JBS N.V. (JBS) Earnings Call Transcript & Summary

Good morning, and welcome to JBS S.A. and JBS USA Fourth Quarter and Full Year 2023 Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded and the link to download the presentation is available on the IR website and in the chat. Any statements eventually made during this conference call in connection with the company business outlook, projections, operating and financial targets, and potential growth should be understood as merely forecasts based on the company's management expectations in relation to the future of JBS. Such expectations are highly dependent on market conditions, on Brazil's overall economic performance and on industry and international market behavior, and therefore, are subject to change. Are present with us today, Gilberto Tomazoni, Global CEO of JBS; Guilherme Cavalcanti, Global CFO of JBS; Wesley Batista Filho, CEO of JBS USA; and Christiane Assis, Investor Relations Director. Now I will turn the conference over to Gilberto Tomazoni, Global CEO of JBS. Mr. Tomazoni, you may begin your presentation.

Good morning, everyone. Thank you for participating in our earnings call. After -- year after year, we have emphasized the importance of our global platform. In periods of challenged condition, like those we faced in 2023, this platform has proven its strength. It has allowed us to continue generating cash and distributing dividends. Despite the persistent negative effects of the cattle cycle in the U.S., the operational management measures adopted last year and the improvements in the medium-term outlook enable us to enter 2024 on the path of margin recovery. It's important to emphasize that our focus on operational excellence was the key to correcting the course of 2 of our businesses that underperformed in 2023; U.S. Beef and Seara. We identified issues and took action to adopt management measures based on our culture with a focus on people and discipline in execution. The results of these measures are already being felt. At Seara, the outlook of 2024 is positive, with the possibility of margin exceeding double-digit already present in the first quarter of the year, a traditionally challenged period of the sector. As supply and demand rebalance bringing resilience and as grain price normalize, Seara is well-positioned to reap the reward of operational improvement implemented in the recent months and investment in expansion made in recent years. I take this opportunity to reiterate that our multi-protein and our multi-geography strategy puts us in an unmatched position in the global industry. This strategy allowed us to capitalize on the cattle cycle upswing in Brazil and Australia, while our American operation faced margin decline due to current market conditions. In Australia, the improvement outlook is reflected in significant increase in margin in the fourth quarter in 2023 compared to the same period last year. In Brazil, where the situation is similar, significant growth in the cattle processing volume, increased value-added product sales, the authorization of new plants to supply the Chinese market, as well as improved profitability of export offering a promising prospect for the beef business in the short and long term. The chicken and pork business faced persistent pressure on production costs throughout 2022, but are already benefit benefiting from the normalization of grain prices. This is evident in the Pilgrim's and USA Pork results. The recovery in margin of these businesses also reflects a better rebalance of supply and demand. Pilgrim's margins saw a strong growth, rising by 1.5% in the fourth quarter of 2022 to 6.8% in the fourth quarter of 2023. Similarly, USA Pork results jumped from 4.8% to 9% in the same period. Through our global platform, we operate successfully in all relevant proteins. With results exceeding expectation, our growth in aquaculture reaffirms our belief that we will replicate what we have done previously with chicken, pork, and value-added products. Likewise, we continue to invest in research and development of alternative proteins such as plant-based and cultivated protein. In 2024, we will complete a cultivated protein facility in San Sebastian in Spain. We are also building JBS Biotech Innovation Center in Brazil, which is a research, development, innovation biotechnology center. We are a food company and our focus is to meet consumer demand for all protein options. We also want to highlight that 2023, we once again demonstrate our financial strength. Maintenance of our healthy cash generation allowed us to distribute $448 million in dividend for the year, creating value for our shareholders. We reduced our gross debt by USD 1.6 billion from the third quarter to the fourth quarter, which we plan to continue in 2024. As a result of our financial discipline, we began the company deleverage process at the end of 2023. The leverage ratio decreased from 4.87x in the third quarter to 4.42x in the fourth quarter. We remain confident in our long-term strategy. We will continue to reinforce our diversified platform by geography and by protein type, investing in strong brands, the value-added products and strategic partnership with our customers. This set of actions is crucial for creating better margin and reducing volatility. The investments we made in 2023 are significant milestones that support this direction. In Brazil, we opened 2 new factories in the state of Parana that will allow Seara to advance in expansion strategy in value-added projects. Similarly, we commenced operations at the new Principe, Italian meat facility in Columbia, Missouri, and invested in our King's Lynn pork unit in U.K. to make it a center of excellence in cold cuts. JBS has demonstrated resilience and strength over its 70 years. The company's diversified platform, commitment to excellence, innovation, and sustainability, focus on people and culture, and the dual listing in Brazil and the United States put the company in a unique position to embark in a new cycle of accelerated growth and shareholder returns. We remain focused on the dual listing process. Today, we took another step to our goal by filing an update to registration requests through SEC. These include our figures up to December 2001 -- 31. Thank you all for the participation in this earnings call. And now I hand over to Guilherme, who will detail our financials. Guilherme, please.

