JBS SA

BOVESPA:JBSS3

Earnings Call Transcript 2018-Q1

[Operator]

Good morning, everyone, and welcome to JBS Conference Call. During this call, we will present and analyze the results for the first quarter of 2018. As requested by JBS, this event is being recorded. The recording will be available this afternoon and can be accessed by following the instructions posted on the company's website at www.jbs.com.br/ir. Taking part on this call, we have Mr. Gilberto Tomazoni, Global COO of JBS; Mr. André Nogueira, CEO of JBS USA; Mr. Wesley Batista, Sr. CEO of JBS Brazil; and Mr. Jerry O'Callaghan, Investor Relations Officer. Now I'll turn the conference over to Mr. Jerry O'Callaghan. Please go ahead, sir.

[Jeremiah O’Callaghan, executive]

Thank you, ma'am. Thank you. Good morning, everybody, and welcome to this call to discuss our results for the first quarter of 2018. Before I hand you over to Mr. Tomazoni for some opening remarks, I just wanted to mention that we posted a presentation on our website just 10 minutes ago. We've got a disclaimer on that, so please bear that in mind. And we will make reference to that presentation during our prepared comments here. So we will reference page numbers to facilitate the communication with you, but before we get to the presentation, I would like to hand you over to Mr. Tomazoni for his opening remarks here. Tomazoni?

[Gilberto Tomazoni, executive]

Good morning. Thank you, everyone, to be part of this call. We feel now it's a great quarter. Net revenue, up almost 6% to BRL 40 billion. EBITDA, up more than 40%. Net income, up more than 43%, and leverage was down. We are pleased to announce the agreement with the bank in Brazil. Regardless, our debt in Brazil, this show the confidence of the financial institute have demonstrated in the company. I want to point out, even that our advanced in compliance and Jerry will give you more details later. Jerry? Please go to the financial details.

[Jeremiah O’Callaghan, executive]

Okay, Tomazoni. Thank you. Thank you for your comments. So making reference to our presentation and jumping in on Slide 5 in our presentation regarding results. Net revenue, as Tomazoni just mentioned, came in at just under BRL 40 billion, BRL 39.8 billion, up 5.8% in relation to the corresponding period last year. Gross margin came in at BRL 5.2 billion. That was up 16.5% in relation to the first quarter of last year. Gross margin, increasing from 11.8% to 13%.

Moving on to the next page in the presentation. EBITDA came in at BRL 2.8 billion, with an EBITDA margin of 7%, up from 5.7% or BRL 2.14 billion in the same period last year. Net income also up substantially, up 43.5% from BRL 353 million, up to BRL 507 million, with earnings per share going from BRL 0.12 per share up to BRL 0.18 per share. With regard to cash flow, Page 7 in the presentation, Operational cash flow came in positive, BRL 163 million. Free cash flow came in negative BRL 110 million in the quarter. Our leverage and our cash position, Page 8 in our presentation. Our net debt reduced by BRL 2.3 billion when compared with the first quarter of last year. Leverage came down quite substantially quarter-on-quarter, from 4.23x in the first quarter of last year, down to 3.24x at the end of the first quarter in 2018. Our cash position at the end of the period was BRL 10.8 billion. And if we add to that the $1.3 billion or BRL 4.3 billion of the committed lines available to JBS in the U.S.A, our total liquidity reached BRL 15.1 billion, which is more than BRL 2 billion above the total short-term debt of the company.

Also, on Page 8 in our presentation, just briefly to mention, the reduction in short-term debt as a percentage of the net debt of the company, we're down from it being 1/3 of the total net debt a year ago to 23% at the end of the first quarter; 95-plus percent of our debt is in U.S. dollars and 4.7% in Brazilian reais. And the cost -- the average cost of that debt is 5.58% in dollars and 9.2% in reais.

Now going to each business unit briefly and going through the presentation by business unit and starting with Seara in Brazil, Page 10 in our presentation. Revenues, almost flat year-on-year, down 2.7% from BRL 4.08 billion down to BRL 3.97 billion. EBITDA though was up from BRL 216 million up to BRL 330 million. That's a 53% increase in EBITDA. EBITDA margin went from 5.3% to 8.3%. The process products category in Brazil posted an increase of 1.9% in pricing, basically reflecting the company's strategy to prioritize higher value-added products and profitability. We also launched a new marketing campaign for our Seara-branded businesses in Brazil just recently at the beginning of this month.

