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Marfrig Global Foods S.A.

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Q3 2021 · Earnings Call Transcript

Oct 27, 2021

Disclaimer*

This transcript is designed to be used alongside the freely available audio recording on this page. Timestamps within the transcript are designed to help you navigate the audio should the corresponding text be unclear.

The machine-assisted output provided is partly edited and is designed as a guide.:

Operator

00:02 Good morning, everyone and thank you for waiting. Welcome to Marfrig Global Foods S.A Third Quarter Conference Call.

With us here today we have Mr. Marcos Molina, Founder and Chairman; Tim Klein, Chief Executive Officer of North America Operations; Mr.

Miguel Gularte, Chief Executive Officer of South America; Tang David, Chief Financial and Investor Relations Officer; Mr. Paulo Pianez, Sustainability and Communications Director and Mr.

Eduardo Puzziello, Investor Relations Director. This event is being recorded.

And all participants will be in a listen-only mode during the company’s presentation. 00:48 After Marfrig remarks, there will start a question-and-answer session, at that time further instructions will be given.

[Operator Instructions] This event is also being broadcast live via webcast and may be accessed through Marfrig website at ri.marfrig.com.br/, where the presentation is also available. Participants may view the slides in any order they wish.

The replay will be available shortly after the event is concluded. Those following the presentation of the website may post their questions on our Webcast.

They will be answered by IR team after the conference is finished. 01:35 Before proceeding, let me mention the forward statements are based on the beliefs and assumptions of Marfrig Global Foods S.A.

management and our information currently available to the company. They involve risks and uncertainties because they relate to future events and therefore, depend on circumstances that may or may not occur.

Investors and analysts should understand the conditions related to macroeconomic conditions industry and other factors could also cause results to differ materially from those expressed in such forward-looking statements. 02:12 Now, I'll turn the conference over to Marcos Molina.

Mr. Molina, you may begin your presentation.

Marcos Molina

02:21 Thank you all for participating in our conference call for the third quarter of twenty twenty one results. I would like to start by thanking and congratulating our entire team for another set of record results.

Our net revenue this quarter was twenty three point seven billion BRL and we had an EBITDA of more than four point seven billion BRL, the highest results in our history. 02:47 Our operation in North America had another record performance, reaching more than eight hundred and fifty million dollars in EBITDA.

In South America, we overcame the problems in shipments that hindered experts. We maintain profitability and continue to experience strong sales growth, thanks to our geographic diversification strategy.

03:10 Based on disciplined financial management and strong cash generation, we lower our leveraging to the lowest historical level. We ended the third quarter with a leverage of one point ten times net debt over EBITDA measured in real.

The strong cash generation combined with lower financial costs has allowed the company to focus more on investing inorganic growth. 03:34 First of this was that in the third quarter, we invested more than five hundred and thirty million BRL.

And most of it was in the growth of processed and higher added value products with constant improvement in our production processes. With the reduction of administrative and financial costs, we continue in a virtuous cycle of results and value generation for our shareholders, fulfilling our role with society being an innovative company that is truly committed to sustainability and with the best corporate governance practices.

04:13 I now give the floor to the CEO of the North American operation, Tim Klein.

Tim Klein

04:20 Thank you, Marcos. Let's begin on slide four, where I will comment on the results for the third quarter.

Started on the left, sales volume in the quarter was zero point six percent higher than the same quarter of last year. Net revenue, however, was forty three point two percent higher than the previous year, coming in at three point two billion BRL, a new record for the company.

This achievement was driven by continued high prices for beef and beef byproducts and the improvement in sales volume. 04:48 On the chart on the right, we also achieved a record EBITDA of eight hundred and fifty seven million dollars for the quarter, one hundred and sixty six point seven percent higher than last year with an EBITDA margin of twenty six point eight percent, which was also another record.

The key drivers of our performance continue to be strong demand for U.S. beef products combined with ample availability of Fed cattle, allowing us to operate our plants at full capacity.

Although Fed cattle prices increased from a year ago, beef and beef byproduct values more than offset that increase. 05:23 Please move now to slide five where I will talk about U.S.

market data. Starting on the left, industry slaughter volume were down two point four percent from last year.

