JBS SA

BOVESPA:JBSS3

Earnings Call Transcript 2023-Q1

[Operator]

Good morning, everyone, and thank you for waiting. Welcome to JBS S.A. and JBS USA First Quarter of 2023 Results Conference Call. With us here today, we have Gilberto Tomazoni, Global CEO of JBS; Guilherme Cavalcanti, Global CFO of JBS; Wesley Batista Filho, CEO of JBS USA; and Christiane Assis, Investor Relations Director. This event is being recorded. [Operator Instructions].

Before proceeding, let me mention that forward statements are based on the beliefs and assumptions of JBS management. They involve risks and uncertainties because they relate to future events, and therefore, depend on circumstances that may or may not occur.

Now I will turn the conference over to Gilberto Tomazoni, Global CEO of JBS. Mr. Tomazoni, you may begin your presentation.

[Gilberto Tomazoni, CEO]

Good morning, everyone, and thank you for part in of this earning call. We started 2023 facing many challenges. But our global and diversified platforms continues to be effortless, especially when we look at our full year. With the operational management measures and significant improvement in the outlook, we can see more positive performance in line with our potential.

As we pointed in our last quarter, this period faced a high input costs, persistent inflation and supply and demand imbalance. In addition, being a traditional weaker period for the global protein industry. All necessary actions to reduce the impact of these circumstances have been taken.

Beyond market conditions, two business were particularly impacted this quarter, Beef USA and Seara. In United States, we faces a high cattle prices and a compression of margins. Additionally, commercial and industrial performance fell below our expectations, which are issues that we have already been addressed. In Seara, we face a challenging of falling pricing and export, high grade cost and low productivity in agriculture, which impacted cost and volume. We have taken measures to reverse productivity in the field and the cost of grain is already show more favorable results.

The increase in our leverage was already the expected. They didn't do the normalization of margins. Therefore, the company prepared for this scenario by extending the average terms and reduction in the cost of debt. Improve liquidity through the -- to increase the revolving credit alignments and aligned bond cost which is the lasted issues when the company was already the investment grade.

We do not have any significant maturities until 2027. In addition, we have already identified the potential to release $1.2 billion in working capital. In the upcoming quarter, we expect better conditions in several important markets.

In U.S., the market historically stronger with the grilling section approaching when the consumption of protein and the value-added product is heightened. Global logistics conditions are also improving with a reduction in container cost boding well for the Asian exports. A significant decrease in corn meal and soybean price is ongoing in important produced market, which has positive impact in our poultry and pork cooperation globally. In Australia, the cattle cycle is starting to show favorable signs, with continuous improvement in supply expected throughout 2023.

In Brazil, resumption of China export, new export authorization in Canada, Philippines and Mexico, as well as a strengthening domestic supply relationship programs, provide the Brazilian business beef with much better outlook for the month ahead.

Our diversification strategy has been complemented in recent years by our investments in value-added products and strong brand in the countries where we operate.

In the last 12 years, during which we have already had a global platform. This is the first quarter that we have faced adversity in almost all countries where we operate. This make us believe more than ever than our team members and our geographical and protein diversifications, our greatest strengths, especially during the challenged times. It's clear that this year first quarter does not reflect the potential of our business and even less what we expect from this year. This first quarter 2023 is an outlier.

Guilherme Cavalcanti will now explain our results in more detail. Thank you.

[Guilherme Cavalcanti, CFO & IR Officer]

Thank you, Tomazoni. Let's go over the operational and financial highlights for the quarter. Starting on Slide 12, please. Before moving on to the consolidated results, I would like to start by highlighting the ongoing work in liability management that we continue to carry out.

In April, we issued senior notes at Pilgrim's Pride for a total amount of $1 billion with a 10-year maturity, a coupon of 6.25% and being significantly oversubscribed. With the proceeds, we fully paid the PPC term loan B in the amount of $473 million, reducing the company's secured debt to below 1%. As a result, our average maturity of our debt increased to 10 years against 8 years in the same period of last year.

