JBS - Q4 2023

Transcript

Christiane Assis (Head of Investor Relations)

Welcome to JBS S.A. and JBS USA Fourth Quarter and FY 2023 Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. As a reminder, this conference is being recorded, and the link to download the presentation is available on the IR website and in the chat. Any statements eventually made during this conference call in connection with the company business outlook, projections, operating and financial targets, and potential growth should be understood as merely forecasts based on the company's management expectation in relation to the future of JBS. Such expectations highly depend on market conditions, on Brazil's overall economic performance, and on industry and international market behavior, and therefore are subject to change.

Are present with us today Gilberto Tomazoni, Global CEO of JBS, Guilherme Cavalcanti, Global CFO of JBS, Wesley Batista Filho, CEO of JBS USA, and Christiane Assis, Investor Relations Director. Now I will turn the conference over to Gilberto Tomazoni, Global CEO of JBS. Mr. Tomazoni, you may begin your presentation.

Gilberto Tomazoni (CEO)

Good morning, everyone. Thank you for participating in our earnings call. Year after year, we have emphasized the importance of our global platform. In periods of challenging conditions like those we faced in 2023, this platform has proven its strength. It has allowed us to continue generating cash and distributing dividends. Despite the persistent negative effects of the cattle cycle in the U.S., the operational management measure adopted last year and the improvements in the medium-term outlook enable us to enter 2024 on the path of margin recovery. It's important to emphasize that our focus on operational excellence was the key to correcting the course of two of our businesses that underperformed in 2023: U.S. Beef and CR. We identified issues and took action to adopt management measures based on our culture, with a focus on people and discipline in execution. The results of these measures are already being felt.

At CR, the outlook of 2024 is positive, with the possibility of margin exceeding double digits already present in the first quarter of the year, a traditionally challenged period of the sector. As supply and demand rebalance bring resilience and as grain prices normalize, CR is well positioned to reap the rewards of operational improvements implemented in the recent months and investments in expansion made in recent years. I take this opportunity to reiterate that our multi-protein and our multi-geography strategy puts us in an unmatched position in the global industry. The strength allowed us to capitalize on the cattle cycle upswing in Brazil and Australia, while our American operations face margin decline due to current market conditions. In Australia, the improvement outlook is reflected in a significant increase in margin in the fourth quarter in 2023, compared to the same period last year.

In Brazil, where the situation is similar, significant growth in the carry-on process volume, increased value-added product sales, the authorization of new plants to supply the Chinese market, as well as improving the profitability of export, offer a promising prospect for the beef business in the short and long term. The chicken and pork business faced persistent pressure on production costs throughout 2022 but are already benefiting from the normalization of grain prices. This is evident in the Pilgrim's Pride and U.S. Pork results. The recovering margin of this business also reflects a better rebalance of supply and demand. Pilgrim's Pride margins saw a strong growth, rising by 1.5% in the fourth quarter of 2022 to 6.2% in the fourth quarter of 2023. Similarly, U.S. Pork results jumped from 4.8%-9% in the same period. Through our global platform, we operate successfully in all relevant proteins.

With results exceeding expectations, our growth in aquaculture reaffirms our belief that we will replicate what we have done previously with chicken, pork, and value-added products. Likewise, we continue to invest in research and development of alternative proteins, such as plant-based and cultivated protein. In 2024, we will complete a cultivated protein facility in San Sebastián, Spain. We are also building a JBS Biotech Innovation Center in Brazil, which is a research, development, and innovation biotechnology center. We are a food company, and our focus is to meet consumer demand for all protein options. We also want to highlight that in 2023, we once again demonstrated our financial strength. The maintenance of our healthy cash generation allowed us to distribute $448 million in dividends for the year, creating value for our shareholders.

We reduced our gross debt by $1.6 billion from the third quarter to the fourth quarter, which we plan to continue in 2024. As a result of our financial discipline, we began the company leverage process at the end of 2023. The leverage ratio decreased from 4.87x in the third quarter to 4.42x in the fourth quarter. We remain confident in our long-term strategy. We will continue to reinforce our diversified platform by geography and by protein style, investing in strong brands, value-added products, and strategic partnerships with our customers. This set of actions is crucial for creating better margins and reducing volatility. The investments we made in 2023 are significant milestones that support this direction. In Brazil, we opened two new factories in the state of Paraná that will allow CR to advance in its expansion strategy and value-added products.

