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

Good morning, everyone. Welcome to the disclosure of results of the second quarter of 2024 of Ourofino Saúde Animal. I am Mariana Anselmo it is my greatest pleasure to be here with you today. This session is going to be recorded and it's going to be available in our shareholder affair website, ourofino.com, as well as our YouTube channel at youtube.com/ourofinosaudeanimal. At the end of the presentation, we are going to have a quick Q&A session. So please feel free to send your questions in the Q&A icon. Before we get started, I would like to read a legal disclaimer to all of you guys. This presentation brings statements about future events that are subject to risks uncertainties. Such declarations are based on assumptions of our Board as well as information that the company has currently access to. Statements about future events, including information about our intentions, beliefs or current expectations as well as the ones of those from the administration board as well as the directors of the company. The exceptions about the declarations and informations about the future also include possible or assumed operational results as well as statements that are received followed by or include words such as believes, may, will, continue, expect, foresees, intends, plans, estimates or others. The statements information about futures are not a performance guarantee. They involve risks, uncertainties and assumptions because they relate to future events. Therefore, they depend on circumstances that may or may not occur. The future results as well as value creation for shareholders may divert significantly of those expressed or suggested by statements about the future. Much of the factors that are going to determine those results go beyond our capacity for control or foresight. So now we are going to start our introduction round that is going to be conducted by our CEO, Kleber Gomes; as well as our CFO, Marcelo Silva. So we can get started with this introduction round. I'd like to give the floor to Kleber Gomes. Kleber, the floor is yours.

Well, good morning, everyone. It is, again, my pleasure to be here with you to present our bottom line of the second quarter as well as the first half of the year 2024. I am currently in Sao Paulo for some business commitment. So I'm using the hotel's WiFi. So if I have any connection problems, please just let me know, but I do believe everything is going to work out just fine. Well, first of all, I think we need to consider our results from this quarter with caution because despite the fact that we are resuming our cash flow generation and profitability, it may look like our revenue growth was kind of lateral, and that is not true at all. There were some effects especially in the second quarter that have to be analyzed in depth. Actually, this is the very first aspect that we must consider is that there was an anticipation of the cancellation of the foot-and-mouth disease vaccination campaign by the municipality. There would be some vaccination campaigns during this first half of the year and the second -- smaller one in the second half, and it didn't happen. So when we compare previous quarters or previous semesters, we always consider the revenue of the foot-and-mouth disease vaccination that didn't happen in the second quarter of the year. And when we consider that, we can see that, yes, we actually are growing, especially for production animals in Brazil, which goes according to plan. Marcelo is going to detail those numbers a little further in the presentation. Another aspect that we must consider is that it has been a difficult year. The commercial dynamic is complex, and we had many incomes and revenues that ended up not being considered in our [ good ] half. We're talking about over BRL 20 million that was delivered in July. We also have some back order of a hormone product that is being delivered right now. So in the operation, we feel very confident that we will be able to deliver all the numbers that we have estimated. Especially for foot-and-mouth disease, we have a growth of 7%; therefore, indicating our profitability indicators. But before that, I would like to talk again about Rio Grande do Sul. We know of the scenario of the whole treasury that we faced in that region. Thankfully, things are looking up finally. So we would like to dedicate this moment to pay our respect and solidarity to our friends and families from Rio Grande do Sul. In that region, they have a very important convention that was finally confirmed and Ourofino is definitely going to be a part of this event. And hopefully, we are also going to make a lot of sales during that event. It's also important to say that we are monitoring the credit situation. We know how strong and how genuine the people from Rio Grande do Sul are and we definitely know that this completely exceptional situation. And any event like that, we basically didn't have any problems. Of course, during the presentation, we are going to show that basically 80% of our receivables from the regions that were affected by the floods because, of course, it was a huge flood. And even so, we are getting our receivables on time, and we don't foresee any problems in the future as well. Obviously, we still have to monitor that. We are paying a close attention it, but we didn't have any delays up until this moment. Everything is running smoothly. And that's why we also are confident that we are going to have an amazing fare in [indiscernible]. Like I mentioned before, if we exclude the foot-and-mouth disease factor, we