Now let's move on to the Slide 13, where we have the operational and financial highlights for the quarter. Net revenue for the first quarter was $17 billion. Adjusted EBITDA totaled $416 billion and represents a margin of 2.5% for the quarter. Net loss was $280 million for the quarter.

As we mentioned in our last earnings call, these results reflected challenging market conditions in a sadly weaker quarter for the global protein industry. However, we maintain our confidence in the gradual recovery of our results in the following months based on our strategy of geographic and protein diversification and the growth of protein consumption in the coming years. In addition, some short-term key indicators such as grain prices, the rebalancing of global supply and demand for poultry, the larger herd of cattle in Australia and Brazil, among others, already start to positively impact results.

Please now moving to Slide 14. The operational cash flow in the quarter was negative by $586 million due to the reduction in the EBITDA margin. Working capital consumption was $959 million, a significant reduction when compared to the consumption of $1.5 billion in the first quarter 2022.

Over the coming quarters of this year, we have the potential to release working capital considering the current levels, which, depending on market condition and grain prices would more than offset the first quarter consumption. More specifically, million seasonal impact of deferred livestock payments that happens every year from December to January, and therefore, tends to revert in the last quarter.

185 million in taxes to be refunding throughout the year, $85 million in U.S. and $100 million of monetization of tax credits in Brazil. $100 million from inventory reductions due to the reduction in corn and soybean new prices. And in a scenario where grain prices do not rise, bear in mind that future curves indicate the decline we could potentially release an additional $120 million.

$100 million reduction in biological assets also due to the reduction in grain prices and $250 million from finished goods inventory reduction. Therefore, not characterizing the guidance, we have the potential to release approximately $1.2 billion in the following quarters. Free cash flow for the quarter was negative in $1.2 billion against a negative $526 million in the first quarter of 2022.

The first quarter has seasonally, the characteristic of consuming cash due to the concentration of payments from cattle and pork suppliers, and restocking of inventories mainly in grains mentioned in the previous item. I will go into more detail about this cash consumption in the change of the net debt on the next slide, please.

Moving on to Slide 15, we have the evolution of our debt profile. Net debt ended the first quarter of 2023 at $16.5 billion, an increase of $1.3 billion against last quarter, explained primarily by consumption of working capital of $959 million. The main consumption was in the suppliers account given the concentration of payments in the first quarter due to the payment of the deferred balance of livestock, both in U.S. and Brazil. And CapEx totaling $331 million, which is already $85 million below the first quarter of 2022 and in line with the full year estimate of $1.3 billion, which would be 40% below the full year 2022.

Expansion CapEx accounted for 55% of the total in this quarter. Net interest expenses for the quarter was $263 million, considering new debt issuance, the increase in interest expenses on the short-term burden debt, which corresponds to 13% of our total debt. And the increase in inflation measured by IPCA which index is 10% of our debt in the form of agribusiness receivable certificates, the projected financial expenses for the year is $1 billion.

It's worth mentioning that 78% of our debt is in the form of senior notes with a fixed interest rate. Additionally, estimated lease payments for the year are $450 million. Therefore, if we add the working capital, financial expenses and CapEx numbers mentioned above, an estimated EBITDA to reach a breakeven free cash flow would be below $3 billion.

On this slide, we also have our cash and debt payment schedule in a pro forma view that is already considering the issuing of Pilgrim's senior notes in April. With that represent a total liquidity of $5.5 billion, of which $3.2 billion in revolving credit facilities and $2.2 billion in cash. Short-term debt rose to $1.9 million as the cash burn was covered with $550 million of credit finance and $750 million of cash use. In relation to the long-term debt, the most significant payment only happens in 2027, which $850 million are PPC senior note that is already callable and has a reduction in price in September of this year.

