Marfrig Global Foods SA
BOVESPA:MRFG3
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
8.52
18.2
|
| Price Target |
|
We'll email you a reminder when the closing price reaches BRL.
Choose the stock you wish to monitor with a price alert.
This alert will be permanently deleted.
Marfrig Global Foods SA
You don't have any saved screeners yet
Good morning, ladies and gentlemen. At this time, we would like to welcome everyone to Marfrig Global Foods S.A. conference call to present and discuss its results for the third quarter 2018. The audio for this conference is being broadcast simultaneously through the Internet in the website, www.marfrig.com.br/ir. In that address, you can also find the slide show presentation available for download. [Operator Instructions]
Before proceeding, let me mention that forward-looking statements are being made under the safe harbor of the Securities Litigation Reform Act of 1996. Forward-looking statements are based on the beliefs and assumptions of Marfrig's management and on information currently available to the company. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions because they relate to the future events and therefore depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the future results of Marfrig and could cause results to differ materially from those expressed in such forward-looking statements.
Now I will turn the conference over to Mr. Marcos Molina, Marfrig Global Foods Chairman. Please, Mr. Molina, you may now begin the conference.
[Foreign Language] Good morning, good afternoon, everyone. Before I hand the call over to Miron, who will comment on the quarter results, I'd like to make a few comments.
[Foreign Language] I consider this a special quarter because it is the first one that includes 100% of National Beef [Foreign Language] and with record revenue and EBITDA.
[Foreign Language] And more importantly, we resumed positive cash generation. [Foreign Language] It also shows a strong net revenue in U.S. dollars [Foreign Language] which provided a natural hedge. [Foreign Language] Even with the strong appreciation of U.S. dollar, our indexes remained stable.
[Foreign Language] We will continue to focus on the execution of our strategic plan [Foreign Language] with organic growth, [Foreign Language] value-added products and therefore creating sustainable value for our shareholders. [Foreign Language] I'd like to congratulate the entire Marfrig team for the results achieved.
[Foreign Language] So now I pass the call over to Eduardo Miron, who will begin the presentation.
Thanks, Marcos. I want to start by thanking everyone for participating in our earnings conference call of Marfrig Global Foods. Today, in addition to commenting on the results for the third quarter of 2018, we also will provide an update on the strategic fields.
With me today are Marcos Spada, CFO and Investors Relation Officer. And given the important moment of our company with the ongoing transition, we also have with us Tim Klein, CEO of North American operation; and Miguel Gularte, CEO of the South American operation.
Let's turn, please, to Slide #3 where we will begin today's presentation. As for our strategy, as we presented in our conference call on Marfrig's new structure, we shared with you the 5 pillars that will support the creation of sustainable value for the company. I want to reinforce this: With a diversified production platform spanning the Americas and access to key consumer markets, our mission is to produce and supply the best quality beef to the world. To achieve that, we have forged strategic alliances and partnerships with producers, industry associations and government agencies to ensure best practices for the entire process. Our firm commitment to food quality and food safety is part of our culture and permeates our entire value chain.
In addition to operational excellence, we also are focusing on continually improving our capital structure, which will help to transform Marfrig into an industry leader with consistent generation of profits and free cash flow.
On the next slide, you can see the status of the actions that will make our global -- our goal of creating value sustainably a reality.
On the Keystone sale, in addition to the approvals by BNDES and the regulatory authorities in United States and Japan, yesterday we announced the approval by the authorities in China. Still pending is the approval by the authorities in South Korea, which should occur by the end of this year. Once the transaction is concluded, the funds will be released, which will enable us to move forward in yet another phase of our liability management process, which is aligned with the goal of ensuring our financial strength.
In the near term, we have the payment of the bridge loan used for the acquisition of a controlling interest in National Beef without abandoning our commitment to maintaining a robust liquidity position given the scenario marked by volatility that persists in Brazil. We also expect to settle other short-term liabilities. More details will be forthcoming soon.
In the specific case of Marfrig, I should remind everyone of how this year has been particularly challenging. As part of our strategic shift towards growing in the beef market, we had 2 major projects with the Keystone divestment now in its final phase. This led to the important transformation throughout the company that, in our view, is just in the initial phase.
