JBS SA

BOVESPA:JBSS3

Earnings Call Analysis

Strong Financials Despite Seasonal Weakness

In the first quarter of 2024, JBS posted solid financial results, underscoring its recovery trajectory. The company reported a net revenue of BRL 89.1 billion (approximately $18 billion) and an adjusted EBITDA of BRL 6.4 billion ($1.3 billion), which translates to a 7.2% margin. Net profit stood at BRL 1.6 billion ($332 million). Despite the typical first-quarter cash consumption due to seasonality, JBS demonstrated resilience through improved results across virtually all business units.

Operational Excellence and Margin Improvement

One of the highlights of the quarter was the significant improvement in margins for various business units. For instance, Seara's EBITDA margin improved from 6.4% in Q4 2023 to 11.6% in Q1 2024, driven by operational excellence, cost reduction, and better supply-demand balance. Similarly, Pilgrim's showed a substantial margin increase from 6.5% in Q1 2023 to 11.5% in Q1 2024. These gains are attributed to lower grain prices and strategic efforts to optimize operations and capture market opportunities.

Deleveraging Efforts and Financial Stability

JBS has made significant progress in deleveraging, reducing its leverage ratio from 4.42x in Q4 2023 to 3.66x in Q1 2024. The company aims to achieve a leverage ratio of 2.5x by the end of the year, although this is presented as a mathematical abstraction rather than a formal guidance. JBS has been actively reducing both short- and long-term debt and anticipates further reductions in gross debt in the second quarter.

Strategic Investments for Future Growth

JBS continues to invest strategically in its global operations. The company is set to open new processing plants in Brazil, including a swine processing plant in Mato Grosso do Sul and an expanded bovine capacity in Campo Grande. In Saudi Arabia, JBS is finalizing its third Halal product plant, and in Spain, it will start operations at a cultivated protein plant. These investments are expected to bear fruit in the coming quarters, enhancing JBS’s product portfolio and market reach.

Challenges and Market Dynamics

Despite the positive outcomes, JBS acknowledged the challenging market conditions, particularly in the U.S. beef segment, where the cattle raising cycle and seasonal factors have pressured margins. However, the company remains optimistic due to its diversified protein portfolio and geographic reach, which helps mitigate specific market challenges. Additionally, ongoing efforts in cost management and operational efficiency are expected to support margin stability.

Outlook and Future Guidance

Looking ahead, JBS remains confident in its growth trajectory. The company projects a consolidated margin close to 7.5% for 2024, underpinned by continued focus on operational efficiency and strategic market positioning. While acknowledging external market dependencies and economic conditions, JBS is well-positioned to leverage its strengths and deliver sustainable value to stakeholders.

Earnings Call Transcript 2024-Q1

[Operator]

Welcome to the conference call of JBS S.A. and JBS USA to announce their Results of the First Quarter of 2024. [Operator Instructions] As a reminder, this conference is being recorded. Any statements made during this conference call relative to the company's business outlook, projections, operational and financial targets and goals and growth potential are merely forecasts based on the company's management expectations in relation to the future of JBS.Such expectations are highly dependent on market conditions, on Brazil's overall economic performance, on the industry and international markets and, therefore, are subject to change. Today here with us, we have Mr. Gilberto Tomazoni, Global CEO of JBS; Guilherme Cavalcanti, CFO -- Global CFO of JBS; Wesley Batista Filho, CEO of JBS USA; and Christiane Assis, Investor Relations Officer.Now I would like to turn the conference over to Mr. Gilberto Tomazoni, who is going to start the presentation. Mr. Tomazoni, please, you may start.

[Gilberto Tomazoni, executive]