still have growth of almost 100% in production animals for the second quarter, which is a strong growth. We had some growth in the first quarter already. And considering the conditions of the market, we definitely believe we are going to have very important share gain. We are also growing in pets as well. We have a 16% growth for pets as well. The sell-out is also positive. It is in line. And it comes from the results of all of the actions that we made. We changed the management of pets last year. And we have people with a lot of experience, people with strong results. And this work definitely reflects in the results. I would also like to say that for production animals, we also had some changes in management actually. We have segregated one unit. We opened the unit for birds in swine, and then we have bovine and equine units, which is the biggest one that we have. And we had this change in the units, both of them are doing very well. And I would like to say that at the end of the first quarter, we had already presented to the market some changes in the process for bovines and equines as well. We have a new commercial policy that is quite innovative in the market right now. And all of our customers are going to have to agree with this new policy. We're talking about a different segmentation in our customers and new methodology for work looking for like a funnel of opportunities. And I am sure that just for pets, we are also going to have fruitful results from now on. We have been facing some challenges in terms of international operations. Well, we didn't highlight that to the team, but we also had another campaign, again, for foot-and-mouth disease that didn't happen this year. Nevertheless, we are going a little underestimated than what we estimated, especially in Mexico. Mexico has been suffering a terrible drought that has harmed the sales, but we are going for a recovery now in the second semester. About the distribution to other countries, we are also facing some challenges with load postponement. The international logistics situation is rather complex right now, and that has been delaying some accounting receivables of sales that we have already made. So again, with this growth of production animals, especially with the foot-and-mouth disease orders and other orders that are still weren't accounted for. For pets, we also have an amazing sell-in sell-out growth, reducing distributor inventories. For international operations, Colombia is doing very well even though the other countries are facing some hardships. And again, let me highlight about the drought in Mexico, which definitely has posed some challenges for all of us. Nevertheless, I can see that we intend to fully fulfill our commercial challenges for this year. We have already told you in the first quarter that we were going to launch EnziClim. For this quarter, we have already launched 2 products, one for swine and one for bovine and equines. I'm going to talk a little bit more about this later. We're talking about pheromones. We also have 2 swine vaccines that were approved by the health ministry that are going to be launched soon. We are not going to talk about the details of the vaccines, but their products that we have high expectations for. I am not going to go into details because they are not going to be launched right now. But on the 14th, we are going to have this Brazil and South American symposium. And we are going to disclose all the information back then, and I would also like to extend you all an invitation to participate on the symposium. And then on October 8, we are going to have another very important launch at our headquarters. So to avoid spoilers, we are not going to give you any details as of now. We also have a launch about another product for pets. And probably in September, it's going to be available in the market, but you are going to have access to more details about this product in the next quarter. Now about what was already open to market. We have this therapies, which is an exclusive Ourofino product that was developed in partnership with an American company that actually made the development of these products that currently holds the patent. They are thermal analogs. So they are synthetic substances to appease swines and bovines. And this is a substance that basically eases -- appeases the animals. They remove fear from the animals. Therefore, of course, the entire production process causes some fear on the animals. So this is a tropical products that last for 14 years. So for example, during the animal transportation, they end up getting stressed out that debilitates the animals. And they also eat less after this transportation, also medical confinement. It also generates some territorial disputes between the animals, which also stresses them out. So there are many situations for animals. Therefore, this product was made in partnership with many important partners that are actually very excited about those -- about these new products. We basically have already sold BRL 1 million in the very first day of the launch. So we are actually feeling very confident with those 2 countries -- I'm sorry, with those 2 products. This is also a product that we are going to work on. This is very innovative. So our commercial team will have their works cut out for them. But, these products definitely present a substantial improvement in Zootechnic factors such as mortality, when we consider the stressing environment of the production landscape, as well as animal well-being. We know how partite is for the market. So we have no doubt that it is going to be a hit