Amortization above $1.5 billion are only after 2030, above $2.5 billion only after 2032, and we have $2.8 billion maturing in 2052. The data collected to Brazil represents 22% of the company's total debt, which is in line with that the region's EBITDA generation. Debt in reais represents 12.5%, in line with the proportion of the company's revenues in reais. In the average cost in reais are 13%, which is below the current Selic rate of 13.75%. The average cost of the debt in U.S. dollars stood at 4.83%, also below the current Fed fund rates of 5.25%.

Now let's quickly go through the business units. Starting with Seara on Slide 16, net revenue for the quarter grew 9% in the first quarter as a result of rising prices and volumes. On the other hand, the quarter's profitability was pressured by a production cost which remained high during the year, alongside a scenario of global chicken oversupply. However, in the domestic market, the highlight was the prepared foods category, which sales grew by 13%.

To further strengthen the value-added portfolio, we inaugurated the largest and most automated JBS plant for the production of breaded chicken products in Rolândia. In addition, investments in the brand, innovation and quality continue to reap good results. We are already present in the -- we are already present in 90% of Brazilian households, and the repurchase rate continues to grow quarter after quarter.

Moving now to Slide 17. JBS Brasil record a reduction in net revenues of 15% year-over-year. Sales and profitability were pressured by the Brazilian South embargo on beef exports to China, which is the main destination for the protein in the international market, which lasted approximately 1 month. Part of these volumes were absorbed by other markets, including the domestic market, whose volumes grew supported by the various initiatives to improve commercial execution.

Moving on to Slide 18 and speaking now in dollars and in U.S. GAAP. Net revenue for JBS Beef North America decreased by 4.9% year-over-year in the quarter and the EBITDA margin was negative 0.4%. As expected, the results reflected the turn of the cycle, the turn of the cattle cycle, reducing the availability of animals for processing. Therefore, live cattle prices according to the USDA, grew 16% in the period, while wholesale prices grew only 2% pressuring profitability.

Moving on to Slide 19. We have JBS Australia. Net revenue fell 1.6%, in the first quarter 2023 year-on-year, impacted by exchange variation as sales grew 4% year-over-year in local currency, explained by the higher volumes sold in the domestic market and growing demand from AGM markets. However, profitability was pressured by beef segment, the largest segment in Australia as the price of live cattle available in field lots was still at high levels during the first quarter, but better prices are already being observed, given the greater availability of animals.

Now moving on to JBS USA Pork. Net revenue for the quarter was 5% lower compared to first quarter of 2022. The oversupply of hogs in the domestic markets linked to the high cost of grains pressured the results for the period. On the other hand, according to the USDA, exports grew 12% year-over-year in the quarter, mainly to Mexico and Asia. I also like to highlight the opening of January's JBS first Italian specialty meats plant in the U.S., in line with the company's strategy of expanding its value-added portfolio.

On Slide 21, presented a reduction in net revenues of 1.8% in the quarter in the annual compared to last year. In the U.S.A., despite a still diverse scenario in the price of products for the use of raw materials, the big birds were -- we were able to partially offset profitability through a more diversified branded portfolio and our partnerships with key customers.

In Mexico, the normalization of supply and demand, coupled with better commercial execution, returned profitability to the historical levels of the quarter. Finally, in the Europe, the improvement in profitability is a consequence of the implementation of several actions aimed at operational and commercial improvements that were initiated last year.

With that, I would like to open to our question-and-answer session.

[Operator]

[Operator Instructions]. Our first question comes from Ben Theurer with Barclays.

[Benjamin Theurer, Barclays Bank]

Yes. Tomazoni. Two to three things I wanted to just try to dig in and get a little bit more of a sense. Clearly, Seara for the quarter, I guess it was one of the weakest quarter ever, and you've called out a few things that just went against you in the first quarter. So help me understand how we should think about the recovery for the coming quarters? How do you think about the improvement here as it relates to some of the cost relief that it's expected to happening just from grain. You've called out the global protein over supply impacting some of the export market. Are you seeing improvements there? Just so we understand a little bit where Seara is heading to, and then I'll go into my next questions that I had.

