JBS - Q2 2023

Transcript

Operator (participant)

Good morning, everyone, and thank you for waiting. Welcome to JBS S.A. and JBS USA second quarter of 2023 results conference call. With us here today, we have 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. This event is being recorded, and all participants will be in a listen-only mode during the company's presentation. After JBS'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. Before proceeding, let me mention that forward-looking statements are based on the beliefs and assumptions of JBS's management. They involve risks and uncertainties because they relate to future events, and therefore, depend on circumstances that may or may not occur. Now, I'll turn the conference over to Gilberto Tomazoni, Global CEO of JBS. Mr. Tomazoni, you may begin your presentation.

Gilberto Tomazoni (Global CEO)

Good morning, everyone, and thank you for joining this conference call of our Q 2023 results. The figures we are present today testify to the strength 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 it in our previous call, in this quarter, we executed a series of important measures to regain efficiency of Seara and U.S. Beef. The first results have started to happen, still below our expectation. We hope that more significant results will show in the next quarters. Even when we face in a global market, market by an increased supply of poultry and tighter margin of beef business in the United States, the promising prospect we anticipate in 2023 have begun to materialize.

Although the global context remain challenging for the protein sector, we are confident that we have started a gradual recovery of our margin. In this 2nd quarter, we doubled our margin over the 1st quarter. Looking ahead, we see a scenario of more balanced poultry 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 a great example when we speak for the strength of our global diversification, geographical, by 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.

Continuing in Australia, I'd like to highlight that Huon is performance above our expectation, validating our decision to enter in the aquaculture sector. In Brazil, the current cow cycle is also favorable. The expansion of sales and of value-added product is strengthening partnership with suppliers and customers, increasing domestic market demand, and open a new foreign market, reinforce our perception of a positive situation for our beef in the upcoming quarters. In the United States, the challenge of beef business will persist for the coming months. Consider a scenario of tight margin with a low cattle supply. Our diversification strategy has been complemented by investment in value-added product and strong brands. In the country, we operate.

In the end of March, we started producing breaded product in our plant in Rolândia, a state of Paraná in Brazil. The results of this operation are promising. Even with market challenge, we had a relevant cash flow generation. 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 BRL 2.2 billion in dividends. The increase of our leverage was expected. We prepared ourselves for this moment, even extending the average terms of our debt, increased liquidity, and reduced the cost of our debt.

All of these factors reinforce our view 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 our dual listing proposal announced, announcing in July, a transformational step to build a new growth avenue just off our IPO was in 2007. Our dual listing strategies will give us more flexibility to financial our growth and deleverage, 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 Securities and Exchange Commission, and we will also disclose our financial results in U.S. dollars. This is aligned with our investors, which for an 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 70th anniversary, a company that start in a small butcher in the countryside of Brazil, and today, one of the largest food company in the world.

We are confident that with a diversification global platform, 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, we also thank you for closing follow our journey. Now, hand over to Guilherme, who will detail our results. Guilherme, please.

Guilherme Cavalcanti (Global CFO)

Thank you, Tomazoni. Before moving on to the operational and financial highlights, and in addition to the comments already made by Tomazoni on the dual listing, I would like to emphasize the need for our investors to participate in the shareholders meeting that will address this topic. We do not doubt the potential of unlocking value that an event of this magnitude can bring to the company and its shareholders. Moreover, last year, several bondholders requested that we register the JBS bonds with the SEC. We have attended that request in July. We obtained the effectiveness of the registration of the 11 senior notes that we have. This important step is essential to expand the investor base, increase the liquidity, and investors' confidence.

Since we announced the registration on May 19, our spread over Treasury has dropped approximately 1 percentage point, reducing the company's cost of capital and the interest rates on future funding. With this registration, JBS became a public reporting company, disclosing its information to the SEC as of this quarter. We will be filing using the 6-K form with financial statements and press release in U.S. dollars. This is aligned, as Tomazoni mentioned, with our investors' desire to be able to better compare JBS with its international peers. It's also aligned with the company's operating structure, which has the majority of its revenues in dollars. Starting next year, JBS will become a SOX compliant, having financial statements in PCAOB standards, will be subject to FCPA compliance, as well as other factors that contribute to the company's governance.

