JBS SA

BOVESPA:JBSS3

Earnings Call Transcript 2018-Q2

[Operator]

Good morning, everyone, and welcome to JBS conference call. During this call, we will present and analyze the results for the second 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, Chief Operating Officer of JBS S.A.; Mr. André Nogueira, President of JBS USA; Mr. Wesley Batista, Senior President of JBS Brazil; and Mr. Jerry O'Callaghan, Investor Relations Officer of JBS S.A.

Now I'll turn the conference over to Mr. Jerry O'Callaghan. Please go ahead, sir.

[Jeremiah O’Callaghan, executive]

Thank you. Thank you, Paola. Good morning, everybody. Welcome to our conference call to analyze the results for the second quarter of 2018. We recently uploaded a presentation on our website, which is available for those that are listening to us, and we will make reference to that presentation during this call, so I recommend that you have a look at the presentation. The first page in the presentation is a disclaimer. So I'll please ask you to bear in mind and to read that disclaimer as we initiate this call.

I will pass you on now to Gilberto Tomazoni. He will make some strategic initial comments, and then I will take the call later to talk a little bit more detail about each business unit. Mr. Tomazoni?

[Gilberto Tomazoni, executive]

Thank you, Jerry. Good morning, everyone, and thank you for participating in today's call. The results announced by JBS for the second quarter reinforce our strength, our successful diversification strategy in kind of proteins and by regions, our focus on operational excellence and the quality of our management. This EBITDA was the best second quarter in all of JBS' history.

While we have been significantly improving our economical results, at the same time, we've also continued to grow in the markets where we operate, focusing on innovation and providing excellent product and service to our customers and consumers.

Net revenue for the quarter was BRL 40.5 billion (sic) [ BRL 45.2 billion ], an 8.4% increase when compared to the last quarter last year. Adjusted EBITDA was BRL 4.2 billion, 12.8% higher than the second quarter last year. EBITDA margin, also improved, was 9.4% compared to 9% in the same quarter of last year.

A relevant point in this quarter was the free cash flow generation of BRL 1.9 billion. I would like to highlight the significant reduction on net debt in U.S. dollar by USD 2.1 billion in 1 year. As a result, leverage reduced to 2.98x compared to 4x in the second quarter last year. In addition, the company debt profile improved significantly. Short-term debt was 7% of the total debt compared to 30% during the second quarter last year. Furthermore, total liquidity for the quarter was BRL 20.3 billion, 5x higher than our short-term debt.

Now let's discuss about our business units. I would like to begin with our Brazilian business, which represented less than 25% of the total company sales.

JBS Brazil, which includes our beef operations, leather and related business, delivered a recovered quarter. EBITDA margin was 6.2%. This positive performance was a result of better spreads, increase in export, strategic partnership with the key customers in domestic markets and the higher value-added product mix.

Our Seara business was strongly impacted by the trucker strike in Brazil. And the penalty from this event, second quarter results were below the potential of this business unit.

One of the biggest challenge has been passing commodity costs to the sales price. Pilgrim's Pride has already reported their second quarter results. The company delivered a solid quarter, with EBITDA margin of 10%, with highlights to its operations in Mexico and Europe. In U.S., the company diversified the portfolio, focusing on higher value-added products, offset our weaker performance of the commodity segments.

In our Pork business, as mentioned in our previous quarter, we saw a period of higher supply and sales price reduction in the domestic market, which were partially compensated by the higher exports. These factors have caused margin to return to historic levels.

It is important to highlight a significant increase in the results delivered by Plumrose, our prepared-food business. In addition to the improvements implemented to the operational level, Plumrose has benefited from lower fresh pork price to be used as a raw material.

At JBS Beef, which consists of our operation in Canada and Australia, included Primo Smallgoods, our prepared-food business in Australia and New Zealand, we saw a very positive cycle. Greater availability of cattle, solid operating performance, helped by the economic improvement and increased international demand have been important factors. Our business in Australia and Canada have both delivered strong quarter results.

Now I would like to return the call over to Jerry, who will present a more detailed analysis of this quarter results. Jerry, please?

[Jeremiah O’Callaghan, executive]

Thank you, Tomazoni. Thank you very much. I'm going to make reference to the presentation that I mentioned earlier and to the page numbers as I go through each one of our business units in a little bit more detail.

