MBRF Global Foods Company S.A. (MBRF3) Earnings Call Transcript & Summary

[Interpreted] Good afternoon. Welcome to Marfrig's Global Foods' Q2 2023 Earnings Call. This presentation is being recorded and interpreted simultaneously into both languages. [Operator Instructions] We have Mr. Marcos Molina, Founder and Chairman of the Board; Mr. Tim Klein, CEO of the Americas; Rui Mendonca, CEO for South American Operations; Mr. Tang David, VP of Finance and IR, Paulo Pianez, Sustainability and Communications Director and IR Director, Mr. Eduardo Puzziello are here with us today. Before we proceed, we would like to state that statements made during the conference are based on the business perspective of the company based on projections, financial and operational goals based on the company's beliefs as well as on information currently available to the company. Future statements are no guarantee of performance, because they involve risks, uncertainties and premises, and they relate to future events, and they depend on circumstances that may or may not occur. Investors and analysts should understand that economic scenario, among other operational factors may affect future results of Marfrig, and they can be substantially different from those estimated in these forward-looking statements. I'll turn over to Mr. Puzziello for his presentation. You may have the floor now, sir.

[Interpreted] Thank you all for attending Marfrig's earnings call. We'll start by showing you the highlights of the consolidated results for Q2 of 2023. Our consolidated net revenue reached BRL 32.5 billion for the quarter. Consolidated adjusted EBITDA was BRL 2.3 billion and consolidated adjusted EBITDA margin was 7.1%. During this period, the operations in North -- was positive BRL 2.4 billion. The operations in North America accounted for 45% of consolidated revenue, while the South American operations accounted for 18% and the BRF results accounted for 37%. When we analyze the consolidated adjusted EBITDA, the North America operations contributed with 32% of the total and the South America operations accounted for 25% and BRF's EBITDA was 43%. The U.S. dollar continues to be the primary currency in our results, accounting for 71% of consolidated revenue. The North America operation reported net revenue of USD 2.9 billion for the quarter and adjusted EBITDA margin of 5.2%. South America operations reported a net revenue of approximately BRL 6 billion and an EBITDA margin of 10%, about 50 bps higher than the margin for the same period of last year. Finally, it's worth mentioning that we concluded the BRF's follow-on in -- which raised BRL 5.4 billion. In addition, regarding our Marfrig Green+ program -- alongside the 100% of direct suppliers monitored by a satellite Marfrig currently tracks 82% of the direct supplies in the Amazon region and 71% of the direct suppliers in the Cerrado. Paulo Pianez, our Sustainability Director, will provide further details on progress of this program. I'll turn over to Tim Klein, CEO for the North America Operations. Tim, over to you.

Thank you, Eduardo. Let's begin on Slide 4, where I'll comment on the results for the second quarter. Starting on the left, sales volume for the quarter was 6.4% lower than the same quarter of last year. This was due mainly to lower fed cattle availability. Also, carcass weights decline resulted in less sellable product per head. Net sales were 2.9 billion, flat with a year ago, while EBITDA came in at 153 million, 60.5% lower than last year, with an EBITDA margin of 5.2%. As expected, the margins in our beef plants were lower versus last year's exceptional results. Overall, beef demand in the quarter was good, but the retail demand index suffered as higher beef prices took effect. Boxed beef prices increased accordingly on lower supply, but the increase was not enough to offset significantly higher cattle prices and lower drop credit values. Now I'll move to Slide 5, where I will talk about U.S. market data. Starting on the left, USDA reported Kansas live cattle prices averaged 174.72 per hundredweight, up 26.4% from a year ago. The USDA comprehensive cutout averaged 302.87 per hundredweight weight, up only 14.6%, while the drop credit declined 4.6% to an average of 12.87 per hundredweight. The cutout ratio was 1.75 versus 1.91 last year. As we look forward to the second half of 2023, lower fed cattle supplies will result in higher prices for fed cattle and reduced capacity utilization across the industry. While beef demand is softer, we are encouraged that consumers are willing to pay higher prices than in previous cycles. Although margins are narrow, we believe the industry will operate at profitable levels the rest of this year. Now I'll pass to Rui.

