JBS - Q3 2023

Transcript

Operator (participant)

Good morning, everyone, and thank you for waiting. Welcome to JBS S.A. and JBS USA Third 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 remarks, there will be a question-and-answer session. At that time, further restrictions will be given. Should any participant need assistance during this call, please press star zero to reach the operator. Before proceeding, let me mention that forward statements are based on the beliefs and assumptions of JBS 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 will turn the conference over to Gilberto Tomazoni, Global CEO of JBS. Mr. Tomazoni, you may begin your presentation.

Gilberto Tomazoni (Global CEO)

Good morning. Thank you everyone for participating in our earnings call. Our third quarter numbers for 2023 show we are on a steady path to recover both our results and margins. As we flagged early in this third quarter of this year, our business segment continues to improve, whether we are talking about margin or cash flow. Thanks to the strength of our global diversified platform across geographies and proteins, and the implementation of key management improvements in Brazil and United States, we have added nearly 1 percentage point for our EBITDA margin compared to the second quarter of this year, rising to nearly 6%. This cash flow progressions and demonstrate our commitment to financial discipline and the fundamentals of our debt policy. This is the first highlight I would like to share about our results.

Moving to the second point, and revisiting an issue I have previously discussed, we had two business areas that we are performing below their potential. In this third quarter, we continued to work on restoring the profitability of this operation and we are beginning to see the initial results. At Seara, we have executed part of our previously identified opportunities, and we believe that the coming quarters will be positively impacted by the realization of this benefit from these measures. Beyond operational improvements, Seara has opportunity outside its gates, meaning opportunities captured from the market with the ramp-up of new facilities like Rolândia, for example, which have yet to reach full capacity. Without a doubt, we are very optimistic about Seara prospects. In our U.S. beef business, the operational measures we have implemented in commercial, industrial areas are helping us navigate the lowest point of the cattle cycle.

The margin of the operation are showing gradual recovery, even amid a scenario of tighter export spreads and reduced cattle supply, demonstrating our commitment to operational excellence. The third point is our dedication to financial discipline to reduce our debt. This quarter, thanks to our strong cash flow, we reduced our net debt by $600 million. Despite this reduction, our leverage increased to 4.87x in dollar terms, due to a statistical issue, which Guilherme will elaborate on shortly. This once again show that we are well-prepared to navigate this challenge period with security and financial robustness. We have extended the average terms of our debt to 12 years, expanded liquidity, and reduced the cost of borrowing. This is a testament to our commitment to the financial discipline and our effort to reduce our debt.

Beginning of this last quarter in 2023, we will enter a structural deleverage process for the company. The fourth point I would like to highlight is our continued growth in the commencement of our operation from the investment in new facility in the past years. As evidenced by the opening of Rolândia breaded product and the sauces factory in Paraná two weeks ago, one of the most modern and sustainable JBS plant in the world. Likewise, our new Italian meat plant in the United States continued to rapidly ramp up production. JBS' long-term vision remain unchanged. We remain focused on our growth through diversification, innovation, value-add product, and strong brands.

We have a unique multi-geography and multi-protein platform that makes us more resilient in the face of challenge scenarios, in any specific geographies or business line. Additionally, I would like to address our focus on generating long-term value for stakeholders, with the dual listing to our shares in Brazil and the United States. We believe this is yet another way to generate even more value to all of our shareholders and our team members, and our communities. Finally, our ongoing investment in expansion, the reduction of our debt, and the execution of improvements in the management of our business show that we are absolutely focused on what we can control, regardless of other issues that may affect our business. As we celebrate our 70th anniversary, we have evolved our brand to commemorate this new chapter for JBS.

It is simultaneously a celebration of our past and a reflection of our present, and a vision for our future. With focus on innovation, operational excellence, quality, financial discipline, and leadership in all that we do. Thank you all for participating in this earnings call, and now I will hand over to Guilherme, who will be detailing our financials. Guilherme, please.

