JBS S.A. (OTC:JBSAF) Q3 2016 Results Earnings Conference Call November 16, 2016 8:00 AM ET
Wesley Batista - Global CEO
André Nogueira - President, JBS USA
Jerry O’Callaghan - IR Officer
Farha Aslam - Stephens
Luca Cipiccia - Goldman Sachs
Bryan Hunt - Wells Fargo
Alex Robarts - Citigroup
Lauren Torres - UBS
Jose Yordan - Deutsche Bank
Pedro Leduc - JP Morgan
Good morning, everyone, and welcome to JBS Conference Call. During this call, we will present and analyze the Results for the Third Quarter of 2016. As requested by JBS, this event is being recorded. The recording will be available this afternoon and can be accessed by following instructions posted on Company’s website at www.jbs.com.er/ir.
Taking part on this call we have Mr. Wesley Batista, Global CEO of JBS; Mr. André Nogueira, President of JBS, USA; Mr. Gilberto Tomazoni, President of Global Operations; Russ Colaco, CFO of JBS Foods International; and MR. Jerry O’Callaghan, Investor Relations Officer.
Now, I’ll turn the conference over to Mr. Wesley Batista. Please go ahead, sir.
Thank you. Good morning to all. Thank you for joining us in our third quarter earnings call this morning. So, I will give you overview about the performance of each part of our business in the third quarter and as well the outlook in each business unit, going forward, starting with Pilgrim’s Pride that already reported their third quarter results.
So, when we look Pilgrim’s Pride, this is the third year that we are operating Pilgrim’s Pride in a double-digit type of margin. We have been doing a lot of things inside of Pilgrim’s. We completely changed our portfolio. Today, we have a very, very good and very well set portfolio that is giving us a differentiation for our operation. We are satisfied where we are, but we still have a lot of work to capture more benefit from our internal operation. Bill and the whole team is very focused on getting more results inside of each part of our business. When we look the dynamic of the chicken industry, we are very positive going forward when we see demand that is still growing around the globe, we see grain prices favor. So, overall, we are satisfied where we are, but we think we even can deliver strong results going forward. I’m very positive when I look ahead for the fourth quarter and even beyond to the fourth quarter in 2017. I definitely think we are going to be collecting good results from Pilgrim’s Pride.
So, moving to pork, we have very strong third quarter in our pork business, so 14% margin. I think it’s important to reemphasize after our last acquisition, our pork business today is $5.5 billion business that can deliver over $500 million EBITDA and is going to deliver it around this number. Again, we are also very positive on the outlook for our pork business. When we see today U.S. is the most competitive market to produce hogs and to produce pork meat is very competitive. Europe is declining their production. China is importing more and more. U.S. pork price today is in a very, very competitive place. Even we delivered this result with 14% margin, we strongly believe our pork business is going to keep delivering very strong margins going forward. This business has been stable business over the last past years. The integration of our last acquisition has been very good. We have been able to integrate this business very, very well, actually capturing more synergies than actually we anticipated in the beginning. Our team is doing outstanding job in this division.
And we follow the dynamics that’s going on in the market around the world. This business, we are very confident that in 2017 is going to be a double-digit margin business and is going to be very positive for JBS. So, moving to our North America beef business actually includes Australia in the results of our North America beef business. We have been discussing for a while in terms of the cycle of this business and definitely we believe we got in a positive cycle now. We had a good quarter, 5% margin. A lot of things is going on around this business. So, we are seen more cattle available in the U.S. U.S. import is declining, so actually declined this year, year-to-date 14% import. And in the other hand, export is growing. The U.S. market grew 8.5% this year export that is also very positive.
Inside of JBS, our export growth is over 30% this year compared to last year. So, the combination of market available, less import and more export is definitely giving a very positive dynamic for the U.S. beef business. Now, we are very satisfied and very well-organized internally. We did some change in our beef business in North America in the past 12 months and we are very satisfied where we are today. We believe we have a very strong structure and very strong team to be able to capture all the benefits that we can capture in our beef business in the U.S.
Looking forward, we are very positive that the industry and we are very positive about our capability to deliver very strong results in this coming years, I am very positive. We are already in the mid of the fourth quarter and the fourth quarter is performing even stronger than the third quarter that is very positive. And I see 2017 that we are going to be able to show delivery margin [ph] in the top of the range. When we say top of the range, we mean 5% in our analysis and in our projections. We are going to shoot for higher than this top of the range, and we think we have a very strong business and a very strong team that we can even deliver above to the top of the range in terms of margins.
