JBS SA

BOVESPA:JBSS3

Earnings Call Transcript 2021-Q3

[Operator]

Good morning, everyone, and thank you for waiting. Welcome to JBS Third Quarter of 2021 Results Conference Call. With us here today, we have Gilberto Tomazoni, Global CEO of JBS; Guilherme Cavalcanti, Global CFO of JBS; Andre Nogueira, CEO of JBS USA; Wesley Batista Filho, CEO of JBS South America; 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 assumptions of JBS management -- of future events and therefore, depend on circumstances that may or may not occur. Now I'll turn the conference over to Gilberto Tomazoni, Global CEO of JBS. Mr. Tomazoni, you may begin your presentation.

[Gilberto Tomazoni, executive]

Good morning, everyone. We have ended the third quarter of 2021 with the certainty that we are in the right path. Once again, the result we are presented are proof not only the operational excellence of JBS and our diversified platform, but also the strength of our team of 250,000 team members around the world. Prosperous and virtuous is the company that can weather challenge peers in such a sound manner, meeting its responsibility to the planet and its community, while at the same time, create value for its stakeholders. We already sent and achieved the recognition that fill us with pride. We are full investment grade, which puts JBS in a group of the world's most respected and solid companies. This is a direct result of our team focus on operational excellence, environment and financial sustainability and corporate governance. We have elected 2 new independent board members. We have strengthened on our governance and compliance policies, process and structure, and we have established an aggressive sustainability target that will help us reach net 0 by 2040. As Guilherme Cavalcanti will detail further, we have ended this quarter at the best and strongest moment in our history. Since 2020, we have invested $1.4 billion in EFG, $3.7 billion in new acquisitions, $1.3 billion in expanding and modernizing our operation units, and we have returned $3.3 billion to our shareholders. In the third quarter -- the third quarter '21, our net revenue was $17.7 billion. And in the last 12 months ended September 30, net revenue was $61.7 billion. Net income for the quarter amount to $1.5 billion. And in the last 12 months ended September 30, our net income was $3.5 billion. Considering the constellation of shares approved by the Board, net income per share in the quarter was BRL 3.20, in the last 12 months BRL 70.5 per share. In this quarter, we completed the acquisition of meat and meal business, Kerry Consumer Foods, leader in the production of frozen and chilled ready-to-eat meals in United Kingdom and Ireland. We also obtained the final approval for the acquisition of Huon, the second largest salmon aquaculture business in Australia. Finally, our entry in this segment, we want to replicate in aquaculture, what we have done with the other types of proteins. Further, we announced the agreement to acquire Sunnyvalley, a company that produced bacon, ham, turkey breast and other prepared foods in the United States. Bearing in mind that the acquisition announced in the last 12 months, but not yet fully factoring our results and included net -- not yet concluded acquisition of Huon, Rivalea and Sunnyvalley. We still have to add around $2 billion to the consolidated net revenue and around $250 million to the consolidated annual EBITDA. In addition, by the end of 2022, we will have invested BRL 3 billion, around $500 million in Seara that will generate in addition BRL 6 billion or around $1.2 billion in revenue. We are on the thread to becoming the house of brands, launching innovative products and strong brands in each region where we operate. Our target is to have 10 brands with over 1 billion in revenue by 2025. With these superior results discussing today, we have also devoted ourselves to safeguarding our future strength and success. We have made sustainability our strategy, foster the transition to low-carbon economy across our entire value chain. We are the first major company in our sector to take to the net zero committed. By 2040, we will have the net zero balance of greenhouse gas emission across our entire value chain. This is why we are also present at COP26 in Glasgow to learn and share progress with the global leaders who have also embraced the [ centers ] of more sustainable future. At the COP26, along with 9 of the world's large global food companies, we committed to develop by COP27, a sectoral roadmap to contain global warming to 1.5 degrees centigrade above pr-industrial levels. This commitment was articulated by the government of United States and United Kingdom with the support of the tropical Forest Alliance, a multi-stakeholder partnership platform hosted by the World Economic Forum and the World Business Council of Sustainable Development. Also at the COP26 we entered in a strategic partnership to reduce bovine enteric methane emission by up to 90% through the use of a new feed supplement in the beef production value chain. But we are not stopping there. We are also working in partnership with the research institutions to apply other solutions that will reduce the methane emissions. We have also 2 urgent issues to tackle, on global warming and ensuring food security for the grow old population. In this respect, we have 2 convictions. One, that is a challenge cannot be - this challenge cannot be tackled in isolate manner or it's to happen, all of us need to unite under a common objective and produce food is a crucial part of the solution. Only the transition to more sustainable products will allow us, our business to drive while guarantee food security and the preservation of the planet. Better prepped to face the challenge, we must scale them up. Given the magnitude of the current environment challenge, yesterday, we announced a new instruction in the creation of the Global Operational President, which will be led by Andre Nogueira and Wesley Batista Filho. These new instruction aims to ensure that our focus in operational excellence, our people and exposure, while at the same time ensuring the company agile and independent in its decision-making and prepare to pursue its sustainability and growth strategy. Andre Nogueira will oversee the operation in Latin America. Wesley Batista Filho will be in charge of operation in JBS, Latin America, Oceania in the plant-based business. As a result, the position of CEO of JBS Brazil will be held by Gilberto Xandó. João Campos will be the CEO of Seara. While, JBS USA will be led by Tim Schellpeper with Steve Cohron taking over JBS USA Beef. You can find further details about the experience and career path of each one of them in the notice to the market that we have disclosed yesterday. Our entire team embrace responsibility that reflects our role as a global leader. We will remain focused on feeding the people in the world with the best there is in an increasingly sustainable manner. Thank you. Now I'll pass to Guilherme Cavalcanti to detail our results.

