Marfrig Global Foods SA

BOVESPA:MRFG3

Earnings Call Transcript 2022-Q3

[Operator]

Good afternoon, everyone, and thank you for waiting. Welcome to Marfrig Global Foods S.A. Third Quarter of 2022 Conference Call. With us here today, we have Mr. Marcos Molina, Founder and Chairman; Tim Klein, Chief Executive Officer of North America Operations; Mr. Rui Mendonça, Chief Executive Officer of South America; Mr. Tang David, Chief Financial and Investor Relations Officer; and Mr. Eduardo Puzziello, Investor Relations Director. This event is being recorded. [Operator Instructions]

This event is also being broadcast live via webcast and may be accessed through Marfrig's 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 this presentation via webcast may post the questions on our website. They will be answered by the IR team after the conference is finished.

Before proceeding, let me mention that forward statements are based on the beliefs and assumptions of Marfrig Global Foods S.A. management and on 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 that 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 will turn the conference over to Mr. Eduardo Puzziello. Mr. Puzziello, you may begin your presentation.

[Eduardo Puzziello, executive]

Thank you all for participating in Marfrig's earnings conference call. Let's start this conference call with the main highlights of the third quarter of 2022.

Marfrig's consolidated net revenue in this quarter was BRL 36 billion, remembering that in accordance with technical standard CPC 15 and CPC 36, which deal with the combination of businesses and consolidated statements. As of April 1, we began consolidating the results of BRF to those of Marfrig.

The consolidated adjusted EBITDA was BRL 3.8 billion. That is a consolidated adjusted EBITDA margin of 10.4%. And the consolidated net profit reached BRL 431 million. The highlight was the operational cash flow as the result of a positive BRL 2.7 billion in the quarter, the highest in the year. Once again, I emphasize that with the effect of the consolidation of the results, we present a more diversified company from a geographical and protein point of view. Therefore, the North American operation now represents 41% of the consolidated revenue, while the South American operation accounted for 20% and BRF's results 39%.

When we analyze the consolidated adjusted EBITDA, the North American operation accounted for 46% of the total while the South American operation, 18% and BRF's EBITDA 36%. From this greater diversification, we observed that the dollar continues to be the main currency of our results and represented 72% of the consolidated revenues in the quarter. The North American operation presented once again a strong quarterly result with net revenues of $2.9 billion and an adjusted EBITDA margin of 11.9%. The South American operation reported a record result with net revenue of BRL 7.5 billion and an EBITDA of BRL 710 million or an EBITDA margin of 9.5%, 5 percentage points above the margin of the same quarter of 2021. The consolidated leverage adjusted by the EBITDA over the last 12 months of BRF was 2.38x when measured in reals and 2.32x when measured in dollars.

Given the strong results presented and the positive outlook for the coming years, based on financial discipline and the consistency of our results in October, the ratings company, Fitch, raised the company's credit rating to BB+ with a stable outlook. And finally, it's worth mentioning that Marfrig achieved the highest rating in 100% of its Brazilian units in BRC certification audits. This topic will be detailed by Rui during his presentation.

Now I give the floor to Tim Klein, the CEO of the North American operation. Tim, please go ahead.

[Timothy Klein, executive]

Thank you, Eduardo. Let's begin on Slide 4, where I will comment on the results for the third quarter. Starting on the left, sales volume in the quarter was 3.3% lower than the same quarter of last year. Net revenue was 11.1% lower than the previous year. And as expected, the EBITDA of $338 million was 60.6% lower than last year with an EBITDA margin of 11.9%. The margins in our business decreased versus last year's exceptional results that were driven by the post-pandemic economic rebound and the backlog of cattle. Fed cattle supplies remain adequate, but with significant price premiums in the north as packers sought out higher grading cattle.

Please move now to talk about U.S. market data. Starting on the left, cattle prices, as reported by the USDA, averaged $139.29 per hundredweight, up 14% year-over-year on strong demand from packers. The USDA comprehensive cutout averaged $261.49 per hundredweight, down 12.5%, while the drop credit declined 3.5% to an average of $13.92 per hundredweight, led by lower hide values, offset in part by higher tallow and meal prices. The cutout ratio was 1.88 versus 2.46 last year. As we look forward to the rest of 2022, industry fundamentals continue to be above historical levels and fed cattle supplies remain adequate while beef demand is robust.

Now I'll pass to Rui.