So, moving to Australia, the Australian beef industry reduced a lot the amount of meat available due to the fact that we are seeing less cattle available to be processed. This is positive mid-term and long-term that we are seeing a rebuilt in the herd in Australia but also this is benefitting U.S. because Australian meat is more expensive, so U.S. is importing less meat from Australia. So when we see for JBS all in is very positive. And on top of that, we are very satisfied with our Primo position in Australia; adding the Primo business inside of Australian business change dramatically our portfolio there. And this is very beneficial. We have seen better margins in the third quarter already comparing to the first and the second quarter that the performance was quite weak in Australia and we believe the worst got behind in our Australian business and we are going to see better performance going forward overall there.
So, Moy Park, we acquired Moy Park just a year ago. We have been able to improve the margins in Moy Park, still more work to be done. We are looking to run this business in a double-digit margin and we believe we can do that. It’s going to take some time for us to get there but definitely we believe this business we should be able to run in a double-digit margin. We are well-positioned in the UK market and very satisfied with our team there. And we believe Moy Park is going to keep improving the margins and the results going forward.
Now, moving to South America and just talking more about Brazil. We are facing some challenged moments in the Brazilian market, Seara specifically is suffering three things, three main things, the appreciation of the real that was around 4 in the end of last year and now is around 3.20 to 3.30. Our Seara business is about 45% export. So, this has been putting pressure in the export margin due to the fact that real appreciated a lot, and also corn price in Brazil this year almost doubled the price comparing to last year. And on top of that chicken international sales price was low due to the fact that the real went to 4 last year and the industry increased volume in the international market last year and put pressure in prices. So, all these three things putting challenge on the performance of Seara.
We believe that just got behind us in the end of this third quarter basically because we are already seeing a lower corn price and recovery in international sales price. And we believe this is going to be progressively improving grain price and international sales price. So, we are positive for 2017. We believe that Seara is going to be back in a normal margin level. We call normal margin level 15% margin and we believe during 2017, we are going to be able to put margin back where margin was before in Seara.
Moving to our beef business and to finalize our business units, also is getting pressure in terms of margin. We are seeing contraction in our margin in the beef business and basically pretty much the same, as I said in Seara, exchange rate is hurting our export business, our export beef business and as well international sales price that was more lower and is recovering prices in the international market. So again, we have a very competitive beef business in Brazil and we believe this business also is going to be back to a normal margin level in 2017.
We are very confident that overall in South America and in Brazil, in the Brazilian market, things, overall the economy, all the difficulties in the Brazilian economy also is getting behind and overall the mood is much better in the Brazilian market and this of course is going to benefit our business overall in South America. So, our biggest focus now on and during 2017 is going to be cash generation. We believe we’re going to be able to generate a strong amount of cash. And we’re going to be able to deleverage our balance sheet. Only to remind everybody, so we did a lot of acquisitions in the last 18 months. We more acquired in the UK, we acquired Primo in Australia, the Cargill Pork business in U.S. and the chicken business in Mexico and in Brazil. So, we did a lot of acquisitions, over $5 billion in acquisitions in the last 18 months. And now, we are very focused on generating cash and deleveraging our balance sheet. We are very optimistic when we look JBS overall, we definitely -- we think, we built a unique platform globally in terms of our diversification in segment and as well our geographic diversification. So we are very optimistic when we look each part of our business and we are confident that we are going to have a very, very strong 2017.
So with that, I’m going to stop here and pass to Jerry to go through the numbers and each business unit performance as well. Thank you.
Thank you, Wesley. Thank you and good morning to everybody. As I go through these numbers, I am going to make reference to our presentation, which is on our website and available, and I will mention page numbers to facilitate people like accompanying my conversation here.
So, starting with page three in our presentation, the consolidated highlights for the third quarter, starting with net sales. Net sales declined by just over 4% to R$41.16 billion from just over R$43 billion in the same time last year. Always bear in mind the FX associated with these numbers. Gross profit declined from R$6.24 billion in 2015 to R$5.34 billion this year, a decline of just over 14% with gross profit margin declining from 14.5% to 13% in the period.