Guilherme Cavalcanti (Global CFO and Investor Relations Officer)

Thank you, Tomazoni. Let's go through the operational and financial highlights of the third quarter, 2023, starting on slide 12, please. I would like to start by highlighting all the work in the liability management that we continue to carry out throughout the second half of the year. In September, JBS issued $2.5 billion in senior notes, of which $1.6 billion with a coupon of 6.75%, and maturity in 2034, and $900 million with a coupon of 7.25%, and maturity in 2053. Subsequently, we issued $500 million through our subsidiary, Pilgrim's Pride, with maturity of 2034, and a coupon of 6.87. Additionally, in October, we issued Agribusiness Receivable Certificates in the amount of BRL 1.7 billion.

Thus, with the resource described above, we paid $440 million of trade finance lines in September, and we repay almost all of our short and mid-term debts in the amount of $2.5 billion, in addition to the tender offer of PPC notes due 2027, already concluded in the amount of $868 million. After completing this entire process, we will extend JBS' average debt term to 12 years, reducing the average cost to 6.08% per year, and practically eliminating the need to pay debt until 2027. Moving on to slide 13, we have the operational and financial highlights of the quarter. Net revenue in the third quarter, 2023, was $19 billion.

Adjusted EBITDA, totally $1.1 billion, which represents a margin of 5.9% in the quarter. A sequential improvement since the first quarter 2023, in line with what we have been mentioning throughout the year. Net profit was $117 million in the quarter. Please, now moving to slide 14. The operational cash flow in the quarter was $1.3 billion, an improvement of 20% when compared to the previous quarter. This result is mainly a consequence of the improvement in operating results, but also in working capital, which was positively impacted by $341 million. The main gains came from improvements in accounts receivable, due to the decrease in average price, and increased payments from China and Middle East countries.

As well as the reduction in inventories, as a result of the decrease in the price of raw materials, mainly livestock in Brazil and Australia, and grains in U.S. and Brazil. In the last two quarters, we informed the market that we could generate enough free cash flow to offset the first quarter cash burn of $1.2 billion. Considering the results of the second and third quarters, we have already reached $1.1 billion, that is 91% of the total amount. Historically, the fourth quarter generates free cash flow due to the postponement of payments from live animals until the following fiscal year.

Thus, in the first quarter, we had a cash outflow of $440 million related to these purchases, and we expect that a good part of this amount will now return in the fourth quarter, which will contribute positively to the free cash flow of the year. Furthermore, we are considering capturing more $150 million in the fourth quarter on the back of lower grain prices. Regarding tax, we are estimating an additional cash inflow of $100 million due to the refund of state tax in U.S., and the monetization of tax credits in Brazil.... These amounts are in addition to the $185 million we booked in the second and third quarters.

Finally, we already expected leveraging the third quarter to be the highest of the year, due to the decrease in EBITDA, which, as we demonstrated, is already improving sequentially. When using the market consensus for EBITDA, our leverage in 2023 will end up around 4x net debt to EBITDA, lower than the leverage posted in the second quarter. Likewise, using market consensus for EBITDA of 2024, which is a margin of 6.5%, leverage would already return to the top range indicated in our financial policy, that is 3x. In 2025, using market consensus data, which is a margin of 7%, our leverage would end up the year of 2025 at 2.5x.

Wrap up the slide. Capital expenditures in the quarter was approximately $375 million, 52% of which was maintenance. Therefore, considering the factors above, free cash flow for the quarter was positive in $703 million. Moving to the slide 15, we have the evolution of our debt profile. Net debt in the third quarter of 2023 ended up at $16 billion, a decrease of approximately $600 million.

The sequential operational improvement reflected in our EBITDA of $1.1 billion, and improvement in working capital of $341 million were more than enough to offset investments in capital expenditures of $375 million, accrued interest of $270 million, biological assets of $113 million, and leasing payments of $101 million. Net financial expenses for the quarter were $261 million, is stable compared to the previous quarter. It's worth mentioning that 79% of our debt is in the form of bonds denominated in dollars with fixed coupons. Leverage in dollars rose to 4.87 in reais and 4.84 in dollars.