Moving on in our presentation. Let's talk about JBS Brazil, and just to remind everybody who is in the call, JBS Brazil is our Brazilian Beef business, our leather and hides business, which is primarily in Brazil, but there are some units outside of Brazil and all of the other-related businesses we have, which are quite substantial -- biodiesel production, collagen production, there are quite a number of other businesses, all of which are part of this business unit. Net revenue came in at BRL 5.91 billion. That was down 4.7% in relation to the same period last year when it came in at BRL 6.2 billion. EBITDA also was down negative BRL 92.5 million in the first quarter, with a negative margin of 1.6%. That's down from positive BRL 59 million in the corresponding quarter last year, which was a 1% EBITDA margin then. Number of livestocks processed and revenues in Brazil are back to the historical levels and basically, in line with the company's processing capacity.

We saw pressure on raw material cost, mainly in regions where the industry as a whole has increased its processing capacity, relevant increase in some of the states in Brazil. We are focusing on value-added products and in more profitable export markets, and we're also beginning to observe an improvement in the fundamentals around the leather and the hides operations, which indicate we will see a reversion of the negative trend in margins in that business over the last number of quarters.

Moving on to JBS USA Beef. We saw revenues up almost 3% to $5.06 billion. Now we will speak in dollars from now on in the presentation, up from $4.92 billion in the corresponding period last year. EBITDA came in strong at $308 million, up to 68% from $183 million in the corresponding period, EBITDA margin going from 3.7% to 6.1%. The North America operations, the improvement was driven by the company's focus on product diversification and customer segmentation, by the improvement in the U.S. economy and by the increasing demand in the international market. In Australia, we saw an improvement in beef operations in relation to the previous year, although there is still limitation on improvement due to less availability of cattle in Australia. Primo, which is a market leader in prepared foods in Australia, had relevant operational improvements and better yields in its prepared foods business.

Moving on, Page 13 in our presentation, JBS USA Pork. We saw revenues up 5%, $1.46 billion against $1.39 billion in the previous year. EBITDA was also up $178 million, up 11.5% in relation to the $160 million of the first quarter of 2017. EBITDA margin going from 11.4% to 12.1%. We saw growth in volume and in revenue in the export market, boosted by selling products into diversified regions, much increased sales into Colombia, for instance, in South America, and also into the Central American countries, on top of the traditional markets like Mexico and Asia, particularly Japan, which are our traditional markets for our pork products. JBS Pork continues to increase its volume and portfolio of higher value-added products in the domestic U.S. market, associated with commercial partnerships and with key customers. We also brought in Mr. Lopez -- Tom Lopez at the beginning of the quarter. He came from Kraft Heinz, and his job is to -- together with the team -- improve the segment of prepared foods in the U.S. under the Plumrose brand. This is the Plumrose business, which JBS USA acquired in May of last year. And obviously he's focusing on synergies in addition to increasing the performance of the Plumrose business.

Our chicken business, Pilgrim's Pride, remembering in the U.S. and Mexico and also relevant operations in Europe, we saw revenue increasing 10.8%, going from $2.48 billion up to $2.75 billion in the comparable periods. EBITDA margin was up also from 9.2% to almost 10%. EBITDA increasing from $228 million up to $272 million, a 19% increase in actual EBITDA. Net revenue of the U.S. operations grew by 6% when compared with the corresponding period last year due to increase in volumes of prepared products and pricing, and that includes obviously, the GNP acquisition, which Pilgrim's completed in January of 2017. In Mexico, operations performed beyond our expectations, mainly due to an increase in volumes and the normalization of that market in the aftermath of the earthquake at the end of 2017. In Europe, the company already sees positive results from the integration with Moy Park and from the operational improvements that are generating synergies ahead of original expectations.