And I'm going to start on Page 4 of that presentation, where we discuss net revenue and gross profit. We had an increase of 8.4% in our net revenue when compared with the same quarter last year from BRL 41.6 billion to BRL 45.2 billion.

Gross profit, also comparing the same periods, went from BRL 6.15 billion to practically BRL 7 billion -- just under BRL 7 billion, an increase of 13.5% year-over-year. Gross margin increased from 14.8% to 15.5%.

Moving on to EBITDA and to net income on Page 5 of our presentation. EBITDA, as Tomazoni mentioned, came in at BRL 4.2 billion, an increase of 12.8% on top of the BRL 3.75 billion of the same quarter last year. And more importantly, EBITDA margin went from 9% to 9.4% in the period.

And net income, the FX, the devaluation of the real against the dollar affects the net income quite substantially, so when we adjust for that, we had net income of BRL 3 billion. We reported BRL 911 million of a net loss, which is basically the FX variation for the period of the end of March to the end of June. That compared with BRL 310 million of net income in the same period of last year.

Moving on to our cash flow on Page 6 of our presentation. We had strong operating cash flow of BRL 2.5 billion, up 177% compared with the same period last year. And free cash flow came in also strong at north of BRL 1.9 billion compared with negative free cash flow in the same period last year.

With regards to debt and leverage on Page 7 of our presentation. As Tomazoni already mentioned, and I think it's a relevant number, our net debt over the last 12 months decreased by $2.1 billion. Leverage in dollars, remembering that the vast majority of our business is in U.S. dollars, leverage in U.S. dollars reduced to under 3x, 2.98x at the end of June. Leverage in reais also remained at -- just under 3.5x at 3.47x. On Page 7, we have the evolution of leverage in both currencies over the last 5 quarters.

Moving on to liquidity, Page 8 in our presentation. Cash at the end of the period was BRL 13.1 billion. And when we add on the $1.85 billion of committed lines in the U.S., which represents BRL 7.15 billion, total liquidity at the end of the period was north of BRL 20 billion, BRL 20.3 billion, which is 5x our short-term commitments.

Short-term debt, again, as Tomazoni mentioned, reduced substantially to 7% of net debt at the end of the quarter. The source of the debt is basically 43% with commercial banks and 57% in the capital markets. The breakdown by entity: 7% at Seara, 33% at JBS and -- JBS S.A., sorry, and 60% at JBS USA.

And by currency, and this reinforces the fact that the U.S. dollar is basically the currency of the company, 96% of the net debt of the company is in U.S. dollars at an average cost of 5.67%. And just 4% of the debt is in reais at an average cost of just north of 9%.

Now moving on to business units, and starting with Seara. I'm on Page 9 of our presentation. Revenue impacted by the trucker strike in Brazil reduced by 5.4% from BRL 4.3 billion last year to just over BRL 4 billion this year.

EBITDA also reduced from BRL 356 million to BRL 226 million, with the EBITDA margin reducing from 8.2% to 5.5%. As I mentioned, the trucker strike was quite relevant and impacted EBITDA in BRL 112.9 million in the second quarter this year in Brazil.

Domestic poultry prices were under pressure as a result of incremental supply in the domestic market in Brazil and higher input costs.

The FX rate, the devaluation of the real in the period, April to June, boosted exports, which partially offset the higher costs.

A portion of our incremental input costs were passed through to sales prices, particularly towards the end of the quarter in the month of June. We continue to focus on profitability through innovation, product mix and costs passed through in our pricing, particularly in Brazil.

Our JBS Brazil business unit, which is basically our Beef business in Brazil, plus our leather business, plus our related activities also, basically all of which are in Brazil. We had a decline in revenue year-over-year of 6%, going from BRL 6.18 billion to BRL 5.81 billion in the comparable period.

EBITDA went from BRL 261 million in the second quarter of '17 to BRL 358 million in the second quarter of '18. EBITDA margin, going from 4.2% to 6.2%. Remembering that in the second quarter of last year, we had activities in Argentina, in Uruguay and in Paraguay, which were part of the composition of the EBITDA of the revenue of last year and of the EBITDA as well.

