JBS S.A.
Q3 2020 Earnings Call Transcript

Published: 13 Nov 2020

[Operator:]

Good morning, everyone, and thank you for waiting. Welcome to JBS Third Quarter of 2020 Results Conference Call. With us here today, we have Gilberto Tomazoni, Global CEO of JBS;, Global CFO of JBS; Andre Nogueira, CEO of JBS USA; Wesley Batista Filho, CEO of JBS South America; and Christiane Assis, Investor Relations Director. This event is being recorded and all participants will be in listen-only mode during the company's presentation. After JBS remarks, there will be a question-and-answer session . 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.

[Gilberto Tomazoni:]

Good morning, everyone. Before we start, I want to thank everyone for being here today. The third quarter of 2020 is a new milestone for GBS. Our net revenue reached BRL70 billion, and our net income reached BRL3.1 billion, a performance that we attribute above all to two factors

[Guilherme Cavalcanti:]

Thank you, Tomazoni. Please, let's begin on Page 4 on the third quarter consolidated results. So net revenues grew 34% and reached the record for the company of BRL70 billion in the quarter. Our adjusted EBITDA reached BRL8 billion with an EBITDA margin of 11.4%, an increase of 35.0% quarter-over-quarter. And our net profit reached BRL3.1 billion and a BRL1.17 earnings per share. Now moving to Page 5. We show our decrease in net financial expenses in $13 million quarter-over-quarter, in line what we are expecting in reducing interest expenses this year in $100 million compared to last year. Our free cash flow reached BRL5.2 billion, an increase in 37%. Please, now on Page 6. We show first our net leverage, which reached also record low levels for the company of 1.60 times in dollars and 1.83 times in reais. Our net debt decreased quarter-over-quarter, $1.7 billion. From the second quarter to the third quarter, the reduction was $950 million, which was the free cash flow that we generated in the quarter. On the chart on the right, we showed that our total liquidity increased from $4.8 billion. And here we are showing liquidity of $5.1 billion because this is a pro forma, and we are considering subsequent events like the payment of the JBS USA 34 bonds that will mature - that was maturing in 2024 on an amount of $150 million.

[Operator:]

Our first question comes from Ben Theurer with Barclays.

[Ben Theurer:]

Good morning. Congrats on the results. I have a question in regards to cattle in the different regions. And clearly, you've highlighted that in Brazil there was a little bit of a headwind because of cattle availability impacting beef production. The same time within USA Beef, you've highlighted the Australian restrictions because of the lack of cattle here. So the question is with that more limited supply out of South America, a more limited supply out of Australia, on a standalone basis, if you would have to look at your operations in the U.S., where would profitability come - what profitability would we have seen for U.S. Beef if we would have to adjust the Australian piece out? Just to understand a little bit how strong the demand is for U.S. Beef right now.

[Gilberto Tomazoni:]

Andre, could you answer Ben about the cattle in U.S.? And Wesley, you can answer about Brazil after.

[Andre Nogueira:]

Hi, Ben. Good morning, thanks for the quarter. Ben, in the quarter, Australia was a very important impact for two main reasons. The most important one is the cattle availability. Australia has been in a strong moment of rebuilding the herd. Australia overall production of beef in Q3 was 30% below last year. Just to give you a perspective, 30% is a big, big reduction because the herds have been very, very strong. Again, we came from a very important drought, one of the strongest in several decades, to since the start - since last year, and even more this year, probably the best condition for grass in Australia and overall Australia, again, in many, many decades. So it came from extreme to another extreme now, so that's why the retention has been so strong in Australia. And this probably stay with us for the remainder of this year and next year. Probably going to see more availability in Australia in 2022. Of course, this depends of the grass condition and the weather. If you see some reduction in grass, you can see a little bit more numbers early. The other point was in Q3, you had some impact in the South in the Melbourne area because of COVID. The plants need to work in a reduced capacity, and we even closed the plants for two weeks in Melbourne. So we have a specific impact related to COVID in operations in the South. The third one is Australia government creates some benefits to try to help some companies that have reduced production related to COVID, and that creates some distortion in the industry. For small companies, and they have a competitive advantage because they have their label covered by the government during the quarter. This is not the same. They reduced that benefit, and this benefit will not be there in the first quarter. So that was another relatively more impact. But also was relevant, we never published the Australia numbers separately. But there's no question that the North America operation, so U.S. and Canada, present a much better margin than what we published in the quarter because of the Australia impact.

[Ben Theurer:]

Okay. So, fair to say it would have been maybe even better than last year, just U.S./Canada on a standalone basis?

[Andre Nogueira:]

Now you want too much information.

[Ben Theurer:]

Okay. That's okay, Andre. And then actually, one other question for you on the pork business. And clearly, just talking a little bit of what you're seeing more recently on the export markets, because last year, clearly, we've had a very strong demand towards November/December for pork out of China. So just to understand what you're seeing in terms of orders coming in and how you feel about exports to China for the current months and within the next, call it, Q3 - two to three months, just to understand a little bit the year-over-year comparison.