A couple of other slides to go through before I hand you over for Q&A just to cover a couple of non-operational aspects here. We've talked in previous calls about compliance. We hired a global compliance officer, who has been boosting our team out of Brazil in the middle of last year. Just recently, we hired -- we appointed a head of ethics and compliance for our operations outside of Brazil. Lance Kotschwar was appointed to that position. He will lead the code of conduct, whistleblower hotline, global anti-corruption policies, antitrust and competition law, trade compliance and conflict of interest policies, assuring JBS global operations will implement and conduct its business in the highest ethical standards. We also, having approved our code of -- our global code of conduct and ethics at board level at the end of March, we launched that code at the beginning of May. There's very relevant internal communication to all of the team around the world. This is a global code of conduct and ethics, contemplating legislation and regulation in all parts of the world where we operate. So we took a lot of time and we put a lot of effort into coming up with a very comprehensive code of conduct and ethics. And we also launched parallel a business associate code of conduct and ethics, comprising of specific rules for our relationship with vendors and third parties.

Page 17 in our presentation. We've been raising the bar in food safety and quality assurance. We pay a lot of attention to this. JBS has been a global standard there for food safety and quality assurance, Alfred Almanza, whom we appointed from his very long experience at the USDA, he is our global head of food safety and quality assurance. He's been traveling the globe and meeting with government officials in several countries to stress JBS' ongoing commitment to food safety and quality assurance. We have a food safety and quality assurance team, a global team, coordinating the best global practices in all our business units around the world. Also to reinforce that team, Ann Knapp, a former government contractor for multiple agencies in the USDA, joined that team to strengthen that team recently. Ann joined us earlier this year, and we've also been working very hard on standardizing our lab tests around the world and improving our relationship with service providers in this category.

Just finally before we hand you over for our Q&A session, just a little bit about Seara, recently launched a national campaign in Brazil associated with the Seara portfolio of products, where quality is the keyword, basically. This campaign is very visible in Brazil across all of the media channels in Brazil. We've also seen at Pilgrim's in the U.S. the relevant investments in the brand, which is called Just Bare Chicken, Just Bare brand in the U.S. There's been relevant growth in online sales with Amazon under this brand. Just Bare is outpacing the growth of Amazon Fresh products generally, and it's in the list of the top 50 best brands of Amazon. And we're also supplying Just Bare to traditional retailers nationwide -- excuse me, nationwide in the U.S.

So just to run through the priorities briefly for JBS going forward here, Page 20 in our presentation. I'm speaking in the name of Tomazoni here. A continuous focus on operational efficiency. Basically, these are the pillars, which we are focused upon across all our operations. Organic growth, organic growth through increased utilization of capacity, and also through improved product mix. Investments in innovation and quality. We are tireless in our investments across all the geographies in innovation and quality. Deleveraging, we mentioned in our previous call, a goal to be under 3x leverage by the end of 2018 and to be around 2x leverage by the end of next year, 2019. We continue to focus on that. And as I mentioned, we've put a lot of effort into being a world-class global compliance program across our businesses around the world. So with that, that completes our prepared remarks today. We would like to open for questions and answers, please. Thank you.

[Operator]

[Operator Instructions] Our first question comes from Farha Aslam with Stephens.

[Farha Aslam, analyst]

Your pork results were quite notable, especially given you had new pork slaughtering capacity opening up in the U.S. Could you share with us any changes in sourcing that you made that allowed you to get the results that you got? And your outlook for that business, particularly any color you could provide about the hog availability versus slaughter capacity in the U.S.

[Jeremiah O’Callaghan, executive]

André?

[Andre Nogueira, executive]