Thank you, Tomazoni. Now let's move on to the operational and financial highlights of the year and the fourth quarter of 2023. Starting on Slide 16, please. I would like to start by highlighting some important events that took place over the past year, and I would like to take the opportunity to update you on some of those processes. The first point to be highlighted is registration of 11 senior notes with the SEC in August. This step was fundamental for both the company and investors as it brought a series of significant benefits. Among them, we can mention the expansion of investor base, the increase in the liquidity of the notes and the obligation to adapt to rules and regulations such as SOX, FCPA and PCAOB in addition to the publication of new reports such as 20-F, which we have just published for the first time. We also just announced that we will register new senior notes issued in September 2023 in the amount of $2.5 billion. We will also take the opportunity to reopen the exchange period for the 11 senior notes, which have already been registered. However, some investors did not exchange their notes at that time, and therefore, we are offering a new opportunity at the request of these investors. Given the announcement of the registration of the senior notes, we have made public our intention to have our shares listed in U.S. and Brazil, as mentioned by Tomazoni. Taking advantage of the end of the fiscal year, we just filed a new F4 form, which is now available for public consultation, allowing all interested parties to follow the progress of the process. In relation to the new issuance on September 2023, we issued $2.5 billion of senior notes at JBS USA. In October, JBS S.A. issued Agribusiness Receivables Certificates in the amount of BRL 1.7 billion. Additionally, through our subsidiary, Pilgrim's Pride, we carried out 2 issuances totaling $1.5 billion. With the resources retained, we significantly reduced our short-term and medium-term debt, practically eliminating the need for debt payments until 2027, as I will detail you later. Now let's move on Slide 17, where we have the operational and financial highlights of the quarter. Net revenue in the fourth quarter of 2023 was $19.4 billion. Adjusted EBITDA totaled $1 billion and represents a margin of 5.3% for the quarter. Net profit was $16.7 million in the quarter. On Slide 18, we have the highlights of the year. Net revenues in 2023 of $73 billion, adjusted EBITDA of $3.5 billion and representing a margin of 4.7% for the year. Net loss was $200 million in the year. Please now moving to the Slide 19. Before commenting on free cash flow generation, it's important to highlight that as of the fourth quarter 2023, we began to increase leasing expenses in the calculation of free cash flow, aiming to more accurately represent the company's cash generation and be in great -- in line with the variation in the net debt. Therefore, this adjustment was considered for both current period and for the period that serves as a base for comparison. Operating cash flow in the quarter was $1.7 billion. Free cash flow for the quarter was $875 million. The free cash flow generation was positively impacted by improving operating results at Pilgrim's, JBS, Brazil and Australia. Release of working capital, mainly in inventories and suppliers, which combined totaled a positive variation of $570 million and the reduction in capital expenditures by $253 million against the fourth quarter last year of 2022. Moving on the next slide. At the beginning of last year, during the first quarter results release call, we have commented on what we would do to compensate for the cash burn of $1.3 billion in the first quarter of 2023. Remembering that seasonally, the first quarter consumes cash. Throughout the year, we provided updates to the market to the previously discussed value totaling $1.4 billion, considering the necessary revisions. And now as the year-end, even in the face of a difficult and volatile year, we not only