Similarly, we commenced operations at the new Principe Italian Meat Facility in Columbia, Missouri, and invested in our King's Lynn Pork Unit in the U.K. to make it a center of excellence in cold cuts. JBS has demonstrated resilience and strength over its 70 years. The company's diversified platform, committed to excellence, innovation, and sustainability, focused on people and culture, and the dual listing in Brazil and the United States put the company in a unique position to embark on a new cycle of acceleration growth and shareholder returns. We remain focused on the dual listing process. Today, we took another step towards our goal by filing an update to the registration request to the SEC. This includes our figures up to December 2021. Thank you all for the participation in this earnings call, and now I hand over to Guilherme, who will detail our financials. Guilherme, please.

Guilherme Cavalcanti (CFO)

Thank you, Tomazoni. Now let's move on to the operational and financial highlights of the year and the fourth quarter of 2023. Starting on slide 16, please. I would like to start by highlighting some important events that took place over the past year, and I would like to take the opportunity to update you on some of those processes. The first point to be highlighted is the registration of 11 senior notes with the SEC in August. This step was fundamental for both the company and investors, as it brought a series of significant benefits. Among them, we can mention the expansion of the investor base, the increase in the liquidity of the notes, and the obligation to adapt to rules and regulations such as SOX, FCPA, and PCAOB, in addition to the publication of new reports such as 20-F, which we have just published for the first time.

We also just announced that we will register new senior notes issued in September 2023 in the amount of $2.5 billion. We will also take the opportunity to reopen the exchange period for the 11 senior notes which have already been registered. However, some investors did not exchange their notes at the time, and therefore we are offering a new opportunity at the request of these investors. Given the announcement of the registration of the senior notes, we have made public our intention to have our shares listed in the U.S. and Brazil, as mentioned by Tomazoni. Taking advantage of the end of the fiscal year, we just filed a new Form F-4, which is now available for public consultation, allowing all interested parties to follow the progress of the process. In relation to the new issuance on September 2023, we issued $2.5 billion of senior notes at JBS USA.

In October, JBS S.A. issued Agribusiness Receivables Certificates in the amount of BRL 1.7 billion. Additionally, through our subsidiary Pilgrim's Pride, we carried out two issuances, totaling $1.5 billion. With the resources obtained, we significantly reduced our short-term and medium-term debt, practically eliminating the need for debt payments until 2027, as I will detail later. Now let's move on to slide 17, where we have the operational and financial highlights of the quarter. Net revenues in the fourth quarter of 2023 were $19.4 billion, adjusted to a total of $1 billion, and represent a margin of 5.3% for the quarter. Net profit was $16.7 million in the quarter. On slide 18, we have the highlights of the year. Net revenues in 2023 were $73 billion, adjusted to a total of $3.5 billion, and represent a margin of 4.7% for the year. Net loss was $200 million in the year.

Please, now moving to slide 19. Before commenting on free cash flow generation, it's important to highlight that as of the fourth quarter of 2023, we began to increase leasing expenses in the calculation of free cash flow, aiming to more accurately represent the company's cash generation and be in greater alignment with the variation in the net debt. Therefore, this adjustment was considered for both the current period and for the period that serves as a basis for comparison. Operating cash flow in the quarter was $1.7 billion. Free cash flow for the quarter was $875 million. The free cash flow generation was positively impacted by improving operating results at Pilgrim's, JBS Brazil, and Australia, release of working capital, mainly in inventories and suppliers, which combined totally a positive variation of $570 million, and the reduction in capital expenditures by $253 million against the fourth quarter of 2022.

