JBS SA

BOVESPA:JBSS3

Earnings Call Transcript 2018-Q4

[Operator]

Good morning, everyone, and welcome to JBS conference call. During this call, we will present and analyze the results for the fourth quarter and year 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 company's website at www.jbs.com.br/ir. Taking part on this call, we have Mr. Jerry O'Callaghan, Chairman of JBS; Gilberto Tomazoni, global CEO of the company; Guilherme Cavalcanti, global CFO; André Nogueira, President of International Operations; and Wesley Batista, Sr., President of Operations in Brazil.

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

[Jeremiah O’Callaghan, executive]

Thank you. Thank you. Good morning, everybody. As I am exiting the Investor Relations role, just a quick word in of introduction on this call. We're very pleased to be here, the whole team, to announce the fourth quarter and the 2018 numbers. And I would just like to extend firstly, a word of gratitude to the CEO of the company during the majority of 2018, Jose Batista Sobrinho, the founder of the company. He abdicated that role in December and handed it over to Gilberto Tomazoni who is here and will present the company's strategy this morning.

I would also like to welcome to the JBS team, Guilherme Cavalcanti, who joined us in January of this year, and so we're very pleased to have Guilherme on board as well. And before I hand it over to Mr. Tomazoni, I would like just a quick word of gratitude to everybody at JBS across all the geographies that we operate in. We had a 2018 of which we are very proud and everybody is very proud of it. We came up with good results and so the team members did a great job, they deserve all our praise and all our gratitude.

So with that, I'll hand you over to Mr. Tomazoni.

[Gilberto Tomazoni, executive]

Thank you, Jerry. Good morning, and welcome to our conference call. We are very glad to announce the results for 2018. It was a great year for JBS. We have record EBITDA and free cash flow generation. We closed the year on high note and delivered everything we set out to do.

As I mentioned, every quarter, nothing happens by chance. It was a result of the choices we make. We have a clear strategy, focused on offering high-quality products, actively manage products and brand mix and having a great discipline with cost and cash generation. The central part of our strategy, our people, our team who has had a deep knowledge on the sector and have been making a difference.

In addition, our results clear show that the business model of JBS production platform diversified in by region and container types is practically impossible to replicate. It is our competitive advantage that makes it easy for the company to maximize opportunities in the local markets and globally.

Before we go into more details of our financial results, I would like to highlight some sectors that are part of our priorities. First, operational excellence. For us, it simply means being the best possible market operator. For that, we compared each business unit with public information from our main direct competitors. We closed the year very satisfied with our results. The majority of our business units' performed better than our peers.

The second, the leverage. JBS used its strong cash generation to reduce debt. In 2018, gross debt was reduced by $2.7 billion and net debt by $1.5 billion. If we use the second quarter 2017 as a reference, until the end of 2018, gross debt decreased by $4.3 billion, reducing our leverage rate -- ratios to 3x its EBITDA. In addition, we made a relevant change in the profile of our debt. At the end of 2018, short-term debt decreased by representing 24% of total debt to only 5%. Moreover, total liquidity was BRL 16.3 billion which is more than 5x short-term debt.

Third, the cost of capital. In 2018, cost of capital decreased significantly by $240 million. However, there is another benefit yet to come which is an interest reduction. Our current cost of capital is not equivalent of our current financial metrics. This reduction will happen with time as we replace our current debt with cheaper lines. Consequentially, this lower cost of capital will reduce our financial effort to achieve future growth.

In terms of compliance and governance, we are very proud of our compliance program. Our initiatives has been present to stakeholders during 2018 and we are very well recognized in Brazil and overseas. We end the year with over 112,000 team members trained in our code of conduct and ethics, in our anticorruption programs.

Now I would like to comment some of our main consolidated results. Net revenue reached BRL 182 billion. Highest EBITDA in JBS history, BRL 14.8 billion. Operation cash flow was BRL 11.5 billion, and the free cash flow was BRL 5.7 billion. Adjusted net income was BRL 1.6 billion.