The growth is explained by 61% reduction in EBITDA in the last 12 months, ending in the third quarter, 2023, when compared to the same period of previous year. However, as I mentioned previously, our average debt term is quite comfortable at 12 years, with an average cost of 6% and no relevant maturities until 2027. Before I move on to the business units, I would like to make everyone aware that both in the earnings release and on our investor relations website, we began to disclose EBIT in dollars and US GAAP for the international operations to facilitate comparability with our U.S. peers. Let's now quickly go through the business units.

Starting with Seara on slide 16, net revenue for the quarter fell 6.7% year-over-year in the third quarter, reflecting lower poultry prices due to global oversupply of poultry. On the other hand, profitability improved sequentially throughout the quarter as a result of lower production costs and greater operational efficiency. Furthermore, I would like to highlight that Seara inaugurated its industrial complex, located in the city of Holambra in October, advancing its expansion strategy in brand and value-added products, particularly in the chicken, bread, and hot dog segments. The new plants are the most automated at Seara and among one of the most modern at JBS globally. Moving now to slide 17, JBS Brazil reported net revenue 4.4% lower when compared to the same period of previous year, as a result of the decrease in beef export prices, mainly to China.

This result was partially offset by greater demand in the domestic market, reflecting the decrease in retail prices. I would like to highlight that in a survey carried out by the Datafolha Institute, in thousands of Brazilian households, the Friboi brand was once again elected top of mind. That is the most remembered and preferred brand by Brazilian consumer. Friboi wins the meat category for the fourth time and consolidates itself as the absolute leader. Moving on to the slide 18, and speaking from now on in dollars and US GAAP, JBS Beef North America net revenue grew 7% year-over-year in the quarter, with an EBITDA margin of 1.6%.

Although profitability reflects the turnaround in the cattle cycle in the annual comparison, the sequential improvement in profitability is a result of the company's efforts to improve commercial and operational performance, already capturing gains on several fronts. Moving on to slide 19, we have JBS Australia. Despite the decrease in consolidated net revenue, the EBITDA margin grew 3 percentage points to 6.6% in US GAAP. This improvement mainly reflects the lower purchase price of live cattle, given the greater availability of animals due to the more favorable cycle. According to Meat & Livestock Australia, the price of live cattle in Australia fell 49% year-over-year in the third quarter. Turning to JBS USA Pork, net revenue for the fourth quarter was 5% lower compared to the third quarter of 2022. However, the EBITDA margin returned to historical levels.

This improvement in profitability is a result of lower, lower grain costs, -24% year-over-year, the decrease in pork prices -18% year-over-year, and continuous efforts aimed at expanding the value-added portfolio and improving commercial and operational execution. Previous slides on slide 21 presented a drop in net revenue of 2% in the third quarter of 2023 in the annual comparison. However, all regions improved in margins compared to the previous quarter as a result of operational excellence programs, continued partnership with key customers, and increasing diversification through a branded and value-added portfolio. In the U.S., poultry cuts that are used as raw material, big birds, we still face a challenging scenario, but market fundamentals have already started to improve. Mexico required strong result in the quarter, with continued improvement in the live chicken operation, lower grain prices, and favorable exchange rate impact.

Finally, in Europe, the positive trajectory of margin growth continued, driven by the conditions, the continuous optimization of operations, cost recovery efforts, consolidation of back ops activities, and growth of partnerships with key customers. As you can observe, and as we have been indicating, the sequential improvement in our profitability has already occurred, and the trend remains positive in the fourth quarter, highlighting JBS Australia, Seara, and JBS Brazil. So I would like to open to our question-and-answer session, please.

Operator (participant)

Ladies and gentlemen, we will now begin the question-and-answer session. If you have a question, please press the star key followed by the one key on your touch-tone phone now. If at any time you would like to remove yourself from the questioning queue, please press star two. And our first question comes from Priya Ohri-Gupta with Barclays. Please go ahead.

