Q2 2023 JBS SA Earnings Call
Speaker 2: This event is being recorded and all participants will be in listen-only mode during the company's presentation. After JPS's remarks, there will be a question and answer session. At that time, further instructions will be given. Should any participant need assistance during this call, please press star 0 to reach the operator.
Speaker 2: Before proceeding, let me mention that forward-looking statements are based on the beliefs and assumptions of GPS's management.
Speaker 3: They involve risks and uncertainties because they relate to future events and therefore depend on circumstances that may or may not occur. Now I will turn the conference over to Roberto Tomazoni, global CEO of JBS. Mr. Tomazoni, you may begin your presentation. Good morning everyone and thank you for joining this conference call of our Q23 results. The figures we are present today testify to the threat of our diversified global platform and our agility and capacity to implement the necessary operational measure to optimize both our commercial and industrial performance. We have mentioned in our previous call in this quarter we execute a series of important measures to regain efficiency of Sierra and U.S. beef. The first results have started to happen but still below our expectation. We hope that more significant results will show in the next quarters. Even when we face a global market by an increased supply of poultry and tighter margins of beef business in the United States, a promising prospect we anticipate to be a
Speaker 3: in 2023 have begun to materialize. And although the global context we made challenging for the protein sector, we have confident that we have started a gradual recovery of our margin. In this second quarter, we double our margin over the first quarter. Looking ahead, we see a scenario of more balleric powder supply with potential positive impact on the sector prices. We have also started capturing the decrease in grain price in our cost, structure, benefiting our chicken and pork business globally. Australia is the great example when we speak for the strength of our global diversification, geographical and by protein type. The Q2 figures from JBS Australia show we are already capturing the benefit of a greater supply of cows, which is reflected in the increase of our margin in the region.
Speaker 3: Continuously non-Australia, I'd like to highlight that UNE is performance above our expectation, validating our decision to enter in the agricultural sector. In Brazil, the current cycle is also favorable. The expansion of sales and of value-added product, a threatening partnership with suppliers and customers, increasing domestic market demand, and opening a new foreign market reinforced our perception of a positive situation for a beef and the upcom quarters. In the United States, the challenge of beef business will persist for the common month. Consider a scenario of tight margin with a low kernel supply. Our diversification strategy.
Speaker 3: has been complemented by investment in value-ad product and strong brands. In the country we operate. In the end of March, we start producing breaded product in our plant in Rolundia, a state of Paraná in Brazil. And the results of these operations are promising. Even with market challenge, we had a relevant cash flow generation. And with that, we kept our net dollar debt stable compared to the first quarter of 2023, while investing in expansion of our operation and distributing 2.2 billion reais in dividends. The increase of our levers was expected and we prepared ourselves for this moment. Evan extended the average terms of our debt, increased liquidity and reduced the cost of our debt. All of this factor reinforced our review that JBS has a unique position in the global protein industry. And we believe that the competitive advantage of our diversified global platform have not yet been fully recognized and priced by the market. That's why we see ours.
dual-list in proposal announced in July , a transformation step to build a new grow avenue just of our IPO was in 2007. Our dual-list in the strategy will give us more flexibility to financial our grow and deliver it in addition to reduce capital costs. We will have access to a broader investor base with greater financial capacity, favoring the unlocking value for our shares and expanding our investment capacity. With the registration of our bond in the United States, we are now a company regulated by the Security and Exchange Commission and we will also disclose our financial results in US dollars. This is aligned with our investors which foreign easier comparison of our performance against our global peers. We must we must also mention that we have begun this August the celebration of JBS 70 anniversary.