Good morning, everyone. Thank you so much for attending our results conference call. Before delving into the results, I would like to take the opportunity to express my sympathy towards the victims of the catastrophe caused by the rains in Rio Grande do Sul, especially to our more than 16,000 team members in the state. The world has been following the situation with sadness and dedication of our entire team has been essential in helping our team members, partners along with their families and impacted communities to recover.Once again, I would like to express my deepest admiration and gratitude to the extraordinary work that everyone has been doing to offer support during this tragic event. As a company, we are mobilized to provide donations of essential items for assistance to people in the regions such as food, hygiene cleaning products, water, clothing and blankets. Now back to our financials. JBS had a solid first quarter -- in the first quarter of 2024. These numbers reinforce that we are on the path of recovery as we had been indicating to you in recent quarters.We have added almost 2 percentage points to our EBITDA -- consolidated EBITDA margin as compared to the fourth quarter of 2023. As to the first quarter of 2023, we have reached a margin of 7.2% in a period increasing by 470 basis points. I would like to highlight the result of Seara which delivered double-digit margins in the first quarter already. Its focus on operational excellence is reflecting a significant evolution of the business margins, which went up from 6.4% in Q4 '23 to 11.6% in Q1 2024.So closing the gap of part of the operational gaps and the cost of grains going back to normal and the growth in volumes, especially in the domestic market, reinforce the promising prospects for Seara this year. We keep our focus on the pursuit for the preference of consumers and to capture operational opportunities. Our focus on key customers, brand growth and consolidation of our business in Europe and the pursuit for operational excellence are reflected in the strong result of Pilgrim's. The business margins had a significant increase going up from 6.5% in Q1 2023 to 11.5% in Q1 2024.USA Pork margins grew to from 2.5% to 16.4% in the same period. Our Poultry and Pork businesses have benefited from the reduction in grain prices as well as a rebalance in supply and demand. I would like to highlight that our results are very robust. And once again, this reinforces the importance of our diversification of geographies and proteins. In a quarter that is traditionally weaker for the global protein industry, cattle businesses in Brazil and Australia captured the results of the high cycle in these two countries, whereas JBS Beef North America goes on with weaker margins as a result of the cattle raising cycle and seasonal conditions as we had indicated before.Once again, I would like to stress our financial solidity. In the first quarter of 2024, we reached a net income of BRL 1.6 billion with a net revenue of BRL 89.1 billion and an adjusted EBITDA of BRL 6.4 billion. Our priority is still to deleverage a process that has consolidated. This rate had a reduction of 4.42x in U.S. dollars in Q4 2023 and now it's down to 3.66x in U.S. dollars in Q1 2024. If we use the numbers of this quarter as a reference, which is one of the weakest quarters in the industry and if we abstract mathematically, we use this information -- we will close the year with 2.5x our leverage.And I would like to reinforce this is not a guidance. This is just a mathematical abstraction that we use as a reference the margins that we had in the first quarter of this year. The numbers of this quarter reinforce our trust in the JBS long-term strategy, focusing on the expansion of our global multi-protein platform and on the consolidation of our strong brand portfolio and high value-added products. In that sense, along recent quarters, we have made several investments that will start to provide good fruit.In the Brazilian state of Mato Grosso do Sul, this year, we are going to open Dourados industrial or manufacturing complex, a new processing plant for swines in natura and another four prepared foods. We also announced that in April, we are going to double our capacity in our bovine plant in the Campo Grande in the same state. One of the units have just been licensed to export to China. In Jeddah in Saudi Arabia, we are finalizing our third plant for Halal products. In San Sebastian in Spain, we are going to start the operations of our cultivated protein plant and biotech foods.We focus on what we can control to become increasingly more competitive in different markets where we operate. For this reason, we have absolute focus in cost management, increasing productivity, optimizing our mix, focusing on opportunities in market and price [ asymmetry ] regardless of the geography and economic variations. We are confident that the strength of our platform added to our financial soundness and our commitment to excellence innovation will enable JBS to move towards this trajectory of growth, adding value to all our stakeholders and the communities where we operate.Once again, I thank you very much for being in our conference call. And now I give the floor to Guilherme, who's going to give you details about our numbers. Guilherme, please.

[Guilherme Cavalcanti, executive]