reversed the first quarter results but also generated $448 million in free cash flow in 2023. The main developments were positive working capital in the amount of $380 million, considering inventory, accounts receivables and suppliers, reduction in capital expenditures are $670 million and tax refunds in the U.S., and monetization of tax credits in Brazil, which totaled $360 million. For 2024, without providing guidance, we expect our cash generation to follow a similar seasonality for the -- as the previous year. This means that it is likely that we will have cash burn in the first quarter, but we expect that it will be around half of the value reported in the same period last year, taking into account the evolution of Seara's results and the maintenance of attractive margins in Australia, USA Pork and Pilgrim's. For the update exercise of the EBITDA necessary for free cash flow breakeven, we consider net financial expenses for 2024, similar to 2023 at $1.1 billion. Leasing expenses, which we are estimating $500 million versus $430 million in 2023, reflecting the increase in installed capacity. In the same way as rental expenses, the increase in our production capacity also increases the consumption of biological assets. Therefore, disregarding possible variations linked to the grain prices, we are estimating a biological asset consumption of approximately $650 million. Capital expenditures in 2023 totaled $1.5 billion, which approximately $500 million was expansion CapEx. For 2024, total cash CapEx of $1.3 billion was approved, of which $50 million was carryover from 2000 -- from the previous year and $250 million for expansion and continuity of the plants inaugurated last year. Thus, disregarding capital variations outside the company's control and without giving -- and without considering this as a guidance, the EBITDA that corresponds to the free cash flow breakeven point is estimated at $3.5 billion. It is worth noting that differences above this amount will be subject to the application of the effective tax rate that is in average globally in 25%. Moving to the Slide 21, we have the evolution of our debt profile. In the fourth quarter, we used cash to reduce gross debt in $1.6 billion. Until February 2024, we already used $566 million of our cash position to reduce gross debt, and we intend to continue this movement in the second quarter. Net debt for 2023 ended at $15.3 billion, stable in relation to the previous years as the company's free cash flow was sufficient to cover the payment of dividends that totaled $448 million. Leverage in dollars reduced to 4.42x and in reals to 4.3x in the quarterly comparison, confirming that the deleveraging path that we had indicated in previous calls. Using market consensus, the leverage will follow the downward trajectory that began in the fourth quarter 2023. Therefore, according to market consensus for 2024, margins that is reflected on the Bloomberg consensus is 6.5%, 7% for 2025, and 7.8% for 2026. Therefore, using these numbers as a reference, we would reach the end of 2024 with a leverage range of below 3.25x, reach the end of 2025 below 3x and the end of 2026 below 2.5x. Now I will briefly go through the business units. Starting with Seara on Slide 22. Net revenue for the quarter fell 5% in the fourth quarter of 2023 and 4% for the year. 2023 was very challenging with margins below the ideal levels due to several external and internal challenges, such as the global excess of poultry and high production costs and challenges in the upstream part of the business, as well as lower dilution of fixed costs due to our plants inaugurated in 2023, which are still in the ramp-up process. However, by maintaining focus on the fundamentals of the business, we managed to end the year on a positive trend, leaving us very optimistic for 2024. Moving now to Slide 23. JBS Brazil recorded net revenue 4% higher than the fourth quarter of 2022, reflecting higher volumes sold, but 6% lower than 2022 due to the decline in prices in the domestic and international markets. 