Company that start an as small butchered in the countryside of Brazil. And today, one of the largest food company in the world. We are confident that with diversification global platformer, our culture and our people, we all continue to generate value for all stakeholders and create opportunities for the communities. And for our more than 260,000 employees worldwide. We also thank you for closing our journey. And now, and over to Guillermo, who will detail our results? Guillermo, please. We do not doubt the potential of unlocking value that an event of these magnitudes can bring to the company and its shareholders. Mar-O will last year several bond holders requested that we register the JBS bond with the SEC. We have attended that request in July . We will be paying the effectiveness of the registration of the 11 senior notes that we have.
having financial statements in DCA or these standards, will be subject to FCTA compliance, as well as other factors that contribute to the company's governance. And the dualistic has the potential to introduce further governance enhancements.
In June , we also announced that payment of intra-individence in the amount of $448 million Equivalent to 20 cents per share.
Let's now move on to the operational and financial highlights for the second quarter of 2023, starting with the July 12th, please. Net revenue of the second quarter was $18 billion. I just did that $1,903 million and represents a margin of 5% for the quarter. Net loss of $53 million for the quarter. As we mentioned on our last earnings call,
We were confident in the gradual improvement of results when compared to the weak performance of the first quarter. And these materialized in the second quarter. This confidence of ours is based upon the strategy of geographic and protein diversification, but also on the full confidence of our ability to execute which is fundamental in this industry. Given that we were quickly able to identify our and address them appropriately. Please now move to slide 13, operating.
cash flow in the quarter was 1.1 billion dollars and imported improvement when compared to the first quarter. This result is due to the improvement in the operating income and working capital which had a positive impact of $355 million. The main gains came from the improvement in accounts receivou and reduction in inventories. As a result of reduction in the price of raw materials, mainly grains and life cattle in Brazil and also from the company's better commercial and operational management. I would like to highlight here some important updates that we committed in less quarter.
The first is related to grains. We mentioned that we would potentially have a gain of $240 million in the year in terms of grain prices. Now we are estimating $450 million because due to the decreasing grain prices mainly corn, and we already have captured $150 million this water. And we project to capture another $300 million in the second half of the year. Regarding taxes, the monetization of tax credits of $100 million.
Capitals, spendages in the quarter was approximately $394 million, which 51% will aid to maintenance copies. So considering the above factors, free cash flow for the quarter was positive in $366 million. Moving on to the slide 14, we have the evolution of our death profile.
It was mentioned in that 75% of our debt is in the form of dollar-deluminated senior notes with a fixed interest rate. Leveraging dollars increased to 4.15, the increase that is expanded by 56% reduction of the bidat of the last 12 months and then in the second quarter when compared to the same period of the previous years. However, our average debt term is quite comfortable in 9.3 years with the first major material query only in 2027.
Let's now go quickly through the business units. Starting with Seattle on the ZLI-15, that's revenue for the quarter fell 3% year over year, affecting lower global poultry prices due to a global oversupply. On the other hand, profitability improved sequentially as a result of operational corrections to the problems we faced in the previous quarters. Furthermore, I would like to point out that the new chicken bread and plant inaugurated in the first quarter is at an accelerated pace of production and with good sales performance, further in here enforcing the growth of value added portfolio. Moving out to the like 16JBS Brazil registered a stable net revenue in relation to the same period of the previous years. BFX Sports reported a growth of 10% in net revenue and 2% in the domestic market in the end of comparison. It's worth noting that the results for the first quarter were impacted by the self-embarable of BFX Sports China after the coup.
and commercial improvements implemented during the quarter.
Moving on to slide 18, we have JBS Australia. Despite the drop in consolidated net revenue in the end of the barrel, EBITDA margin grew significantly to 8.6% in US gas.
This improvement mainly reflects the lower purchase price of live cattle, given the greater availability of animals due to a more favorable cycle. Moving now to JBS USA, pork net revenue for the quarter was 16% lower compared to the second quarter 2022. The main impact in the business unit continues to be the oversupply of pork in the domestic market, which pressured results for the period. On the other hand, according to the USDA, inventories are on a downward trend, which could benefit the rebalancing of supply and demand in the medium term.