Moving onto the next page and speaking of EBITDA and of net income. EBITDA declined to R$3.14 billion, a decline of 18% from R$3.83 billion in 2015. EBITDA margin declined from 8.9% to 7.6%. Net income in this quarter in this third quarter 2016 was R$887 million or R$0.32 per share, a decline of 74% when compared with the same quarter in 2015 where net income was R$3.44 billion or R$1.19 per share.
Moving onto cash flow, operating cash flow in this third quarter 2016 was R$1.83 billion as compared with just over R$3 billion in the same period last year. Free cash flow in this quarter was positive, R$782 million against the negative R$8.5 billion in the same period in 2015.
Speaking of net debt and leverage a little bit and moving onto page six in our presentation. Leverage, as Wesley mentioned, has moved up; it’s 4.32 times net debt to EBITDA at the end of the third quarter. Net debt actually declined from R$49.2 billion to R$48.8 billion when compared with the previous quarter with the second quarter in 2016. But leverage moved up because of the lesser EBITDA in the third quarter of 2016 when compared with 2015. Our debt maturity is also on page six, more than one-third of our debt maturing after 2021.
Having a little bit of a closer look at our debt profile on page seven of our presentation, the breakdown by currency firstly, almost 92% is in U.S. dollars and just over 8% in reals. The cost per currency is just over 5% in dollars and 14.45% in reals. By source, almost 60% coming from commercial banks and 40% coming from the debt capital market. And then the breakdown by company is almost 47% at JBS S.A., at the parent; 44% at JBS USA; and the difference at Seara here in Brazil.
Short-term debt is at 31% of the total debt which is similar to where it has been in previous quarters. And we always highlight the fact that the major portion of short-term debt is trade finance and that’s because of the volume of exports that we have out of Brazil, by far the cheapest source of financing in Brazil. And for that reason, we have that portion of our short-term debt in trade finance.
Now, speaking of the business units and moving onto page nine in our presentation, Seara. Net revenue was down 8.6% at R$4.57 billion against just over R$5 billion in the same quarter last year. EBITDA as well as I mentioned declined quite a bit in this business unit; EBITDA was down to R$334 million against just over R$1 billion in the same period last year. EBITDA margin declined from 20.7% to 7.3%. In fact, we had growth in our domestic sales due to an increase in sales prices and in volumes domestically. And what really jeopardized this business was the FX variation, as again we mentioned earlier and the cost of grains which impacted the quarter quite a bit, although we do see an improvement in the input cost of feed. We also saw an improvement in service levels and a growth in our customer base in Brazil, reaching 143,000 active customers in the domestic market in Brazil. We also introduced the Seara Gourmet line and we also innovated with an organic line in Brazil under the Seara DaGranja brand.
Moving onto our Mercosul business, page 10 in our presentation. Again, revenues decline here; again FX is a factor in reduced revenues from R$7.14 billion in 2015 to R$6.78 billion, a decline of 5% in revenue; EBITDA, down from R$640 million to R$340 million; EBITDA margin from a 9% margin this time last year to 5% margin this year. We saw a reduction in the revenue primarily due to a decrease in export volumes in reals. This was partially offset by an increase in prices and volumes sold in the domestic market again. We had higher raw material costs and again the FX variation. And in this business unit, we inaugurated right at the end of the third quarter a beef processing facility in Paraguay, which will increase our capacity in that country by 75%. And I’d like to highlight the fact that the fastest growing herd in South America is actually in Paraguay.
Now, moving on to our North American business, JBS USA Beef, which includes Canada and Australia. And in dollars here, we had revenues of $5.36 billion in the quarter against $5.75 billion in the same quarter last year. EBITDA increased from $197 million to $270 million with EBITDA margin going from 3.4% to 5%. We had a good increase in cattle availability in the U.S. We had a decrease in revenue due to a decline in beef prices in the U.S. market, as a result of a decline in cattle prices. And we had a growth of -- and Wesley mentioned this a growth of over 30% in our U.S. exports due to strong demand coming particularly out of the Asian market.
Our pork business in the U.S., JBS USA pork, we had a big increase in revenue due to the integration of the acquired assets at the end of last year, revenues going from $785 million in the third quarter 20115 to $1.35 billion in 2016. EBITDA went from $48 million to $190 million with an EBITDA margin going from 6.2% to 14%. Primarily, we had higher export prices, again boosted by strong demand coming particularly out of Asia and an improvement in efficiencies with an increasing productivity and the capturing of the synergies from the integration of the assets we acquired at the end of last year.