Priya Ohri-Gupta (Managing Director, Fixed Income Research)

Good morning. Thank you so much for taking the questions. I'm gonna apologize a little bit, but we had some difficulties with the connection this morning on the call, the first call that you hosted. So if some of this is a repeat of that, it's just because we didn't quite clearly hear the responses. Congratulations on the results this morning. I think, Guilherme, first, if we can talk a little bit about the free cash flow performance. I think on the call this morning, you guys mentioned that the free cash flow performance in fourth quarter should be similar to third quarter. Is that the right way to think about it, in terms of the dollar amount or just directionally? So that would be the first question.

Guilherme Cavalcanti (Global CFO and Investor Relations Officer)

Okay, it's directionally could be more or less the same range in the third quarter or could be higher. What we'll have for the fourth quarter is good operational margins for Australia, beef Brazil and Seara. So we will benefit the operation of free cash flow. We also have more working capital release to the grain prices decrease. Also working capital release through the prices of the live animals in Australia and Brazil. We also expect more $100 million in tax refund by state taxes in U.S. and credit monetization in Brazil. And remember that every year we have postponed of live livestock payment.

For example, in first quarter this year, we had $440 million that was payments that was postponed from December to January. $140 million was deferred payment of cattle in Brazil, and $300 million was deferred cattle and hogs in U.S. So if you have the same thing that we had this year, we has also a potential positive effect of these livestock deferred. So all in all, we expect to have a good free cash flow for the fourth quarter as well as improvement in operational margins in almost all of our business units.

Priya Ohri-Gupta (Managing Director, Fixed Income Research)

Okay. And then, picking up on that point, you mentioned specifically that Australia, Brazil, and Seara are continuing to see positive momentum into the fourth quarter. You, you guys had a really solid margin performance in U.S. pork. How should we think about that performance into fourth quarter and then next year, particularly given where it is relative to kind of the long-term range?

Guilherme Cavalcanti (Global CFO and Investor Relations Officer)

Okay, I'll pass to Wesley Filho to talk about the prospects of next year of pork, and then Tomazoni.

Wesley Batista Filho (CEO)

Priya, good morning. On pork, we expect that... You know, when we look back, pork is the most stable business we have overall, and in this first half of the year, we consider is more of a, you know, an anomaly than more to do with the business going forward. You know, we had a good quarter on the third quarter, and we expect the fourth quarter usually to be a bit more challenging the third quarter. That's seasonal, no, nothing wrong with that. But we expect next year for pork to be a pretty good year... and to have more margins closer to his historic. So that should be, we're optimistic about pork.

Beef, you know, it's gonna be a challenge, right, as we go into the bottom of the cycle. We haven't reached there yet, and especially when we start retaining heifers, that's gonna be good news long term, but short term, pain. So when that happens, and we're, that's all gonna be depend on climate, and weather. If weather allows, we're gonna start probably retaining heifers next year, which should reduce the availability of fed cattle. And so we're expecting 2024, you know, to be a challenging year, more challenging than this year. Having said that, we have a lot of internal opportunities that we are capturing.

We have been closing that gap in the last couple of quarters, and so we expect that even though the market is gonna be more challenging for JBS USA into next year, we expect that if we're able to capture all of these internal opportunities we have, we should be able not to have a worse year than this year, and potentially even put- could have a better year than this year. Even though the market will be more challenging, we have you know approximately, we still expect another 2 percentage points improvement in our operation from where we are today. We capture a bunch of the most of the commercial opportunities in these past two quarters.

There are still some opportunities in our commercial side of the business, but most of it was captured, and now operations is where we're really focused, and there is probably another 2 percentage points to be captured there. That's more or less our forecast, our outlook for the U.S. business.

Priya Ohri-Gupta (Managing Director, Fixed Income Research)

Okay, that's helpful. And so we shouldn't necessarily think of beef as losing money next year. Is that fair?

Wesley Batista Filho (CEO)

It will depend. It will depend a lot on all of the things that's internal, Priya. So, but yes, you should consider that. That's what we are considering.