The dual listing has the potential to introduce further governance enhancements. In June, we also announced the payment of interim dividends in the amount of $448 million, equivalent to $0.20 per share. Let's now move on to the operational and financial highlights for the second quarter of 2023, starting with slide 12, please. Net revenue of the second quarter was $18 billion. Adjusted EBITDA totaled $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 this materialized in the second quarter.

This confidence of ours is based upon the strategy of geographic and protein diversification, 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 internal issues and address them appropriately. Please now move to slide 13. Operating cash flow in the quarter was $1.1 billion, an important improvement when compared to the 1st 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 receivable and reduction in inventories. As a result, as a result of reduction in the price of raw materials, mainly grains and live 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 the last quarter. The first is related to grains. We mentioned that we would potentially have a gain of $340 million in the year in terms of grain prices. Now, we are estimating $450 million, because due to the decrease in grain prices, mainly corn. We already have captured $150 million this quarter, 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 already happened in the second quarter.

Additionally, the tax to be refunded of $85 million in the U.S. was already had a $30 million impact in the second quarter. The remaining entered in July, and therefore, it will appear in the next earnings release. Finally, we had mentioned a reduction of $250 million of finished goods inventory for the year. There, there has already been a reduction of approximately $110 million in the second quarter. Capital expenditures in the quarter was approximately $394 million, which 51% relates to maintenance CapEx. Considering the above factors, free cash flow for the quarter was positive in $366 million. Moving on to slide 14, we have the evolution of our debt profile.

Net debt at the end of the second quarter was $16.7 billion, practically stable compared to the first quarter. The Adjusted EBITDA of $903 million and the improvement of in working capital of $355 million were sufficient to the payments of the dividends in the amount of $148 million, CapEx in the amount of $394 million, and accrued interest of $263 million. Net interest expense for the quarter was $265 million, flat when compared to the previous quarter. It's worth mentioning that 75% of our debt is in the form of dollar-denominated senior notes with a fixed interest rate. Leverage in dollars increased to 4.15.

The increase is explained by 56% reduction of the EBITDA of the last twelve months, ending in the second quarter when compared to the same period in, of the previous years. Our average debt term is quite comfortable in 9.3 years, with the first major maturity occurring only in 2027. Let's now go quickly through the business units. Starting with Seara on the slide 15, net revenue for the quarter fell 3% year-over-year, reflecting 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 breaded plant inaugurated in the first quarter is at an accelerated pace of production and with good sales performance, further enforcing the growth of value-added portfolio. Moving now to slide 16, JBS Brazil re- registered a stable net revenue in relation to the same period of the previous years. Beef exports reported a growth of 10% in net revenue and 2% in the domestic market in the annual comparison. It's worth noting that the results for the first quarter were impacted by the self-embargo of beef exports to China after the confirmation of an atypical case of BSE. That generated a larger inventory of beef in the domestic market and a decline in the exports for the period.

Thus, with the end of the self-embargo and favorable beef cycle in Brazil, coupled with a greater international demand for beef, both sales and profitability were positively impacted in the second quarter. Moving on to slide 17 and US GAAP, from now, from now on, JBS Beef North America, net revenue grew 5% year-over-year, and the margin was 1.4%. Although profitability still reflects the turn of the cycle, the cattle cycle in the annual comparison, the sequential improvement in profitability is a result of a favorable seasonality in the period and the operational 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 annual comparison, EBITDA margin grew significantly to 8.6% in US GAAP.

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 of 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. Pilgrim's Pride, on the slide 20, represented a reduction in net revenue of 7% in the second quarter in the annual comparison.

In the U.S.A., despite still adverse scenario in the prices of products for the use of raw materials, big birds, we were able to improve profitability through a more diversified branded portfolio and our partnership with key customers. In Mexico, the normalization of supply and demand, coupled with the adjustment in the live chicken operation, contributed 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-office activities, and increasing in partnership with key customers. With that, I would like now to open to our question and answer session.

Operator (participant)

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 touchtone phone at this time. If at any time you would like to remove yourself from the questioning queue, press star two. Please hold while we gather your questions. Our first question comes from Lucas Ferreira with JPMorgan.