When we exclude the discontinued assets, revenue increased by 7%, and we had a robust growth in the number of livestock processed, which was up 17.5% when -- in the comparable period.

Fresh beef is a highlight for the quarter, with revenue growth of 12.8% in Brazil and 33.7% increase in exports.

EBITDA margin of 6.2% was boosted by a better spread between beef and raw material, and by a more favorable export environment.

Moving on to JBS USA Beef business, Page 11 of our presentation. And just remembering that the Australian business and also our Canadian business is part of this business unit. And now moving from reais to dollars. So revenues for the period were $5.6 billion, up 1.3% when compared with the same period of last year. EBITDA grew substantially from BRL 324 million top BRL 570 million, with EBITDA margin going from 5.9% to 10.2%. The improvement in EBITDA margin was primarily due to the greater capital availability and the strong demand for beef, both in the domestic U.S. market, but also in the export markets.

The U.S. industry's beef exports have grown quite substantially in the first half of this year and the second quarter grew by more than 26%. The industry exports out of the U.S. We've seen an improvement in product mix and in the growth in special programs in this business unit, again, particularly in the U.S., including our organic business, our grass-fed business and our natural business, which has dedicated brands towards each one of these special markets.

In Australia, the greater ability of cattle operational efficiencies and a diversified product portfolio contributed to a significant improvement in the performance of our Australian business.

Moving on to our Pork business, and it's all in the U.S. -- JBS USA Pork. Revenues were down by 6.3% from $1.52 billion to $1.43 billion. EBITDA was also down from BRL 178 million to 103 -- excuse me, dollars, $178 million to $103 million, a decrease of 41.8%. EBITDA margin was down from 11.7% in the second quarter of last year to 7.2%.

Basically, an increase in hog supply pressured sales prices in the domestic market in hog supply and less pork products in the domestic market in the U.S. The U.S. industry pork exports actually grew by 3.9% in the second quarter of 2018 when compared with the same period last year.

We've also had an increase in the volume of higher value-added products that we are selling. And Plumrose integration has been completed, with a new leadership team, and that team is already achieving higher volumes and better results in our Plumrose business.

Pilgrim's Pride, which already reported its results at the turn of the month, it had an increase in its revenue of 3.1% going from $2.75 billion to $2.83 billion.

EBITDA went from $449 million to $283 million, a decrease of 37%. EBITDA margin went from 16.3% in the second quarter of '17 to 10% in the second quarter of this year.

We had an increase in revenues due to incremental volumes in all of the regions. Remembering, Pilgrim's Pride is in the U.S., in Mexico and also in Europe. In the U.S., adverse market conditions in the commodity segment were offset by a stronger performance in other segments.

In Mexico, the highlight was the EBITDA margin of 19.6%, with a double-digit increase in the higher value-added products under our Del Dia and Pilgrim's brands in Mexico.

Also, we had an increase in volume and in prices in Europe with a share gain in our key customers in the European market.

That concludes our prepared comments for this presentation. We will hand you back -- I will hand you back now to the operator so that we can initiate our Q&A session. Thank you.

[Operator]

[Operator Instructions] Our first question comes from Bryan Hunt, Wells Fargo.

[Bryan Hunt, analyst]

Jerry, I was wondering if you could comment, first of all, on drought conditions in Australia, what it's meant for accelerated livestock availability. And how long do you think the heightened livestock availability may last?

[Jeremiah O’Callaghan, executive]

André?

[Andre Nogueira, executive]

So we've seen no sign of drought, especially in New South Wales. Normally, the wintertime in Australia is the time, especially July and August, is a time of less [ cattle availability ]. It's part of the normal seasonality there. It's early to say if this drought is causing a liquidation in the herd yet. My impression at least to stop the recover, but it's early to say if it's -- there's a liquidation, especially because the more localized droughts there increase on the big cattle producer. It's a much better shape than it is in New South Wales. And South Australia have herds that are in very good shape. So it's early to say what would be the impact of this drought because it's not an overall drought in Australia. It's more localized in one area. My impression, based on what we have seen in the cattle that's coming, that at least at this point, it's stopped the recovery of the herd.