Priya Ohri-Gupta (Managing Director, Fixed Income Research)

Okay. That's helpful. And then, I think just on the listing, just final point as to sort of where you are in terms of the SEC conversations and when we may be able to see some sort of a relief on the shareholder vote? And that's it for me. Thank you.

Gilberto Tomazoni (Global CEO)

Priya, I it's Tomazoni speaking. I would like just to add what Wesley's talk about the perspective in terms of U.S.. We are very bullish in terms of Australia. We are now working one shift. We are planning for the next year to be working two shifts because the availability of cattle, the market is demanding. We are very bullish in terms of our Australia operation. And in terms of Brazil, we are very positive with Seara, because we have identified the very important gaps inside of our operation, and we are working on that. And we our perspective that we'll be start to show a more robust results in terms of our internal improvement. Beside of the market conditions, we have a lot to kept inside of the company.

Then, the demand from our end out of the gate, we are new plants of Seara, and we are able to capture more market, and we are. And our strategy is not fight for the same space. We are focused on grow the categories with innovations, and we are very positive with Seara. And about answer your last question about the listing. After we present our structure of our dual listing in U.S. and Brazil, we received the considerations from our ADR investor, who would like to have the right to vote in the shareholder meetings, as well, the other investors.

Since our present structure did not consider that option, then consider it to be a fair claim from our. We do not have a financial urgency in carrying out the listing. We decided to comply with the request from our shareholders invested in ADR, in ADRs, and this decision forced us to redo the legal structure for our F-4 with the SEC. Our legal department worked on this, on the matter, and we resubmitted our F-4 to the SEC, and now we are in the process for Q&A with the SEC. And that is the answer to the question.

Operator (participant)

Our next question comes from Ben Theurer, with Barclays. Please go ahead.

Ben Theurer (Managing Director, Head of LatAm Equity Research)

Yeah, good morning, and thanks for taking all of my questions. Just wanted to follow up quickly on the operations in Brazil, Seara in particular. So we've seen the sequential improvement over the last two quarters, up now back at the margin of 5.5%, which we know is not the level you wanna be. So how should we think about, just given the comments you made, sequential improvement into Q4, but maybe a little bit of a preview into 2024, how are expected lower grain prices and the business itself, also on the export markets, looking into 2024, how should we think about that margin recovery back to the more historic level at Seara? That would be my first question.

Gilberto Tomazoni (Global CEO)

... Hi, Theurer. Thank you for your question. We see with the internal improvements, with the cost of the grain and the increase of the capacity that we have invested in CAPEX during this three or four years, our margin will be double-digit if we are working on this.

Ben Theurer (Managing Director, Head of LatAm Equity Research)

Okay, so you're saying, you're saying double-digit margin for next year?

Gilberto Tomazoni (Global CEO)

Exactly. This is our, this is our forecast.

Ben Theurer (Managing Director, Head of LatAm Equity Research)

Okay, perfect. And then, Australia obviously is having a nice run, and you've mentioned the decline in cattle costs around close to 50%, just on that cost side. Now, as we're going through another El Niño phenomena, and obviously the implications from El Niño tend to be more dry conditions down in Australia, any early signs of some sort of a herd liquidation because of that, and what has been accelerating that cattle supply or the lower cost? Or is it really just because of everything that's been rebuilt from the last recovery post-drought situation some years ago that you now just have a healthier availability on cattle?

Gilberto Tomazoni (Global CEO)

When we are the situation in Australia, it's they have rebuilt the herd, and the availability of the herd is because the past two-three years rebuilt this herd. Now, the availability herd, the price, and the availability of the herds, the cost, because the cycle is a positive cycles. I mentioned before, we are working one shift, and now we are preparing for the second shift. But nothing related to El Niño. El Niño could be an issue, but so far it's too early to say something about that.

Ben Theurer (Managing Director, Head of LatAm Equity Research)

Okay. Perfect. Thank you very much. I'll leave it here.

