JBS S.A. (OTC:JBSAF) Q1 2019 Results Earnings Conference Call May 14, 2019 10:00 AM ET
Gilberto Tomazoni - JBS, Global CEO
Guilherme Cavalcanti - Global CFO and Investor Relations Officer
AndrT Nogueira - JBS USA CEO
Wesley Batista Filho - President of JBS South America
Conference Call Participants
Alan Alanis - UBS
Benjamin Theurer - Barclays
Good morning, everyone, and welcome to JBS Conference Call. During this call, we will present and analyse the Results for the First Quarter of 2019. As requested by JBS, this event is being recorded. The recording will be available this afternoon and can be accessed by following the instructions posted on company’s website at www.jbs.com.br/ir.
Taking part on this call we have Gilberto Tomazoni, JBS, Global CEO, Guilherme Cavalcanti, Global CFO and Investor Relations Officer, AndrT Nogueira, JBS USA CEO; and Wesley Batista Filho, President of JBS South America.
Now I will turn the conference over to Mr. Gilberto Tomazoni. Please go ahead, sir.
Good morning, everybody. Thank you for your presence in this conference call. I’m very happy to announce our results in this first quarter of 2019. These results show our discipline and commitment to our value creation strategy.
Go through the numbers, net revenue was R$44.4 billion up 11.5%. And the consolidated EBITDA increased by 14.5%, and increase in margin as well. Our leverage was in R$3.1 and our reported net income was R$1.1 billion and EPS was R$0.41
Before I pass to Guilherme, I want to emphasize some points. First, our financial position, leverage reduction, lower cost of debt, lower amount of interest paid, better debt profile, cash position and cash generation. All of these efforts, means that the company only needs to assess the market in 2020.
In our endowment commitment with transparency, we released our policy, related liquidity, indebtedness, and dividend last night. Later, Guilherme will be explaining more about this two policies.
Third, our good market conditions. We are in a favorable cycle of protein, favorable supply/demand and a low cost of grains. Combined, with the consumption of protein in Asia has been growing for sometimes. In line with this, the company announced a final agreement of 3.5 billion in China. I think in the previous quarters.
Now, with the African Swine Fever, this demand is boosting, and this is a point that I want to stress here. The other point is the global supply footprint. I think JBS has built a truly global footprint, which is practically impossible to replicate. We have our -- we have our operations far continent and we operate with five types of proteins.
We have a strong management team. I just put this, because if I summary this, our financial conditions, our favourable market conditions, our footprint, our strong management team, JBS is ready to accelerate growth inside of the market opportunity.
We believed investment is our priority to unlock value and boost the growth. I will now hand over the call to Guilherme who will detail the results.
Thank you, Tomazoni. Before I start, I would like to remember the disclaimer on page 2 about future events that are subject to risks and uncertainties beyond our ability to control or predict.
Now let's move to page four, where we show the evolution of our figures, net revenue increasing 11.5% to R$44.4 billion, gross profit increasing 13.3% reaching R$5.8 billion and EBITDA increasing 14.4% to R$3.2 billion EBITDA margin passing from 7% to 7.2%.
Net profit of R$1.1 billion and earnings per share at R$0.41. It's worth mentioning that business profit was impacted by a deferred income tax that is generated because of the tax loss on the Brazilian operations, due to the FX depreciation becomes an asset that improves results.
These accounting in fact becomes a cash tax savings as it offsets future profits and decrease the usage of tax credits that can be used in the future.
For the shareholders, this means higher minimum dividend as Brazilian corporate law requires at least 25% of net profits and higher base of accumulated profit for future dividends.
Now let's move to Page five where we show that our operational cash flow equates to R$750 million given the higher EBITDA as explained before. And free cash flow reached a negative R$712 million.
It's worth mentioning that the first quarter of the year is characterized by a seasonality effect of concentration of supplier’s payment and inventories with composition. So every first quarter we have cash consumption, and this quarter was not different. It's worth mentioning that the first quarter 2018 we had R$110 million negative only, because we had R$924 million of asset sales in the quarter, in the first quarter of 2018.
So considering, the divestments in the first quarter 2018 our cash consumption decreased almost by half in the first quarter. Even reinvesting, we think we're coming back to our normal levels of capital expenditures of R$750 million because in the first quarter of 2018 we were contingent to the CapEx for R$440 million. So we could increase our CapEx to normal levels, and at the same time decrease the cash consumption of the first quarter.
And also, it's worth mentioning that despite the cash consumption of the first quarter 2018, we generated R$5.7 billion in free cash flow or $1.5 billion.