[Gilberto Tomazoni, CEO]

Ben, thank you for the question. Seara had two main challenge. First of all was the international price for export. And this price at the beginning of the year was very depreciated and start to recover in practically all of the markets. It was the first.

The second was that the internal issue, we face low productivity in the -- our farms. It is an issue that has been already addressed. And this -- in terms of the external market, in terms of the price, it's prices recovering now. It depends on market to market, but in domestic -- in the issue, internal issue we had, this impacted around 3% to 4%, our EBITDA of Seara. And this is already addressed. Of course, there is a time to get -- to get all of the benefit in the results. It's one important point.

Second, that the cost of the grain was high in the first quarter. Now the corn dropped at 40% in 15 days in Brazil. It is a huge impact in terms of our costs. And that will be kept by Seara in the coming months. So look, and we are -- it's important to separate that Seara is going very well.

Chicken is important business in Seara. If we had an impact in terms of price, external price and domestic and the cost of the operation, and these are the -- and -- but when you look for value added, we have been growing very well. We grew 30%, if you hear, as Guilherme mentioned, and we increase price, and now we are getting all the benefit from this reduction of the cost of the grain.

[Benjamin Theurer, Barclays Bank]

Okay. Perfect. That's very clear. And then my second topic really is, I mean, as you've highlighted, we're gaining two issues, Seara and US Beef. So talking about US Beef, obviously, it was a very soft quarter with an EBITDA already negative in that quarter, but you said there is improvement coming as it relates to summer just because the grilling season more demand for some of the higher-value things. Now help me understand if -- once we looked at industry data during the first quarter, the cut out didn't look too bad and the ratio just because of what the value was on beef prices versus the cattle cost, yes, obviously, not as great as maybe a year ago, but it actually looked better sequentially, and it got worse sequentially. So help us understand what particularly brought you into negative territory into the first quarter versus what industry would have suggested a slight improvement versus the fourth quarter.

[Wesley Batista Filho, CEO, JBS South America]

Ben. So for sure, the first quarter was a challenged quarter. Like you said, compared to last year, for sure, and overall, it was a tough quarter. Having said that, like we said in the Brazilian call and the Portuguese call and what Tomazoni says right now, we had some internal challenges. We do not think that the result shows what the potential of the margin was even given the market conditions. We estimate then that we probably have between 2 or 3 percentage points in our results that we could improve internally. This is regardless of the market conditions. We can improve this, and we are working to get that done.

So outlook, we're forecasting that second quarter, third quarter for sure because of a market -- just seasonality will be better, but we're probably going to see some of those results out of that 2% or 3%. We're probably going to see more of that number into third quarter, fourth quarter as improving back to what our performance should be.

And just to give you some more color on that, those improvements come. A part of it -- a relevant part of it comes from our operations, but also a part of it comes from our -- from commercial challenges which would explain part of the results given that, like you said, cut out from fourth quarter to first quarter wasn't bad.

[Operator]

Our next question comes from Priya Ohri-Gupta with Barclays.

[Priya Ohri-Gupta, Barclays Bank]

Great. Thank you and for helping us understand sort of how to think about the flow-through of that 2 to 3 point margin improvement. I guess, if we could go back to maybe the free cash flow point. That $1.2 billion of working capital release that you highlighted should more than offset what we've seen so far. I guess if we bring it back to your full year cash flow expectation on the last call, we had talked about sort of this year being potentially sort of breakeven to even slightly better in terms of free cash flow. Is that still the expectation, particularly given that working capital release? And then I have a follow-up on that.