Operator (participant)

Our next question comes from Andrew Strelzik with BMO. Please go ahead.

Andrew Strelzik (Managing Director, Senior Equity Research Analyst)

Hey, good morning. Thanks for taking the questions. My first one is on export demand, and in particular from China. You called out some pressure on export prices from China, so I guess I'm curious what your expectation is going forward as we roll into 2024 in terms of China export demand, and if you're expecting a recovery, and what your level of confidence in that is?

Gilberto Tomazoni (Global CEO)

I'll give you the overview about consider all of the market, and then if you actually want to add some specific things from the U.S., please feel free to do that. And we, when you talk about China, it was specifically your question, we see that the demand from China's keep growing, because it's structural. If you look for the per capita consumption in China, it's very low, consider other markets, with the same income power. That means that red meat is an aspiration in China, and it keep growing. When you talk about other proteins, that other proteins, there is different dynamic. China will buy just of a specific cuts, but not structural.

Beef, we see that will be keep growing, and people say, Oh, that the market, the economy is not the growth as before. But look, it still grows 6%, and the size of the economy is much bigger than before. We are very, we are very positive with China, not just for next year. We are positive for long term in terms of beef, that the demand from the beef is structural and keep growing.

Andrew Strelzik (Managing Director, Senior Equity Research Analyst)

Okay, that's helpful. Thank you. And then my second question is just on the debt paydown expectations. You talked about entering the deleveraging phase. So how should we be thinking about the pace of that, and the debt targets you'd like to achieve over kind of what kind of time frame? Thank you.

Guilherme Cavalcanti (Global CFO and Investor Relations Officer)

Thank you, Andrew. So, at this moment, we are in budgeting process. So, we still don't know what business units will put in the budget for margins. But one thing is for sure, for next year, maybe it's not on market consensus, is that capital expenditures will decrease, given that we finish our capital expenditures expansions, both in Seara and value-added products and bacon in the US. So capital expenditures next year will most likely be lower. Probably by the next call, I will give you our guidance on capital expenditure for 2034, once we have it, it finalized. So if I...

Then if I put the market consensus for the fourth quarter now, as we are mentioning, especially because of Australia, Brazil and Seara, we will see most likely the EBITDA in the levels or higher than we saw in the third quarter. The same for free cash flow. But again, even if we put the market consensus that's on the Bloomberg, we can get it for the fourth quarter, we'll finish this year at four times and at the EBITDA. Then the first quarter next year, remember, because the fourth quarter, fourth quarter of 2022, remember we had $870 million EBITDA, and again?

... Just you see the exchange of EBITDA will improve, plus the free cash flow will make this fast deleveraging for the fourth quarter. Then first quarter, 2023 was the worst quarter, and we had a $460 million in EBITDA, which will be replaced to a much higher EBITDA in the first quarter, 2024. Then, despite cash consumption of the first quarter, we will see the statistical effect in our benefit, decreasing again, the leverage. In the second quarter, we start to generate free cash flow, plus the EBITDA's improvement that we mentioned, that's our expectation for next year. We'll see this deleveraging path, which will have more clear after the budgeting process.

But again, even if it puts the market consensus in the model, you'll see that we'll finish next year with 3x EBITDA. And if you put market consensus in 2025, we will see 2.5x EBITDA. Bear in mind that the market consensus is 6.5% margin for next year and 7% margin for 2025, which we can think that is more on the conservative side.

Andrew Strelzik (Managing Director, Senior Equity Research Analyst)

Great, I appreciate all of that color. Thank you very much.

Operator (participant)

Our next question comes from Carla Casella with JPMorgan. Please go ahead.

Carla Casella (Managing Director, High Yield Research)

Hi, just a couple follow-ups on the earlier questions. Just on in terms of the listing, is it really just a shareholder vote that is the last hurdle, or are there other hurdles that you need for that listing? And also related to that, do you have any early thoughts in terms of how much, your business should be paying out in dividends, when you've done the listing versus what you pay today?