To summarize the initial part of my comments, I want to emphasize 2 factors. Debt has been very important for the growth of our revenue and margins. First, high value-added products. The relevance of these products has been increasing significantly in our portfolio and our focus in our future growth. The second, strong growth of protein consumption in Asia. JBS thinks to keeps diversify the production and distribution platform in Asia has been increasing sales significantly and is extremely well positioned to serve this growing demand.

Now I would like to turn to the call to over Guilherme who will detail the results. Guilherme, please.

[Guilherme Cavalcanti, executive]

Thank you, Tomazoni. Thank you, Jerry. Now please let's move to Page 4, where I will talk about 2018 consolidated results. Net revenue grew 11.3%, reaching BRL 181.7 billion. Gross profits and EBITDA, they grew at 10.8% and 10.7%, respectively, but keeping constant the margins. Net profit after adjustment has reached BRL 1.6 billion.

Now moving to Page 5. We had a significant increase in operational cash flow given the better working capital mainly due to supplier days of payment improvement. This better working capital plus lower financial expenses, partially offset by higher income tax due to results improvement, led to a more than double the free cash flow of the company, reaching BRL 5.7 billion or $1.5 billion.

Now please, moving to Slide 6. We'll talk about fourth quarter 2018 consolidated results. So net revenues grew 10.7% reaching BRL 47.3 billion. Gross profit and EBITDA, they grew lower than proportional to the net revenue, given the lower increase in gross profit and EBITDA of Pilgrim's Pride and Pork, when you compare the fourth quarter 2018 of these 2 divisions with fourth quarter 2017. However, poultry and pork prices already presented increases in 2019. We had a better net profit in the fourth quarter, mainly due to financial expenses reduction.

Now please let's move to Page 7. We had a 19.4% increase in operational cash flow, again, higher increase -- this high increase was due to working capital and better suppliers' terms of payment. Taking the divestment effect, free cash flow increased 41.3% due to the higher EBITDA and better working capital, partially offset by higher taxes due to higher net profits.

Now let's move to Page 8 to talk about the dividend profile. We ended up with a cash on hand of BRL 8.9 billion and with almost $2 billion in revolving credit facilities, making a total liquidity of BRL 60.3 billion, more than 5x our short-term debt, that to date is only 5% of the total debt. We also presented, from the second quarter 2017 to the end of the year, a reduction of BRL 4.2 billion in gross debt.

Our net debt-to-EBITDA ratio decreased from the second quarter '17 that was at 4.07 to 3.01 at the end of 2018. It's worth mentioning that given 2019 positive free cash flow, the ratio of net debt-to-EBITDA they should decrease for the year-end of 2019.

Now let's talk about 2018 business unit performance, please. Let's start with Seara 2018 highlights. In 2018, Seara recorded net revenues of BRL 17.7 billion, an increase of 1.1% when compared to 2017. Seara's EBITDA and EBITDA margin were BRL 1.5 billion and 8.7%, respectively. The results were impacted by the increase in raw material costs, such as corn and soy milk and by the nationwide truckers' drive strike (sic) [ truck drivers' strike ] in Brazil, factors that are not expected for 2019.

During 2018, Seara's strategy was centered on strengthening its positioning to align with consumers' preference by focusing on delivering excellence, quality and product innovation. With national and international recognition, the company was able to increase household penetration to 70.7% in 2018 with a 70 point -- with a 75 -- sorry, to 77% in 2018 with a 75% repurchase rate at the same period. Strong international demand, particularly from Asia, positively contributed to Seara's product price and in international markets with grain prices appear to moving forwards with a (sic) [ towards a ] supply and demand better balanced.

Now let's move please to JBS Brazil. 2018 highlights was net revenues of BRL 27.6 billion and increasing 17.1% when compared to 2017. Substantial EBITDA growth of 3,129% from 2017 to 2018 with an EBITDA margin of 4.5%. Focusing maximizing profitability through the improvement of products and channel mix and strengthening of partnerships with key clients, understanding their needs and efficient and tailor-made solution.

