BRF S.A. (NYSE:BRFS) Q3 2023 Earnings Call Transcript

BRF S.A. (NYSE:BRFS) Q3 2023 Earnings Call Transcript November 14, 2023

Operator: Good morning, ladies and gentlemen. Welcome to BRF’s Q3 2023 Earnings Conference. This conference is being recorded and will be available for replay at the company’s website, ir.brf-global.com, where the presentation slide deck can also be downloaded. All attendees are now connected in listen-only mode. Later, the call will be open for questions and further instructions will be provided. Before moving on, we’d like to emphasize that forward-looking statements are based on BRF’s management’s beliefs and assumptions as well as currently available information. These statements may involve risks and uncertainties seeing as they relate to future events and therefore rely on circumstances that may or may not materialize.

Investors, analysts and journalists must acknowledge that events relating to the macroeconomic environment, the industry and other factors may lead to materially different results than those expressed in set forward-looking statements. Joining our conference today are Mr. Miguel Gularte, CEO and CFO, Fabio Mariano. I will now turn over to Mr. Gularte, who will begin the presentation. Please, Mr. Gularte, you may proceed.

Miguel Gularte: Good morning. I would like to thank everyone for attending our third quarter 2023 earnings call. Discipline in the execution of our BRF us efficiency plan has once again contributed positively to our performance. The company has been working consistently and improving its results every quarter. This period was largely characterized by the increased profitability of our processed food portfolio in Brazil, the downswing in product costs and the continued improvement of BRF plus. We strengthened our capital structure by enhancing our operations month after month and using the funds from our follow-on offering, which helped to reduce our financial expenses and leverage. Now I’d like to invite our CFO, Fabio Mariano, to go over our detailed results, after which I’ll return for my final remarks.

Fabio Mariano: Good morning to everyone joining us on the initial slide, I’d like to highlight our main financial indicators for the third quarter, starting with net revenue, which came to BRL 13.8 billion. Our EBITDA was BRL 1.2 billion in the quarter. This gave us a 9% EBITDA margin for the period. Free cash flow performance nearly broke even with the best cash generation yet for the current year. On the working capital front, we continue to make significant progress with a reduced inventory of finished goods, unprocessed goods, in particular, which was offset throughout the quarter by the spike in corn inventory during the double crop harvest and the peak in commemorative goods inventory. The financial cycle reached 7 days, 6 days less than this time last year and inventory turnover was 84 days, 20 days less than in 2022.

Now ending the slide with leverage, we came to 2.66x EBITDA in the last 12 months. Our focus is still to strengthen our capital structure, promoting a decrease in net debt, so our leverage can fall even further. In the next slide, Page 4. We show our gross profit over time coming to 18% in the period. We reported a gross profit of approximately BRL 2.5 billion. On the right, we also see the company’s EBITDA over time, as mentioned earlier. In the next slides, we will go over our performance by market business segment. Starting with Brazil, we continue to progressively improve our EBITDA and our margins. We reported an EBITDA margin of 11.9%. And the result was even more impressive when we look exclusively at the processed foods portfolio where profitability was in line with historical levels despite the country’s more sluggish consumer spending.

On the following page, Slide #6, we make it clear how the drop in prices within the unprocessed foods portfolio in Brazil has held us back from an even more substantial performance in the region. We can see in the chart on the lower left side where base equals 100, how profitability has developed for processed goods in recent quarter, already mirroring the decrease in game presses, the efficiency gains provided by the BRF plus program as well as our improved commercial execution and price positioning. On the right, we can see the behavior of cost per kilogram throughout 2023, making it clear what we anticipated in our last earnings conference call, the positive downward trend in input costs and efficiency gains, which are driving profitability gains.