[Guilherme Cavalcanti, executive]

Thank you, Tomazoni. Let's please move to Slide 21 with our financial management achievements. And where I would like to start highlighting that we received an upgrade of JBS credit rating by Moody's and considering the received by Fitch in June of this year, we are now rated as full investment grade. This is an important achievement for our investors and stakeholders and it's the result of our growth strategy combined with financial discipline and advancements in our ESG strategy. On Slide 22, we are demonstrating that, what I mentioned, considering the period from the beginning of 2020 until now, we have invested $9.6 billion with the following breakdown. We returned $3.3 billion to shareholders through share buybacks and dividend distribution, including the anticipation of dividends announced yesterday. We invested $3.7 billion in acquisitions. This includes the announced acquisitions that were not concluded yet as who owned Rivalea, Sunnyvalley and PPC. We also invested $1.3 billion in the modernization and expansion of our production units. And finally, we have invested globally more than $1.4 billion in ESG initiatives. Half of this investment was done with the company's generated free cash flow. 1/4 is not concluded and 1/4, it's already included in our net debt. However, we were able to reduce our leverage from 2.1x in 2019 to 1.49x. And we increased our interest coverage from 6.2x to 10.8x in the same period. So despite of the increase in net debt, our capacity to repay the debt increased significantly. With EBITDA and free cash flow perspective for the fourth quarter, and despite the addition of payments of announced acquisitions of Huon, Rivalea, PPC, Sunnyvalley and our anticipated dividends, our leverage should remain below 1.6x by year-end. Now move to Slide 24, we were -- where we present the financial and operational highlights for the quarter. In the third quarter of 2021, we achieved revenues of $18 billion, which represents an increase of 32%, BRL 293 billion. In the last 12 months, net revenues totaled $62 billion. Considering the acquisitions announced in the last 12 months, which are not fully reflected in these results and including the not settled acquisitions of on Huon, Rivalea and Sunnyvalley, we would add around $2 billion in annual consolidated net revenue and around $250 million in consolidated EBITDA. The adjusted EBITDA for the quarter was $2.7 billion, which represents an EBITDA margin of 15%. In the last 12 months, EBITDA totaled $7.4 billion or equivalent to BRL 40 billion, a record. Net income was a total of BRL 7.6 billion in the quarter, which represents an earnings per share of BRL 3.2 per share. In the year-to-date, net income was BRL 14 billion. This value indicates a significant profit for the year of 2021, and consequently, a high minimum dividend as per the Brazilian corporate law. It is important to highlight that the balance sheet exposure to U.S. dollars in the end of the quarter was only BRL 94 million. This improves the predictability of our net profits. Thus, in addition to the anticipation announced in August, we are announcing another interim dividend totaling BRL 2.4 billion, which represents BRL 1 per share to be paid on November 24, 2021. Considering these interim dividends, dividend yield reached 8% in 2021. If we had the repurchase of shares of BRL 7 billion carried out this year until October, the total yield reached 15% for the year so far. The company's Board also approved yesterday the [Technical Difficulty]. So move on to Slide 25, we highlight the 32% growth in consolidated net debt revenues in a comparison as a result of revenue growth in all of our business units. The adjusted EBITDA also posted an important growth of 74% in the quarter, and EBITDA margin expanded 3.6 percentage points in the same period from 11.4% to 15% in the third quarter of 2021. Now moving on to Slide 26. The operating cash flow was $2.1 billion or BRL 11 billion in the quarter, and free cash flow amounted to $1.4 billion or BRL 7.3 billion, which represents a conversion of 52% of EBITDA to free cash flow. Excluding the nonrecurring payments, the conversion would have been 60%. We have also increased investments in the company's organic growth. In the graph on the bottom of the slide, we have our CapEx in the quarter, totaling BRL 2.6 billion, of which 54% is related to investments in modernization and expansion. Now please, let's move to Slide 27, where we have the evolution of our debt profile. Net debt for the third quarter was $11.2 billion, which represents an increase of $386 million in relation to the net debt of the second quarter 2021. This increase is mainly due to the payment of Kerry acquisition, the distribution of dividends and the net repurchase of shares, which together totaling $1.7 billion. Despite all of these initiatives, net leverage was 1.5x in dollars and 1.54x in reals. It's important to mention that the net debt is already impacted by acquisition of Kerry, which was concluded in the end of