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

Good morning, everyone. So welcome to this quarter of results and the consolidation of the year for Ouro Fino. I am Mariana Anselmo, I'm part of the communication team, and it's a pleasure to be here. This recording -- we are recording this and it will be available on our website as well as on youtube.com-saudeanimal -- ourofinosaudeanimal. After the presentation, we will have our Q&A session. And in case you want to participate, you can click on it, and there is a very nice disclaimer, which is that this presentation will bring statements about future events that are submitted to risks and uncertainties and some statements as beliefs and assumptions of our demonstration and information that the company could have excess statements about future events and the exceptions related to statements and information about the future also includes information about the operational results as statements that are followed in which the words such as believe, can, will be, we'll continue, wait, predict, intend, plan can have some similar expressions in the statement information about the future are not a guarantee of performance. And they involve risks, uncertainties and the future results and the creation of value for the stakeholds can defer in a significant way, the things that are expressed or suggested and some of those factors will determine these results and values that go beyond our control and predictions. So after the disclaimer, I will invite our CEO, Kleber Gomes; as well, Marcelo Da Silva, the Financial Director and the relation with investors. So to start our round here I will invite Kleber to give his remarks. So welcome.

Good morning. Can you hear me well because I'm not in the office. Good morning, everyone. As I've said, I'm out. So I just hope that there is no technical issue. And Marcelo will lead the Q&A session with the team, okay, with the people who are in the office. We have been explaining everything that has been happened. We know that last year, wasn't a good year. We had several challenges. And basically, we had no vaccination for 6 months. We had the suspension of exportation of some kinds of meat and then we had some issues in the end of the year. The price of the meat was lower and a lot -- several states had the same issue because of Foot-and-Mouth disease and as well as application of products and everything brought some impacts on reproduction, so the prices lowered a lot. There was a postponement of the negotiations, and we also had the drop of some pesticides. We also had other situations. We know that the market had a deceleration, but it's not our goal here to explain every time the situation where we are in. But we needed to explain how we needed to adjust. And as we see the seriousness of it, we know that it would be a hard year, but it was much harder than we thought, and we've been taking collective actions. We had an action of constraint of the expenses. It worked well. We had a positive impact on the cost reductions, but not enough to compensate the fall of our performance, the reduction of it. We worked a lot in the second half of the year with our Board. Looking ahead, we did everything we could to give the best results, but that's not the result that we wanted, but we really worked hard on 2024 to have a good year as we did in 2020, 2021, '22. It's obvious that Ouro Fino has had other important years, but we have to remember that from '22 to '23, we doubled the size of the company. So we gained the market share. But now we have to look ahead and now we have some actions. I will mention some of them, a very important one was to segmentate our BU, our former BU. So then now we have 2. We had the ruminants and the other one that is specific for swine. We had some movements in the -- like in the Board, and now we have a director that I will introduce to you. He is very skilled that has come to lead this new BU. So that's what we have. And for the swine as we have the need in this business to be more diversified and to have a better growth in this sector. We have brought Marcelo Da Silva, a very skilled person that has been in several important companies and will help us a lot. So we guarantee the focus on what we need when we strongly work on the cattle area and Marcelo on the other one. In ruminants, for example, we had 3 executive managers, but now we have different models. Now there will be only 1 national and international manager, 1 for marketing that has come to reinforce this team. We also have changed the swine and bird segment. We have a large project to expand this line. So all those changes have been made internally. We had a change in the Board. And now we're seeing this fourth quarter, the result of this change. We had a growth. Last week, we had a distributor convention with several processes, and we are reinforcing some of our teams. We have worked a lot on the distributors' mindset to be more aggressive and in the company, we are looking at the results of the areas to be more agile, efficient and we were able to build a budget for this year that will bring the profitability that we expect for us, for the investors and for the stakeholders. We did that -- what we thought that was important. I'm very confident. We had 2 good months like January and February. And we also have a good view for the launch of products. A good perspective. So I would like to highlight my commitment as a CEO to change this scenario and that as well as the approach that we've had with the Board in the -- we are demanding this change. I'm very confident in the new Board that we have, all the leadership that we have for Ouro Fino and I'm totally sure that we will have a great year in 2024. And I really thank you. Marcelo will lead at the end of it, I'll try to stay till the end. But to Marcelo, will lead this Q&A session. Thank you.