JBS USA chicken, Pilgrim’s Pride, which already reported its numbers, so briefly, just over $2 billion in sales down from $2.1 billion in the same quarter last year. EBITDA was $211 million in the period against $274 million in the same quarter last year with an EBITDA margin declining from 13% to 10.4%. We had lower sales due to a reduction in volumes sold of processed products. We had a decline in sales, when we converted to dollars in Mexico due to the depreciation of the Mexican peso, which was partially compensated by higher prices and volumes sold domestically in Mexico. EBITDA was impacted by lower capacity utilization at one of our largest prepared foods plant as the company modernizes that facility.
JBS Europe, Moy Park basically and now in pounds sterling, revenues increased margin early to £352 million from £350 million in the same quarter last year. EBITDA went from £26.8 million to £31.4 million sterling with EBITDA margin increasing from 7.6% to 8.9%. We had a decrease in volumes of prepared products sold in the domestic market, which was offset by an increase in prices in the international market, and we also had a growth in our exports from Moy Park business. We also saw an improvement in margin results, resulting from synergies to increased operational efficiencies implemented by the management after the acquisition in September of 2015.
That concludes our remarks about our business units. So, thank you very much. And we are now open for Q&A. Thank you.
[Operator Instructions] Our first question comes from Farha Aslam, Stephens.
Hi. Good morning. Two questions, both longer term in nature. The first one is on your pork business. Your pork business performed very well in the quarter but in the U.S., you are having four to five new processing facilities that are coming in line over the next three to four years. How are you thinking about your pork profitability over that period of time and how are you preparing your business in light of the increased capacity in the industry?
André, can you answer Farha’s question.
Yes. Good morning, Farha. So, Farha, there’s two important and sizeable new pork plants under construction right now, another one is pretty small. I think that the growth in the hog availability will be enough to supply these plants. And I think the most important thing is the global demand, how did global export and I think that if you see what’s going on right now is U.S. recovering, market share in the import [ph] market for U.S. I think that you have the reduction in the cell numbers in China; you have the reduction and production in Europe and U.S., pork price is very competitive in the global base. So, as long as we continue to grow in export and that’s what is happening now, I think that will have a long way to go to equal [ph] all the export mark that we lost during the virus [ph] in U.S. I think that we expect that the profitability in the business will continue in a very healthy level.
What we’re doing is the same that we have been doing in the last several years, I think that investing in our operation; make sure that our operation, our plants work in a very efficient way. We have been outperforming the industry for a very long time now; we have very healthy gap between ourselves and the industry. We create investment relationships, differentiate our products to make sure that each of [indiscernible] that our products have a premium and have the preference in the customer. That’s what we’re doing and being very successful doing that. If you see the level that we sell our products, the part of our products both the domestic and in national market, we have clear difference from most of our competitors and that’s the way that we prepare ourselves on that. And I think that the global demand and are seeing that are producing more right now and the demand continues to be very good level.
Farha, just to add one more comment on Andréa’s comment, so on top of everything that Andréa already said, in our view, the ramp up of these new projects, these new plants in U.S. is going to take much more time and is not going to be fast like it was before due to labor constraint. We believe that it’s going to take longer than before and even than the market is anticipating how this ramp us is going to happen. And on top of the competiveness in terms of how U.S. can produce hogs today, we believe the market is going to -- demand is going to be there to absorb more production from U.S.
That’s helpful and perhaps there is one follow-up. Recently, we’ve had a big political change in the U.S. with Trump being elected. And one of the campaign promises is increased tariff of products from Mexico in particular and China. Are you concerned about a trade war growing and that impacting U.S. protein exports?
Well, Farha, we are not concerned about any change in government. At the end of the day, we are going to compete in the market with everyone else. And we are very fortunate to be very good in what we are doing and what we do. And we are not concerned at all about any changing government.
The next question comes from Luca Cipiccia, Goldman Sachs.
Thanks for taking my questions. I wanted to ask two things, one is, if you can comment on the current and expected competitive environment for Seara in Brazil, maybe as you go into the fourth quarter. What type of strategy, commercial initiatives you are putting in place, value relative to mix? We’re saying a lot of trimming down, we’re saying a lot of dynamics. Maybe what type of competitive environment do you think we will see in the fourth quarter, how disciplined or not as well as looking out in 2017? And then, secondly on the recovery, beef division, U.S. beef division, can you quantify given the swings in currency and relative performance, what is the contribution of Australia now and the net profitability of that unit combining beef and Primo; was it higher or lower than the consolidated margin that you reported? That would be questions. Thank you.