Lucas Ferreira (Senior Equity Research Analyst)

Hi, everyone. Thanks for taking my questions. My first question is regarding the initial comments that Tomazoni made about the dual listing, making the company more flexible in the future to grow, and also kind of keeping the balance sheet under control. My question is, if you already see the company, already sees opportunities in M&A, the company was a bit more quiet in terms of M&A over the last two years. I guess, invested a bit more in organic growth as opposed to M&A. My question is, if you see the market already kind of more favorable or more interesting deals happening potentially this year or next year, that could justify eventually even the company raising capital to pursue M&A? The second question is regarding China.

I mean, there were several comments made about the markets in general and the Portuguese call, but I wanted to specifically focus on China, how you see the market there. We've been seeing a very important economic slowdown. If this is, in your view, impacting the protein prices, I'm seeing, you know, the type of flavor of inventories in China. Any, any view that the prices of all proteins, pork, chicken, beef, could be decreasing in the second half versus the first half? Thank you.

Gilberto Tomazoni (Global CEO)

Thank you, Lucas, for the question. About your question related to M&A. We in the last years, we, we, we made some greenfields, because the price of the assets, or the target was we consider that is in a value that not great value to us in terms of margin, in terms of multiples. Because of that, we start a process to, to build the greenfields. We, we see now the market more reasonable, and we-- when you say that this as the, this dual listing, has the potential, a transformational potential, like 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.

This is kind of acquisitions we are looking for in the future. We don't, we don't have anything now, to that, for sure, we are creating conditions for that in the future. I think is, we have a potential to, to move our multiples in, with, with, a right acquisition in terms of value-added or the other business that we are mentioned before, that it is our strategy to enter in aquaculture. This is not. We don't have anything for now. With this, for now, we are focused to be approved our dual listing, that we can think about greater after that. About China, and, I'll let if you, whereas we compliment our, or Guilherme. I see China as...

We see now in the short term, we had decline in terms of price and decline in terms of volume. This was, was because of the end of the lockdown there, and because we have BSE in Brazil, and then we have this situation that some volume of meat was in the water, and that, you know, decide to enter, not enter, and then was approved in the 1 moment, and everything. That created a oversupply, or say, oversupply for the moment. Now the price decreases. We see from that now, the all the price was recomposed. I see that market keep growing because it's structural. We need to focus on the demand for protein. We are need to produce till 2050, 70% more protein.

This is, this is a fact, and the, and, and the, the consumption comes from Asia, it come from Sub-Saharan Africa. You made a specific question on China. I see that the China consumption of beef keep growing. They are be not affected by the situation now because beef is consumed for the top of the pyramid and not for the low of the pyramid. This, for me, it's structural. It will be not change because of the market situation or not, because the consumption is too low compared to the other parts of the world, is one thing. About beef, about chicken and pork. Pork, you know, 50% of the pork is produced and consumed in China. This is, will remain. It's the...

We had the problem before of our disease, this will recompose it now. I see that we'll be start buying as they buy it in the, in the, in the past... it's, it's a, it's a, it's a small volume compared to the old consumption there. Of course, small volume for China is big volume for each other country, for Brazil as well, for example. Still, will be not, will be not the focus to produce pork to supply China. China is opportunity in terms to supply pork. Other, other countries there is really an opportunity to supply. Chicken is the same. I don't know if, if someone of my colleagues want to complete?

Guilherme Cavalcanti (Global CFO)

No, I just, I just put some color. When I joined JBS almost five years ago, the per capita consumption per year of beef in China was four kilos per person. Today, it's 7.8.

Wesley Batista Filho (CEO)

No, nothing to add to there.

Gilberto Tomazoni (Global CEO)

Oh, thank you.

Lucas Ferreira (Senior Equity Research Analyst)

Thank you. Thank you very much, you all.

Operator (participant)

Thank you. Our next question comes from Andrew Strelzik with BMO.

Andrew Strelzik (Restaurant Analyst)

Hey, good morning. Thanks for taking the questions. My, my first one is about the expectations for the margin recovery in Seara for the rest of the year, and how you're thinking about the margin potential for that business in the back half. You talked about feed cost benefits, you've talked about improving poultry supply demand. What are, what are the other puts and takes? How much more efficiency opportunities is-- are, are there to, to, to recover there that, that you didn't recapture in this quarter?