Thank you, Kleber. So to reinforce the invitation, I really would like you to participate in this Q&A session. Just write your question here in this part. And now I will invite our Director, Marcelo Da Silva. So please. The floor is yours.

Thank you, Mari. Good morning. I will continue here with the call of your results, bringing some more information related to it. Kleber has brought a very good view of the market and where we tried to like to come back again to have this resumption and the result of better efficiency and also the capital was better for the cash. We doubled the generation of the cash in the company. And this combination of the reduction of costs in the generation, the increase of the generation of the cash enabled the company to close the year with very good levels for the leverage as well as the financial cost, which enables us to have this strong agenda for the launch of new products and you have this recovery of growth for 2024. As Kleber said, the fourth quarter of 2023 was in a very complex scenario, especially for some kind of animals, we had the reduction of the volume of sales for the reproduction -- for the animal reproduction, which is for the insemination protocol and because of the price which was lowered from 3,000 to 1,000 last year. So there was a fall in this protocol besides the volume. We had the impact of price, which was very strong. Basically, all the companies that work in this segment not to have the significant losses in their inventory. They changed their prices. And with that, we had the impact on it. We had the frustration of the -- we had the frustration because of the vaccines and because of the Foot-and-Mouth disease and there were some spare vaccines in this campaign, which also changed the price of it. We are actually 7 states that didn't vaccinate their animals. So as now, it's not mandatory to have the vaccination of Foot-and-Mouth disease brings an impact on us, especially on the center north of our country. The campaigns of it were followed by the application of other medicines of other drugs, which brings the change of this new dynamic. And looking at the segment for those animals, the wholesale is still different, but the -- the retail is still good. And now the launch of new products in the company was also something good and gave us a growth of 10%. And comparing to this year, we had also a reduction in the fourth quarter of 2023. We had a spot sales to Indonesia with higher prices, which give us this comparison base related to the third quarter of 2022. So this 13% of reduction that we show here in the fourth quarter compared to 2022 reflects this combination of factors as well as the drop of the growth margin is the result of the lower volume, which brings lower fixed costs, but then we had to have a forecast for the inventory for the Foot-and-Mouth disease and for the reproduction line because what we predicted, we couldn't carry out because of the demand that was lower or the accumulation of the year was -- the gross margin is like 49%. The result of the year reflects on the conditions. We had the biggest impact in the last quarter, especially for the inventory, for the Foot-and-Mouth disease and the repositioning of some products. In the previous slide, I gave an overview of the market about our product lines. The one that had the largest impact was for the Foot-and-Mouth disease, and we had the impact on the gross margin because of the lower volume of sales as well as the reproduction line and because of everything that I have already mentioned. So the company animals, we grew 10.7% in this fourth quarter and this growth is because of the launch of new products in the other parts is because of the sellout of the distributor. So we closed the year with a good balance between selling and sell out, as Kleber said, we had the convention. So we started this year with a good volume in the inventory. So it gives us the idea that we will continue growing well. The gross margin closes -- not -- it doesn't close well -- actually didn't close well last year because of the -- of some products. International operations, the drop of 10.9% in the fourth quarter, it's the comparison that we had where we had a strong sale of more than BRL 90 million of revenue to Indonesia and then it's 13.6% so we finished the year with a growth in international operations. When we compare the gross margin to -- in this area, it goes to 52%. There isn't any inversion or any change in the price. We still have the effect of the prediction of the loss of the investments that we had in the company because of the Foot-and-Mouth disease because as some companies don't do it. Some countries, then we have this issue and then -- it -- and then other countries such as Argentina, Colombia, Paraguay have the same issue and that's why we had to stop the operation to other countries. That's what affects the growth margin. Then we had this reflects year, as Kleber said, the shares were not focusing on the core of the company. There was no restriction for investment, but we didn't have anything for the research and development. So the investment was focused only internally on the departments, and we had a reduction of 13%. And this reduction of 13% doesn't captured the total of the adjustments that we made. And then it brings other costs such as the terminations, among others. In 2024, now has a lighter structure due to the reduction costs that we had last year is strong -- more strongly in the fourth quarter. We kept the same level in R&D, we didn't have a reduction for the investments, the projects were kept within the deadline that we had. The reduction of EBITDA, which is a combination of -- because of the sales that were lower and also the reduction of G&A, but this is not enough to compensate this gross margin. I think it's important to highlight that the flow -- the cash generations reflects of the reduction of the financial cycle because of the reduction of the inventory. We shortened the deadlines that we had with some distributors. We also reduced the credits of some taxes. There, it was BRL 190 million only for cash. So then we closed the year with BRL 304 million in cash. The robust cash generation, which leverage the capital structure. We have always worked with a proper capital structure because we invest in research and development. We always have a good technology. So our capital is suitable to the investment that we have in the areas as a pharmaceutical segment. We had a project of BRL 225 million, and we had a very good condition in this process with the cost of TR plus 2.8%. The funding that we had lowered our cost which was a very positive cost and we closed December with this number of 8.3%. We started the year with this number of 8.3% lower than 2023. Then we have the profile of that 77% for like long term. So we are more than 41% above this numbers. So we can take a breath here, and we will be able to generate our cash in this year. I wrap up here, bringing -- or actually agree on what Kleber said last year wasn't so positive. We had to take several actions to recover. But for the production line, we weren't able to recover as much as we wished, but we try to keep the health of the company with the capital costs lower and the leverage was very healthy and the commitment to continue 2024 with a better agenda with our growth. I thank you, and I give the word back to Mariana.