September. Including Kerry's, last 12 months' EBITDA, net leverage would be 1.49x in dollars and 1.52x BRL, the lowest level achieved by the company historically. And it's important to highlight our comfortable liquidity position. We have at the end of the third quarter, a cash position of $4.3 billion, together with the revolving line of $2.2 billion at the end of the third quarter, totaling $6.5 billion in total liquidity, which is more than 3x the short-term debt and enough to pay the debt until mid 2026. Move to the bottom of the slide, I highlight that our average cost of debt in dollars was 4.47% per year, the lowest ever recorded by the company. However, it is still 1.4% above the interest of our bonds on the secondary market for the same average period of 6 years. And therefore, it means that we still have a potential opportunity to reduce financial expenses, is $220 million per year. For the next year, for example, 3 bonds that together totaled $2.6 billion with coupons of 7%, 5.75% and 5.87% become callable. The refinance of these 3 bonds will extend the average term of the debt and will capture around $100 million in net financial expenses savings per year. Now let's move to the business unit's performance. Starting with Seara on Slide 28, we have the third quarter 2021 net revenue growing 38% in the annual comparison and reaching BRL 9.6 billion. In the domestic market, which represents 51% of the total business revenue, the category of prepared products has remained the highlight, posting a growth of 4% in sales volume and 20% in average sales price. Seara continuous focus on innovation and among the main introductions of this quarter, I highlight that we launched the Incredible Seara brand, the first complete line of 100% vegetable protein-based cuts in Brazil. In the export market, Seara posted a growth of 20% in volumes sold and 11% in average sales price. The scenario for production costs remain challenging, with the average cost of soybean meal and corn rising by 23% and 74% year-over-year, respectively, according to Esalq data. As a result, adjusted EBITDA reached BRL 984 million with a margin of 10.2%. Now moving to JBS Brazil on Slide 29. We see the revenue for the quarter growing by 35% year-over-year, reaching BRL 15.5 billion in the quarter. The export market was the highlight of the quarter, with net revenue posting a significant increase of 50% in the annual comparison as a result of the 25% growth in volume and 27% in average sale price of fresh beef category. In Brazil, Friboi brand achieved an important mark by being elected the most remembered meat brand in Brazil according to the Top of Mind '21 survey. Despite the sequential improvement, the performance for this business unit continues to be impacted by the increase in the average price of cattle, which according to the data published by Esalq increased around 35% in the annual comparison. As a result, the EBITDA for JBS Brazil totaled BRL 946 million in the quarter with a margin of 6.1%. Moving to Slide 30. JBS USA Beef and now speaking in dollar terms and in U.S. GAAP. JBS U.S. beef's revenue reached $7.4 billion in the third quarter, an increase of 38% year-over-year with EBITDA of $1.6 billion and a margin of 22%. In Mexico -- sorry. In North America, beef demand continued growing as the progress in the COVID vaccination accelerated the reopening of the foodservice channel. At the same time that retail sales remained strong. Global demand for beef also remains very strong, particularly in Asia, which now is responsible for more than 75% of the total U.S. beef exports, with China becoming the third largest destination for American beef. The performance of Australia beef continues to improve sequentially, mainly due to the strong domestic and international demand that are sustaining beef prices. Now moving to JBS USA pork. Net revenue was $2.1 billion, an increase of 46% year-over-year, and EBITDA reached $249 million with a 12% EBITDA margin. Margins increased in the quarterly comparison, supported by the strong domestic month as well as the fact that labor shortage continue to hold back production. In the export market, Mexico, Japan and South Korea grew volumes year-to-date in 30%, 6.5% and 5%, respectively, compensating the decline in the exports to China since the beginning of 2021. Pilgrim's Pride on Slide 32, presented a net revenue of $3.8 billion in the quarter, an increase of 25% year-over-year. EBITDA totaled $347 million with an EBITDA margin of 9.1%. In United States, demand and pricing have been robust given the improvement in the foodservice channel, while retail volumes remained strong. In Mexico, business continued to perform well, while in Europe, shortage of labor and grain inflation, among other costs, put pressure on margins. To finish, I would like to move to Slide 33 that shows that our exports totaled $5 billion in the quarter, with Greater China representing 28% and Asia as a whole, representing 50% of the stock. With that, I would like to open to our question-and-answer session.

