BRF S.A.
Q4 2020 Earnings Call Transcript

Published: 28 Feb 2021

[Lorival Luz:]

…for many of us because of the COVID pandemic. And this was a year in which we had to take care of people, do everything that we had to, and still maintain our responsibility of producing food so that we could supply our consumers. Even with all of the effects and challenges, the company continued to deliver its results which were very robust. And this was the fruit of a very good execution focused on financial discipline, operational efficiency, commercial services, and this year as you'll see, our mix of products has been changed.

[Operator:]

The first question is from Victor Saragiotto for Crédit Suisse. Victor you can ask your question.

[Victor Saragiotto:]

Good morning. Congratulations for the results. Lorival one thing that called our attention was the increase in prices in the domestic market? If I'm not mistaken it was one of the highest of the company's history. So how do you see the dynamics of this price increase for 2021? We know that these prices are made up by many factors but could you comment more on that?

[Lorival Luz:]

Yes. Thank you Victor for your question. Well I would call it a price adjustment due to the events, particularly in the second half of the year -- sorry. Can I continue? Victor, I don't know if you can hear me. I'm going to repeat the beginning of my answer. But I think this is better called a price adjustment because over the course of the second half of last year, we had increases in many of our inputs. For example corn went from BRL 40 to nearly BRL 80 also the price of some packaging also increased. So what's happening now is a natural adjustment in our prices. I'm going to put it in simple terms to try to facilitate your understanding. Our chicken is fed with this corn and the price of the corn increase. So it's natural that the company will have to adjust its prices and the sales prices, and that's what we did. That's why the prices changed.

[Sidney Manzaro:]

No. I totally agree, Lorival. And you know that our price formation, 70% of prices is cost. And in this equation, when the price of cereals -- the price of cereals will directly affect our price equation. But it's important to understand that we are in a context where the impact is valid for the entire scenario. And the ratio that we have between chicken and pork compared with beef, for example, is very advantageous to us. Perhaps, we have one of the highest spreads between beef and the other types of protein. But what Lorival said is exactly this that our company has been really resilient throughout this process due to our strong brands. 85% of our business in Brazil virtually comes from a high added-value portfolio, which can resist withstand this impact of the price of cereals really well. So last year, it went from BRL80 to BRL84. And we are becoming more and more a food company and a food company that integrates all the values that are perceived by consumers through our brand. Practicality, convenience and the eating at home, is what's making us have increasing demand for this high added-value portfolio. So we have this price equation, but we have another lever which is our brands and services, which also add value to what consumers are looking for.

[Victor Saragiotto:]

Thank you, Lorival and Sidney, and congratulations on your results.

[Sidney Manzaro:]

Thank you.

[Operator:]

The next question is from Isabella Simonato, Bank of America. Isabella, you may ask your question.

[Isabella Simonato:]

Thank you. Good morning, Lorival. Good morning, everyone. I would like to know more about the external market. We know that the situation is still very difficult in most of the markets, except for China. So what should we expect for 2021? Do you think that Halal will improve? But still we have the restrictions in some of your plants abroad. In Japan, you have a high level of stock. So what will this recovery in volume and profitability look like, particularly in terms of direct exports in Halal in 2021?

[Lorival Luz:]

Thank you, Isabella. Patricio will answer your question.

[Patrício Rohner:]