Guilherme Cavalcanti (Global CFO and Investor Relations Officer)

Okay, I will start with the dividend question, and then I'll pass to Tomazoni. So remember that we announced that when leverage was 3.15, we announced a special dividend in case of a general assembly approval, and then the listing process. Now, the leverage is beyond what allows for extraordinary dividends, which is 3.75 threshold. So going forward, we'll be able to pay extraordinary dividends, except from the minimum obligated by Brazilian corporate law, only when this leverage goes below 3.75. And of course, if we list in U.S., we do not have this requirement of minimal dividends. So this could, it also, the 3.75 will be exactly the threshold that we allow us to pay dividend.

The only thing that we have contemplated for next year is the special extraordinary dividends, in case of the listings approved, that we announced when leverage was 3.50.

Gilberto Tomazoni (Global CEO)

Carla, just to add what Guilherme said in terms of, there is delisting in the U.S. is our priority, and the only change that we considered to give to our investors in ADR, the right to vote in our shareholder meeting. It's just that. This is an implication because it's a legal implication. It's the only change we have done so when we have launched the project.

Guilherme Cavalcanti (Global CFO and Investor Relations Officer)

Yeah. So we had to do another F-4 application, and we are in this process of a barrage of questions of SEC on this new application that we changed to allow our ADRs to be able to vote, given that our ADRs trade over the counter.

Carla Casella (Managing Director, High Yield Research)

Okay, great. Just one business follow-up. We've heard a lot of companies talk about some variable trends in China, and I know you've got some business there. Can you just talk about what you're seeing in kind of China and the Asian markets, and how that impacts your different regions?

Gilberto Tomazoni (Global CEO)

We are optimistic with this market, and we are increased our sales from Brazil, from Australia. The only issue that we are facing in U.S., because the availability of cows in U.S., and we are. But the other business in U.S. for pork and chicken, we are optimistic with the Asia market.

Wesley Batista Filho (CEO)

Carla, I'll just add that, you know, the lower availability of U.S. beef is going to be a great opportunity for grain-fed out of Australia. So we're already seeing that today, where, you know, a lot of times it's much better for us to sell, some of the cuts are better for us to sell in the domestic market, and that volume is going to our grain-fed business in Australia, so that's pretty good for the Australian business.

Gilberto Tomazoni (Global CEO)

And Carla, this is one of the benefit from our diversified platform. When we have, we can catch the opportunity for different geographies, like U.S., we have a restriction in terms of beef, but Brazil and Australia, we have, we are catch this opportunity.

Carla Casella (Managing Director, High Yield Research)

Okay, great. And then one... This is, I'm not sure how much of this you can or will answer, but, in the past, we've asked and talked about normalized margin ranges for the different businesses. And I know the businesses have changed dramatically with more prepared foods, some facility additions.... efficiency improvements, can you just give us any sense for what the normalized range is for your operating margin are on the different businesses? Recognizing we may not be in that yet, in some of the businesses where we're in a down cycle.

Gilberto Tomazoni (Global CEO)

Carla, it's if you consider that we are working on the Seara for two digits, we are working for Australia close two digit or two digits. We are positive of chicken in U.S. as well, in Europe. And the only really challenge we are seeing it's our beef in U.S. The other-

Wesley Batista Filho (CEO)

Yeah, and you could consider... Sorry to not interrupt, but you could consider beef to be the low, low single digits, somewhere close to that, and the lower side of the low single digits during the very down part of the cycle, and high single digits for pork, something like that.

Carla Casella (Managing Director, High Yield Research)

Great. Thank you.

Operator (participant)

Our next question comes from Benjamin Black with RBC Capital Markets. Please go ahead.

Benjamin Black (Investment Grade Desk Strategist and Director)

Hi, guys. Thanks for taking my call. Just a couple questions on, credit side. You know, it seems like you're reasonably confident in the deleveraging path of your business for next year. Maybe just talk a little bit about, excess free cash flow, and if you would ever consider maybe taking out some, you know, lower dollar debt in the future, given the current rate environment. And then second question, just going back to the Chinese consumer, you know, beef prices seem to be a little bit of a headwind in your, Brazilian beef segment.