[Operator]

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

[Benjamin Theurer, analyst]

Congrats on those outstanding results. A couple of questions. So first of all, you've talked a little bit about it, but within your sustainability approach, and I know there was a release a few days ago that you're partnering with DSM and the feed additive in order to reduce methane within your supply chain. So my understanding is this is primarily focused on Brazil because of the approvals that are out there in Brazil. But could you give us maybe a little bit of a roadmap on how you think to potentially roll this out as approvals come in into other markets? And what are the biggest challenges to overcome, given the fact that it needs to be administered on a daily basis, but in Brazil or in Australia, you still have a lot of cattle grown on grass? So that would be my first question.

[Gilberto Tomazoni, executive]

Hello, Ben. This is Tomazoni. Thank you for the question. It is -- we start -- the agreement is a global agreement with DSM. You know that DSM spent more than 10 years studying this supplement. And it's in Brazil, and we start in Brazil because the approval and because the restriction of production of DSM. We start in Brazil. We are developing this project. They need to bring the supplement to Brazil. We are starting the development in Brazil. We're planning with DSM to -- the next step will be in Australia. And the other roadmap, we not have decided yet. But what I can say to you is that a global agreement, we start Brazil, the second will be Australia and I think the next will be U.S. after Australia. And for sure, you have the question, how you supplement that? We are not just -- because and you ask it a lot, it's easy, where we have in the grass, it will more -- is a challenge to do that. We need to learn on that. We are just starting to work with this. But it's not the only project that we have in this target to reduce methane. We have already some experience with lemongrass, then it will be much easier to feed the [indiscernible], that have the potential to reduce 30% of the methane emission. And we start other projects in Brazil with an Italian company, the Brazilian Institute, research Institute, that can add other supplements. And we are not stop on that. We believe that we have a -- it's a good and a way to reduce the methane emission. Of course, we have a lot of opportunity to -- and meth-based solutions, natural based solution. For example, the integration of cattle and grain and florist has the potential to reduce that. I talk now for the -- all the balance in terms of the carbon emission, the greenhouse carbon emissions. We -- at the end, just to summarize, we believe that all of the initiatives, the additives in the diet to reduce the enteric fermentation and to reduce the emissions by the land, we can be -- can ensure to devote that cattle, it's a part of the solution for the - part of the solution of the challenge in terms of the environment. And the other challenge that we have to feed the world with the growth of population.

[Benjamin Theurer, analyst]

Okay. Perfect. And then my next question, I guess, that one is more for Gui. Given the most recent upgrade from Moody's on your bonds and you said you're looking into some opportunities to get some refinancing then to serve or save money. How fast can you implement that? And is there anything else needed in order to potentially get included in some of the IG benchmarks, et cetera? I think there's a change required. So how do you think about this because that obviously could further improve access to capital markets and even further reduce the cost of capital? Is that something you're already planning around? Or how do you feel about the need to move here on the ones?

[Guilherme Cavalcanti, executive]

Yes, Ben, that's a good question. The speed of implementation, we could wait for the call dates, which will happen in January, in July and September, of the 3-month bond that I mentioned or we can do tender offers before. If they have good marketing by market conditions, we will probably be anticipating those re-financings through tender offers. So that's the idea.

And in terms of the benchmark index, we are sure, given now that we have the investment grade. We will be looking -- we'll be starting to see if we can make a part of bond index like the Bank of America one, which given that we are 144A, we can participate and others like market that we are not -- that has to be registered, we will also see the pros and cons of maybe registering the bonds in [ SE ] or making self-registrations to speed up the process and it speed up this refinancing because we have this tremendous opportunity. We still have a lot of expensive debt in our balance sheet, and our bonds are trading at 3.10%, 3.15%, the 10-year bond yield. So we have -- again, as I mentioned, the tremendous opportunity to cut those expensive debt by more than a half in the interest expense.

[Benjamin Theurer, analyst]

Okay. And how much -- well, is there any connectivity to what you said on the call earlier this morning around the plans to list the shares in the U.S. in 2022? Is there something that is somewhat -- well, needs to be done first on the bond side to then move forward on the U.S. listing or what's next in order to get this finally done?

[Guilherme Cavalcanti, executive]

No. The listing is totally separated process from the bond side. So the least thing is just a matter of restart, begin again the process because those process, once you stayed without, for example, making confidential filings, you have to start all over again from the beginning. So just a matter of restarting again. But in the meantime, of course, we're taking steps that maybe will be done only after the listing. Examples was [ societary ] structure that we've seen a more efficient debt allocation that we continue to do in the meantime, all the ESG investments. And I think it's important for us prior to the listings have a better recognition of our ESG and maybe improvement our ESG ratings. And the M&As that we have been doing is increasing the mix of value-added and branded products in portfolio, which you also potentialize the rerating once we miss the company and also the steps that we announced, the proposal for the minority of PPC. So that's a step that after the -- if we conclude this, we won't have 2 listed companies in the U.S., will be better for our shareholders, and you won't have to dilute shareholders in the future because we are using cash for that. So those steps we will be continuing to be doing. And all of them will potentialize, I think, the rerating that we could get once we listed the company in U.S.