The UNSFRIED-O, the July 20, presented a reduction in natural revenue of 7% in the second quarter in the end of comparison. In the USA, despite still a diverse environment, the prices of products for the use of raw materials, big birds, we were able to improve profitability through a more diversified bread and ports volume, and our partnership with key customers. In max for the normalization of supply and demand, a couple with adjustment in the life chicken operation, contributes positively to the profitability. Finally, in Europe , the positive trajectory of margins growth, continued driven by the ongoing optimization of the manufacturing network, cost recovery efforts, consolidation of back-offs activities, and increasing in partnership with key customers. With that, I would like now to open to our question and answer session. Thank you. Ladies and gentlemen, we will now begin the question and answer session. If you have a question, please press the star key followed by the one key on your touch to unphone at this time. If at any time you would like to remove yourself from the questioning queue, press star 2. Please hold while we gather your questions.
economic slowdown if this is you're doing pectin the protein prices I'm seeing you know you have a flavor of inventories in China any any view that the prices of all proteins or chicken beef could be increasing in the second half versus the first half thank you
Thank you, Lucas, for the question about your question related to M&A. In the last years, we made some green fields.
because the price of the assets or the target was we consider that is a value that not great value to us in terms of margin in terms of multiple and because of that we start the process to build the green fuel.
We see now the market more reasonable and when you say that this dual-lister has the potential, a transformation of potential, I like to...
we had when the IPO in 2007, it's the reality because if we have a great project, we can do a transformational acquisitions that move our multiples. And this is kind of acquisition we are looking for in the future. We don't have anything now to that, but for sure we are creating conditions for that in the future.
We have a potential to move our multiples and with right acquisition in terms of value added or the other business that we are mentioned before that it is our strategy to enter Manacacolchew. But this is, we don't have anything for now. With this, for now we are focused to be approved our dualistage. That we can think in a way greater after that. About China then I look at you.
where we complement our, or it's a little bit. I see China as, we see now in short term, we had declined in terms of price and decline in terms of volume. It was because of the end of the lockdown there and because we have the DSE in Brazil and then we have this situation that that some volume of meat was in the water and that the site to enter not ended and then was approved in the one moment and everything that created over supply or say over supply for the moment. And now the price decreases but we see it from there now that all the price was recomposed and then I see that market keep growing because it's structural. We need to focus on the demand for protein. We are need to produce until 2050, 70% more protein. This is the fact.
And in the consumption, confront Asia, a confront, a confront, a confront, a sub-Sarian Africa. You made a specific question on China. I see that the China consumption of beef keep growing. And they are not affected by the situation now because beef is consumed for the top of the pyramid and not for the low of the pyramid. And this for me, it is structural. It will not change because of the marty situation or not. Because it is too low compared to the other part of the world. Now, I see that we will be start by it in the past. And it has small volume compared to the old consumption. Of course, small volume for China is big volume for the country, for Brazil as well, for example.
Hey, good morning. Thanks for taking the questions. My first one is about the expectations for the margin recovery in Sierra for the rest of the year. And how you're thinking about the margin potential for that business in the back half. You've talked about fee cost benefits. You've talked about improving poultry supply demand. What are the other puts in taste? How much more efficiency?
opportunities are there to recover there that you didn't recapture in this quarter? Thank you for the question. We see that if you look for our results, the efficiency we cut in this quarter was around 1% in terms of BTDA.
But we see where already identified and from the farms to the process of plants and farms with the conversion mortality and the sector is yield and productivity. We see more 3 to 4 percent the opportunity to be kept in these sectors. I don't know if I answered your question or...
That was part of it that's very helpful. I guess the rest of it is just, when you think about how much better given the poultry supply demand, given the feed costs, how much, and the efficiencies, how much better can the CIARA margins be in the back half of the year, in your opinion? It's difficult to say when, but our, this business, CIARA business, with our portfolio we have, with the brand we have, our expectation for this business is from 12 to 50. This is the margin that we are focused to have. And of course, the conditions to be there should be more reasonable supply in terms of the market. And I mentioned in the Portuguese call that CIARA, we have invested 8 billion Ruyais in the last four years. And now we are start to ramp up new factories, most of them in value added.