Gilberto Tomazoni (Global CEO)

Hi, Andrew. Thank you for the question. We see that the... We, if you look for our results, the efficiency we kept in this quarter was around 1.1% in terms of EBITDA. We see, we have already identified in the from the farms to the processor plants. In farms, we use the feed conversion, mortality, and in the factory, is yield and productivity. We see more 3%-4% the opportunity to be kept in these, in these sectors. I don't know if I answered your question or.

Andrew Strelzik (Restaurant Analyst)

That's, that, that was, that was part of it. That's very helpful. I guess the rest of it is just, you know, when you think about how much better, given the poultry supply demand, given the feed costs, how much... And the, the efficiencies, how much better can the Seara margins be in the back half of the year, in your opinion?

Gilberto Tomazoni (Global CEO)

It, it's difficult to say when, but our-- this business, Seara business, with our portfolio we have, with the brand we have, Our expectation for this business is from 12%-15%. This is the margin that we are focused to have. Of course, these, the conditions to be there should be more reasonable supply in terms of the market. I mentioned in the Portuguese call that Seara, we have invested BRL 8 billion in the last four years. 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 standards, because it's the ramp up.

We, we, we have planned during this year, to in the second half of the year, we have more one plant to ramp up, and the beginning of next year, we have more two plants to ramp up. This is create an additional cost, but they produce much higher in terms of EBITDA, because we have an example now for breaded product. We ramp up the three months ago, the plant, and we are, we are full capacity already. That was much much quick that we expect to be, to be full. Maybe it will be not all of the category are the same, but we can say, look, it's something that we see that Seara, in the future, we are investing for grow margins because we are invested in value-added. What we expect, Seara, we, the expectation is 12%-15%, more to 15% than 12%.

Andrew Strelzik (Restaurant Analyst)

Okay. That, that's very helpful color. I appreciate it. 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 up 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.

Gilberto Tomazoni (Global CEO)

Andrew, in Australia, we Australia and Brazil, both, we are in the beginning of the cycle. We just start, we are mentioned that last quarter when the results of Australia was, was really below our expectation. I mentioned that thought. The herd is in the, in the land, is in the farm, is not come yet to the, the processor plant because of the favorable weather conditions to the farmers to keep, to keep, to keep the cows at the land. Now, because there is a, there is a, there is a, a optimal moment to sell, now they heard that the cows start to go to the, to the, the, the factories.

We are in the beginning. Australia, we are, we are, we are ramp up our operation. Before we work some plants for three days, now we have a five days per weeks. Now we are looking for labor to, to, to, to have the second shift in the beginning of next year. We see Australia for good conditions for the next two years. It, it will be not different from Brazil.

We see the, we see that the favorable conditions for Brazil for the next two years, because both are the beginning. They are opposite to the U.S. I think when they are the end of the cycle, U.S. start the new good cycle there. I think this, this is the, this is the beauty of our diversification, because we have in the same, same, same business, we have different geography, and we have different moment of the cycle. This is how I put a lot of emphasis. Look, there, there is the, the, the strong competitive advantage of JBS to have this, this diversified platform.

Andrew Strelzik (Restaurant Analyst)

Great. Thank you very, very much. I appreciate it.

Operator (participant)

Thank you. Our next question comes from Priya Ohri-Gupta with Barclays.

Priya Ohri-Gupta (Managing Director and Fixed Income Research Analyst)

Hi, Priya Ohri-Gupta from Barclays. Thank you so much for taking the questions. I was hoping we could start with sort of the, the pork market in the U.S. As you mentioned, you know, some of the more recent data seems to be a little bit encouraging. How should we think about margin performance for that trending over the back half of the year? I know you mentioned some of the USDA data for the medium term, trying to get a little bit more of a shorter-term perspective, maybe six, the next six months or so.

Wesley Batista Filho (CEO)

Priya, good morning. Like I said, in the Portuguese call, we believe that the third quarter is going to be a good quarter, but better than the first half of the year. You know, fourth quarter is too early to tell. For these margins to really, really change and go back to what historical, historical has been, we still think that there will be need a need for a bigger adjustment in number of sales and the total production of pork in the U.S. We are optimistic about third quarter. Fourth quarter, we're, we're not, it's not yet clear to us, but we expect that the second quarter should be, second half of the year should be better than the first half overall.