[Benjamin Theurer, analyst]

Okay. Perfect. And then one operational question, and I'm very sorry for basically taking over the call here. But within JBS USA Beef, obviously, the Australian unit, I remember you've talked about this in the past, it represents about 1/5 of the contribution here. If -- I know you don't give the exact details, but could you give us some quality comments around the level of profitability you're seeing within the Australian operations between the fresh business and the prepared business and how you think this is going to trend into 2022?

[Gilberto Tomazoni, executive]

Andre, can you take this question?

[Andre Nogueira, executive]

Ben, thanks for the question. So the prepared food business in Australia run a pretty good level, double-digit margin. The fresh business, as we said, have been recovering sequentially in the quarters, but still way below what we consider normal for Australia, especially in the market that we're seeing strong sales the way that we're seeing right now and way below U.S. then. I think that as Australia move next year, especially in the second part of next year, where we should see -- start to see that availability of cattle. And I strong believe that the international price of beef and lamb will continue to be very strong. We should see Australia improving margin. And we will be, at that point, way above what would be the normal margin for our strategy just because price of beef international has been so strong and this, I think that have everything in place to continue to be very strong with demand in Asia, the way that it is and internal demands in each market, the way that it is. So -- but today, Australia, it's a drag in our overall results. Of course, U.S. margin is way above the Australia margin. Canada is in line with U.S. in terms of margin. Even in U.S., remember that we have the different type of category process, native cattle, we process hostings and process cows. Hostings are very similar with the native cattle. Cows are not in the same level of profitability. It's a good level, but not even close to what we have in terms of margin natives and hostings. And we have the capacity in our plants to balance this mix. So in the plants that we process cows and hostings, we process much more hostings now and we reduced the amount of cows. We have this capability to adjust, and that's a unique opportunity that we have at JBS. I strongly believe that Australia will continue to improve, respecting the normal seasonality of the business. We will continue to improve. It's a huge, very strong retention of cattle going now, happening right now in Australia in the last several months and several quarters. The cows that have been processed are historically low. That means retention that we should see the second part of next year, start to have a much better availability with the price that we have today. But again, margin have been strong considering historic levels just because of sales price, global sales price for beef have been seasonal.

[Gilberto Tomazoni, executive]

And Ben, just to add that what Andre explained about Australia, but you just show that how it's important, how it is strong is our global platform because we have cycles in different regions, in different kinds of protein, but our global platform, it's really the competitive advantage of the company.

[Operator]

Our next question comes from Guilherme Palhares, Bank of America.

[Guilherme Palhares, analyst]

2 questions here on Seara. It seems that the company continues to gain share over time, right? So every quarter, we are seeing Seara outgrowing the competition. And in that sense, if you could give us some color in terms of what are the categories that the company is outperforming in terms of value-added and processed food? And also regarding the spend between beef prices and chicken prices that are diminishing in Brazil, what are your thoughts in terms of how this would change the demand for the poultry protein here in Brazil?

[Unknown Executive]

Good morning, Guilherme. So regarding the first part of your question, we have -- we have been seeing an increase in market share and the strength of the brand in Brazil, for sure. We've been -- for the last couple of years, we have led the frozen category in Brazil, Seara brand, has been the leader in the market for 28 consecutive months. So this is a very consolidated leadership that we were able to achieve. Other than that, we have made very, very good improvements in our market share in the pizza category and recently, a very strong market share gain in cold cuts and the other -- and mostly cold cuts, Mortadella. These have been really, really good achievements that we had in the previous -- in the last couple of months or actually in the last half year. The second part of the question, I didn't really understand, if you could repeat that?

[Guilherme Palhares, analyst]

Sure. When we are taking a look on the spread between the beef price in Brazil since we had been from China. And the price of chicken continues to go up with [ pass-throughs ]. How this changes demand going forward? Do you think that there is a structural shift there or we're continuing to see great demand for poultry in Brazil?

[Unknown Executive]

Yes. We see a structural change in demand for poultry in Brazil. We think that per capita consumption will continue to increase. We see that more and more of this will be -- it is a trend. Obviously, there is a short-term change in beef prices in Brazil, that's because of all the reshuffling that the industry had to do to adjust to this temporary suspension. But we don't see that any of these short-term movements would change the trend that Brazil will overall consume more -- on a per capita basis.

[Guilherme Palhares, analyst]

Thank you. That's very clear. And just one follow-up there. In terms of the pork consumption in Brazil, we see that there are some investments being made in that front to Brazil could actually expand the feedstock and more consumers coming to this market. Do you see this trend going up going forward here in Brazil as well?