In September, the senior management of the North American operation National Beef visited some of our industrial sites in South America. They focused on the southern part of the continent, which is the origin of the products exported to the United States. They visited our further processing plant in Rio Grande do Sul in Brazil, the Tacuarembó plant in Uruguay and our portion and that products plant in Itupeva, São Paulo.
This initial phase supported the creation of an opportunity map focusing on the sales and production areas. For each opportunity analyzed, the company identified those responsible in each operation and the actions required to transform them into reality. Some examples include the expansion of the processed products portfolio for sale in the U.S. market. The other example is the sale of products from South America to Japan and South Korea using the sales team that already exists in North America. And finally a change in best production practices across operations from equipment, processes and training.
Turning to the quarterly results, let's go to Slide #5, please. I want to commend our team for the exceptional results that we managed to deliver with new records set for the sales volume, EBITDA and cash flow. This first quarter was not only the first quarter in which we consolidated 100% of the results from the North American operations, but it also marks the first quarter in which we resumed positive cash generation. Free cash flow, even though we were in a scenario in which we do not consider our capital structure normalized, was BRL 271 million. Net revenue, despite 1 fewer week of cattle processing in North America, grew 21%, reached a new record level of BRL 11 billion. We also set a new record for the quarterly EBITDA of BRL 1.1 billion, which attests the -- to the success of our strategy of focusing on beef with geographic diversification.
With the receipt of the proceeds from the Keystone divestment, we will be able to deleverage by nearly 50%, and we'll have one of the industry's lowest leverage ratios, 2.57x if using the last 12 months first quarter '18. When measured in U.S. dollar, given our level of exposure to the international market, the leverage ratio would be even lower at 2.3x.
So we are on the path of becoming a simple and focused company with a capital structure adequate to the industry we operate.
I will now hand the call over to Marco Spada who will comment on our third quarter results.
Thank you, Miron. Good morning and good afternoon, everyone. I can let you to please turn to Slide #7 where we will resume our presentation.
On Slide #7, you can see the variation in Marfrig's consolidated net revenue from the third quarter last year to the third quarter of this year. As you can see in the chart, we adopted 3 bases to show the main factors that led to the variation, which are sales volume, sales price and exchange rate. And specifically for this quarter, we also eliminated from the analysis the impact from the fewer weeks of results reported in North American operations.
Marfrig's net revenue in the quarter reached BRL 11 billion, representing a growth of 21% year-over-year. The higher volume in sales, which was due to the higher slaughter volume in South America, supported a positive variation of BRL 857 million while the average sales price, which follow the market's downward trend, generated a negative impact of BRL 377 million.
The effects of the Brazilian real depreciation on exports from Brazil and also on the translation of the result from the international operations had a positive impact of BRL 2 billion. This reinforces the current profile of international expansion that marks Marfrig.
Another important factor was the fewer weeks of operation in the North American operation in third quarter, which was 13 weeks compared to 14 weeks in the same period last year. The difference resulted in a negative revenue impact of BRL 576 million.
Net revenue from the North America operation, which accounted for 67% of Marfrig's third quarter net revenues, was BRL 7.5 billion, a 16% growth compared to the previous year. This revenue growth is explained by the effect of the FX depreciation between periods. In U.S. dollar, net revenue fell by 8% due to lower cattle slaughter volume with the decline explained by the fewer weeks in third quarter '18 compared to the third quarter 2017, as I had just explained.
Meanwhile, in South America, net revenue in third quarter was BRL 3.6 billion, 35% higher year-over-year. This growth is explained by the higher sales volume and local currency depreciation, which offset the lower average sales price. Note that despite the challenging political and economic scenario in Brazil, we have posted double-digit sales volume growth in the domestic market of 25%.
In exports, we delivered volume growth in all markets. This led our exports volume mix to register a higher share of countries from the so-called general list, which does not require specific certifications and has a lower sales price. Important to mention that this certifications for the recently reopened facilities are still in the approval process.
Let's move to next slide, please. Complementing my previous comments, this slide shows Marfrig's global profile. Our geographic diversification enable us to serve the largest and most important beef consumer markets in the world. As you can see, the U.S. domestic market accounted for 58% of our revenue in the third quarter, China including Hong Kong, Japan and Europe combined accounted for 20% of our revenue. With a production platform concentrated in the Americas and daily primary processing capacity of 32,000 heads, Marfrig today is a leading global beef supplier.