product for the next few months and years. Now I would also like to highlight, just like I said, the situation about our revenues or incomes. Nevertheless, we had planning -- a growth of planning, even considering a challenging market situation, even though we are seeing some improvement, especially when we come to bovines. We know that this is a seasonal market in our market is resilient, and we have our mission to work. Despite of this challenging scenario, we can see not only a growth in revenue, but also an improvement in our profitability indicators as well as a very strong focus on debt and cash flow. And I am very happy to announce that our results are very consistent. Like I said, we had this growth in revenue. And even the consolidated results, we can see that there are the international numbers. We also have the situation about the foot-and-mouth disease. And I am sure that those indicators are going to have great results despite of the market landscape. So we have a growth of over 2 percentage points. We also have a growth in our EBITDA in 5 points as well as the net markup. And we have made many actions to reduce costs. They have been saying this since last year, and the results are robust. And it's going to keep being the case, especially now with the launch of those new 2 products and we are definitely going to mitigate any risk from our operation. We also had a great cash flow generation last year and we had those problems, and you can see that the company is in a very solid position. In the very first half, we could generate BRL 100 million in cash flow generation, increasing our leverage that was already -- not increasing, sorry, improving our leverage. We went from 0.9x to 0.4x our EBITDA. So as you can see, this is a great leverage level in a debt level of 7.9%. Of course, this is still a high number, but comparing to the CDI which is the interest national rate, we can see that we have advantages when it comes to our financial situation and that generates for a good net profitability. Even though we still have some investments to be made such as the purchasing cycle that we're going to have in the second half, we can see -- we can foresee reduction of our leverage and the idea is to get very close to 0 when it comes to our debt until the end of this year, leaving the company in an extremely comfortable situation. Well, so basically, this is the main message that I had to convey to you right now, especially talking about this new management, the Board who has been following up very closely all of our operations, we have this legal tax committee, our People Committee, our Innovation Committee. I would like to thank our founders and our shareholders for your trust in our work. And you have been foreseeing our projects for the future. And we are definitely going to have great things to deliver, and I am confident that Ourofino is going to deliver even better results. Now I will give the word back to Mariana and I will give a final wrap-up at the end of the Q&A session.

Thank you very much, Kleber. So again, once more, if you have any questions, please just type them up in the Q&A icon, so we can answer them at the end of the presentation. Now I would like to invite Marcelo Silva to go in depth about the bottom line of our company for the second quarter of 2024. Good morning Marcelo, and the floor is yours.

Thank you very much, Mariana. Good morning, Kleber. Good morning, everyone. Who are here connected to us to listen to the announcement of those results. And now continuing talking about the events that we faced during the second quarter, especially about the foot-and-mouth disease. I am going to start by talking about net revenue of the second quarter as well as the first semester of the year. And in this point, we understand that it's important for us to adjust and understand the organic growth that we had in the company considering all the events that we had during this period. And well, about the second quarter, we had BRL 29.7 million of net revenue about foot-and-mouth disease here between Brazil and international operation. Of course, the biggest number was Brazilian. We only have like BRL 6 million when it comes to international operations, but we had BRL 231 million in revenue and BRL 27 million of them were about the foot-and-mouth disease. So when we make these adjustments, you can see BRL 201 million to BRL 206.9 million, which shows us a growth of 7.3% in this area and order decrease of 7.3%, which is the number that was disclosed. For the semester, this number is even more relevant. We're talking about a total of BRL 36.6 million of foot-and-mouth disease in 2023 versus BRL 7.8 million in 2024, which adjusting the numbers would be like BRL 362.4 million through to BRL 284.8 million, bringing a growth in 7% in growth and not a decrease in 0.9%, which is the official number. So the effect of the anticipation of the campaign and then the [ video ] of the vaccine campaign in May because usually the campaigns happen between April and May and then October and November. So the government later has limited the April numbers. And in this context, not only did we not have the sales, but we also had to provision the inventories. So we had a penalty in our revenues and an even bigger penalty in gross margin. So in the second quarter of 2023, we can see that foot-and-mouth disease had a gross margin of 10.8%, which is the difference between the cost and revenue, which was a positive result of 10.8%. And in the second quarter of 2024, not only did we not have the revenue, but we also had a negative result of BRL 8.1 million