Moving on to the next slide. At the beginning of last year, during the first quarter results release call, we had commented on what we would do to compensate for the cash burn of $1.3 billion in the first quarter of 2023, remembering that seasonally the first quarter consumes cash. Throughout the year, we provided updates to the market to the previously discussed value, totally $1.4 billion, considering the necessary revisions. And now, as the year ends, even in the face of a difficult and volatile year, we not only reversed the first quarter results but also generated $448 million in free cash flow in 2023. The main developments were positive working capital in the amount of $380 million, considering inventory, accounts receivables, and suppliers, reduction in capital expenditures of $670 million, and tax refunds in the U.S., and monetization of tax credits in Brazil, which totaled $360 million.

For 2024, without providing guidance, we expect our cash generation to follow a similar seasonality as the previous year. This means that it is likely that we will have cash burn in the first quarter, but we expect that it will be around half of the value recorded in the same period last year, taking into account the evolution of CR's results and the maintenance of attractive margins in Australia, U.S. pork, and Pilgrim's. For the updated exercise of the debt necessary for free cash flow break-even, we consider net financial expenses for 2024 similar to 2023 at $1.1 billion. Leasing expenses, which we are estimating at $500 million versus $430 million in 2023, reflect the increase in installed capacity. In the same way as rental expenses, the increase in our production capacity also increases the consumption of biological assets.

Therefore, disregarding possible variations linked to grain prices, we are estimating a biological asset consumption of approximately $650 million. Capital expenditures in 2023 totaled $1.5 billion, which approximately $500 million was expansion CapEx. For 2024, a total cash CapEx of $1.3 billion was approved, of which $50 million was for carryover from the previous year and $250 million for expansion and continuity of the plants inaugurated last year. Thus, disregarding capital variations outside the company's control and without considering this as a guidance, the bit that corresponds to the free cash flow break-even point is estimated at $3.5 billion. It is worth noting that differences above this amount will be subject to the application of the effective tax rate that is on average globally at 25%. Moving to slide 21, we have the evolution of our debt profile.

In the fourth quarter, we used the cash to reduce gross debt by $1.6 billion. Until February 2024, we already used $566 million of our cash position to reduce gross debt, and we intend to continue this movement in the second quarter. Net debt for 2023 ended at $15.3 billion, stable in relation to the previous years as the company's free cash flow was sufficient to cover the payment of dividends that totaled $448 million. Leverage in dollars reduced to 4.42 and then revised to 4.3x in the quarterly comparison, confirming the deleveraging path that we had indicated in previous calls. Using market consensus, leverage will follow the downward trajectory that began in the fourth quarter of 2023. Therefore, according to market consensus for 2024, margins that are reflected on the Bloomberg consensus are 6.5%, 7% for 2025, and 7.8% for 2026.

Therefore, using these numbers as a reference, we would reach the end of 2024 with a leverage ratio below 3.25x, reach the end of 2025 below 3x, and the end of 2026 below 2.5x. Now I will briefly go through the business units. Starting with CR on slide 22, net revenue for the quarter fell 5% in the fourth quarter of 2023 and 4% for the year. 2023 was very challenging with margins below the ideal levels due to several external and internal challenges, such as the global excess of poultry and high production costs and challenges in the upstream part of the business, as well as lower dilution of fixed costs due to our plants inaugurated in 2023, which are still in the ramp-up process.

However, by maintaining focus on the fundamentals of the business, we managed to end the year on a positive trend, leaving us very optimistic for 2024. Moving now to slide 23, JBS Brazil recorded net revenue 4% higher than the fourth quarter of 2022, reflecting higher volume sold but 6% lower than 2022 due to the declining prices in the domestic and international markets. 2023 was marked by high volatility in the markets, mainly due to self-embargo of beef exports to China, the main destination for the Brazilian industry, and the favorable livestock cycle, which increased the viability of animals for slaughter and reduced the price of live cattle in Brazil. In this scenario, we strengthened international relationships, gained new plant certifications, further improved the level of service for key partners, and brought out brands closer to the consumers.