On Page 7, I’d like to mention in the Brazil market that our commercial execution is still enabling us to grow more competitive. Among the strides we’ve made, I’d like to point out the increased number of active customers and products available in store as well as greater adoption of our suggested retail prices. Service level metrics remain at high levels, allowing for greater sales volumes. Finally, the processed foods and spreads market share ended the period over 39%. The next slide shows the international market performance. Our EBITDA was still heavily impacted by the adverse sonar of protein experts. EBIT margin came to 4.2% and steady when compared to the previous quarter, given the recovering profitability in Chicken and process products, which was offset by the narrower margins in the pork and turkey portfolio.

We’ve also reported gains in the share of chicken and pork experts to several different destinations. On the next slide, we point out the resilience of our results in GCC, especially the strength of the Sadia Brent and local distribution as well as the positive performance in Turkey, which also reflects the increased supply of value-added products in the Turkish market and the greatest balance of supply as a way of reversing the price trend locally. We retained our market share leadership with the Sadia and Banvit brands with a share of 36% and 22% in their respective markets. On the right-hand side, we have the highlights of direct experts. We can see the price impacts of the main cuts, which canceled out our gains and cost competitiveness.

We continue to broaden our business alternatives with 19 new licenses for markets such as Asia, Africa and the Americas. We should come to 50 new expert licenses by 2023. Direct factory experts remain at high levels with reduced logistics costs and unsold inventory continues to decrease, improving our commercial execution and relieving the capital we employed. I’ll end the presentation on business segments on the following slide, showing the performance of our ingredients and Pet operations. The segment reported an EBITDA margin of 15%, EUR 126 million in the quarter. It’s important to remember that the performance of manufacturing output continues to contribute to the maximization of our results in the company’s core portfolio. We’ve continued to make progress in realizing synergies in Pet, we simplified the product portfolio within some brands in the food channel while strengthening our presence in the specialty channel where we have continually cultivated a better relationship with veterinarians.

In ingredients, we are still focused on broadening the markets and increasing our sales and production capacity for value-added items. We’re still adding value to our co-products in order to maximize business integration. Next, we’ll talk about the progress of our efficiency plan, which Miguel will be quantifying in numbers shortly. I’ll be showing you some comparisons with the same period last year of the light gray colored bars. And other basis for comparison can also be seen in our disclosed material. In agriculture and livestock, the feed conversion in the poultry and pigs, fell by 1.7% and 1.6%, respectively. Chicken mortality fell by 2 percentage points and hatching rates rose by 6.8 percentage points. In manufacturing, we increased our factory output by more than 3 percentage points.

And in logistics, we’ve reduced our returns and raised service level in Brazil significantly. On Page 13, we show you the highlights in sustainability ESG with our achievements, such as the certification of 100% of our poultry and pork, slaughter units in Brazil and animal welfare, 8% reduction in water consumption per ton produced versus the base year, which was 2020, which is the equivalent to 2.7 billion liters in 2023. We’ve also already started using an average of 14 megawatts of clean energy on a monthly basis from the wind complex we announced in 2021 in a partnership with AES. We expect to reach 80 megawatts on average in 2023. And finally, our Quality brand has launched a special packaging to celebrate the milestone of 12,000 tons of recycled plastic.

On Page 15, we show you information on the company’s capital structure. The chart on the left side shows the performance of our net debt and leverage over time. These indicators have already been pointed out at the beginning of our conference. On the right, we see the debt profile, which remains diversified and long with no repayments concentrated in the near term and a comfortable liquidity position. The next slide shows the free cash flow. The bridge shows an operating cash flow of BRL 923 million, investment flow of $536 million and $480 million in financial flow, leading to a free cash consumption of BRL 21 million. This was the best cash generation of the current year, as we can see in the chart at the top right-hand side of this slide.

On the final page, we can see the performance of our net debt over quarters. We’ve reported a net debt of BRL 10.3 billion capitalization of the share offering in July. The allocation of funds from the follow-on offering will continue to help reduce interest charges in the coming quarters. Now I’ll turn the floor back to CEO, Miguel Gularte, for his closing remarks.