[Bryan Hunt, analyst]

Very good. I mean -- and in periods where we have a herd liquidation like this, it -- we're seeing livestock prices drop in Australia, and your margins, I believe, are expanding. How has that impacted your expectations for earnings out of the Australia segment for this year relative to what you were expecting just 2 quarters ago?

[Andre Nogueira, executive]

I don't think that we'll see a liquidation in the herd. I cannot say that we are liquidate the herd because of the drought is more localized in New South Wales, not overall in Australia. The margin in Australia, it's in good level now, in a similar level to U.S., a little bit -- still a little bit below [ knowing ] that we have several other businesses in Australia, Primo business, that from there the rest of the year, have several other businesses. The cattle beef in Australia, our expectation again, we had the last 2 years was very tough. This year is better. But it's still below what we want to consider for the full year, still below what we consider the normal level of margin of Australia. Again, this New South Wales drought, relatively new, started in the last 2 or 3 months. It's impacted the price of grain in Australia, the grain in Australia pretty much doubled the price. But we have several other areas that are in very good shape in Australia. It's early to say the impact of this drought, if it's going to have a liquidation, if it's going to have a reduction in the herd. I think that's early to say. I think that next quarter, we are going to have a much better visibility about the impact of this specific drought in New South Wales.

[Bryan Hunt, analyst]

All right. And continuing on the drought conversation and impacts. There's a drought across most of Europe. Feed costs likewise there have spiked. Are you all seeing the increased export competition in any herd liquidations out of Europe at this time?

[Andre Nogueira, executive]

You talk about beef?

[Bryan Hunt, analyst]

No, I was thinking more of pork.

[Andre Nogueira, executive]

No, I think that -- the U.S. perspective, Europe is a pork competitor. I don't think that I have seen a liquidation in the herd from Europe. It's just a normal competition between U.S. and Europe in pork. What is impacting U.S. right now, Bryan, is the trade discussion that has an impact in -- especially the price of by-products. If you see what happened to by-product price in the last few months, the big reduction in the price, and especially hams to Mexico, there are other reduction the price too. So that was the thing. I think that in terms of volume of exports are continuing to do well. But there was an impact, specifically in price of hams from U.S. to Mexico and the by-products that we sell in Asia and the direct consequence of trade discussion and the growth in production from U.S. I'm not seeing any special competition from Europe. What we need to keep our eyes on later in Europe is the fever that exists today, after swine fever that exists today in some countries and seems, based on the imports that we see, I think it's spreading a little bit. We do not achieve the big countries that produce for us in Europe yet, so German, Netherlands, Denmark. And if it, for some reason, this achieved that countries and they have the fever, that can have be a big impact in their export. Because normally, Denmark will close the door, and that will open a big opportunity for U.S. We are not there yet. I'm not telling that this is going to happen, but it is something to pay attention.

[Jeremiah O’Callaghan, executive]

I think just to add to André's comment, I think in Europe, because of the warm weather, what is most jeopardized is pasture, hay and silage, and that would affect more the beef industry in Europe, potentially than the other meat industries. And potentially would make the European Union more import-dependent, which could be an opportunity particularly for our business in Brazil. We have relevant access to the European market, so I think that could be a consequence of the weather situation in Europe.

[Bryan Hunt, analyst]

All right. Great. And 2 last questions, if you will. One, I was wondering, is there any progress update on any settlement with the Department of Justice in the United States, which would allow you to list your U.S. entity on a stock exchange?

[Jeremiah O’Callaghan, executive]

Yes. With regards to the progress we are making towards the listing in the U.S., we continue to work on all of the fronts necessary to remove any of the obstacles so that we can do that listing as early as we possibly can. Beyond that, I would not like to make any specific comments about any specific activities that we are conducting.

[Bryan Hunt, analyst]

All right. And then my last question is, you mentioned a net debt reduction, and it's more through a build of cash as opposed to an absolute debt reduction based on the financial [ tariffs ] released today. When do you -- at what level of cash or do you all feel comfortable operating with and really start to use free cash to reduce the absolute debt levels?