I’m going to take the first part of your question about Seara. Look, we have been working since grain price went almost to the roof in Brazil this year and also the exchange rate dropped so much. To recover price in both markets in the international market and we have been able to get some price increase and also in the domestic market, we are working to reposition price given the fact that the cost is different this year, comparing to last year. We are going to keep working on that. We have planned to pass more price in the international market and as well as in the domestic market.
So, the fourth quarter is usually a better quarter overall where you have Christmas that we sell a lot of products and we say a good amount of products to the Christmas period. And we are going to have a better fourth quarter. And we are more positive for 2017 due to the fact that we are seeing corn price declining and as well export and domestic price picking up. And we saw the market quite challenged in the third quarter, but we are seeing a better outlook already and for 2017. So, we are going to focused. In terms of market trending down, actually we are working in opposite way. We just launched a product line by the Seara Gourmet and we are actually pushing to trend up our portfolio and we have been able in some extent even with all the challenge in the Brazilian economy, we have been able to hold our mix without seeing big trending down due to these initiatives that we are doing, launching like the Seara Gourmet and the organic chicken and we believe this is going to keep happening. So, I’m going to pass to André to comment about your question on beef. André, please?
When you look our segment inside of the beef U.S. that you have Australia, you have Canada, you have the regional business that’s more the cow business and the best performing part was the fed business. The others perform in a similar level, but a little bit less including Australia. And of course inside of Australia, Primo [ph] was the highest performance and the lamb [ph] business in the south was the lowest performance, it’s kind of the seasonal low for lamb; [ph] we’re going to see a better performs in Australia in the fourth quarter, compared to third quarter, plus it’s the time that lamb [ph] business will improve, but Primo is performing much better than the average of Australia. But the best performance in the quarter was the fed [ph] business in the U.S. The gap between the businesses is much smaller than was in the first quarter and the second quarter.
The next question comes from Bryan Hunt from Wells Fargo.
Thank you for your time this morning. You gave us a lot of good color with regards to each of the divisions in terms of margin prospects or what you felt like Seara and the Australia business was bottoming out. Do you feel like this is peak leverage for the Company at the current time, and what type of leverage target would you have for 2017, given the earnings outlook?
Yes, we see leverage in the peak now in the end of the third quarter, if you look your LTM results by each quarter, fourth quarter, first quarter 2016. So, the quarter is that we are going to replace is weaker than we definitely believe we are going to deliver it. So, only due to the fact that we are going to replace strong quarters against lower quarters is going to improve leverage. And on top of that we are very confident the amount of cash that we are going to be able to generate going forward and on top of that we have been spending pretty strong amount of money inside of our business. In the last many years, we have been acquiring this business, some of this business has been not performing well and was a pretty big need in terms of capital in a lot of business that we acquired. And when we look forward, the need in terms of investment is going to be smaller because all the plans and all the assets is in a very, very good shape now due to the amount of money that we put over the past many years.
So, we the combination of strong amount of free cash flow and strong results, we think that this is the peak of our leverage and it’s going to decline quarter-by-quarter. And we believe we are going to see this leverage much lower than it is now by the end of 2017. I am not going to go specifically about where the leverage is going to be. We are closing to finalize all of our projections for 2017 but it’s going to decline substantially.
My next question is when you look at your last couple of acquisitions like Moy Park and the Cargill Pork acquisition. Can you -- just isolating those two, can you talk about the synergies that you’ve garnered so far and how much maybe left for both of those businesses?
Yes, sure. André, can you go on the Cargill acquisition?
Bryan, you probably remember when we announced acquisition that the synergy was around a $100 million then, after we assumed the plants, we updated the number for $150 million. And that’s what we believe that is the possibility of the total synergies. We have now -- we just completed one year that we did this acquisition. We already captured $100 million, over a $100 million. So, we have $50 million more to go. And this is more in the use [ph] side then a little bit in the sales side. The cost side of the equation is pretty much done but we have a little bit more opportunity in the use [ph] and the sales side. But again, we are very proud about the work that the team has done here in less than a year. In reality, it’s four or five months of the business run absolutely inside of our systems, IT, form of operation, for of leadership with integrating, we did that in four or five months and now we year, we captured most of the synergies, too soon [ph] some to go that we did investments as already said in the two plants to capture this and then we believe that we capture that in the next six months.