Miguel Gularte: Thank you, Fabio. To conclude our presentation, I’d like to say that the final stretch of this year shows our BRF plan, BRF plus plan, delivering more than we planned for and increasing the company’s resilience in the face of a challenging scenario. It’s important to note that the planned additional capture amounted to BRL 677 million this quarter, exceeding the target we set for the period. And our continuous improvement journey, we’ve already mapped out and established the priorities for next year and what we’re calling BRF plus 2.0. The plan was built hand-in-hand with the company’s senior leadership and focuses on the improvement of our indicators. Just as in 2023, the commitments we’ve made and the opportunities we’ve identified have motivated us to remain on our path of improvement with simplicity, agility and efficiency.

This quarter, the drop in grain prices is already impacting our results just as we predicted. Our predictive models and our grain purchasing strategy are a competitive edge for our company and proving to be highly efficient. In Brazil, we’ve returned to double-digit EBITDA margin and approach to our historical levels of profitability. This mirrors the positive performance of our processed foods portfolio alongside our positive commercial execution and improved management. In October, we recorded the lowest FIFO level over the last 34 months. Our results also mirror the strength of our brands, which are still preferred by more than half of our line consumers. Sadia is still a leader in the food sector and was named top of mind by the full De San Paulo newspaper in 4 different categories, and quality was also named for the 18th consecutive year in the margarine segment.

In our international operations, our market diversification strategy is still proving to be decisive in maximizing the company’s revenue. We’ve won 19 export licenses for Latin America, Asia, Eurasia and South Africa by 2023, we’ll have reached 50 new licenses. As always, the best option is to have many options. We’re still focused on the constant search for new markets, continued improvement in our operating results and our reduced financial expenses by using the funds from our follow-on offering have contributed to a balanced cash flow and lower leverage. Lastly, I’d like to thank our nearly 100,000 employees for their work and dedication because of the progress and deliveries we’ve made so far. I’d also like to thank our Chairman, Marcos Molina and the Board of Directors for their trust, presence and continued support and also shareholders, out-growers customer suppliers and all the communities where we have a footprint.

We’re prepared for 2024, convinced and expecting that in the face of a normalized scenario for the effects of everyone’s work and the efficiency plan will be even more impactful. We will continue to build an ever stronger and more competitive BRF. We will now begin the Q&A session for investors and analysts.

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Q&A Session

Operator: Our first question comes from Ricardo Alves with Morgan Stanley.

Ricardo Alves : Thank you for the call. I would like to ask two questions about Brazil one the short term related to the fourth quarter. Do you really understand that the market has been anticipated, what would be a sequential result of the company? We still believe it’s going to be a tailwind. In addition to that, we also have the commemorative events I’d like to understand from you the part where we don’t see a lot of visibility. How do you see that the company is going to perform in the high season in terms of inventory, product in stock, all things related to the high peak season that could impact the result? I don’t believe so, but if you could provide us with this level of detail, it would help us understand the performance and the results.

And the other question is related to the first question as a follow-up. When we look at Brazil, we can see that we reached nearly 12% in terms of Brazil. But if I’m right, Fabio showed the slide, saying that if you want to change the in nature, chicken and the process chicken, we can see that the margins are really high. So I would like to understand if it’s how we should be looking at the results for Brazil division because I think it would be similar to the margin that we have considered that the uncross nature was like this. And if things happen have improved in September, October, we understand that the favorable level is going to be reached. So these are the 2 questions I would like to ask you.

Miguel Gularte: Ricardo, I’m going to start answering your first question, and then I’ll turn the call over to Fabio, and he will answer the second question. You’re right. We are starting the fourth quarter, very enthusiastic. And this is based on financials that we see in our business. We keep on make headway in BRF plus, and this touches upon all the dimensions of our production of operation and our sales as well. It’s also important to mention that the fourth quarter is for BRF, a very special quarter. We know very well that Sadia, Banvit and even quality are brands that associated with the end of the year and also Christmas season. And we have been preparing ourselves to renovation, trading and inventories so that the fourth quarter can really be a very promising quarter as we see it.