Priya Ohri-Gupta (Managing Director and Fixed Income Research Analyst)

As you think about some of the production capacity that's out there, does, does that need to come down at all? Do it need to be facility closures in order to support what's going on on the pork side?

Wesley Batista Filho (CEO)

Priya, from our side, we on our, on our end, we know we have very, very efficient plants. Most of our plants are double shift. This is not from, not from our side. It's very difficult for me to try to estimate what this looks for, for the rest of the industry. 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 south facilities coming out of market overall and the newer facilities being more productive overall. We, we're, we believe that that's something that, that is a trend, but talking about facilities will be very difficult. On our side, it's, it's, all of our plants are double shift, very efficient, very stable, stable customer base, and stable supply base.

Priya Ohri-Gupta (Managing Director and Fixed Income Research Analyst)

Okay, that's, that's helpful. Jeremy, if we could switch a little bit to talking about your free cash flow performance. Congratulations on the working capital improvement in the quarter. As we think about, you know, the dividend that was paid in this quarter and the potential for this special dividend to be paid in the 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?

Guilherme Cavalcanti (Global CFO)

Thank you, Priya. Now, we, we, we expect that we'll be generating free cash flow in the second half to fund this this possible, a special dividends if the dual listing is approved on the general assembly. From now to the, for the, to the time that we would have to pay this dividends, we expect to generate free cash flow, basically because of our EBITDA improved and because of the working capital release from the grain side, which we released at $150 million this quarter, and we expect about $300 million of working capital release, given the, the, the future markets of the grain prices. We also have better margins compared to the first half.

We expect to generate free cash flow, and we would not have need for funding to pay these dividends. However, we may access the market for liability management purposes. As you see in our press release, we have $2.2 billion of short-term debt. If we have opportunities to extend the short-term debt, we may do it.

Priya Ohri-Gupta (Managing Director and Fixed Income Research Analyst)

If we think about, I guess that short-term debt, and this brings me to my next question around your CRA notes or the agribusiness receivables certificates, there is a net leverage threshold of 4.75x in reais that would sort of limit additional incurrence. 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?

Gilberto Tomazoni (Global CEO)

Hi, Priya. No, there's no concern on that. First, you're right, is the only covenant that remained is on a part of these agricultural receivables, which complies of around $1 billion. The first is that we can just fund from trade finance or any other capital market and pay these $1 billion. However, as you mentioned, it's an incurrence covenant, and we have several baskets beyond that threshold. If we reach 475, let's say by the third quarter, we still can raise more 1% of our assets, plus more 25% of our EBITDA, and plus other refinances, and we'll be able to refinance all the debt that we had at that time.

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. These, these agriculture receivables that we still have covenants because we issued them before it grain, granted investment grade. This will be amortizing also, in the next year, then we can accelerate the amortization with other types of funding. Given that we think that, as of the fourth quarter, we start to leverage, given that the statistical effect of getting the last 12-month EBITDA, statistical effect will be ended in the third quarter. We start to leverage on the fourth quarter and beyond, so this may be a 1 or at most 2-quarter event of being above that threshold.

Priya Ohri-Gupta (Managing Director and Fixed Income Research Analyst)

Okay, that's very helpful. Then, 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 better aligning your capital structure? Thank you.

Gilberto Tomazoni (Global CEO)

Yeah, Priya, yes, we have this, this possibility in our documentation. U.S. will always be a co-issuer, but we can move the Luxembourg, issuer to the Dutch company. We don't have any urgency in doing that, but it's. Because the financials that we'll be filing in SEC, as of this quarter, it's already the consolidated numbers. If there's any simplification of gaining doing that, we have this flexibility for sure.

Priya Ohri-Gupta (Managing Director and Fixed Income Research Analyst)

Thank you so much.

Operator (participant)

Thank you. Our next question comes from Antonio Hernandez.

Antonio Hernandez (Analyst)

Hi, good morning. Thanks for, for taking my question. Just a quick follow-up on the, on the Australia segment. I mean, you, you already mentioned where could we see some, some upside there, but if you could quantify that, that would be appreciated. Then I have another follow-up. Thanks.

Guilherme Cavalcanti (Global CFO)

Antonio, thank you for the question, but I had, I have a problem to understand your question. If you don't mind, please, could you repeat?

Antonio Hernandez (Analyst)

Yes, sure. Regarding Australia, you already mentioned where could we see some upside, going forward, if you could quantify that, that would be appreciated. Then, I have a quick follow-up.