[Interpreted] Thank you, Tim. We'll now move on to Slide 6. I'll explain the performance of South American operations in Q2 of this year. On the left, we can see that the total sales volume reached 333,000 tonnes in the second quarter of '23, a 6% decrease compared to the same quarter of last year. This performance can be explained by mainly the reduction of operations in Uruguay, where drought impacted the availability of animals for the industry in the short-term, leading to an approximately 20% drop in slaughter in that country for the quarter. Moving on to the chart on the middle -- or in the middle of the page, we see that the net revenue in the second quarter reached BRL 5.8 billion, 18.6% below the revenue of 2022. In addition to the volume reduction, as I mentioned above, I would also like to highlight the decline in the average export prices when compared to the same period of '22. On the right, we can see that the EBITDA margin reached 10% this quarter, compared to 9.5% in the second quarter of 2022, representing a 50% -- or 50 basis point expansion. This is primarily explained by the reduction of the average cattle cost during the period, which more than offset the lower average export prices. In absolute terms, EBITDA reached BRL 578 million, 14.7% lower than EBITDA in 2022 due to the reductions in volume and revenue, as I mentioned earlier. I emphasize that the increasing participation of value-added products, greater market diversification and effective pricing system and a continuous operational efficiency program, they have all contributed to South American operations, maintaining healthy and more stable margins. Moving on to Slide 7. I'll discuss the performance of exports in the second quarter of 2023. In the chart presented export evolution, we can see that China and Hong Kong continue to be the main destinations for exports. They accounted for about 69% of South American international sales during the period. I reiterate that even as the Asian region remains the company's largest importer of beef, Marfrig has been focusing its efforts to increase the certifications of its units to other markets, aiming at seizing the best commercial opportunities possible. I will now turn it over to Paulo Pianez, he will discuss the highlights and sustainability.

[Interpreted] Thank you, Rui. Marfrig's journey towards sustainable development continues to achieve significant results this quarter, demonstrating that the launch of a Marfrig Green+ program, which is now 3 years old, it has provided the necessary means for implementing a strategy aimed at transforming Brazilian lifestyle aligned with climate and nature based solutions. Back in April, we hosted the Marfrig Green+ livestock trends and opportunities in Sao Paulo and in May in London, in partnership with Chatham House, where we shared the results from 1,000 days after the implementation of the program, 1,200 people attended it both online and presentially, experts, farmers, suppliers, partners, investors, NGOs, the universities, banks and government. With this program, Marfrig is making strong products in the sector that is most challenging topic, which is traceability. 100% of our direct suppliers have been monitored via satellite. We now have 82% of indirect suppliers in the Amazon region and over 70% in the Cerrado region, over 30 million hectares that are monitored daily larger than the United Kingdom and the state of Sao Paulo. Within the first framework of the program, which prioritizes regularization, and the inclusion of farmers, 3,393 farms have been reintegrated since 2021, up until Q2 of this year. Suppliers will have resumed operations in compliance with our commitments. As far as emissions go, Marfrig is in line with its reduction targets for both Scopes 1, 2 and 3 approved by SBTi, the science-based target initiative. This quarter, we published results related to climate change, water security and forests for the year 2022 in collaboration with carbon disclosure project. The company achieved a BBB rating ahead of the competition in the MSCI's ESG Index, Morgan Stanley Capital International. MCI Inc. is the world's largest provider of environmental, social and governance indices with over 1,500 ESG equity and fixed income indices designed to help institutional investors more effectively and assess ESG investment performance. In the quarter, Marfrig published its annual sustainability report for the 14th consecutive year, highlighting achievements in the field for 2022 as well as results in key commitments and goals following the GRI methodology. The company's consistency in social environmental matters is evidenced by the results achieved this quarter as well as by international assessments, positioning Marfrig as a reference in the field, while simultaneously contributing to the development of low carbon economy as well as the preservation, and recovery of biodiversity in the areas we operate. I will now turn over to Tang for the financial results.