[Jeremiah O’Callaghan, executive]

I think potentially, the FX influence your analysis there. If you look at our debt in U.S. dollars, which if you look at our activities, it is the currency that we should be looking at. The vast majority of our activities, our debt and our cash generation is in U.S. dollars. We had a relevant reduction in our net debt in U.S. dollars over the last 12 months, more than $2 billion -- $2.1 billion of net debt reduction in U.S. dollars. So we are generating cash. We are reducing debt. We continue to focus on that. It is our priority. In U.S. dollar terms, our leverage is already under 3x, which was a target we set ourselves for the end of this year. And we will continue to focus on cash generation, deleveraging, debt reduction through 2019. We've set ourselves a target of 2x leverage by the end of next year.

[Andre Nogueira, executive]

Just to complete Jerry's question. I think that we are crossed a valid point. We are today with a total liquidity that is above a comfortable level. And I think as from now until to the end of the year, we are going to apply this cash to pay down debt, or [indiscernible] the most efficient debt that we need to pay down. But we are going to accelerate. We are -- with a liquidity that we played this way in the last year, and we comment about that, we are going to keep a large liquidity -- the liquidity now is above the level that is efficient, and we are going to accelerate to pay down debt from now to the end of the year. And we are going to look at the most efficient debt we pay, but we have a very strong cash position that we are going to use part of this position to pay down debt.

[Operator]

The next question comes from Benjamin Theurer, Barclays.

[Benjamin Theurer, analyst]

Actually, just a couple of things I wanted to touch base on then. Starting off with Seara, and thank you very much for actually giving the disclosure on the implications from the trucker strike. So clearly, we had other issues affecting during the quarter with the oversupply, then the trucker strike implementing a lot of constraints in terms of the delivery of products. So if we think about being now somewhat at the middle -- halfway through the third quarter, what are you seeing in the chicken business, and in specific in Brazil? How have you seen some of the oversupply getting solved? And what's your outlook for the remainder of the year on the Seara business in specific? Because obviously, if we adjust for the implications, margins were still pretty attractive. So should we expect that those margins they go basically more or less immediately back to a normalized level? Or do you still see headwinds for the back half of 2018 on the Seara business? That will be my first question.

[Wesley Batista, executive]

This is Wesley. So I'll answer that question for you. So yes, we had a challenging quarter with the trucker strike in Brazil. We think that -- we see that most of the effect that we had in the results have been posted on this quarter, and there will be very little residual effects on the following quarters. So we see that, that will be something that -- we think that our team did a good job there managing the situation. And we don't think that there will be much more residual impact in the next few quarters here. So when it comes to normal business and out of this special situation, we see that grain prices in Brazil are challenged and something that will be a challenge for us in the near future and will continue to be a challenge for us. And there's no way around that, other than we are focusing on putting that on the price and changing price to match that. We have been able -- successfully been able to do that on the export side. We've seen our export prices go up, both because of the U.S. dollars -- U.S. dollar-real exchange rate, but also with opportunities we have in markets like Europe, like Japan. And so we see that, that has been successful. On the prepared side, we have been able to pass some of the cost over to price, but not as much as we would like to. So we're focusing on the prepared side to be able to pass the increase -- the elevated grain cost to the -- to our prices. The domestic side, on the fresh domestic side, there has been a little bit more of a challenge. We have a larger oversupply than -- that has been making it difficult for us to pass the cost over to price. So we are -- we have a more challenging situation there. So, overall, we see that -- we still have some challenges in the following quarters, but we're confident that we'll be able to leverage some of the export opportunities we have to focus on improving results.

[Benjamin Theurer, analyst]

And then my second question goes into the Pork business U.S. So clearly, we've seen several -- well, somewhat severe margin contraction on a year-over-year basis. And obviously, there were implications just because of what you've mentioned with the increased supply from other competitors. Could you elaborate a little bit of what you're seeing on how hog supply is coming in? I mean, very lately, we've seen actually the spread somewhat improving on the packer margin, especially in July. So what's your expectation here? What are you seeing in terms of the competitive environment that the [indiscernible] the fact there's new capacity coming in? And how do you feel about the second half on the pork side?