Cattle prices as reported by the USDA averaged one twenty one point fifty four per hundredweight up twenty point nine percent year-over-year on strong demand from cattle’s. 05:45 The USDA comprehensive cutout averaged two ninety eight sixty nine per hundredweight up forty two point six percent over last year.

At the same time, drop credit values increased ninety three point seven percent to an average of fourteen forty two per hundredweight, led mainly by increases in hide and tallow values. The cutout ratio was two point four six up from two point one zero last year.

Higher cutout values and drop credit values resulted in one hundred and thirteen percent increase in per head gross margins versus last year. 06:20 As we look forward to Q4 and the rest of twenty twenty one, industry fundamentals continue to be in our favor, fed cattle supplies remain adequate while beef demand is robust, both domestically and internationally.

Margins for the industry should continue to be favorable. 06:37 Now I'll pass to Miguel.

Miguel Gularte

06:40 Thank you very much, Tim. We will now move on to slide number six, where I will explain the performance of the South American operations in the third quarter of twenty twenty one.

As we can see in the first graph on the left, the comparison between sales volumes, there was a five point four percent growth compared to the same period last year, from three hundred and seventy thousand to three hundred and ninety thousand tons in the third quarter. This increasing volume is explained by the fifteen percent growth in exports in the period and by the strong sales volume of industrialized products in the domestic market, which grew thirteen percent compared to last year.

07:18 In the center graph, net revenues, we can see that we reached six point nine billion BRL this quarter, forty four percent higher than the revenue of the same period in twenty twenty. It is worth talking a little more about the challenges that we faced over the past quarters.

Despite the logistical difficulties in South America with the unavailability of ships and containers, we were able to reverse this issue throughout the third quarter, especially in July and August. This had a positive impact not only on the sustainability of volumes but also on the working capital of the operations.

07:52 Furthermore, thanks to Marfrig’s geographic diversity. In the beginning of September after Brazil suspended exports to China, we were able to move up blanket vacations of certified plants in Brazil and quickly change the destination to our operations in Uruguay and Argentina where we have six plants qualified to exports to China.

This strategic advantage minimize the impacts of Brazil’s decision to suspend exports to China on the consolidated results of the South American division. 08:24 In the domestic market, I'd like to highlight again that despite the small growth in sales volume of four percent compared to the same period of twenty twenty.

This quarter, we managed to increase net revenue by forty one percent that is, there was an increase of about thirty six percent in the average sales price resulting from the combination of a strategy to optimize commercial channels with a focus on sales growth of industrialized and branded products. 08:53 In the graph on the right, EBITDA, we can see that this quarter, we reached a three hundred and one million BRL with a margin of four point four percent.

This behavior of the margin is explained by the impact of the increase in the cost of cattle in Brazil and by the impacts of the suspension of Brazilian exports to China. These effects were partially offset by the operations in Uruguay, Argentina and Chile, as well as by the growing share of industrialized products in our results, which accounted for fifteen percent of revenues this quarter compared to eleven percent in the same period of twenty twenty.

09:31 Turning now to slide seven. I will talk about exports and the operational efficiency program in Q3 twenty twenty one.

Exports accounted for sixty two percent of this quarter's revenue, the same percentage as in the same period of twenty twenty. However, out of this total sixty four percent were exports to China against fifty one percent in the third quarter of twenty twenty.

It is worth mentioning that even with the restrictions on exports to China as of September fourth, the inventory built up at the port at the end of the second quarter was sold throughout the third quarter and offset the reduction in exports to China in the last month of the quarter. 10:14 As I have been seeing over the past few results, Marfrig has been striving to implement operational programs through efficiency programs, it is operations in Brazil Uruguay, Argentina and Chile.

Looking at the table on the right of the slide, we can see that though the implementation of these measures this quarter we were able to capture operational improvements that positively impacted our results by about fifteen million BRL when compared to the previous quarter. 10:47 I will now turn to Tang, who will comment on the consolidated results and the financial highlights of the operation.

Tang David

10:56 Thank you, Miguel. In the next slides, we will present Marfrig’s Q3 twenty twenty one consolidated financial results.

The robust performance of our North American operation coupled with the maintenance of results in our South American operation, which performed resiliently in the face of an adverse quarter, resulted in strong profit and cash generation in the quarter, allowing us to reduce that and further reduce our leveraging. 11:23 Starting with Slide nine in the left chart, we generated in Q3 twenty twenty one a consolidated net revenue of twenty three point six billion BRL, an increase of forty point four percent compared to Q3 twenty twenty.