[Interpreted] Thank you, Paulo. In the following slides, I'll show you consolidated financial results for Marfrig in the second quarter of the year. Once again, we will demonstrate the consolidated results of BRF alongside Marfrig following technical accounting regulation CPC 15 and CPC 36 Therefore, the information I will comment in the next slide, except when otherwise indicated, encompasses BRF figures. On to Slide 11. On the left for Q2, we generated a consolidated net revenue of BRL 32.5 billion. Breaking it down, 37% generated by BRF, 45% in North America and 18% in South America. During this quarter, 74% of the net revenue was tied to the dollar plus other strong currencies and -- 26% in Brazilian reals. On the right, you can see a generation of BRL 2.3 billion of adjusted consolidated EBITDA, 7.1% was the margin. Given the complex and challenging global macroeconomic environment, Marfrig achieved robust results outperforming peers. This is testament of our team's resilience in navigating volatile circumstances, our business model focused on value-added products as well as our financial discipline. On Slide #12, let me show you the free cash flow. On the left, we demonstrate Marfrig's cash generation, excluding BRF's consolidation effects. In Q2, 2023, Marfrig's ex BRF operational cash generation was positive at BRL 1.6 billion. We paid BRL 950 million in interest and investments for growth plus maintenance, amounted to BRL 430 million, resulting in a positive free cash flow of BRL 258 million. On the right, on a consolidated basis, operational cash generation in Q2 '23, considering BRF's performance was BRL 2.4 billion. After deducting CapEx, investments plus interest payments, free cash flow was negative at BRL 374 million. Slide 13, net debt and leverage ex BRF. At the end of Q2, 2023, Marfrig's net debt, not considering BRF's consolidation totaled USD 4.9 billion, in line with the previous quarter when measured in reals, net debt amounted to BRL 23.9 billion, a 5% reduction when compared to Q1 of this year, primarily due to the positive cash generation during the quarter, plus exchange rate variations between periods. Marfrig's ex BRF leverage was 4.08x measured in reals. Slide 14, consolidated net debt according to CPC's 15 and 36 with the pro forma resources from BRF's follow-on conducted in July, totaling BRL 5.4 million reached BRL 34.3 billion, a 14% reduction when compared to Q1 2023. In dollars, pro forma net debt totaled USD 7.1 billion. The consolidated pro forma leverage adjusted by the last 12 months EBITDA of BRF was 3.5x when measured in reals. On Slide 15, these are the debt profile details. Starting on the left, Marfrig ex BRF ended June 2023 with a cash position of around USD 2.2 billion. On the right, due to the consolidation under CPC's 15 and 36, the cash position at the end of Q2 reached USD 3.9 billion, already adjusted by the capital increase conducted at BRF, resulting in a final cash position of around USD 5 billion. I will now hand over to the operator. Thank you.

[Interpreted] [Operator Instructions] Vinicius Lovato asks the first question from Morgan Stanley.

[Interpreted] I'm actually Ricardo Alves from Morgan Stanley. I have 2 questions. Number one -- the first one is to Tim. Cattle prices are at a high, and it's not new. But according to historical seasonality seems to be jeopardized. There haven't been any price reliefs in recent months or years. And when we think about Q4, Tim, are you more concerned about price trends in Q4? Now at the beginning of winter, I don't recall whether in the past, different price dynamics plays out as to animal availability. Can you share what you expect as far as cattle prices are concerned or market dynamics for Q4? That would be very helpful. And my second question is about South America, the 10% margin stands out that was a surprise to us. But I have to -- I'd like to know how relevant was Brazil's contribution when, compared to both Argentina and Uruguay. We're talking about price coming down. But the same thing happens in Uruguay or spreads are getting better in Argentina as well. So I would like to better understand how much each of these markets contributed?

Yes. This is Tim. I'll answer your first set of questions. Regarding cattle prices where they're at today, yes, they are at near record levels. I will point out that even at these price levels, operating margins are in the black compared to the last time, we had cattle prices here, packers were operating deep in the red. So the demand side of the equation is definitely better now than it was in the past. We do expect that we're going to continue to see price escalation in cattle through this part of the cycle, which we do not anticipate will bottom until sometime in 2025, '26 as far as fed cattle numbers. But what we do know is that the industry will adjust production schedules, to the available supply of live cattle in order to maintain an operating margin that's acceptable. So we started to see that here at the last month or so. As we went into the summer months, Q2, that's seasonally the best time of the year for demand. Packers are generally running at full production as cattle prices went up maintain full production schedules in order to fill orders. Now, we come out of the summer months, and that's changing a little bit. So I expect we're going to see Q4 cattle prices really not a whole lot different than -- where they're at right now, given what we see as the supply in the very short-term. And one thing I will point out is that we believe that second half 2023 results will be similar to first half.