For the fourth time, the Friboi brand was top of mind. As a result of everything above, both for the quarter and for the year, we improved the profitability. Moving now to slide 24 and speaking now from now on, in dollars and in US GAAP, JBS Beef North America net revenue grew 15% year-over-year in the quarter and 6% year-over-year in 2023. Despite the increase in revenue resulting from higher prices in the period, profitability was impacted by growth in the price of live cattle at a faster pace than the increase in sales price, reflecting the increasing costs resulting from the cattle cycle in the U.S. Additionally, the company uses futures contracts as a short-term protection measure. However, in the fourth quarter, the business unit ended up being adversely affected as the price of live cattle fluctuated in an atypical way.

In September 2022, it was approximately $1.87 per pound. On December 7th, it fell to $1.62 and quickly returned to $1.88 in the beginning of the year. Therefore, the negative impact of the fourth quarter has already been partially offset by gains in the first quarter. In the quarter, revenue growth was the result of higher volume sold, reflecting the greater availability of cattle in the market. However, during the year, the increase in volume sold did not fully compensate for the reduction in prices in both domestic and international markets. Despite this, both periods, there was an improvement in profitability, mainly due to the reduction in the price of cattle acquisition, resulting from greater availability of animals due to the more favorable cycle in the country and efficient gains in several areas in the subsegments of these business units.

Turning now to the JBS USA Pork, net revenue for the quarter was 4% higher compared to the fourth quarter of 2022, but a reduction of 5% in 2023 against 2022. At the beginning of 2023, we faced challenges in price and profitability due to excess supply of hogs in the domestic market. However, throughout the year, we observed a normalization in production accompanied by a reduction in grain costs as well as the average price of live hogs. Furthermore, through continuous efforts to improve results such as expanding the value-added portfolio and improving commercial and operational execution, the EBIT margin returned to normalized levels in the second half of the year. Pilgrim's Pride, as highlighted on slide 27, recorded an increase in net revenue of 10% in the fourth quarter of 2023 compared to the fourth quarter of 2022 and remained stable in 2023 in the annual comparison.

Like other business units mentioned previously, 2023 was marked by high volatility in the commodities markets. At the beginning of the year, poultry prices began at historical low levels due to the oversupply in the industry, especially in the heavy bird segments, now known as big birds in the U.S. However, through a better balance between supply and demand, prices gradually stabilized, although cost inflation remained high. Despite the challenges faced, the company remained focused on executing its strategy and managed to improve its results throughout the year in all regions. As you could see and as we had indicated, the improvement in profitability occurred in all business units throughout 2023, with the exception of Beef North America. Similarly, the path remains positive for 2024, with emphasis on JBS Australia, CR PPC, and USA Pork. I would like to open now for our question-and-answer session.

Christiane Assis (Head of Investor Relations)

Ladies and gentlemen, we will now begin the question-and-answer session. If you have a question, please click on the raise your hand button. If you would like to remove yourself from the queue, please click on the lower hand button. Our first question comes from Ben Theurer with Barclays. Please go ahead.

Guilherme Cavalcanti (CFO)

All right. Yeah, good morning, everyone, and thanks for taking questions. Just following up on what you've already discussed during the call a while ago on the translated one. So my first question, CR, can you elaborate a little bit more as to what's different in Q1 versus Q4, as you've talked about the double-digit margin potential, just given that the fourth quarter was obviously flat on a year-over-year basis so that we better understand what are the drivers that basically help you boost that margin, as you've talked about, into the double digits? That would be my first question. I have one quick one more.

Gilberto Tomazoni (CEO)

Good morning, Ben. Thank you for the question. I think before going into detail, I want to clarify that CR did not have any market problem, does not have any. I want to reinforce that because consumer preference rates have increased. The brand has increased penetration to 90%, owns of products, and repurchase of products is 89%. Strong numbers mean that we don't have any problem with the marketing, with the perception, with the consumer preference, with the relation with the customers. We had problems with the operational efficiencies indexes related to productivity indicators, processes, performance, and equipment availability. These costs have been identified, and countermeasures are in place. The result of this action still had a small impact in the fourth quarter, but will begin to appear much more in the stretch from the first quarter of the year.

Furthermore, we have not reached yet the optimal point of the efficiency in the ramp-up of the Rolândia factory. It is a highly automated factory that requires time to parameterize and synchronize all stages of the process. It is normal for a factory with a lot of embedded technology. However, however they adjusted, completed, the competitiveness will greatly increase. For all of this, we are optimistic for the CR next quarter.

