Marfrig Global Foods SA
BOVESPA:MRFG3
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Marfrig Global Foods SA
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Good morning, everyone, and thank you for waiting. Welcome to Marfrig Global Foods S.A. Second Quarter Conference Call. With us here today, we have Mr. Marcos Molina, Founder and Chairman; Tim Klein, Chief Executive Officer of North America Operations; Mr. Miguel Gularte, Chief Executive Officer of South America; Mr. Tang David, Chief Financial and Investor Relations Officer; Mr. Paulo Pianez, Sustainability and Communication Director; and Mr. Eduardo Puzziello, Investor Relations Director. This event is being recorded. [Operator Instructions] This event is being recorded. [Operator Instructions] This event is also being broadcast live via webcast and may be accessed through Marfrig website at https://ri.marfrig.com.br/, where the presentation is also available.
Participants may view the slides in any order they wish. The replay will be available shortly after the event is concluded. Those following the presentation, the webcast may post their questions on our website. They will be answered by the IR team after the conference is finished.
Before proceeding, let me mention the forward statements are based on the beliefs and assumptions of Marfrig Global Foods S.A. management and our information currently available to the company. They involve risks and uncertainties because they relate to future events and, therefore, depend on circumstances that may or may not occur. Investors and analysts should understand the conditions related to macroeconomic conditions, industry and other factors could also cause results to differ materially from those expressed in such forward-looking statements.
Now I'll turn the conference over to Mr. Marcos Molina. Mr. Molina, you may begin your presentation.
Before I talk about the second quarter results, I would like to thank and congratulate the whole team for one more set of record results. Our North American operations showed its best historical performance achieving over $720 million in EBITDA. In South America, even facing a scenario of cattle shortage and problems with shipping, which affected our exports, we maintained our profitability, and we made progress through our programs of operational efficiency and our geographic diversification strategy.
In the last 12 months, thanks to a disciplined financial management, we drastically reduced the cost of debt, and we lower our leveraging to its lowest historical levels. We ended the second quarter with a leverage of 1.45x in reals. And we also had the lowest interest expenditure in dollars.
Strong cash generation allied to a lower financial cost allowed us to increase investments in the organic growth in the company. In the last 12 months, more than BRL 1.7 billion were invested in projects that increased our capacity in processed products and in those of added value.
We also made an important strategic investment with the acquisition of BRF shares. This stake aims at diversifying our investments in a segment that has a strong relation with Marfrig. With the constant improvement in our production processes and the reduction of administrative and financial costs and increased efficiency, we are on a virtuous cycle of value generation, which allows us to pay increasingly frequent dividends.
Based on the strong results already achieved this year, we are proposing an early paying out of dividends of BRL 958 million, and we also proposed a buyback program of over 26 million shares and the canceling of another 20 million shares that are already in our treasury. We will continue to generate value to our shareholders, fulfilling our role with society, being an innovative company that is truly committed with sustainability and best ESG practices.
I now turn it over to the CEO of the North American operations, Tim Klein.
Thank you, Marcos. Let's begin on Slide 4, where I will comment on the results for the second quarter. Starting on the left, sales volume in the quarter was 12.5% higher than the same quarter of last year. And in this, we achieved our largest quarterly sales volume since 2012, as cyclically large fed cattle supplies were further enhanced by carryover from last year's coronavirus-impacted slaughter reductions.
Net revenue was 10.1% higher than the previous year, driven by continued high prices for beef and beef byproducts and the improvement in sales volume. Finally, we achieved a record EBITDA of $722 million, 13.8% higher than last year with an EBITDA margin of 24.5%, another historical record. The key drivers of our performance were strong demand for U.S. beef combined with ample availability of fed cattle. The continued renormalizing of the economy after the coronavirus pandemic, especially the foodservice sector, supported exceptionally strong demand for beef.
Please move now to Slide 5, where I will talk about U.S. market data. In the quarter, the total U.S. kill increased more than 17% as cattle supplies allow packers to operate at full capacity. Cattle prices, as reported by the USDA, averaged $119.76 per hundredweight, up 12% year-over-year as industry kills returned to normal seasonal levels. The USDA comprehensive cutout averaged $292.21 per hundredweight, steady with last year, while the drop of credit increased 64.4%, led by increases in hide in term of values. The cutout ratio was 2.45% versus 2.69% last year. Higher cattle prices, combined with steady box beef prices and higher drop credit values, resulted in an 8.9% decline in per head gross margins.
As we look forward to Q3 and the rest of 2021, industry fundamentals continue to be in our favor. Fed cattle supplies remain adequate, while beef demand is robust, both domestically and internationally. Margins for the industry should continue to be favorable.