in inventory, which reduces in percentage our gross margin. On the other hand, it's also important to highlight that even though we had this BRL 8.1 million in inventory compared to last year, we still have a gain in margin to 48.2% just like Kleber mentioned. So even though we had this loss, our margin has grown in percentage. And this is the result of many actions that the company has taken, that brought not only cost reduction in operation which happened in a very nominal way, costs with people, with services that are lower in 2024 compared to 2023, and that could be perceived in our financial statements. You can see all the costs and the expenses in administration and commercial. You can see all these details. We can see this comparison between the 2 years. And in this case, we had a positive result. In raw material, for example, even though we have this increase in exchange with dollar that happened between June and July, that is going to bring some impact. The majority of the purchases that we made this year had already been made. Therefore, the dollar only had a partial impact in the second quarter. For the third quarter, we also should not have such a high impact. But if we keep the dollar in BRL 5.6, we should feel a bigger impact on the fourth quarter of the year and the first quarter of next year. Regardless, we have a positive impact for dollars, which have some impact for international operations as well as some national operations that are negotiated in dollar. So even after absorbing those negative impacts, we can see a gain in margins and we can bring this to the adjustment. And when we consider the foot-and-mouth disease, we can still have a gross margin consolidated going to 52%, which is a much better number. We're talking about 40 percentage points about the foot-and-mouth disease going 2 points higher in the 2023. So when we compare the adjusted numbers, we can see a 2% growth in the gross margin. And for the semester, we also have an BRL 8.3 million loss in inventory, 48.1% in gross margin against 45%, considering foot-and-mouth disease in both periods. And when we adjusted, our gross margin goes to 51.2% versus 46.2%, which shows that even adjusting the losses, we are improving our gross margin numbers because of all the actions that I just mentioned, you know: better raw material performance, reduction in costs and a better capacity usage of our plants, especially when we launch the vaccines that are going to be launched in the market. So just like Kleber mentioned, for our biological factory. For those of you who know our plans, you know that we have a foot-and-mouth disease plant and -- as well as other vaccines that it is one of the most modern plants in the world. It's the most modern one in Latin America, and this plant is being partially occupied, which brings a penalty to our consolidated results. Because, of course, we don't have the depletion of our operational usage. But now that we have the launch of these new products, we will be able to use full capacity of this plant having a positive result for both gross margin as well as better fixed costs for our company. So this is the summary of our results. Now specifically about the business units. Let's start with production animals. We can feel the bigger results in here -- the impacts here because 95% of the results in foot-and-mouth disease came from Brazil. And the growth when we adjust the numbers, we go from BRL 180 million to BRL 153 million, showing 10.7% growth in this semester and order reduction of 8.7% as well as a growth of 8.7% and order reduction is 0.2%. So we can see that this unit has been growing, gaining more and more space and market share. We have been working in 2024 to recover our market share for some of the segments, and we have a good representativeness in this business unit. That's why it's also important to consider the foot-and-mouth disease numbers here and make this adjustment. And when we disregard this loss in inventory, the unit would have a gross margin of 46.8% and not 41.4%, which shows then with this adjustment of growth and recovery in margin compared with last year, but also previous years as well. For the accumulated number, we have more than 41.3%. Adjusting the foot-and-mouth disease, it goes to 45.4%, which also shows a better margin in the accumulated numbers or year-to-date numbers into this semester. For pets, we had a growth in this quarter of 16.3%, which is a rather relevant number. For this business unit, the accumulated number is 18.6%. And in this semester, we had a very strong growth of 16.3%, accumulating a total of 15.8%. So this business unit had launch of new products, improving sell-in and sell-out numbers alike, again reflecting the actions that we have taken. But not only do we have a growth in the margin, we are also improving our profitability numbers. We had a gross margin of 68% compared to 65% last year. So again, this is a combination of growth as well as actions to improve profitability numbers and this BU still has a lot of opportunities for expansion of revenue and margin alike; therefore, improving our gross margin in the consolidated numbers of the company. When it comes to international operations, typically about Colombia, Mexico and other countries. We consider this was the BU that were impacted the most this quarter. The second quarter of 2024, we had a number of BRL 27.5 million against BRL 32.5 million last year. And this quarter was also affected by foot-and-mouth disease. We had a sale of BRL 6 million that happened in 2023, adjusting this effect. Basically, we had a stable