Development of special programs with cattle suppliers to ensure high-quality standards. It's also worth mentioning that fourth quarter 2018 margin presented a decreasing relation to the third quarter '18 margins due to lower exports that was offset by higher domestic sales, an increase in the raw material price and the FX appreciation. Despite the pressure of the raw material, we expect a very good trend for the exports for 2019.

Now please, let's move to JBS USA Beef. The strong economic environment in North America, combined with solid industrial fundamentals, positively impacted cattle supplier and beef producers, with the growing cattle ability and a stable slaughter capacity. Record level in U.S. exports. JBS Beef invested in sales infrastructure in order to raise market share in export and profitability with an improved product mix.

Growth in financial results from JBS Australia mainly due to increase in cattle availability and exports to China and Asia. Primo Food related to (sic) [ restated its ] leadership position in Australia and New Zealand on prepared food segments.

Now please, let's move to JBS USA Pork. Increasing domestic pork supply contributed to a decrease in sales price while the impact in margins was partly offset by the lower supply price. Pork USA segment exports presented a 4% increase in volumes when compared to 2017. Plumrose reported a record performance in 2018. The company continues to successfully execute their strategy plan, which is focused on incremental production, sale and new product development. JBS closely monitors the events related to the African swine fever in Asia due to its potential to cause significant change in the global trade and overall market segment -- market environment.

Now Pilgrim's Pride. Pilgrim's Pride faces a challenging commodity environment along with a slower recovery from climate changes in the U.S. These impacts was partially offset by a 15% increase in Prepared Food sales. In Europe, even through Pilgrim's benefited -- sorry, in Europe, even though Pilgrim's benefited from synergies, the results were impacted by higher poultry feed costs due to drought in the region. Mexico's domestic market represented a significant 33% increase in Prepared Food sales volume in 2018.

Now I would like to begin the question-and-answer session.

[Operator]

[Operator Instructions] Our first question comes from Barbara Halberstadt, Bank of America.

[Barbara Halberstadt, analyst]

I have 2 questions, actually. The first one is regarding debt exchange. There's some headlines in Bloomberg talking about debt exchange, if you would have mentioned back in the first call in Portuguese. So I just wanted to understand what are you thinking in terms of the debt allocation within the structure, if you're looking to do any liability management this year?

And then the second question is regarding the fact that you don't have any more the qualified opinion in your balance sheet, it's currently unqualified. If you feel that is the auditors being more comfortable with the provisions you made, and if you can make any comments about that?

[Gilberto Tomazoni, executive]

Thank you, Barbara. I'll ask Guilherme Cavalcanti to please answer these 2 questions.

[Guilherme Cavalcanti, executive]

Okay. Regarding liability management, it's something that we will be doing going forward because we have an opportunity to decrease interest expenses of this company, given the solid credit metrics that we are presenting. More specifically, a 3x net debt-to-EBITDA. So going forward, we will continue -- we will be doing liability management and for that we'll be monitoring all the markets.

[Unknown Executive]

[ Well, 5. ]

[Guilherme Cavalcanti, executive]

[ Only 5, yes. ] And you are right, the unqualified opinion of the financial statements really reflects a higher comfort of the auditors regarding the provisions on our balance sheet.

[Barbara Halberstadt, analyst]

And just on a follow up on the liability management, if I can ask. I understand instead you're going to look to different markets and margin opportunity, but could we expect from the leverage metrics we see on the different subsidiaries any concentration in the U.S. versus Brazil? Or also looking at where your operations are would make more sense to increase leverage or concentrated on where you have more operations currently?

[Guilherme Cavalcanti, executive]

Yes, you're right. Today, 85% of our cash generation roughly is generated outside Brazil, in U.S. And U.S. has only 65% of the debt. However, a better arrangement and a better allocation of the debt will be a result of Deloitte's work, which already hired in order to do that. So today, I can't say we are -- how we will structure to increase our efficiency in terms of assets and liabilities. But it is this, the result that Deloitte will present us after they finish their work.