Moving to next slide, I will comment on the evolution of Marfrig's key operating indicators in the third quarter compared to the same quarter last year. We had processed 1.8 million head of cattle in the third quarter, 4% more than the third quarter of last year. This growth is explained by the higher process in South America due to the expansion of the production capacity of our Brazilian operation.
Another highlight was Uruguay where we moderately increased our share of the country's cattle processing to 22%. Note that this global slaughtering growth would have been even stronger if not for the difference in the number of weeks reported for North American operation as mentioned earlier.
In the third quarter, Marfrig posted consolidated gross profit of BRL 1.5 billion and adjusted EBITDA of a bit above BRL 1 billion, setting a new quarterly record. This performance is explained by the operating result in North America where margin expansion accompanied by the industry trend reflecting the positive phase of the country's cattle cycle and also by the company's global profile, which was benefited from the weaker Brazilian real, obtaining results that offset the higher raw material cost in South America in comparison to the third quarter of last year, which was benefited from factors external to the industry.
Please, let's move to the next slide. Here we show our debt profile and some key financial indicators after the conclusion of the strategic divestment of Keystone. On September 30, Marfrig's net debt including the figures for Keystone stood at BRL 16.9 billion, up 4% against second quarter 2018, influenced by the stronger dollar in comparison period.
Considering the inflow of the proceeds from Keystone sale, Marfrig's net debt stand at BRL 8.3 billion, which represents a decline of nearly 50%. On the same basis, as you can see in the chart on the right side of the slide, financial leverage measured by the ratio of net debt to adjusted EBITDA in the last 12 months ended the quarter at 2.57x. It's important to note that this EBITDA of BRL 3.2 billion already excludes the result from Keystone Foods.
Given the company's growing international exposure with its dollar-denominated revenue in debt accounting for a high share, we believe that as of this quarter a good metric for evaluating financial leverage is to also report the ratio in the same terms. So operating EBITDA based on historical dollar of each quarter, the company's average ratio would be even lower at 2.3x. In other words, after the recent strategic transaction, Marfrig will become the Brazilian company in the sector with the lowest leverage ratio.
Moving to the next slide, I will comment on cash flow. Important to note the dip in the first quarter which reflects National Beef results in foods for the 3 months as the transaction was concluded early June this year. I also like to note that this does not consider the cash flow from Keystone. On this basis, Marfrig's operating cash flow came to BRL 804 million, reflecting a strong performance of its operating -- of operations in a more normalized environment for working capital following the negative impact from the truck drivers' strike in second quarter 2018.
CapEx, which came to BRL 198 million, was influenced by the effect from Brazilian real depreciation on the international operations and by the investments in maintenance and in the new projects such as expanding the further process and portioned products portfolio.
Interest expenses amounted to BRL 336 million. A sharp appreciation in the U.S. dollar against the Brazilian real of 10% and the non-recurring increase in the line of the interest arising from expenses with the bridge loan for the acquisition of control of National Beef in the amount of BRL 77 million were the main factors. Note that we have highlighted this BRL 77 million on the interest expenses in the chart because it's a figure that should decline immediately after receiving the proceeds from the Keystone sale.
As a result, free cash flow in the third quarter was positive BRL 271 million, marking our return to positive cash generation. This positive free cash flow corroborates Marfrig's strategy of maintaining a diversified production platform focused on beef protein. Today we are opening with a better capacity to generate cash and with an asset portfolio capable of serving our debt costs which remain high.
Once the Keystone divestment process is concluded, in addition to repaying the bridge loan and other short-term liability, we also will have the challenge of reaching an adequate debt cost for this new company. In other words, one of our goals is to continue improving Marfrig's capital structure by reducing our average debt cost.
I will now hand the call back over to Miron for his closing remarks.
Thank you, Marco. Today, as you know, we have a future more focused business model with the production platform that is diversified geographically to serve the most key consumer markets. With an ample supply of cattle and driven by strong demand in both the domestic and international markets, the U.S. beef industry has delivered record results. And the expectation is for this cycle to last at least for the next 3 years.
In Brazil, the outlook for the beef cattle cycle is also positive and the country's importance as a platform for serving growing global demand is refutable. And to add to this scenario, the expectations for the Brazilian economy to resume its structural growth with rising consumer confidence and growing consumption of beef. In this context, as I commented at the start of our presentation, our focus will be on the quest of operational excellence and sustainable value creation.
And once again, I will emphasize that the one thing that will not change is -- in this entire process is our non-negotiable commitment to the financial discipline.