[Andre Nogueira, executive]

So first Benjamin, first thanks for the question. When you look at our year-to-date margin in the Pork, we are around 10%. So pretty good -- pretty strong margin for the year-to-date '18. There's a contraction in margin in the last quarter, and I think that's much more related with the volatility that we're seeing some of the export market and the consequences of the trade discussion than is related to hog supplier. I think that we're in pretty good shape in terms of hog supplier. All the numbers show that we're going to have a lot of availability of hogs for the rest of the year, for next year. The produce [ from change ] increased. So I don't think that the hog supply will be an issue. The issue in the discussion is how successful can we be in selling out this new higher production in the export market. We have strong positions in markets, but with this new production with more availability, we will need to continue to sell more outside of U.S. Some markets are [ promising ]. If you see what's happened in Colombia, for example, that comes from 0 a few years ago to today be the sixth largest export for U.S. I think that we are doing a very strong job in the whole Latin America to sell more. But Mexico is a very important partner and the tariff in Mexico affect our business. How fast can we resolve that or how long this will drag between U.S. -- Mexico and U.S. and China, will be the most important fact that we can have in the business. It's not related to hog. I think that hog supply will be plenty. It will very strong. The question is, can we move all this meat in the reasonable price in the export market. We're still optimists in our business when we look at how our business performed compared to our competitors. How strong is our operation, how efficient we are, how we changed our business and we have much more value added for the process compared to how we used to be 3, 4, 5 years ago. We -- it is a very strong business for us and performs extremely well compared to our competitors. We are not going to be immune from some volatility in the export market. We're doing what we can internally to find the new markets in the U.S. It is extremely competitive, and at the level that we're at now, and at the level that the pork need to be in the third quarter and the fourth quarter, I think that we can find new markets. But what happens with Mexico discussion, China discussion will be relevant for the margin in the business overall, be relevant for the margins for the pork producers. And we have an impact [ obviously ]. I still believe that we can finish the year in a pretty strong base and be for the whole year around 8% and 10% margin for our business because the way that we run the business, because our efficient, because our value-added products.

[Benjamin Theurer, analyst]

Okay, perfect. And then one last, very quick. It's more of a strategic question. So we see you guys, even with the leverage that's been out there. And now I really appreciate the significant reduction on the over -- the last 12 months. But clearly, I mean, a year ago, leverage was higher, and we've seen you still active to a certain degree on the M&A side. You have the Plumrose acquisition, you have the [ BNP ] acquisition. So clearly, there were things that were kind of fitting into your portfolio complementary. So is M&A currently still something -- is M&A something that you would currently still consider? Is that -- for example, with assets that are up for sale in Europe, I mean, we know some of your competitors are out there trying to sell assets there. But could that be something of interest for you, just in order to further strengthen some of the international footprint you have outside of Brazil? Or is M&A something that you would currently discard?

[Gilberto Tomazoni, executive]

Ben, it's Tomazoni speaking. Our focus now is in organic growth. We have our priority to deleverage the company. Of course, we are all the times looking for opportunity in the market. But it's not the focus. It's more for understand how is the market opportunity there for the future options but not for now. Maybe after we are able to make [indiscernible] in the U.S., we start a new phase of JBS. That could be M&A acquisition. Today, we are just focused on deleverage the company.

[Andre Nogueira, executive]

Tomazoni, allow me to add some color on that. So allow me to add some color on that, Tomazoni. 2 things here, Ben. I think that you are seeing in our results this quarter is a proof of how correct is the JBS strategy in terms of diversification, not only different proteins but in different markets. So our strategy is paying back big for us, with all the diversification that we build in different markets and proteins and continuing the growth in the further process -- value-added processed foods. Having said that, Tomazoni is very clear about the direction. This is the priorities, have been very consistent the last [ 3 years ], the last 4 quarters, I have been saying the same thing, for delivery in what we promised. We just need to consider that PPC is a [ constrained ] company that have their boards and have their directions. So PPC, it's looking and a little bit different than JBS. They can look and do what's the best for PPC. For JBS, the stock [ overall ] is very clear and defined in the last page of our presentation.

[Jeremiah O’Callaghan, executive]

And regarding Europe, you mentioned Europe, Ben. Just to add a final comment. Seara already has a very strong presence in Europe, as does JBS, through Pilgrim's and Moy Park. We have relevant customer base, a relevant supply of product there. And so we have good access to that market already, and we would look to grow that access organically with the team we have in Europe, a very good team in Europe, a very good customer base. So from our strategy point of view in Europe, we would continue to look at growing that business organically.