Now moving to page six, we should – looking at our debt profile, our gross debt decreasing from $17 billion [ph] to $14 billion. Our net debt in Reais coming from R$45 billion to R$49 billion due to the FX depreciation on the debt when translated to Reais. However, the strong free cash flow that the company presented last year despite the these FX impact, the leveraging Reais decreased from R$3.24 to R$3.20. Leveraging dollars stayed at 3.1 times.
Now please let us let's move to Page seven where we’ll talk about the liability management that was done as a subsequent event of the quarter. This liability management took the average maturity from 4.3 years to 6 years. We had $7.5 billion maturing until 2022. This number decreased to $2.7 billion of which $1.6 billion is loans with banks under the normalization agreement that we already started that process -- the process of renegotiation to extend maturities, decrease the interest rates, and release guarantees.
Cash on hand plus revolving covered maturities up to 2023. On the other hand, cash generation, plus cash on hand covered maturities up to 2026. This means, a very, very low refinancing risk.
This financial stress is already reflecting on the yield-to-maturity of our bonds negotiated on the secondary market. From the beginning of the year, to today, our bonds had -- is negotiating a yield-to-maturity around 1.5% lower.
This means, lower financial expenses for the future, a consequently higher free cash flow to shareholders. Our other positive points of this liability management was a decrease, the decrease on the gross debt, this liability management was leveraging the [indiscernible] We increased the liquidity of our bonds, and consequently the price discovery. And we decreased our level of secured debt in around $2.5 billion from $6 billion of secured debt to $3.5 billion of secured debt. This gives the company another cushion given that you can use the guarantees to quickly raise debt if needed.
It’s worth mentioning that yesterday, as Tomazoni said, we uploaded policies, revised it and approved by the board of directors. More specifically, any liquidity indebtedness policy and a dividend policy.
The liquidity policy states that the leverage rate to be pursued in the long run is to be between two and three times net debt-to-EBITDA. Dividends are limited to 3.75 net debt-to-EBITDA as the dividend policy.
As the investment policy, mergers and acquisitions could be two quarters over 3.75 as long as a contingency plan is presented to the Finance Committee. This shows our commitment to the financial strength of the company into higher governance and transparency.
To finish, it’s worth mentioning that our leveraging ratio finished the first quarter at 3.1 and the positive free cash flow will take us to the long term target in the next quarters.
Now let's talk about the business units performance. Please move to Page nine, where we’ll talk about Seara. Net revenue totaled R$4.3 billion, 5.6% higher than the first quarter 2018, essentially due to price increases of 13.9% and 18.4% in the domestic and export markets respectively.
Total volumes were lower than the first quarter mainly in fresh chicken, partly as a result of the decertification of certain facilities to export to Saudi Arabia, and the company's focus on price increases. Domestic prepared foods volumes increased by 5.2%.
EBITDA in the first quarter reached R$278 million with an EBITDA margin of 6.6% impacted by higher raw material cost partially offset by higher sales price.
With continuous focus on innovation, Seara recently launched new products that have a health and convenience appeal. The Seara Natureline, which is made of natural ingredients, noblemeats, without artificial food preservatives, reduced sodium and nolactose.
Additionally, Seara Gourmet launched the Incredible Burger, an option for vegans with an unmistakable meat flavor, but with 100% vegetable ingredients, and also the long-awaited Seara Organic Chicken.
JBS Brazil on page ten please. Net revenues of R$6.8 billion which corresponds to an increase of 7.4% over the first quarter 2018 with the number of bovine processed growing 2.9% in the period.
EBITDA for the quarter was R$195million, with a 2.9% margin, reversing the negative result posted in the same period last year.
In the domestic market, net revenue was R$3.8billion, a 2.7% increase when compared with the first quarter 2018. A positive highlight was the 7.1% price increase in freshbeef.
In the export market, which represented 44% of this business unit’s sales, net revenue increased by 13.9% to R$3 billion, with an increase of 8.8% in volume and 4.7% in average sales prices.
Please let’s move to page 11 for JBS USA Beef. Net revenue increased by 1.4%, excluding 5 Rivers net revenue, sold at the end of the first quarter 2018.
Average sales prices for the quarter increased by 0.4% and production volume grew by 1.8%, mainly due to the U.S. Exports increased both in volume and prices when compared with the first quarter 2018.
In the United States, this quarter results were affected by climate events that impacted the activities of delivering and slaughtering cattle in some of the Company’s facilities in the country. Nevertheless, cattle availability and demand for beef continue improve, while the industry’s capacity remains stable, which indicates the continuation of a positive and growing margin scenario for upcoming quarters.