[Operator]

Our next question comes from Benjamin Theurer, Barclays.

[Benjamin Theurer, analyst]

Good luck with the transition and your more expanded role as a Chairman, first of all, on that one. Now if I may, 2, 3 questions. It's maybe with -- in regards to the whole trade situation and the whole -- the huge outbreaks that are happening across the world. So connecting 2 things because obviously, you've mentioned in the press release and also now in the prepared remarks, that you'll continue to monitor the ASF outbreak over in China and how that could impact. But there's an additional case with the PED in Alberta in Canada. And I wanted to get your thoughts on how much of an implication or what you think implications could be for the U.S. pork industry, considering that there's that significant increase in capacity and now that the PED has been breaking out in the U.S. but we've got a little bit of a short-term hiccup on lean hogs short term. So a little bit of your short-term implications view but also medium-term opportunities you're thinking are going to be seen in the Pork business first? That would be my first question.

[Gilberto Tomazoni, executive]

André, I think you can. Can you answer this question?

[Andre Nogueira, executive]

I can, Tomazoni. Just want make sure that I understood Ben's questions, I think that's related to trade and the implications, especially in the hog -- or the pork volumes in U.S.

[Benjamin Theurer, analyst]

Correct.

[Andre Nogueira, executive]

So Ben, one important issue that was sold that was the NAFTA. So Mexico and Canada, two very important partners of U.S. in beef, pork and chicken and it's that behind now. We've reduced a lot, the questions on the stability of the market.

China, they are going to import much more protein during the year, period. The amount that this will grow is the heart of the question. That's not clear yet. The number which they grow, that's not clear yet. U.S. will get some benefit there, direct or indirect. If you have scale and if they reach a trade deal with China and everything that the authorities talk about that looks like that if the trade deal is achieved, this is the very positive for the agriculture community in the U.S., it will be fantastic. Because then you have direct access and the demand will be extremely strong, so the scenario will be one last time, probably, if that happens.

If that does not happen, so U.S. does not have a trade deal with China, perhaps achieve a trade deal later this year or next year, then U.S. gets the benefit indirect, but at the end of the day, China will import much more anyway and import much more beef, pork and chicken, so U.S. will supply the market that probably Europe, Canada and Brazil will open for U.S.

So I commented in the previous call that just in the 11 weeks of this year compared to the same 11 weeks of last year, Australia exported 100% more to China, beef. So that's going to Chinese, less meat is coming to U.S. from Australia, less meat is going from Australia to Japan and Korea, and that's opened a huge opportunity for beef there.

Pork, the same scenario. If Europe start to export much more to China, and Canada start to export much more to China, then U.S. start to export much more to China. All the traditional markets for U.S., will have a huge demand for the U.S. pork, that means Mexico, Japan and Korea and the new markets that the U.S. has opened, like Colombia.

So the perspective is all very positive. The industry is growing, hog production is growing and you comment that have more pork capacity. But this global demand, the way that's shaken up, the scenario is very positive.

[Benjamin Theurer, analyst]

Okay, perfect. Very clear. And then just one question, there were some floodings in the U.S. and some of the cattle work got impacted. And we actually we saw live prices going a little higher. How -- can you assess the impact of how much that has impacted the short term, some of your sorting and in case of the cattle supply in the U.S.?

[Andre Nogueira, executive]

So cattle supply overall is very positive. The U.S., they just released another cattle on feed report that shows that cattle on feed is even higher than it was last year. So continue to grow cattle production in U.S. at a slow pace but continue to grow cattle on feed is very high. We have a very harsh winter, very wet and cattle feedstock does not perform well in wet environments. So cattle performance was very bad for the feed lot during this winter. With that cattle that should be prepared to be harvest in the first quarter will be prepared to be harvested in the second quarter. So we have a little bit of shortage compared to our expectation, all weather related. All weather related. The fundamentals of the supply in the industry are very positive, it means that the cattle that was not available, and that's priced a little bit higher than our expectation. In the first part of the quarter, in the quarter, will be available in the second quarter and the third quarter.