[Operator]

The next question comes from [indiscernible], HSBC.

[Unknown Analyst]

First question, very quickly. On what are you guys are seeing in U.S. in terms of a knock-off impact of oversupply in hog -- in hogs in the U.S.? And also obviously Chinese tariffs obviously haven't affected your beef segment in the U.S. yet and -- but poultry seems to be kind of getting a bit of heat from that. So what's the outlook going forward? I know the company is focusing on increasing the share of value-added products. But it would be interesting to see -- to hear your thoughts on how beef segment could get impacted in the second half and whether that will have any sort of impact maybe on shortening the cattle cycle in the U.S. because of these exogenous factors.

[Jeremiah O’Callaghan, executive]

André.

[Andre Nogueira, executive]

So I'm not sure, the call here's a little bit bad, and I'm not sure if I understood the question correctly. I think that I understood what was the impact in China in terms of the hogs, the pork...

[Unknown Analyst]

No, what I'm basically asking is you guys have diversified into value-added products, I understand that. But these proteins are still interchangeable, pork, poultry obviously, and beef, in a way. Your Beef segment is obviously doing phenomenally well in the second quarter. But going forward, given the oversupply in pork, given the retailers are not promoting maybe poultry as much as they have or beef in the first half. And what -- do you think that margins for Beef segment could come down because consumers are going to switch maybe to -- back to poultry? Or the pork prices being down. How -- what's the outlook for the second half of the year for the U.S. Beef business? And also, longer term, do you think these external factors, these trade wars and the discussions between U.S. and China could impact the cattle cycle in the U.S.?

[Andre Nogueira, executive]

I think that the cattle cycle in the U.S., let's talk about first the supply side. The cattle cycle in the U.S. is -- it's just starting more availability. They're going to have more availability this year. Probably 2% more availability next year and this continuing to grow in 2020 and maybe even 2021. So the supply side will be in a very good shape. The demand side has been very strong, in U.S. and globally. So I don't see at this moment that more availability of pork and chicken will wean back the demand for beef in the U.S. If you look historically, U.S., the beef side's just recovered some of the market share, the domestic market. But I think that the big drive for [ beef ] overall is the demand in the domestic market part of this, but I think there's a global demand for beef. And I call the attention for Japan and Korea, 2 very important markets for the U.S. beef, and Australia, and the growth in the demand in the domestic market in Japan and Korea is just phenomenal. A combination of probably the price of fish overall, very high and continue to move higher. The domestic production of beef continues to decline in these 2 markets and the [indiscernible] situation in that area that's drive the demand of beef and drives the import in a pretty strong level. I think that this is more relevant overall. I think the domestic demand helps to be strong. If they such promote more beef and more chicken or more pork and more chicken, I don't see how this is impacting the margin in beef. I think that, of course, we have a very strong quarter, 10% margin. I feel pretty confident that we're moving the overall margin in beef for a different level that was in the past and consequence of the whole cycle of the supply, the capacity to process this cattle. We saw several plants that was shut in the last 5 years that's impacting. The specifics for JBS, our business today is very different than our business was 5 years ago. We improved dramatically in the operational side with all the investment that we have done in our plants. We improved even more in the sales side, doing much more value-added programs, so our business fundamentally is very different than it was before. And that explains part of the expansion in the margin, up on top of what the markets offer. So to answer in a very short way, I don't see that next year the margin will be different than we are going to see this year, maybe even some expansion in the margin. But I cannot see how the beef U.S. can be less profitable in 2019 compared to how it is going to perform in 2018.

[Operator]

The next question comes from [ Azeem Haider ], DWS Investment.

[Unknown Analyst]

I just wanted to get further clarity in export sort of volume and revenues for you guys. So good that you guys have broken down this time, just export volume overall basis, in terms of revenue. But would you have a sense of what percentage of EBITDA that export sort of number comprises of?

[Jeremiah O’Callaghan, executive]

What percentage -- I'm sorry, can you just repeat the last part of your question?

[Unknown Analyst]

Of EBITDA.