Thank you, Tomazoni. Now let's go to operational and financial highlights, starting on slide 15. The net revenue was BRL 89 billion or $18 billion. The adjusted EBITDA, BRL 6.4 billion or $1.3 billion. This represents a margin of 7.2% of the quarter. Net profit was BRL 1.6 billion, $332 million. Now moving to the next slide, the operating cash flow in the quarter was BRL 122 million or $25 million. Free cash flow in the quarter was negative at $622 million or BRL 3.1 billion. As we anticipated in our last earnings conference call, we estimated the cash consumption on behalf of the amount reported in the same period in the year which happened.Despite this cash consumption, which is common for the first quarter due to the seasonality of the period, this is explained by the increase in results in practically all our business units. CapEx in the quarter was BRL 1.4 billion or $284 million, 55% maintenance CapEx. This amount is 18% lower than Q1 '23, which is in line our estimates of $1.3 billion. Now moving to slide 17; the net debt ended at $15.9 billion, reflecting an increase of $569 million as compared to the previous quarter variations explained by the cash burn considering the typical seasonality of this time of this year. The leverage in dollars went down from 4.42x to 3.66x in BRL and 4.32x to 3.70x in U.S. dollars in a quarterly comparison, thereby confirming the deleverage.In the second quarter this year, we are expecting another significant drop in this indicator to about 3x. Now conducting a leverage exercise and not considering the guidance for us to reach a leverage of 2.5x at the end of the year, our consolidated margin in 2024 should be close to 7.5%, considering that the first quarter is seasonally weaker, and the margin was already 7.2%. It's reasonable to think at this level of leverage for the end of the year, thereby staying within our policy of having to -- be between 2x and 3x our net debt along the year.We reduced our net debt by $666 million in the first quarter, especially due to the payment of short- and long-term bank debt. We are going to reduce our gross debt in the second quarter. In this manner, now I'm going to go over each one of our business units. Starting with Seara on slide 18, the net revenue in the quarter was stable as compared to the same period in the year before, $10.3 billion [ or ] $2.1 billion. However, as we had said, the profitability has already gone back to normal 2-digit levels. This improvement is a result of intense focus on operational excellence, management team, cost reduction, especially grain, better offer and demand balance and maturation of new plants.And the EBITDA margin grew more than 10 percentage points year-on-year, reaching 11.6% in Q1 '24. Now on slide 19, JBS had a net revenue 17% higher than Q1 2023, driven by higher volumes sold. The favorable cattle cycle had a positive impact in sales volumes, both in Brazil and internationally due to the higher availability of animals for slaughter. This cycle has also contributed for the reduction of cattle prices but and as a consequence, it had a positive impact on profitability. On slide 20, and now dollars U.S. GAAP -- net revenue in U.S. JBS Beef North America grew 6% year-on-year.Profitability is still pressured, considering a more challenging cattle cycle because the price of living animals went up more than wholesale. JBS Australia we have higher volumes sold both in the domestic and international markets. The growth in profitability year-on-year reflected especially the higher availability of cattle in the market, considering a more favorable cattle cycle and efficiency gains in many business areas in Australia. Now JBS USA Pork, the net revenue was 6% compared to Q1 '23 because of the average prices in the period.In addition to better commercial dynamics, the profitability was positively impacted by lower grain costs, a drop in average price of swines in Q1 '24 and continued efforts aiming to expand the value-added portfolio in addition to better commercial execution, operation and logistics, too. So Pilgrim's Pride had an increase in net revenue of 5%. The first quarter showed the results of the strategy, making it possible for the company to grow compared to the market. The product portfolio with this brand contributed to diversification and still expanding. As you can see, the results of the first quarter are very exciting as we had indicated in our more recent conference calls. And we are optimistic in our deleveraging trajectory and cash generation for the year.Now we are going to open for questions and answers.

[Operator]

[Operator Instructions] Our first question comes from Isabella Simonato, Bank of America.

[Isabella Simonato, analyst]

Hello. Good morning, Tomazoni and Guilherme. Congrats on the results. I have two questions. The first one is about Seara. We can see, of course, the market reality. As you've pointed out, it is really favorable for the future ahead. And I'd like to know your vision about the external market for poultry. We've seen some markets performing at price levels above the average. And now you're going to have a new plant in Saudi. I would like to hear from you about the external market for poultry. -- considering Seara's reality. The second question concerns the U.S. cycle. The landscape is still quite challenging. But please tell us a little bit about the beginning of the cycle of the quarter and how you've been analyzing the seasonality for the second and third quarter of the year.

[Wesley Mendonça Filho, executive]

Good morning, Isabella. I'm going to start talking about our Beef business in U.S. We expect normal seasonality this year, but weaker than it had been last year. There is less availability of beef of cattle. We've seen that in the first quarter, about 3% drop of our slaughter -- even more than that 13% in the decrease of cow slaughter, very relevant, as you can see. The demand is more restrict because of inflation. The price of [indiscernible] higher. The second quarter will have the natural seasonality -- with now spring and summer time in the U.S., we may expect better margins, but -- it is going to be more challenging than it had been last year.

[Gilberto Tomazoni, executive]

Isabella, thank you very much for the question. Concerning poultry and the international market, as you pointed out, our perspective for this business is very positive for two main reasons. First, we can see more interest for poultry protein in all different markets. U.S., for example, the U.S.A., we can see that and also other international markets. Globally speaking, there is an increased demand for poultry.In addition, the protein offer is very well balanced, and it has been a challenge, of course, to manage our new genetic lineage that have been developed for all different markets and producers, we are managing that increased productivity based on genetic handling. And you can see, for example, that in the U.S.A., the FDA has shown that they are showing a small growth of poultry production. And they have been still having an increased demand. So it's a positive demand all over. That's the fact.

[Isabella Simonato, analyst]

If I can have a follow-up on my question, thinking about regionally and your exposure to the Middle East, what is your outlook there? Maybe you could increase your market share in the region and thinking about the new plants -- are you thinking about changing your external marketing mix?