In Australia, results were higher than the same quarter last year, with a significant growth in exports posted an impressive growth, with a significant growth in exports that posted an impressive growth with Asia and notably China and South Korea being the main highlight.
Now please move to page 12 for JBS USA Pork. JBS USA Pork net revenue was $1.3 billion in the first quarter of 2019, a 8.9% decrease in relation to the first quarter in 2018. This result was mainly due to a 13% decrease in average sales prices, impacted by a 4% increase in pork production during the period. EBITDA was $105.4 million, with a 7.9% EBITDA margin.
The increase in pork supply in the U.S. during the first quarter of 2019 limited the potential to reach a margin level comparable to the first quarter 2018, while lower exports also pressured domestic prices.
Additionally, although hogs production in the U.S. continues to grow, news about the evolution of African Swine Fever in China and Europe contributed to an increase in the spot of future prices of livehogs.
Management continues to closely monitor the events related to African Swine Fever in Asia and believes that the environment for global trade of pork and potentially other animal proteins may change, with the magnitude of the impacts from the disease in the Chinese hog herd yet to be confirmed.
Plumrose continues to excel in the execution of its strategy to increase production capacity, grow its sales and develop branded products. Its performance for the quarter was one of the best since its acquisition in 2017.
Now, please let’s move to page 13 for Pilgrim’s Pride. Net revenue from U.S. operation increased by 2.3% as a result of 1.4% higher sales prices and 0.9% higher volumes. Still in the U.S; a more favorable environment was experienced during the first quarter of 2019, with feature activities normalized to seasonal levels in retail and foodservice and a recovery in commodity poultry prices.
In Mexico, net revenue was 9.7% lower in comparison to the same period of last year, mainly due to a 9.4% decrease in sales prices as a result of a softer demand for chicken combined with a more availability of imported pork from the U.S.
Nevertheless, management believes chicken demand will continue to grow in-line with historical rates longer term.
In Europe, net revenue decreased by 5.4% as a result of an unfavorable FX rate impact and 4.2% lower volumes, which were partially compensated by 5.3% higher sales prices.
With that, I would like to turn over for the question-and-answer, please.
[Operator Instructions]. Our first question comes from Alan Alanis from UBS.
Hello everyone. Thank you for taking my questions and congrats on the results. I have a – I mean a lot of my questions were answered on the [indiscernible] call, but I do have a follow up to that one, and it has to do with the benefit that you will get in margins from the – on the US Pork business. I’m just trying to understand how the level of integration that you have in the US Pork business should translate into a margin expansion on the back of higher US Pork price, I don’t know if you can elaborate on that I am just trying to understand how the level of integration that you have in the U.S. pork business, should translate into a margin expansion on the back of higher U.S. pork prices.
I don’t know if you can elaborate on that. And then I have a very brief follow-up on another topic. Thank you.
Andre, are you in the call?
Yes, and I'm going good.
Good. Could you answer because U.S. answer important here that you follow me, the answer in question there? Okay. So, I don’t think it's still for the question. Then I think about its two folds. One it's more like towards from your -- even if that is secular to China, the open space now with additional U.S. not like that put into here.
So, should see margin expansion should the African side. And as we're having 30 to 35, it's been I think there is it shows that fire is the after benefit in the values. So, have myself looking at the end around 30% to 35% inclination. Then I think that we are going to see a large profit from margins in the pork side.
Yes, because the side expansion we have, we saw new brands come in line, then there are also [indiscernible] and we should see the made up this year and next year that our [indiscernible]. Can see that even more if our labor have been and this thing was so the lot the both shaping that you don’t skip at. This involves and labor cost.
So, actually we have stripped it. The profit comply that expecting margin for in is our level of continuation but the ability in that franchise.
Yes, that's very clear. So, for around 60% to 70% your or your production in the U.S. I mean, some of that since you're not it be weighted on that, some of that the increase in prices will be we should be shared let's put it that way with third party suppliers of pork, correct?
Since, largely this is that has a mid-margin, now it's from change of a bit of margin, no doubt about that.
Okay, thank you so much. And the second question is more of more on the consolidated level. If you could just explain a bit more what happened with the taxes, with the negative effective tax rate that we saw in the first quarter and what should be the effective tax rate that JB has consolidated which should be expecting for the full-year 2019, please.
Thank you, so much.
Okay, thank you. Okay, the first let me explain what happened in the first quarter. The 12 million, the company basically didn’t rate their loss, the parent company they rated a lot, even the effective depreciation on the [indiscernible] make advancement towards related to be high.