[Unknown Executive]

Yes, absolutely. So Brazil consumes very little pork on a per capita basis, mostly on -- most of the pork consumption in Brazil, a lot of it is in processed product, prepared foods, right? We see that there is a huge opportunity to increase per capita consumption in Brazil. We are working with a lot of our [Technical Difficulty] incentivize that consumption and find new ways of having that consumption growing in Brazil. We've been doing a lot of programs that are pretty similar to what we do on the beef side. We've [Technical Difficulty]

[Operator]

Ladies and gentlemen, please hold.

[Unknown Executive]

Okay. Sorry. I don't know until what part you guys could listen. So -- but I'm just saying that overall, we have been developing the Brazilian pork market through similar approaches to what we do in the beef side, [ we were talking about this ]. I hope that you could understand, Guilherme, my answer well enough.

[Operator]

Our next question comes from Rodrigo Almeida.

[Rodrigo Reis de Almeida, analyst]

First of all, congratulations on the results, very impressive. So I just wanted to touch on a couple of points here, if possible. I want to talk for a little bit on the U.S. leasing potential. You were very focused about 2022. And then I just wanted to explore a little bit on the format of this leasing in terms of whether there will be a corporate restructuring? If you have an idea of leasing the whole of JBS' business in the U.S. or just limiting to a carve-out of the U.S. businesses and leasing those in the U.S.? I think it would be very helpful if we could get some color on this front, if possible, of course. The second question that I have is related to Brazil and in investments. You mentioned the BRL 3 billion investments that is planned and underway. I just wanted to understand a little bit if there is a potential way to break down this investment in what's an increase in capacity for fresh products and what's an increase in capacity for new production lines for processed products? I just wanted to get a little bit of an understanding and a tangible understanding of the growth of processed foods in Brazil. And then I have a third point, sorry, if you've touched upon this earlier this morning already, but I wanted to understand a little bit of the outlook for the fourth quarter in Brazil, more specifically taking into account the exports restrictions to China and the significant decline of cattle prices in Brazil. I think I just wanted to understand a little bit more of the outlook for margins in Brazil. We saw a good improvement quarter-over-quarter in the third quarter, but then I wanted to understand if that could continue into the fourth quarter? I have these 3 questions.

[Guilherme Cavalcanti, executive]

Okay. Thank you, Rodrigo. I'll begin with the U.S. listing. As you know, when we were working on this before the pandemic, we -- and the pandemic came and then we stopped the process. Since then, you see the evolution of our financials. We generated a lot of cash. We also have changes in tax legislation around the world. So I think it's now with our current -- the current state of our balance sheet prospectus. We did a lot of M&As in the meantime. We can see it again, and we'll start to study what will be the best societary reorganization that will create more value for the shareholders. So when I say that we will begin the process again, we will begin exactly specifically redesigning the associatory structure for the listed in light of, again, the current balance sheet situation in light of all the M&As that we are doing around the world. And in light of the possible tax legislation around the world, Brazil, in U.S., in the OECD countries.

[Unknown Executive]

Good morning, Rodrigo. Regarding Seara and investments in Seara, so roughly about 2/3 of what we're investing is focused on prepared and value-add. And about 1/3 is in natura production. Remembering that a lot of that in natura production will support our growth in prepared. So that's crucial for -- to make that happen. So the investment is well underway, and we're making good progress, and we'll have most of all of our investment being finished and in operation in the next year. Regarding beef margins and the beef scenario sold, for sure, we -- there is a disruption that comes from this temporary suspension from China. We saw a lower cattle cost due to this important market not being available. We think that, again, we think that this is a temporary suspension. We don't think this is something that should hold for a long period of time. So we think in the year -- somewhere in the future here, we should regain that market access. Having said that, we do think that we can -- we are able to maintain similar margins in the beef market, somewhere similar to the third quarter, in the fourth quarter.

[Operator]

The next question comes from Carlos Laboy, HSBC.

[Carlos Alberto Laboy, analyst]

Congratulations on this balance sheet optimization process you've been waging since you arrived. Along those lines, what pieces of your ESG plan, do you think, you want to have in place ahead of a New York Stock Exchange listing? And are some of these maybe also important for what you want to do with your bonds next year?

[Guilherme Cavalcanti, executive]

Yes. That's a good question, Carlos. In fact, I think the company is doing a lot of things in ESG. I think the problem is not what we are going to do because I think we are investing a lot in the social, as we're doing our program here in COVID situation [indiscernible] invested more than BRL 400 million just in Brazil. The Hometown Strong project in the U.S., which will support the communities, the Better Futures in U.S., which provides college tuition for employees and relatives. On the environmental side, we put the Amazon fund together. Now we're signing this agreement to decrease the methane emissions of cattle. So I think we are -- on the governance side, we are increasing the level of independence of our Board. So we are acting in all of the fronts. I think that's more a matter of we being recognized by the ESG ratings of what we've been doing. We think we do not deserve to have some grade that we have in some of the indexes that is with artificial intelligence, collecting headlines around the world because we are the largest meat company in the world. So all the headlines against the sector will fall on us. So -- and this jeopardizes our ratings on ESG.