[Interpreted] Let me talk about margins in South America. Cattle cycles in Brazil has been favorable ever since last year. Cattle prices came down 18%, which contributed to good results. But we have made continuous progress in processed food, even in our full brand products that has helped us get these more significant margins, a 22% decrease in prices in Uruguay. And in Argentina, there was a 17% drop in the same period, but our operations there is flex over 50% from processed food feed. And we remain Vienissima for sausage and we're very close to food services chains. As far as expectations go, prices are coming down, even after Q2 especially in Brazil. And there's some recovery coming from China. So we have a very positive outlook for the remainder of the year.

[Interpreted] Lucas Ferreira from JPMorgan.

[Interpreted] I actually have 2 questions. The first one is to Tim. Tim, can you elaborate on the demand for beef in the U.S.? We've seen a slowdown cutout in the past month. I don't know whether this is a seasonal effect or whether you can detect any downtrending, retail are promoting more chicken, because there seems to be more margin for them rather than beef to believe there will be some slowdown or drop in prices for the cutout. And the other question is to Rui. Rui mentioned China, you expect something -- some improvements from there. What price levels are you -- have been able to get from China, if you can say that more information about the demand, inventory levels, but when can we expect some better prices of exports getting better and more consistently.

Lucas, I'll answer your first set of questions regarding the demand for beef. We're pretty pleased with that. We think the demand side of the equation is holding up very well. Certainly, at these price levels, consumers are trading off, they're buying more of the cheaper beef items, ground beef and in cuts and less of the middle meats, the ribs of the lions. So the price dynamics have changed. But overall, cutout value has remained relatively firm around this $300 level. So we did see a decline coming out of the barbecue season in May and June, but we've kind of settled here around 300, the next move in our opinion will be higher as we go into the fall season. So that's our expectation. Certainly, retailers will feature chicken if it's cheaper. But our experience in the past is that consumers will continue to buy beef they'll make different decisions on which cuts to buy, but beef is the primary protein that they're interested in.

[Interpreted] Let me now address China. Q2 showed that prices remained flat due to their inventory levels and especially the inventory levels that were produced in Brazil before that suspension. As of June, demand and prices are on an upward trend. These price increases are over 10%. And we'll see that reflected as of August in the SESC data. The outlook is positive. The second half is of a large demand last year was over 80% bigger. So the focus is for the beginning of next year. So we expect very strong second half for both price and demand in China.

[Interpreted] Thiago Duarte from BTG Pactual asks the next question.

[Interpreted] I actually have 2. The first one is to Tim. Based on the comment he has just made about the fact that the industry is showing signs of adjusting its capacity, by having less supply of cattle this year. So here's my question to Tim. Do you believe that this is going to be the industry's behavior further down the road? When you take USDA numbers, the outlook for next year is a high digit expectation of less availability of cattle. Is the industry ready to show that rationality level once you have more of a shortage of cattle, that's the first question? My second question is just a follow-up and maybe to hear your take down the road and my focus now is on South America the volume decrease, driven by the decrease in slaughter in Uruguay. Is this the lowest point we're supposed to expect in the second half?

Yes. This is Tim. I'll answer that question. I do believe that the industry is showing restraint in terms of production numbers, given -- the declining supply of live cattle as supplies decrease. I think the industry will continue to lower production schedules. And our expectation is the industry will run that less than 40 hours a week through the whole -- this part of the cycle. And that gives us a lot of opportunities to do a lot of preventive maintenance in the plants, by having the weekends free. And that's what happens every time we go into this part of the cycle. So it should be no different this time.

[Interpreted] Let me talk about Uruguay. That was a decrease of about 20% in the number of slaughters in Uruguay due to the draft. 2 highlights that reduction took place in cows. So that was not a major change in the total number of the herd. The herd was 4% to 5% bigger than the same period of last year. So that was that herd recovery, slaughter numbers in the second quarter was 8% above those of that of the second quarter of last year, recovering to a certain extent in this year already. Let me take this opportunity to point out that we managed to grow the share of organic beef. That's part -- or that explains in part that recovery.

[Interpreted] Antonio Hernandez from Barclays asks the next question.

