Minerva : 1Q17 Results

Minerva (BEEF3)

Price on 5/5/2017: R$10.51

Market cap: R$2,451.8 million

229,860,259 shares

Free Float - 51.7%

Conference calls

May 9, 2017

Portuguese 10:00 a.m. (Brasília) 9:00 a.m. (US EST)

Phone: +55 (11) 2188-0155

Code: Minerva

English

12:00 p.m. (Brasília) 11:00 a.m. (US EST) Phone: +1 (412) 317-5479

Code: Minerva

IR Contact:

Eduardo Puzziello Kelly Barna Matheus Oliveira

Phone: (11) 3074-2444

ri@minervafoods.com

• In 1Q17, Minerva's operating cash flow totaled R$53.6 million. ROIC stood at 22.2% in 1Q17, in line with last quarters. Cash position at the close of the first quarter of 2017 totaled R$2.9 billion, 2.4x higher than short-term maturities. At the close of 1Q17, financial leverage, measured by the net debt/LTM EBITDA ratio, was 3.8x.

• Gross revenue amounted to R$2,302.9 million in 1Q17 and R$10,091 million in the last twelve months, in line with the LTM1Q16 figure. First-quarter exports accounted for 60.5% of consolidated revenue, being impacted by the temporary imports ban by certain countries due to onset of the so-called Carne Fraca (Weak Meat) Operation at the close of 1Q17. However, fueled by the Company's implementation in recent years of commercial efficiency programs to boost local market capillarity, privileging the diversification of channels and sourcing, the Beef Division's sales in the domestic market grew 4.4% over 1Q16, despite Brazil's economic deterioration.

• First-quarter 2017 EBITDA totaled R$197.6 million, accompanied by an EBITDA margin of 9.2%. The main factor impacting EBITDA was the 19.3% depreciation in the average dollar in 1Q17 over 1Q16, affecting export profitability. However, this effect was partially offset by the reduction in the average arroba price in 1Q17, 5% down on 1Q16.

• In February, the Company exercised the call option of US$105.5 million in face value of its 2022 Bonds, with annual coupon of 12.25% and with maturity in 2022. This measure, combined with the maturity and redemption of the 2017 Bonds (annual coupon of 9.25%), is within the scope of the liability management strategy that the Company has been adopting in recent years to reduce the cost of debt.

• The Brazilian herd grew 8% in the last four years, reflecting the expansion phase initiated in the 2013/14 season. Cattle producers began to retain a higher number of females in order to increase the production of calves. This measure has created now a higher supply of cattle ready for slaughter which, combined with the improved zootechnic rates and the reduction of the industry capacity in the last two years, should be the main factor affecting the arroba price in the coming years.

• The Company paid R$60.2 million in dividends relative to profits to its shareholders in April 17. This amount remunerated the investor in 2.7% over the market price of the shares on April 13, 2017 (dividend yield)

The onset of the Carne Fraca (Weak Meat) operation at the end of the first quarter of 2017 significantly impacted Brazil's entire protein chain. Consequently, both domestic demand and export sales contracted, influenced by the temporary suspension of purchases by certain importing countries, or by the increase in sanitary inspections, until the content and extension of the investigations became clearer. It is worth noting that, in this context, representatives of the Brazilian Ministry of Agriculture, along with beef producers' associations (in this case represented by the Brazilian Association of Meat Exporters - ABIEC) were agile and assertive in ensuring the public opinion and customers of the soundness and reliability of Brazil's health control system. Various interviews were given to local and international media vehicles, responding to a number of inquiries, and many meetings, teleconferences and videoconferences were held. After little more than a week of the launching of the probe, the fast response of the government and the sector's agencies started to pay off. Domestic consumption gradually recovered and embargoes were being lifted. Therefore, the sector was affected by a one-off impact mainly in the last two weeks of the quarter, which ended up influencing the operating results of all players in Brazil's protein industry. It is worth noting also that these effects dissipated quickly in the following weeks, as of April. It became clear that these setbacks only involved some small meatpacking companies, and that the beef industry health control system is really robust and efficient.