So I think we should -- I think that what we have is to make the agencies recognize everything we've been doing and improve this. And of course, this is -- this will have a potential impact on the listing, yes, because a lot of ESG funds sometimes follow these indexes. These artificial intelligence indexes, and they are -- they cannot increase the stakes in JBS, for example. So this is a work that we have been focusing, Tomazoni has been very vocal on that. And especially -- and we believe that and we hope that we'll be recognized for everything we've been doing in this front. And on the bond side, probably our next bonds, as most as we can, we'll make them sustainability linked. But of course, we want to do KPIs that are challenging that we think we can achieve them. And so for example, we -- the last 2 bonds sustainability link that we did was related to greenhouse gas emissions. I think it's the first thing that we should focus on. We launched a local debenture in Brazil. Which has a KPI, which is 2 tranches, one a 10 and another 15-year tranche, which the KPIs is our blockchain platform of transparency in cattle procurement.

If we don't see this, by January [indiscernible], all of our capital purchases is not on this blockchain, we will guarantee that our -- the purchase of our direct suppliers and of the suppliers of our suppliers are only in compliance with the zero deforestation policy that we have, no tolerance for something different. The interest rates of these local debentures we'll be increasing 25 basis points. So we'll be the first sustainability-linked local debenture in Brazil. So as most as we can, we will be focusing both on the bond side and also from our corporate ESG ratings that we expect to improve.

[Carlos Alberto Laboy, analyst]

Okay. Thank you. And one last question. Can you give us some color on whether there is any industry-specific efforts in the United States being made with the federal government to help you deal with the labor shortage that you have perhaps with some relief on leases or something? Or do you think this is kind of a medium to long-term constraint that the whole industry is just going to have to deal with?

[Andre Nogueira, executive]

Hello, Carlos, it's not an issue for the industry, Carlos. It's an issue for U.S. overall, not only issue for U.S., the issue for today, all the developed countries. Blue-collar labor, it's hard to find. And it's impacting in several different industries. You see in the TV the advertisement of Amazon, trying to convince people to go to work there. So yes, there's a movement, but this is not an industry issue. This is a U.S. issue for labor. And I believe that this will stay with us for quite a period of time, Carlos. The change in the labor force that happened, that's happening fast. It's related to demographics. It's related to participation rates of the labor force. And this will be a constraint to grow production. This will be -- impact the cost of labor, but in the other side of this equation, we generate more than ad. Because I think that especially for blue collars who works in U.S., the price of this labor, the cost of this labor will continue to increase. So there is movement that I don't think that there's nothing specific about the industry. It is a shortage of labor investment overall.

[Operator]

Our next question comes from Carla Casella, JPMorgan.

[Carla Casella, analyst]

Most of my questions have been answered, but, I guess, just one further one. Some of the management changes you recently announced and the Board changes. Are these all required or moving you forward towards that U.S. listing? And do you have any timeframe of a potential U.S. listing? And in the event of one, will there be a change in cash between the U.S. and the S.A. business to return any of the intercompany loans?

[Unknown Executive]

Hello, Carla. This -- all of this change in terms of the management structure we announced yesterday in the Board, changes, it's nothing related direct to the leasing in U.S. Our lease in the U.S., keep as a priority, and we have done so far a lot of initiatives that facilitate and speed up the process. And we believe that we'll be listed next year in U.S.

[Guilherme Cavalcanti, executive]

And about the intercompany, Carla, as you've seen, we are already capitalizing the inter-companies. Still we have to do this throughout time for several reasons. But the auditors already are considering those intercompany loans to, say, as an investment profile, not at that profile anymore. And that's why it's not -- we are not having FX impact on those intercompany loans. So we'll continue the process of capitalizing those inter-companies. And at the same time always distributing the debt in a more efficient way. So I think that's -- I don't know if that answer your question. Yes, I think it's worth mentioning that once we got the investment grade, all the covenants of our bonds fell. And now we don't have any limits in terms of money transferred through entities.

[Operator]

Next question comes from Ricardo Alves, Morgan Stanley.

[Ricardo Alves, analyst]

I got cut off, so apologies if this was asked. A quick question to Andre on exports in the U.S. Beef division. I remember you had been gaining market share overall in the U.S. Did those gains of market share continued in the third quarter? If you have any comments, Andre, specifically on China since September with the suspension in Brazil? I know that the channels and clients are different between what you're dealing with out of the U.S. versus Brazil. But given the relevance of Brazil as a beef supplier to China, just wonder if at least some impact could have affected you in the U.S.?