[Andre Nogueira:]

Ben, I would say that overall for the year, China import of pork and the volume that U.S. export was higher than our expectation. If you look at amount that China imported during the full year, I think that is higher than we anticipate last year, higher than the market anticipated for last year, and the amount that we export from U.S., it's higher than we anticipate. I think that for a moment, China has enough. I think that they look like they slowed down a little bit the import, but the perspective continue to be very positive. U.S. is gaining market share. U.S. is extremely competitive. Demand overall for U.S. pork have been pretty good and you can see the level of inventory, it's pretty low. That's the time of the year that normally we would put some ribs and bellies in the freezer, and we are not doing that. We're not doing that. So the freeze is still very low. And we need to put some, because again, when it comes summertime, the demand for these items is very strong. So we should be putting now more meat in the freezer, that's normal, and we are not. We're still with our freezer, inventory is very, very low. So demand is pretty good. There's a little bit of slowdown export for China now. I think that this is normal for this time of the year. They bought what they need until the New Year for China. But I don't think that changed anything the perspective for next year. I think that the import of this year was higher than we expect. I think that will slow down a little bit next year. But still, U.S. will continue to gain market share and continue to gain volume. I strongly believe that U.S. export next year to China will be higher than it was this year. Despite of I believe that China will import a little bit less, I think that we actually continue to gain market share. And I think that, again, the other markets have been pretty strong. And that's - the best sign for that is the level of inventory that is very, very low. And still, we are now November and we still not put meat out in the freezer. That's very, very unusual.

[Ben Theurer:]

Okay. Perfect. Andre, thank you very much for the color and congrats on the results.

[Gilberto Tomazoni:]

Ben, all of the questions was answered?

[Ben Theurer:]

Yes, yes. I'm all good. Yes, Tomazoni. Thank you very much.

[Operator:]

The next question comes from Carla Casella with JP Morgan.

[Carla Casella:]

Hi. You have done a lot of work on the JBS S.A. ESG policy, and we've seen a lot more details on that. I really appreciate that. How are you approaching that for the U.S. business? And will there be a fully separate ESG policy for the U.S. business?

[Gilberto Tomazoni:]

Andre, do you understand the question?

[Andre Nogueira:]

Yes, I understood, Tomazoni. It's related to ESG. No, Carla. It's absolutely the same. The company has a global policy related to ESG, and the company has published this in a global base. The company has a sustainability program. So it's absolutely the same, and we all follow the same guidance on it. We publish the same information.

[Carla Casella:]

Okay. Great. And then are you on track for the U.S. listing as you had hoped for potential 2021?

[Gilberto Tomazoni:]

Guilherme, do you want to answer that?

[Guilherme Cavalcanti:]

Could you repeat, please, the question?

[Carla Casella:]

I'm wondering if you're still on track to do a U.S. listing for the U.S. business in 2021. So I guess the U.S. business plus Seara?

[Guilherme Cavalcanti:]

This project was impacted, of course, by the pandemic, which the company made all - put all of our efforts and focus in keeping our employees safe and keeping our lines operating. And we don't know how long this pandemic will continue. It's very difficult to do a project like that, which we can even travel to United States anyway, and now we are probably facing a second wave. So it's difficult to put a time line on that. But it's a priority project for us. We're taking some steps in this front. Some steps that we would take only after the listing, we anticipated the steps. As you can see on our financial statement on Page 24, Note 12, there are some real sociatary reorganizations that we are implementing, which is part of this strategy, which is also we are capitalizing intercompany loans. So it's a way to pave the way for the listing in the future. But again, it's difficult to say. It's a priority project for the company. We will resume it at some point, for sure. But it's difficult to give a date because we don't know how long this pandemic will take, if the second wave will be stronger or weaker, when we will have the vaccine. But again, as soon as we can, we will resume the project. Hopefully we can get it next year. But in the meantime, again, we are taking other steps related to it that whatever we can do to anticipate and continue this project.

[Carla Casella:]

Okay. Great. And then just one question on Australia, Tom. Can you talk about the trends in that market from a supply and demand perspective and the impact on - any impact, if it had any significant impact on your margins?

[Gilberto Tomazoni:]

Andre.

[Andre Nogueira:]

I'm assume that you talk about beef in Australia, correct?

[Carla Casella:]

Correct.

[Andre Nogueira:]

Yes. Because again, we have the lamb business, we have the prepared food. The prepared foods business doing very well. Production is up. The brands continued to grow and being very strong. So the prepared food side is doing well. Despite of lose some volume in food service, the retail more than offset that. In the beef side, we are in the retention mode, the full retention mode, as I commented in the previous question from Ben. And the production of Australia was down, not for - our company but for the industry during the quarter almost 30%, 28% during the quarter. So it came from a drought. They have a liquidation of the herd. Now the grass condition since last year in the whole country is very, very good, and they're in fully retention mode to rebuild the herd. And this will stay with us for the remainder of this year and probably for the next year or two. So we should see a better cattle availability, stronger cattle availability in 2022. So our quarter in Australia was a tough quarter for us. Was not only the cattle availability. We have close of some plants in the South during the COVID, but the cattle availability will be tough. Again, demand is very strong for beef. So beef price and export and price of exports from Australia have been pretty good. But with this amount of retention that's going on to rebuild the herd, cattle price in Australia now is in the highest point historically. And as long as this retention will continue, we will need to adjust operation. We have done that during this quarter. We changed some shift in some operation of the plants to adjust for the new reality that we are going to have less cattle. I think that next year will be a little bit better than what we saw during this quarter, but to really see a big improvement in cattle availability in Australia will be 2022. Again, price is going up in the beef side, but not enough to offset the record level that we're seeing cattle price.