No change in any supply of hogs for us, we have the same balance as we had before. We have a pretty good mix in terms of how we source hogs. We have a piece of our own production, we have a piece that is based in -- some form of base grain price, have some piece that's based in future of hogs and by hogs in the market. So we are pretty happy with the diversification of the mix, how we source the hogs and how we price the hogs. I think that our team is doing a fantastic job in terms of operational excellence, Farha. Our cost of production for hogs this year is below how it was last year, despite of our inflation, despite we have been raising compensation, especially for hourly employees way ahead of the shortage of labor in the U.S. and started to do that 4 years ago. So in spite all of this, we finished the quarter with a cost per head that was lower than last year. As you know, we integrated -- finished the integration of the plant that we acquired. We captured all the synergies that we plan. In fact, we got a little bit more. Our exports continue to perform extremely well. And as you know, we now have a piece that is prepared foods inside of the Pork business with Plumrose and with the bacon operation that are performing very strongly. So our outlook for pork, I think that, in terms of supply and demand, be a good balance in spite of the new production that you are aware. I think that the hog producers have been growing the herd in the U.S. ahead of this growth of capacity, so I think that will be good balance. The big question for the future is if we'll actually be able to continue to grow exports to absorb this new production and that's a fair question, until now it's doing well. U.S. is growing export, probably not in the speed it should be that I think is more a question of time. I think the demand will be there. I think the U.S. is extremely competitive. For our business, as we anticipated last quarter, we think that it's a stronger year for our Pork business. I think that we will continue to be double-digit margins for the year. We do not anticipate that to be as strong as it was last year. So I think that's a little bit less than last year, but still in the double-digit margins.

[Farha Aslam, analyst]

That's helpful. And just as a follow up on U.S. beef, currently, you have very ample supplies of beef and very high processing margins. Could you share with us your outlook for the cattle supply, particularly given that we're seeing dry weather in the West and we're starting to hear about cows going to slaughter? Any concern about cattle supplies going into next year?

[Andre Nogueira, executive]

No, not at all. I think the cattle supply for next few years has been -- in reality the cattle supply for the next 2, 3 years has -- with the amount of cow herd that we have in place we're not seeing any relevant cow liquidation or heifer liquidation. I think that U.S. expanded at a really strong pace in the last 2, 3 years. I don't think that they're going to continue to expand the herd in the same pace. I think that will be stable, but we do not anticipate any liquidation margins, profitability continue to be pretty strong in the whole chain of the cow/calf producer, for the feedlots and for the packing industry. So I think that the supply for the next 2, 3 years is done. If you stop to grow the herd, then it will be stable. We'll continue to grow production next year. I think that production this year will be 2%, 3% higher than last year and another 2% for the next year, and probably stable for 2020. I don't anticipate -- I'm not seeing -- do not anticipate any relevant liquidation. I think that the margin will be pretty strong. U.S., North America demand is very strong. That's both Mexico, U.S. and Canada. Export is doing extremely well, we grew our export last quarter in 21% in sales. So I think that's a very good supply of cattle for this year for the foreseeable future and great demand, both inside of U.S. and in all countries that we export.

[Operator]

Our next question comes from [ Tiago Duarte ] from Insight investments.

[Unknown Analyst]

Wondering if you can comment a bit on what you see the outlook for Brazil beef, first of all, given the moves in FX but also what you said about the level of competition?

[Unknown Executive]

Yes, Tio.

[Wesley Batista, executive]

Tio, this is Wesley. So what we've been seeing is our volumes are back at the same level as what we had last year. So volume wise and efficiency wise, we're back at our normal volume. The volume of our plants -- the capacity of our plants. But as we mentioned in the release, we see increased competition -- especially [ Rondonia ] and Mato Grosso in the North of Brazil. Those states, we saw a significant increase in competition for cattle procurement. We see that competition staying in the medium term. We don't see any changes to that, but we see a few other things that are improving in the market that makes us a little bit more optimistic. So we have -- the leather business in Brazil, which had a relevant effect -- a negative effect on our results for this business unit, we see that coming back. We see the positive signs in the future. We also see export demand in some of the main markets of China has been very strong for us, some of the Middle Eastern countries as well. Europe as well has been very strong for us. So we're focusing very much so in those markets. With the currency here in Brazil, that's going to support the exporting of more beef out of Brazil. And in the domestic market, we've been focusing a lot on further value-added products. So on one hand, through our brands and different types of beef here in Brazil, but also on processed beef, so burgers and patties and all of that; we're seeing good margin and good improvement there. So summarizing cattle supply and cattle competition for cattle procurement in the medium term, tough. But we see an upside on the export and for the value-added products here in Brazil.

[Unknown Analyst]

Okay, that's helpful. And so we should see then Q1 of this year as being kind of the trough in terms of Brazil margins? Do you think you have a couple of typical quarters to go before we go see an improvement?