This, when we start ramp up, you have cost per kilo higher than the standard because it is a ramp up. We have planned during this year, the second half of the year, we have more one plan to ramp up and the beginning of next year we have more two plans to ramp up. This is great in addition to cost, but they produce much higher in terms of ABTDA because we have an example now for breaded products. We ramped up three months ago the plan and we are at full capacity already. That was much quicker than we expected to be full. Maybe not all of the categories are the same, but we can say look, it is something that we see that in the future we are investing for growth margins because we are invested in value added. Then what do you expect, Charlie?
We, this expectation is 12 to 15, more to 15 than 12. Okay, that's very helpful color. I appreciate it. And if I can squeeze in one more question, just on the beef businesses outside of the United States. I mean, Brazil is making progress on the margins. Australia put a very, very strong margins. Where are we in the cattle rebuilding cycle in those two markets and how should we expect that to impact margins as we think about, you know, the rest of this year and into next year for Australia beef and Brazil beef. Thank you. Andrew, in Australia, we, in Brazil both, we are at the beginning of the cycle. We are, we just start. We are mentioned that less quiet and when the results of Australia was, was really, below our expectation, I mentioned that thought, the hurt is in the land, isn't the farm, is not coming to the, not coming yet to the, the process of land. Because of the favorables, well conditions to the farmers to keep, to keep the cows at the land. But now, because there is, there is a, there is an optimal moment to sell. Now, they heard that the cows started to go to the, to the, to the farm. The factories we are in the beginning, Australia, we are, we are, we are ramp up our operation before we work some plans for three days. Now we have a five days from weeks. Now we are looking for a labor to, to, to, to have the second sheet in the beginning of next year. Then.
From our side, on our end, we have very, very efficient plants. Most of our plants are double shift, so this is not from our side and it's very difficult for me to try to estimate what this looks for the rest of the industry. But overall, we think that we are seeing on the production side, not talking here about facilities, but talking about the production side, we're seeing more inefficient and older cell facilities coming out of the market overall and the newer facilities being more productive overall.
fourth quarter. Should we anticipate that the company will be able to pay that with cash flow generation or could there be a need to take on a little bit of extra debt to help fund that? Thank you Priya. Now we expect that we will be generating free cash flow in the second half to fund this possible project.
Is that something that you could potentially look to address? Are there any concerns that you might come close to this threshold or need a waiver? How should we think about that? Hi Priya. No, there's no concern on that. First you're right, the only covenant that remains is on the part of these agricultural receivables which complies with around a billion dollars. The first is that we can just fund from trade finance or any other capital market and pay these billion dollars. However, as you mentioned, it is an insurance covenant and we have several baskets beyond that threshold. So if we reach 475, let's say by the third quarter, we still can raise more than 1% of our assets. How much do you have to spend to meet that specific Shantak ruin?
plus more 25% of our bidat and plus other refinances and we'll be able to refinance all the debt that we had at that time. So there's absolutely no concern, especially because as we mentioned before, we don't expect any need, any funding needs given that we expect a free cash flow generation. And these agricultural receivables that still have covenants because we issued them before granted investment grade, these will be amortizing also in the next year, then we can accelerate the amortization with other types of funding. But given that we think that as of the fourth quarter, we start to leverage, given that the statistical effect of getting the last 12 months of bidat, the statistical effect will be ended in the third quarter. We start to leverage on the fourth quarter and beyond. So this may be one or at most two-quarter event of being above that threshold. Okay, that's very helpful. And then when you get to the seeding point, I can another point again because it shapes so much better for something like five studies based on these assessments.