Thank you, Marcelo. I Invite everyone to participate in this Q&A session. So feel free to write whatever you wish, and I thank you, again, for your attendance. And then I have already a question here. So Marcelo, let's go back with you and then just to participate, ask your question here for your name and the institution that you represent. The first question is from [indiscernible]. And he says, what is the impact of the change according to the vaccination obligation for the Foot-and-Mouth disease? And how does it impact the company?

And yes, it brought a relevant impact, especially in the last quarter, and we can have this variation, if you compare the gross margin of 2022 to 2023. The difference is significant because of this Foot-and-Mouth disease, but there is something else, which is the change of the dynamic of the market, especially in the center north of the country. Because in the past, it was mandatory as other vaccines. And now it's not mandatory anymore. And it can change all the handling that we have because the campaigns were held in some months and now maybe because as there are no campaigns, the sales will be lower. But I believe that the market is still -- will still grow because the animals need the vaccines, regardless this issue.

As we have no more questions, so our Q&A session will finish, and then I will call Kleber Gomes again to carry out the final remarks of this transmission. So Kleber?

Can you hear me well? As we said, I think the main message here is that we will recover what we had with strategic actions, and we are very confident that this year will be better, especially with the results that we had for these 2 last months. Yes, it was a very, very hard year. I think it was the hardest one in my whole history, my whole journey, but I'm sure that we will be stronger, and we will be much more efficient because we learn and then we will work hard to bringing better -- great results regardless this scenario that we had. And I'm sure that [indiscernible] will give the answers that we need. So thank you, and we are always available here through our IR area in case you have questions. So thank you. Thank you, Mari.

Thank you, Kleber. I thank you, Marcelo, and I thank you all of you for being here with us. As Kleber said, I also -- I will remind you that this will be available on our website and on our YouTube channel. And we are here to talk to you and then see you next. [Statements in English on this transcript were spoken by an interpreter present on the live call.]