[Wesley Batista, executive]

No. We see that we have more positive signs in the future, like I mentioned before, not necessarily that it's going to come back right now to the normalized margin that we expect out of this business, but we're working hard to bring it back to a more normalized level in the future here.

[Operator]

Our next question comes from [ Guillerme Agiata ] with UBS.

[Unknown Analyst]

I have a couple of questions here. The first one, a follow up on JBS Brazil. We have seen another quarter of negative EBITDA margin, and we appreciate your comments on things like the cost pressure. But we were wondering if you could provide us some color on how was the margin progression through the quarter? I mean, where we left off by end March and what are your expectations for the remaining of the year? And if you're seeing certain capacity adjustments following this cost pressure? And my second one would be on -- below your operating line, we saw a positive contribution from the income tax lines supporting your strong net profit growth, despite a lower pretax profit year over year. And we're just wondering what drove this positive income tax effect in the P&L? And what should we expect your effective tax rates being this year, and on a more normalized basis, going forward?

[Wesley Batista, executive]

So I'll speak here about the follow-up question on Brazil. So we don't disclose the month-by-month margin, but the trend is more positive on the end of the quarter than at the beginning of the quarter. So we see a positive trend here in the future. Now when we talk about adjustment, we've seen nothing very relevant on capacity adjustment to be in line with the cattle supply. But we -- what we're seeing is that, on our side, especially is, we have been adjusting. We're in line with the same slaughter, same processing rate as same time last year, but we are adjusting within our plants. We have increased in the production in plants to have more approvals for exports and we have reduced, for example, for plants to have more commodity mix. So we have been changing the mix of plants that we have been producing. That's a huge focus of ours as well.

[Jeremiah O’Callaghan, executive]

Regarding your other question on tax. The improvement in the tax rate at JBS S.A. is due to the fact that JBS Brazil incurred losses. So that improves the tax rate. And obviously, there was a new tax regime in the U.S., also, which is quite relevant to our business. I don't know -- Andre, want to make any comment about the tax in the U.S.

[Andre Nogueira, executive]

No big comment, just the change in the regime that we represent -- that the U.S. tax rate came from 34% to 21%. And we represent for us in the consolidated basis $200 million savings for the year.

[Jeremiah O’Callaghan, executive]

Okay. Thank you.

[Operator]

Our next question comes from Andrew De Luca with Barclays.

[Andrew De Luca, analyst]

I just have a quick question on that. You mentioned that you've rolled 78% of that debt for 3 years. Can you just provide us with an update for the remaining 22%?

[Jeremiah O’Callaghan, executive]

The remaining debt, it will be decided upon in bilateral conversations and negotiations with the other banks but we're not involved in the package, the normalization package that we announced.

[Andrew De Luca, analyst]

And those are also set to expire in July of this month?

[Jeremiah O’Callaghan, executive]

In principle, yes. But obviously, there are ongoing conversations with all of these financial institutions well before the deadline.

[Andrew De Luca, analyst]

Sure, sure. And just on the debt that was rolled, can you let us know if there -- I remember under the previous extension, there were leverage targets that you had to meet 3.5x by year-end '18 and 3x by year-end '19, I believe. Are those still there? Or have those been revised?

[Jeremiah O’Callaghan, executive]

Those have been revised, Andrew. Those have been revised. Andre, did you want to comment on that?

[Andre Nogueira, executive]

Yes. We are now much closer to [indiscernible] in the bonds level. When that same leverage language that we have in the bonds. So there's no covenant -- the full covenant. So it gives the company much more flexibility than the previous covenants there.

[Operator]

Our next question comes from Bryan Hunt with Wells Fargo.

[Bryan Hunt, analyst]

My first question is -- on the balance sheet question that was just asked. Considering that you've got your short-term debt issues in Brazil settled, when you think about reaching your leverage targets of 3x, it seems like you would begin to pay down debt in pockets and regions where you haven't in the past, like the U.S. Can you just talk about how you plan on achieving your 3x this year and your 2x next year?