[Gilberto Tomazoni, executive]

Well, in Saudi Arabia, we have very great perspectives. We have two plants. We've started developing our third processed food plants that where we are developing the brand Seara, especially in retail. The market in the region has been very promising with high demands. It's a market also benefit by the Turkey's decision to restrict part of the exports. It used to -- Turkey used to be a very important player there. Therefore, we have the focus of developing our brand all over the region. We focused on Saudi Arabia using our branded added-value product, but we also provide services through food service also at higher volumes. Middle East and Asia are extremely relevant markets to Brazil and Seara is serving the same way.

[Operator]

The next question comes from Ricardo Alves, Morgan Stanley.

[Ricardo Alves, analyst]

Good morning, everyone. Thank you very much for the opportunity. I have two brief questions to ask building up on what has already been asked. Considering North America beef, this improvement of the first quarter compared to the fourth quarter '23, was great to see. But when we think about the second quarter and what Wesley has just said that it's going to be probably a harder second quarter than previously because of the whole cycle -- life stock cycle. But thinking about the cutout side -- how do you see that delay in reacting of cutout?We've been seeing that the fat cattle price had been impacting the market. It seems that there is something really bringing down the prices. But do you have any information about higher inventory levels or something like that? And do you also expect to have a recovery on prices in a seasonality perspective? We believe so, but we would just like to know if there is anything else that you know that you've been observing in the market that would impact demand and the price of cutout going from less cattle and more into beef offer.For Seara, I would just like to understand whether we can quantify a sequential improvement of margin mostly. It has come from grain. But does it also have operational adjustments? Have you been streamlining some of your plans? Just to understand how much of that margin benefit has derived from commercial pricing adjustments or operational improvement? And finally, the last question for U.S. pork. Is there still room for your topline to be increased? It's been great to see that historical range we like to see stability. But do you think there is a potential of increasing the topline? China has adjusted its production of pork, so maybe even for exports, the perspective of U.S. pork can be even better. So that's it.

[Wesley Mendonça Filho, executive]

Good morning, Ricardo. Starting about our beef cattle in U.S. Comparing to the same period last year, we've observed a delayed demand, but it's coming into the market. We can see it now Memorial Day coming, which is a very important holiday in the U.S. for the second quarter. So we've been seeing more activity than in the first part of the second quarter. We strongly believe that it's going to be a seasonal movement, but lagging behind somewhat compared to last year. But the current cutout, it's not bad. Historically, the cutout as we have today somewhat below $3 per pound is not low, but of course the impression that we have in terms of cost of cattle is very relevant.And compared to last year, it really applies pressure on the spread. But we are going to see that happening. Something else about beef, the first quarter of '24 was much more challenging than the same period last year. If you analyze USDA data of spread, we can say that the spread was just half of what it was last year. So the market margin was subject to much compression. And we've delivered better results than last year because of [Technical Difficulty] internal improvements. We've been talking about our own internal improvements in our business, both commercially and industrially speaking, in our estimate, and it's important to say that 2 percentage points have already been captured, and we are looking for more.We know it's going to be a very challenging year for beef cattle, but we believe there are 2 more percentage points of margin to be captured regardless of market, regardless of cutout, price of fat cattle, we believe there is still 2 more percentage points in addition to the 2% that we estimate that we have already captured. And I mean that regardless of the market's performance. Now speaking about Pork USA, we believe there is a potential there of increasing our top line. Please bear in mind that within Pork business, it's not only Pork -- there are also prepared food businesses.And we've made relevant investments of expanding our capacity, bringing new lines -- there is a new plant recently opened in Missouri for Salami, Prosciutto, Italian specialty of cuts, this is something that has a huge potential to growth. It's not going to be huge, of course, in terms of added revenue, but in terms of adding value, our signed products can really get better. There is a line, which is at maturity level -- our bacon line, very much focused on food service. There is also an important performance in retail. So within our businesses of prepared foods, we see a great potential of increasing topline. Therefore, the cutout of Porks also impacted topline up or down, depending on the commodity in the market. I'm talking about adding value because we can see a great possibility of adding value and with that increasing top line.

[Gilberto Tomazoni, executive]

And Ricardo, this is Tomazoni speaking about Seara. You've asked us where does it come from in terms of margin improvement quarter-over-quarter? Margin improvement, as I pointed out in my opening remarks, it has resulted from grain prices. We've been building up on that since the last quarter. In this last quarter, we can say that mostly the benefit of grain prices have been fully captured. But there was another part resulting from our operating improvements and that balance between supply and demand. So it's a combination of actions.What we are going to see from now on won't have a contribution from grain prices anymore because everything has already been absorbed within our cost structure, but we are going to see that the potential of Seara is to keep on increasing margins because only part of the operational improvements that have been identified have already been captured. Seara has a very long chain and it takes some time for improvements to reach the P&L. It takes time. We are going to keep on seeing Seara with a potential to grow margins.