[Guilherme Cavalcanti, CFO & IR Officer]

Priya. So let me clarify. We don't give guidance, and it's not that we expect a breakeven. What I say is a breakeven analysis that we do, we showed that an EBITDA to reach a breakeven has to be lower than $3 billion. So that's on a breakeven analysis. Then any -- so investors do their own estimation of EBITDA to see how much will be the free cash flow because the expenses that we are estimating is that $1 billion of net interest expenses, okay, then $550 million of leasing, then $1.3 billion capital expenditures.

Then we reached the working capital, which we consumed $1 billion in the first quarter and we expect to release $1.2 billion throughout the year. So working capital would be around 0. So with that, we see that in order to reach the breakeven, EBITDA should be below $3 billion. But of course, we don't give guidance and everybody, we have -- your own estimations. And then of EBITDA, and you see the difference from these expenses which I highlighted here. That, of course, depends on market conditions and grain prices.

[Priya Ohri-Gupta, Barclays Bank]

Okay. That's helpful. I think what I was referring to was sort of part of the discussion around your dividend payment, and that was going to be my next question, which is -- I think the expectation previously had been that there was potential for you to generate enough cash after the CapEx, that you could potentially consider paying a dividend this year. Now given through the Brazilian laws, you don't have to make a dividend payment this year. So if we could just sort of get an update on what you're thinking around the dividend given where your leverage is right now and whether there's any scope to maybe bring down that $1.3 billion of CapEx as you manage cash flow, that would be helpful.

[Guilherme Cavalcanti, CFO & IR Officer]

Okay, Priya. So in order to address your point of the Brazilian corporate law, the breakeven analysis that I made for free cash flow you can basically replicate that to net profit, basically because our depreciation is more or less the CapEx plus the leasing because the leasing comes as in IFRS as a depreciation expense. So net profit, EBITDA below $3 billion, that would be the breakeven for net profit again.

So any EBITDA over $3 billion, we would be generating net profit, which by Brazilian corporate law, we will have to pay 25%. However, we've been anticipating dividends every year. Last year, we anticipated $900 million in dividends. And depending on the expectations for the year and for the next year, if we -- and we have access to credit, we could do the same, but there's no decision on that. But we have the financial flexibility to anticipate the dividends if we want to do. So this is a decision that we are not doing.

We are not repurchasing shares. And you mentioned about leverage. It's also worth to mention that the leverage this quarter increases by an increase in the numerator, the $1.2 billion of cash consumption, that increase in net debt. But the major effect was a lower EBITDA when it took out last year's quarter. So next -- in the next 2 quarters, we think that we won't have the impact on the numerator because we're probably generating free cash flow throughout the year and the numerator will have impact on the second and third quarter. But on the fourth quarter, where we already have margins normalize it, we will start to see leverage decreasing by the free cash flow generation. So that's more or less what we have here.

[Priya Ohri-Gupta, Barclays Bank]

Can you give us any indication of how high you expect EBITDA or leverage to peak out at over the next 2 quarters before it starts to come down?

[Guilherme Cavalcanti, CFO & IR Officer]

We don't give guidance. You can get the market consensus and our estimates for the market and see how much will be the difference from this year's quarter with the previous years.

[Priya Ohri-Gupta, Barclays Bank]

But is it fair, given your assumption that we should start to see it come down in the fourth quarter that sort of any extra actions wouldn't be necessary at this point given sort of the direction that the leverage is moving in?

[Guilherme Cavalcanti, CFO & IR Officer]

Exactly. No extra action would be needed. And I would only need to access markets through bonds or bilateral loans, if we decide to anticipate the dividends, Otherwise, we don't need to go to the market for any capital raising.

[Operator]

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

[Gilberto Tomazoni, CEO]

I thank you all once again for your presence and want to close with the words to thank to our 260,000 team members around the world for their commitment and dedication during this challenge period. We are confident in our diverse global platform and will continue to work hard to deliver value to the all stakeholders. Thank you very much.

[Operator]

That does conclude the JBS audio conference for today. Thank you very much for your participation. Have a good day, and thank you for using chorus call.