Guilherme Cavalcanti (CFO)

Okay, perfect. Thank you very much. And then just coming back to some of the technical things, and that's mostly a question for Guy. So with the new filing and the new registration and everything you've been doing, obviously, on the fixed income side, as it relates to the equity listing, do you have any estimate as to the timeline for that? Is that a Q3 thing? Is that a Q4 thing? What are the next steps you need to kind of get over to actually get this listing finally done?

Gilberto Tomazoni (CEO)

Okay. So as you saw, we just filed a new F-4, updating the 2023 numbers and including the previous comments from SEC. Now, we have to wait if SEC has more comments on the document, and if it has, we have to do another filing with the new comments. At the point that SEC doesn't have any comments anymore, then we can ask a registration of the equity. And then when SEC gives the go-ahead, the green light for the registration, then we can call a general assembly, which will be in at least 45 days, as we mentioned previously. So this timeframe, it's uncertain given what I mentioned, but it's possible that we could finalize this year still.

Guilherme Cavalcanti (CFO)

Okay, perfect. I'll go back into the queue. Thank you.

Christiane Assis (Head of Investor Relations)

Our next question comes from Andrew Strelzik with Bank of Montreal. Please go ahead.

Benjamin Theurer (Analyst)

Good morning, everyone. Thanks for taking the question. I wanted to start maybe at a high level. In the release and the CEO comments, there was a line that referenced an improvement in the medium-term outlook. So I was hoping you could maybe elaborate on where you're seeing those improvements or where you're now more optimistic than you would have been three or four months ago the last time you reported.

Gilberto Tomazoni (CEO)

Okay. Thank you for the question. We are very optimistic in beef in Brazil and in Australia. I think they started a new cycle. We see that the margin will be growing because it's the beginning of the cycle of the beef. When I say positive outlook, it's for the year. Maybe you need to remind that the first quarter and the fourth quarter is the tough quarter, and the medium quarter is the better quarter for the company. But this is both we are on a positive outlook. Then we have CR. Maybe CR is the most positive outlook if you compare the results of the fourth quarter. We see that CR in this quarter, the results were below the potential of the company.

In the beginning of the first quarter of the year, we can see that much more results, what the action we have done to change the I mentioned before, the parameters and the alignment with the process. We have a long chain, and it will take time to get the results of the improvements in the balance sheet, but we will see in the first quarter. We see the chicken. Chicken was pure grease. Pure grease is positive outlook. We have chicken positive in the U.S. Even Mexico and Europe, we are positive in terms of results. We are positive on pork in the U.S. It remains a challenge of our U.S. beef business that we are in the cycle, and we have commented before that it's a tough moment. Even in this business, when you look for the year, the result should be positive.

It's not as it was before, but it's more positive that when you compare the last quarter, this quarter that we now show the results.

Benjamin Theurer (Analyst)

Okay, thank you. And then on the North American beef performance in the quarter, you talked about a hedging loss, I think it was, in the quarter, and then that's reversing in the first quarter. Just trying to get a sense for kind of the steady state profitability right now in that business. Can you quantify that loss that was in the Q4? And did you say? I know you said positive for the year. Are you expecting positive in Q1 as well? Did you say that?

Wesley Batista Filho (CEO)

Andrew, good morning. About half of the negative EBITDA came from this impact. Like I said, very unusual to have such a big variance in futures like what we had, about $0.20-$0.20-something in three months, so pretty atypical. Our outlook for 2024 would be low single digits. We expect that it is possible to have a break-even scenario in a worse case scenario, but in a worse scenario, but there is the seasonality of the business. So we should expect to see a first quarter of 2024 and a last quarter of 2024 being the worst quarters and the second and third quarter, like always, being better quarters and, on average, being able to do that mid-single digits to break-even sort of result, being that the first and the fourth quarter bringing the average lower and the second and third bringing the average higher.

Benjamin Theurer (Analyst)

Great. Thank you very much. I'll pass it on.