[Ricardo Alves, analyst]

Great. Thank you very much, all of you. Thank you for the level of details. Have a nice day.

[Operator]

Our next question comes from Leonardo Alenca from XP.

[Leonardo Alencar, analyst]

Good morning, everyone. Thank you so much all the information about U.S. beef, but I would like to follow up on that topic. Number one, what is your capacity utilization? Because we are seeing an interesting dynamics, there's a better demand in the quarter. It's kind of late, but [ we see indication ]. It seems that retail is carrying a lot of margin. In terms of slaughter, very high -- and then we're wondering if slaughter was lower, maybe the margins would be better.Could you tell us about these dynamics and then talk about your strategies, but what catches the eye is that an increase that there is an increase in margin should be expanding faster and you have the tool enhanced to adjust. And thinking about JBS Brazil, there was a positive surprise in terms of slaughter in Q1. Was there any room for higher slaughter and better cost management?And the other question is related to your leverage references in the guidance -- but in the 4Q quarter, there was an expectation of 3x leverage for the end of this year and shortly afterwards, you were talking about 2.5x for the end of this year. So which are the other assumptions that may have changed from last quarter? So thinking of the 3x for the second quarter, what should we expect in terms of EBITDA?

[Wesley Mendonça Filho, executive]

Leonardo, entering first the bovine business in U.S. capacity utilization? Well, yes, this is an estimate. We don't know the market results, but we can see that slaughter at the current level of 620 -- 600-something heads, 1,000 heads per week. Well, it's well balanced. The U.S., it's not a very, very high slaughter level. It's quite stable in terms of slaughter. It doesn't surprise us. We can talk about the level of slaughter in the market because we might be getting into our strategy. But we are seeing this in a very well-balanced way. I cannot see -- it's neither too much or too little. Below that, the capacity would be underused and above that. It's more over-work during the week. So it's very well balanced.I don't think it's either end of the scale, not neither too much, nor too little. So what has gotten better? Are the operational results. So in the first quarter, we have an EBITDA of $400 million in 2023. And now we have $1.30 billion. After one month and a half in Q2, so we are confident to say that once again, our EBITDA is going to be higher.And moreover, after the second half of the year, we are going to have positive free cash flow. So the combination between having a higher EBITDA and cash generation will drive leverage to get 2x, 3x in the second half, thereby advancing an EBITDA improvement and continuing -- on this trend we are going to get to the end of the year with 2.5x already considering the dividend that we have announced in case our listing is approved.So as I said, if you do the math to get to 2.5x the average of the year needs to be 7.5%, we have 7.2% in Q1. So I think the 2.5x is an estimate that is quite conservative for this. Of course, everything can change. This is just an expectation. But I think that today, this is the most likely scenario of having this trend of deleveraging getting to the end of the year within our policy, which is a policy. This is based on keeping our investment grade, which is our priority.

[Leonardo Alencar, analyst]

Just one follow-up, going back to what Wesley said. So this issue of dairy cattle and exports to China, are you worried in any way? Maybe your plants in China could then -- could there be any problems?

[Wesley Mendonça Filho, executive]

Well, USDA has been doing a very, very good work in the U.S., both domestically and internationally. So we're not worried about neither demand nor offer. The situation is well under control, very well monitored, and this is not an issue that we are worried about.

[Leonardo Alencar, analyst]

It looks to us that it's well under control by the USDA. So avian flu, considering it? Is it a problem?

[Wesley Mendonça Filho, executive]

No, no, no, nothing new on that front. And as a reminder, in the U.S., things are slightly different than in other countries because all plants in the U.S. are licensed. So there is a difference. China is slightly different than U.S. All our plants are licensed.

[Operator]

Our next question comes from Thiago Duarte from BTG.

[Thiago Duarte, analyst]

Hello. Good morning, everyone. Thank you so much for the opportunity. I would like to run the risk of being repetitive -- I would like to insist on Seara and U.S. beef. As to Seara -- it is clear and Tomazoni has mentioned many points to qualify the better margins. But Tomazoni, I would like to ask you to qualify the top line dynamics.I would imagine that by now, with all the capacity that has been added in terms of processed foods, breaded foods that we would be seeing a more significant growth in volume. Could you explain or try to qualify or describe to us how much of the ramp-up of volume capacities we are already seeing in these numbers and a little bit of the success and challenges that you are having to increase the share of this category of processed foods that may have been one of the most significant in terms of capacity increase in the latest Seara's investment cycle.And question number two for U.S. Beef. It's more a follow-up. Also trying to have more details about the margin improvement quarter-on-quarter. Wesley, I had understood from the discussion of the effect of derivatives of the results in the fourth quarter that we would still be seeing part of it this quarter. Have I understood it wrong? Could you confirm that? And how much could have had an impact in the results that we are seeing in the first quarter?