In the right chart, we generated this quarter more than four point seven billion BRL in adjusted EBITDA, with a margin of twenty percent, a nominal growth of one hundred and fifteen point six percent and seven hundred basis points versus the Q3 twenty twenty EBITDA. 11:53 And out of this total EBITDA, ninety five percent was generated in North America.

As commented by our CEO’s, Miguel and Tim, the growth in net revenue and EBITDA is a result of the record profitability of our North American operation and the sequential improvement in the South American operation with higher sales volumes and better prices. 12:16 We now move on to slide ten.

The net financial result in Q3 twenty twenty one was an expense of five hundred and seventy eight million BRL. The increase in the interest rates in Brazil and the mark-to-market on the passive investments in BRF shares were the main drivers of this expense in the quarter.

In the quarter, the exchange variation was negative six hundred and ninety six million BRL caused by the difference between the final PHX of the periods, Q3 twenty twenty one, five point forty four BRL versus five BRL in Q2 twenty twenty one. 12:51 Now onto slide eleven, net results.

The strong operational performance added to the captures of the operational efficiency program and fixed cost control, resulted in a net income generation of one point seven billion BRL in Q3 twenty twenty one. In the second graph below, we present the accumulated net profit of three point seven billion BRL in the nine months of twenty twenty one, an increase of seventy three point three percent in relation to the same period of twenty twenty.

13:22 We remind you that in the third quarter, we advanced payments of nine hundred and fifty eight point four million BRL of interim dividends to Marfrig’s shareholders. This amount is equivalent to a dividend yield of approximately seven percent.

13:37 On slide twelve, we represent cash generation. In Q3 twenty twenty one, we generated more than four point seven billion BRL in operational cash flow, discounting the advanced in CapEx and interest in the period, the free cash flow totaled three point eight billion BRL as shown in the graph above.

In the graph below, we present the operating cash flow generation for the last twelve months, totaling nine point nine billion BRL and the free cash flow generation for the last twelve months totaling six point five billion BRL. 14:12 On slide thirteen net debt and leverage.

Our net debt at the end of the third quarter totaled two point five billion dollars, a reduction of twelve point two percent in relation to Q2 twenty twenty one, a direct consequence of the strong cash generation in the period. As a result, our leverage reached its lowest historical level both in reais one point one times and in dollars one point zero seven times.

In Q3, twenty twenty one, nine hundred and fifty eight point four million BRL were paid in dividends to Marfrig’s shareholders and seven hundred and eighty four million BRL to national beefs minority shareholders. 14:56 Some details of our debt in the graph on the right.

Seventy nine percent of our debt is indexed in U.S. dollars.

The increased exposure to the real is part of the strategy to better manage our liability, taking advantage of the good opportunities in the domestic market. Seventy five percent of our debt is long term with an average maturity of four point ninety seven years at an average cost of five point forty six percent per year.

15:26 On slide fourteen, we present the details of our debt profile. Starting with the graph, on the left, the debt schedule, we ended Q3 twenty twenty one with a cash volume of about two point nine billion dollars enough to cover maturities until practically twenty twenty six.

In the graph on the right, we see the evolution of net debt in dollars over the last three years. The net debt shown in Q3 twenty twenty one is twenty three point five percent lower than the net debt at the end of twenty nineteen and twelve point eight percent lower than at the end of twenty twenty.

16:04 I now turn to turn Paulo Pianez, who will comment on the sustainability highlights. Thank you.

Paulo Pianez

16:12 Thank you, Tang. Marfrig has historically been at the forefront of an innovative low carbon and deforestation free cattle farming industry.

Always trying to engage the entire supply chain especially producers the company has been working under the premise of the inclusion, believing that this is the key to transform the industry. It believes that it is inclusion that we'll make it possible to reconcile production with the conservation of our biodiversity, building a production system that is profitable, innovative and that effectively contributes to the social and economic development in the regions in which it operates.

16:54 The means by which Marfrig addresses the relevant challenges in this supply chain is through a robust ESG management model and a sustainability platform based on six pillars: origin control of raw materials; technology and innovation to reduce greenhouse gas emissions; practices that ensure animal welfare; rationale use and optimization of natural resources, especially water and energy always seeking renewable services of generation; reduced generation of waste and effluents and their proper disposal; and finally and very importantly, respect and social support to communities and native peoples in the regions where it sources and produces. 17:37 Furthermore, given the complexity of establishing this new standard in livestock farming and the production of differentiated products, we believe that we must go further.