Good morning, Isabella. 2020 was a very challenging year, as you said yourself. But we had results similar to 2019 and similar to 2015, which was our historical record. Of course, we suffered in some specific markets with the closing of food services, shutting down of tourism services and religious tourism is very important for consumption. So in some places we had a huge impact. The economic crisis in Turkey was also very strong, not just because of the pandemic. And this impacted their currency, their tourism and all the industry sectors that are very relevant for their economy. But still, in the direct export markets, such as Africa and also oil-dependent countries such as Angola, there was also an impact in the imports of foods, and I don't mean to take too long, but I want to be very specific in my answer. We also had logistic problems that started back in February last year and continued throughout the year due to social distancing and everything related with the pandemic, which ended up delaying the ships and planes throughout the year due to social distancing and everything related with the pandemic, which ended up delaying the ships and planes throughout the year. So whatever we shipped last year had to withstand this pressure. There's logistic pressure due to social isolation. And whenever you have this type of reduction this also impacts your mix. For example, the mix for Japan which is a more premium mix, you end up losing some of that. So when we look at the entire scenario including the shutdown of our plants, also in China, we had some suspensions, but they recovered quickly, it was a very challenging year. And what we did was that in addition to going through the crisis, we accelerated our strategic plans regarding what we expect in 2021 and looking forward. We launched many products. Many of these products were very high added value. And in many markets including Latin America, Africa with industrialized products, South Africa, Angola also the Middle East with frozen foods many new products. We also accelerated our plan to become more local in Saudi Arabia with the acquisition and expansion that we're working on right now in the country. And we're selling products manufactured in Saudi Arabia. So this was really good for us to prepare during this very challenging year and accelerate our strategic direction and not just solving our everyday problems and doing housekeeping. So what we have today is much more flexibility in Food Services. The countries are reopening for consumers to frequent restaurants, not so much for tourism at least not for now. And there's an important barrier, which is the balancing between offer and the demand and supply. And this was a problem in many countries, but now this is changing rapidly and this is also boosted by the price of cereals. And in the case of Turkey, for example, Turkey for us in terms of volume is larger than Saudi Arabia. So when you look at the Halal market, it was Turkey that was boosting our results not so much Saudi Arabia. Their currency is recovering. They're reopening local production to balance demand and supply and we had a very good work in terms of product launches, increasing our market share, strengthening our brands, improving brand reception in Turkey. So what we expect for this year, I think that last year the month of October was the worst month of the year. November, it was much better. December was even better. So for the future, what we expect is more flexibility in terms of consumption, more consumer confidence at least for food products. And we are already seeing the reflexes on our results. And what are the problems this year? We have the growth of China, very positive growth in China. So if they end up consuming some of the containers that we would use, so we're treating January, February and March skeptically because of -- but this is a positive problem actually. The increase in China's GDP, they're recovering faster and the GDP is increasing faster than they're recovering their production. The government has also been implementing a lot of initiatives for people to resume consumption in Food Services, going out to eat. Not so much for tourism, but for the local population right now. So we're very optimistic. I think the worst is past behind us and it happened last year. Thank you.

[Q – Isabella Simonato:]

Thank you.

[Operator:]

Mr. Ricardo Alves will ask the next question.

[Ricardo Alves:]

Thank you, everyone. Good morning, Lorival. So looking at processed goods there was a strong performance this quarter. So -- but it still seems that BRF had a problem with its prices in December and November according to our information. So can you tell us a bit more about competitiveness in your environment? Especially in terms of competing with smaller companies if you can tell us a bit more about that. And what the last quarter has been like?

[Lorival Luz:]

Good morning. I'm sorry. I don't know if it's me, but I couldn't hear your question very well. What I understood was that you had asked about the competitive environment in Brazil at the last few months of the year. So, I'll pass it on to Sidney who can tell you a bit more about that. And then I'll take it back.

[Sidney Manzaro:]

Okay. Thank you, Ricardo. I also could not hear very well. So, if I don't answer your question as you asked it, please let me know. So, about prices in the first quarter, we're still seeing some pressure because of costs, but once again, I think all of the intelligence that we have and that we've been used for, for example, purchasing grain has provided a very positive equation for us. So, this seems to have been a winning bet. This is an impact for the market, right, for all of our main competitors. So, from what I understood of your question, you're asking about our competitive environment. And I see everyone doing the same and the same intensity because of how pressured we are by costs. I believe that in the first quarter, we will be able to adapt. And for the rest of the year, it will depend of course on grain price variations. We still don't have enough information to design a complete scenario. So, we do believe that the first quarter will have some price variation and this is still due to our cost pressure. I don't know if that answers your question. So, please let me know if I haven't answered it well.

[Ricardo Alves:]

No, that does answer my question. Thank you.

[Sidney Manzaro:]

Thank you.

[Operator:]

Thiago Duarte from BTG Pactual will ask the next question.