Guilherme Cavalcanti (Global CFO)

We not give a forecast about our business. It's not our policy. I can tell you we are the beginning of the cycle, if you look for the past, our results, it's a good perspective, how we can deliver. 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, will be, will be similar or could be higher, could be low, because, of course, the Australia export 70% of the production.

If the marketing conditions will be help Australia, for example, in U.S., we have now reduced in terms of availability of cattle, could be help Australia to be more, more, more active in international market because we are competing some market. It is, we see that, we see for Australia from the coming quarters, the results in the similar we have, we have released it.

Antonio Hernandez (Analyst)

Okay. Okay, thanks. Just, a quick follow-up regarding the U.S., just as, as you mentioned, overall, what do you think are the cattle costs, in the U.S., especially after live cattle costs, prices are, are being higher after another one? If you could provide more light on, on the U.S. in that sense, that will be helpful. Thanks.

Wesley Batista Filho (CEO)

Sorry, Antonio, could you, could you repeat that question, please?

Antonio Hernandez (Analyst)

Yes. On, on your perspective on cattle costs in the U.S., especially after cattle prices are being higher, they're a little bit unexpected on, on that, but any, any perspective on, on the U.S. beef business? Thanks.

Wesley Batista Filho (CEO)

Antonio, you know, what exactly the cattle cost going to be, is going to depend a lot on the, on the activity level of the industry, on the, on the supply, on any given month. We, we know that from a supply perspective, we, we are in a, in a tight supply of cattle right now. We're going into 2024, in which we're going to start seeing a herd rebuild, hopefully, and, and, and all signs point to that.

We're going to start seeing heifers coming out of the, the, of, you know, not going to feedlots and actually going to breeding herds, which should, in 2024, actually restrict supply further, which is all that the, the, the, the public data points to. This is no, no news. We, we, we expect that, you know, we already are in a tight supply situation, and, and going into next year, we're probably going to see a tighter supply for, for cattle. Okay, thanks for the call. Have a nice day.

Operator (participant)

Thank you. Our next question comes from Carla Casella with J.P. Morgan.

Carla Casella (Managing Director)

Hi, great. Thank you. Just a couple, follow-up 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 the... Is that, that's contingent on the listing, and the timeframe of it?

Gilberto Tomazoni (Global CEO)

Okay, Carla, yes. First, it, it is contingent on the approval or the listing on the general assembly. Expectations is to be paid only by year-end of this dividend, despite it has been announced in the last quarter.

Carla Casella (Managing Director)

Okay, is that assume the amount, assuming that would be the typical Brazilian 25% of net income payout, or was it just a, you know, I'm guessing how you rove, I'm wondering how you rove to that number?

Gilberto Tomazoni (Global CEO)

The number which we already announced it, which is 1 real per share or $0.20 per share, that is the same that we paid in June, $448 million. This amount was just because we want to still try, as all other food companies, we want to try to make our dividends more stable for predictability purposes. Last year, we paid $900 million in dividends. This year, if it's approved on the general assembly, will be another $900 million. The main reason for us to put this special dividend is to, 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.

Carla Casella (Managing Director)

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 20%, 25% Brazilian requirement for payout?

Gilberto Tomazoni (Global CEO)

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'll have, we will be designing and mentioning a new policy that we already been working that since the last trials. Will be more generic. Basically, will be a language. The new dividend policy will be a language that it is based on our free cash flow generation. Because, because we are a cyclical company, we have to have the flexibility, although we'll be trying to make it the more stable as possible, but we cannot commit ourselves to more specific parameters given the cyclicality of our business. Will be something that we'll mention that will be based on our free cash flow generation.

Carla Casella (Managing Director)

Okay, great. Then you commented that, you know, third quarter will be your, your peak leverage, and you should start deleveraging by the fourth quarter as the cycles, we lap easier comparisons in the cycle. Do you think you'll be able to keep your leverage inside of the 5x, or could you have ratings risk on third quarter earnings?