[Gilberto Tomazoni, executive]

Thiago, thank you very much for your question, yes. You're right to say that Seara should have higher volumes than it does. So we should start seeing this in the next quarters. When we said that we are adjusting processes, part of adjusting processes is to recalibrate the volumes that we had in order to be able to accelerate output of processes later on. So Seara does have additional capacity in excess of what it delivered in Q1. So part of it is related to the ramp-up that we are doing.So the ramp-up is doing -- going very well and [indiscernible] part of your first question. So the ramp-up is going very well. We are being able to gain market share. And even in some subcategories because we have subcategories, this has been very positive. And so we are going back to normal with our operations, trying to accelerate the output of our plants. So from next quarter onwards, we are supposed to -- we should see an increase in output in a top line at Seara, as you said.

[Wesley Mendonça Filho, executive]

And now about the beef derivatives, about half of the difference of the impact that we had in Q4, we recovered. This is going to be much more stable in the future.

[Operator]

Our next question comes from Guilherme Palhares from Santander.

[Guilherme Cavalcanti, executive]

Good morning, everyone. Before anything, I would like to thank everyone for the help to Rio Grande do Sul and all the efforts and everything that you have done recently. That said, going to the questions, I would like to talk about U.S. Pork. So we saw the prices of animals, and has led to a difference between IFRS and U.S. GAAP. But so this price doubled in the short term and cutout is still reacting to adjust to this reality. So could you give us a little bit more details, especially on the commodity scenario?Wesley had talked about processed foods. But I would like to hear more on the short-term dynamics of all the adjustments that we are seeing? And number two, could you give us more details about the dynamics of feedlots in the U.S.? So there are new placements in feedlots in the U.S., sometimes more or less -- maybe as feed is cheaper, you were having more animals in feedlot. What about female animals we are getting -- going through a moment of reduction. So they are staying longer until they gain weight until the end. So how do you see that?

[Gilberto Tomazoni, executive]

As to pork, this IFRS U.S. GAAP difference, this is beyond our control. There are two accounting methods on a day-to-day. We manage everything according to U.S. GAAP. This is a number that we have in our day-to-day management. It's not something that we can control. And obviously, this quarter, there was a major difference. Both the price of hog has gone up as well as grain. But I don't think that this is something that is worth focusing on. What really matters is the bottom line according to U.S. GAAP. Now as to prices of living animals, this has been going up and this is a correction.In the beginning, especially in the beginning of the first quarter, living pork or hogs here in the U.S. was kind of in balance. Now it's back to normal. And this really makes the margin more narrow -- leads to narrow margins, especially in terms of processing plants. But in the second quarter, we are not seeing an increase in the prices having a negative effect in terms of our pork margins. So we see our Pork businesses very, very optimistically, both in terms of costs in supply and demand is very strong. So the channel is likely to increase to adjust for higher hog prices and the cattle market has better prices and lower volumes.This helps a lot in the internal demand of pork and the U.S. is exporting [indiscernible] 8% more of pork. It has gained share in international markets, so pork business, despite the increase in prices, both because of our purchasing strategy and as the potential of higher prices for pork, both domestically and internationally, and we are optimistic about the future. As to the beef cattle, we see that feedlots, they stay longer, and this is good because it increases our potential.So we have higher quality of the beef. This increases our potential of transferring higher costs of beef because we have more choice, more prime, and this helps the processing plant. And naturally, the cost of grain is cheaper, the feeder cattle in feedlots is higher. And then feedlot -- animals will be longer in the feedlot. We're not seeing this in retention. No absurd or hugely significant indicator in terms of retention. But we see a few things that make us optimistic.I have been saying a few things over conference calls. Humidity this year is better because -- well, it's not yet perfect everywhere where we raise cattle, but it's better than last year. So it's good. And now when we look at slaughter numbers, we see a few things that I think are starting to show a movement in retention. We see 13% less slaughter of cows. And when we look at 3.3% reduction of slaughter -- of cattle, there is a drop of 3% of male cattle and 3.8% of calves. And so this is still a high percentage of slaughter of female animals. But we are seeing indications that we can see some retention. It's not really significant, not very dynamic, but they are initial indications.

[Operator]

Our next question comes from Renata Cabral from Citi.