And then a couple of questions to Guilherme. Just if you could comment quickly, Guilherme, on the capital dynamics from the second quarter into the third quarter and then what you expect for the fourth quarter. Just trying to get a sense if your cash conversion in the fourth quarter is going to be higher than the third quarter. Of course, the EBITDA generation is lower. But in terms of cash conversion, should we be more optimistic on that front? And then just a final question, perhaps to be Guilherme or Tomazoni as well on the Pilgrim standard offer, just a quick update with regards to timing and prices, basically, your recent thoughts on that. So those 3 quick questions.

[Andre Nogueira, executive]

Hello, Ricardo. Exports continue to be extremely strong, Ricardo. U.S. is growing at 21%. We are growing above that. We continue to gain. And it is normal. We have a strong, strong presence in terms of sales and relationship with key customers in all the markets. If you see what we have in Japan, if you see what we have in Korea. Last week our main customer in the international market, spend a week with us here, visiting us, visiting our plants. The relationship is extremely strong. And our talk about projects, our talk about products with more value, different type of products, so brands. So it is strong.

We continue to gain much share. And it's normal, considering our global footprint, considering our capacity, considering the focus that we've put on that. China specific, I don't think that Brazil impact U.S. Beef in anyway, it's very different channels. It's very different type of product. The reality is, China, as I said, probably a year ago that I expected China will be one of the top 3 exporter to U.S., now China, it is one of the top 3 exporters for U.S. So happened exactly what I said. U.S., in the most recent month, represent 80% of the China import. And I think that it has all the capacity to grow to 15% of all the China importing beef. And if you see that, how much is represented for the U.S. production and if you see that Japan, it's kind of quiet right now, and I expect that Japan will come back pretty strong. So export will continue to grow. And that's one of the key point why I believe that this price beef continue at a very, very sustainable high level.

[Guilherme Cavalcanti, executive]

Okay. On the working capital side, as I mentioned in the second quarter call, in the second quarter of 2021, we had logistics problems around the world with port delays and because of that, we had some working capital that would come back in the third and fourth quarter of this year. And that's what happened. We see that the cash conversion of the third quarter was very good. And it would be even higher if it was not from nonrecurring payments.

For the fourth quarter, the trend is the same. In Brazil, specifically because of the China situation, the release of working capital would be higher if it was not for that. But we hope that this situation being resolved, fourth quarter working capital release from Brazil will be significant. And then this -- and, again, the perspective is from U.S. of free cash flow, it's also very good. So we expect that the fourth quarter cash conversion will be in line of this third quarter.

[Ricardo Alves, analyst]

Perfect. I just had that final one on Pilgrim's.

[Gilberto Tomazoni, executive]

The Pilgrim's, we made the offer, as you know, the public tender offer. And we have no news on this front. This is a process. This is a negotiation process like other similar of this one.

[Operator]

Our next question is from Priya Rangarajan, MidOcean.

[Priya Rangarajan, analyst]

I had a couple of questions. In the past, you guys have been moving debt from S.A. to U.S. and now with the listing, but you also did an issuance of the 32s, which was ESG linked. When you're talking about tendering the bonds and also listing in the U.S., how should we be thinking about future bonds? Will it be issued out of the U.S.? Or will it be -- and you mentioned that it would be ESG linked as well. So would it be issued out of the U.S.? Or would it be more S.A. issued?

[Guilherme Cavalcanti, executive]

Okay. Going forward, we'll continue to issue bonds, both from U.S.A. and from S.A. as well. For one of the reasons is that with this way, we capture a higher public, given that we can reach emerging markets funds and also U.S. funds. So that we'll continue to do. But bear in mind that we have provisions on our S.A. bond that we can always change the issuer to U.S. or to another entity on top in the case of a listing that we have this provision. So regardless of where we issue, we can always move these bonds to one entity above. So -- and that's how we will proceed. As I mentioned, as most as we can, we'll try to do sustainability-linked bonds, although for timing or other reasons, we may do also regular bonds going forward.

[Priya Rangarajan, analyst]

Got it. And one follow-up. You had mentioned that some of the new bonds that you will be issuing after the tender would -- could be registered in order to get index eligibility. Your -- some of your bonds, existing bonds are 144A for life. Would you consider listing them as well? Or would that not be a consideration?

[Guilherme Cavalcanti, executive]

We'll see what are the costs on doing that? And what are the advantages? What are the commitments that we have to do? So we will -- again, as I mentioned, we will start to make this study. So far we will continue to issue 144A. And once we have this, we make bigger decision, should -- we should do this or not, we can list the new ones. And depending on the cost, we can list the old ones. But 144A, it's eligible for Bank of America units, but it's not eligible for the Barclays index.

[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, executive]

I would like to finalize this to thank you all our team members around the world for the outstanding work and commitment. They are the response for the excellent results that you are delivered today. Thank you.

[Operator]

That does conclude the JBS audio conference for today. Thank you very much for your participation, and have a good day. Thank you.