Now I'll pass to Miguel.
Thank you very much, Tim. We will now move on to Slide #7, where I will explain the performance of South American operations in Q2 2021. As we can see on the left, comparing sales volume, there was a 5.5% retraction as compared to the same period last year, going from 339,000 to 320,000 tons. This movement is explained by the strategy adopted by the management to preserve operating margins considering the adjustments of demand vis-Ã -vis the supply of animals.
In the center graph, showing net revenue, we can see that we achieved in this quarter BRL 5 billion, 14% above the revenue in the same quarter in 2020. Here, I should mention the challenges that we faced in our exports. Despite the 12% increase in the average price as compared to Q2 2020, throughout this quarter, we had significant logistics challenges in South America with the unavailability of vessels and containers, which delayed shipping, impacting volume in 15% and sales in 4% when compared to Q2 2020. The good news is that these difficulties are being overcome and this impact should be totally reverted throughout the second half of the year.
On the other hand, in the domestic market, even with the stability in sales as compared to the same period in 2020, we were able to bring net revenue up in 53%. That is there was a 54% increase in the average sales price in the domestic market, resulting from a combination of a strategy to optimize our commercial channels, focusing on sales growth of branded products and the beginning of the recovery of the local economy.
On the right, showing the EBITDA, we can see that we achieved in this quarter BRL 181 million with a margin of 3.6%. The behavior of the margin is explained by the impact of the increased cost of cattle in Brazil and Argentina and the impact of logistics problems in our experts, as I mentioned. These effects were partially offset by the operations in Uruguay, just like with the growing share of industrialized products in our results, exceeding 15% of the revenue in Q2 2021 as compared to 9% in the same period in 2020. Finally, I have to mention the new captures of the operating efficiency program that in this quarter reached BRL 30 million when compared to the previous quarter.
Moving on to Slide #8. I will speak about exports and the operating efficiency program in Q2 2021. Our exports accounted for 58% of the total revenue this quarter as compared to 68% in the same period in 2020. Out of that, 62% were exports to Asia. Currently, the market showing the best trade opportunities, especially China and Hong Kong. I'd like to remind you that Marfrig is the company with the highest authorized capacity to export to China, our 13 certified plants in South America account for 70% of our production capacity.
As I've been saying along the last calls, Marfrig has strived to implement operating improvements through efficiency programs in the operations in Brazil, Uruguay, Argentina and Chile. Observing the chart on the right, we can see that through the implementation of these measures, we were able to capture, throughout this quarter, operating improvements that positively impacted our results in about BRL 30 million when compared to the previous quarter.
I will now pass it on to Tang that will speak about the consolidated results and the financial highlights of the operation.
Thank you, Miguel. In the next slides, we will present the consolidated financial highlights of Marfrig's Q2 2021. Once again, the record performance of our North American operation, which posted its best results ever, and the maintenance of the results of our South American operation, which proved to be resilient even in a very challenging quarter, Marfrig posted its highest quarterly profit and the lowest leverage ratio in the company's history.
Starting on Slide 9, on the left graph. In Q2 2021, we generated consolidated net revenue of BRL 20.6 billion, a 9% growth compared to Q2 2020. Moving on to the second graph on the right. This quarter, we generated BRL 3.9 billion in adjusted EBITDA, with a margin of 19%. Out of this total EBITDA, 96% was generated in North America. This growth, as commented by our CEOs, Miguel and Tim, is explained by the record profitability of our North American operation, which offset the performance of the South American operation that was impacted by the lower dollar level and the logistics challenges in exports this quarter.
We now turn to Slide 10, financial results. Looking at the evolution of our financial results in the upper chart, we present a financial expense in Q2 2021, amounting to BRL 44 million, a 78% reduction in relation to Q1 2021. In the lower chart, we detailed the interest provision in the quarter, BRL 321 million or $60 million, the lowest ever recorded at Marfrig.
I'd like to emphasize as well the BRL 228 million gain related to mark-to-market of the investment made in BRF shares. The exchange rate variation in Q2 2021 was positive at BRL 96 million, explained by the difference between the final exchange rates of the periods, Q2 2021, BRL 5 versus BRL 5.70 in Q1 2021. Adding the 3 items together, the financial result is positive by BRL 52 million.
On the next Slide #11, the net results. The record operating performance added to the captures of the operating efficiency program, fixed cost control and the continuous reduction of our financial expenses resulted in the generation of net income of BRL 1.7 billion in Q2 2021. In the second graph below, we present the accumulated net income of BRL 2 billion in the first 6 months of 2021, an increase of 38% compared to the same period of 2020.