If you ask become the credit, because we can offset this future tax payments. So, it becomes an asset that relates and that positively the results. So, that's what's happened and again we will get offset throughout the year as we generated profit became on the effects for example.
So, it's difficult to say how much it's going to be, the effective tax rate for 2019 because depends on several factors that makes the volatility very high like the effect swings for example. What I can say is that currently the effective tax rate in U.S. is 9.1% and is it's more predictable in some way.
For the long-term, we probably in the U.S. operation, it is the main part of the result of the company. We have new tax law in U.S. which the income tax came to 21%. So, I think but again it's difficult to predict what's going to be the effective tax rates going forward.
Just to add in there. All the JBS at side of the room, they should more to add on the 90% of the effective tax rates going forward. [Indiscernible.]
Yes, that makes sense. Okay, cool. Thank you so much, really appreciate it, congrats.
And there also it was mentioned Alan that and we'll we will not have cash back for our own you can did the amortization tax laws going forward and that's like it.
Oh, that's important. Okay, that's important. So, this level of taxation it might be slightly lower on a cash basis.
Got it. We'll appreciate it. Thank you, so much.
Our next question comes from Alexa Pistuloches [ph], HSBC.
Yes, hi. Good morning. Thank you for taking my question. So, you clearly outlined a lot of things you have already done on liability management. It sound that you're said that the lease guarantees of the maturities. But it seems like the next thing you need to do the real big ones require a U.S. [indiscernible} and you're establishing good thing.
We need for investment great bonds, you should measure credit lines in the U.S. with lower rates than you can get in Brazil, will cost of equity or better governance platform forecasting the capital. So, my question is what else do you need to do with this listing and reduntify the next we expect.
And if so, one why not now the investors are focused on your industry more than ever before.
Okay, thank you. I'll -- let's first talk about what can be done in going forward given the liability net than it gives me first rate. I think one other I think the first that we have to do is complete the scheduled investors the financial strength of the company.
As we try to demonstrate in this presentation because if you look at the average that we determine industry in U.S. or even the average [indiscernible] they all stay lower interest rates than us. And again, so I think we have few rules we give with the same rate we do it.
However, going to choose between two and three times of EBITDA is what's making and it requires for us to the investors to the investment rate. So, I think we have also on a second effect that would be rate in this global. And what we talk about the redone side or at least the U.S. for example, we off and on we are studying different structures that the target is made it to be continue to bring the cost of capital.
And these of course can be reaching from several ways. First of all the Brazilian operation today and that is 35% of the total debt of the company but only 18% of our free cash flow. And that includes if you look at our bonds that are acquired on the secondary margin they're on 1% is still higher in our U.S. bonds.
So, I think there's also owned that this part of the debt because it's the same risk, so I think the new teams will help to show that the risk is the same so shouldn’t have to do the spread. And of course, there is in U.S. as I mentioned before, we present the cost of debt and with each per session I mean that is on the company, we need consequently between the cost of capital, the cost of and then of cost of that actually end of that.
So, that's what the listing you'll probably between the cost of the average cost of capital, it means higher motives. So, I think this we do a great an opportunity for us to have multiples more in line with our U.S. peers. It was knowing that it should be if we had a record here in the light of 15.25 billion rise.
And if you look at going forward, the perspective of the company, we and fortunately in currently need a price that of the company. We still paid it as more than six times that has an enterprise that did that by all that its upgraded at you say five or a 10 times either prices. That it should that so I think that would be the opportunity.
And you asking why we don’t do this now, because we don’t need to do first. In the past, we needed to be seen investing in capital pay down that. We don’t have this strategy any more. So, we can go deeply in different structure, we have to go and meet and to choose which one to be the best maximize the value of the company.
And of course, if we how the perspective of the next quarter bearing, at least postponing everything after the results of peers in our results it's telling better pricing.
Very clear to me. Thank you, very much.
Our next question comes from Benjamin Theurer, Barclays.
Hello, good morning. Can you hear me, just to make sure that I don’t want to cut on.
Yes, I can hear you clearly. Now, go ahead.
Perfect. So, thank you very much for taking the questions. Well, one question I had to start off, I mean obviously with the whole trade dispute and you mentioned when we talked a lot that allowed it between the United States and China we've seen input cost I mean it's particularly solid prices basically collapsing over last couple of days.
So, just to understand I mean clearly it's going to be positive for you’re the PTC operations in the U.S. but does that offer something to believe that are basically favor allow attractive pricing on our things such as capital. And if there was some way that you can lock in that price from shipping operations considering the significant sell off in that.