I think my final question is just a technical one. If the listing goes through, and I realize we still need to sort of get past that in the coming months, but if that were to happen, should we expect you to move the bonds to that listed entity as well, as you think about sort of federal lining your capital structure? Thank you. Yeah, Priya, yes. We have this possibility in our documentation. US will always be a co-issuer, but we can move the Luxembourg issue to the Dutch company. But we don't have any urgency in doing that. But it's because the financials that we'll be filing SEC.
Australia segment. I mean you already mentioned where could we see some upside there, but if you could quantify that, that would be appreciated. And then I have another follow-up. Thanks. Thank you.
Thank you for the question, but I have a problem to understand your question. If you don't mind, please could you repeat? Yes, sure. Regarding Australia, you already mentioned where could we see some upside going forward, but if you could quantify that, that would be appreciated. And then I have a quick follow-up. We don't give a forecast about our business. It's not our policy, but I can tell you we are the beginning of the cycle and if you look for the best.
Our results, it's a good perspective how we can deliver. But we are saying that in Australia, beef is our big segment and we are just in the beginning. We see that the margin will be similar or could be higher, could be low because of course the Australia exports 70% of the production if the marketing conditions will help Australia. For example in the US we have now reduced in terms of availability of cattle. Could we help Australia to be more active in international market because we are competing in some markets. Do we have more volumeima? Absolutely, essentially yes but wind is reading the dailywu.
We see for Australia from the coming quarters the results in the similar we have released. Okay, thanks. Just a quick follow-up regarding the US, just as you mentioned. What do you think about cattle costs in the US, especially after live cattle prices are being higher after another one? So if you could provide more light on the US in that sense, that would be helpful. Thanks. Sorry Antonio, could you repeat that question please? Yes, on your perspective on cattle costs in the US, especially after cattle prices are being higher, a little bit unexpected on that, but any perspective on the US beef business? Thanks. Yes, so Antonio, what exactly the cattle cost is going to be is going to depend a lot on the activity level of the industry, on the supply on any given month, but we know that from a supply perspective we are in a tight supply of cattle right now.
We're going into 2024 in which we're going to start seeing a herd reviewed, hopefully, and all signs point to that. So we're going to start seeing heifers coming out of not going to feedlots and actually going to breeding herds, which should in 2024 actually restrict supply further, which is all that the public data points to. So this is no news. So we expect that we already are in a tight supply situation and going into next year we're probably going to see a tighter supply for cattle. Okay, thanks for the call. Have a nice day. Thank you. Our next question comes from Carla Casella with JP Morgan. Hi, great. Thank you. Just a couple of clarification questions. The dividend that you expect to pay with the listing, can you just talk about the thought process before that, around that, sorry, and is that contingent on the listing and the timeframe of it? Okay, Carla. Yes, first it is contingent on the approval or the listing on the General Assembly. So expectations should be paid only by year-end.
of this dividend despite it has been announced in the last quarter. Okay. Is that less, is that the amount, assuming that would be the typical Brazilian 25% of net income payout or was it just a, I'm guessing how you wrote a rove, I'm wondering how you rove to that number? The number which we already announced, which is one riel per share or 20 cents per share, that is the same that we paid in June for $148 million. And this amount was just because we want to try, as all other food companies, we want to try to make our dividends more stable for predictability purposes. So last year we paid $900 million in dividends. This year, if it's approved on January 17th, it will be another $900 million. But the main reason for us to put these special dividends is for the shareholders that faces any capital gains.
in the exchange on the listing process, they have the funding to pay for this capital gain. Okay, great. So you haven't set a policy yet for dividend payout after the listing, but do you expect it to be similar to where it was before, or would it be lower since you don't have the 25% Brazilian requirement for payout? That's a good question. Yeah, we will not have the 24 or 5% minimum dividends payout, it's something that's very particular to Brazil. We will be designing and mentioning a new policy that we already been working that since the last trials. We'll be more generic. Basically, we'll be a language, the new dividend policy will be a language that it is based on our free cash flow generation. Because we are a cyclical company, we have to have the flexibility, although we'll be trying to make it more stable as possible, but we cannot commit ourselves to more specific parameters given the cyclicality of our business. So it will be something that we'll mention that will be based on our free cash flow generation. Okay, great. And then, we have a question from the audience. Okay, great, and then you commented that third quarter will be your peak leverage, and you should start to be leveraging by the fourth quarter as the cycle.