So, on Moy Park, so if you look the historical Moy Park results comparing to our latest quarters, we have been already able to improve 1.5% margin in Moy Park and we believe still 2% more to go. And we are well on track to capture this.
And my last question. I know you all made a significant investment in Scott Technology and I believe you’ve been testing some robotics in Greeley. You touched on -- maybe some of your competitors would have a tough time getting access to labor with their new plant constructions. Can you talk about the initial test of Scott Technology and what kind of cost savings you may be seeing from using robotics in either hard processing and/or on the beef side? That’s it for me. I appreciate your time.
First, the investment is not of significance, relatively small investment around $40 million to buy 51% of the company and control the company. But it’s too early, Bryan, to see any big impact. Of course, we have in our lamb plant in Australia, two robot systems of cut the carcass and deboning, wanting to introduce in the second lamb plant. We’re working we spoke in several different areas, one is in the state, [ph] they have created and developed in the last few years a very good system that can [indiscernible] that will improve [ph] dramatically and we implement this in a lot of our plants. That’s a big savings in the cost of any safety issue that we have in the plant. But to start to elaborate now both possible savings in the pork and in the beef business is too early for that. We’re working on that but it’s too early to anticipate any number.
Thank you so much. I appreciate your time.
The next question comes from Alex Robarts, Citigroup.
Yes. Hi everybody. Thanks for taking the question. Listen, I was keen to actually go back and see if we could drilldown into some of the factors that you’ve described about Beef USA that we are seeing this recovery, both in the cycle, but also operationally with you guys as you’ve given us interesting guidance also for fourth quarter and next year. So, around Beef USA, it was just kind of three related questions. You mentioned first in your prepared remarks that in the last 12 months, you’ve executed some changes in that business. And I was wondering, if there was one or two that you could highlight that you think was particularly relevant in getting us up into this a little higher than what we had expected margin in the third quarter in beef USA in kind of this pretty high conviction guidance that you’ve got over the next few quarters?
Secondly, it seems Australia had kind of been a drag in the first half of the year on Beef USA. You’ve outlined the case that Primo has been helping Australia. And I’m wondering around Primo, is it safe to think that this can be a sustainable double-digit margin business and can’t it be scalable and exportable, the brand and products to other markets that you’ve got in the JBS platform? And the 5% -- probably this is the third that the 5% kind of higher end of the range margin guidance for Beef USA next year. What kind of just industry or I should say, the cattle price range are you thinking about for next year as you set out that guidance? So, three related questions on the Beef USA margin recovery outlook. Thanks very much.
Thank you. André, can you answer the question, please?
Yes. Alex, the first, you ask about the change. The most important change that we did more than 12 months ago, we used to run the beef business in U.S. as one business. We separated the beef business in two businesses that the fed business, the original business and we start to collecting the benefits of that with more focus, both in the operation and in the sales side that they are businesses; they have different dynamics and was the right move. We had some pain initially when we did the move, separate the teams, create the folks, create the ownerships, set up the team but we are starting to collect. Again, we had, relative in terms of operations, fourth quarter last year was weak, the first quarter of this year was weak below our expectation, start to improve in the second quarter and improve a lot in the third quarter. We’re not there yet. We have space to continue to improve and we’ll work on that. But for sure, we feel now that we are in the right direction. But the most important change was the setup of the business and divide the business in Q2 and it is rightly in place.
About Australia, the acquisition of Primo, no question, we bought this business to be a double-digit business. And the direction for us is in the high double digits, not in the low point of that. So that is the direction that we’re working and are very confident. Again, the team is in place there. Since we bought the business, we have a new head of the business, a new leader for sales, a new leader of operations, and we’re starting to collect the benefits of the team in place and the structure. So, absolutely no question, we would be very unhappy if this business run in the next one, two years below, anything below 15%. We believe that’s between 15% and 20% margin business, the Primo business there.
About cattle price, I think that we’re back to the normal level and are going back to the normal level of cattle price in U.S. and historical price. So, if you look at how well the historical price before the drought and before the big reduction in herd that we had, so if you go back in 2009, 2010 and 2011 more the normal cycle, the structure changed dramatically in 2012, or 2014 and 2015. If you go back there, between 85 and a 100 and that’s probably what we’re going to see in the next few years between 85 and 100.