2023 was marked by high volatility in the markets, mainly due to self-embargo of beef exports to China, the main destination for Brazilian industry, and the favorable livestock cycle, which increased the availability of animals for slaughter and reduced the price of live cattle in Brazil. In this scenario, we strengthened international relationships, gained new plant certifications, further improving the level of service for key partners and brought out brands closer to the consumers. For the fourth time, the Friboi brand was Top of Mind as a result of everything above both for the quarter and for the year, we improved the profitability. Moving now to Slide 24 and speaking now -- from now on in dollars and in U.S. GAAP. JBS Beef North America net revenue grew 15% year-over-year in the quarter and 6% year-over-year in 2023. Despite the increase in revenue resulting from higher prices in the period, profitability was impacted by growth in the price of live capital at a faster pace than the increase in sales price, reflecting the increase in costs resulting from cattle cycle in the U.S. Additionally, the company uses future contract as a short-term protection measure. However, in the fourth quarter, the business unit ended up being adversely affected as the price of live cattle fluctuated in an atypical way. On September 2022, it was approximately $1.87 per pound. On December 7, it fell to $1.62 and quickly returned to $1.88 in the beginning of the year. Therefore, the negative impact of the fourth quarter has already been partially offset by gains in the first quarter. In the quarter, revenue growth was the result of higher volumes sold reflecting the greater availability of cattle in the market. However, during the year, the increase in volumes sold did not fully compensate for the reduction in prices in both domestic and international markets. Despite these both periods, there was an improvement in profitability, mainly due to the reduction in the price of cattle acquisition result from greater availability of animals due to the more favorable cycle in the country and efficient gains in the several areas in the subsegments of these business units. Turning now to the USA Pork. Net revenue for the quarter was 4% higher compared to the fourth quarter of 2022, but a reduction of 5% in 2023 against 2022. At the beginning of 2023, we faced challenges in price and profitability due to the excess supply of hogs in the domestic market. However, throughout the year, we observed the normalization in production accompanied by a reduction in grain costs as well as average price of live hogs. Furthermore, through continuous efforts to improve results such as expanding the value-added portfolio and improving commercial and operational execution, the EBITDA margin returned to normalized levels in the second half of the year. Pilgrim's Pride as highlighted on Slide 27 recorded an increase in net revenue of 10% in the fourth quarter 2023 compared to fourth quarter 2022 and remained stable in 2023 in the annual comparison. Like other business units mentioned previously, 2023 was marked by high volatility in the commodities market. At the beginning of the year, poultry prices beginning at historical low levels due to the oversupply in the industry, especially in the heavy bird segments. Now as known as big bird in the U.S. However, through a better balance between supply and demand, prices gradually stabilized, although cost inflation remained high. Despite the challenges faced, the company remained focused on executing in strategy and managed to improve its results throughout the year in all regions. As you could see, and as we had indicated, the improvement in profitability occurred in all business units throughout 2023, with the exception of Beef North America. Similarly, the path remains positive for 2024, with emphasis on JBS Australia, Seara, PPC and USA Pork. I would like to open up our question-and-answer session.

Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions]. Our first question comes from Ben Theurer with Barclays.

Just following up on what you've already discussed during the call a while ago on the translated one. So my first question, Seara, can you elaborate a little bit more as to what's different in 1Q versus 4Q, as you've talked about the double-digit margin potential, just given that the fourth quarter was obviously flat on a year-over-year basis so that we better understand what are the drivers that basically help you boost that margin as you've talked about into the double digits? That would be my first question. I have one quick one more.

Thank you for the question. So I think is -- before to go to the detail, I want to clarify that Seara did not have any market problem. It does not have any, I want to reinforce that because consumer preference rates have increased, the brand has increased its penetration to 90% homes of products and repurchase of product is 89%. Strong numbers means that we don't have any problem with marketing, with perception, with consumer preference, with relation with the customers. We had problems with the operational efficiencies' indexes related to productivity indicators, processes, performance and equipment availability. These costs have been identified and countermeasures are in place. The result of this action still had a small impact in the fourth quarter, but will begin to appear much more in the stretch from the first quarter of the year. Furthermore, we have not reached yet the optimal point of the efficiency in the ramp-up of the Rolandia factory. It is highly automated factory that requires time to parameterize and synchronize all the stages of the process. It is normal for a factory with a lot of embedded technology. However, the adjusted -- the competitiveness will be with greater increase. For all of these, we are optimistic for the Seara next quarters.

And then just coming back to some of the technical things, and that's most like a question for Guil. So with the new filing and the new registration and everything you've been doing, obviously, on the fixed income side, as it relates to the equity listing, do you have any estimate as to the time line for that? Is that a 3Q thing? Is that a 4Q thing? What are the next steps you need to kind of get over to actually get this listing finally done?

Okay. So as you saw, we just filed a new F4 updating the 2023 numbers and including the previous comments from SEC. Now we have to wait if the SEC has more comments on the document, and if it has, we have to do another filing with the new comments. At the point that SEC doesn't have any comments anymore, then we can ask a registration of the equity. And then when SEC gives the go-ahead, the green light for the registration, then we can call a general assembly, which will be at least 45 days, as we mentioned previously. So this time frame is uncertain given that what I mentioned, but it's possible that we could finalize this year still.

And our next question comes from Andrew Strelzik with Bank of Montreal.

I wanted to start maybe at a high level and in the release, in the CEO comments, there was a line that referenced an improvement in the medium-term outlook. And so I was hoping you could maybe elaborate on where you're seeing those improvements or where you're now more optimistic than you would have been 3 or 4 months ago, the last time you reported?

Okay. Thank you for the question. We are very optimistic in Beef in Brazil and in Australia. I think it's -- they start a new cycle. We see that the margin will grow because with the beginning of the cycle of the beef, when I say positive outlook is for the year, maybe you need to remind that the first quarter and the fourth quarter is the tough quarter and the medium quarter is the better quarter for the company. But this is both -- we are on a positive outlook. Then we have Seara. Maybe Seara is the most positive outlook if you compare the results of the fourth quarter. We see that Seara in this quarter, the results was below our -- the potential of the company. And in the beginning of the first quarter of the year, we can see that much more results, what the action we have done and to change the process -- I mentioned before, the parameters and the alignment with the process. We have a long chain and we will take time to get the results of the improvements in the balance sheet, but we will see in the first quarter. We see the chicken, chicken as Pilgrim's. Pilgrim's has positive outlook. We have chicken positive in the U.S., even Mexico and Europe. We are positive in terms of results. We are positive on pork in U.S. and remain a challenge of our U.S. Beef business that is we are in the cycle, and we have commented before that it's a tough moment. But we are -- even this -- in this business, when you look for the year, the results should be positive. It's not as it was before, but is more positive that when you compare the last quarter -- this quarter that we now show the results.

And then on the North American Beef performance in the quarter, you talked about a hedging loss. I think it was in the quarter, and then that's reversing in the first quarter. Just trying to get a sense for kind of the steady state profitability right now in that business. Can you quantify that loss that was in the 4Q? And did you say -- I know you said profit positive for the year. Are you expecting positive in 1Q as well? Did you say that?

Andrew, about half of the negative EBITDA came from this impact. Like I said, very unusual to have such a big variance in futures like what we had about [ $0.2, $0.2-some ] in 3 months are pretty atypical. Our outlook for 2024 would be low single digits. We expect that it is possible to have a breakeven scenario in a worse-case scenario. But in a worse scenario, but there is the seasonality of the business. So we should expect to see a first quarter of '24 and the last quarter of '24 being the worst quarters. And the second and third quarter, like always, being better quarters. And on average, being able to do that mid-single digits to breakeven result being that the first and the fourth quarter bringing the average lower and the second and third bringing the average higher.