[Renata Fonseca Cabral Sturani, analyst]

Good morning. I have two questions. One, it's a follow-up on U.S. Beef if and all you've already talked about that and in details, but I would like to ask you, Wesley about the perspective for the progression of the cycle. [Technical Difficulty] atypical, we have to say compared to previous livestock cycle, it was somewhat delayed -- there is the expectation. And as you've just said, there might be some signs of retention -- it might get stronger in midyear, in my opinion. And therefore, there might be an increase in cattle prices.But inventory levels are low in the U.S. compared to the historical average. And probably the recovery compared to previous cycles might be slower because of biological renovation, so to speak, of the chain. We would like to hear from you how would we expect a cycle of improvement? What would be the peak prices? And secondly, capital allocation. The company is deleveraging -- it had been faster than what we had expected at first, and it might get to the end of the year at a very comfortable deleveraging level. So what are your perspectives for M&A? In the past, you've talked about the possibilities of acquisitions in the U.S. for processed food plants. What are your ideas on M&A?

[Wesley Mendonça Filho, executive]

I'm going to start talking about leverage and then I'll hand it over to Tomazoni to talk about M&A. Our process of deleveraging has been faster than expected, indeed. And yes, it does open opportunities because if we get to a margin of 7.5% to the year, which means improvement for upcoming quarters, 2.5x by the end of the year. It means it opens space for capital allocation, either for M&A or for dividend sharing that we'll keep on deleveraging. Our goal is to be between 2.5x and 3x. If it's below 2.5x then our capital structure is no longer efficient. But till there, we can have opportunities for dividend sharing or M&A depending on the process of deleveraging. Let me hand it over to Tomazoni.

[Gilberto Tomazoni, executive]

M&A is a natural process in our company, Renata. If you look back to our history, it has been built through acquisitions. So we constantly analyze opportunities that have a strategic fit and add value. We've already said that we want to build in aquaculture -- aquaculture what we've done for poultry and pork. We focus on added value and branded products. And we keep on investing in poultry with Pilgrim's, nothing new yet.It does not depend on leverage our acquisitions and the analysis of opportunity of acquisitions, the mapping of M&A opportunities that are strategically fit are routine and part of our company everyday business. Concerning the livestock cycle recovery and prices, you are absolutely right. As we retain female animals it reduces inventory levels, and that's expected whenever we regrow a cycle before it increases offer, there is inevitably a reduction in shrinkage.This is expected, and we expect it to happen as quickly as possible, this reduction of considering the reconstruction of the herds. In the short term, it brings some additional difficulty, but it's difficult to anticipate how long it would take. It depends on climate. It depends on conditions of all the cattle breeders' conditions. We constantly focus on, and as we've said before, the 2% that we've captured in terms of benefits and the 2% more to be captured. This is what we constantly focus on because we cannot control the livestock cycle or other things.

[Wesley Mendonça Filho, executive]

If I may build up on it, which I think is worth mentioning, Renata, our business in the U.S. is very relevant -- and being at this time of the cycle, it deserves further analysis, and we have to pay constant attention to the market variations. But as we are deleveraging our company and the soundness of our operations -- it clearly shows that our diversification is very relevant.If we go -- if we look back in 2021 and said that the beef challenge would be as challenging as it is, and we still had good results as we had very few people in 2021 would believe it to be true. But our current status shows the strength of JBS, which is our diversification of protein sales in the U.S. and internationally. This quarter and this year will serve as a very good example of this strategy.

[Operator]

The next question comes from Lucas Ferreira, J.P. Morgan.

[Lucas Ferreira, analyst]

Thank you for the questions. The first question is about Pilgrim's -- to understand the level of optimism you have for the year, how do you anticipate the drivers of supply and demand? Is it going to be well-balanced in the U.S. market? Do you think that the second quarter is showing improvement in seasonality?And what can we expect in terms of profitability for this business? And I'd like to ask you to tell us a bit more about Australia. Do we expect increased slaughter rates in Australia and the margins for cattle? And what about process food profitability rates there, which can be -- and what are your expectations for the end of the year?

[Wesley Mendonça Filho, executive]