[Interpreted] That you provided on the U.S. operations. My question is regarding sight of America operations more specifically Brazil, domestic market. If you could also provide more light in terms of the consumer environment and what you're seeing starting the second half of the year in terms of the month. That will be helpful?

[Interpreted] Demand has been strong in the domestic market, especially for food service and branded products. Marfrig's brand accounts for over 34% of our beef revenue, a 12% increase year-on-year. Let me point out the industrialized product in South America accounts for 17% of revenue. So most of it is due to the domestic market, which is gaining traction. And we end up adding the share of added value products, which provides a more stable and healthier profile. So by boosting exports, we'll be reducing that production, so for the domestic market.

[Interpreted] Okay. Could you please remind us what the percentage of value-added products that you have there?

[Interpreted] Today, they account for about 17% of Marfrig's revenues in South America.

[Interpreted] Isabella Simonato from Bank of America is next.

[Interpreted] My question is Marfrig standalone.

[Interpreted] Please ask your question in Portuguese channel, please.

[Interpreted] Can you hear me okay now?

[Interpreted] Yes, we can hear you. Go ahead.

[Interpreted] So here's my question. I'm looking at Marfrig standalone, the balance sheet and cash generation. You reverted that cash burn, we see what we saw in Q1. Can you give us some more color as to your expectations as to cash flow -- and what's your take on deleveraging your net debt EBITDA ratio as we move forward? The BRF follow-on won't impact Marfrig at the holding level. But once the U.S. EBITDA come down, how are you going to address that in your balance sheet?

[Interpreted] This is Tang, Isabella. That capital increase we announced yesterday, once again, we'll strengthen our capital structure. For the second half, it's usually strong as far as cash generation is concerned, in Q2, we generated BRL 258 million of free cash flow. We have now working capital of BRL 420 million, and it's going to be even stronger in the second half. And on top of that, we have operational improvements that will continue. These are all drivers to bring that consolidated leverage down. What's your expected net debt EBITDA for 2023 or maybe 2024. I'm not going to give you any guidance in that respect, but it's going to come down.

[Interpreted] [ Pedro Neto ] from XP is up next.

My question is a follow-up on the last question. When you talk about improvements of working capital in Q3, can you give us some more color in amongst the different regions? What are the main drivers in South America, in North America? That's my first question. My second question is about, I would like to get your take on the recent announcements of suspension -- on Argentinian beef 15 days initially. Is that a matter of concern? Is there any concerning precedent in there? I would like to hear your take about this recent announcement?

[Interpreted] Let me start by addressing the question about Argentina, the officially meeting between the government and the industry representative will take place at 3 p.m. There's nothing official about that. Of course, there's a negotiation going on, looking for some help from the industry and in return, there may be a ban of about 15 days. We may have news later in the afternoon. But our operation in Argentina, is completely flexed. Industrialized account for over 50% of our operations in that country. If we reduce raw materials, will be even beneficial to our production of industrialized products. But the way we see it, it's non-official. It's an unofficial piece of news. So we have to wait and find out what's going to happen as to that likely ban of 15 days, and we'll have to wait for their official decision. I'll turn it over to Tang.

[Interpreted] [ Pedro ], as far as working capital, just like I said, we have a release of BRL 420 million in the quarter. The main driver of that positive working capital was from the suppliers account in South America, as you know, cattle prices were down. And on top of that, we are continuously financially managing our capital with suppliers. And one of the activities was to extend payment terms with suppliers. As far as receivables, we have a release of 115 -- 380 from suppliers and 115 in receivables. In receivables, traditionally, just like Rui put it. Q3 have demanded from China and in exports to China. We have 40% payments in advance that contributed to that positive working capital.

[Interpreted] Sebastian Hickman from JPMorgan is next. This concludes the Q&A session. I'll turn over the floor to Mr. Marcos Molina for his closing remarks.

[Interpreted] Good afternoon, everyone. Thank you all for attending. I would like to congratulate all our divisions, North America, South America and now BRF for having performed greatly despite the challenging scenario. Once again, thank you all, and our IR team is available to answer any questions you may have, and let's finish the year with a bang. Thank you.

[Interpreted] Marfrig's earnings call has come to a close. If you have any questions submit them to the IR team [email protected]. Thank you for attending once again, and have a great day. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]