Something worthy of mention is the operational flexibility demonstrated by Minerva during the temporary embargoes. In a short period of time, the Company managed to reroute its production, serving the countries affected by the embargoes through its industrial units located outside Brazil (e.g. Uruguay, Paraguay and Colombia). This measure mitigated the impact of Brazil's reduced access to export markets, clearly demonstrating the importance of geographic diversification as a protection and risk management instrument.

In addition, regarding the international beef supply and demand environment, it became evident that, after the Federal Police operation, South America (especially Brazil) still has a privileged space in the global arena as the main exporting region, and that the international market suffers from lack of beef supply, as there was undersupply in certain countries which temporarily suspended Brazilian beef imports. These countries also had to deal with a significant increase in the average price of imported products. This was another factor which contributed to a quick resumption of imports.

In the domestic market, despite the impacts of the Federal Police operation at the end of the quarter, the Company continued to expand its distribution channels in Brazil, focusing on food service and small and medium retailers. In addition, Minerva third-party product sourcing has been increasing, through own trading companies located in Brazil, Uruguay and Australia. This is the most efficient way to capture business opportunities, focusing on sourcing via

"trading" and developing other efficient distribution channels. These movements can be demonstrated by the increase in the volume of total domestic sales of fresh beef in the first quarter.

Regarding the operational efficiency program, management continues to foster programs aimed at standardizing processes, minimizing the volatility of operating results and increasing operational productivity and efficiency.

Lastly, still regarding raw material sourcing, we expect to have more cattle available for slaughter in 2017 and 2018, due to a combination of (1) animals that should have been slaughtered last year, but which due to industry capacity adjustment remained on farms and should be available in the coming months, and (2) the reversal of the cattle cycle to the phase of higher animal supply, as we already noticed the first signs of higher slaughter of females and the reduction in the margin of breeding activities. In addition, the industry capacity adjustment fueled by the recent reduction in domestic demand (due to the Carne Fraca operation) also impacted demand for cattle. The combination of these factors reduced the average nominal arroba price by more than 10% compared to the same period in 2016. Despite the various challenges imposed by the sector, we still strongly believe that Minerva's operating capacity will generate attractive, sustainable and consistent returns over time.

Brazil

Cattle Supply

Slaughter volume totaled 6,086 thousand heads of cattle in 1Q17, slightly up on 1Q16 and 4Q16 (1.8% and 2.6%, respectively). The availability of animals ready for slaughter has grown in recent months, fueled by the reversal of the cattle cycle and animals that should have been slaughtered in recent years, but which due to industry capacity adjustment remained on farms and are beginning to be available. On the other hand, the industry reduced slaughter due to the weak seasonality effect of the first quarter. This combination of good supply of animals ready for slaughter and low demand explains the reduction in the average arroba price in 1Q17 (reference: Finished cattle Esalq/BM&F - state of São Paulo), down by 3.1% over 4Q16 and 5.0% over 1Q16, averaging R$145.6/@.

Brazil's cattle supply perspectives remain positive for 2017, influenced by: (i) lower grain prices, due to the prospects of record soybean and corn yield for this year, which tends to increase the volume of animals from feedlots in the offseason; and (ii) the reversal of the cattle cycle, resulting in a greater availability of animals ready for slaughter. These factors explain the reduction in the arroba price in the futures market.

Slaughter ('000 heads) R$/@ 153,2 156,1 152,0 150,2145,6

Slaughter ('000 heads) R$/@

148,4 145,0143,3

5.976 6.402 6.003 5.925 6.086

2.047 1.944 2.095

1Q16 2Q16 3Q16 4Q16 1Q17

Jan-17 Feb-17 Mar-17

10,0%

5,0%

0,0%

-5,0%

-10,0%

-15,0%

Annual Variation - Slaughter Cattle Price - R$/@

160,00

150,00

140,00

130,00

120,00

Apr-14

Jun-14 Aug-14 Oct-14 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16

Feb-17

110,00

Source: Ministry of Agriculture, Livestock and Supply, CEPEA/ESALQ | 1Q17 Preliminary slaughter figures