Thank you for the question, Lucas. You've asked one question about Pilgrim's and about Australia. Well, in the U.S., broilers and you've been observing yet, of course, it has been presenting an increase in prices, which is related with the demand and very well controlled supply. I've talked about some of the challenges that we have in the U.S. market. And that's very clear there. There is no genetics in place. And as such, it requires learning to increase fertility and production. According to U.S. FDA, a recent publication -- there is an increase in supply, but not huge.In terms of demand we see a migration of consumer costs. Consumers therefore, prefer to buy more affordable protein so pork and poultry. We have controlled supply. We have increasing demand. In other words, results of Pilgrim's are up. And we are very optimistic for the whole process of adjustment of genetics and management. These are all things that lead to improvement and can be obtained little by little. The perspective, as Fabio pointed out, Pilgrim's CEO is very positive, especially in the U.S., and it's also positive as we are consolidating our three business units in Europe. We purchased them there.It was separated for a while to learn more about the process. And now we are consolidating them. We can see gains of synergy for G&A and also footprint of having large-scale plants and all that. This is all very positive. In Mexico, despite its natural volatility, it's still a very attractive market to us. Now speaking of Australia, in the beginning of the year, there was a challenge. Heavy rain in some regions and that has prevented animal transportation.The slaughters in Australia, there's a lot of [ raids ] have been slower or lower I mean, than we thought. Now with better climate conditions, things are going back to normal rates. We see Australia as a very positive region. We have a favorable cycle there, a favorable cycle in Brazil. And our Pork business, we've made an acquisition. It's doing great. It's even surprising us we've managed to progress very significantly in our productive process, gaining in agriculture productivity. Now processed foods in the U.S. or rather in Australia, it's something very stable.Australia is not an exporting market. We've started now to export some processed foods from Australia to Asia. The focus is on local market, which is very stable. The population in Australia it's not a population that's been growing. It grows just as a result of immigration. We are leaders in Australia and New Zealand. We work focused on brand. It's a very stable business with [Technical Difficulty], and we believe we are going to use Australia as our platform to export further to Asia.

[Operator]

Our next question comes from Guedes from Genial. Our next question comes from Thiago Bortoluci from Goldman Sachs.

[Thiago Bortoluci, analyst]

Good morning, Wesley. Congratulations on your performance. I would like to ask two questions about USB Beef and Seara. Number one, you answered the question about capacity in U.S. Beef and the capacity at a reasonable level. What do you think in terms of capacity that you need for the adjustment cycle? Last cycle, we saw some closings, and it's okay that the last cycle had some unique features, which doesn't seem to be the case now.So in this potential adjustment process that is going on in the industry, where is the industry in terms of capacity and closing of capacity? And Seara to Tomazoni last year, in the middle of last year ever since we surprisingly saw the industry with a well-balanced supply and this is at a time when you are adding capacity and your leading competitor was focusing on getting a smaller and focusing on profitability. Probably these two cycles are complete. So in the estimates in April, we see a high increase. So how do you see supply/demand looking into the future as a rationale? And how do you see it?

[Wesley Mendonça Filho, executive]

So we can talk about closing our plants, of course. So the plants that we have, that we have 9 plants in U.S., one in Canada. There are no studies about closing or capacity reduction. This is not in our plans.

[Gilberto Tomazoni, executive]

Thiago, about supply and demand in the market. We are seeing that international markets are under high demand for poultry. So in Brazil, we have more feedlots. You can see -- so you can see that we have more animals in feedlot chicken, but the demand in the international market is really driving this. So we are supposed to have -- we can never make long-term forecasts. We have shorter cycles. So, so far, as we see it this increase in demand will offset this increase in supply.We're going to have a rebalance now. If supply continues to grow, this naturally has consequences in many different markets. This is something that we can't control. What we can control in our case is that we to exceed our top efficiency we are operating at top capacity and what we do in the U.S. touches on different markets and different product mixes. This makes it possible to be able for us to navigate even in excess supply in a zone of good profitability.

[Operator]

Our next question comes from Igor Guedes from Genial.

[Igor Guedes, analyst]

I think -- I'm sorry, I could not speak the first time you called me. I understand the average cost of your debt. It went up to 5.78%. It was 5.73% last quarter, and the average term is stable. The penetration of bonds went up to $86 million. The average cost of dollar per bond is lower than your debt in real in Brazilian BRLs. So it should have helped you to bring down the average cost rather than bringing it up. So I'd like to understand from your perspective, what has caused this slow or the minor increase in cost of your debt?

[Guilherme Cavalcanti, executive]

When we pay anticipated debt, we pay premium to reduce it. Therefore, it goes into our financial expenses. It doesn't mean the liability management is negative, but it does have an impact on our financial expenses and present increased costs. Secondly, I've paid some trade finance lines, the $666 million in this quarter.It also depends on the time you made the payment -- and some other leverage of balance would go into our financial expenses. They are not debt, right? For the next quarter, we are going to keep on paying net debt, gross debt, I mean, but there are other variables. If we rebuy bonds, if we buy back bonds, even though there is additional issuance, we have to pay premium on the anticipated amortization. It impacts our financial cost, but not when we look ahead. Is it clear?

[Operator]

Well, if there are no further questions, I would like to hand it over to Gilberto Tomazoni for his closing remarks.

[Gilberto Tomazoni, executive]

I would like to thank all of you for having participated with us in this earnings release call. Our team of 270,000 employees have really provided the conditions to deliver these results. Thank you all very much.

[Operator]

The call is now closed. Thank you all very much for your participation. Have a great day. Thank you.