[Jeremiah O’Callaghan, executive]

So Bryan, obviously, there are 2 manners of reaching the leverage target. Increase in EBITDA, there are good indications for a strong year. And generating cash to pay down debt. We will look across all the geographies where we have debt expiring or that can be -- that is payable, that is callable, to focus on the most expensive debt by region and pay down that debt, in order to reach those leverage targets.

[Bryan Hunt, analyst]

My next question is, with your new executives from Kraft-Heinz looking at Primrose and in garnering additional synergies, can you talk about his initial evaluations? And what additional synergies he's found so far?

[Jeremiah O’Callaghan, executive]

I think you wanted to make comment, Andre, about leverage? And can you take up that question as well, please?

[Andre Nogueira, executive]

Yes. So about the leverage, the agreement with the banks in Brazil is that the July [indiscernible] will be guaranteed for 3 years. But there's no penalties for us to pay or accelerate that payment. So that can be paid faster. And as Jerry pointed out, we're looking at each region what is the most efficient use and probably pay debt in all the regions that we have in operations today, consider the amount of free cash flow that we expect to generate in the next 1 and 2 years. About Plumrose, not only is that -- we have a food chain Plumrose now. So [indiscernible] have a new head of operation a new head of marketing, a new head of innovation. So we have a full team at Plumrose that are reviewing the plan and what put a very aggressive plan for growth and for increasing in margins. I think that's a little bit too early to put any target on that. The team is onboard in less than 2 months but we're very excited about the quality of the team that he put in place and we are very excited with the improvement that we saw in just 2 months that the team has worked together.

[Bryan Hunt, analyst]

And then my last question is, Pilgrim's on their conference call, talked about new automation that they're putting in place in light of the tightening labor markets in the United States. Can you comment on anything you might be doing on the JBS USA to shield yourself from shortage in labor as well as escalating labor rates? That's it for me.

[Andre Nogueira, executive]

So Bryan, the labor is a big topic of conversation. It's a big topic of conversation in the U.S. I am very happy with the improvements that we did. I can tell you that our turnover rates in U.S. for the first quarter of this year, it's lower than last year, despite of all the tightening in the labor markets. I think that we saw that coming. We prepare ourselves for that. We have the best team ever in the company, and the management team, supervisor up. And even the overall turnover is lower than it was in the company combined in U.S. in the first quarter of last year. So the first thing is pay in the right level, a little bit ahead of the competition, have the right management team in place. That's the most important thing to face the tight labor market in the U.S. On top of that, the investment that we are doing, as you know, with the partnership and the ownership that we have in this squad, we have a lot of projects in place. I think that probably in chicken, the projects can deliver results faster. The technology is more close to available. And delivered the [indiscernible] that needs to be delivered. In the other business, you have more that is not the full technology that you can implement but in the area by area. Scott Technology just did acquisition of a company that will help us to accelerate the improvement and the technology in the back of the plant. It's a German company and they did the acquisition few months ago. And we will continue to invest in Scott and invest that Scott help the whole JBS to improve the use of the technology to reduce labor. But for this year, for next year, it's much more treat the labor in the right way. All the investments that JBS did in the last several years, at the facility level, in parking lots, in restrooms, in the cafeteria, all the investments that we put in all these plants are now paying off. And I think that we are way ahead of our competition in obvious things that matter for the hourly people and that's why we're seeing that despite of the very tough labor market, our turnover was lower this year than it was last year.

[Operator]

Our next question comes from [indiscernible] with HSBC.

[Unknown Analyst]

Asking a couple of questions on behalf of Carlos Laboy. Jerry, are you guys still on track to start preparing for the new expected change listing later this year, I guess? And do you see the DOJ, CVM and forensics audits in the rearview mirror at some point in the second half of this year? That's my first question.

[Jeremiah O’Callaghan, executive]

Okay. So -- with regards to the events that you mentioned, all of those events are progressing. We've reported to you today, the question with the authority in Brazil and in the U.S., there was good dialogue and we are progressing with all of these matters. [indiscernible] the conclusion of those issues will determine. And us going to the market and eventual IPO process will be conditional to how all of these events progress. But I can tell you, they are progressing well within the time line that we expected and we don't expect to see any reversion of those trends until we are in a situation where we can make a decision about the IPO process.