On the other hand, we saw at the end of the third quarter, a recovery in relation to prices, not only in the domestic market, when we talk about unprocessed product, but also regarding the international market. When we look at the prices of the third quarter and we look at the prices compared to our price portfolio of the fourth quarter. In other words, the export portfolio that we have for November and December, we can see that prices have recovered in a very significant manner such as in the Middle East of up to $350 per ton. If you go to Americas, some cuts we can see also prices going up, especially for chicken breast. And in some cases, we even see $100 per ton. And there’s something that has been presented, but I would like to draw your attention to is the fact that BRF worked quite hard to get more licenses.

And we have 50 new authorizations, new licenses and many of them in the third quarter. So we see a very enthusiastic team, powerful brands, a very well done execution in a more normalized cement terms of exports. And we reported a very good performance that will lead to a good fourth quarter. I’m going to turn the call to Fabio, who will complement my first answer, and we’ll answer your second question.

Fabio Mariano: I think your 2 questions related to Brazil are interconnected. I can say that your understanding is perfect. The margin of from processed food in Brazil has to do with the historical level. So we boosted the profitability that makes us confident that when we see what happens in the processed food, as we saw in the data that we showed, we see that in nature on prices, food have already recovered. So we make the transition to the fourth quarter at a very good level of profitability in most of the cuts that we sell in Brazil. So when you combine this element with the element that you have already mentioned, we have a stronger quarter as a result of the seasonable portfolio due to the commemorative events. And in addition, to our inventory turnover, we believe that we are going to have a quarter which is going to be very strong in Brazil.

You also asked about possible events or negative events as to planning, we are very well balanced in terms of how we are going to serve the market. So yes, we are very optimistic because of the margin of processed food and also the margin that we see.

Operator: Our next question comes from Gustavo Troyano with Itau BBA.

Gustavo Troyano: First, I would like to go back to the cost per ton. I would like you to help me understand for the third quarter. What would justify the cost per ton in Brazil dropped quicker than when compared to the international terms? Is it to do with having more process to Brazil? Because I would expect the drop to be more accelerated at the international level. And do you believe this is going to be reversed or is it going to be sustained for the fourth quarter? And since we’re talking about costs, I would like to understand if the sequential drop that we saw in the third quarter could be used as a parameter for us to imagine the performance in the fourth quarter? The second point may be talking about cash flow, we saw that there was a reduction in the result for the half of the year.

But it seems that the annualized reduction was higher than the BRL 600 million that we discussed at the beginning of the year at the offer at the time of the offer. I would like to know if there’s anything going on so that we can understand the breakeven, especially when we talk about the annualized results and also considering the CapEx?

Fabio Mariano: Thank you, Gustavo. I’m going to start from the first part of your question that has to do with the cost per ton. You mentioned that there was a retraction in Brazil cost, and you tried to make an alignment with what happened internationally. So we’re talking about a drop of 7.5% in the domestic market and a 6.9% drop in the international segment. I’m going to explain to you why this difference happened. But I would like you to provide your breakdown about this drop. The first aspect is the reduction of the consumption of grains. This has influenced our COGS. And then we have the captures of the efficiency program, which is the BRF plus that accounts for 25% of this drop. And then we have 15% that has to do with the mix of products sold and another 50% related to other effects.

When you compare the drop Brazil, with the drop in international segments, you have to take into consideration that in the international segment, we have influences of currencies, different currencies in the case dollar. In the Middle East, we prepare an inventory, so we use our distributions, and we maintain the inventory at the local level. So you have the FX effect that influences the dynamic of transfers in Brazil, so that we can then sell the products. We have to remember Turkey as well, which is a business unit where we sell products for the Turkish market. And we also have the translation effect that also affect the results. So this is something that we have to pay attention to. And you asked what we can expect in terms of costs, you asked if we could expect the same behavior in the fourth quarter.