we lap easier comparisons in the cycle. Do you think you'll be able to keep your leverage out of the five times, or could you have ratings risk on third quarter earnings? Hi, Carla. Yes, I think that they remember that the rating agencies, they work on a moving average of two historical years and three forecast years. So one quarter being on levels of four to five times is not enough for them to make a revision. And this third quarter peak will not come from an increase in the debt, but a statistical effect, the denominator will be exchanged last year is a bid of third quarter of $1.9 billion to something lower. But on the fourth quarter, we already had a more tough fourth quarter last year. We expect to be there this year. So then this is the statistical effect finishes and our free cash flow.
begins our deleveraging process. This is not a guidance, but just to give you an account that let's see what is necessary to happen for us to be at the 2.5 times, which is our long-term target, by 2025. If we, so if we're making this calculation backwards, if you have 5% margin this year, and an average of 6.5% of margin in the next two years, we will reach the 2.5 by 2025 on the third or fourth quarter. So this is the natural path of the leverage that the rating agencies can consider in their forecast. Remembering that the last five years, our beta margin averaged 10%, in the last 10 years this average was 9%, and if the last 15 years, this average is 7.5%. So if we consider margins below those levels, we still managed to reach 2.5 times.
by the end of 2025. Basically, these calculations I mentioned in calls before, 75% of our debt is bonds that has fixed coupons, so our interest expenses is in a range of 1 to $1.1 billion per year. Our leasing is around $500 million per year. Our capital expenditures on a range of 1.3 to 1.4 billion per year. Tax will be much lower than last year, given the tight margins that we are presenting. So, break even if it's not, we can continue to assume around the $3 billion figure. So, you see that those margins, you can make the calculation of the excess free cash flow that will leverage the company. That's fantastic, thank you for all the color. Let me just ask one more business question. You've made some management changes and additions over the last six months. Are you fully, are you still looking for any key members?
Basically, these calculations I mentioned in calls before, 75% of our debt is bonds that have fixed coupons, so our interest expenses is in a range of $1 to $1.1 billion per year. Our leasing is around $500 million per year. Our capital expenditures are in a range of $1.3 to $1.4 billion per year. Tax will be much lower than last year given the tight margins that we are presenting. Break-even and business, we can continue to assume around the $3 billion figure. You see that those margins, you can make the calculation of the excess free cash flow that will leverage the company. That's fantastic. Thank you for all the color. Let me just ask one more business question. You've made some management changes and additions over the last six months. Are you still looking for any key members of your team or are you fully staffed at this point?
then so the dilution will be less for the shareholders. And then just one last follow-up question. You know, I know you said earlier that the rating agencies were, you know, very aware of your deleveraging path and are comfortable with it. I guess if you were to come into a situation where they were less comfortable, would you feel comfortable raising equity to preserve the investment grade rating? That's something that you have to think when it comes. As I mentioned, it will all depend on the level of the share price will be, the multiples that we have. So this is something that we have to discuss on the context to when it appears. Perfect. Thanks, guys. Thank you. This concludes today's question and answer session.
I would like to invite Mr. Tomazoni to proceed with his closing statements. Please go ahead, sir. I would like to thank all of you for being part of our conference call and thank you for our investors, for our suppliers and our 260 team members that made this company be the great company and one of the largest food companies in the world. Thank you. That does conclude the JBS's audio conference for today. Thank you very much for your participation. Have a good day and thank you for using Cora's Call. Thank you.