[Unknown Analyst]

Right. I guess, as far as the internal plan is concerned, are your expectations to be done with all of those investigations maybe before the end of the year, in the next few months? Would that be a fair assumption?

[Jeremiah O’Callaghan, executive]

It's difficult for us to determine a time line. But like I said, everything is progressing well towards a satisfactory conclusion. And our expectations are that those conclusions will be reached by the end of this year.

[Unknown Analyst]

And I guess my second question would be on a similar topic. Is BNDES kind of still resistant to the [indiscernible] listing as you originally contemplated or are they sufficiently at peace, so to speak, by the terms or the restrictions that you guys have to implement? Or what you have done so far?

[Jeremiah O’Callaghan, executive]

The BNDES is relevant shareholder of the company. There was a shareholder agreement, which is a public document. And obviously, all of the shareholders, including the BNDES are interested in seeing the enhancements of the value of the company. And we feel that everybody would support any initiative to unlock value. And we believe that the listing process outside of Brazil will definitely be an event which would unlock relevant value.

[Operator]

Our next question comes from [ Julia Rizzo with HDI Capital ].

[Unknown Analyst]

My question goes -- I'd like to know an update on how much exports represent for each of the business, especially in Brazil and Seara.

[Francisco de Assis e Silva, executive]

Seara is 60% of the revenue. And the beef is around 40%.

[Unknown Analyst]

And in the U.S., can you give us an update as well?

[Francisco de Assis e Silva, executive]

Andre, could you help with this answer.

[Unknown Analyst]

Fulfillment in the beef?

[Andre Nogueira, executive]

Their exports is around 18%, for Pilgrim's is less than that, around 10% export. And pork is around 15%.

[Unknown Analyst]

And Andre, can you give us a little bit of an update on the beef? What is your outlook for margins for this year? I understand that first year is not the best year for the company. And also, since exports are growing that much for U.S. overall [indiscernible] from who are you taking shares? And how much do you think that is sustainable?

[Andre Nogueira, executive]

So normally, beef in the first quarter for the company overall outside of Brazil for the first quarter is a weaker quarter and I believe that this year will be the same. The first quarter will be the weakest quarter. And the margin will increase in the beef in the second and third quarter will be pretty strong margins in the historical level. Probably the record quarter for the historical level in the second and third quarter. A lot of cattle available, good demand in the domestic market, very good demand in export. I'm not sure about taking share from anyone. I think that's just more demand. Demand is growing. If you look the countries that we grew more export in beef, it's Japan, it's South Korea, it's Mexico, it's China. I think that is just growth and demand. Probably for Japan, South Korea and China, it's replacing domestic production. I think if you look domestic production in Japan, South Korea and China all went down during this time. So I think that they are replacing the mass production. Will not take much -- continue to be strong in all those markets. It's just more demand in land and mass production.

[Unknown Analyst]

One last question, do you have anything that would prohibit the company to do more M&A this year, especially using other vehicles, perhaps Pilgrim's?

[Andre Nogueira, executive]

Could you repeat the question? I'm not sure I understood your question?

[Unknown Analyst]

Is there anything that would avoid making the company because of the holdouts or the leveraging target growth that would make the company less willing to do M&A opportunities around?

[Andre Nogueira, executive]

I think that Tomazoni commented that the priority for the whole company is to deleverage and organically grow. So for the whole JBS, we are not looking acquisitions. Pilgrim's is a different situation. Pilgrim's is a public traded company want to do what's the best for the company so if they have the right opportunity in place, if they have -- I think that they have the financial capability to do what makes sense for Pilgrim's. So Pilgrim's is a different story inside of JBS. For the whole company, we are looking for organic growth and we're looking for leverage, vertical targets that will be below 3x at the end of this year and along the lines of 2x next year.

[Operator]

This concludes today's question-and-answer session. I'd like to invite Mr. Gilberto Tomazoni to proceed with his closing statements. Please go ahead, sir.

[Gilberto Tomazoni, executive]

Thank you, everyone, for being part of this call. And I hope we can deliver next quarter good results like this one. Thank you.

[Operator]

This concludes JBS audio conference for today. Thank you very much for your participation, and have a good day.