On the structural demand part, totally understand where you're coming from on that, but I guess let me just speak to some of the pricing weakness that you're seeing and what it would take for that pricing out of China to move back up. Thanks.

Guilherme Cavalcanti (Global CFO and Investor Relations Officer)

Thank you. So I, I will start with the free cash flow question. So we again, as I mentioned, we are still in the process of budgeting, which will give us more clarity once we finish about CAPEX expenditures for next year. But so far, we've been able to consider a break-even EBITDA of around $3 billion. So you get the difference of your estimate of EBITDA to $3 billion, which is our interest expenses per year, which is around $1.1 billion, fixed, plus $500 million of operational leasing. Then we have the CAPEX expenditures, which is again, we're still revising, but so far, before we finish the budget, we can work with this $3 billion. So...

Given that our EBITDA next year, as Tomazoni and Wesley Filho mentioned, will be improving, the margins will be improving for almost all the business units except the U.S. beef. We will probably see a higher free cash flow as well, for next year. For example, then, generally first quarter, we have cash consumption every quarter, this is only healthy, but on the second quarter, next year onwards, we start to see free cash flow generation. Then you have a relevant question, is that what we will do with this excess free cash flow? Remember that our indebtedness policies, forbidding us to make acquisitions beyond 4.25 net EBITDA, so we will only be able to deploy capital for acquisitions once we decrease the leverage above, below these levels.

We cannot pay extraordinary dividends above 3.75. So in case, so most likely, these excess cash that we start generating the second quarter next year, will be used to pay down debt. Which debt? Because we will be left over with almost only, mostly, basically almost all, capital market debt. We'll have to choose what will be more efficient way to tender for the debt. It's an opportunity because, given the low coupon that we have on those debt, they are trading below face value, so any payment will decrease gross debt more proportionally than that debt, if we buy those debts at a discount.

On the other hand, our average cost of debt is very low because we have bonds with coupon of 2.5%, with 3%, even a 30-year of 4.3%, which is very cheap. But again, that will, the kind of, of calculations that, we'll have to do, which will be more efficient way, to decrease, our debt. It's clear? Right.

Benjamin Black (Investment Grade Desk Strategist and Director)

And then just on the Chinese pricing part of these?

Gilberto Tomazoni (Global CEO)

Oh, okay. We, in terms of, you talk about in terms of price and, the demand, we are, we are positive with the demand in China. And, we are positive because it's a, it's a long term, it's a structural demand. In, is, that, increase, increase the per capita consumption. If you consider that the per capita consumption in China is very low, it's 7.8 kilos per capita is, if you consider globally, is very low, that this year will be keep growing. It's not just for next year, but they keep growing long terms, because the economy is keeping growing. This is one point.

If you look for now, the current price that you need to consider, it is a consideration in terms of the cost of the cattle we have in Australia, the cost of the cattle we have in Brazil, and the current price in China, the margin is not too bad. Of course, there is opportunity for growth, the price, if you consider historically, the price can grow. But even that not grow, if you consider the current price, the margin is not bad, that we are positive in China, for next year.

Benjamin Black (Investment Grade Desk Strategist and Director)

Perfect. So you would think that, JBS Brazil should see sequential margin improvement from here?

Gilberto Tomazoni (Global CEO)

Exactly.

Benjamin Black (Investment Grade Desk Strategist and Director)

Perfect. Thanks, guys.

Guilherme Cavalcanti (Global CFO and Investor Relations Officer)

Thank you, Benjamin.

Operator (participant)

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 would like to thank you for all of you to participate in this earnings call. Thank you for our team members, that they are commitment to make this company stronger and focus on operational excellence. Thank you.

Operator (participant)

That does conclude the JBS audio conference for today. Thank you very much for your participation. Have a good day, and thank you for using Chorus Call.