In this sense, we launched a Marfrig [indiscernible] plus plant in twenty twenty, a program that is already generating robust results. It is important to point out that the plan was conceived in partnership with the Dutch public-private institution IDH initiative for a sustainable trade, aiming to ensure that one hundred percent of the company's production chain is sustainable, low carbon and deforestation free in all biomes by twenty thirty.

There is an intermediate target that by twenty twenty five, these targets will be met for the Amazon biome. This quarter under this program, Marfrig re-included more than eleven hundred producers in its supply chain, helping them to bring their production systems back into full compliance with the company's social and environmental purchasing criteria.

18:41 This was equivalent to about two hundred thousand head of cattle produced in profitable and sustainable manner. Marfrig also started an ambitious program to diagnose the need for environmental adequacy in its supply chain, the PAA environmental adequacy program.

The first stage of this program has already been concluded. The program conducted a diagnosis of the situation of the areas on-site and the need for remediation measures.

With this, producers will have the necessary technical tools to identify the best instrumental of preparation, ranging from natural regeneration to the total replanting of forests. 19:24 Other relevant results were the first slaughters under the sustainable calf production program, a project in partnership with IDH initiative for a sustainable commerce.

Calf re-foundation, [indiscernible] farms and now also Marfrig, which is already contributing with two million dollars for the expansion of the program that will go from one hundred and fifty small livestock producers to more than three hundred. The premise of this program is an integrated model of livestock production from origin that is from the movement the animal is born until the moment it goes through retail and becomes available to our consumers and all of this with total trace 20:09 In this quarter, Marfrig also published the audit report public commitment to cattle farming in the Amazon, with one hundred percent compliance of its supply chain.

It is worth noting that Marfrig is the only company in this sector that publishes this report with such an achievement that is one hundred percent compliance. On July fifteen, Cattle Breeders Day, Marfrig launched Portal do Pecuarista breeders portal, a relationship channel with its supply chain to discuss topics relevant to daily production activities, especially highlighting the vast production practices such as animal welfare, sustainable management, production, intensification, crop livestock for as integration, genetic improvement among others.

21:01 Since this launch, Marfrig has promoted monthly webinars addressing these topics with producers. These efforts and results Harvard under the Marfrig Verde+ program drove our commitment to generate positive impactsm, contribute to the development of a low carbon economy and to the maintenance and recovery of biodiversity in the territories where we operate.

Operator

21:32 Thank you. The floor is now open for questions.

[Operator Instructions] Our first question comes from Ben Theurer with Barclays. Please you may proceed.

Ben Theurer

22:13 Yeah. Good morning, everyone and thanks for taking my questions.

So I’ve one for Tim maybe just to start off that might be an easier one. So, Tim, obviously, it was a very good quarter and the industry is doing very well.

If you look into the fourth quarter and you think about your specific capacity, and still with the cutout being fairly attractive. Are there any ways for you to potentially increase a little bit to slaughter?

I mean, we seen in the quarter, the volume was essentially flat. Do you have any flexibility to potentially add given that it looks like a very strong quarter so far?

Tim Klein

22:57 Yeah. Well, currently, we were running at one hundred percent capacity utilization.

So there is no opportunity to increase production from what we've been operating.

Ben Theurer

23:08 For that, do you need to run from of time-to-time Saturday shift or you're running just the five days and that's it because you don't want to stress your labor?

Tim Klein

23:17 We are running six day operations right now. Although, in each of our plants, we provide once a month a Saturday off in order to keep our workforce happy.

Ben Theurer

23:32 Okay. Perfect.

And then one for Miguel and I'll wait for the translation to go through and I will say it slowly, if we take a look at the current cattle price environment in Brazil as cattle prices have come down over the last couple of weeks because of the decision to stop or not being able to export to China. Are you seeing opportunities that the lower cattle price can translate into lower beef price to be supportive to volume in the domestic market?

Miguel Gularte

24:15 I Good morning. Thank you so much for your question.