[Jeremiah O’Callaghan, executive]

It's very difficult for you to break down EBITDA by domestic and export markets because basically our industry is an industry where we have a blend of products, we process the livestock, we produce a blend of products. And so we have a blend of sales which results in the EBITDA and the EBITDA margin of the business. You cannot isolate one and give that a specific value because one is dependent upon the other or -- they are both interdependent. So because you are processing a livestock, you've got to think about the EBITDA margin of the animal that you've purchased with a blend of sales domestically and in the export market. It's -- in my view, it's impossible to separate out the performance, the EBITDA in that regard.

[Gilberto Tomazoni, executive]

We have a -- these are several businesses. And the cost is the whole chicken or the whole pork. To define what is the cost for each part is kind of...

[Jeremiah O’Callaghan, executive]

Subjective.

[Gilberto Tomazoni, executive]

Subjective. Then we prefer to see the results for the whole bird.

[Unknown Analyst]

Okay, that's fair. And then just to further expand on the color on exports. Would you have a sense of your exposure to China and Mexico because they're just so topical in terms of tariffs, et cetera?

[Jeremiah O’Callaghan, executive]

We export from South America, from Australia and from the U.S., and so you would have to think about that kind of regionally. Any trade disputes is not affecting our South American export business. Nor is it really affecting our Australian business, but I would defer to André to further comment on that. André, please?

[Andre Nogueira, executive]

Yes, you are right. You need to define which culture we talk about and which protein are we talking about, because for Canada, some of these trade disputes is [ opportunist ]. For Australia, some of these trade disputes is [ opportunist ]. At this moment, the impact in the negative side is only -- have been only in the pork from U.S. And in the grain, but the grain's a benefit for us. If the grain price remain in this compressed level in the U.S. because of the trade dispute, will be positive for our chicken and hog production in U.S. The real impact -- the real negative impact until this moment is pork from U.S. to Asia and especially in the by-products because that's the main market from the by-products in the U.S. And those are impacting price -- a relevant impacting price in every by-product that we export from the U.S. to Asia. And there is an impact in price in the ham, especially in the hams that U.S. export to Mexico because they put the tariff, and if you look what happened with the price that we export, pretty much came down the same level of the tariff. So that is a true impact until now. If these trade disputes continue and expand, then you can have some other consequence from U.S. It will be positive in other aspects, probably for Brazil, probably for Canada, probably for Mexico. So that is [ trouble ] for Australia. And that's again -- once again, the relevance of the diversification of the footprint of JBS. It's unique. You don't have any other companies with this type of diversification. That allows us to navigate better, even a scenario of trade disputes like we're having right now.

[Unknown Analyst]

Got it. And then lastly, just want to circle back on the asset sales sort of question and sort of get an update from your end. In terms of the original plan that you guys had to divest noncore assets to sort of beef up liquidity and deleverage, are you guys mostly through it? Or is there some more sort of asset sales of noncore units we can expect in future?

[Jeremiah O’Callaghan, executive]

On that question, we announced just over a year ago, about 13 months ago, an asset sale, which we clearly defined the assets that were up for sale. We divested all of those assets, I would say, in a timely manner and, in our view, at market value. And that concluded our divestment program. That is concluded. As also -- may I add that, at that time, we announced the divestment plan because we decided to focus on our balance sheet, on deleveraging, on cash generation, and we continue to have an absolute focus on those priorities right now with no intention of revisiting the M&A market in any circumstance during this period of time.

[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]

To close today's call, I would like to reinforce that the company's priorities continues to be focus on operational efficiency, organic growth and focus on deleveraging, invest in innovation and quality in world-class compliance programs. If -- this is -- we just reinforce every call, every quarter because we are focused on that. I think it's -- we can change the priority. We can change there in the future, of course, maybe when will be a [indiscernible] in the U.S. But today, our focus is deleverage the company. Our target is to be, in the end of this year, below 3 and next year, around 2x leverage. This is so important, and we believe that it is the best way to create value to the shareholders. With that, I would like to thank you for all our 230,000 employees which made it possible for the company to deliver the results announced today. And I would like to thank you, every one of you, for participating in JBS to -- this quarter conference call. And a good day.

[Jeremiah O’Callaghan, executive]

Thank you.

[Operator]

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