Based on this strong performance, the management is proposing the distribution of approximately BRL 958 million in interim dividends. This amount is equivalent to a dividend yield of approximately 7%. Management has also approved a share buyback program of approximately 26 million shares and simultaneously, the cancellation of 20 million shares held in treasury today.
On Slide 12, we generated in Q2 2021 more than BRL 3 billion in operating cash flow. Discounting the investments in CapEx and interest paid in the period, the free cash flow was BRL 2.2 billion, as shown in the graph above. In the graph below, we present the operating cash generation in the last 12 months, which was BRL 7.5 billion.
Here, we highlight the investment of over BRL 1.7 billion in CapEx, mainly in projects of organic growth, such as the expansion of the lines of processed products and of higher added value, and the increase in productivity and efficiency. Free cash flow generation in the past 12 months was BRL 4.3 billion.
On Slide 13, net debt and leverage. Net debt at the end of the second quarter totaled $2.8 billion, an 8% reduction as compared to Q1 2021. As a consequence of the strong cash generation in the period, our leverage reached the lowest historical level, both in reals, 1.45x and in dollars, 1.55x.
In Q2 2021, approximately BRL 517 million in dividends were paid, in that BRL 141 million paid to Marfrig shareholders referring to the results of 2020 and the remainder to National Beef's minority shareholders. Observing the graphs on the right, 90% our debt is indexed in dollars, which matches our EBITDA generation, which is over 90% and 73% of our debt is long term.
On Slide 14, we present the details of our debt profile. Starting with the first graph on the left, the debt schedule. We ended Q2 2021 with cash of about $2.7 billion, enough to cover maturities until almost 2026. In the second graph on the right, we see the continuous decrease in the average cost of our debt that at the end of the quarter stood at 5.09% per annum, 60 basis points lower than in Q4 2020.
As a result of all this process, we increased the average debt term from 3.4 years to 4.7 years. We have just concluded in August 2021, the issuance of CRA with a volume of BRL 1.2 billion into Series 7 in 10 years, remunerating IPCA plus 4.5% per annum for the 7-year series and IPCA plus 4.60% per year for the 10-year series, which we have fully swapped for a CDI plus 0.97% per annum, one of the company's lowest cost operations.
I will now turn to Paulo Pianez, who will comment on the sustainability highlights.
Thank you, Tang. Historically, Marfrig has based its operations and actions that have had a positive impact on the development of low carbon livestock farming, which combines production with the conservation of our biodiversity and that is productive, profitable and contributes to the social and economic development of the regions in which we operate.
Within its sustainability management platform, the main ongoing program is the Marfrig Verde+ Plan, launched in 2020 and conceived in partnership with IDH, initiative for sustainable trade, aiming to ensure that 100% of the company's production chain is traceable, sustainable, low carbon and deforestation free.
During this year and more specifically in the second quarter, Marfrig intensified the process of implementing projects and initiatives planned for 2021. The first one has to do with the monitoring of the Cerrado, an important Brazilian biome in terms of biodiversity but also in terms of production. Marfrig has already concluded the implementation of satellite geo monitoring of 100% of the properties that produce in this biome, allowing for the identification and mitigation of social and environmental risks in its supply chain.
Another relevant initiative was the development of the risk mitigation map, a relevant initiative that allows us to prioritize areas of greater risk. It's all developed by [ Agro Ikani ] and that is now integrated to Marfrig's geo monitoring system. It shows us the path we must follow to be more assertive in the implementation of our initiatives.
Another important initiative is the Sustainable Calf Production Program. It was also developed in partnership with IDH, Carrefour and the São Marcelo Farms that has been implemented since 2018 and seeks to establish a new standard of sustainable production in the most critical phase, the breeding phase. The program has 150 producers and Marfrig is investing EUR 1.8 million to double the number of producers benefited by this program.
Marfrig has also developed a protocol of good practices called Marfrig Club. This protocol was redesigned in light of the highest sustainability standards included in the main international indices and protocols such as BB Fall, CDP Accountability Framework initiative and IFC, always from the perspective of the producer. Another important tool, especially for the monitoring of indirect suppliers is called Connector, that is based on blockchain technology that was developed in partnership with Safetrade, CPqD, the Nature Conservancy and Friends of the Earth to provide more security and transparency for traceability throughout the supply chain. The application of the tool is already being tested.
Along the same lines, we've also been implementing Visipec which is a joint effort between U.S.-based NGO NWF and Friends of the Earth, based on a methodology developed by the University of Wisconsin. It is a traceability tool complementary to the systems Marfrig already uses. The first phase has already been concluded, and we have already achieved 99.4% compliance in all our supply chain, including indirect suppliers.