Gilberto Tomazoni (Global CEO)

Hi, Carla. Yeah, I think that. Remember that the rating agencies, they work on a moving average of 2 historical years and 3 forecast years. 1 quarter, being on levels of 4x-5x, is not enough for them to make a revision. And this third quarter peak will not come from an increase in the debt. A statistical effect that the denominator will be exchanged, last year's EBITDA of third quarter of $1.9 billion to something lower. On the fourth quarter, we already had a more tough fourth quarter last year. We expect to be better this year.

This, this statistical effect finishes, and our free cash flow begins the our deleveraging process. This is not a guidance, but just to give you up the an account that let, let's see what, what is necessary to happen for us to be at the 2.5x, which is our long-term target by 2025. If we so for making this calculation backwards, if you have 5% margin this year and an average of 6.5% of margin in the next 2 years, we will reach the 2.5 by 2025 on the third or fourth quarter. We this is the natural path of the leverage that the rating agencies can consider in their forecast.

Remembering that the last 5 years, our EBITDA margin averaged 10%. In the last 10 years, this average was 9%, and if the last 15 years, this average is 7.5%. If we consider margins below those levels, we still manage to reach 2.5x 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 billion-$1.1 billion per year.

Our leasing, around $500 million per year. Our capital expenditures on a range of $1.3 billion-$1.4 billion per year. Tax will be, this year, will be much lower than last year, given the tight margins that we are presenting. Break-even EBITDA, 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 deleverage the company.

Carla Casella (Managing Director)

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 of your team, or are you fully staffed at this point?

Gilberto Tomazoni (Global CEO)

Sorry, Carla, could you repeat the question, please?

Carla Casella (Managing Director)

Yes, yes. You've made some, management hires over the last six months or management changes, and I'm just wondering if the, if all of your key roles are filled at this point, or are there any, missing links of holes you're expecting to fill between now and year-end on the management?

Gilberto Tomazoni (Global CEO)

Carla. Okay, it's clear. Thank you for the question and the opportunity to, to clarify. We have made some change in our structure in order to accelerate the change we need to do in our operations. We are now designed, after the delisting, what will be the right structure for manage our business. So far, we are not in the market for look at someone for any position, but all the time, we are use our internal internal team to promote for different positions. If you look for the top, top level now, C-level, we are not looking for anyone for any position at the moment.

Carla Casella (Managing Director)

That's great. Thank you.

Operator (participant)

Thank you. Our next question comes from Ben Black with RBC.

Ben Black (Director of Investment Grade Desk Strategist)

Hi, guys. Thanks for taking my call. Just a quick question on a go-forward basis. I know that in the infographic that you guys set up, showing how the dual listing will go, you'd mentioned, you know, the possibility to raise money to potentially deleverage. Maybe just help frame how you see accessing, potentially accessing the market in the future to deleverage the balance sheet, under what consider, under what circumstances you would do that, one? Second of all, you know, your, your comments about potential M&A in the future earlier in the call, maybe just speak about how using equity to do acquisitions would, would be considered? Thanks.

Guilherme Cavalcanti (Global CFO)

Thank you. Thank you. Thank you, Ben. Just as I mentioned before, we don't need an equity raising to deleverage the company, as, as I mentioned in the previous question, only if we wanted to speed up this deleverage. I think, situations that could, could, might raise equity, I would say first was on a transformational M&A, that it could use this currency, which we don't have anything right now, but that's a possibility.

It will also depend on how fast the rerating of our shares happens. Just to give you a sense, PPC, which we own 82%, has a market cap of $6.1 billion, while JBS has a market cap of $8.8 billion, more or less. PPC multiples, it's in a range of 9x, while our multiples in the range of 6x. In order to have an efficient equity raising, we would need this rerating to happen, then, so the dilution will be less for the shareholders.

Ben Black (Director of Investment Grade Desk Strategist)

Then just one last follow-up question. you know, I, 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 though, where they were less comfortable, would you feel comfortable raising equity to preserve the investment grade rating?

Guilherme Cavalcanti (Global CFO)

That's something that you have to think when it comes. As I mentioned, it will all depend on the level of the, the share price, will be the multiples that we have. This, this is something that we have to discuss on the context when it appears.

Ben Black (Director of Investment Grade Desk Strategist)

Perfect. Thanks, guys.

Operator (participant)

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.

Gilberto Tomazoni (Global CEO)

I'd like to thank you, all of you, to be part of, our, 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 company in the world. Thank you.

Operator (participant)

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 Chorus Call.