Okay. Fair enough, very clear. And just I mean is Primo something, André, that you feel will just be built in Oceana or is it something that you could perhaps start exporting or is it going to pretty much remain a domestic business there in Oceana?
Again the business in Australia and New Zealand, we already have some level of export. We believe that Moscow [ph] used to grow a lot but we need to do a lot of work on that. We are not there, but yes we believe that there is a business that can have a important presence in Asia.
Okay, fair enough. Thank you.
The next question comes from Lauren Torres, UBS.
Hi. I just have a follow-up on Seara. I appreciate the level of detail that you’re giving with respect to the pressures that you’re seeing. And it does appear going into next year, a lot of these pressures will abate, so we’ll see a recovery in margins. I guess I just have a bigger picture question on the margin contraction that we’ve seen this year. It seems that seeing the branded business that you have, there should have been less variability in margins, meaning there is 21% margin a year ago going down to 7% seemed quite of a wide drop. And once again, having some pricing power and good brands under this platform, maybe that drop was more than you thought. So, I guess just thinking, even though with the environment improving next year, if you feel there has kind of been lessons learned about maintaining a better, more sustainable margin even in light of market or industry pressures?
Yes, we agree. Lauren, actually the margin declined more than we anticipated in the beginning of this year. The biggest pressure came from corn more than anything else. Even though the real appreciated a lot but we were following what’s going on and some extent was in the account that the real was going to appreciate but corn going from 25 reals per bag to 45 or even to 50 reals per bag wasn’t thing that I think no one anticipated that this was going to happen. And the reality the industry was not able to best price in the same velocity and in the same magnitude that we saw in pressure in terms of cost. So definitely, there’s a lot of lessons for us that we learned from this big change in the market. And I think the industry is going to be much well-prepared for next year to be able to recover margin.
We are working very focused on improving our portfolio and we have been able to do that. We are well-satisfied the work that we are doing around the Seara brand, the expansion that we are seen in our customer base. In all of these fronts, we are very satisfied. But in reality, the industry was not able and we are part of the industry to pass the pressure in cost in the same magnitude, in the same velocity. And again, I think we are just going to start 2017 in a much positive scenario when we look forward.
Just to add to that, we had the appreciation of the real from about 4 to about 3.20 in the middle of the year. So that was quite a rapid appreciation adding that onto the corn issue. And just projecting for 2017, we just look at the most recent projections for corn production in Brazil. I think it’s kind of interesting to have this on your radar as well, Lauren. In the early harvest, which is in January and February now in 2017, we have a projected increase of about 7.5% in this harvest, when compared with the harvest of early 2016. But more importantly, in the second harvest, which we call in Portuguese safrinha, which comes out in the middle of the year, projections are indicated that we will have an increase in production of corn of close to 40% in the middle of the year. So, we should have a bumper harvest. Climate has been favorable up until now. And that would give us a completely different dynamic in terms of feed and feed costs for 2017.
Okay. That’s very helpful and if I could just ask as follow-up to that on Seara. You mentioned that there are or there is room for further pricing going into next year. And I’m curious to get your perspective on the consumer in Brazil. We’re hearing about maybe a gradual recovery, at least a more stable environment. But, are you seeing this? And do you feel there is room for further pricing in light of how the consumers behaving right now? I mean, is it something that can be well-absorbed or we should be cautious going into next year?
Look, we believe that the worst on consumers’ confidence and as well in consumers’ ability to spend on food is definitely behind. We believe that we are just starting in the last three months a more positive sentiment from consumers. And we are slowly seeing this in our business overall that demand is starting to not in a big way, but starting to be better. And we believe that this is going to keep improving in Brazil and we are very focused on improving our portfolio and our mix. We just launched the Seara Gourmet and it’s going very, very well. And all these initiatives is to have a better portfolio for us to be able show capture better margins. And we believe that consumer is going to be there to buy very, very good products with a good value proposition, even we are trying and working to push up the trend.
The next question comes from Jose Yordan, Deutsche Bank.
My question is about PPC. I am just wondering to what extent this modernization of the prepared food plants is -- what role it’s playing in your sales declines because obviously -- I mean in the U.S. it’s been now I think six quarters of sales declines? So, I am wondering if you can tell us when this stops becoming a factor and whatever other factors are causing it which are namely perhaps substitution from lower beef prices and just that? So, it’d be great to get a little color on when you see sales growing again and what a normalized sort of production and sales growth number we should be looking at?