quarter compared to the second quarter of 2023. We had BRL 33.5 million against BRL 32.5 million. So it would be stable month. And the accumulated numbers also have this effect. When we adjust the BRL 60 million, we also had a decrease of 8% and not 21.4%. When we address those numbers, we can see that they had bigger challenges in the international operations, especially in Mexico, again where they are having a mix of a long drought which is something that has migrated some producers that have left these activities. But we are still working on keeping our participation in Mexico, which is such an important market for us, and that is a part of our international expansion plan, especially in the Latin America. Also, we have a stronger dollar, which impacts our raw material numbers, but it also benefits our international operations. We're talking about 60.4% numbers in the second quarter of 2024, which brings us an accumulated margin of 57.3%. Now, leaving the BU performance and going to the SG&A, pay day operational numbers as well. We can see that the SG&A in the second quarter of the company is in BRL 67.6 million, which is a lower number compared to 2023 and basically the same one that we had in 2022. So basically, we are keeping the same cost that we had in 2022, even considering -- even after inflation and payment adjustments and for those of you who are from the financial area, you know how difficult it is to maintain those numbers. And it all goes to reflect the hard work that we have been doing to have more and more efficient management in such a way that we were able to maintain the numbers that we had in 2022. Now looking at the year-to-date numbers, we can see that we have almost BRL 6 million lower compared to 2023 and BRL 1 million less than 2022. So we are definitely growing our revenues, increase our profitability, keeping the same cost or even reducing costs, having lower cost than we had in 2022. Now about R&D, we keep our agenda. We didn't have any type of contingency here. The idea is to look for the better possible allocation of resources, so we can have impactful and fruitful projects. We are now reaping the fruits of our R&D with the launch of the vaccines that are going to be launched into the market real soon. And again, we have been keeping 8.6%, 8.7% of our total expenses with R&D, and we don't foresee to change this investment agenda for the next few months. Now about our EBITDA. In 2023, we had a quarter of BRL 34.7 million comparing to this year of '24. So we had a decrease of 5.4%, going to BRL 32.8 million. However, after we adjust the numbers after the foot-and-mouth disease loss, we get to a better EBITDA number of about BRL 41 million, which shows a growth of about 70% compared to the second quarter of 2023. So if we also adjust the foot-and-mouth disease in the EBITDA of the first semester against the last semester, we had BRL 65 million, which is almost twofold of the EBITDA that we had in 2023. So we are keeping our growth in sales and growing gross margin even more than revenue; therefore, having EBITDA growth even better than the growth of gross margin given the expense cuts or cost reduction that we have been having. Now about cash flow generation, we keep going with a robust cash flow generation, especially because of all of the adjusting inventory levels after the pandemic now that we're finally able to normalize that. We also are cutting costs, improving our financial cycle. So we are improving our cash flow generation in 2023, and the same goes for 2024. We are talking about BRL 100 million in operational cash flow generated in the first 6 months of the year, which is enough to keep our organic growth agenda. And also, it's important to keep into account that our heavier investment which is in R&D is already guaranteed. We had a BRL 250 million project last year and BRL 225 million were funded by Finep in very adequate conditions. We had a 12-year contract, [ 3% ] of interest. With all-in cost, we are talking about 5.8% a year, which makes it very comfortable for us to keep our intense R&D agenda as well as generating cash flow operationally that supports organic growth as well as it brings a reduction in the leveraging of the company considering net debt. And EBITDA has decreased like Kleber mentioned, in the second quarter, when we compare it to the second quarter of 2023, but keeping an organic growth and cash flow generation of this index which is going to reduce this index in the next few months. The debt capital is 2.8 for the quarter. The rate was 7.9%, and the national interest rate was higher. So it is a very favorable situation for the company given our investment profile. Well, in addition to cost, which is lower than the market, the long-term debt is 76% long-term debt, which is something very important, given the fact that our projects have a longer maturation period. So when we look at the aging of the debt, we can see that the good part of it is above 40% being above 5 years -- 42.7%. So considering BRL 100 million in debt for the second quarter, we can see that we have a very comfortable situation to make all the necessary amortizations and payments. In the second semester, we are going to keep creating these liquidity profile that we have with this maintenance or even an increase of the Selic, which is the interest rate. And we foresee a lower rate for these structures than the one that we foresee and the one that we had in this semester. So thank you for your time, for your attention and for your trust, and I would like to give the floor back to Mariana, who's going to lead the Q&A.