Wesley Batista Filho (CEO)

Thanks.

Christiane Assis (Head of Investor Relations)

Our next question comes from Carla Casella with J.P. Morgan. Please go ahead.

Andrew Strelzik (Analyst)

Hi, thank you. My question is somewhat a follow-up on that prior question. Can you just talk about the U.S. cattle availability? And can you also remind us where you source most of your cattle from and kind of where you have a preferred sourcing or relationship so we can kind of track it as we see weather develop over the next few months?

Wesley Batista Filho (CEO)

Carla, we buy cattle. Our footprint, if you look, it's very, very geographically diverse. Our large plants are in Texas, Nebraska, Colorado. So those are the big plants, so in Texas, Midwest. But we also have our regional business, right? So in our regional business, we have plants in Arizona, in Pennsylvania. So we're pretty well spread out. We are seeing and we also have our Canadian operation, which is a relevant part of our business. Part of our business, the regional business where we source, has always been a business that has sourced a lot of cow product and also a lot of Holstein cattle. Obviously, that always swings. As we go into a scenario where we have less cows, we're going to see an increase in our Holstein kill as part of a share of that business raw materials sourcing.

But we're a pretty good proxy to what the cattle market is across the country. We don't have one region which is much more impactful than what the national average was. Carla, sorry, but there was a first part of your question. I think I'm missing it. What was that?

Andrew Strelzik (Analyst)

No, I think that was it. But I think the last we spoke, you talked about some green shoots you were seeing in terms of heifer retention and that being the first potential step towards an improving cycle in the U.S. Any update there?

Wesley Batista Filho (CEO)

Look, pasture conditions are better than in the previous year. We're seeing promising weather forecasts for especially the center of the United States. So far, that's good news, but it's promising. But we have seen still minor signs of heifer retention. We still believe that the economic signals are all there. And weather being better than last year, we should start seeing heifer retention. But obviously, we still have to see significant heifer retention and heifer retention numbers. But we do expect, and like I said before, Carla, in that scenario, we will start seeing first in our regional business, the lower availability of cows. And we believe that if weather is and we have a wet spring here, we could expect heifer retention to get started.

Andrew Strelzik (Analyst)

Okay, great. Thank you.

Wesley Batista Filho (CEO)

Thank you.

Christiane Assis (Head of Investor Relations)

Our next question comes from Orges Asllani with Barclays. Please go ahead. This is Orges Asllani from Barclays. You can go ahead.

Guilherme Cavalcanti (CFO)

Do you hear me now? Two quick questions on the debt side for us. Are you still expecting incremental debt based on using free cash flow generation between 2Q and 4Q?

Gilberto Tomazoni (CEO)

Okay. So first, you saw that we finished the year with a cash position, which we already used to repay debt on an amount of $566 million up to February. We still have excess cash. So we intend to continue reducing gross debt in the second quarter. Then basically, repayment. Most of our debt today is capital markets, so it would be repayment of probably a capital market bond.

Guilherme Cavalcanti (CFO)

Got it. Thank you for that. Just very quick on the registration that was announced today, should we expect any future issuance that you do to be fully registered, or is there any administrative reason for you to use reg rights? Thank you.

Gilberto Tomazoni (CEO)

The reg rights, it's to speed up the process. So last September, in order to make the issuance quicker, we did 144A with reg rights. We already asked SEC to be a week C, which is a frequent issuer. So then when we are a week C or a frequent issuer, then we can have a registered issuance very quickly as well. So as long as we don't have that, we continue to do 144A and giving reg rights.

Guilherme Cavalcanti (CFO)

Thank you so much.

Christiane Assis (Head of Investor Relations)

Ladies and gentlemen, there have been no further questions. Now, I would like to pass the floor to Mr. Gilberto Tomazoni. Please go ahead.

Gilberto Tomazoni (CEO)

I'd like to thank you all for participating in our calls. I want to thank you for our global team, for your dedication, the determination to make our business better every day. Thank you.

Christiane Assis (Head of Investor Relations)

This is the end of the conference call held by JBS. Thank you very much for your participation, and have a nice day.