[Thiago Duarte:]

Good morning everyone. Thank you for taking my question. Actually I have two and a follow-up. So, you usually don't provide this information, but if you can help us navigate this information I think it would be very good. First about your inventory. Lorival, you mentioned during the presentation that your raw material inventory has gone up significantly. And that seems to have been a very good decision. I'd just like to understand if you can break it down for us. If you could tell us about your inventory in real terms what does this mean in terms of volume? How many months of grains do you have stored? My second question is more for Sidney I believe. You mentioned during your presentation that your market share has been consistently high in the last few quarters and across all categories. So, how do you look at price changes in the entire industry? You mentioned that in the past few months they have been going up. So, when we look at the volume share not only your price share, is it a similar development? So, did BRF get a higher volume share in the last few years? And a follow-up question. You mentioned that your mix effect was also very important when you look at the average price of processed foods in Brazil. So I'd just like to ask if your mix effect was more important than your price effect? If we separate your average price from the company's mix, how does that affect it? Thank you.

[Lorival Luz:]

Thank you, Thiago. I'll answer a part of your question and then Leo will answer the rest and maybe Sid can also say something. So about competitiveness. It's important to make this very clear. BRF has showed its competitiveness on that graph when we compare ourselves to others. This is due to the strategy that we've had. Of course, that's very important because it’s this strategy that allows us to have a very important cost competitiveness. You saw the difference and the gap that exists between other companies and ours. Another important thing is remember that we've been talking about implementing a number of initiatives on operational system, logistics system, services system that will expand and affect the company's maturity. This will also make us more competitive. When we look at innovations and everything that we've done and what is still to come in the first half of this year, this makes us very confident about the company's margins the first and second quarters and we believe they will continue along the same line as we're planning. All of these initiatives will remain robust commercially. And this is, of course, supported by the strength of our brands. So with that being said, I'll pass it on to Leo so he can add some information on inventories. And then Sidney will answer your last question.

[Leo Dallorto:]

Hi. Good morning. As Lorival said and as we've been saying in the last earnings calls, this entire topic of commodities is very strategical to us. We've had a very consistent strategy which has been asserted for the last years. You can see from our inventory position that we started 2021 with the highest inventory in the last years. I can't tell you strategically -- because of strategical reasons, the exact level of inventory that we have, but it is of course higher than we had in the past. And besides that we have future orders. We already had future orders placed since last year. So this has made a big difference for us getting ahead of the market. We can look at consumption around the world for our kind of protein and this is what directs our production in Brazil and in other players that produce grains. So we have the US, China, Brazil, Argentina and Ukraine and we see how the production is going there. We see how the production is going in Brazil. We have a field team that monitors it that drives around fields seeing how they're doing, and based on that we have our own models which help us in taking these decisions. So we've been doing this for the last quarters. So we've had a very good level of inventory which will allow us to continue to be competitive and which has allowed us to remain at the price as we are right now. So we're very confident with this strategy.

[Sidney Manzaro:]

Thiago, you had asked some questions about the Brazilian market. So I just want to understand what you're asking. Our main measurement is value and it's remained constant for the last years, but it's also important to underscore what we've been saying frequently in the last calls. Of course, market share is important for us, but it only represents a part of our results about 50%. For example, Food Service we're the biggest food service company in Brazil this is not captured by our market share figures, small retailers in some regions this is very partially captured. So our top-line represents all of the efforts that we've made in growth. And when it seems like we're growing in processed goods by over 10% that is a double-digit growth. There is no doubt that we are seeing some contributions from the mix. So our mix is boosting our average price. And of course in the last quarter we have holidays, which always have a significant impact on our quarterly results. On the other hand though, we've mentioned this before. We're also passing on some of the costs that we've had to our prices. So it's important to look at the figures we presented, because they of course don't show a clear picture of the advances we've made in our portfolio, the added value that we had that went from 80% to 85%. So there is a big effort that we're making in added value products. And there's a portfolio that's not measured here, which also influences us with new categories that are not even included in our market share figures. For example, holiday products, this is not included. So, it doesn't really match when you look at prices and market share. It's important to look at our market share as a trend. So this is just what I wanted to let you know. Behind it we also have a strong effort in innovation. We left 1.1% share to -- we went up to about 5% to 6%. And so, of course, this adds value to our equation, which is based on our strategy. This is what we've committed ourselves to doing strategically.