That concludes today's presentation. So let's go now to the Q&A session. Thanks, everyone.
[Operator Instructions]. Our first question comes from Leandro Fontanesi, Bradesco BBI.
So I have 2 questions. The first one is, at least through the first quarter where we see the results really reflecting the new Marfrig post the transactions that you did, I was just wondering if you could comment in terms of the cash flow, if it makes sense to assume the decimal literal that we saw on working capital consumption and also CapEx for the following quarters? And the second question is, if it makes sense for us to assume that we could see some improvement for the Brazilian market in terms of margins given we could see some improvement in supply-demand dynamics with the recent lifting of the regional ban and also they have been mentioning some potential new markets that could open like China and Europe for new plants. If it makes sense for us to assume that we could actually see an improvement for the Brazilian operations.
Thank you very much. So let's see if we go step by step. So in terms of cash flow, yes, so we believe that we'll continue generating positive cash flow. Certainly the FX is a component. So, for example, we mentioned this quarter that our CapEx is a little bit higher because there is a conversion of the investments made in U.S. to reais and therefore, I mean, we always have this type of impact. In terms of working capital consumption, after all the issues we had in the second quarter, we believe that we are moving more towards a normalized level of working capital. Our target is always have a flat impact, but as you know, it changes depending on specific inventory building that you have do. For example, if you are putting some inventories before the end of the year to meet specific demand, so then we can have some volatility, but we don't expect any major fluctuation in this item. And back to the margin in terms of EBITDA, we continue looking at the margins at the range that we mentioned before between 8 to 10. This quarter was a not very positive one with a margin towards the end of this range, but we believe that this range is not -- should not be changed. So we continue expecting results on those levels. So the other question you had was about potential improvements because of new markets or new destinations that we could have, and you mentioned Russia and you mentioned China. Russia is not a material destination for us. Just to give you a little bit of information, we had less than 2% of our sales when this market was opened for us. And even in Uruguay where we can support that business, it's less than 5%. And certainly it's not a market that provides the best profitability. But we always want to have more markets open, so don't take me wrong. On the flip side, the Chinese market is a very tough market and we are -- and it's very important for the South America. We have to participate in a material way for our -- in our sales from that region. We have a visit to Brazil from a Chinese group and we are pretty excited and we expect to have more plans opened for that market and with that, yes, we could potentially see improvement in our marking, as I mentioned, this quarter because of the growth and because we did not have all the limitations from all the markets that we want to have, prices are a little bit lower, so therefore when you have those limitations. So we feel we have better margin in the business. I hope I was clear in my answer.
The next question comes from Alex Robarts, Citigroup.
I had a clarification and then a couple of questions on Uruguay. And you said earlier this morning on the Portuguese call that with the National Beef business, you're expecting or you're looking for a lower margin in the fourth quarter sequentially to the third. And I just wanted to clarify if that was purely about seasonal reasons or were there some elements that you're seeing out in the export market or the domestic market that would explain your cautiousness for the sequential quarter margin there. Uruguay, you talked about the mapping of opportunities and such kind of between the Latin business and the U.S. business and I guess as you've done more work on the possibilities and opportunities, Uruguay have kind of been really exporting fresh beef in the United States through the excess sales force associated with Keystone or perhaps its own smaller sales force. Now with National, I mean, it seems that that's going to be a very interesting opportunity medium term. I'm wondering if you can give us some color about the dimension of that and the timing of getting more fresh Uruguayan beef in through the National Beef sales force. And then the second piece on the Uruguayan questions is, you've talked about perhaps Japan opening up for Uruguay and I'm wondering what could the timing be there and the potential dimension of that opportunity.
