on the animal segment? Will the search for acquisitions be to complement the portfolio or reinforce the brand?

Well, we have this confidence policy, but we are working on that way. I cannot guarantee now. I cannot present it now, but we are working in this way. We have already publicized this on operations day. We are going towards inorganic movements. We see the company with a very healthy financial situation that allows us to make some moves. We understand there are many good things that we can accelerate. So I hope that as soon as it's possible, we can bring you some good news.

Well, [ Hena ] has asked what is the financial strategy in the midterm of the company? Do you intend to have a net debt around 0? What's the leverage range?

Well, no, we don't tend to have a 0 net debt. We have a very cheap net debt. Our focus at the moment is research and development. We don't have many challenges of expenses in the industry itself. We have subsidized credit lines. Just for you to have an idea, we hired finAPI for BRL 180 million. We still have BRL 126 million to use, and the cost is 0.71. It's a 12-year contract with 3 years to go. So we don't need net debt 0. The low average, there's a reason for that. It is the balance so that we can have more resources to make more inorganic movements and advancing acquisitions, looking for the best market conditions.

We have other questions here. I will try to answer all of them. Let me just read it. [ Alexandre ] is saying, with such robust results year on, why doesn't the market recognize this?

Well, we have a number of factors at the moment, attention factors with relation to our shares in general. We know there's a stability in the market. But looking specifically at Ouro Fino, we are sure that we are doing a very good work. The company is in the right path, and it is in very good sectors. And sectors that have a growth drive, which are excellent. And this will be recognized in the market. But because we have low liquidity at the moment, we are less influenced, but we hope soon this will be sold. Our most concern is to do a good job and deliver the results expected. And we are managing to do that very well.

The next question coming from [ Pablo Sheso Morales ]. Ouro Fino has targets and index to participate the revenue of products that have been launched less than X years.

Yes, we use IPVA. And this X years, we have -- we used 5 years. This is an index that we have not publicized, but it's possible that we may show it in the next Ouro Fino Day. This is the name index used in innovation and we recognize constant betterment, improvement. And we see these results, and for the next few years, we have a great expectation to increase our NPV.

Another question comes from [ Fabio Miguel ]. What's the perspective of revenue with diagnostic kits and the margin for this product?

We don't get guidance on the recipe of products. But what we can say to what Angelo has brought is that this is an information market and it is development -- it's in development and growing. So the relevance of Ouro Fino in the sector and our brand, strong brand and the influence that we have with the 5,000 vets every month, we hope to be one of the leaders in the sector, and we'll also have a very strong growth in the next years.

Now we have [ Alexandre Sali ]. Ouro Fino couldn't support the health ministry to manufacture vaccines, including coronavirus. Why wasn't this feasible?

Well, we've had some answers about that, but it's also important to reinforce that. I thank you for the opportunity. We have one of the most important plants for the manufacturing of biological in the country. We have a plant production -- vaccine production plant, and we have a capacity -- volume capacity, which is very high. And we have biosafety 4 lab, which is the highest level of safety in the country. But it has -- it attends to one type of technology and COVID vaccines uses many different types of technology. So some may be manufactured here. We also have the bioplant, recombining bioplant. There's nothing in Brazil that is similar to that. So there are 2 companies that we have. We could produce to the technologies that is existent. We're trying to work on this product, this process. We had some meetings with ANVISA. We had a good answer from ANVISA on the technical point, but you need to have the technology for the vaccine. We don't have any development for that, as was done by AstraZeneca, Pfizer or Sinovac, that they would have to license a vaccine, so that we could produce it. Even the Health Ministry does not own these technologies. So -- and we talk about helping the ministry. Yes, we could have with the plants, but someone would need to have the technique, the vaccine technique. In general terms, this process, we are still attentive to that, but it hasn't become feasible yet. It wasn't possible yet. But this makes us very proud because we have important plants that show us that within our vaccine project, we are in the right path with the investments that we have made.

Alexandre is asking, does these margin levels -- are the margin level sustainable?

Yes, I am sure. It's a consolidated as the company advances through international markets, and the pet market, increasing the participation. In these 2 units within the consolidated, our margin tends to grow. And when we look at the vet production animals, we have a capacity -- productive capacity for vaccines, which is not yet in full use. So we are releasing new vaccine, including the ones we have announced today, decreasing the fixed cost and bring incremental margin for production animals as well. Maybe circumstantially, there are some pressures, as you can see now in international logistics and proceeds. Of course, the company repassed the price systematically. We have a perception of quality of our brand and it doesn't -- anything to the big multinational companies, we have a very good perception, and we produce some of these products in our site. So there is a combination of the cost expense diminution, decreasing the advance in the internal/external companies. And we hope that we can put the level of the company.

We have one more question [ Kai Liao ]. How is the competitive environment in terms of price?

Well, the competitive environment, of course, is strong. We have many pharmaceutical, global pharmaceutical labs, which are in the market. This Brazilian companies were not leader in the market. So it's a competitive market. If we are talking about production animals. Brazil is a beef producer, great producer and supplier of protein to the world. So this market will always be disputed. If we talked about company animal, we are the second biggest market in the world an average of distance to the U.S. market, but it's also a very disputed market, competitive market, but it's a fair competition. They are robust companies and the structures. They have a lot of investment in research and development. So they are looking for a price structure that is compatible. Ouro Fino has a very strong brand, leader product with excellent quality. So we have a premium position in terms of price if compared to other companies, open companies. So I thank you for your question.

Thank you, Kleber. Thank you, Marcelo. Thank you, everyone, that have taken part in our Q&A. So we have answered all the questions that were made. So we thank everyone for being here for the kindness of being here this afternoon. Our company has its doors open so that we can come and know our values. Kleber, thank you, the floor is yours.

I would like to say again that I am very satisfied with everything that has been done. We know the path is right. I would like to thank every collaborator in our company that work daily to deliver these results. I'd like to thank our management teams, our administrative board that supports the actions in our company that helps us with strategy and thank also our partners, business partners, mostly our clients that trust our band, the investors, the suppliers and say that I am convicted that we will have a historical year for the company with very good news, seeds for the future that has been well planted in a sustainable path, growth path and a profitable path. Thank you, everyone, and see you soon. [Statements in English on this transcript were spoken by an interpreter present on the live call.]