For sales overall, you have the impact of the sales price for the whole industry that has been the fact not only for food but for the whole industry. Specific for food, yes, volume in the prepared foods was affecting the -- last especially in the last two quarters and on top of that, we did and we are doing some transformations of plants. We are transforming one of our plants in organic plant, we are transforming another plant from 60s [ph] to a better mix for a specific customer that impacted the last quarter and will impact the fourth quarter little bit. So, it’s a combination of sales price for the overall industry in volume doing the transformation that they do inside of the company.
There we expect the plant to be in full run, this prepared food plant to be in the full run at the end of the first quarter. And the transformation that we did in the other three plants will be done and it will be run in the first quarter. So, in terms of volume, we will have a better position in volume in the first quarter. In terms of trade down or trade up, demand in retail continue to very strong for chicken, in spite of being very good in beef and pork too but chicken demand in retail is in a very, very good position. So, we don’t see any fact of any trade down. In fact, if you look the per capita consumption in U.S. has been growing in the last several years and we expect that to continue to grow.
The next question comes from Pedro Leduc, JP Morgan.
Good morning and thank you for the question and the call. In respect to U.S. operations and then across the board you’ve been mentioning very strong exports helping your profitability. In this respect, we’ve seen let’s say in the last few weeks or so dollar strengthening or other currencies losing a lot in effect of the dollar. So, we’re wondering if you see room perhaps to retain your dollar pricing or how you’re seeing clients behave in that respect. And then, in the second movements we know that Mexico is a relevant source of U.S. protein exports, right, 20% of pork, poultry and then beef; you operate on both sides of the border obviously. And so, we’re wondering if you can help us understand how you are perhaps preparing for trade shifts, if at all; and if it were to happen, how do you believe it can affect your operations outside of the U.S. as you reroute the former Mexican bonds, again if it were to happen? Thank you.
So, Pedro, I’m going to ask -- portion of your question and ask André to add on my answer. So, we are not seeing any change yet in export volume or customers interest in terms of buying U.S. protein because the appreciation of the dollar that has happened in the last two weeks, and I think it’s too early for a call that the U.S. dollar is going to be much stronger or not. So, like I mentioned before, we are not doing anything, we’re not preparing to any change because any change in government. We don’t have any control on that and what’s going to happen. In the end of the day, U.S. produced protein in a very competitive way. Pork is very, very competitive; chicken is very competitive and even beef now is back to be very competitive. So, we are very focused on our business internally and we want to make sure that we operate our business regardless anything that is going to happen in government, very, very well. And we think Mexican consumer is going to still be there and they still are going to be looking to buy protein to meet their needs, and not only Mexico, in Japan, in South Korea, in China. And if you look the two main places around the globe that is very, very competitive and produce a meaningful amount of protein is North America and South America and we are glad that we are in both of these regions well-positioned to what’s going to happen. I don’t know André you want to add anything more.
I just want to add that Australia is very important between beef and lamb production. [Ph] But in terms of price and dollar impact, if you look especially in beef that Japan and South Korea in the two most important markets for the U.S. beef and U.S. is going a lot in these two markets this year, it’s much more related how competitive U.S. it is with the domestic production, and domestic production is so much higher the costs compared to the imported beef that unless the currency moves a lot, 30%, 40%, continues to be extremely competitive with the domestic production there. And same domestic production seeing a big increase of the U.S. export, at the same time that Australia is keeping the same volume for these markets. In reality for South Korea, Australia is even growing. So U.S. is growing, Australia is growing. So, we are replacing domestic production there.
One more comment, Pedro that I’m going to repeat what I said in the beginning. So, we believe we built a unique platform. And only to remind you, a strong dollar is actually pretty good for us overall. So, overall, seeing the dollar getting a little stronger is not a bad thing for JBS overall. So, if you see the amount of earnings that we generate in dollars and as well the amount of product that we export from Brazil actually is pretty positive. So, overall, actually we like to see this dollar getting a little stronger.
This concludes today’s question-and-answer session. I’d like to invite Mr. Wesley Batista to proceed with his closing statement. Please go ahead, sir.
I want to thank you for being on the call this third quarter earnings call. And look forward to speak with you again in our coming quarters. Thank you very much. Bye, bye.
This concludes the JBS audio conference for today. Thank you very much for your participation and have a good day.
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