Okay. A lot about Uruguayan. Let's go step by step. So Tim Klein is the CEO of North America is on the left. So I will ask him to maybe talk a little bit about the opportunity from Uruguay. But let me tackle most of your questions. So if you don't mind. So the first thing is related to the performance in Uruguay in the first quarter, so that is seasonal. So we always have lower margin in the third quarter in Uruguay due to the climate. So there is -- it's not unique. It's something that happens over and over. So that was our reference about the Uruguayan result. Yes, we expect the next quarter to be better than the third quarter. So that's what normally happens. In terms of the potential to Japan, yes. So things are moving pretty fast and we absolutely expect this to happen in the short run. Hard to define a specific date, but we believe that it's going to be very, very soon. Still about Uruguay and the map opportunities, map from our perspective and I mentioned this during my speech was National Beef visit in the South of Brazil and the South of South America, meaning Uruguay because there is already corporations trading between those regions to U.S. National Beef has a very strong position, commercial operations over there. So we truly believe that we can take advantage of this and therefore do more business together. And we expect to add to National Beef portfolio products that they currently don't have, for example the organic and the grass-fed products from Uruguay. And we expect from our industrialized business in the South of Brazil where we have a dedicated plant in the South that we can avoid brokers and have direct sale using the commercial strength of National Beef. So having said that, I will ask team to provide some inputs as well.
Yes. Thank you, Miron. The demand for U.S. beef, for organic beef in the U.S., is the fastest growing segment. So there's a significant opportunity to leverage the supply of organic cattle from Uruguay with the demand we have here in the U.S. with our existing customer base of National Beef. So we're exploring what those opportunities are and we believe that this will continue to be a significant growth opportunity for our business in North America on the organic beef.
Our next question comes from Botir Sharipov, HSBC.
Two questions for me. One, if you could maybe clarify for us your -- what do you think the sustainable CapEx sense has been, CapEx going forwards for the consolidated business. I understand there's still quite a bit of noise still in integrating National Beef. Is BRL 200 million is sort of the runway, we could assumedly expect it to come down in the next few years? And my second question is on I guess division by division EBITDA margin, I was wondering if once you complete the deal with Keystone and release your Q4 result, you should be disclosing a separate segment data for each division.
Yes, thank you. So regarding the first question, the CapEx -- we made our comment that our -- the number for the whole year for CapEx was between BRL 550 million to BRL 600 million. That was the number that we had been working with. When we talk about reais, you always have a little bit of exposure and volatility because we can [ trust it ] a little bit given the volatility of the FX. But we are still under the same range. So we're not changing, so we should not expect any major impact in the fourth quarter for the CapEx. For the coming years, we are not providing any forecast at this point. I'd like to take the opportunity of your question to mention that we, as we mentioned before, we will get together and at the beginning of next year, to have our Marfrig Day where we're going to discuss the 5-year plan and provide a little bit more disclosure on our plans for the businesses. And so at this point, we cannot comment on that, on what kind of level of CapEx we have for this coming years or next year. Regarding the breakdown, we know there is an expectation from the market to have this breakdown between the South and North American businesses. And as we mentioned in the past, we are at the beginning of this transmission. We're studying and making sure that we don't make any mistake in terms of what should be disclosed and how to disclose this. We understand the demand from the market, but we thought that for this year it would be something that we need to spend little bit more time to fully to deep dive and fully understand before we provide this breakdown. So it is something that is in our top priority list in terms of analyzing, but at this point, we are not ready to provide.
Our next question comes from Teo Lasarte, Insight Investment.
First of all, I was wondering if you could tell us the expectation to the Keystone sale. You might have mentioned this before in the call, apologies if I missed it, but are you still expecting the entire process from the proceeds from the sale to come through by the end of Q4 or is it early 2019 when you expect it to happen?
Yes, thanks for the question. You'll remember that when we closed the deal, we had the expectation to have this done by the end of the year. That was our initial estimation, our initial forecast and we still believe that it will happen in the fourth quarter of 2018. As you noted, we have had most of the approvals. Yesterday we released the information regarding China. So therefore in terms of antitrust approvals, we did have South Korea. So, therefore, we are still positive that it can be done until the end of this year.
And given the liabilities you have next year, I'm referring to the 2019 bond, I mean is it the case that you would expect to redeem it only when you finalize the sale of Keystone or is there a possibility that you would redeem this bond before the actual proceeds come in?
This is Spada speaking. Well, regarding the callback from the 2019, we also have the situation regarding the cash position. We are holding the cash due to the uncertainties regarding the Brazilian current scenario here, that's the determination from our Board. We are waiting. So definitely before receiving -- concluding Keystone sale, we will not be doing anything on this matter.
[Operator Instructions]. This concludes today's question and answer session. I would like to invite Mr. Eduardo Miron to proceed with his closing statement. Please go ahead, sir.
First of all, thanks for you all for attending this call and for supporting the company. We continue committed to generating sustainable growth. It was again a special quarter and we look forward for the next one. Thanks a lot.