[Thiago Duarte:]

Okay. Thank you.

[Operator:]

Andre Hachem from Itaú will ask the next question.

[Andre Hachem:]

Thank you for taking my question. Hi, Carlos and Lorival. My question is about your cash. We know that you had many suppliers, and I'd just like to know if this will continue in 2021 when it comes to your cash? And what will your CapEx be for the next quarters? If you could give us some more information on that? Thank you.

[Lorival Luz:]

Okay. Thank you. I'll pass it on to Carlos, our CFO who will give us some more information.

[Carlos Alberto Bezerra de Moura:]

Thank you, Lorival. Good morning everyone. Thank you for your question Andre. You're giving us an opportunity to clarify this point very well. First, when we look at our net debt variation, you see that it's reduced. So cash generation is being used to reduce our net debt, and as you can see that generated proportion of capture and amortization. So we're amortizing high level of our debt and we're putting our balance to the company's strategy. And what is our strategy? As Andre and Lorival said, we're getting prepared to sustain a high a level of grain storage, so that we can continue at the same level of value generation in our feed mills. We also want to stay at the same level of client credit both in Brazil and abroad. I'd just like to remind you that over 2020 even despite the pandemic, we had very low default levels. And we managed to have a very good relationship with our clients in Brazil and with other direct initiatives that we had and this also was true for our foreign clients even with Food Service clients. So the company's cash generation was very healthy. You can see that our financial cycle is between 17 to 20 days. We've reached 13 days in the last quarter. But as we said this will probably remain between 17 and 20 on the long-term. The company's capital structure is more comfortable. And when you look at the effects of foreign exchange variation over debt in the last quarter, we're reaching our leverage guidance very well. It's 2.73 times as Lorival said. And this is below our guidance, which was 2.75 times. So we need to look at cash flow and our balance together. We're not sacrificing one for the other, but we're trying to step into 2021 on the right foot to generate more business for the company.

[Andre Hachem:]

Okay. Thank you. So if I could just ask a follow-on question. When we think about your CapEx for 2021, how are you financing that CapEx? If you could tell us a little bit more about that?

[Carlos Alberto Bezerra de Moura:]

Andre, our capital for next year, which we'll invest about BRL5.2 billion, this year actually BRL5.2 billion in biological assets and FRRS BRL1.9 billion, BRL1.2 billion in support initiatives and efficiency, so that we can increase our operational leverage and BRL2.2 billion in growth to expand our lines and to continue our strategy of advancing and higher added-value products to stabilize our margins. This will all come from the company's cash generation. As a reminder we're going to continue to be financially disciplined. Our limit is three times net debt-to-EBITDA in the last 12 months. So this is very important to keep in mind so that we don't risk our balance. If we need to dose out these investments, the company can do that due to the integration between our company's or our team's and our CapEx control. So we are moving forward with this plan. If you look at the fourth quarter, we're already seeing that our growth initiatives are advancing. At the end of 2020, we had invested BRL2.5 billion. So we are confident that these investments will generate cash. And, of course, this will retrofit our growth and financing structure.

[Andre Hachem:]

Great. Thank you.

[Operator:]

Leandro Fontanesi from Bradesco will ask the next question.

[Leandro Fontanesi:]

I have a couple of questions. You announced a 10-year plan last year. And you mentioned investments. But can you just give us some color on how you're doing in each line? What sorts of investments have you already made? And if you could tell us a bit about the results you've been seeing from these new initiatives considering your revenue and EBITDA? My second point is you've been talking about your strategy and how successful it's been to provide stable margins especially in Brazil around 20%. So if you could tell us a bit about your growth plan and your competitors' growth plan and how you're planning to invest on processed foods? When we look at process prices, especially because of inflation it's still on the rise. So what -- do you have any concerns about reaching the guidance you provided on the processed foods market? Thank you.