[Rui Mendonça Junior, executive]

Thank you very much, Tim. We will now move on to Slide #6, where I will explain the performance of the South American operation in the third quarter of 2022.

As we can see in the graph on the left, the total sales volume reached 383,000 tonnes this quarter, practically stable compared to the volume of the third quarter of the previous year. Here, it is important to highlight the strong basis for this comparison because in the third quarter of 2021, we sold the additional volume produced and not sold due to logistical issues during the first half of last year. Therefore, despite the stable comparison, the volume this quarter can be considered quite satisfactory.

Moving on to the central graph on this slide, net revenue. We can see that this quarter, we reached BRL 7.5 billion, 8% above the revenue for the same period in 2021. In this quarter, the average export prices in reals were 17% higher than the prices for the same period in 2021. It is important to say that exports represented 65% of the total consolidated sales in this quarter.

I would like to highlight here the great differential Marfrig has. Marfrig has 13 units in South America certified to export to China. We are the largest exporter in the region to that country, which is currently the largest importer of beef in the world.

Finally, in the graph on the right, EBITDA. We reached a record amount of BRL 710 million in the third quarter, a growth of more than 130% over the EBITDA for the same period in 2021. This better performance can be explained by the effects of better prices in the foreign market, as I mentioned earlier. Therefore, we reached an EBITDA margin of 9.5%, 5 percentage points above the margin of the same quarter of 2021.

It is always good to remember that our business model with integrated platforms in the countries where Marfrig operates along with the active operational efficiency program provides us with a differential in results that are translated into the performance presented here. This confirms the assertiveness of our strategy.

Going now to Slide 7. I will talk about the performance of exports in the results of the third quarter of 2022. As can be seen in the graphs on the evolution of exports, we noticed a significant variation in our main destinations. China and Hong Kong went from 65% of exports in the third quarter of 2021 to 81% in this quarter. This higher sales volume to China throughout practically the entire year reinforces our strategy and confirms our position as the largest exporter to that important market where export prices and volumes rose strongly in the quarter, benefiting Marfrig's results. I would also like to take this opportunity to highlight that.

In this third quarter, Marfrig won the highest score in the international BRC certification in all its Brazilian units. This is a reference standard for food safety and operational quality. This recognition allows Marfrig to strengthen its relationships with the most important global markets and demonstrates the company's commitment to the effective control of internal processes, the reduction of operational risk and transparency.

Now I turn to Paulo Pianez, who will comment on the highlights of the sustainability area.

[Paulo Pianez, executive]

Thank you, Rui. Marfrig achieved significant results in its ESG agenda in this quarter. Within the scope of the Marfrig Verde+ program, the supply chain traceability front, Marfrig already controls 71% of its indirect suppliers in the Amazon and 71% in the Cerrado, remembering that for direct suppliers, the control is 100%.

As for the legalization and inclusion of producers, the company has supported and reincluded 2,501 farms in its supply chain since 2021 until the end of this quarter. Marfrig became a member of the Steering Committee of the Cerrado voluntary protocol. A protocol being developed by Proforest in alignment with AFI, establishing the criteria for social and environmental monitoring in that biome. The objective of this group is to accelerate and standardize the implementation of commitments to fight deforestation in the Cerrado.

Another important initiative that was concluded and implemented in this quarter was the direct and indirect suppliers network map, which makes it possible to monitor the connections between the links in the supply chain, facilitating the traceability of animals and the strengthening of a supply chain that complies with the strict social environmental commitments taken on by Marfrig.

Last but not least, Marfrig extends the social environmental risk mitigation map to the Atlantic Forest biome, allowing the expansion of Marfrig's social environmental practices to that biome as well, in line with the Marfrig Verde+ plan. These efforts and results obtained with the Marfrig Verde+ program, together with other actions, demonstrate our commitment to sustainability, generating positive impacts throughout the company's supply chain in all regions where we operate.

[Tang David, executive]

Thank you, Paulo. In the next slides, I will present Marfrig's consolidated financial results for the second quarter of 2022.

As already mentioned, after the approval of the new BRF Board of Directors appointed by Marfrig, we will hold the controlling power of the company as of April 1, 2022. For this reason, the BRF results will be consolidated with those of Marfrig as of the second quarter of 2022 in accordance with the technical accounting regulation, CPC 15 of Business Combination and CPC 36 consolidated statements. Therefore, the information I will comment on in the next slides, except where indicated, includes BRF's figures.