[Operator]

Our next question comes from Carlos Laboy, HSBC.

[Carlos Alberto Laboy, analyst]

You have brought a fresh pair of eyes to the CFO function and you've now had some time to gather some early impressions. Can you perhaps share with us, what some of these early impressions are and also the top priorities that you highlighted in that function? And then maybe you can share with us some of your initial thoughts on capital allocation discipline and then your capital market strategy going forward?

[Jeremiah O’Callaghan, executive]

Carlos, your line is garbled. We could not get the question. I don't know if perhaps -- we'll try to get all those forward.

[Carlos Alberto Laboy, analyst]

I was saying that you have brought a fresh pair of eyes to the CFO function and you've now marked in time to gather some early impressions. And perhaps you can share what some of the early impressions are and some of your top priorities. And in doing that, maybe you can share with us some of your initial thoughts on capital market strategy going forward and your capital allocation discipline?

[Guilherme Cavalcanti, executive]

Okay. Thank you, Carlos. I will divide my first impressions in 2 sets. The first one, whatever I saw outside the company. So it was really an opportunity to unlock value, given a cost of debt that is not in line with the credit metrics. So I think the financial performance of the company, with that, we have an opportunity to decrease interest expenses. And of course, also the lower multiple of enterprise-value EBITDA compared to our peers.

Now inside the company, I would -- I came here also to learn what was behind all the success stories of the company. Basically, Swift turnaround, Pilgrim's turnaround, Cargill pork turnaround and other successful purchases of the company, and well, what I can tell is that the JBS really puts the right person on the right place. The top management team, the -- its excellence and the lower turnover of top management team and last but not least, a very strong commitment of all the employees of this company. So I think this is probably -- these are my first impressions that I have here in JBS.

Now moving to your question about capital market allocation. As I mentioned, I think we have a tremendous opportunity of decreasing the cost of capital and the cost of debt of the company. This will -- the cost of debt decrease will be achieved with liability management, while showing us the markets are more confident with our credit metrics, we'll be exchanging more expensive debt to cheaper debt, and at the same time, extending the maturities in a way that will decrease significantly our refinancing risk. I think we will also show, we'll give more comforts to the investors to invest in the company. So there, and for that I'm monitoring all markets, local markets, foreign markets, bilateral loan ones. We will use all the instruments available to reach our goal of decreasing our interest expenses. Thank you, Carlos.

[Operator]

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

[Gilberto Tomazoni, executive]

Thank you. I'd like to highlight a few important points. Please look to Page 15, our priority. We've not changed our priority. We have the same priority focused on operational excellence, organic growth, investment, innovation and quality, focus on deleverage, in world-class global compliance program.

In Page 16, I think it is important. Now we are discussing too, this is -- first, net flow outcomes has increased the consumption of Asia. It was natural, the increase in consumption. And now with the problem that is China is faced with the disease in pork, I think this platform of JBS is to a strong advantage -- competitive advantage because we are very diversified in terms of regions, in terms of proteins, and we are able to supply the demands in the market for different place, even if we have -- if the conditions improve in relation to U.S. and China will be much better. But if they keep as is, we have a really strong conditions to supply this market because if U.S. will be not able to reach directly China, the other parts of the world we are able to reach direct China. And we have great conditions for U.S. to supply this market that we are not prioritizing for the other platforms. Another thing, and you see this Page 17, our export. We are very strong today, where our Greater China represents 24% of export. We are well positioned in the market. And we are creating a distribution, we are investing and sales team and distribution platform in these markets. And say, it is -- this is just to finalize now, my final words. Thank you, everyone, for being part of this conference, and have a good weekend.

[Operator]

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