[Lorival Luz:]

Thank you, Leandro. So I'm going to answer your first question and then I'll let others answer your second one. Regarding the 2030 initiative starting on January 1st that's when we started working on them. And we have a mix of initiatives, a mix of priorities including domestic market international market and organic growth related initiatives also initiatives for inorganic growth and we are already working on them. We have a team that was launched and a management model to ensure that all these initiatives are implemented successfully. And, you asked us about when you'll start seeing the results I can't really anticipate anything. But regarding the results in our balance sheet itself, of course, in the first quarter of 2021, we won't be seeing the impacts of these initiatives, because they are too insipient, but we expect to start seeing the results of these initiatives in the first half of this year. And also, we will communicate to you the results of all the initiatives that we have implemented and completed. So we expect to have good news for you in the first quarter of this year. Now, in respect to the risk of oversupply, I don't really see a risk of oversupply in this sector. And it's important to stress that, the population in general, not just in Brazil, but in the external market, as well having is growing will continue to grow also people's habits are changing. And when you have a projection of population growth, and also a change in people's habits and lifestyle this all leads to an increase in demand, demand for more practical products, processed products, and this is to meet this increasing demand. And we are already paying attention and investing and expanding the production of these high added-value products to meet this demand. We have our foots on the ground. Everything we do is well grounded by data and in-depth analysis. I don't know, if anyone wants to add anything.

[Sidney Manzaro:]

Yes. Lorival so just to add to what you just said. If we extrapolate the 2030 goals, we understand that, the categories that never fit with our business, if we could calculate the market share we are at 20% of what – where we could be. So there's a lot of room for new categories for new markets for BRF to advance, particularly in Brazil and also in international markets. And if we look at the macro trends, and how consumers are behaving today, we see that most people do not want to cook at home and another large portion of consumers that the foods that we are delivering to these consumers does not really meet their taste standards. So there's a huge opportunity in the market and BRF will be leading this transformation, the transformation of the food industry in Brazil. And also, looking at newer generations that are becoming more and more demanding they want specific products and also looking at all consumption occasions. We still see a macro trend towards people living in smaller spaces, people living alone that these people will want practical products, easy to prepare, off-the-shelf and tasteful foods. And this combination of factors shows the size of the opportunity that we have. So, yes, we do have a lot of space to advance to grow at a very fast pace and in line with the 2030 goals. With processed product today, for example, pork consumption in Brazil is half of what we see in other places in the world. So this leads to many innovations, new categories that will all contribute to the growth level that we forecast for 2030.

[Leandro Fontanesi:]

Thank you. And just one follow-up. When we look at the Brazil segment, you had a significant increase in processed products, but a reduction in pork and chicken. Is that part of your strategy to adjust your mix to preserve your margins, or is there any other element here that is worth mentioning?

[Sidney Manzaro:]

It is actually a combination of factors. This is actually the secret of our company. We have an inter-market demand and we have an adjustment between domestic and international markets, which leads to us deciding what the product mix will be. On the other hand, we are also advancing in terms of added value. And with all the innovations that we mentioned here today, we have a combination of value, so we're looking at the market as a whole to try to understand how markets interact. And, yes, we are advancing our high added-value portfolio. So the two things are happening at the same time.

[Patrício Rohner:]

Sidney, I'd like to add something or reinforce what you said. Processed foods they consume our own in natura product. So when we increase our added value, we are doing a value up of our in natura products. So we have this positive cannibalization, which is natural. I just wanted to reinforce what you said.

[Sidney Manzaro:]

Yes. Well done, Patrício. Thank you.

[Operator:]

This question-and-answer session is now closed. Now I hand it over to Mr. Lorival Luz for his final remarks.

[Lorival Luz:]

Thank you all for participating today. Thank you for taking the time to listen to us. I would like to once again stress the high level of competitiveness of the company and how we are delivering our results and also the high level of trust. Now trust that we have from you for 2021 which we know is a result of the very effective management of what we're doing in terms of our costs our supplies, the management of our brands and the motivation that is being invested in all the initiatives that we're putting in place to reach our 2030 vision and everything that we communicated to you in December. So, once again, thank you all for attending and have a great afternoon.

[Operator:]

BRF SA video conference is now closed. Thank you all for attending and have a great day.