Thank you very much, Marcelo. And now I would like to again invite you all to send questions. So Marcelo and Kleber can answer them to us. As of now, we only have one Q&A -- I'm sorry, one question. So I would like to invite Marcelo and Kleber back. So maybe, Marcelo, you can answer the question.

Well, okay. So we have a question from [indiscernible]. Could you please give more details about the foot-and-mouth disease. Are you going to discontinue the production? Do you have a plan to replace this capacity in the plant? And please feel free to send more questions, okay? Well, as we have said in Brazil for many, many years, we have been playing to become free from foot-and-mouth disease without a vaccine. We were free of the disease, but with the vaccination, and this status was caused because they stopped creating a vaccine. So we can no longer vaccinate the bovines in Brazil. So the production had already been discontinued last year because the foot-and-mouth disease has a very long approval cycle. It also requires some internal tests that also last for a few months and the government does the same, which takes even more months. There were some commercialization expectation for 2 more campaigns. And there was like in anticipation of those plans, which caused basically the block of this campaigns this year, and we had about 57 million doses of the vaccination causing BRL 10 million loss that definitely have impacted our results. So yes, we do have some plans to use the plant. We have 2 discussions ongoing as of now. Unfortunately, I cannot disclose any details to you given our strategy. But yes, there are 2 discussions being made, one in a more advanced stage and the other one at the very early stages yet. But yes, I mean, there is a possibility that very soon, we are going to have some new production in that plant, okay?

Okay. Kleber. We don't have any other questions as of now. So I would like for you to give your closing remarks, please.

Perfect, Mari. So we understand that we have given important answers from the accountability point of view. We can see a lot of growth in production animals as well as pets. We had some very important launches of products that were very important for our business. For this new semester, we are going to launch new products, 3 of them that are already certified for pets that is going to be launched very soon as well as 2 very important vaccines that are going to be announced in the market on August 14 and October 8. We also expect to launch new products until the end of the year. We also have Expointer, which is the main business that is going to happen. This semester, we also have investment strategies that are very well on the way of giving good results to us. We also have some projects that were already submitted to the Ministry of Health this year that's probably going to be approved next year. So we have been working hard. We made some very important adjustments in the company when it comes to expenses and costs and strategy. We have new directors, and we, again, discussed our strategy. The last one that we had was in 2019. So we closed that cycle in 2024. The new cycle, the new road map is already undergoing analysis by the Board, by the directors as well as a consultant company. So we can start looking at the new growth cycle that is probably going to be even stronger when it comes to international operations and also supported by Mitsui, our shareholder, that has been helping us very relevantly. So again, we feel confident in our work. We know about the challenges, but we are confident that we are going to deliver good numbers for this year. So again, I would like to thank the shareholders, the business partners, our creditors, but especially the Ourofino team, who has been so dedicated and understood the need that we had and they are well engaged and working very hard and working very closely to the external market in terms of our brand, in terms of our operation and of the internal work that we have been developing as well. So thank you once more. And I hope to see you soon, especially when we announce the numbers for the next quarter.

Thank you, Kleber. I would like to thank you and Marcelo as well as everyone who connected here with us. And the final message that I have is that our Investor Relations team is always available to you guys. Here are our contact information and see you soon. Thank you. Bye-bye.