Last, we've been implementing the cattle supplier protocol for the Amazon region, which was a partnership with the Public Federal Ministry. In the first phase of implementation, Marfrig already achieved excellent results in the first audit that took place in Q2, showing 100% compliance. These efforts and results show our commitment to increase positive impacts and thus contribute to social economic development and to the maintenance and recovery of biodiversity in the territories where we operate.
I now turn it over to the operator to begin our Q&A session.
[Operator Instructions] Our first question comes from Mr. Antonio Hernández with Barclays.
Congrats on the results. My question is regarding the details you could quantify the impact from both the logistics exports challenges that you mentioned that you've already overcome, but just have more light on what was the specific impacts? And also, what was the positive impact from the better sales mix?
Antonio, thank you for your question. This quarter, we had a carryover stock of BRL 750 million which is roughly 2 EBITDA points. Point two, so our EBITDA was BRL 3.6 million, but it should have been BRL 5.6 million. So that would be the estimate for our inventory. It's roughly 15,000 tons -- 16,000 tons of beef that stayed back due to the impact on the shippings that we were expecting for this quarter. We believe this situation will become more stable in the third quarter and that logistic bottleneck should ease throughout the semester.
Our next question comes from Mr. Rob Dickerson with Deutsche Bank (sic) [ Jefferies ].
Great. I'm actually from Jefferies, but no problem. Just one question that's for Tim. Obviously, profitability margin in North America was quite impressive in the quarter. I believe it's company high and realize the drivers of that margin just off of essentially cattle supply relative to retail pricing demand. We've seen this kind of flow through over the past year or so, and it looks like the cutout spread has now reemerged to be somewhat attractive once again.
So I heard your comment in the prepared remarks say you'd expect that level of profitability to remain elevated. So the direct question is just how elevated, right? I'm assuming in the back half of this year, it will be -- what we saw in Q2. But at the same time, it sounds like it could be a bit higher than we even saw in the back half of the past 2 years? And that's it.
Sure. To answer your question, we do expect margins in the second half to be very, very good. They will be above last year's second half. And as we look forward into 2022, we still have the same cyclical cattle supply that will be in our favor. And the real improvement has been on the demand picture with the foodservice industry opening back up, demand has been very good. So as we look down the road, we think 2022, although we don't expect it to be the same as this year in total, but should still be at the high end of the historical range.
[Operator Instructions] Our next question comes from Rob Dickerson with Deutsche Bank (sic) [ Jefferies ].
Great. And it's Jefferies again. I guess there's no other questions in the queue. I will take this opportunity to just kind of ask about the investment in Brazil Foods. Obviously, somewhat of a material investment. I feel a lot of investor questions on it since it's occurred -- since the announcement. So maybe just give you the opportunity to provide a bit more color as to why Brazil Foods, why now, and kind of how involved on the operating side you might be going forward?
This is Marcos. I'll be taking the question. Buying the BRF shares, as we've said in our announcement, was a passive but strategic investment. They are our largest clients. But there's a lot we can do together that would be strategic for Marfrig. We bought the shares at what we thought to be very interesting prices. And we will be keeping the same strategic position with BRF. We have no intention at all to buy the rest of the shares paying the 40% premium. So we won't be doing that.
Our next question comes from Mr. Carlos Laboy with HSBC.
Yes. Just a natural follow-up from the last question. You won't buy, but would you consider a merger still with BRF? And is that also off the table? The other question I had related to Visipec. There were some questions about the legality of Visipec early on. And it sounds like a lot of those issues and questions have been addressed and answered. Do you see any legal issues with how you are now using Visipec? And how Visipec may remain a very viable component to cattle tracing in Brazil?
I'll answer the question about the merger with the BRF first. These past 2 years, we looked into a merger, but we didn't go through with it. Now that we've bought the shares, and we own 32% of BRF, we thought that would be the best way to invest in the company. So at the moment, the merger between the 2 companies is not on the table.
Carlos, Visipec has no legal issues at all. It complements the monitoring and tracing system here at Marfrig. It's been implemented, and it had excellent results. So we're actually enhancing the implementation. It's part of Marfrig's traceability platform. What happened in the past was that Visipec's databases were open and you could have access to all sorts of information, and that's no longer the case. But in terms of legality, there are no legal issues, and we're still using it here at Marfrig.
This concludes today's question-and-answer session and does conclude Marfrig Global Foods S.A. conference call for today. Thank you very much for your participation, and have a nice day.
[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]