[Operator:]

Our next question comes from Gillian Pudyadis with Bank of America.

[Unidentified Analyst:]

Hey there. Thank you for taking my question. So I was just wondering how the company is preparing for a second wave of the virus and how that should impact the market, mainly in the U.S. where we have their pricing cost dynamics before. If we should see a scenario what that same movement could actually take place again? Or if not, why would that be?

[Gilberto Tomazoni:]

Andre.

[Andre Nogueira:]

Hi. Good morning and thanks for the question. U.S. has seen the number of case overall increase. I think that yesterday was a new record level for positive case in U.S. So this is a big concern and a big focus for the company. The company since February put very clear what was the priority. We've not changed anything the priorities. The safety of our team members, the protection of our team members and continue to produce food during this pandemic and keep the jobs and benefits. And I can tell you that we are in the maximal alert right now. All the actions that we implement and all the safe actions that we implement, we continue to follow. On top of all the actions of screening the workers when they arrive in the plant with temperature test, five questions in terms of COVID, communication to the team members about symptoms. If they are sick, they should not come to work. Free health care cover related to COVID and free access to doctors that they can call. And in the last several months, we implement a very strong program of surveillance test that are testing most of the plants every week, a percentage of the workers. We have done more than 12,000 tests at this point of surveillance tests. So everything to protect the worker. But the reality - and you are right. We are in the, I don't know if the middle or the start of a second wave that's impacting a lot of people. Again, I think that yesterday the numbers in U.S. was 142,000 new case in one day. So we are doing everything that we can to protect our workers, doing everything that we can to protect the plants, but we are part of a society and we live in communities. Do I expect that they're going to have the same level of impact that you have in the first wave? No, I don't think so. But it's possible some impact. I mean, it's possible some disruption of production. It is. It is. We're doing everything that we can to avoid that, including the surveillance tests and all the other actions that we put in place. We implement just for each alone April and May a filtrational system with plasma and the UV light in every plant in U.S. So we have done a lot to protect everyone. But the number of the cases in U.S. and the communities that we operate is very concerned. Colorado, again, the place that you have are off here in one of our plants. Yesterday was again a new record for Colorado. So the cases are growing, and we are doing everything that we can to protect our plants.

[Unidentified Analyst:]

Okay. Very clear.

[Operator:]

The next question comes from the webcast platform. I'd like to pass the floor to Mr. Guilherme Cavalcanti to address it.

[Guilherme Cavalcanti:]

Thank you. So I'm going to read the two questions that we receive on our webcast. The first is for Wesley and the second is for Tomazoni. First question is that regarding the BRL13 billion CapEx announced for the next five years, BRL8 billion from JBS and BRL5 billion coming from our growers to support our - the growth of JBS. So the question is, will it be more than 50% to Seara? And will you build 12 units? So those are the questions related to it. And for Tomazoni is if you could talk about our acquisition strategy. Thank you.

[Wesley Batista:]

Thank you, Guilherme. So we announced last year this investment plan, BRL13 billion. BRL8 billion, like you said, BRL8 billion came from direct investment from us and BRL5 billion are investments with our partners, our grower partners. Most of the biggest part of this investment is in Seara, more than 50% for sure. And regarding the 12 plants, that's just an update that we announced it previous year. And it's already under - it's already been - there is already progress in this project. And these are projects, the 12 projects that we announced that are part of this BRL13 billion are going to be delivered within the next year. So, just an update of when and how that will be will be done and completed. So Tomazoni, if you want to answer the other one or add to what I just said.

[Gilberto Tomazoni:]

Okay, Wesley. About our strategy of acquisition, everybody knows that our G&A, the growth in part of the G&A and acquisition is in the companies are growing with the acquisition. And we are active in the market and looking for opportunities. But for to it should be at the right price - at the right price. We are looking to grow in our existing platforms, and the reason that we have that created synergy and increase our participation in the value-added and branded product. We are looking, and still when you not find the right target for M&A, we are doing our investment in greenfield, like we have mentioned, in the U.S. with Plumrose and Brazil with Seara and other parts of the world we'll do the same.

[Operator:]

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:]

Okay. To finish this call, I would like to add that the world continues to confront our global pandemic, and we must all remain focused and protecting our team members, our communities and our families during this challenged time. Our team has demonstrated once again that we have a talent, commitment and patience to play an important role in the society and positively impact the lives of millions of people every day with healthy and nutritious foods. I'm proud that we have accomplished, and I am excited about the journey ahead for our company and the good we do for this society. Thank you for your attention.