Buying price and sale price are always adjusted according to the market reality and right now, the arroba price has been dropping and the price of beef both wholesale and retail has also been decreasing. What had been happening the weeks prior to this one was that the price of arroba had been decreasing less than the price of beef or decreasing more slowly.

And as time goes by that adjust so and answer to your question. Yes, we should expect the price of the arroba and the prices of beef to be balanced over the next few days at a lower level.

What we don't know for sure is, if once the Chinese market is open again, what the upward adjustment will be, but definitely, when China comes back, there will be a balance again, and it would be possible to expect a partial or full recovery of the price of the arroba.

Ben Theurer

25:47 Okay. Perfect.

Thank you very much and congrats on the strong results.

Operator

25:56 [Operator Instructions] Our next question comes from Antonio Gomez (ph) with [indiscernible]. Please go ahead, sir.

Unidentified Analyst

26:45 Thank you for your time. My question is with regards to the cycle and it’s states.

As you can see, you know the results have been very strong and margins have been exceptionally high. It seems like you got the perfect track factor of ample supply, limited processing capacity in very high demand in the states.

So just wanted to hear your views on how that's going to develop going into twenty two. You mentioned the Q4 is going to be quite strong.

And whether you see supply getting more mitigated or demand falling or even capacity, more capacity coming online. And as a follow-up to that, what's your view on Biden's comments with regards to investigating the beef markets for price fixing?

Tim Klein

27:41 Regarding twenty twenty two, it appears based on USDA data that, there continues to be plenty of cattle available as we forecast in twenty twenty two. Our expectation is total cattle numbers would be declined marginally maybe around a one percent decline from twenty twenty one.

Don't forget twenty twenty one we were dealing with the backlog of cattle that didn't get killed in Q2 of twenty. So, still plenty of cattle, the industry continues to operate at full capacity, there are more cattle available each week than we can process as an industry and that will continue going into twenty twenty two, although, we'll have fewer cattle and the margins won't be quite as robust as they are this year, but certainly, we expect that they will remain well above the historical averages.

28:38 In terms of new capacity coming on, there is no new capacity that will affect our industry at least for the next two to three years, if somebody decided to build a plant today it would be three years before they're processed in any cattle, so no new capacity there. The investigations going on in Washington, various segments of our industry, we'll continue, we'll cooperate fully with any request for information.

We don't expect anything come of that or any process that would change the structure of the industry.

Unidentified Analyst

29:22 And on the demand side?

Tim Klein

29:24 Demand remains very strong. One thing, we're seeing is as consumers started going back to restaurants, when they do eat at home, they're eating a higher quality cut of beef rather than ground beef.

They are buying more expensive items that really drive our margins up. So that continues to be the case as we're seeing all segments retail, food, service, our export markets, the demand is very, very good and we don't see anything changing on that front in the near future.

Unidentified Analyst

30:09 Okay. Thank you.

Operator

30:14 Our next question comes from [indiscernible] with PGIM. Please go ahead, sir.

Unidentified Analyst

30:23 Hi. Thank you.

Actually my question has been answered. My question was about cattle supply in twenty twenty two in the U.S.

Because I've seen as you mentioned the USDA data for September, where cattle placements have been down, there are ninety seven percent versus expected one zero one point four percent and you stated that your expectation for cattle supply in the U.S. will be -- probably only one percent down.

I'm also looking at the price of cattle year on year changes is twenty one percent up twenty twenty one versus twenty twenty. So, I see a mirror image in the U.S.

obviously, in Brazil to Brazil, in Brazil are always coming down price for rollout, but beef is dropping more better the prices in the final price. In the U.S.

it’s opposite. I wonder whether twenty twenty two will be the year when the tool kind of catch with each other and margin will -- as you mentioned be weaker or but much weaker than you expect, what's various for that?

Thank you.

Tim Klein

31:24 Yes. The increase or the decrease in cattle supply will drive prices higher somewhat.

We expect prices in twenty twenty two to be somewhere around eight percent higher than they are in twenty twenty one on average. To cutout values will remain very high and because of that, we're going to maintain very strong margins but not as high as we experienced here in twenty twenty one.

Unidentified Analyst

31:52 Okay. Thank you.

Operator

31:59 Excuse me, this concludes today's question-and-answer session. And this concludes Marfrig Global Foods S.A.

conference call for today. Thank you very much for participation, and have a nice day.

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