So, what prospects from volumes we might have to because of the input cost coming down. That'll be my first question, if you could elaborate on that.
[Indiscernible] You are right, it's with what we think continuing or it's going for us in the West that we know that we're going to do inside. And with the thoughts in record which is true. It depends for [indiscernible].
On the other hand then, [indiscernible] CapEx that partly offset the benefits.
Okay, perfect. And then, you've mentioned in this cost that obviously some of the cost pressure in Brazil but could you elaborate what your expectation is for the other going into the remainder of the year and what's your strategy is because it sounds like that we've been trying to be very proactive in terms of price increases but still have a lot of input cost pressure and hence we're roughly 170 basis points contraction of the margin inside.
So, are there any initiatives you think during the cost the pricing in order to kind of get margins back on track? So, what's the strategy for it for that would great if you could elaborate on that?
Ben, we will we're not expecting to be in track margins here next quarter. Because to explain which you are weak result is simple. It's just two factors. One factor was related to which see our loss some in lease. Some brands do export to other areas.
And now, but honestly have some open but before some plan when lots business [indiscernible] it bring our other markets. Now, in last plan, we were allowed to spot being stop was not to push the all the but thing, that went for this if it should complain that is allowed to take part.
That’s big sign because we need to do organize your life operation because it is die of the are different. And to other life as well. But it is already done, it's already done. The second, we have two operational problem in shipment, just shipments. The labor charge and there is rate [indiscernible.]
There's two brands here amongst us and the plan and the problem was here. We believe that the common non give back against we are in this end part. This is to what will be the if you put all in back together, what we decide of the impact is around 2% of the EBITDA, whereas 2% of EBITDA. And the cost up the grade if the conditions of the crops in Brazil have done very well.
I think this only been favor of we thought the cost of the size is fairly off the brand and increase and then it just on the consumer. We launched a new comparing, everything is for retail. We have to fix a point and we're off to it.
Okay. And then last of my at least on we've all seen obviously the term to mute IPL beyond the happening in the U.S. We’ve have lot of interest very strong and it's mentioned actually in the prepared remarks that you've launched as well a new product and so on.
Could you elaborate a little bit of how you think you can basically position yourself and how you can develop to that there is basically mute I turn of your plant days and what's your strategy on that. In Brazil and the U.S. and as an international company.
So, just to understand how you think of those alternative offerings now going forward.
Ben, as far as I'd like to thank you that we are if you are maybe you are not actually do but we are not disclosing our strategy on week, as part of the segment. But I can tell you what we are doing so far and then --.
We have our building team innovation, building in Chicago. It is distracting all of the consumer trends and we have all the one. And we are put together all of our for different regions to accelerate the new and the innovation. We have innovation one side where one country we can and we can accelerate this innovation in other countries.
This is one thing. And we are looking for all of the trends that you have mentioned before. And launch last week a line of [indiscernible] in Brazil. How more than other kind of strategy little less. It is launching. I think the few for several. I think we are doing now but we are really deep involvement and understanding the market trend about it.
Okay, perfect. Thank you, very much. Congratulations.
Our next question comes from Karlenka Zaviour [ph] JPMorgan.
Hi. We've seen a couple of retailers bring more of their own production in house. Can you say if you see that trend continuing or if it's impacted in your U.S. [indiscernible]
Andre, would you like to comment?
Yes. Let's -- I don’t think that is a change of style. We saw them leaving exactly but I wonder that with is them and then its segment. What sounds now very now, one of that with that moving though that. With that [indiscernible] I don’t think that can obtain just a normal. We saw that in other parts of the globe just outside that become a real experience in the offer.
Okay, great. And then, on the ASF, is it more concerning that has with the Hong Kong from China, does that make a big change in your that talk about the risk of that prices coming to U.S. or Brazil?
That [indiscernible] it's in China, it's in U.S., it's in Hong Kong, it's in Cambodia. So, it's been happening [indiscernible] should try to present that. I think that the actual a very strong buyer to choose. [Indiscernible.]
Thanks a lot.
This concludes today's question and answer session. And now we'll turn right with Gilberto Tomazoni to proceed with his statements. Please go ahead, Sir.
I mean, I would like to [indiscernible] this morning. JBS has really a global footprint. JBS has strong financial footing position and a good management team. JBS has position and to size [indiscernible.]
I would like to thank you each all of our team members, we have made a difference. And thank you all of you for attending this conference call.
This concludes [indiscernible] conference call for today. Thank you very much for your participation. [Indiscernible.]