Starting on Slide 11 on the left graph. In Q2 2022, we generated a consolidated net revenue of BRL 34.5 billion. In the right chart, this quarter, we generated almost BRL 4 billion in adjusted EBITDA with an 11.5% margin. It is worth mentioning here the new revenue and EBITDA profile brought by the consolidation. We started to generate 42% of net revenue in North America, 21% in South America and 37% by BRF. The breakdown in EBITDA generation was 47% in North America, 17% in South America and 36% in BRF.

On Slide 12, if we look at consolidated net revenue, we see an important diversification of sales destinations. The diversification of proteins added to geographic diversification are success factors of Marfrig's value generation strategy.

Moving on to Slide 13. We show the consolidated net income, which for the quarter, was BRL 4.3 billion. The effect of the PPA on the net income was BRL 3.9 billion. We must remember that this quarter, the mark-to-market of BRF shares was no longer applicable since we now control the company.

On Slide 14, we present cash generation. In the graph on the left, Marfrig's operating cash generation, BRF excluded, was BRL 1.4 billion. Discounting CapEx investments for maintenance and organic growth of BRL 523 million plus interest paid of BRL 570 million, recurring free cash flow was positive BRL 286 million. In the right chart and in consolidated terms, operating cash generation in the second quarter of 2022 was BRL 1.9 billion. Discounting CapEx investments and interest paid in the period, free cash flow was negative BRL 343 million.

Moving on to Slide 15. Net debt and leverage, BRF excluded. Marfrig's net debt without considering the effects of the BRF consolidation at the end of the second quarter of 2022 totaled $4.5 billion. In the quarter, BRL 855 million were also paid in dividends, out of which BRL 472 million went to National Beef's minority shareholders and BRL 383 million to Marfrig shareholders. Marfrig's leverage, BRF excluded, was 1.67x measured in reals and 1.68x measured in U.S. dollars.

On Slide 16, the consolidated net debt according to CPC's15 and 36 totaled $7.1 billion at the end of Q2 2022. When measured in reals, consolidated net debt totaled BRL 37.6 billion in Q2 2022, already considering BRL 13.1 billion of BRF's net debt. BRF's consolidated leverage adjusted by EBITDA for the last 12 months was 2.00x measured in reals and 2.01x measured in U.S. dollars.

On Slide 17, we present the details of the debt profile. Starting with the graph on the right, Marfrig, BRF excluded, ended June 2022 with cash of $2 billion. Additionally, we have an available $900 million revolver line at National Beef. In the graph on the right and due to the consolidation according to CPC's 15 and 36, the cash position at the end of the second quarter of 2022 totaled $3.6 billion.

Finally, here on Slide 18, I would like to highlight Marfrig's capital allocation actions, BRF excluded. During the second quarter and taking advantage of market opportunities, we repurchased $320 million in bonds. The buyback at below face value and subsequent cancellation in addition to reducing growth indebtedness generated a financial gain of $15 million.

As we announced, we will cancel 31 million treasury shares and also launch a new share buyback program of 31 million shares, representing more than BRL 400 million. Based on the strong operating performance commented by Tim and Miguel, management has proposed an early payment of BRL 500 million in interim dividends, which represents approximately BRL 0.76 per share. And so we remain committed to creating value and return for our shareholders through buyback programs, dividend distributions, investment in organic growth and debt reduction.

I will now hand it over to Marcos Molina, who will make his closing remarks. Thank you.

[Marcos Molina, executive]

Thank you, Tang. I would like to close this conference call by highlighting that our strong operating performance combined with our financial and strategic discipline has been fundamental to our purpose of generating value for all our shareholders. As a result, we were recognized by the rating agency, Fitch, which raised our credit rating to BB+, 1 notch below investment grade.

I end this presentation by thanking all of our employees, suppliers, customers and shareholders for their support and trust that allowed us to present another excellent result. We remain confident in the performance of our company and its ability to continue improving day by day and generating value for all. Thank you very much.

[Operator]

[Operator Instructions] Now I will pass the floor to Eduardo. Please go ahead.

[Eduardo Puzziello, executive]

Thank you. Let me just make an announcement very quickly. We've had some technical issues in the recording of our call. Part of our presentation, we show the second quarter. On our website in half an hour, we'll be updating that file. So I'd like to apologize for those of you that heard the audio about the second quarter and the slides of the third quarter.

[Operator]

This concludes today's question-and-answer session, and this concludes Marfrig Global Foods S.A. conference call for today. Thank you very much for your participation, and have a nice day.